Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File No. 000-23467

(877) 736-9378
(Registrant’s telephone number, including area code.)

     Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X]   No [  ]

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 26, 2003.

Table of Contents

PENWEST PHARMACEUTICALS CO.

TABLE OF CONTENTS

     TIMERx® is a registered trademark of the Company. Geminex^TM and SyncroDose^TM are also trademarks of the Company. Other tradenames and trademarks appearing in this quarterly report are the property of their respective owners.

2

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PENWEST PHARMACEUTICALS CO.
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

PENWEST PHARMACEUTICALS CO.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

PENWEST PHARMACEUTICALS CO.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

PENWEST PHARMACEUTICALS CO.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

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

1. Business

     Penwest develops pharmaceutical products based on innovative oral drug delivery technologies. The foundation of Penwest’s technology platform is TIMERx, an extended release delivery system that is adaptable to soluble and insoluble drugs and is flexible for a variety of controlled release profiles. The Company has also developed two additional oral drug delivery systems, Geminex and SyncroDose. Geminex is a dual drug delivery system that is designed to provide independent release of different active ingredients contained in a drug, and SyncroDose is a chronotherapeutic drug delivery system that is designed to release the active ingredient of a drug at the desired site and time in the body.

     Prior to February 27, 2003, Penwest also developed, manufactured and distributed branded pharmaceutical excipients, which are the inactive ingredients in tablets and capsules, primarily consisting of binders, disintegrants and lubricants. On February 27, 2003, Penwest sold substantially all of the assets used in the Company’s excipient business to subsidiaries and affiliates of Josef Rettenmaier Holding GmbH & Co. KG (the “Asset Sale”). The Company received $39.5 million in cash and a promissory note for $2.25 million in consideration for the excipient business. The Company received $1.0 million of the $2.25 million promissory note in April 2003 with the balance due in May 2004. The Company used approximately $5.5 million of proceeds of the sale of its excipient business to repay debt (see Note 6) and intends to use the balance of the proceeds to expand its drug delivery business. As a result of the Asset Sale, the accompanying consolidated financial statements present Penwest’s excipient business as a discontinued operation, for all periods presented.

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

2. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation for the interim periods presented have been included. All such adjustments are of a normal recurring nature. Operating results for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the full-year consolidated financial statements and footnotes thereto included in the Company’s Current Report on Form 8-K filed on September 4, 2003.

     As a result of the Asset Sale, the operating results of the excipient business have been presented as discontinued operations in the condensed consolidated statements of operations for the three and nine month periods ended September 30, 2002 and the nine month period ended September 30, 2003 (see Note 9). In order to conform to the current period presentation, certain reclassifications have been made in the prior period financial statements.

     During the quarter ended September 30, 2003, the Company recorded an adjustment to reduce the accruals for its share of the costs of oxymorphone ER development and marketing by $266,000 and $72,000, respectively. The effect of this adjustment for the quarter was to decrease the net loss by $338,000 (no tax effect) or $0.02 per common share. In addition, the Company recorded an adjustment of approximately $202,000 in the quarter ended September 30, 2003, to reduce an accrual relating to 2003 compensation. The effect of this adjustment for the quarter was to decrease the net loss by $202,000 (no tax effect) or $0.01 per common share.

     During the quarter ended March 31, 2003, the Company recorded an impairment loss of approximately $214,000, net of accumulated depreciation, relating to equipment of its excipient business. The impaired equipment primarily related to a pulp shredding transfer system which did not function as planned, resulting in the eventual abandonment of the related project and full write-down of its carrying value. This impairment loss is included in earnings from discontinued operations in the nine months ended September 30, 2003 condensed consolidated statements of operations.

7

Table of Contents

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

The balance sheet at December 31, 2002, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

3. Summary of Significant Accounting Policies

Revenue Recognition

     Revenues from product sales are recognized when title transfers and customer acceptance provisions have lapsed, provided collections of the related accounts receivable are probable. Revenue received from non-refundable upfront licensing fees are recognized ratably over the development period of the collaboration agreement, when this period involves development risk associated with the incomplete stage of a product’s development or over the estimated or contractual licensing and supply term when there exists an obligation to supply inventory for manufacture. Non-refundable milestone fees received for the development funding of a product are partially recognized upon receipt based on the Company’s proportionate development efforts achieved to date relative to the total expected development efforts and the remainder is generally recognized ratably over the remaining expected development period. The proportionate development efforts achieved are measured by estimating the percentage of work completed that is required of the Company in the development effort for the product. This estimate is primarily derived from the underlying project plans and timelines, developed by qualified personnel who work closely on such projects. In particular, the Company reviews output measures such as job specifications and tasks completed, compared to all such job specifications and tasks outlined for a particular project. Job specifications vary with each project and primarily include development activities regarding initial formulation work, manufacturing scale-up, proof-of-principle biostudies, clinical development and regulatory matters. Other contractual fees received in connection with a collaborator’s launch of a product are also recognized ratably over the estimated or contractual licensing and supply term. Product royalty fees are recognized when earned.

Research and Development Expenses

     Research and development expenses consist of costs associated with products being developed internally as well as products being developed under collaboration agreements and include related salaries, benefits and other personnel related expenses, clinical trial costs, and contract and other outside service fees. Research and development costs are expensed as incurred. Certain reimbursements of costs, generally related to drug formulation on feasibility studies, are netted against research and development expense. A significant portion of the Company’s development activities are outsourced to third parties including contract research organizations, and contract manufacturers in connection with the production of clinical materials, or may be performed by the Company’s collaborators. These arrangements may require estimates be made of related service fees or of the Company’s share of development costs, in which actual results could materially differ from the estimates and affect the reported amounts in the Company’s financial statements.

Stock Options

     The Company adopted the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation,” in 2002. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, which was originally provided under SFAS No. 123. The Statement also improves the timeliness of disclosures by requiring the information to be included in interim as well as annual financial statements. The adoption of these disclosure provisions had no impact on the Company’s 2003 consolidated results of operations, financial position or cash flows.

     At September 30, 2003, the Company maintained two stock-based employee compensation plans. The Company accounts for these employee stock compensation plans in accordance with the intrinsic value-based method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” During the nine months ended September 30, 2003, the Company recorded $106,000 in compensation expense (no related tax effect) in connection with the acceleration of the vesting date of certain stock options. No other stock-based employee compensation expense is reflected in net loss as all options granted under these plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant.

     Consistent with the method described in SFAS No. 123, if compensation expense for the Company’s plans had been determined based on the fair value at the grant dates for awards under its plans, net loss and loss per share would have been increased to the pro

8

Table of Contents

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

forma amounts indicated below (in thousands, except per share data):

4. Issuance of Common Stock

     On August 5 and August 6, 2003, the Company completed the sale of a total of 2,507,762 shares of common stock through a private placement to selected institutional investors (the “Private Placement”), resulting in net proceeds to the Company, after fees and expenses, of approximately $49.3 million. As part of the Private Placement, the Company granted the institutional investors additional rights to purchase up to an additional 501,552 shares of common stock at a price of $26.00 per share. These additional investment rights became exercisable on September 12, 2003, and will expire on December 9, 2003, subject to extension in specific circumstances. The Company intends to use the net proceeds from the Private Placement to fund the research, development, marketing and commercialization of its products and technologies, and for general corporate purposes.

5. Recent Accounting Pronouncements

     In November 2002, the Emerging Issues Task Force (“EITF”) finalized its tentative consensus on EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” which provides guidance on the timing and method of revenue recognition for arrangements that include the delivery of more than one product or service. EITF 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a material effect on the Company’s financial position or results of operations.

     Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or not significant to the financial statements of the Company.

6. Loans and Notes Payable

Credit Facilities

     On January 17, 2001, the Company completed arrangements for a revolving line of credit (“Revolver”) with a financial institution. Under the terms of the Revolver, the Company could borrow up to $10.0 million (“Line of Credit”) as determined by a formula based on the Company’s Eligible Accounts Receivable and Eligible Saleable Inventory, as defined in the agreement. Under the formula, generally 85% of the Company’s U.S. and Canadian receivables, as well as generally 60% of the Company’s U.S. saleable inventories, were included in the borrowing base. Amounts outstanding under the Revolver were collateralized by the Company’s U.S. and Canadian accounts receivable, and its inventory and general intangibles. The Revolver had an initial term of three years, and provided for annual renewals thereafter. On February 27, 2003, the Company paid off the outstanding balance of $3.3 million and terminated the Revolver in connection with the Asset Sale (see Note 9).

