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Article by DailyStocks_admin    (01-02-09 06:00 AM)

Filed with the SEC from Dec 18 to Dec 24:

Penwest Pharmaceuticals (PPCO)
Perceptive Advisors believes PPCO is "wasting money on programs that will not generate value for its shareholders." Perceptive said that a Nov. 21 presentation by Penwest CEO Jennifer Good "did nothing to address our assertion" that PPCO is wasting money; rather, the holder said it was given greater detail "into exactly where this money is being wasted." Perceptive challenges the CEO and the board of directors to present a coherent, quantitative, and rational analysis illustrating that the $22 million in expenses projected for '09 are justified and will result in value creation. Perceptive currently holds 6,697,208 shares (21.2%).

BUSINESS OVERVIEW

Overview

We are a drug development company dedicated to bringing to the marketplace innovative products that help improve the lives of patients. Our goal is to identify, develop and commercialize products that address unmet medical needs, primarily for disorders of the nervous system. We are currently applying our drug development and drug delivery expertise to a pipeline of potential products that are in various stages of development, and that we intend to commercialize independently or through third party alliances.

On June 22, 2006, the United States Food and Drug Administration, or FDA, approved Opana ® ER. Opana ER, an extended release formulation of oxymorphone hydrochloride, is a product that we developed with Endo Pharmaceuticals Inc., or Endo, using our proprietary TIMERx ® drug delivery technology. Opana ER is approved for twice-a-day dosing in patients with moderate to severe pain requiring continuous, around-the-clock opioid therapy for an extended period of time and is being marketed by Endo in the United States.

We are currently developing product candidates designed for the treatment of pain, epilepsy, Parkinson’s disease and diseases related to the mitochondrial respiratory chain. We are developing nalbuphine ER, a controlled release formulation of nalbuphine hydrochloride, for the treatment of moderate chronic pain. In addition, we are developing A0001, a product candidate designed for the treatment of inherited mitochondrial respiratory chain diseases, under a collaboration and license agreement with Edison Pharmaceuticals, Inc., or Edison, that we entered into in July 2007. Under the Edison agreement, we have agreed with Edison to collaborate on the development of A0001 and up to one additional drug candidate of Edison’s, initially for the treatment of inherited mitochondrial respiratory chain diseases. Finally, we have two other product candidates in formulation development for the treatment of epilepsy and Parkinson’s disease, respectively.

Our strategy includes developing drug candidates to treat disorders of the nervous system. We expect to leverage our expertise in drug formulation and drug development to advance these products. We also expect to expend resources on product candidates obtained through in-licenses or acquisitions. Our spending in this area, however, is discretionary and is subject to identifying appropriate opportunities, as well as the availability of funds from our operations, cash resources, collaborative research and development arrangements, and external financing.

Products

Opana ® ER. Opana ER is an oral extended-release opioid analgesic, which we developed with Endo using our proprietary TIMERx ® technology. In June 2006, the FDA approved for marketing Opana ER for twice-a-day dosing in patients with moderate to severe pain requiring continuous, around-the-clock opioid therapy for an extended period of time. Under the terms of our strategic alliance agreement with Endo, Endo is responsible for the marketing of Opana ER in the United States. Endo launched Opana ER in the United States in July 2006 in 5 mg, 10 mg, 20 mg and 40 mg tablets. In March 2008, Endo announced the launch of three new dosage strengths of Opana ER, 7.5 mg, 15 mg and 30 mg. Under the terms of the agreement with Endo, any fees, royalties payments or other revenues received by the parties in connection with any collaborator outside of the United States will be divided equally. We and Endo are currently seeking a collaborator for Opana ER in Europe. Opana ER has not been approved in Europe.

In January 2007, we entered into an amendment to the strategic alliance agreement between us and Endo. Under the terms of this amendment, we and Endo agreed that royalties payable to us for U.S. sales of Opana ER would be calculated based on net sales of the product rather than on operating profit. We expect Endo to initiate the payment of royalties to us on U.S. sales of Opana ER in the second half of 2008. A description of this amendment is included below under the caption “Collaborative Agreements.”

Opana ER competes in the market for long acting, strong opioid analgesics with products such as Purdue Pharma’s OxyContin ® and MS Contin, Johnson and Johnson’s Duragesic ® patch, King Pharmaceuticals’ Avinza ® and Alpharma’s Kadian ® , as well as generic versions of some of these products. Products in the long acting, strong opioids market had aggregate sales in the United States in 2007 of approximately $4.1 billion.

We and Endo are parties to two lawsuits against Impax Laboratories, Inc., or IMPAX, in connection with IMPAX’s Abbreviated New Drug Application, or ANDA, for Opana ER in four strengths, 5 mg, 10 mg, 20 mg and 40 mg. IMPAX notified Endo and us in October and November of 2007 that its ANDA contained Paragraph IV certifications for our patents, U.S. Patent Nos. 5,662,933, 5,958,456, and 7,276,250, listed in the Orange Book for Opana ER. We and Endo originally filed a lawsuit against IMPAX in the United States District Court for the District of Delaware, or U.S. Dist. Delaware, on November 15, 2007 alleging infringement of certain these patents, and seeking a declaratory judgment that, among other things, IMPAX had no basis to trigger the ANDA patent litigation process under the Hatch-Waxman Act because the FDA, according to IMPAX’s press releases, had rescinded its acceptance of IMPAX’s original ANDA before the date of IMPAX Paragraph IV certification notices. In addition, we and Endo asked the court to declare that these Paragraph IV certification notices to be null, void and of no legal effect.

On December 14, 2007, we received a letter from IMPAX notifying us that the refiling of its ANDA was accepted by the FDA as of November 23, 2007. The notice letter stated that IMPAX’s ANDA contained Paragraph IV certifications for the three patents noted above and that the FDA had required IMPAX to notify Endo and us of these certifications. In this December notice, IMPAX also stated that it would not withdraw its prior Paragraph IV certification notices because it believed they were properly provided and because IMPAX was continuing its efforts to convince the FDA to assign an earlier filing date to its ANDA. As a result of the FDA’s determination of IMPAX’s ANDA filing date and the receipt of the new Paragraph IV certification notice, on December 20, 2007, we and Endo filed a notice of dismissal of the portion of our November 15, 2007 complaint seeking declaratory judgment as noted above. We and Endo did not dismiss the patent infringement claims in the November lawsuit because IMPAX refused to withdraw its prior Paragraph IV certification notices. On January 25, 2008, we and Endo filed a second lawsuit against IMPAX in U.S. Dist. Delaware, alleging infringement of two of these patents above in response to IMPAX’s December notice. Given the FDA’s acceptance of IMPAX’s ANDA as of November 23, 2007, we believe that we are entitled to a 30-month stay under the Hatch-Waxman Act beginning on December 14, 2007. Endo and we intend to pursue all available legal and regulatory avenues defending Opana ER. A description of this litigation is included in “Part I. Item 3-Legal Proceedings.”

On February 14, 2008, we received a notice from Actavis South Atlantic LLC, or Actavis, advising of the filing by Actavis of an ANDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j) for Opana ER in four strengths, 5 mg, 10 mg, 20 mg and 40 mg. The Actavis Paragraph IV certification notice refers to our patents, U.S. Patent Nos. 5,128,143, 5,662,933, 5,958,456, and 7,276,250, which cover the formulation of Opana ER. These patents are listed in the FDA’s Orange Book and expire in 2008, 2013, 2013 and 2023, respectively. We and Endo are currently reviewing the details of this notice from Actavis.

