10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2010

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from     to    

Commission File Number 001-34267

PENWEST PHARMACEUTICALS CO.

(Exact name of registrant as specified in its charter)

Washington (State or other jurisdiction of incorporation or organization)	91-1513032 (I.R.S. Employer Identification No.)
2981 Route 22 Suite 2 Patterson, New York (Address of Principal Executive Offices)	12563-2335 (Zip Code)

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

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

  Indicate by 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 þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

        Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of August 2, 2010.

Class	Outstanding
Common Stock, par value $.001	31,946,576

PENWEST PHARMACEUTICALS CO.
TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Condensed Financial Statements (Unaudited):
	Condensed Balance Sheets		3
	Condensed Statements of Operations		4
	Condensed Statements of Cash Flows		5
	Notes to Condensed Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36
Item 4.	Controls and Procedures		36
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		37
Item 1A.	Risk Factors		41
Item 6.	Exhibits		53
Signature			54
Exhibit Index			55
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-31
EX-32

     TIMERx^®, Geminex^® and SyncroDose^® are our registered trademarks. GastroDose™ is also our trademark. Other tradenames and trademarks appearing in this quarterly report, including Endo Pharmaceuticals Inc.’s Opana^® trademark, are the property of their respective owners.

Forward Looking Statements

     This quarterly report contains 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,” “could,” “should,” “targets,” “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 will actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. 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. These important factors include those set forth under “Part II — Item 1A, Risk Factors”. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed herein may not occur, and our actual performance and results may vary from those anticipated or otherwise suggested by such statements. In addition, any forward-looking statements represent our estimates only as of the date this quarterly report is filed with the Securities and Exchange Commission (“SEC”) and should not be relied upon as representing our estimates as of any other date. While we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so, even if our estimates change.

PART I — FINANCIAL INFORMATION

Item 1. Condensed Financial Statements (Unaudited)

PENWEST PHARMACEUTICALS CO.

CONDENSED BALANCE SHEETS

	June 30,			December 31,
	2010			2009
	(In thousands, except share
	amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	13,098		$	11,246
Marketable securities		1,309			240
Trade accounts receivable		13,204			6,226
Inventories, net		604			263
Prepaid expenses and other current assets		980			1,289
Total current assets		29,195			19,264
Fixed assets, net		1,233			1,576
Patents, net		876			996
Deferred charges		1,591			1,740
Deferred income taxes		310			—
Other assets, net		2,155			2,320
Total assets	$	35,360		$	25,896
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	587		$	750
Accrued expenses		1,269			2,178
Accrued development costs		283			275
Income taxes payable		110			—
Loan payable		1,371			4,112
Deferred compensation — current portion		291			294
Total current liabilities		3,911			7,609
Deferred revenue		865			889
Deferred compensation		2,238			2,376
Total liabilities		7,014			10,874
Commitments and contingencies (see Note 15)
Shareholders’ equity:
Preferred stock, par value $.001, authorized 1,000,000 shares, none outstanding		—			—
Common stock, par value $.001, authorized 60,000,000 shares, issued and outstanding 31,931,076 shares at June 30, 2010 and 31,778,416 shares at December 31, 2009		32			32
Additional paid-in capital		251,065			249,982
Accumulated deficit		(222,888	)		(235,127	)
Accumulated other comprehensive income		137			135
Total shareholders’ equity		28,346			15,022
Total liabilities and shareholders’ equity	$	35,360		$	25,896

See accompanying notes to condensed financial statements

3

PENWEST PHARMACEUTICALS CO.

CONDENSED STATEMENTS OF OPERATIONS

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Unaudited)						(Unaudited)
	(In thousands, except						(In thousands, except
	per share data)						per share data)
Revenues:
Royalties	$	12,717		$	4,851		$	20,370		$	9,573
Product sales		90			158			292			338
Collaborative licensing and development revenue		832			250			1,735			618
Total revenues		13,639			5,259			22,397			10,529
Operating expenses:
Cost of revenues		833			468			1,749			1,122
Selling, general and administrative		2,453			3,283			4,099			5,604
Research and product development		1,903			3,425			4,111			6,431
Total operating expenses		5,189			7,176			9,959			13,157
Income (loss) from operations		8,450			(1,917	)		12,438			(2,628	)
Investment income		2			4			3			11
Interest expense		(83	)		(225	)		(202	)		(483	)
Income (loss) before income tax expense		8,369			(2,138	)		12,239			(3,100	)
Income tax expense		—			—			—			—
Net income (loss)	$	8,369		$	(2,138	)	$	12,239		$	(3,100	)
Net income (loss) per common share:
Basic	$	0.26		$	(0.07	)	$	0.38		$	(0.10	)
Diluted	$	0.26		$	(0.07	)	$	0.38		$	(0.10	)
Weighted average shares of common stock outstanding:
Basic		31,866			31,644			31,837			31,635
Diluted		32,064			31,644			31,997			31,635