Note Payable to AstraZeneca AB

     On October 25, 2002, the Company entered into an agreement with AstraZeneca AB to acquire from AstraZeneca AB assets related to the excipient product, Pruv, including trademarks and other intellectual property, for a total purchase price of $3.0 million. Pursuant to this agreement, the Company issued a note to AstraZeneca AB in the principal amount of $2.25 million. Under the agreement, the note required the Company to pay all indebtedness outstanding under the note upon the closing of the Asset Sale. As a result, the note was paid in full in February 2003 in connection with the Asset Sale (see Note 9).

9

Table of Contents

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

Business Insurance Premium Financing

     On September 24, 2002, the Company entered into a Premium Finance Agreement (the “Finance Agreement”) through which it financed approximated $1.1 million of premiums payable in connection with the annual renewal of its general business insurance. Under the Finance Agreement, Penwest was required to repay the amount financed in equal monthly installments through June 2003, plus interest at a rate of 3.11% per annum. In addition, the Company assigned, as a security interest, any and all unearned premiums or other amounts which may become payable to the Company under the insurance policies. The amount financed under the Finance Agreement was paid in full in May 2003.

7. Income Taxes

     For continuing operations, the effective tax rates for the three and nine months ended September 30, 2003 and 2002 were zero. The effective tax rates are higher than the federal statutory rate of a 34% benefit due to valuation allowances recorded to offset deferred tax assets relating to the Company’s net operating losses.

     The gain on sale of discontinued operations of approximately $9.5 million, recorded in the nine months ended September 30, 2003, is net of tax expense of $51,000, or less than 1% of the pretax gain. The tax expense is lower than the federal statutory rate of 34% primarily due to net operating losses which offset the gain. In addition, earnings from discontinued operations of $177,000 and $1,674,000, respectively, for the nine months ended September 30, 2003 and September 30, 2002, are net of tax expenses of $26,000 and $337,000, respectively, or 13% and 17% of pretax earnings, respectively. These tax expenses, which include foreign taxes, are lower than the federal statutory rate of 34% primarily due to overall U.S. net operating losses which offset the U.S. earnings of the discontinued operation (see Note 9).

8. Comprehensive Loss

     The components of comprehensive loss for the three and nine months ended September 30, 2003 and 2002 are as follows (in thousands):

     Accumulated other comprehensive income (loss) equals the cumulative translation adjustment and unrealized net gains on marketable securities which are the only components of other comprehensive loss included in the Company’s financial statements. Effective on the date of the Asset Sale, accumulated other comprehensive income (loss) is comprised solely of unrealized net gains and losses on marketable securities.

9. Discontinued Operations

     On February 27, 2003, Penwest sold substantially all of the assets (the “Assets”) used in the Company’s excipient business to subsidiaries and affiliates of Josef Rettenmaier Holding GmbH & Co. KG (“Rettenmaier”) for $41.75 million, plus the assumption of specified liabilities, subject to a working capital adjustment. The Assets of the excipient business were sold to Rettenmaier, either directly or through the sale of the outstanding capital stock of the three subsidiaries of Penwest that did business in the UK, Germany and Finland. The purchase price included $39.5 million in cash and a non-interest bearing promissory note of $2.25 million, with $1.0 million paid in April 2003 and $1.25 million due May 25, 2004.

     In the first quarter of 2003, the Company recorded a gain on the Asset Sale of approximately $9.6 million, net of taxes of $62,000, and has reported the operating results of the excipient business as a discontinued operation in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In the second quarter of 2003, the Company recorded an expense of $83,000 for the working capital adjustment, net of a tax benefit of $11,000, for a total gain of $9.5 million, net of tax

10

Table of Contents

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

expense of $51,000 for the nine months ended September 30, 2003. The net carrying amount of the assets and liabilities on the date of the Asset Sale was approximately $29.5 million. The approximate carrying values of the major classes were: property, plant and equipment of $11.4 million; inventory of $8.3 million; receivables of $6.0 million; and intangible assets of $4.3 million offset by other net liabilities. The Company has presented its December 31, 2002 balance sheet in the consolidated financial statements to reflect the assets and liabilities of the excipient business separately as assets held for sale and liabilities held for sale. The gain on the Asset Sale is net of transaction related costs totaling $3.1 million, primarily consisting of professional and advisory fees. As of December 31, 2002, these costs approximated $1.7 million and were reflected as deferred transaction costs on the condensed consolidated balance sheet. Revenues and pretax profits for the excipient business approximated $6.1 million and $203,000, respectively, for the period January 1, 2003 through the Asset Sale date of February 27, 2003, and approximated $9.4 million and $583,000, respectively, and $27.6 million and $2.0 million, respectively, for the quarter and nine months ended September 30, 2002.

     Prior to the sale of the excipient business, the Company owned its office, laboratory and warehouse facility in Patterson, New York, as well as a facility in Cedar Rapids, Iowa, where it manufactured pharmaceutical excipients. As part of the Asset Sale, the Company transferred these properties and assigned its lease of a pharmaceutical excipient manufacturing facility in Nastola, Finland to Rettenmaier. Under a lease agreement signed with Rettenmaier on February 27, 2003, the Company has the right to occupy approximately 14,000 square feet of office and research and development space in the Patterson facility until February 2008, initially on a rent-free basis (plus operating expenses) for two years and then pursuant to three successive one-year options at monthly rent payments approximating $14,000, plus operating expenses. In addition, in February 2003, the Company signed a lease agreement for approximately 11,000 square feet of office space in Danbury, Connecticut. This lease has an initial term expiring January 31, 2006, with renewal options through December 30, 2006, and requires that monthly base rents of approximately $20,000 be paid through the initial lease term. The Company moved its corporate offices to Danbury, Connecticut on March 31, 2003.

10. Licensing Agreements

     The Company enters into collaborative arrangements with pharmaceutical companies to develop, manufacture or market products formulated with its drug delivery technologies.

     In September 1997, the Company entered into a strategic alliance agreement with Endo Pharmaceuticals, Inc. with respect to the development of an extended release formulation of oxymorphone a narcotic analgesic for the treatment of moderate to severe pain based on the Company’s TIMERx technology. This agreement was amended and restated in April 2002. Endo is a fully integrated specialty pharmaceutical company with a market leadership in pain management. Endo has a broad product line including 20 branded products that include the established brands such as Percodan(R), Percocet(R), and Lidoderm(R). Endo is registered with the U.S. Drug Enforcement Administration as a developer, manufacturer and marketer of controlled narcotic substances.

     Under the strategic alliance agreement, the responsibilities of the Company and Endo with respect to the oxymorphone product are determined by a committee comprised of an equal number of members from each of the Company and Endo (the “Alliance Committee”). During the development of the product, the Company formulated oxymorphone ER and Endo conducted all clinical studies and prepared and filed all regulatory applications. The Company has agreed to manufacture and supply TIMERx material to Endo, and Endo has agreed to manufacture and market oxymorphone ER in the United States. The manufacture and marketing outside of the United States may be conducted by the Company, Endo or a third party, as determined by the Alliance Committee.

     Prior to March 17, 2003, the Company and Endo shared the costs involved in the development of oxymorphone ER. On March 17, 2003, the Company gave Endo notice that it was discontinuing its participation in the funding of the development and marketing of oxymorphone ER effective April 17, 2003. As a result of this termination, Endo has the right to complete the development of oxymorphone ER and recoup the portion of development costs incurred by Endo that otherwise would have been funded by Penwest. Endo may recoup such development costs through a temporary adjustment in the royalty rate payable to Penwest that will return to its pre-adjustment level once Endo has recovered such costs. The parties have agreed that the party marketing oxymorphone ER will pay the other party royalties initially equal to 50% of the net realization (as defined in the agreement). This percentage will decrease if the aggregate U.S. net realization exceeds pre-determined thresholds. In general, the royalty payable by the marketing party to the other party will not drop below 40%. However, the royalty will be reduced by one-third in limited circumstances, including termination of the agreement based on uncured material breaches of the agreement by the royalty receiving party and certain bankruptcy and insolvency events involving the royalty receiving party. Under the agreement, Endo will purchase formulated TIMERx material for use in oxymorphone ER exclusively from the Company at specified prices. Such prices will be reflected in the determination of net profits.