Nalbuphine ER. We are developing nalbuphine ER, a controlled release formulation of nalbuphine hydrochloride, for the treatment of moderate chronic pain. Nalbuphine ER, which we formulated using our TIMERx drug delivery technology, is designed to be taken as a tablet twice daily. Nalbuphine hydrochloride is a synthetic opioid agonist/antagonist analgesic that interacts with certain opioid receptors. The agonist/antagonist mechanism of action of nalbuphine ER may reduce the potential for abuse of nalbuphine ER. Nalbuphine hydrochloride is currently only available as a sterile solution suitable for subcutaneous, intramuscular or intravenous injection for acute pain under the brand name Nubain ® and in a generic version. The annual sales of Nubain and its generic version were approximately $11.2 million in 2007, but we believe the market for nalbuphine hydrochloride is limited by currently available formulations of the drug. We expect that nalbuphine ER, if approved, would compete in the moderate chronic pain market. Physicians currently treat patients with moderate chronic pain with a range of treatments from non-steroidal anti-inflammatory drugs, or NSAIDs, to strong opioids. These treatments include products such as Tramadol ® ER and products containing hydrocodone, codeine or propoxyphene, such as Vicodin and Darvon. We believe the profile of nalbuphine ER may be attractive in the treatment of moderate chronic pain compared to current options because it should provide a better balance of good efficacy, low abuse potential and low side effects.

We conducted multiple Phase I studies of various formulations of nalbuphine ER in 2005 to establish the pharmacokinetic profile and generate safety data. In December 2005, we completed a Phase IIa trial of nalbuphine ER designed to determine the degree and duration of pain relief of two different dose levels of nalbuphine ER in an acute dental pain model. The goal of this study was to establish the proof of efficacy in oral dosing. Results from this Phase IIa study demonstrated that nalbuphine ER reduced mean pain intensity in a dose-dependent manner over the twelve-hour period of the study. No unusual side effects were reported during the twelve-hour dosing interval.

In 2006, we conducted some reformulation work to develop the product for chronic pain and conducted several Phase I studies. In January 2007, we commenced a Phase I dose escalation to steady state trial. The intent of this trial was to collect additional safety and pharmacokinetic information which was used to bridge the safety data from the acute pain trial we conducted in 2005 to a chronic pain trial we initiated in June 2007. The June 2007 Phase IIa trial was designed to determine the safety and efficacy of nalbuphine ER compared to placebo for treatment of moderate chronic pain. It was a randomized, double-blind, placebo controlled design, with a forced weekly dose escalation. The main objective of the trial was to evaluate the analgesic efficacy of nalbuphine ER in a patient population experiencing chronic pain. There were 138 patients in the intent-to-treat population with chronic pain secondary to osteoarthritis of the knee or hip. Patients enrolled in the trial were given the lowest dose of the drug for week one, increased to a mid-dose level for week two, and increased to the highest dose studied for week three. The study group included a 2-to-1 randomization of patients on drug versus placebo. We designed the trial with multiple endpoints related to clinical pain relief in an effort to understand the activity of the drug and provide the basis for designing a Phase IIb study. Based on the Phase IIa results, we have concluded that nalbuphine ER demonstrated trends of efficacy sufficient to support continued development of the drug. The adverse events were typical opioid-type side effects. In the study, 24% of the nalbuphine ER patients reported no side effects, 66% reported side effects that were characterized as mild or moderate in severity, and 10% reported side effects that were severe. No drug-related serious adverse events were reported during the trial. The adverse events in the trial appear to have occurred only in the first week of the trial and were not chronic adverse events that continued throughout the study.

We are planning for a Phase IIb trial which we expect to commence in the second half of 2008, subject to the availability of capital resources to conduct such study. We expect that the goals of the Phase IIb trial will be to demonstrate statistically significant analgesic efficacy of the drug versus placebo using an accepted clinical endpoint and to characterize a clinically meaningful titration regimen. We believe that this trial will take approximately one year to complete. We expect that if we complete all the clinical trials required by the FDA for nalbuphine ER, we would seek FDA approval through the filing of a 505(b)(2) NDA. We expect to seek collaborators in the United States and Europe to complete the development of this product and to share marketing rights with the collaborators.

A0001. A0001 is a drug candidate we in-licensed from Edison under our collaboration and license agreement with Edison. A0001, a coenzyme Q molecular analog, has shown biological activity in cell assays developed by Edison to test the ability of this class of compounds to improve mitochondrial function. Impairment of mitochondrial function is commonly believed to be a significant factor in a number of inherited disorders, including Friedreich’s Ataxia, Leber’s Hereditary Optical Neuropathy, Coenzyme Q10 Deficiency Syndrome and MELAS syndrome. A0001 is commonly known to be orally bioavailable in humans and has received orphan drug designation from the FDA for the treatment of inherited mitochondrial respiratory chain diseases. We have completed the Investigational New Drug Application, or IND, enabling toxicology studies for A0001 and we intend to submit an IND for certain of these indications and commence Phase 1 development on this compound in the second half of 2008.

Additional Product Candidates. We have two other product candidates in formulation development:


PW4153
Parkinson’s disease
PW4110
Epilepsy

We are currently developing formulations and plan to conduct pilot scale Phase I clinical studies on these product candidates to obtain pharmacokinetic data. If the Phase I clinical studies of any of these product candidates show the desired plasma level profiles, we expect to advance the product candidate into further clinical trials after consideration of a number of factors, including our available resources at such time, the regulatory pathway and the development status of our other product candidates. We will also determine how to advance the product, for example, whether to develop the product on our own and, if not, when to seek a collaborator.

In the third quarter of 2007, we completed a scientific review of our development programs, which we conducted to align our efforts with our corporate strategy and internal resources. As a result of this review, we determined to cease development of torsemide ER, a controlled release formulation of torsemide, that we were developing for the treatment of chronic edema resulting from congestive heart failure. In addition, we made the decision to cease efforts on two Phase I programs.

Under a collaboration agreement with Mylan Pharmaceuticals Inc., or Mylan, we developed Nifedipine XL, a generic version of Procardia XL, based on our TIMERx technology. In March 2000, Mylan announced that it had signed a supply and distribution agreement with Pfizer Inc., or Pfizer, to market Pfizer’s generic versions of all three strengths (30 mg, 60 mg, 90 mg) of Procardia XL. In connection with that agreement, Mylan decided not to market Nifedipine XL, and agreed to pay us a royalty on all future net sales of the 30 mg strength of Pfizer’s generic Procardia XL.

Our Strategy

Our business strategy is to build a drug development company that identifies, develops and commercializes products that address unmet medical needs, primarily for disorders of the nervous system. The elements of our strategy include:


• Focus on products that address disorders of the nervous system. We are focusing on products that address disorders of the nervous system. We believe the market for treating nervous system disorders is attractive because many of these disorders are chronic in nature and are largely treated by specialist physicians that can be addressed with a relatively small sales force. In addition, we believe many of the currently approved products for the treatment of nervous system disorders can be enhanced by drug delivery technologies. If, however, we believe that we could develop a product that would address an unmet medical need and have a substantial market value, we may also selectively develop product candidates for disorders outside of the nervous system.

• Develop product candidates that have the potential for at least five years of exclusivity in the marketplace. We intend to expand our portfolio to include product candidates for which we or our collaborators could obtain at least five years of exclusivity in the marketplace following marketing approval. This exclusivity could arise from meeting certain regulatory criteria for market exclusivity with the FDA, for example, in connection with the approval of new chemical entities or orphan drugs, or from intellectual property protection.

• Seek alternative regulatory pathway when appropriate. When appropriate, we intend to utilize a “505(b)(2) regulatory strategy” to seek approval for products we develop by reformulating existing drugs utilizing proprietary drug delivery technologies. Under this strategy, we would file a section 505(b)(2) New Drug Application, or a section 505(b)(2) NDA, which would rely on the FDA’s previous findings for the safety and effectiveness of the existing drug, in addition to the data we generate regarding our reformulated drug. Because a section 505(b)(2) NDA may rely on the FDA’s previous findings, the trials that need to be conducted are generally more limited. Therefore, the development of a drug using the 505(b)(2) regulatory strategy is generally less costly and time consuming than the full NDA process.

