##### 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, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 001-34267
 PENWEST PHARMACEUTICALS CO.
 (Exact name of registrant as specified in its charter)
 Washington
    
    91-1513032(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)39 Old Ridgebury RoadSuite 11Danbury, Connecticut
    
    06810-5120(Address of Principal Executive Offices)
    
    (Zip Code)
 (877) 736-9378  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    OutstandingCommon Stock, par value $.001
    
    31,762,831




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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
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    35Item 4. Controls and Procedures
    
    36PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    36Item 1A. Risk Factors
    
    39Item 6. Exhibits
    
    51Signature
    
    52Exhibit Index
    
    53EX-31EX-32
  ® ® ® ®
 Forward-looking Statements
  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 31,2009
    
    
    2008(Unaudited)
    
    
    (Note 2)(In thousands,except share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,802
    
    
    $
    16,692Marketable securities
    
    
    719
    
    
    
    Trade accounts receivable
    
    
    5,730
    
    
    
    4,894Inventories  finished goods
    
    
    168
    
    
    
    440Prepaid expenses and other current assets
    
    
    1,615
    
    
    
    1,365Total current assets
    
    
    19,034
    
    
    
    23,391Fixed assets, net
    
    
    1,692
    
    
    
    2,177Patents, net
    
    
    1,086
    
    
    
    1,819Deferred charges
    
    
    1,792
    
    
    
    2,244Other assets, net
    
    
    2,325
    
    
    
    2,223Total assets
    
    $
    25,929
    
    
    $
    31,854LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    709
    
    
    $
    745Accrued expenses
    
    
    2,143
    
    
    
    1,695Accrued development costs
    
    
    426
    
    
    
    385Loan payable  current portion
    
    
    5,483
    
    
    
    5,483Deferred compensation  current portion
    
    
    294
    
    
    
    291Total current liabilities
    
    
    9,055
    
    
    
    8,599Loan payable
    
    
    
    
    
    
    4,112Accrued financing fees
    
    
    
    
    
    
    360Deferred revenue
    
    
    925
    
    
    
    473Deferred compensation
    
    
    2,251
    
    
    
    2,384Total liabilities
    
    
    12,231
    
    
    
    15,928Shareholders equity:Preferred stock, par value $.001, authorized
1,000,000 shares, none outstanding
    
    
    
    
    
    
    Common stock, par value $.001, authorized
60,000,000 shares, issued and outstanding
31,759,545 shares at September 30, 2009 and
31,697,250 shares at December 31, 2008
    
    
    32
    
    
    
    32Additional paid in capital
    
    
    249,753
    
    
    
    249,262Accumulated deficit
    
    
    (236,344
    )
    
    
    (233,627
    )Accumulated other comprehensive income
    
    
    257
    
    
    
    259Total shareholders equity
    
    
    13,698
    
    
    
    15,926Total liabilities and shareholders equity
    
    $
    25,929
    
    
    $
    31,854
  3




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PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited)(In thousands, except per share data)Revenues:Royalties
    
    $
    5,286
    
    
    $
    1,039
    
    
    $
    14,859
    
    
    $
    1,998Product sales
    
    
    134
    
    
    
    52
    
    
    
    472
    
    
    
    581Collaborative licensing and development revenue
    
    
    874
    
    
    
    270
    
    
    
    1,492
    
    
    
    837Total revenues
    
    
    6,294
    
    
    
    1,361
    
    
    
    16,823
    
    
    
    3,416Operating expenses:Cost of revenues
    
    
    708
    
    
    
    322
    
    
    
    1,830
    
    
    
    999Selling, general and administrative
    
    
    1,758
    
    
    
    2,247
    
    
    
    7,362
    
    
    
    9,642Research and product development
    
    
    3,256
    
    
    
    5,888
    
    
    
    9,687
    
    
    
    16,797Total operating expenses
    
    
    5,722
    
    
    
    8,457
    
    
    
    18,879
    
    
    
    27,438Income (loss) from operations
    
    
    572
    
    
    
    (7,096
    )
    
    
    (2,056
    )
    
    
    (24,022
    )Investment income
    
    
    3
    
    
    
    127
    
    
    
    14
    
    
    
    506Interest expense
    
    
    (192
    )
    
    
    (308
    )
    
    
    (675
    )
    
    
    (986
    )Income (loss) before income tax expense
    
    
    383
    
    
    
    (7,277
    )
    
    
    (2,717
    )
    
    
    (24,502
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    383
    
    
    $
    (7,277
    )
    