11

Table of Contents

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

     The FDA accepted for filing a new drug application, or NDA, submitted by Endo for oxymorphone ER in February 2003. In October 2003, the FDA issued to Endo 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. Endo intends to communicate with the FDA throughout the final approval process in order to address the issues raised in the approvable letter and determine the appropriate course of action.

     On March 2, 2000, Mylan Pharmaceuticals Inc. announced that it had signed a supply and distribution agreement with Pfizer, Inc. to market a generic version of all three strengths (30 mg, 60 mg, 90 mg) of Pfizer’s Procardia XL. In connection with that agreement, Mylan decided not to market Nifedipine XL and agreed to pay Penwest a royalty on all future net sales of the 30 mg strength of Pfizer’s generic Procardia XL. The royalty percentage was comparable to the percentage called for in Penwest’s original agreement with Mylan for Nifedipine XL. Mylan’s sales in the United States in 2002 of the 30 mg dosage strength version of Pfizer’s generic Procardia XL totaled approximately $34.9 million. The term of this agreement continues until such time as Mylan permanently ceases to market generic Procardia XL.

12

Table of Contents

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

     The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those described below under “Risk Factors.”

Overview

     Penwest develops pharmaceutical products based on innovative oral drug delivery technologies. The foundation of Penwest’s technology platform is TIMERx, an extended release delivery system that is adaptable to soluble and insoluble drugs and is flexible for a variety of controlled release profiles. The Company has also developed two additional oral drug delivery systems, Geminex and SyncroDose. Geminex is a dual drug delivery system that is designed to provide independent release of different active ingredients contained in a drug, and SyncroDose is a chronotherapeutic drug delivery system that is designed to release the active ingredient of a drug at the desired site and time in the body.

     Penwest’s proprietary controlled release drug delivery technology is utilized in four products that were developed with collaborators and have been approved in various countries. In addition, the Company has a number of product candidates in its drug development pipeline. The most advanced of these is oxymorphone ER, an extended release formulation of oxymorphone incorporating TIMERx technology. The Company is developing oxymorphone ER with Endo. The FDA accepted for filing a new drug application, or NDA, submitted by Endo for oxymorphone ER in February 2003. In October 2003, the FDA issued to Endo 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. Endo intends to communicate with the FDA throughout the final approval process in order to address the issues raised in the approvable letter and determine the appropriate course of action. On March 17, 2003, the Company exercised its right under the oxymorphone ER agreement and gave Endo notice that it was discontinuing its participation in the funding of the development and marketing of oxymorphone ER, effective April 17, 2003.

     Prior to February 27, 2003, Penwest also developed, manufactured and distributed branded pharmaceutical excipients, which are the inactive ingredients in tablets and capsules, primarily consisting of binders, disintegrants and lubricants. On February 27, 2003, Penwest sold substantially all of the assets used in the Company’s excipient business to subsidiaries and affiliates of Josef Rettenmaier Holding GmbH & Co. KG (the “Asset Sale”). The Company received $39.5 million in cash and a promissory note for $2.25 million in consideration for the excipient business. The Company received $1.0 million of the $2.25 million promissory note in April 2003 with the balance due in May 2004. The Company intends to use the proceeds of the sale of its excipient business to expand its drug delivery business. Commencing in the first quarter of 2003, the Company reported the operating results of the excipients business as a discontinued operation.

     On August 5 and August 6, 2003, the Company completed the sale of a total of 2,507,762 shares of common stock through a private placement to selected institutional investors (the “Private Placement”), resulting in net proceeds to the Company, after fees and expenses, of approximately $49.3 million. As part of the Private Placement, the Company granted the institutional investors additional rights to purchase up to an additional 501,552 shares of common stock at a price of $26.00 per share. These additional investment rights became exercisable on September 12, 2003, and will expire on December 9, 2003, subject to extension in specific circumstances. The Company intends to use the net proceeds from the Private Placement to fund the research, development, marketing and commercialization of its products and technologies, and for general corporate purposes.

     The Company has incurred net losses since 1994. As of September 30, 2003, the Company’s accumulated deficit was approximately $86.7 million. The Company expects operating losses and negative cash flows to continue until substantial sales of products commercialized utilizing TIMERx technology occur. A substantial portion of the Company’s revenues through February 27, 2003 were generated from sales of the Company’s pharmaceutical excipient product line. The Company expects that the balance of its revenues for 2003 will be generated primarily from Mylan royalties and shipments of bulk TIMERx. The Company’s future profitability will depend on several factors, including the successful commercialization of TIMERx controlled release products, including in particular oxymorphone ER; approval of Endo’s NDA for oxymorphone ER and the timing thereof; the Company’s ability to use net proceeds from the Asset Sale and the Private Placement to expand its drug development product pipeline; royalties from Mylan’s sales of Pfizer’s 30 mg generic version of Procardia XL; and the level of the Company’s investment in research and development activities.

     The Company’s strategy includes a significant commitment to spending on research and development targeted at identifying and

13

Table of Contents

developing modified release products which can be formulated using the Company’s TIMERx technologies. The Company also expects to expend significant resources on the development of new drug delivery technologies, both internally and through in-licenses or acquisition. The Company’s spending in the area of new technology, however, is discretionary and is subject to the Company identifying appropriate opportunities, as well as the availability of funds from the Company’s operations, cash resources, collaborative research and development arrangements and external financing. There can be no assurance when or if the Company will achieve profitability or if it will be able to sustain profitability on a quarterly basis, if at all.

     The Company’s collaborative agreements include licensing arrangements in which the Company is entitled to receive milestone payments, royalties on the sale of the products covered by such collaborative agreements and payments for the purchase of formulated TIMERx material, as well as licensing arrangements which include revenue and cost sharing components in which the Company shares in the costs and profitability at predetermined percentages, but does not generally receive milestone payments. There can be no assurance that the Company’s controlled release product development efforts will be successfully completed, that required regulatory approvals will be obtained or that approved products will be successfully manufactured or marketed.

     The Company’s results of operations may fluctuate from quarter to quarter depending on the amount and timing of royalties on Mylan’s sales of Pfizer’s 30 mg generic version of Procardia XL, volume and timing of orders of formulated bulk TIMERx, and on variations in payments under the Company’s collaborative agreements, including payments upon the achievement of specified milestones. The Company’s quarterly operating results may also fluctuate depending on other factors, including variations in gross margins of the Company’s products, the mix of product sales and royalty revenues, competition and regulatory actions.

Critical Accounting Policies and Estimates

     The Company’s discussion and analysis of its financial condition and results of operations are based upon its condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The Company’s significant accounting policies are more fully described in the notes to the consolidated financial statements in the Company’s Current Report on Form 8-K filed with the SEC on September 4, 2003. These policies are important to the portrayal of the Company’s financial condition and results of operations. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Areas where significant judgments are made include, but are not limited to, revenue recognition, deferred taxes-valuation allowance and impairment of long-lived assets. Actual results could differ materially from these estimates. For a more detailed explanation of the judgments made in these areas, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Current Report on Form 8-K filed with the SEC on September 4, 2003.

     The Company also makes significant judgments in determining research and development expenses. Research and development expenses consist of costs associated with products being developed internally as well as products being developed under collaboration agreements and include related salaries, benefits and other personnel related expenses, clinical trial costs, and contract and other outside service fees. Research and development costs are expensed as incurred. Certain reimbursements of costs, generally related to drug formulation on feasibility studies, are netted against research and development expense. A significant portion of the Company’s development activities are outsourced to third parties including contract research organizations, and contract manufacturers in connection with the production of clinical materials, or may be performed by the Company’s collaborators. These arrangements may require estimates be made of related service fees or of the Company’s share of development costs, in which actual results could materially differ from the estimates and affect the reported amounts in the Company’s financial statements.

Results of Operations — Continuing Operations

Quarters Ended September 30, 2003 and 2002

     Total revenues for the third quarter of 2003 and the third quarter of 2002 were $1.0 million and $1.7 million, respectively. There were no revenues from sales of formulated bulk TIMERx for the quarter ended September 30, 2003 compared to $201,000 for the quarter ended September 30, 2002. The decrease in these product sales was primarily due to the timing of shipments of formulated bulk TIMERx to the Company’s primary customer for bulk TIMERx. Royalties and licensing fees decreased by $464,000 for the third quarter of 2003 to $1.0 million from $1.5 million in the third quarter of 2002, primarily due to lower royalties from Mylan attributable to Mylan’s decreased sales of Pfizer’s 30 mg generic version of Procardia XL, due to increased generic competition.