See accompanying notes to condensed financial statements

4

PENWEST PHARMACEUTICALS CO.

CONDENSED STATEMENTS OF CASH FLOWS

	Six Months Ended
	June 30,
	2010			2009
	(Unaudited)
	(In thousands)
Operating activities:
Net income (loss)	$	12,239		$	(3,100	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities		(6,706	)		1,607
Net cash provided by (used in) operating activities		5,533			(1,493	)
Investing activities:
Acquisitions of fixed assets		—			(16	)
Patent costs		—			(34	)
Proceeds from sale of fixed assets		—			6
Reimbursements of patent costs by collaborator		—			229
Purchases of marketable securities		(1,558	)		(499	)
Proceeds from maturities of marketable securities		490			—
Net cash used in investing activities		(1,068	)		(314	)
Financing activities:
Repayment of debt		(2,742	)		(2,741	)
Issuance of common stock		129			30
Net cash used in financing activities		(2,613	)		(2,711	)
Net increase (decrease) in cash and cash equivalents		1,852			(4,518	)
Cash and cash equivalents at beginning of period		11,246			16,692
Cash and cash equivalents at end of period	$	13,098		$	12,174

See accompanying notes to condensed financial statements

5

PENWEST PHARMACEUTICALS CO.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. Business

     Penwest Pharmaceuticals Co. (“Penwest” or the “Company”) is a drug delivery company focused on applying its drug delivery technologies and drug formulation expertise to the formulation of product candidates under licensing collaborations (“drug delivery technology collaborations”). Penwest’s drug delivery technology is included in Opana^® ER, a product for the treatment of moderate to severe chronic pain marketed by Endo Pharmaceuticals Inc., (“Endo”). The Company is also developing A0001, or a-tocopherolquinone, for the treatment of Friedreich’s Ataxia and MELAS syndrome.

     Opana^® ER is an extended release formulation of oxymorphone hydrochloride that the Company developed with Endo using the Company’s proprietary extended release TIMERx^® drug delivery technology. Opana ER was approved by the United States Food and Drug Administration (“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 six month period ended June 30, 2010, the Company recognized $19.5 million in royalties from Endo related to sales of Opana ER. In June 2009, Endo signed an agreement with Valeant Pharmaceuticals International (“Valeant”) to develop and commercialize Opana ER in Canada, Australia and New Zealand. Opana ER is not currently approved for sale in any country other than the United States.

     The Company is conducting two Phase IIa clinical trials of A0001. The Company is conducting one trial in patients with Friedreich’s Ataxia (“FA”), a rare degenerative neuro-muscular disorder, and the second trial in patients with the A3243G mitochondrial DNA point mutation that is commonly associated with MELAS syndrome, a rare progressive neurodegenerative disorder. The goal of these trials is to determine if A0001 has a discernible impact in the treatment of patients with these disorders using various biochemical, functional and clinical measures. The Company expects data from both of these trials by the end of 2010. In September 2009, the Company exercised its option under its agreement with Edison Pharmaceuticals, Inc. (“Edison”) to acquire the right to a second drug candidate for the treatment of mitochondrial diseases from Edison. The Company has determined not to conduct any additional development work on this compound until after it reviews the results of the Phase IIa studies of A0001. The Company is currently seeking to license A0001 to a third party to complete further development and assume responsibility for the commercialization, manufacturing and marketing of this compound.

     The Company is a party to a number of collaborations involving the use of its extended release drug delivery technologies as well as its formulation development expertise. Under these collaborations, the Company is responsible for completing the formulation work on a product specified by the collaborator using the Company’s proprietary extended release technology. If the Company successfully formulates the compound, it will transfer the formulation to its collaborator, who will then be responsible for the completion of the clinical development, manufacturing, and ultimately, the commercialization of the product. The Company has drug delivery technology collaborations with Otsuka Pharmaceuticals Co. (“Otsuka”) and with Alvogen Inc. (“Alvogen”).