    $
    (2,717
    )
    
    $
    (24,502
    )Net income (loss) per common share:Basic
    
    $
    0.01
    
    
    $
    (0.23
    )
    
    $
    (0.09
    )
    
    $
    (0.83
    )Diluted
    
    $
    0.01
    
    
    $
    (0.23
    )
    
    $
    (0.09
    )
    
    $
    (0.83
    )Weighted average shares of common stock outstanding:Basic
    
    
    31,760
    
    
    
    31,521
    
    
    
    31,652
    
    
    
    29,381Diluted
    
    
    31,805
    
    
    
    31,521
    
    
    
    31,652
    
    
    
    29,381
  4




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PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 Nine months EndedSeptember 30,2009
    
    
    2008(Unaudited)(In thousands)Operating activities:Net loss
    
    $
    (2,717
    )
    
    $
    (24,502
    )Adjustments to reconcile net loss to net cash used in operating activities
    
    
    1,445
    
    
    
    4,143Net cash used in operating activities
    
    
    (1,272
    )
    
    
    (20,359
    )Investing activities:Acquisitions of fixed assets
    
    
    (32
    )
    
    
    (37
    )Patent costs
    
    
    (34
    )
    
    
    (267
    )Proceeds from sale of fixed assets
    
    
    20
    
    
    
    286Reimbursements of patent costs by collaborator
    
    
    229
    
    
    
    Proceeds from maturities of marketable securities
    
    
    500
    
    
    
    14,457Purchases of marketable securities
    
    
    (1,219
    )
    
    
    (7,859
    )Loan disbursed to collaborator
    
    
    
    
    
    
    (1,000
    )Net cash (used in) provided by investing activities
    
    
    (536
    )
    
    
    5,580Financing activities:Repayment of debt
    
    
    (4,112
    )
    
    
    (1,804
    )Issuance of common stock, net
    
    
    30
    
    
    
    23,187Net cash (used in) provided by financing activities
    
    
    (4,082
    )
    
    
    21,383Net (decrease) increase in cash and cash equivalents
    
    
    (5,890
    )
    
    
    6,604Cash and cash equivalents at beginning of period
    
    
    16,692
    
    
    
    15,680Cash and cash equivalents at end of period
    
    $
    10,802
    
    
    $
    22,284
  5




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

(Unaudited)
 1. Business
  ® ®
   2. Basis of Presentation
  6




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
      3. Per Share Data
 Income (Loss) Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Numerator:Net income (loss)
    
    $
    383
    
    
    $
    (7,277
    )
    
    $
    (2,717
    )
    
    $
    (24,502
    )Denominator:Denominator for basic income (loss) per
share  weighted average shares
    
    
    31,760
    
    
    
    31,521
    
    
    
    31,652
    
    
    
    29,381Dilutive effect of employee stock options
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted income (loss) per
common share  weighted average shares
    
    
    31,805
    
    
    
    31,521
    
    
    
    31,652
    
    
    
    29,381Income (loss) per share-basic
    
    $
    0.01
    
    
    $
    (0.23
    )
    
    $
    (0.09
    )
    
    $
    (0.83
    )Income (loss) per share-diluted
    
    $
    0.01
    
    
    $
    (0.23
    )
    
    $
    (0.09
    )
    
    $
    (0.83
    )
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands of shares)Stock options outstanding
    
    
    2,210
    
    
    
    2,683
    
    
    
    2,656
    
    
    
    2,607Restricted stock outstanding (unvested)
    
    
    
    
    
    
    134
    
    
    
    86
    
    
    
    144Warrants to purchase common stock
    
    
    4,070
    
    
    
    4,070
    
    
    
    4,070
    
    
    
    3,0266,280
    
    
    
    6,887
    
    
    
    6,812
    
    
    
    5,777
 7




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 4. Recent Accounting Pronouncements
     5. Fair Value Measurement
  Level 1: Quoted prices (unadjusted) in active markets that are accessible at the
measurement date for assets or liabilities. The fair value hierarchy gives the highest
priority to Level 1 inputs.Level 2: Observable prices that are based on inputs not quoted on active markets, but
corroborated by market data.Level 3: Unobservable inputs that are used when little or no market data is available.
The fair value hierarchy gives the lowest priority to Level 3 inputs.
  8




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(Unaudited) (In thousands)Cash and cash equivalents
    
    $
    10,802
    
    
    $
    
    
    
    $
    
    
    
    $
    10,802Marketable securities
    
    
    
    
    
    
    719
    
    
    
    
    
    
    