     Selling, general and administrative expenses increased by $55,000 to approximately $2.3 million for the third quarter of 2003 from approximately $2.2 million in the third quarter of 2002. The increase in selling, general and administrative expenses was partially due to increased facility rent expenses, state taxes on capital, and personnel costs primarily associated with the expansion of the business

14

Table of Contents

development and marketing teams. The increase also reflects certain selling, general and administrative overhead expenses being fully absorbed in continuing operations during the quarter ended September 30, 2003, that were previously allocated between continuing operations and discontinued operations for the quarter ended September 30, 2002. These increases were offset by the Company’s termination of its participation in the funding of marketing costs related to oxymorphone ER effective during the second quarter of 2003, as well as an adjustment recorded in the third quarter of 2003 to reduce the Company’s accrual for these marketing costs by $72,000. No selling, general and administrative expenses related to oxymorphone ER are expected to be incurred during the remainder of 2003, unless the Company resumes its participation in the funding of the development and marketing of oxymorphone ER. In addition, the increase in selling, general and administrative expenses were offset by an adjustment of approximately $202,000 in the third quarter of 2003 that the Company recorded to reduce its accrual for 2003 compensation. The Company also capitalized approximately $200,000 of internal general and administrative personnel costs that would otherwise have been recorded as selling, general and administrative expense during the third quarter of 2003 as part of an implementation project relating to the Company’s information system.

     Research and product development expenses increased by $58,000 to approximately $4.4 million for the third quarter of 2003 as compared to approximately $4.3 million in the third quarter of 2002. The Company incurred no costs on the development of oxymorphone ER in the third quarter of 2003. In the third quarter of 2002, the Company incurred $2.2 million of research and development expenses in connection with funding research and development relating to oxymorphone ER. The third quarter of 2003 also included an adjustment to reduce the Company’s accrual for development costs of oxymorphone ER by $266,000. This decrease was offset by an increase in the Company’s research and development expenses relating to its other products. During the third quarter of 2003, the Company incurred research and development costs primarily in connection with conducting clinical development and manufacturing scale-up for PW2101, the Company’s hypertension product, as well as clinical trials of several product candidates utilizing TIMERx technology.

     The most advanced of the Company’s product candidates is oxymorphone ER, which the Company is developing with Endo. Endo, which is responsible for conducting the clinical trials and seeking regulatory approval of the product, completed the clinical trials for this product in 2002 and the FDA accepted for filing the NDA for oxymorphone ER in February 2003. In October 2003, the FDA issued to Endo 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. Endo intends to communicate with the FDA throughout the final approval process in order to address the issues raised in the approvable letter and determine the appropriate course of action. No additional research and development expenses are expected to be incurred by the Company with respect to oxymorphone ER after April 17, 2003, unless the Company resumes its participation in the funding of the development and marketing of oxymorphone ER.

     Of the product candidates for which the Company is conducting clinical trials, the majority of spending in the third quarter of 2003 related to the clinical development and manufacturing scale-up of PW2101. The Company is currently conducting a Phase III clinical trial of PW2101 for the treatment of hypertension. The Company completed the enrollment of the approximately 100 patients who are participating in the trial in the third quarter of 2003 and expects to complete the trial in the first quarter of 2004. The Company is also completing three Phase I studies to support this filing. Assuming that the trials are successful, the Company expects that it would submit an NDA for this product in the second half of 2004. Although the Company has developed PW2101 on its own, the Company does not intend to market PW2101. As a result, the Company is currently seeking one or more marketing partners for this product.

     There can be no assurance that any of the Company’s products will be successfully developed, will receive regulatory approval, or will be successfully commercialized. Completion of clinical trials and commercialization of these product candidates may take several years, and the length of time can vary substantially according to the type, complexity and novelty of a product candidate.

     For continuing operations, the effective tax rates for the quarters ended September 30, 2003 and 2002 were zero. The effective tax rates are higher than the federal statutory rate of a 34% benefit due to valuation allowances recorded to offset deferred tax assets relating to the Company’s net operating losses.

Nine Months Ended September 30, 2003 and 2002

     Total revenues for the nine months ended September 30, 2003 and September 30, 2002 were $3.4 million and $4.1 million, respectively. Product sales increased by $104,000 to $455,000 for the nine months ended September 30, 2003 compared to $351,000 for the nine months ended September 30, 2002. The increase in product sales was primarily due to the timing of shipments of formulated bulk TIMERx to the Company’s primary customer for bulk TIMERx. Royalties and licensing revenues decreased by $731,000 to approximately $3.0 million for the first nine months of 2003, as compared to approximately $3.7 million in the comparable period in 2002, primarily due to lower royalties from Mylan, attributable to Mylan’s decreased sales of Pfizer’s 30 mg generic version of Procardia XL, due to increased generic competition.

     Selling, general and administrative expenses increased $2.1 million to approximately $7.8 million for the nine months ended

15

Table of Contents

September 30, 2003, from $5.7 million for the nine months ended September 30, 2002. This increase is primarily attributable to increased facility rent expenses, increases in the cost of business insurance, increased state taxes on capital, and increased personnel costs primarily associated with the expansion of the business development and marketing teams. The increase also reflects certain selling, general and administrative overhead expenses that were incurred subsequent to February 27, 2003, the date of the Asset Sale, being fully absorbed in continuing operations for the nine months ended September 30, 2003, that were previously allocated between continuing operations and discontinuing operations for the nine months ended September 30, 2002. The nine months ended September 30, 2003 only include marketing costs for oxymorphone ER through April 17, 2003. No selling, general and administrative expenses related to oxymorphone ER are expected to be incurred by the Company during the remainder of 2003, unless the Company resumes its participation in the funding of the development and marketing of oxymorphone ER.

     Research and development expenses during the nine months ended September 30, 2003 were $13.6 million, compared to $14.2 million for the comparable period of 2002. This lower spending reflects the completion of clinical trials for oxymorphone ER in the second half of 2002 to support the NDA filing, as well as Penwest’s decision to cease its participation in the funding of the development costs of oxymorphone ER in 2003, as compared to the comparable period of 2002, when the Company was participating in the development costs of oxymorphone ER for the full nine months. This lower spending was partially offset by increased development costs for other products in the Company’s development pipeline, primarily the Company’s hypertension product, PW2101.

     For continuing operations, the effective tax rates for the nine months ended September 30, 2003 and 2002 were zero. The effective tax rates are higher than the federal statutory rate of a 34% benefit, due to valuation allowances recorded to offset deferred tax assets relating to the Company’s net operating losses.

     The gain on sale of discontinued operations of approximately $9.5 million, recorded in the nine months ended September 30, 2003, is net of tax expense of $51,000, or less than 1% of the pretax gain. The tax expense is lower than the federal statutory rate of 34% primarily due to net operating losses which offset the gain. In addition, earnings from discontinued operations of $177,000 and $1,674,000, respectively, for the nine months ended September 30, 2003 and September 30, 2002, are net of tax expenses of $26,000 and $337,000, respectively, or 13% and 17% of pretax earnings, respectively. These tax expenses, which include foreign taxes, are lower than the federal statutory rate of 34% primarily due to overall U.S. net operating losses which offset the U.S. earnings of the discontinued operation.

Liquidity and Capital Resources

     Since August 31, 1998, the date the Company became an independent, publicly-owned company, the Company has funded its operations and capital expenditures with cash flows from proceeds from the sale of the excipient business, the sale of excipients, sales of formulated bulk TIMERx, royalties and milestone payments from Mylan and other collaborators, advances under credit facilities, and proceeds from the sale and issuance of shares of common stock.

     The Company is a party to an agreement with Endo with respect to the development of oxymorphone ER. On April 17, 2003, the Company discontinued its participation in the funding of the development and marketing of oxymorphone ER. Accordingly, the Company’s research and development, and selling, general and administrative expenses with respect to oxymorphone ER has decreased significantly in the second and third quarters of 2003, and the Company expects no significant expenses relating to oxymorphone ER for the remainder of 2003 unless the Company resumes its participation in the funding of the development and marketing of oxymorphone ER. The Company anticipates using the funds that otherwise would have been expended on oxymorphone ER to increase its investment in the development of additional products utilizing TIMERx technologies and in research and development involving new drug delivery technologies.