• Continue to leverage and expand our expertise in drug development and the use of our proprietary drug delivery technologies. We believe that we have significant expertise in drug formulation and in oral drug delivery technologies. Our proprietary drug delivery technologies, TIMERx controlled release, Geminex ® dual delivery, and SyncroDose ® and Gastrodose tm site-specific deliveries are applicable to a wide range of drugs with different physical and chemical properties including water soluble and insoluble drugs, as well as high dose and low dose drugs. Using these technologies, we believe that we can formulate drugs with precise release profiles and improve the characteristics of existing drugs. We have made, and plan to continue to make, these technologies available to collaborators in traditional drug delivery arrangements to leverage the potential breadth and financial value of our proprietary technologies.


• Commercialize product candidates independently and in collaboration with third parties. We currently do not have any sales infrastructure. Opana ER is marketed by Endo; other marketed products using our TIMERx technology are marketed by other collaborators. We expect that in the future, we will independently seek regulatory approval for most of our product candidates designed for the treatment of disorders of the nervous system. By retaining the rights to these products through approval, we believe that we can retain more value of such products if they are approved. In addition, we may retain marketing rights, or co-promotion rights, for our products that would be marketed to specialist physicians and build a relatively small specialty sales force to market these products. For those products that we selectively develop for the treatment of disorders outside of the nervous system, we plan to seek collaborators for the marketing of those products. The timing of seeking a collaborator will depend on a number of factors, including the costs of clinical development and our financing needs.

Drug Delivery Technologies

We currently have four proprietary drug delivery technologies: TIMERx, a controlled-release technology; Geminex, a technology enabling drug release at two different rates; SyncroDose, a technology enabling controlled release at the appropriate site in the body; and our GastroDose system, a technology enabling drug delivery to the upper gastrointestinal tract. We believe our drug delivery technologies have broad applicability across multiple therapeutic areas. To date, our TIMERx technologies have been used in four products that have received regulatory approval, one in the United States and the others in countries in Europe or South America.

TIMERx

We developed our proprietary TIMERx delivery technology to address some limitations of other oral drug delivery technologies. We believe that the TIMERx technology has advantages over other oral drug delivery technologies because it is readily manufactured, adaptable to soluble and insoluble drugs, and flexible for a variety of controlled release profiles. We continue to develop additional products in our pipeline using TIMERx and seek to outlicense the technology to third parties for products outside of our strategic focus.

The TIMERx drug delivery platform is based on a hydrophilic matrix combining a heterodispersed mixture composed primarily of two polysaccharides, xanthan gum and locust bean gum, in the presence of dextrose. Under the TIMERx delivery system, drug release is controlled by the rate of water penetration from the gastrointestinal, or GI, tract into the TIMERx gum matrix, which expands to form a gel and subsequently releases the active drug substance. We can precisely control the release of the active drug substance in a tablet using the TIMERx technology by varying the proportion of the gums, together with the tablet coating and the tablet manufacturing process. Drugs using TIMERx technology are formulated by combining the active drug substance, the TIMERx matrix and additional excipients, and compressing the mixture into a tablet.

Opana ER was formulated using our TIMERx technology. We have also developed the formulation for nalbuphine ER with our TIMERx technology. To date, several other drug formulations utilizing our TIMERx technology have received regulatory approval in the United States, United Kingdom, Italy and Finland. In the United States, Nifedipine XL, a generic version of Pfizer’s Procardia ® XL for the treatment of hypertension and angina that we developed with Mylan, is approved for sale. Mylan, which has the marketing rights for Nifedipine XL, is not marketing Nifedipine XL as a result of its acquisition from Pfizer of the right to market Pfizer’s generic versions of three strengths of Procardia XL under Pfizer’s NDA.

Geminex

Our patented Geminex dual release technology provides the independent release of one or more active ingredients in a single bi-layer tablet. The release of the active ingredients can be achieved at different rates involving two different controlled release profiles, or a controlled release and an immediate release profile. The technology is based on a bi-layer tablet that utilizes TIMERx matrix in the controlled release layer or layers.

SyncroDose

Our patented SyncroDose drug delivery system delivers the active drug substance within a specific site in the GI tract or at the optimal time after ingestion, which is referred to as chronotherapeutic delivery. We believe that there are several disease states that can benefit from chronotherapeutic delivery including arthritis, cardiovascular disorders, asthma, neurological disorders and site-specific diseases such as GI cancers. SyncroDose is a technology based on our underlying TIMERx technology. The SyncroDose technology utilizes the TIMERx gum matrix in the coating of the tablet.

GastroDose

We developed our gastroretentive drug delivery system to provide controlled delivery of drugs in the upper GI tract. Drugs delivered orally are mostly absorbed in the stomach and the upper portions of the GI tract. By targeting delivery in the part of the stomach where a drug is absorbed, we believe we can increase the bioavailability of the drug, which could result in increased efficacy or a lower required dose of the drug.

Collaborative Agreements

We enter into collaborative agreements with pharmaceutical companies to develop, market or manufacture some of our products. Under these agreements, we may jointly fund research and development with our collaborators. In some of these arrangements, we may pay up-front licensing fees or milestone payments and may agree to pay royalties on the sales of the products developed under these agreements. We may also license our TIMERx technology to collaborators who agree to be responsible for the development and marketing of a product using our technology in exchange for up-front licensing fees, milestone payments, and royalties on our collaborators’ sales of the products covered by such collaborative arrangements. In some of these arrangements, we may be entitled to payments for the purchase of formulated TIMERx material by our collaborators.

In the future, we may enter into collaborative agreements involving the outlicensing of a product candidate after we complete some or all of the development work on the product candidate. We anticipate that we would receive up-front licensing fees, milestone payments and royalties. For those product candidates which we seek to license prior to a regulatory filing, we would expect the collaborator to fund some of the development costs, as well as to market or co-promote the products upon approval. In determining whether and when to enter into such a collaborative agreement for a product, we will consider the complexity, the risk and cost of the development program, the level of marketing information required during development and the diseases for which the drug is intended.

Endo Pharmaceuticals Inc.

In September 1997, we entered into a strategic alliance agreement with Endo with respect to the development of Opana ER. This agreement was amended and restated in April 2002, and was further amended in January 2007.

During the development of the product, we formulated Opana ER, and Endo conducted all clinical studies, and prepared and filed all regulatory applications. We agreed to supply bulk TIMERx material to Endo, and Endo agreed to manufacture and market Opana ER in the United States. We also agreed with Endo that any development and commercialization of Opana ER outside the United States would be accomplished through licensing to third parties approved by both Endo and us, and that we and Endo would divide equally any fees, royalties, payments or other revenue received by the parties in connection with such licensing activities. We and Endo are currently seeking a collaborator to develop and commercialize Opana ER in Europe.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a drug development company dedicated to bringing to the marketplace innovative products that help improve the lives of patients. Our goal is to identify, develop and commercialize products that address unmet medical needs, primarily for disorders of the nervous system. We are currently applying our drug development and drug delivery expertise to a pipeline of potential products that are in various stages of development, and that we intend to commercialize independently or through third party alliances.

On June 22, 2006, the FDA approved Opana ® ER. Opana ER, an extended release formulation of oxymorphone hydrochloride, is a product that we developed with Endo Pharmaceuticals Inc., using our proprietary TIMERx ® drug delivery technology. Opana ER is approved for twice-a-day dosing in patients with moderate to severe pain requiring continuous, around-the-clock opioid therapy for an extended period of time and is being marketed by Endo in the United States.