    719Total
    
    $
    10,802
    
    
    $
    719
    
    
    $
    
    
    
    $
    11,521
  6. Other Assets
  September 30,
    
    
    December 31,2009
    
    

    2008(Unaudited) (In thousands)Assets held in a trust for the Companys
Supplemental Executive Retirement Plan and
Deferred Compensation Plan (see Note 12):Cash surrender value of life insurance policies
    
    $
    2,285
    
    
    $
    1,924Money market account
    
    
    40
    
    
    
    2992,325
    
    
    
    2,223Loan receivable from collaborator (see Note 14)
    
    
    1,000
    
    
    
    1,0003,325
    
    
    
    3,223Allowance for loan receivable from collaborator
    
    
    (1,000
    )
    
    
    (1,000
    )Other assets, net
    
    $
    2,325
    
    
    $
    2,223
 7. Loan Payable
 Credit Facility
   9




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
    8. Shareholders Equity
  Private Placement
    Share-Based Compensation
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited) (In thousands)Selling, general and administrative
    
    $
    304
    
    
    $
    524
    
    
    $
    2
    
    
    $
    1,731Research and product development
    
    
    143
    
    
    
    205
    
    
    
    458
    
    
    
    655Total
    
    $
    447
    
    
    $
    729
    
    
    $
    460
    
    
    $
    2,386
  10




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   9. Cost of Revenues
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited) (In thousands)Cost of royalties
    
    $
    102
    
    
    $
    47
    
    
    $
    309
    
    
    $
    112Cost of product sales
    
    
    136
    
    
    
    42
    
    
    
    461
    
    
    
    223Cost of collaborative licensing and development revenue
    
    
    470
    
    
    
    233
    
    
    
    1,060
    
    
    
    664Total cost of revenues
    
    $
    708
    
    
    $
    322
    
    
    $
    1,830
    
    
    $
    999
  10. Staff Reductions
  11. Income Taxes
  11




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 12. Supplemental Executive Retirement Plan and Deferred Compensation Plan
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited) (In thousands)Interest cost
    
    $
    30
    
    
    $
    30
    
    
    $
    90
    
    
    $
    89Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    1Net periodic benefit cost
    
    $
    30
    
    
    $
    30
    
    
    $
    89
    
    
    $
    90
   13. Comprehensive Income (Loss)
  September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited) (In thousands)Adjustment for funded status of post retirement plan
    
    $
    257
    
    
    $
    259
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited) (In thousands)Net income (loss)
    
    $
    383
    
    
    $
    (7,277
    )
    
    $
    (2,717
    )
    
    $
    (24,502
    )Changes in unrealized net gains and losses on marketable securities
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (6
    )Adjustment for funded status of post retirement plan
    
    
    (1
    )
    
    
    
    
    
    
    (2
    )
    
    
    1Comprehensive income (loss)
    
    $
    382
    
    
    $
    (7,280
    )
    
    $
    (2,719
    )
    
    $
    (24,507
    )
 12




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 14. Collaborative and Licensing Agreements
  Endo Pharmaceuticals Inc.
    
    
    Endo has agreed to pay the Company royalties on U.S. sales of Opana ER calculated based
on a royalty rate starting at 22% of annual net sales of the product up to $150 million of
annual net sales, with the royalty rate then increasing, based on agreed-upon levels of
annual net sales achieved, from 25% up to a maximum of 30%.
    
    No royalty payments were 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). In the third quarter of 2008, the Royalty Holiday ended. The
Company recognized royalties from Endo related to sales of Opana ER in the amount of $13.7
million for the nine month period ended September 30, 2009.
    
    The Companys share of the development costs for Opana ER that it opted out of funding in
April 2003 totaled $28 million and will be recouped by Endo through a temporary 50%
reduction in royalties. Commencing in the third quarter of 2008, the Company began to
receive reduced royalty payments from Endo, with such temporary reductions to continue until
the $28 million is fully recouped. As of September 30, 2009, $9.3 million of the $28
million remains to be recouped by Endo.
    