     On February 27, 2003, the Company completed the sale of its excipient business to Rettenmaier. As a result of the Asset Sale, the Company had approximately $35 million of net cash proceeds available after the closing, which the Company plans to use to fund development of products in its pipeline as well as the rest of the Company’s operations. However, as a result of the Asset Sale, the Company no longer derives cash flow from the sale of excipients. A portion of the proceeds from the sale of the excipient business was used to pay the $3.3 million of outstanding borrowings under the Company’s line of credit, which was terminated on February 27, 2003. In addition, the Company used the proceeds from the Asset Sale to repay in full a $2.25 million note payable to AstraZeneca AB, incurred in connection with the Company’s acquisition of certain intellectual property related to the excipient business.

     On August 5 and August 6, 2003, the Company completed the sale of a total of 2,507,762 shares of common stock through a private placement to selected institutional investors (the “Private Placement”), resulting in net proceeds to the Company, after fees and expenses, of approximately $49.3 million. As part of the Private Placement, the Company granted the institutional investors additional rights to purchase up to an additional 501,552 shares of common stock at a price of $26.00 per share. These additional investment rights became exercisable on September 12, 2003 and will expire on December 9, 2003, subject to extension in specific circumstances. The Company intends to use the net proceeds from the Private Placement to fund the research, development, marketing and

16

Table of Contents

commercialization of its products and technologies, and for general corporate purposes.

     As of September 30, 2003, the Company had cash, cash equivalents, and short-term investments of $69.6 million. The Company has no committed sources of capital other than Rettenmaier’s commitment to repay the Company $1.25 million pursuant to promissory notes in May 2004, issued in connection with the sale of the excipient business.

     The Company had negative cash flow from operations for the nine months ended September 30, 2003 of $16.4 million, primarily due to a loss from continuing operations of $17.8 million in the period. The Company had negative cash flow from operations for the nine months ended September 30, 2002 of $14.3 million, primarily due to the loss from continuing operations of $15.8 million in the period partially offset by cash flows from discontinued operations operating activities of $2.0 million. Investing activities provided $7.6 million in cash for the nine months ended September 30, 2003, primarily reflecting the Company’s receipt of cash proceeds from the Asset Sale of $36.9 million, net of transaction costs paid of $1.4 million, and the Company’s net investment in marketable securities of $26.8 million. Net cash provided by investing activities also reflected funds expended for the acquisitions of fixed assets related to the second phase of an implementation project relating to the Company’s information system and laboratory equipment for drug development activities, and funds expended for intangible assets, which included costs to secure patents on technology developed by the Company. Financing activities provided $47.8 million in cash, primarily due to the cash received in the Private Placement, as well as $2.2 million in cash provided by discontinued operations, which was offset by the repayment of approximately $5.5 million in loans in connection with the Asset Sale. The Company’s cash flow in 2003 has differed from its cash flow during 2002 primarily because the Company no longer derives revenues from sales of its excipient products and does not incur expenses in connection with its excipient business, except for the related revenues and expenses during the period ended February 26, 2003.

     The Company anticipates that its existing capital resources and anticipated internally generated funds from the sale of formulated bulk TIMERx, royalties from Mylan and other payments from collaborators, will be sufficient to fund its operations for the foreseeable future if oxymorphone ER is approved by the FDA during 2004.

     The Company’s requirements for capital in its business are substantial and will depend on many factors, including:

	•		the ongoing costs under the Company’s other collaboration agreements;
	•		whether oxymorphone ER is approved on a timely basis or at all;
	•		whether the Company resumes its participation in the funding of the development and marketing of oxymorphone ER;
	•		the structure of any future collaborative or development agreements;
	•		the progress of the Company’s collaborative and independent development projects and funding obligations with respect to the projects and the related the costs to the Company of clinical studies for its products;
	•		the costs and timing of adding drug development capabilities;
	•		royalties received from Mylan;
	•		the timing and amount of payments received under existing and possible future collaborative agreements, in particular oxymorphone ER; and
	•		the prosecution, defense and enforcement of potential patent claims and other intellectual property rights.

     If the Company’s existing resources are insufficient to satisfy its need for capital due to a delay in the approval for oxymorphone ER, lower than expected revenues from oxymorphone ER or otherwise, or if the Company acquires additional product candidates or technologies, the Company may need to sell additional equity or debt securities or seek additional financing through other arrangements. Any sale of additional equity or debt securities may result in additional dilution to the Company’s shareholders, and the Company cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to the Company, if at all. If the Company is unable to obtain this additional financing, the Company may be required to delay, reduce the scope of, or eliminate one or more of its planned research, development and commercialization activities, which could harm its financial condition and operating results.

Contractual Obligations

     The Company’s major outstanding contractual cash obligations relate to its operating leases, primarily for facilities. Below is a

17

Table of Contents

table summarizing the Company’s contractual obligations under its operating leases having initial lease terms of more than one year, as of September 30, 2003 (in thousands):

Net Operating Loss Carryforwards

     At September 30, 2003, the Company had federal net operating loss (“NOL”) carryforwards of approximately $60.6 million for income tax purposes, of which approximately $6.2 million, $8.4 million, $9.1 million, $17.8 million and $19.1 million expire in 2018, 2019, 2020, 2021 and 2022, respectively. In addition, the Company had research and development tax credit carryforwards of approximately $1.4 million of which $299,000, $306,000 and $777,000 expire in 2019, 2020, and 2021, respectively. The use of the NOLs and research and development tax credit carryforwards are limited to future taxable earnings of the Company. Due to the degree of uncertainty related to the ultimate realization of such carryforwards, at September 30, 2003, a valuation allowance of approximately $23.3 million has been recognized to offset net deferred tax assets, primarily attributable to the NOL carryforward. Utilization of the operating losses may be subject to a limitation due to the ownership change provisions of the Internal Revenue Code. The Company does not expect to use any of its NOL carryforwards to offset the Company’s taxable capital gains and ordinary income from the sale of the excipient business, as current year losses are expected to fully offset such gains and ordinary income.

18

Table of Contents

Forward Looking Statements

     This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or incorporated in this report regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “plans,” “expects,” “intends,” “may,” “projects,” “will,” and “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. In addition, any forward-looking statements represent our estimates only as of the date this quarterly report is filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date. We do not assume any obligation to update any forward-looking statements.

Risk Factors

     There are a number of important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements. We believe that the material factors that we discuss below could cause or contribute to such material differences.

We have not been profitable and expect to continue to incur substantial losses

     We have incurred net losses since 1994, including net losses of $17.1 million, $16.0 million and $8.8 million, during 2002, 2001, and 2000, respectively. For the nine months ended September 30, 2003, we had a loss from continuing operations of $17.8 million, income from discontinued operations of $177,000 and a gain on the sale of the excipient business of $9.5 million. This resulted in a net loss for the nine months ended September 30, 2003 of $8.2 million. As of September 30, 2003, our accumulated deficit was approximately $86.7 million.

     We expect net losses to continue until substantial sales of products commercialized utilizing TIMERx technology occur. If we are unable to successfully develop and commercialize these products, or generate substantial sales from these products, we may never achieve profitability.

     A substantial portion of our revenues since 1994 has been generated from the sales of our pharmaceutical excipients. Our net losses in 2000, 2001 and 2002 were reduced as a result of the operating results of our excipient business. Effective February 27, 2003, we ceased generating any revenues from the sales of excipient products; our business depends exclusively on our drug delivery business.

     Our future profitability will depend on several factors, including:

	•		the successful commercialization of TIMERx controlled release products, including in particular oxymorphone ER, a narcotic analgesic for the treatment of moderate to severe pain, being developed with Endo;
	•		our ability to use the net proceeds from the sale of our excipient business and the net proceeds from the private placement of our common stock in August 2003 to fund the research, development, marketing and commercialization of our products and technologies;
	•		royalties from Mylan Pharmaceuticals Inc.’s sales of Pfizer, Inc.’s 30 mg generic version of Procardia XL; and
	•		the level of investment in research and development activities

     Our strategy includes a significant commitment to spending on research and development targeted at identifying and developing modified release products which can be formulated using our TIMERx and other drug delivery technologies. We also expect to expend significant resources on the development of new drug delivery technologies, both internally and through in-licenses or acquisition. Our spending in the area of new technology, however, is discretionary and is subject to the availability of appropriate opportunities and funding.