2. Basis of Presentation

     The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) 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 U.S. generally accepted accounting principles 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 except for: a non-cash charge recorded in the three month period ended June 30, 2010 in the amount of $467,000 for the accelerated vesting of certain outstanding stock option and restricted stock awards (see Note 8); and costs incurred by the Company approximating $821,000 and $846,000 for the three and six month periods ended June 30, 2010, respectively, in connection with the Company’s proxy contest associated with its 2010 annual meeting of shareholders; a charge recorded in the six month period ended June 30, 2009 in the amount of $550,000 for severance costs associated with staff reductions implemented in January 2009; a non-cash credit recorded in the six month period ended June 30, 2009 in the amount of $885,000 associated with the forfeiture of stock options held by these former employees (see Note 10); and costs incurred by the Company approximating $1.1 and $1.3 million for the three and six month

6

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

periods ended June 30, 2009, respectively, in connection with the Company’s proxy contest associated with the Company’s 2009 annual meeting of shareholders and the related litigation. Operating results for the three and six month periods ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

     The balance sheet at December 31, 2009 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

     During the three and six month periods ended June 30, 2010, there were no significant changes in the Company’s significant accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.

     The Company evaluates subsequent events occurring between the most recent balance sheet date and the date that the financial statements are available to be issued, in order to determine whether the subsequent events are to be recorded in and/or disclosed in the Company’s financial statements and footnotes. The financial statements are considered to be available to be issued at the time that they are filed with the SEC.

3. Recent Accounting Pronouncements

     In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13, amends existing revenue recognition accounting pronouncements that are currently within the scope of Accounting Standards Codification (“ASC”) Subtopic 605-25. This authoritative guidance provides principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. ASU 2009-13 introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This guidance is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its results of operations, financial position or cash flows.

     In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820)” (“ASU 2010-06”). This authoritative guidance provides amendments to Subtopic 820-10 and related guidance within U.S. GAAP to require disclosure of the transfers in and out of Levels 1 and 2, and a schedule for Level 3 that separately identifies purchases, sales, issuances and settlements. It also amends disclosure requirements to increase the required level of disaggregate information regarding classes of assets and liabilities that make up each level, and more detail regarding valuation techniques and inputs. This guidance is effective for fiscal years beginning on or after December 15, 2009, except for the disclosure regarding Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. The Company’s adoption of ASU 2010-06 as of January 1, 2010 did not have a material effect on its results of operations, financial position or cash flows.

     In April 2010, the FASB issued Accounting Standards Update No. 2010-17, “Milestone Method of Revenue Recognition (Topic 605)” (“ASU 2010-17”). This update provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Authoritative guidance on the use of the milestone method did not previously exist. This guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Alternatively, retrospective adoption is permitted for all prior periods. The Company is currently evaluating the impact that the adoption of this guidance will have on its results of operations, financial position or cash flows.

     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.

7

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

4. Per Share Data

Income (Loss) Per Share

This table shows the computation of basic and diluted income (loss) per share (in thousands, except per share data):

	Three Months Ended					Six Months Ended
	June 30					June 30,
	2010		2009			2010		2009
Numerator:
Net income (loss)	$	8,369	$	(2,138	)	$	12,239	$	(3,100	)
Denominator:
Denominator for basic income (loss) per common share - weighted average shares		31,866		31,644			31,837		31,635
Dilutive effect of employee stock options		198		—			160		—
Denominator for diluted income (loss) per common share – weighted average shares		32,064		31,644			31,997		31,635
Income (loss) per common share-basic	$	0.26	$	(0.07	)	$	0.38	$	(0.10	)
Income (loss) per common share-diluted	$	0.26	$	(0.07	)	$	0.38	$	(0.10	)

     The following are the potential shares of common stock, which were excluded from the calculation of weighted-average shares outstanding because their effect was determined to be anti-dilutive. For the three and six month periods ended June 30, 2010, all of the exercise prices of the outstanding stock options and the exercise price of the outstanding warrants included in the table below were each greater than the average market price per share for such period. For the three and six month periods ended June 30, 2009, the Company incurred a net loss and thus anti-dilutive.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
	(In thousands of shares)
Stock options outstanding		1,500		2,727		1,548		2,625
Restricted stock outstanding (unvested)		—		90		—		92
Warrants to purchase common stock		4,070		4,070		4,070		4,070
		5,570		6,887		5,618		6,787

5. Fair Value Measurement

     Financial assets and financial liabilities are required to be measured and reported on a fair value basis using the following three categories for classification and disclosure purposes:

     Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

     Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

     Level 3: Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

     In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company also considers counterparty credit risk in its assessment of fair value.