We are currently developing product candidates designed for the treatment of pain, epilepsy, Parkinson’s disease and diseases related to the mitochondrial respiratory chain. We are developing nalbuphine ER, a controlled release formulation of nalbuphine hydrochloride, for the treatment of moderate chronic pain. In addition, we are developing A0001, a product candidate designed for the treatment of diseases related to inherited mitochondrial respiratory chain, under a collaboration and license agreement with Edison that we entered into in July 2007. Under the Edison agreement, we have agreed with Edison to collaborate on the development of A0001 and up to one additional drug candidate of Edison’s, initially for the treatment of inherited mitochondrial respiratory chain diseases. Finally, we have two other product candidates in formulation development for treatment of epilepsy and Parkinson’s disease.

Our strategy includes developing drug candidates to treat disorders of the nervous system. We expect to leverage our expertise in drug formulation and drug development to advance these products. We also expect to expend resources on product candidates obtained through in-licenses or acquisitions. Our spending in this area, however, is discretionary and is subject to identifying appropriate opportunities, as well as the availability of funds from our operations, cash resources, collaborative research and development arrangements, and external financing.

On March 11, 2008, we sold units representing an aggregate of 8,140,600 shares of our common stock, together with warrants to purchase an aggregate of 4,070,301 shares of our common stock, in a private placement, for a total purchase price of approximately $25.1 million. We expect net proceeds to be approximately $23.2 million from this private placement, after deducting the placement agent’s fees and other estimated expenses.

The warrants are exercisable on or prior to March 11, 2013 at an exercise price of $3.62 per share. The warrants may also be exercised pursuant to cashless exercise provisions under certain circumstances.

Pursuant to the securities purchase agreement entered into in connection with the private placement, we agreed to file a registration statement with the SEC by April 10, 2008, registering for resale the shares and shares issuable under the warrants. We also agreed to use our reasonable best efforts to have the registration statement declared effective as soon as practicable after the filing date of the registration statement, but in any event within 90 days after the filing date of the registration statement. The failure to file the registration statement on or prior to April 10, 2008, or the failure to have the registration statement declared effective by the SEC within 90 days after we file the registration statement will result in financial penalties to us. We have agreed to maintain the registration statement’s effectiveness until the earlier of (i) the later of (A) the twelve month anniversary of March 11, 2008, the closing date of the private placement or (B) the twelve month anniversary of the last date on which warrant shares are issued upon exercise of warrants and (ii) the date all of the shares and warrant shares have been resold by the original purchasers.

Products

Opana ® ER. Opana ER is an oral extended-release opioid analgesic, which we developed with Endo using our proprietary TIMERx ® technology. In June 2006, the FDA approved for marketing Opana ER, for twice-a-day dosing in patients with moderate to severe pain requiring continuous, around-the-clock opioid treatment for an extended period of time. Under the terms of our collaboration with Endo, Endo launched Opana ER in the United States in July 2006 in 5 mg, 10 mg, 20 mg and 40 mg tablets. In March 2008, Endo also announced the launch of three new dosage strengths of Opana ER including 7.5 mg, 15 mg, and 30 mg tablets.

In January 2007, we entered into an amendment to the strategic alliance agreement between us and Endo. Under the terms of this amendment, we and Endo agreed that royalties payable to us for U.S. sales of Opana ER would be calculated based on net sales of the product rather than on operating profit. We expect Endo to initiate the payment of royalties to us on U.S. sales of Opana ER in the second half of 2008. A description of this amendment is included above under the caption “Collaborative Agreements.” Under the terms of the agreement with Endo, any fees, royalties, payments or other revenues received by the parties in connection with any collaborator outside of the United States will be divided equally. We and Endo are currently seeking a collaborator to develop and commercialize Opana ER in Europe.

Opana ER competes in the market for long acting, strong opioid analgesics with products such as Purdue Pharma’s OxyContin ® and MS Contin, Johnson and Johnson’s Duragesic ® patch, King Pharmaceuticals’ Avinza ® and Alpharma’s Kadian ® , as well as generic versions of some of these products. Products in the long acting, strong opioids market had aggregate sales in the United States in 2007 of approximately $4.1 billion.

We and Endo are parties to two lawsuits against IMPAX in connection with IMPAX’s ANDA for Opana ER in four strengths, 5 mg, 10 mg, 20 mg and 40 mg. IMPAX notified Endo and us in October and November of 2007 that its ANDA contained Paragraph IV certifications for our patents, U.S. Patent Nos. 5,662,933, 5,958,456, and 7,276,250, listed in the Orange Book for Opana ER. We and Endo originally filed a lawsuit against IMPAX in the U.S. Dist. Delaware on November 15, 2007 alleging infringement of certain these patents, and seeking a declaratory judgment that, among other things, IMPAX had no basis to trigger the ANDA patent litigation process under the Hatch-Waxman Act because the FDA, according to IMPAX’s press releases, had rescinded its acceptance of IMPAX’s original ANDA before the date of IMPAX Paragraph IV certification notices. In addition, we and Endo asked the court to declare that these Paragraph IV certification notices to be null, void and of no legal effect.

On December 14, 2007, we received a letter from IMPAX notifying us that the refiling of its ANDA was accepted by the FDA as of November 23, 2007. The notice letter stated that IMPAX’s ANDA contained Paragraph IV certifications for the three patents noted above and that the FDA had required IMPAX to notify Endo and us of these certifications. In this December notice, IMPAX also stated that it would not withdraw its prior Paragraph IV certification notices because it believed they were properly provided and because IMPAX was continuing its efforts to convince the FDA to assign an earlier filing date to its ANDA. As a result of the FDA’s determination of IMPAX’s ANDA filing date and the receipt of the new Paragraph IV certification notice, on December 20, 2007, we and Endo filed a notice of dismissal of the portion of our November 15, 2007 complaint seeking declaratory judgment as noted above. We and Endo did not dismiss the patent infringement claims in the November lawsuit because IMPAX refused to withdraw its prior Paragraph IV certification notices. On January 25, 2008, we and Endo filed a second lawsuit against IMPAX in U.S. Dist. Delaware, alleging infringement of two of these patents above in response to IMPAX’s December notice. Given the FDA’s acceptance of IMPAX’s ANDA as of November 23, 2007, we believe that we are entitled to a 30-month stay under the Hatch-Waxman Act beginning on December 14, 2007. Endo and we intend to pursue all available legal and regulatory avenues defending Opana ER. A description of this litigation is included in “Part I. Item 3-Legal Proceedings.”

In February 2008, we along with Endo, received a notice from Actavis advising of the filing by Actavis of an ANDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j) for Opana ER in four strengths, 5 mg, 10 mg, 20 mg and 40 mg. The Actavis Paragraph IV certification notice refers to our patents,

U.S. Patent Nos. 5,128,143, 5,662,933, 5,958,456, and 7,276,250, which cover the formulation of Opana ER. These patents are listed in the FDA’s Orange Book and expire in 2008, 2013, 2013, and 2023, respectively. We and Endo are currently reviewing the details of this notice from Actavis.

Nalbuphine ER. We are developing nalbuphine ER, a controlled release formulation of nalbuphine hydrochloride, for the treatment of moderate chronic pain. Nalbuphine ER, which we formulated using our TIMERx drug delivery technology, is designed to be taken as a tablet twice daily. Nalbuphine hydrochloride is a synthetic opioid agonist/antagonist analgesic that interacts with certain opioid receptors. The agonist/antagonist mechanism action of nalbuphine ER may reduce the potential for abuse of nalbuphine ER. Nalbuphine hydrochloride is currently only available as a sterile solution suitable for subcutaneous, intramuscular or intravenous injection for acute pain under the brand name Nubain ® and in a generic version. The annual sales of Nubain and its generic version were approximately $11.2 million in 2007, but we believe the market for nalbuphine hydrochloride is limited by currently available formulations of the drug. We expect that nalbuphine ER, if approved, would compete in the moderate chronic pain market. Physicians currently treat patients with moderate chronic pain with a range of treatments from non-steroidal anti-inflammatory drugs, or NSAIDs, to strong opioids. These treatments include products such as Tramadol ® ER and products containing hydrocodone, codeine or propoxyphene, such as Vicodin and Darvon. We believe the profile of nalbuphine ER may be attractive in the treatment of moderate chronic pain compared to current options because it should provide a better balance of good efficacy, low abuse potential and low side effects.