    Endo will pay the Company a percentage of any sublicense income it receives and milestone
payments of up to $90 million based upon the achievement of agreed-upon annual net sales
thresholds.
   13




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   ®
  Edison Pharmaceuticals, Inc.
  14




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




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   Mylan Pharmaceuticals Inc.
    Drug Delivery Technology Collaborations
  15. Contingencies
  16




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Impax ANDA Litigation
    Actavis ANDA Litigation
  17




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
    Sandoz ANDA Litigation
  ® ®
  Barr ANDA Litigation
   18




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Tang/Edelman Shareholder Claim
  Tang Capital Partners, et al. Penwest Pharmaceuticals Co.
 Tang Capital Partners, et al. Penwest Pharmaceuticals Co.)
 Tang Capital Partners, et al. v.
Penwest Pharmaceuticals Co.)
  16. Subsequent Events
  19




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  20




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
  ® ®
    
    
    Maximizing the value of Opana ER, working closely with Endo.We are working with
Endo to take steps to protect and prosecute the intellectual property around Opana ER
and to explore licensing opportunities for Opana ER outside the United States. The
agreement with Valeant resulted from these efforts.
    
    Advancing the development of A0001 drug candidate.Through the completed Phase
Ib trial and the planned Phase IIa trials, we are seeking to establish proof of concept
with respect to both the safety and efficacy of A0001.
    
    Monetizing the value of our proven drug delivery technologies and drug
formulation expertise by executing additional deals.Our goal is to enter into
at least two new collaborations in 2009. We believe that with two agreements, this aspect of our business can operate on a breakeven
basis, fund a
 21




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portion of our overhead and provide us with a financial stake in products,
should the collaborations advance into development and commercialization. In June 2009,
we entered into a new collaboration with Otsuka Pharmaceuticals Co., Ltd., or Otsuka. In
September 2009, we achieved a development milestone for achieving proof of principal in a
Phase I pharmacokinetic study on the first collaboration signed with Otsuka. Achieving
this milestone triggered a financial payment to us, which we expect to receive in the
fourth quarter of 2009.
    
    Managing overhead and other costs to ensure that our infrastructure is sized
appropriately to our priorities.In the nine months ended September 30, 2009,
we continued to reduce expenses and closely managed our cash expenditures, including
staff reductions implemented in January 2009. We have reduced our selling, general and
administrative, or SG&A, and research and product development, or R&D, expenses by 36%
in total for the nine months ended September 30, 2009 as compared to the prior years
nine month period. In addition, in November 2009, we announced additional cost
reduction measures as discussed below.
   Products
 Opana ER.
   22




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®
    23




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A0001.
    24




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Nifedipine XL.
 Net Loss and Profitability
  
    
    the commercial success of Opana ER, and the amount of royalties from Endos sales of
Opana ER, which may be adversely affected by any potential generic competition;
    
    our ability to successfully defend our intellectual property protecting our products;
    
    our ability to access funding support for our development programs from third party
collaborators;
    
    the level of our investment in research and development activities, including the timing
and costs of conducting clinical trials of our products;
    
    the level of our general and administrative expenses;
    
    the successful development and commercialization of product candidates in our portfolio
and products being developed for collaborations; and
    
    royalties from Mylans sales of Pfizers generic version of Procardia XL 30 mg.
  25




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Critical Accounting Policies and Estimates
  Recent Accounting Pronouncements
  Results of Operations for the Three and Nine month periods ended September 30, 2009 and 2008
 Revenues
 Three months
    
    
    
    
    
    
    Three months
    
    
    Nine months
    
    
    
    
    
    
    Nine monthsended
    
    
    Percentage
    
    
    ended
    
    
    ended
    
    
    Percentage
    
    
    endedSeptember 30,
    
    
    increase
    
    
    September 30,
    
    
    September 30,
    
    
    increase
    
    
    September 30,2009
    
    
    (decrease)
    
    
    2008
    
    
    2009
    
    
    (decrease)
    
    
    2008(In thousands, except percentages)Royalties
    
    $
    5,286
    
    
    
    409
    %
    
    $
    1,039
    
    
    $
    14,859
    
    
    
    644
    %
    
    $
    1,998Product sales
    
    
    134
    
    
    
    158
    
    
    
    52
    
    
    
    472
    
    
    
    (19
    )
    
    
    581Collaborative
licensing and
development
revenue
    
    
    874
    
    
    
    224
    
    
    
    270
    
    
    
    1,492
    
    
    
    78
    
    
    
    837Total revenues
    
    $
    6,294
    
    
    
    362
    %
    
    $
    1,361
    
    
    $
    16,823
    
    
    
    392
    %
    
    $
    3,416
   26




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##### Table of Contents



Cost of Revenues
 Three months
    
    
    Percentage
    
    
    Three months
    
    
    Nine months
    
    
    Percentage
    
    
    Nine monthsended
    
    
    increase
    
    
    ended
    
    
    ended
    
    
    increase
    
    
    endedSeptember 30, 2009
    
    
    (decrease)
    