     We are dependent on collaborators to conduct clinical trials, obtain regulatory approvals for, and manufacture, market, and sell our TIMERx controlled release products

19

Table of Contents

     Many of our TIMERx controlled release products have been or are being developed and commercialized in collaboration with pharmaceutical companies. Under these collaborations, depending on the structure of the collaboration, we are dependent on our collaborators to fund some portion of development, to conduct clinical trials, obtain regulatory approvals for, and manufacture, market and sell products utilizing our TIMERx controlled release technology. For instance, we are dependent on Endo to obtain the regulatory approvals required to market oxymorphone ER and will be dependent on Endo to manufacture and market oxymorphone ER in the United States. We are also dependent on Sanofi-Synthelabo S.A. and Leiras OY to manufacture and market Slofedipine XL and Cystrin CR, respectively. In addition, we are dependent on Mylan with respect to the marketing and sale of the 30 mg strength of Pfizer’s generic version of Procardia XL.

     Our collaborators may not devote the resources necessary or may otherwise be unable to complete development and commercialization of these potential products. Our existing collaborations are subject to termination on short notice under certain circumstances including, for example, if the collaborator determines that the product in development is not likely to be successfully developed or not likely to receive regulatory approval, if we breach the agreement or upon a bankruptcy event.

     If we cannot maintain our existing collaborations or establish new collaborations, we would be required to terminate the commercialization of products or undertake commercialization activities at our own expense. Moreover, we have limited experience in conducting full-scale clinical trials, preparing and submitting regulatory applications and manufacturing, marketing and selling the pharmaceutical products. We may not be successful in performing these activities.

     Our existing collaborations and any future collaborations with third parties may not be scientifically or commercially successful.

     Factors that may affect the success of our collaborations include the following:

	•		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;
	•		reductions in marketing or sales efforts or a discontinuation of marketing or sales of our products by our collaborators would reduce our revenues, which may be based on a percentage of net sales by the collaborator;
	•		our collaborators may terminate their collaborations with us, which could make it difficult for us to attract new collaborators or adversely affect our perception in the business and financial communities; and
	•		our collaborators may pursue higher priority programs or change the focus of their development programs, which could affect the collaborator’s commitment to us.

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

     The pharmaceutical industry is highly competitive and is affected by new technologies, governmental regulations, health care legislation, availability of financing, litigation and other factors. Many of our competitors have longer operating histories and greater financial, marketing, legal and other resources than we do and than certain of our collaborators do.

     We face competition from numerous public and private companies and their extended release technologies, including Johnson & Johnson’s oral osmotic pump (OROS®) technology, multiparticulate systems marketed by Elan Corporation plc, Biovail Corporation and K-V Pharmaceutical Company, traditional matrix systems marketed by SkyePharma, plc and other controlled release technologies marketed or under development by Andrx Corporation, among others.

     Our TIMERx products in development will face competition from products with the same indication as the TIMERx products being developed by Penwest. For instance, we expect extended release oxymorphone ER will face competition from Purdue Pharma’s OxyContin® and Duragesic® marketed by Johnson & Johnson.

     In addition to developing controlled release versions of immediate release products, we also selectively develop generic versions of branded controlled release products, and controlled release products which we refer to as branded generic products, that utilize our TIMERx technology and generic active chemical ingredients which are utilized in branded controlled release products. The success of these generic versions of branded controlled release products and these branded generic products will depend, in large part, on the intensity of competition from the branded controlled release product, other generic versions of the branded controlled release product and other drugs and technologies that compete with the branded controlled release product, as well as the timing of product approval.

20

Table of Contents

     The generic drug industry is characterized by frequent litigation between generic drug companies and branded drug companies. Those companies with significant financial resources will be better able to bring and defend any such litigation.

     If our clinical trials are not successful or take longer to complete than we expect, we may not be able to develop and commercialize certain of our products

     In order to obtain regulatory approvals for the commercial sale of our potential products, including controlled release versions of immediate release products and branded generic products, we or our collaborators will be required to complete clinical trials in humans to demonstrate the safety and efficacy of the products. We or our collaborators may not be able to obtain authority from the FDA or other regulatory agencies to commence or complete these clinical trials.

     The results from preclinical testing of a product that is under development may not be predictive of results that will be obtained in human clinical trials. In addition, the results of early human clinical trials may not be predictive of results that will be obtained in larger scale advanced stage clinical trials. Furthermore, we, our collaborators or the FDA may suspend clinical trials at any time if the subjects or patients participating in such trials are being exposed to unacceptable health risks, or for other reasons.

     The rate of completion of clinical trials is dependent in part upon the rate of enrollment of patients. Patient accrual is a function of many factors including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study and the existence of competitive clinical trials. Delays in planned patient enrollment may result in increased costs and program delays.

     We and our collaborators may not be able to successfully complete any clinical trial of a potential product within any specified time period. In some cases, we may not be able to complete the trial at all. Moreover, clinical trials may not show any potential product to be safe or efficacious. Thus, the FDA and other regulatory authorities may not approve any of our potential products for any indication.

     Our business, financial condition, or results of operations could be materially adversely affected if:

	•		we or our collaborators are unable to complete a clinical trial of one of our potential products;
	•		the results of any clinical trial are unfavorable; or
	•		the time or cost of completing the trial exceeds our expectations.

We may not obtain regulatory approval; the approval process can be time-consuming and expensive

     We are not able to market any of our products in the United States, Europe or in any other jurisdiction without marketing approval from the FDA, the European Agency for the Evaluation of Medicinal Products, or an equivalent foreign regulatory agency. The regulatory process to obtain market approval for a new drug takes many years and requires the expenditure of substantial resources. We have had only limited experience in preparing applications and obtaining regulatory approvals.

     To date, several drug formulations utilizing the TIMERx system have received regulatory approval:

	•		Cystrin CR was approved in Finland in 1997;
	•		Slofedipine XL was approved in the United Kingdom in 1998 and in Italy in 2001;
	•		The 30 mg strength of Nifedipine XL was approved by the FDA in December 1999; and
	•		Cronodipin was approved in Brazil in 2001.

     We also have a number of TIMERx products in our development pipeline. The most advanced of these is oxymorphone ER, which we are developing with Endo. In February 2003, the FDA accepted for filing an NDA for oxymorphone ER. In October 2003, the FDA issued to Endo 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. Endo intends to communicate with the FDA throughout the final approval process in order to address the issues raised in the approvable letter and determine the appropriate course of action. If the NDA for oxymorphone ER is not approved on a timely basis or at all, it would have a material adverse effect on our business, financial condition and results of operations.

21

Table of Contents

     We may encounter delays or rejections during any stage of the regulatory approval process based upon the failure of clinical data to demonstrate compliance with, or upon the failure of the product to meet, the FDA’s requirements for safety, efficacy and quality; and those requirements may become more stringent due to changes in regulatory agency policy or the adoption of new regulations. After submission of a marketing application, in the form of an NDA or an abbreviated new drug application, or ANDA, the FDA may deny the application, may require additional testing or data and/or may require post marketing testing and surveillance to monitor the safety or efficacy of a product. While the U.S. Food, Drug and Cosmetic Act, or FDCA, provides for a 180-day review period, the FDA commonly takes one to two years to grant final approval to a marketing application.

     Further, the terms of approval of any marketing application, including the labeling content, may be more restrictive than we desire and could affect the marketability of products incorporating our controlled release technology.

     Some of the controlled release products that we are developing with our collaborators are generic versions of branded controlled release products, which require the filing of ANDAs. Certain ANDA procedures for generic versions of controlled release products are the subject of petitions filed by brand name drug manufacturers, which seek changes from the FDA in the approval process for generic drugs. These requested changes include, among other things, tighter standards for certain bioequivalence studies and disallowance of the use by a generic drug manufacturer in its ANDA of proprietary data submitted by the original manufacturer as part of an original new drug application. Any changes in FDA regulations that make ANDA approvals more difficult may have a material adverse effect on our business, financial condition and results of operations.