We conducted multiple Phase I studies on various formulations of nalbuphine ER to establish the pharmacokinetic profile and generate safety data. In December 2005, we completed a Phase IIa trial of nalbuphine ER designed to determine the degree and duration of pain relief of two different dose levels of nalbuphine ER in an acute dental pain model. The goal of this study was to establish the proof of efficacy in oral dosing. Results from this Phase IIa study demonstrated that nalbuphine ER reduced mean pain intensity in a dose-dependent manner over the twelve-hour period of the study. No unusual side effects were reported during the twelve-hour dosing interval.

In 2006, we conducted some reformulation work to develop the product for chronic pain and conducted Phase I studies. In January 2007, we commenced a Phase I dose escalation to steady state trial. The intent of this trial was to collect additional safety and pharmacokinetic information which was used to bridge the safety data from the acute pain trial we conducted in 2005 to the chronic pain trial we initiated in June 2007. The June 2007 Phase IIa trial was designed to determine the safety and efficacy of nalbuphine ER compared to placebo for treatment of moderate chronic pain. It was a randomized, double-blind, placebo controlled design, with a forced weekly dose escalation. The main objective of the trial was to evaluate the analgesic efficacy of nalbuphine ER in a patient population experiencing chronic pain. There were 138 patients in the intent-to-treat population with chronic pain secondary to osteoarthritis of the knee or hip. Patients enrolled in the trial were given the lowest dose of the drug for week one, increased to a mid-dose level for week two, and increased to the highest dose studied for week three. The study group included a 2-to-1 randomization of patients on drug versus placebo. We designed the trial with multiple endpoints related to clinical pain relief in an effort to understand the activity of the drug and provide the basis for designing a Phase IIb study. Based on the Phase IIa results, we have concluded that nalbuphine ER demonstrated trends of efficacy sufficient to support continued development of the drug. The adverse events were typical opioid-type side effects. In the study 24% of the nalbuphine ER patients reported no side effects, 66% reported side effects that were characterized as mild or moderate in severity, and 10% reported side effects that were severe. No drug-related serious adverse events were reported during the trial. The adverse events in the trial appear to have occurred only in the first week of the trial and were not chronic adverse events that continued throughout the study.

We are planning for a Phase IIb trial which we expect to commence in the second half of 2008 subject to the availability of capital resources to conduct such study. We expect that the goals of the Phase IIb trial will be to demonstrate statistically significant analgesic efficacy of the drug versus placebo using an accepted clinical endpoint, and to characterize a clinically meaningful titration regimen. We believe that this trial will take approximately one year to complete. We expect that if we complete all the clinical trials required by the FDA for nalbuphine ER, we would seek FDA approval of nalbuphine ER through the filing of a 505 (b)(2)

NDA. We expect to seek collaborators in the United States and Europe to complete the development of this product and to share marketing rights with the collaborators.

A0001. A0001 is a drug candidate we in-licensed from Edison under our collaboration and license agreement. A0001, a coenzyme Q molecular analog, has shown biological activity in cell assays developed by Edison to test the ability of this class of compounds to improve mitochondrial function. Impairment of mitochondrial function is commonly believed to be a significant factor in a number of inherited disorders, including Friedreich’s Ataxia, Leber’s Hereditary Optical Neuropathy, Coenzyme Q10 Deficiency Syndrome and MELAS syndrome. A0001 is commonly known to be orally bioavailable in humans and has received orphan drug designation from the FDA for the treatment of inherited mitochondrial respiratory chain diseases. We have completed the IND enabling toxicology studies for A0001. We intend to submit an Investigational New Drug Application, or IND, for certain of these indications and commence Phase 1 development on this compound in the second half of 2008.

In consideration for the rights granted to us under the Edison agreement, we paid Edison an upfront cash payment of $1.0 million upon entering into the Edison agreement and agreed to loan Edison up to an aggregate principal amount of $1.0 million, solely to fund its research and development, with the right to draw upon such loan commitment subject to certain limitations. We are also required to make payments to Edison upon achievement of specified milestones set forth in the Edison agreement and upon exercise of our option to develop another of Edison’s compounds as noted above, and royalty payments based on net sales of products containing A0001 and any other compound as to which we exercise our option, or any replacement compound, as provided for in the agreement.

On February 5, 2008, we loaned Edison $1.0 million pursuant to the loan provisions of the Edison agreement. The loan bears interest at an annual rate of one month LIBOR at the time of the loan, plus 5%, or a total of 8.14%, which rate is fixed for the term of the loan. The loan matures on the earlier of July 16, 2012 and the occurrence of an event of default, as defined in the Edison agreement. All accrued and unpaid interest is payable on the maturity date; however, interest accruing on any outstanding loan amount after July 16, 2010 is due and payable monthly in arrears. As of March 11, 2008, $1.0 million is outstanding under this loan. We are currently assessing the collectability of the loan made to Edison. At the present time, we have not completed our initial assessment; however, we believe that there is the potential for us to record an impairment charge in our statement of operations during the first quarter of 2008, or at a future time as a result of on-going collectability assessments.

In the third quarter of 2007, we completed a scientific review of our development programs, which we conducted to align our efforts with our corporate strategy and internal resources. As a result of this review, we determined to cease development of torsemide ER, a controlled release formulation of torsemide, that we were developing for the treatment of chronic edema resulting from congestive heart failure. In addition, we made the decision to cease efforts on two Phase I programs.