    
    September 30, 2008
    
    
    September 30, 2009
    
    
    (decrease)
    
    
    September 30, 2008(In thousands, except percentages)Cost of royalties
    
    $
    102
    
    
    
    117
    %
    
    $
    47
    
    
    $
    309
    
    
    
    176
    %
    
    $
    112Cost of product sales
    
    
    136
    
    
    
    224
    
    
    
    42
    
    
    
    461
    
    
    
    107
    
    
    
    223Cost of collaborative
licensing and
development revenue
    
    
    470
    
    
    
    102
    
    
    
    233
    
    
    
    1,060
    
    
    
    60
    
    
    
    664Total cost of revenues
    
    $
    708
    
    
    
    120
    %
    
    $
    322
    
    
    $
    1,830
    
    
    
    83
    %
    
    $
    999
    27




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##### Table of Contents



Selling, General and Administrative Expenses
 Three months
    
    
    
    
    
    
    Three months
    
    
    Nine months
    
    
    
    
    
    
    Nine monthsended
    
    
    Percentage
    
    
    ended
    
    
    ended
    
    
    Percentage
    
    
    endedSeptember 30,
    
    
    increase
    
    
    September 30,
    
    
    September 30,
    
    
    increase
    
    
    September 30,2009
    
    
    (decrease)
    
    
    2008
    
    
    2009
    
    

    (decrease)
    
    
    2008(In thousands, except percentages)Selling,
general and
administrative
expenses
    
    $
    1,758
    
    
    
    (22
    )%
    
    $
    2,247
    
    
    $
    7,362
    
    
    
    (24
    )%
    
    $
    9,642
   Research and Product Development Expenses
  28




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Three months
    
    
    
    
    
    
    Three months
    
    
    Nine months
    
    
    
    
    
    
    Nine monthsended
    
    
    Percentage
    
    
    ended
    
    
    ended
    
    
    Percentage
    
    
    endedSeptember 30,
    
    
    increase
    
    
    September 30,
    
    
    September 30,
    
    
    increase
    
    
    September 30,2009
    
    
    (decrease)
    
    
    2008
    
    
    2009
    
    
    (decrease)
    
    
    2008(In thousands, except percentages)A0001 and Edison Payments
    
    $
    1,332
    
    
    
    (41
    )%
    
    $
    2,250
    
    
    $
    3,852
    
    
    
    (35
    )%
    
    $
    5,884Nalbuphine ER
    
    
    
    
    
    
    (100
    )
    
    
    192
    
    
    
    
    
    
    
    (100
    )
    
    
    1,827Other Phase I Products and Internal Costs
    
    
    1,924
    
    
    
    (44
    )
    
    
    3,446
    
    
    
    5,835
    
    
    
    (36
    )
    
    
    9,086Total Research and Product Development
Expenses
    
    $
    3,256
    
    
    
    (45
    )%
    
    $
    5,888
    
    
    $
    9,687
    
    
    
    (42
    )%
    
    $
    16,797
  
    
    A0001 and Edison Payments These expenses reflect our direct external expenses relating
to the development of A0001, and for the three and nine month periods ended September 30,
2008, in addition to our funding of Edisons research activities under the Edison agreement.
These expenses approximated 41% and 40%, respectively, of our R&D expenses for the three
and nine month periods ended September 30, 2009.In May 2008, we submitted an IND for A0001 for the treatment of symptoms associated with
inherited mitochondrial respiratory chain diseases. In July 2008, we initiated a Phase Ia
placebo-controlled, single ascending dose trial designed to evaluate the safety and
tolerability of A0001 in healthy subjects, and to collect pharmacokinetic data. A0001 was well
tolerated by all subjects across all dose groups and there were no drug-related serious adverse
events. In June 2009, we completed a Phase Ib multiple ascending dose safety study of A0001 in
healthy subjects. In the Phase Ib trial, the drug was well tolerated by subjects and no
serious adverse events were reported. There was a dose-dependent increase in exposure
approaching steady state following repeat dosing, and a maximum tolerated dose was established.
Based on these results, we plan to advance A0001 into Phase IIa studies in patients with
mitochondrial diseases in the fourth quarter of 2009. We intend to commence two Phase IIa
trials  one trial focused on patients with Friedreichs Ataxia and another trial focused on
patients with the A3243G mitochondrial DNA point mutation associated with MELAS syndrome. The
goal of these trials will be to determine if A0001 has biological activity in those
indications. We expect data from both of these trials by the third quarter of 2010. In
parallel with the Phase Ib trial, we also conducted long-term animal toxicology studies to
support longer dosing in the clinical program, which we expect to complete by the end of the
fourth quarter of 2009.In September 2009, Edison presented to us and we selected an additional compound that we
were entitled to under the Edison Agreement. With the selection of this additional compound,
we became obligated to make a milestone payment to Edison, which we accrued and recorded as
research and development expense in the third quarter of 2009 and paid to Edison in October
2009. We cannot reasonably estimate or know the nature, timing or estimated costs of the
efforts necessary to complete the development of A0001 or the additional compound selected, due
to the numerous risks and uncertainties associated with developing and commercializing drugs.
We expect our A0001 and Edison payments expenses to decline for 2009 compared with our costs
for 2008, as the quarterly contract research payments to Edison were completed by the end of
2008.
    