     Other products containing our TIMERx controlled release technology require the filing of an NDA. A full NDA must include complete reports of preclinical, clinical and other studies to prove adequately that the product is safe and effective, which involves, among other things, full clinical testing, and as a result requires the expenditure of substantial resources. In certain cases involving controlled release versions of FDA-approved immediate release drugs, we may be able to rely on existing publicly available safety and efficacy data to support an NDA for controlled release products under Section 505(b)(2) of the FDCA when such data exists for an approved immediate release version of the same chemical entity. However, we can provide no assurance that the FDA will accept such section 505(b)(2) NDA, or that we will be able to obtain publicly available data that is useful. The section 505(b)(2) NDA process is a highly uncertain avenue to approval because the FDA’s policies on section 505(b)(2) NDAs have not yet been fully developed. There can be no assurance that the FDA will approve an application submitted under section 505(b)(2) in a timely manner or at all.

     The FDA also has the authority to revoke or suspend approvals of previously approved products for cause, to debar companies and individuals from participating in the drug-approval process, to request recalls of allegedly volatile products, to seize allegedly volatile products, to obtain injunctions to close manufacturing plants allegedly not operating in conformity with current Good Manufacturing Practices and to stop shipments of allegedly volatile products. The FDA may seek to impose pre-clearance requirements on products currently being marketed without FDA approval, and there can be no assurance that the Company or its third-party manufacturers or collaborators will be able to obtain approval for such products within the time period specified by the FDA.

Even if we obtain marketing approval, our products will be subject to ongoing regulatory review

     If regulatory approval of a product is granted, such approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing follow-up studies. As to products for which marketing approval is obtained, the manufacturer of the product and the manufacturing facilities will be subject to continual review and periodic inspections by the FDA and other regulatory authorities. The subsequent discovery of previously unknown problems with the product, manufacturer or facility may result in restrictions on the product or manufacturer, including withdrawal of the product from the market.

     If we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

We may require additional funding, which may be difficult to obtain

     As of September 30, 2003, we had cash, cash equivalents, and short-term investments of $69.6 million. We have no committed sources of capital other than Rettenmaier Holding GmbH & Co. KG’s commitment to repay us $1.25 million in May 2004 pursuant to promissory notes issued in connection with the sale of the excipient business.

     We anticipate that our existing capital resources and anticipated internally generated funds from the sale of formulated bulk TIMERx, royalties from Mylan and other payments from collaborators will be sufficient to fund our currently planned operations for the foreseeable future if oxymorphone ER is approved by the FDA during 2004.

22

Table of Contents

     We have had negative cash flows and net losses since 1994. See “We have not been profitable and expect to continue to incur substantial losses” for a discussion of our risk of continued losses. We expect negative cash flows from operations to continue until substantial sales of products commercialized utilizing TIMERx technology occur, particularly because we expect our operating expenses to continue to increase in the future, including our research and development expenses, as our product development efforts accelerate.

     The proceeds from the sale of our excipient business provided us with significant funding, but we have lost the positive cash flows generated by our excipient business.

     Our requirements for additional capital are substantial and will depend on many factors, including:

	•		the ongoing costs under the Company’s other collaboration agreements
	•		whether oxymorphone ER is approved on a timely basis, or at all;
	•		whether the Company resumes its participation in the funding of the development and marketing of oxymorphone ER;
	•		the structure of any future collaborative or development agreements;
	•		the progress of the Company’s collaborative and independent development projects and funding obligations with respect to the projects and the related the costs to the Company of clinical studies for its products;
	•		the costs and timing of adding drug development capabilities;
	•		royalties received from Mylan;
	•		the timing and amount of payments received under existing and possible future collaborative agreements, in particular oxymorphone ER; and
	•		the prosecution, defense and enforcement of potential patent claims and other intellectual property rights.

     If our existing resources are insufficient to satisfy our need for capital due to a delay in the approval for oxymorphone ER, lower than expected revenues from oxymorphone ER or otherwise, or if we acquire additional product candidates or technologies, we may need to sell additional equity or debt securities or seek additional financing through other arrangements. If we determine to seek additional funding, we may do so through collaborative agreements or research and development arrangements and public or private financings. Additional financing may not be available to us on acceptable terms, if at all.

     If we raise additional funds by issuing equity securities, further dilution to our then existing shareholders may result. In addition, the terms of the financing may adversely affect the holdings or the rights of such shareholders. Any sale of additional equity or debt securities may result in additional dilution to our shareholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to delay, reduce the scope of, or eliminate one or more of our planned research, development and commercialization activities, which could harm our financial condition and operating results.

Our controlled release products that are generic versions of branded controlled release products that are covered by one or more patents and our branded generic products may be subject to litigation

     We expect to file or have our collaborators file ANDAs or NDAs for our controlled release products under development that are generic versions of branded controlled release products that are covered by one or more patents, or are branded generic products. It is likely that the owners of the patents covering the brand name product or the sponsors of the NDA with respect to the branded product will sue or undertake regulatory initiatives to preserve marketing exclusivity as Pfizer did with respect to our generic version of Procardia XL that was developed with Mylan. Any significant delay in obtaining FDA approval to market our product candidates as a result of litigation, as well as the expense of such litigation, whether or not we or our collaborators are successful, could have a material adverse effect on our business, financial condition and results of operations.

The market may not be receptive to products incorporating our drug delivery technologies

     The commercial success of products incorporating our extended release technology that are approved for marketing by the FDA and other regulatory authorities will depend upon their acceptance by the medical community and third party payors as clinically

23

Table of Contents

useful, cost-effective and safe. No product based on our TIMERx or other extended release technology is marketed in the United States, so there can be no assurance as to market acceptance.

     Other factors that we believe could materially affect market acceptance of these products include:

	•		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; 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

     Our success depends in significant part on our ability to develop patentable products, to obtain patent protection for our products, both in the United States and in other countries, and to enforce these patents. The patent positions of pharmaceutical firms, including us, are generally uncertain and involve complex legal and factual questions. As a result, patents may not issue from any patent applications that we own or license. If patents do issue, the claims allowed may not be sufficiently broad to protect our technology. In addition, issued patents that we own or license may be challenged, invalidated or circumvented. Our patents also may not afford us protection against competitors with similar technology.

     Our success also depends on our not infringing patents issued to competitors or others. We are aware of patents and patent applications belonging to competitors and others that may require us to alter our products or processes, pay licensing fees or cease certain activities.

     We may not be able to obtain a license to any technology owned by a third party that we require to manufacture or market one or more products. Even if we can obtain a license, the financial and other terms may be disadvantageous.

     Our success also depends on our maintaining the confidentiality of our trade secrets and patented know-how. We seek to protect such information by entering into confidentiality agreements with employees, consultants, licensees and pharmaceutical companies. These agreements may be breached by such parties. We may not be able to obtain an adequate, or perhaps, any remedy to such a breach. In addition, our trade secrets may otherwise become known or be independently developed by our competitors.

We may become involved in patent litigation or other intellectual property proceedings relating to our products or processes which could result in liability for damage or stop our development and commercialization efforts

     The pharmaceutical industry has been characterized by significant litigation and interference and other proceedings regarding patents, patent applications and other intellectual property rights. The types of situations in which we may become parties to such litigation or proceedings include:

	•		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.

     An adverse outcome in any litigation or other proceeding could subject us to significant liabilities to third parties and require us to cease using the technology that is at issue or to license the technology from third parties. We may not be able to obtain any required licenses on commercially acceptable terms or at all.

     The cost of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Although the legal costs of defending litigation relating to a patent infringement claim are generally the contractual responsibility of our collaborators (unless such claim relates to TIMERx in which case such costs are our responsibility), we could nonetheless incur significant unreimbursed costs in participating and assisting in the litigation. Some of our competitors may be able to sustain the cost of such litigation and proceedings more effectively than we can because of their substantially greater resources. Uncertainties resulting from the initiation

24

Table of Contents

and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to complete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

We have only limited manufacturing capabilities and will be dependent on third party manufacturers

     We lack commercial scale facilities to manufacture our TIMERx material or any products we may develop in accordance with current GMP requirements prescribed by the FDA. We currently rely on Draxis Pharma, Inc. for the bulk manufacture of our TIMERx material for delivery to our collaborators under a contract that expires in September 2004. The agreement shall be automatically renewed for successive one- year periods, unless either party gives notice of its intent not to renew the contract, at least six months prior to the end of the then-current term.