Under a collaboration agreement with Mylan, we developed Nifedipine XL, a generic version of Procardia XL, based on our TIMERx technology. In March 2000, Mylan announced that it had signed a supply and distribution agreement with Pfizer, to market Pfizer’s generic versions of all three strengths (30 mg, 60 mg, 90 mg) of Procardia XL. In connection with that agreement, Mylan decided not to market Nifedipine XL, and agreed to pay us a royalty on all future net sales of the 30 mg strength of Pfizer’s generic Procardia XL.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us 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. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. We regard an accounting estimate underlying our financial statements as a “critical accounting estimate” if the nature of the estimate or assumption is material due to the level of subjectivity and judgment involved or the susceptibility of such matter to change, and if the impact of the estimate or assumption on our financial condition or performance may be material. On an ongoing basis, we evaluate these estimates and judgments. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are fully described in Note 2 to our financial statements included in this annual report, we regard the following as critical accounting estimates.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview
We are a drug development company focused on identifying, developing and commercializing products that address unmet medical needs, primarily for disorders of the nervous system. We are currently applying our drug development and drug delivery expertise to a pipeline of potential products that are in various stages of development, and that we intend to commercialize independently or through third party alliances.
Opana ER is an extended release formulation of oxymorphone hydrochloride that we developed with Endo Pharmaceuticals Inc., or Endo, using our proprietary TIMERx ® drug delivery technology. Opana ER was approved by the United States Food and Drug Administration, or FDA, in June 2006 for twice-a-day dosing in patients with moderate to severe pain requiring continuous, around-the-clock opioid therapy for an extended period of time and is being marketed by Endo in the United States. In the three month period ended September 30, 2008, we recognized $577,000 in royalties from Endo related to sales of Opana ER, as described below.
We are currently developing product candidates designed for the treatment of pain and mitochondrial diseases. We are developing nalbuphine ER, a controlled release formulation of nalbuphine hydrochloride, for the treatment of moderate chronic pain. In addition, we are developing A0001, a product candidate that will be initially targeted for the treatment of mitochondrial diseases, under a collaboration and license agreement with Edison Pharmaceuticals, Inc, or Edison, that we entered into in July 2007. Under the Edison agreement, we have agreed to collaborate with Edison on the development of A0001 and up to one additional drug candidate of Edison’s. In the third quarter of 2008, we terminated our development program for PW4153, a product candidate designed for the treatment of the symptoms of Parkinson’s disease following Phase I clinical results that did not meet the target profile.
Products
Opana ® ER. Opana ER is an oral extended-release opioid analgesic which we developed with Endo, using our proprietary TIMERx ® technology. In June 2006, the FDA approved for marketing Opana ER, for twice-a-day dosing in patients with moderate to severe pain requiring continuous, around-the-clock opioid treatment for an extended period of time. Under the terms of our collaboration with Endo, Endo launched Opana ER in the United States in July 2006 in 5 mg, 10 mg, 20 mg and 40 mg tablets and in March 2008 in 7.5 mg, 15 mg and 30 mg tablets.
Under the terms of our collaboration with Endo, Endo pays us royalties based on U.S. net sales of Opana ER. No payments were due to us for the first $41 million of royalties otherwise payable to us beginning from the time of the product launch, a period we refer to as the royalty holiday. In the third quarter of 2008, the royalty holiday ended and we recognized $577,000 in royalties from Endo related to sales of Opana ER. Endo has the right under our agreement to recoup the $28 million in development costs that Endo funded on our behalf prior to the approval of Opana ER through a temporary 50% reduction in royalties. The royalty amount we recognized in the third quarter of 2008 reflects this temporary reduction.
Under the terms of our agreement with Endo, any fees, royalties, payments or other revenues received by the parties in connection with any collaborator outside of the United States will be divided equally between Endo and us. We and Endo were seeking a collaborator to develop and commercialize Opana ER in Europe. We do not expect to enter into such an agreement in 2008 but we plan to continue to seek licensing opportunities outside the U.S. A description of our agreement with Endo is included under the caption “Collaboration and Licensing Agreements” in “Part I. Item 1. Notes to Condensed Financial Statements”.
We and Endo entered into a Second Amendment to the Amended and Restated Strategic Alliance Agreement with respect to Opana ER, effective July 14, 2008. Under the terms of this amendment, Endo agreed to directly reimburse us for costs and expenses incurred by us in connection with patent enforcement litigation related to Opana ER. If any of such costs and expenses are not reimbursed to us by Endo, we may bill Endo for these costs and expenses through adjustments to the pricing of TIMERx material that we supply to Endo for use in Opana ER. In connection with the amendment, in July 2008, Endo reimbursed us for such costs and expenses incurred prior to June 30, 2008, totaling approximately $470,000. We credited this reimbursement to selling, general and administrative expense in the third quarter of 2008. We have not incurred any more of such costs subsequent to June 30, 2008.
We and Endo are parties to two lawsuits against IMPAX Laboratories, Inc., or IMPAX, in connection with IMPAX’s Abbreviated New Drug Application, or ANDA, for Opana ER in four strengths, 5 mg, 10 mg, 20 mg and 40 mg. On July 25, 2008, we and Endo filed a third lawsuit against IMPAX in connection with its amended ANDA for Opana ER 7.5 mg, 15 mg and 30 mg. IMPAX notified Endo and us in October and November of 2007 that its ANDA contained Paragraph IV certifications for our patents, U.S. Patent Nos. 5,662,933, 5,958,456, and 7,276,250, listed in the Orange Book for Opana ER. We and Endo originally filed a lawsuit against IMPAX in the United States District Court for the District of Delaware, or U.S. Dist. Delaware, on November 15, 2007 alleging infringement of U.S. Patent Nos. 5,662,933 and 5,958,456 and seeking a declaratory judgment that, among other things, IMPAX had no basis to trigger the ANDA patent litigation process under the Hatch-Waxman Act because the FDA, according to IMPAX’s press releases, had rescinded its acceptance of IMPAX’s original ANDA before the date of IMPAX Paragraph IV certification notices. In addition, we and Endo asked the court to declare these Paragraph IV certification notices to be null, void and of no legal effect.
On December 14, 2007, we received a letter from IMPAX notifying us that the refiling of its ANDA was accepted by the FDA as of November 23, 2007. The notice letter stated that IMPAX’s ANDA contained Paragraph IV certifications for the three patents noted above and that the FDA had required IMPAX to notify Endo and us of these certifications. In this December notice, IMPAX also stated that it would not withdraw its prior Paragraph IV certification notices because it believed they were properly provided and because IMPAX was continuing its efforts to convince the FDA to assign an earlier filing date to its ANDA. As a result of the FDA’s determination of IMPAX’s ANDA filing date and the receipt of the new Paragraph IV certification notice, on December 20, 2007, we and Endo filed a notice of dismissal of the portion of our November 15, 2007 complaint seeking declaratory judgment as described above. We and Endo did not dismiss the patent infringement claims in the November lawsuit because IMPAX refused to withdraw its prior Paragraph IV certification notices. On January 25, 2008, we and Endo filed a second lawsuit against IMPAX in U.S. Dist. Delaware, alleging infringement of U.S. Patent Nos. 5,662,933 and 5,958,456 in response to IMPAX’s December notice.
On June 14, 2008, we and Endo each received a notice from IMPAX advising us and Endo that IMPAX had amended its ANDA for Opana ER to include three additional strengths, 7.5 mg, 15 mg and 30 mg. This ANDA amendment contained a Paragraph IV certification against our Orange Book listed patents, U.S. Patent Nos. 5,662,933, 5,958,456 and 7,276,250. On July 25, 2008, we and Endo filed a lawsuit against IMPAX in U.S. Dist. Delaware, alleging infringement of U.S. Patent Nos. 5,662,933 and 5,958,456 in response to the notice.
On February 14, 2008, we, along with Endo, received a notice from Actavis South Atlantic LLC, or Actavis, advising of the filing by Actavis of an ANDA containing a Paragraph IV certification for Opana ER in four strengths, 5 mg, 10 mg, 20 mg and 40 mg. The Actavis Paragraph IV certification notice refers to our patents, U.S. Patent Nos. 5,128,143, 5,662,933, 5,958,456 and 7,276,250, which cover the formulation of Opana ER. These patents are listed in the FDA’s Orange Book and expire in 2008, 2013, 2013 and 2023, respectively. On March 28, 2008, we and Endo filed a lawsuit against Actavis in the United States District Court for the District of New Jersey, or U.S. Dist. NJ, alleging infringement of U.S. Patent No. 5,958,456. We believe that we are entitled to a 30-month stay under the Hatch-Waxman Act beginning February 14, 2008. On June 2, 2008, we and Endo each received a notice from Actavis advising us that Actavis had amended its ANDA for Opana ER to include two additional strengths, 7.5 mg and 15 mg. On July 2, 2008, we and Endo each received a third notice from Actavis advising that Actavis had further amended its ANDA to include the 30 mg strength. Each ANDA amendment contained a Paragraph IV certification against our Orange Book listed patents, U.S. Patent Nos. 5,128,143, 5,662,933, 5,958,456 and 7,276,250. On July 11, 2008, we and Endo filed a lawsuit against Actavis in the U.S. Dist. NJ alleging infringement of U.S. Patent No. 5,958,456 in response to these two additional Paragraph IV certification notices from Actavis.
On July 10, 2008, we and Endo each received a notice from Sandoz Inc., or Sandoz, advising us and Endo that Sandoz had filed with the FDA an ANDA for Opana ER in four strengths, 5 mg, 10 mg, 20 mg and 40 mg. This ANDA contained a Paragraph IV certification against our Orange Book listed patents, U.S. Patent Nos. 5,662,933, 5,958,456 and 7,276,250. On August 22, 2008, we and Endo filed a lawsuit against Sandoz in the U.S. Dist. Delaware, alleging infringement of U.S. Patent No. 5,958,456 in response to this notice.