    Nalbuphine ER These expenses reflect our direct external expenses relating to the
development of nalbuphine ER. In the three and nine month periods ended September 30, 2008,
these expenses consisted primarily of payments to third parties in connection with clinical
trials of nalbuphine ER, which were underway. After the completion of the Phase IIa trial
in the first quarter of 2008, we determined to seek a collaborator for the further
development and commercialization of nalbuphine ER, and not to conduct any additional
development work until we enter into such a collaboration. As a result, we did not incur
any R&D expenses in the three and nine month periods ended September 30, 2009, and we do not
expect to incur any additional R&D expenses for nalbuphine ER, unless we find a collaborator
to continue the development work.
 29




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##### Table of Contents




    
    Other Phase I Products and Internal Costs These expenses reflect internal and
external expenses not separately reported under a product development program noted above
and include the areas of pharmaceutical development, clinical and regulatory. The types of
expenses included in internal expenses primarily are salary and benefits, share-based
compensation costs, depreciation on purchased equipment, and the amortization or any
write-downs of patent costs, other than product patent write-offs charged directly to a
separately reported product development program or amortization of patent costs relating to
commercialized products, which are included in cost of revenues. The types of expenses
included in external expenses are primarily related to preclinical studies,
proof-of-principle biostudies conducted on our Phase I product candidates and payments to
third parties for drug active. These costs decreased in the three and nine month periods
ended September 30, 2009, compared with the three and nine month periods ended September 30,
2008, primarily as a result of lower compensation expense due to staff reductions
implemented in March 2008 and in January 2009, allocations of internal costs related to our
drug delivery technology collaborations to cost of collaborative licensing and development
revenues, and lower Phase I product expenses, as we did not incur any external expenses on
these product candidates. Partially offsetting these decreases was a patent impairment
charge of $270,000 recorded in the 2009 three month period related to patents on technology
that we no longer believe have commercial value and other patents we determined we would no
longer prosecute and/or maintain.
   Share-Based Compensation
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(In thousands)Selling, general and administrative
    
    $
    304
    
    
    $
    524
    
    
    $
    2
    
    
    $
    1,731Research and product development
    
    
    143
    
    
    
    205
    
    
    
    458
    
    
    
    655Total share-based compensation
    
    $
    447
    
    
    $
    729
    
    
    $
    460
    
    
    $
    2,386
   30




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Tax Rates
  Liquidity and Capital Resources
 Sources of Liquidity
  Private Placement.
  Senior Secured Credit Facility.
   31




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Cash Flows
   Funding Requirements
       32




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##### Table of Contents




    
    the commercial success of Opana ER, and the amount of royalties from Endos sales of
Opana ER, which may be adversely affected by any potential generic competition;
    
    the prosecution, defense and enforcement of our patents and other intellectual property
rights, such as our Orange Book listed patents for Opana ER, and the prosecution by us and
Endo of additional patent applications with respect to Opana ER;
    
    the timing and amount of payments received under collaborative agreements;
    
    the timing and amount of our internal costs of development for drug candidates acquired
under the Edison Agreement;
    
    the progress of our existing development projects and any development projects we may
undertake, funding obligations with respect to the projects and the related costs to us of
clinical studies for our product candidates;
    
    our ability to enter into new collaborations for Opana ER outside the United States and our
drug delivery technologies, and the structure and terms of any such agreements;
    
    our ability to access funding support for development programs from third party
collaborators;
    
    the level of our investment in capital expenditures for facilities or equipment;
    
    the timing and amount of our costs of the shareholder lawsuits filed against us and our
directors in connection with the proxy contest related to our 2009 annual meeting of
shareholders and the costs of any future proxy contests which may occur;
    
    our success in reducing our spending and managing our costs.
    33




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Contractual Obligations
  Less Than
    