     There are a limited number of manufacturers that operate under GMP regulations capable of manufacturing our TIMERx material. Although the Company has qualified alternate suppliers with respect to the xanthan and locust bean gums used to manufacture our TIMERx material, if our current manufacturer is unable to manufacture the TIMERx material in the required quantities, on a timely basis or at all, we may be unable to obtain alternative contract manufacturing, or obtain such manufacturing on commercially reasonable terms.

     If our third party manufacturers fail to perform their obligations, we may be adversely affected in a number of ways, including:

	•		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 have limited experience in manufacturing TIMERx material on a commercial scale and no facilities or equipment to do so. If we determine to develop our own manufacturing capabilities, we will need to recruit qualified personnel and build or lease the requisite facilities and equipment. We may not be able to successfully develop our own manufacturing capabilities. Moreover, it may be very costly and time consuming for us to develop such capabilities.

     The manufacture of any of our products is subject to regulation by the FDA and comparable agencies in foreign countries. Any delay in complying or failure to comply with such manufacturing requirements could materially adversely affect the marketing of our products and our business, financial condition and results of operations.

We are dependent upon a limited number of suppliers for the gums used in our TIMERx material

     Our drug delivery systems are based a hydrophilic matrix combining a heterodispersed mixture primarily composed of two polysaccharides, xanthan and locust bean gums, in the presence of dextrose. These gums are also used in our Geminex and SyncroDose drug delivery systems. We purchase these gums from a sole source supplier. We have qualified alternate suppliers with respect to such materials, but we can provide no assurance that interruptions in supplies will not occur in the future or that we will not have to obtain substitute suppliers. Any interruption in these supplies could have a material adverse effect on our ability to manufacture bulk TIMERx for delivery to our collaborators.

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 in certain markets

     The availability of reimbursement by governmental and other third party payors affects the market for any pharmaceutical product. These third party payors continually attempt to contain or reduce the costs of health care by challenging the prices charged for medical products and services. In certain foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control.

     The generic versions of controlled release products being developed by us and our collaborators may be assigned an AB rating if the FDA considers the product to be therapeutically equivalent to the branded controlled release drug. Failure to obtain an AB rating from the FDA would indicate that for certain purposes the drug would not be deemed to be therapeutically equivalent, would not be fully substitutable for the branded controlled release drug and would not be relied upon by Medicaid and Medicare formularies for reimbursement.

25

Table of Contents

     In both the U.S. and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system. Further proposals are likely. The potential for adoption of these proposals may affect our ability to raise capital, obtain additional collaborative partners and market our products.

     If we or our collaborators obtain marketing approvals for our products, we expect to experience pricing pressure due to the trend toward managed health care, the increasing influence of health maintenance organizations and additional legislative proposals. We may not be able to sell our products profitably if reimbursement is unavailable or limited in scope or amount.

We will be exposed to product liability claims and may not be able to obtain adequate product liability insurance

     Our business exposes us to potential product liability risks which are inherent in the testing, manufacturing, marketing and sale of pharmaceutical products. Product liability claims might be made by consumers, health care providers, pharmaceutical companies, or others that sell our products. These claims may be made even with respect to those products that are manufactured in licensed and regulated facilities or that otherwise possess regulatory approval for commercial sale.

     We are currently covered by primary product liability insurance in the amount of $1 million per occurrence and $2.0 million annually in the aggregate on a claims-made basis and by umbrella liability insurance in excess of $25.0 million which can also be used for product liability insurance. This coverage may not be adequate to cover any product liability claims. Product liability coverage is expensive. In the future, we may not be able to maintain or obtain such product liability insurance at a reasonable cost or in sufficient amounts to protect us against losses due to liability claims. Any claims that are not covered by product liability insurance could have a material adverse effect on our business, financial condition and results of operations.

The market price of our common stock may be volatile

     The market price of our common stock, like the market prices for securities of pharmaceutical, biopharmaceutical and biotechnology companies, have historically been highly volatile. The market from time to time experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in our operating results, future sales of our common stock, announcements of technological innovations or new therapeutic products by us or our competitors, announcements regarding collaborative agreements, clinical trial results, government regulation, developments in patent or other proprietary rights, public concern as to the safety of drugs developed by us or others, changes in reimbursement policies, comments made by securities analysts and general market conditions may have a significant effect on the market price of the common stock.

Certain 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

     We have adopted a shareholder rights plan, often referred to as a poison pill. The rights issued under the plan will cause substantial dilution to a person or group that attempts to acquire us on terms that are not approved by our board of directors, unless the board first determines to redeem the rights. Various provisions of our Certificate of Incorporation, our Bylaws and Washington law may also have the effect of deterring hostile takeovers or delaying or preventing changes in control or management of our company, including transactions in which our shareholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of shareholders to approve transactions that they may deem to be in their best interest.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk and Risk Management Policies

     Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates and other market changes. Market risk is attributed to all market sensitive financial instruments, including debt instruments. The operations of the Company are exposed to financial market risks, primarily changes in interest rates. The Company’s interest rate risk primarily relates to its investments in marketable securities.

     The primary objectives for the Company’s investment portfolio are liquidity and safety of principal. Investments are made to achieve the highest rate of return to the Company, consistent with these two objectives. The Company’s investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by issuer. Marketable securities primarily consist of corporate debt, certificates of deposit and U.S. Government Agency-backed notes, and approximated $28.8 million at September 30, 2003. These securities have contractual maturity dates of up to twenty-three months. Due to the relatively short-term maturities of these securities, management believes there is no

26

Table of Contents

significant market risk. At September 30, 2003, market values approximated carrying values. At September 30, 2003, the Company had approximately $69.6 million in cash, cash equivalents and investments in marketable securities, and accordingly, a sustained decrease in the rate of interest earned of 1% would cause a decrease in the annual amount of interest earned of up to approximately $696,000.

Item 4. Controls and Procedures

     The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2003. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of September 30, 2003, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company is made known to the Company’s chief executive officer and chief financial officer by others within the Company, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

     No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

27

Table of Contents

PART II — OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

     On August 5 and August 6, 2003, the Company completed the sale of a total of 2,507,762 shares of common stock through a private placement to selected institutional investors, resulting in net proceeds to the Company, after fees and expenses, of approximately $49.3 million. As part of the private placement, the Company granted the institutional investors additional rights to purchase up to an additional 501,552 shares of common stock at a price of $26.00 per share. These additional investment rights became exercisable on September 12, 2003, and will expire on December 9, 2003, subject to extension in specific circumstances. The shares and additional investment rights were offered and sold to “accredited investors” without registration under the Securities Act of 1933, as amended, or the securities laws of certain states, in reliance on the exemptions provided by Section 4(2) of the Securities Act and Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws.

Item 6. Exhibits and Reports on Form 8-K

     a.     Exhibits.

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

     b.     Reports on Form 8-K.

     On August 5, 2003, the Company filed a report on Form 8-K reporting it had entered into definitive agreements for the sale of approximately 1.9 million shares of common stock and additional rights to purchase up to an additional 380,952 shares of common stock at a price of $26.00 per share in a private placement to selected institutional and other accredited investors for a total of $40 million.

     On August 6, 2003, the Company filed a report on Form 8-K reporting it had entered into definitive agreements for the sale of approximately 603,000 shares of common stock and additional rights to purchase up to an additional 120,600 shares of common stock at a price of $26.00 per share in a private placement to selected institutional and other accredited investors for a total of $12.7 million.

     On August 6, 2003, the Company filed a report on Form 8-K under Item 9, containing a copy of its earnings release for the period ended June 30, 2003 (including financial statements) pursuant to Item 12 (Results of Operations and Financial Condition).

     On September 4, 2003, the Company filed a report on Form 8-K for the purpose of filing with the Securities and Exchange Commission audited consolidated financial statements, including its consolidated balance sheets as of December 31, 2002 and December 31, 2001 and related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. The consolidated financial statements included in this current report were prepared and were filed solely for the purpose of presenting as a discontinued operation, the Company’s excipient business, which was sold on February 27, 2003 and was previously included in continuing operations. The Company also included in this current report its related Management’s Discussion and Analysis of Financial Conditions and Results of Operations, which reflected Penwest’s excipient business as a discontinued operation.

28

Table of Contents

SIGNATURE

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

Date: October 30, 2003

29

Table of Contents

EXHIBIT INDEX

(1)		Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K (No. 000-23467) filed with the Commission on August 5, 2003
(2)		Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K (No. 000-23467) filed with the Commission on August 6, 2003

30