On September 12, 2008, we and Endo each received a notice from Barr Laboratories, Inc., or Barr, advising us and Endo that Barr had filed with the FDA an ANDA for Opana ER in 40 mg strength. On September 13, 2008, we and Endo received an additional notice that Barr’s ANDA was amended to include the strengths of 5 mg, 10 mg and 20 mg. Barr’s ANDA, as amended, contained a Paragraph IV certification against our Orange Book listed patents, U.S. Patent Nos. 5,662,933, 5,958,456 and 7,276,250. On October 20, 2008, we and Endo filed a lawsuit against Barr in the U.S. Dist. Delaware, alleging infringement of U.S. Patent Nos. 5,662,933 and 5,958,456.
A description of the lawsuits related to Opana ER are included in “Part II. Item 1 — Legal Proceedings.” We and Endo intend to pursue all available legal and regulatory avenues defending Opana ER.
Nalbuphine ER. Nalbuphine ER is a drug candidate we are developing for the treatment of moderate chronic pain. In January 2008, we reported the results of a Phase IIa trial that we conducted to determine the safety and efficacy of nalbuphine ER compared to placebo for the treatment of moderate chronic pain. The trial was a randomized, double-blind, placebo-controlled design, with a forced weekly dose escalation with the main objective to evaluate the analgesic efficacy of nalbuphine ER in a patient population experiencing chronic pain. We designed the trial with multiple endpoints related to clinical pain relief in an effort to understand the activity of the drug and to provide the basis for designing a Phase IIb study. Based on the Phase IIa study results, we concluded that nalbuphine ER demonstrated trends of efficacy sufficient to support continued development of the drug.
We are currently designing protocols for a Phase IIb trial. We expect that the goals of the Phase IIb trial will be to demonstrate statistically significant analgesic efficacy of the drug versus placebo using an accepted clinical endpoint, and to characterize a clinically meaningful titration regimen. We believe that this trial will take approximately one year to complete. We are currently seeking a collaborator for the development and commercialization of nalbuphine ER. The timing of the initiation of this Phase IIb trial will be subject to entering into such a collaboration and the availability of financial resources. We do not anticipate entering into such a collaboration or initiating the Phase IIb trial during the remainder of 2008. We expect that upon completion of all the clinical trials required by the FDA for nalbuphine ER, we or our collaborator would seek FDA approval of nalbuphine ER through the filing of a 505 (b)(2) NDA.
A0001. A0001 is a drug candidate we licensed from Edison under our collaboration and license agreement. A0001, a coenzyme Q analog, has shown biological activity in cell assays developed by Edison to test the ability of this class of compounds to improve mitochondrial function. Impairment of mitochondrial function is commonly believed to be a significant factor in a number of inherited disorders, including Friedreich’s Ataxia, Leber’s Hereditary Optical Neuropathy, Coenzyme Q10 Deficiency Syndrome and MELAS syndrome. A0001 has received orphan drug designation from the FDA for the treatment of inherited mitochondrial respiratory chain diseases.
In May 2008, we submitted an Investigational New Drug application, or IND, for A0001 for certain indications. In July 2008, we initiated a Phase Ia placebo-controlled single ascending dose trial designed to evaluate the safety and tolerability of A0001 in healthy subjects, and to collect pharmacokinetic data. There were no drug-related serious adverse events that occurred in the study. We are currently planning a Phase Ib trial that we expect to be a multiple ascending dose trial in healthy volunteers which we could initiate in the first half of 2009. We expect that, if successful, this study will be followed by a Phase IIa proof of concept trial in patients with mitochondrial diseases. In connection with the dosing in the Phase Ia trial noted above, we made a milestone payment to Edison in August 2008.
Under the terms of the Edison agreement, we have exclusive, worldwide rights to develop and commercialize A0001 and up to one additional compound of Edison’s, which we may exercise our option to select, for all indications, subject to the terms and conditions in the agreement. A description of the Edison agreement is included under the caption “Collaborations and Licensing Agreements” in “Part I. Item 1. — Notes to Condensed Financial Statements”.
PW4153. PW4153 was a drug candidate we were developing for the treatment of symptoms of Parkinson’s disease. The drug candidate was designed to be an extended release formulation containing carbidopa and levodopa. In July 2008, we conducted a Phase I clinical trial for PW4153 to assess the pharmacokinetics of our formulation in healthy volunteers.

CONF CALL

Jennifer Good

Good morning, everyone. Welcome to our review and discussion of Penwest results for the third quarter and nine months ended September 30, 2008. Joining me on the call today is Ben Palleiko, Penwest’s Senior Vice President of Corporate Development and Chief Financial Officer.

I' will provide an update on our business as well as the priorities for the remainder of the year. And then Ben will discuss the financial results for the quarter and nine-month period. After our prepared remarks, we will open up the call to answer any questions you may have. We have been busy on three primary fronts; advancing the drug we have under development, actively working on multiple licensing efforts, and finally, aggressively controlling our expenses and related burn within the company. I will touch on each of these areas.

But first, let me provide an update on Opana ER. The third quarter was an important one for us on the Opana front as we recorded our first revenues from the product. We completed the royalty holiday period provided for in the contract during the quarter and will now begin receiving 50% of the royalties due to us while we work off the $28 million of development costs incurred by Endo on our behalf during the development program. When Endo released its earnings late last week, it reported an increase in sales for the Opana franchise of 73% to $41.5 million compared to $24 million in the same period a year ago. Endo also reported a prescription volume for the franchise increase 80% in the third quarter of 2008 versus the comparable 2007 period.

For the nine months ended September 30, 2008, net sales for the Opana franchise increased 64% to $128 million compared to $78 million in the same period a year ago. As a reminder, we are involved with Endo on the extended release product in this franchise, which according to recent IMS numbers represents about 82% of the underlying prescription demand.

Endo discussed on its call last week that this increase in sales reflects strong prescription demand as well as a success of its physician targeting program. Endo has also had success with managed care conversions. During the quarter, they signed an additional five new managed care contracts. We are pleased with the continued growth of this product and the priority it has within the Endo sales force.

Turning now to the areas that have been keeping us busy. We made important progress during the quarter on the two products that we have under development and advanced two additional drugs we are developing under drug delivery collaboration deals. In July, we announced that we had begun dosing in Phase Ia clinical trial of A0001, a molecule that we are developing for the treatment on certain mitochondrial diseases.

The clinical trial was designed to evaluate the safety and tolerability of A0001 at various doses and to collect pharmacokinetic data. As we announced this morning in our press release, this trial is complete and the results from the trial support our advancing to the next phase of development. There were no drug-related serious adverse events in the study and a pharmacokinetic range was achieved in dosing. Penwest is proceeding with plans to initiate a Phase Ib multiple ascending dose trial to assess safety and tolerability following repeating dosing in healthy subjects. If all goes well, we would then advance the product to a Phase IIa trial in patients.

In July, we also began dosing of Phase I clinical trial for PW4153, an extended release formulation of carbidopa/levodopa that Penwest was developing for the treatment of symptoms of Parkinson's disease. The goal of this formulation was to extend the dosing and level of the drug while minimizing the peak to trough ratio. We believe it could enhance the efficacy tolerability and convenience of the drug for Parkinson’s patients. As we announced this morning, we did not meet the targeted profile. And a result, the company has terminated this program.