    
    1-3
    
    
    4-5
    
    
    After 5Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    206
    
    
    $
    206
    
    
    $
    
    
    
    $
    
    
    
    $
    Purchase obligations
    
    
    2,885
    
    
    
    2,885
    
    
    
    
    
    
    
    
    
    
    
    Payments due under credit facility
    
    
    6,153
    
    
    
    6,153
    
    
    
    
    
    
    
    
    
    
    
    Deferred compensation
    
    
    2,545
    
    
    
    294
    
    
    
    587
    
    
    
    587
    
    
    
    1,077Total
    
    $
    11,789
    
    
    $
    9,538
    
    
    $
    587
    
    
    $
    587
    
    
    $
    1,077
   
    
    We have a Supplemental Executive Retirement Plan, or SERP, a nonqualified plan, which
covers our former Chairman and Chief Executive Officer, Tod R. Hamachek. Under the SERP,
effective in May 2005, we became obligated to pay Mr. Hamachek approximately $12,600 per
month over the lives of Mr. Hamachek and his spouse.
    
    We also have a Deferred Compensation Plan, or DCP, a nonqualified plan, which covers Mr.
Hamachek. Under the DCP, effective in May 2005, we became obligated to pay Mr. Hamachek
approximately $140,000 per year, including interest, in ten annual installments. However,
these installments are recalculated annually based on market interest rates as provided for
under the DCP.
   34




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Net Operating Loss Carryforwards
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk and Risk Management Policies
    35




---



##### Table of Contents



Item 4. Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures.
 (b) Changes in Internal Control Over Financial Reporting.
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Impax ANDA Litigation
  36




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Actavis ANDA Litigation
    Sandoz ANDA Litigation
  37




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##### Table of Contents



® ®
  Barr ANDA Litigation
    Tang/Edelman Shareholder Claim
  Tang Capital Partners, et al. Penwest
Pharmaceuticals Co.
 Tang Capital Partners, et al. v. Penwest
Pharmaceuticals Co.),
 38




---



##### Table of Contents



Tang Capital Partners, et al. v. Penwest
Pharmaceuticals Co.),
 
 Item 1A. 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 on Form 10-Q . 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 a history of net losses
and may not be able to achieve or maintain profitability on an annual basis; We may require
additional funding, which may be difficult to obtain; We are dependent on our collaborators to
manufacture and commercialize our products;

We face significant competition, which may result in others
discovering, developing or commercializing products before us or more
successfully than we do;

 We have only limited manufacturing capabilities and
will be dependent on third party manufacturers; and The market price of our common stock may be
volatile)
 We have a history of net losses and may not be able to achieve or maintain profitability on an
annual basis
     
    
    the commercial success of Opana ER, and the amount of royalties from Endos sales of
Opana ER, which may be adversely affected by any potential generic competition;
    
    our ability to successfully defend our intellectual property protecting our products;
 39




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##### Table of Contents




    
    our ability to access funding support for development programs from third party
collaborators;
    
    the level of our investment in research and development activities, including the timing
and costs of conducting clinical trials of our products;
    
    the level of our general and administrative expenses;
    
    the successful development and commercialization of product candidates in our portfolio
and products being developed for collaborations; and
    
    royalties from Mylans sales of Pfizers generic version of Procardia XL 30 mg.
 We may require additional funding, which may be difficult to obtain
     
    
    the commercial success of Opana ER, and the amount of royalties from Endos and Valeants
sales of Opana ER, which may be adversely affected by any potential generic competition;
    
    the prosecution, defense and enforcement of our patents and other intellectual property
rights, such as our Orange Book listed patents for Opana ER, and the prosecution by us and
Endo of additional patent applications with respect to Opana ER;
    
    the timing and amount of payments received under collaborative agreements, including our
agreement with Mylan with respect to Pfizers generic version of Procardia XL 30 mg and
other drug delivery technology collaborations;
    
    the timing and amount of our internal costs of development for drug candidates for which
we acquire rights under the Edison Agreement;
    
    the progress of our existing development projects and any development projects we may
undertake, funding obligations with respect to the projects and the related costs to us of
clinical studies for our product candidates;
 40