Our pharmacokinetic profile did match the currently marketed ER version on the product, Sinemet CR. But we believe that because of the absorption window and variability of the drug, we were not able to improve upon this profile and therefore it did not want our continued development. We continue to believe that dosing carbidopa/levodopa in a more sustained manner could have important benefits for patients. However, we have convinced ourselves that it is not technically achievable through the oral delivery route.

Next, our development team has been busy working on the two collaborations we signed with Otsuka and Cobalt that utilize our drug delivery technology. During the quarter, we completed work on the Otsuka compound and will now wait for the result of this clinical trial. The work on the Cobalt compound will continue on to the first part of next year. As these are not our compounds, I will not be providing any additional information or guidance on them until we either achieve a successful contractual milestone or the program is terminated.

Completing business development deals for the company is important to increasing our cash position as well as advancing programs that are not core to our strategy. We have three primary assets available for license; nalbuphine ER, Opana ex-US, and collaborations utilizing our drug delivery technology.

I’ll now give you a brief update on each of these assets. Nalbuphine ER is a drug we have been developing for moderate chronic pain that completed a Phase IIa trial in chronic pain in the first quarter of this year. We have largely completed the design of a Phase IIb trial for this drug candidate. However, because pain is not core to Penwest’s strategy and the cost involved in conducting a Phase IIb trial are significant, we are actively seeking a partner to co-develop this drug. We are still active in that process.

We have discussed in the past that Endo was in discussions to out-license Opana ER in Europe. Based on BD priorities at Endo around in-licensing, Endo has transferred the lead on efforts to license this drug in ex-US territories to Penwest. We are currently evaluating the opportunities for this product in various territories outside of the US. We do not currently believe a deal can be signed by the end of this year. But we will be spending efforts to realize value on this product outside of the US opportunity. Finally, on the drug delivery front, we are in discussions regarding several potential collaborations and believe we will find one additional deal by year-end.

Before turning the call over to Ben, I want to comment on our steps to control expenses and the related burn within the company. We are continuing to manage this company so that we will not have to raise capital in 2009. We have managed our cash throughout the year by downsizing our workforce, cutting or renegotiating all non-essential overhead expenses, and expending significant efforts to license assets that are not core to Penwest mission.

Tightly controlling our cash burn continues to be a high priority for Ben, for me, and for our Board. This quarter you can see a reduction in our operating expenses, both in SG&A and R&D, as well as a reduction in the cash burn. We will continue with these efforts as we try to build value in the company without raising additional capital to do so.

In closing, it is a very tumultuous time both in the macro economy and for small cap stocks in the biotech/spec pharma space. Our staff is obviously no exception. Like other than our industry we feel this pressure and are acutely focused on trying to build incremental value inside the company while ensuring that we will not need to access the capital markets next year. We are focused one executing a strategy of licensing the available assets we have to fund the development of select programs that we believe are meaningful and can generate value for Penwest shareholders.

We, as a management team and Board, believe this is both an achievable and manageable strategy. I understand the risks of trying to develop a pharmaceutical product. But we are following a path with definable checkpoints and that can be course corrected if necessary. I believe we demonstrated this in the termination of our carbidopa/levodopa program and the advancement of A0001.

I have a strong conviction that we are taking the right step to build this company for the long-term based on the fundamental financial principle of the business, increasing revenues by leveraging and developing assets that have real value. I also believe it is important to do that in the least dilutive way to our shareholders, which will likely require some pacing of our investments. Although this pacing comes with the price of time, I believe it is necessary in these difficult and uncertain financial times. These are the principles in which we are building Penwest today. I think we demonstrated progress during the quarter on all the fronts under our control and we will continue to try to make the most out of what we have.

I appreciate your patience and look forward to things improving, as I know you all do as well. I will now turn it over to Ben to discuss the financial results for the quarter and nine months.

Ben Palleiko

Thank you, Jennifer, and good morning. The net loss for the third quarter of 2008 was $7.3 million or $0.23 per share compared with the net loss of $9.3 million or $0.40 per share in the third quarter of last year. For the nine months ended September 30, 2008, our loss was $24.5 million or $0.83 per share compared to $25.2 million or $1.08 per share for the comparable period in 2007. The decrease in the loss for both of these periods primarily reflects lower operating expenses and higher revenues. These were partially offset by decreases in investment income due to the lower interest rates and average balances on our cash and securities balances.

As Jennifer mentioned, we completed our $41 million royalty holiday on Opana ER royalties in the third quarter and recognized revenues of $577,000. Our total revenues for the quarter were $1.4 million compared with $882,000 in the third quarter of 2007. Besides royalties from Endo, our other revenues in the third quarter were derived primarily from our continuing royalties on sales by Mylan Pharmaceuticals of Pfizer’s 30 milligram generic version of Procardia XL, although we also recognized $209,000 in revenue related to our ongoing drug delivery collaborations.

For the nine months ended September 30, 2008, our total revenues were $3.4 million compared to $2.4 million for the comparable period in 2007. This increase is due largely to the Endo royalties and drug delivery collaborations revenues, partially offset by a continuing decline in royalty revenues from Mylan.

Selling, general and administrative expenses in the third quarter were $2.2 million compared to $3.4 million in last year’s third quarter. This decrease is due primarily to a $470,000 reimbursement from Endo recognized in the third quarter related to the legal expenses associated with our generic litigation as well as lower stock-based compensation, facility related costs, and other operating expenses.

SG&A expenses for the nine months ended September 30, 2008 were $9.6 million, a decrease of $1.2 million from $10.8 million from the third quarter of 2007. The nine-month expenses include a $1 million charge recorded in the first quarter related to a $1 million loan made to Edison as part of our agreement, offset by the previously mentioned reimbursement from Endo and lower expenses.

Research and development spending for the third quarter was $5.9 million compared to $6.6 million in the third quarter last year. This decrease was due to lower contractual payments to Edison, overall lower program spending, primarily due to lower spending on nalbuphine ER and lower operating expenses, partially due to headcount reductions and other expense controls implemented in the first quarter. Partially offsetting these reductions was $490,000 patent impairment charge we recorded on patent costs related to certain programs and other patents that we decided not to maintain for various reasons. Our last full sponsored research payment to Edison under the terms of the collaboration agreement was made earlier this month and our last partial sponsored research payment will be made in January.

For the nine months ended September 30, 2008, our R&D expense was $16.8 million, a decrease of $254,000 from $17.1 million in the comparable nine months of 2007. This decrease is primarily due to overall slightly higher development expenses offset by the patent impairment charge previously mentioned. In addition, headcount reductions and allocations of costs to the ongoing drug delivery collaborations contributed to the overall decrease in R&D expense.

As promised earlier this year, we have placed great emphasize on reducing our operating costs and managing our cash balance closely. Our overall operating expenses as of the end of the third quarter are 19% lower than the comparable period of 2007 and 5% lower year-to-date, despite the fact that the majority of the cost reductions were not fully implemented until the second quarter.

As of September 30, 2008, we had cash and investments of $23 million compared to $23 million at December 31, 2007, and $28.7 million at the end of the second quarter of 2008. As a result of our cost controls and development plans for the rest of 2008, we anticipate that our cash and investments balance at the end of the year will be towards the higher end of the $14 million to $16 million range we’ve previously provided. We believe that this cash level combined with the royalty payments we anticipate receiving from Endo and other sources will be sufficient to fund our operations into at least the first quarter of 2010.

In closing, I want to emphasize that we continue to be as conservative as possible in our financial assumptions, given the current economic environment. We are currently in the budgeting process and are constructing our plans for 2009 with high control of overhead expenses and staged program spending to enable us to operate through at least next year and potentially beyond without requiring the company to access the capital markets.

Our guiding principle is to make responsible investments in our programs, pursuing the best opportunity in achieving what we can while acknowledging that not everything is possible in the current climate.

With that, Jennifer and I would now like to open up the call for any questions that you may have. Jennifer?

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