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
    
    our and Endos ability to enter into collaborations for Opana ER outside the United
States and our drug delivery technologies, and the structure and terms of any such
agreements;
    
    our ability to access funding support for development programs from third party
collaborators;
    
    the level of our investment in capital expenditures for facilities and equipment;
    
    the timing and amount of our costs in connection with any future proxy contest in
connection with our annual meetings of shareholders and the shareholder lawsuits filed
against us and our directors; and
    
    our success in reducing our spending and managing our costs.
  Our ability to generate revenues depends heavily on the success of Opana ER
   
    
    the safety and efficacy of Opana ER as compared to competing products;
    
    Endos ability to educate the medical community about the benefits, safety and efficacy
of Opana ER;
    
    the effectiveness of Endos sales and marketing activities;
    
    the potential impact of tamper resistant opioids newly available in the market;
    
    Endos ability to manufacture and maintain suitable inventory for sale on an ongoing
basis;
    
    the reimbursement policies of government and third party payors with respect to Opana ER;
    
    the pricing of Opana ER;
    
    the level of stocking of Opana ER by wholesalers and retail pharmacies;
    
    the required risk evaluation management strategy currently being considered by FDA; and
    
    the availability of generic versions of Opana ER and the timing of generic competition.
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Our success depends on our ability, or our collaborators ability, to protect our patents and
other intellectual property rights
 ,
   42




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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, which 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.
    
    Disputes may arise between us and our collaborators from time to time regarding
contractual or other matters. In 2006, we were engaged in a dispute with Endo with regard
to the sharing of marketing expenses during the period prior to when Opana ER reaches
profitability, which we subsequently resolved. Any other such disputes with Endo or other
collaborators could be time consuming and expensive, and could impact our anticipated rights
under our agreements with those collaborators.
 We have limited experience in developing, manufacturing, marketing and selling pharmaceutical
products
 43




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##### Table of Contents



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
   Misuse and/or abuse of Opana ER, which contains a narcotic ingredient, could subject us to
additional regulations, including compliance with risk management programs, which may prove
difficult or expensive for us to comply with, and we may face lawsuits as a result
  We face significant competition, which may result in others discovering, developing or
commercializing products before us or more successfully than we do
  
    
    significantly greater financial, technical and human resources than we have and may be
better equipped to develop, manufacture and commercialize drug products;
    
    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.
  44




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##### Table of Contents



®
  If our clinical trials are not successful or take longer to complete than we expect, we may not be
able to develop and commercialize our products such as A0001
   45




---



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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.
     46




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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
   47




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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
  48




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under a manufacturing and supply agreement with an initial term that expires in November 2009.
On May 7, 2009, we received notice from Draxis, our contract manufacturer of TIMERx material, that
as a result of its decision to cease manufacturing of solid dosage form products in the facility in
which TIMERx is currently manufactured, it will not renew the manufacturing agreement with us upon
the expiration of the current term in November 2009. As a result, we intend to increase our
current inventory levels of TIMERx material and are working with Endo on the qualification of
another manufacturer. We believe that there are a limited number of manufacturers that comply with
cGMP regulations and are capable of manufacturing our TIMERx materials.  We have
identified a potential manufacturer and are working on the
qualification of that manufacturer. Based on our preliminary
technology transfer activities with this potential manufacturer, we
expect to enter into a commercial manufacturing agreement with this
manufacturer on terms that are comparable to our  manufacturing
agreement with Draxis. However, we may not be able to qualify the
manufacturer or to enter into a commercial manufacturing agreement
on terms acceptable to us. Although we
have qualified alternate suppliers with respect to the xanthan gum and locust bean gum used to
manufacture our TIMERx materials, we currently do not have a second supplier of TIMERx materials.
If we are unable to obtain alternative contract manufacturing or obtain such manufacturing on
commercially reasonable terms, we may not be able to comply with our supply obligations to Endo and
Valeant with respect to Opana ER, and our business could be materially adversely affected.
    
    
    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
  49




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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
  The market price of our common stock may be volatile
  50




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Specific provisions of our Shareholder Rights Plan, Articles of Incorporation and Bylaws and the
laws of Washington State make a takeover of Penwest or a change in control or management of our
Company more difficult
  Proxy contests pursued by dissident shareholders may be costly and disruptive to our business
operations
    
 Item 6. Exhibits
  51




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SIGNATURE
  PENWEST PHARMACEUTICALS CO.Date: November 9, 2009
    /s/ Jennifer L. GoodJennifer L. GoodPresident and Chief Executive Officer 52




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EXHIBIT INDEX
 ExhibitNumber
    
    Description31
    
    Certification of Principal Executive Officer and Principal Financial Officer
pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a), as adopted pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.32
    
    Certification of Principal Executive Officer and Principal Financial Officer
pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
 53