8

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

     Financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 are classified in the table below in one of the three categories described above:

	Level 1		Level 2		Level 3		Total
	(In thousands)
Cash and cash equivalents	$	13,098	$	—	$	—	$	13,098
Marketable securities		—		1,309		—		1,309
Money market account		77		—		—		77
Total	$	13,175	$	1,309	$	—	$	14,484

     Marketable securities consist of debt securities issued by a U.S. government sponsored enterprise and corporate commercial paper. Each security is valued by the Company, after considering a third party pricing service that reviews various market makers. The original maturity of the securities are greater than three months but do not exceed one year.

     There were no transfers of financial assets or liabilities as described in the table above between Level 1 and Level 2 during the six month period ended June 30, 2010.

     Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 are classified in the table below in one of the three categories described above:

	Level 1		Level 2		Level 3		Total
	(In thousands)
Cash and cash equivalents	$	11,246	$	—	$	—	$	11,246
Marketable securities		—		240		—		240
Money market account		296		—		—		296
Total	$	11,542	$	240	$	—	$	11,782

     Marketable securities consist of a certificate of deposit issued by a banking institution. The original maturity was greater than three months but did not exceed one year. The certificate of deposit matured in January 2010. At December 31, 2009, the Company did not have any certificates of deposit in amounts which were in excess of the FDIC insurance limit.

6. Other Assets

     Other assets, net are comprised of the following:

	June 30,			December 31,
	2010			2009
	(Unaudited) (In thousands)
Assets held in a trust for the Company’s Supplemental Executive Retirement Plan and Deferred Compensation Plan (see Note 12):
Cash surrender value of life insurance policies	$	2,078		$	2,024
Money market account		77			296
		2,155			2,320
Loan receivable from collaborator (see Note 14)		1,000			1,000
		3,155			3,320
Allowance for loan receivable from collaborator		(1,000	)		(1,000	)
Other assets, net	$	2,155		$	2,320

     The cash surrender value of life insurance policies held in the trust for the Company’s Supplemental Executive Retirement Plan are recorded at contract value as determined by the issuer of the policies, which approximates fair value. Contract value is the relevant measurement attribute because contract value is the amount the Company would receive if it were to initiate permitted transactions under the terms of the policies. The money market account held in the trust is measured and reported at fair value and classified as Level 1 as reflected in Note 5.

9

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

7. Loan Payable

Credit Facility

     On March 13, 2007, the Company entered into a $24.0 million senior secured credit facility (the “Credit Facility”) with Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., which was acquired by GE Capital in February 2008 and is now known as GE Business Financial Services Inc. The Credit Facility consists of: (i) a $12.0 million term loan advanced upon the closing of the Credit Facility and (ii) a $12.0 million term loan that the Company had the right to access until September 15, 2008, subject to conditions specified in the credit agreement. The Company did not access the second $12.0 million term loan prior to September 15, 2008, at which time it expired in accordance with the terms of the agreement.

     In connection with the Credit Facility, the Company granted the lender a perfected first priority security interest in all existing and after-acquired assets of the Company, excluding: (i) its intellectual property, which is subject to a negative pledge to GE Business Financial Securities Inc.; (ii) royalty payments from Mylan on its sales of Pfizer Inc.’s (“Pfizer”) generic version of Procardia XL 30 mg, if the Company pledges such royalty payments to another lender; (iii) up to $3.0 million of equipment which the Company may, at its election, pledge to another lender in connection with an equipment financing facility separate from the Credit Facility; and (iv) the assets of the Company’s trust described in Note 12. In addition, the Company is precluded from paying cash dividends to its shareholders during the term of the Credit Facility. The outstanding term loan has a term of 42 months from the date of advance of March 13, 2007. Interest-only payments were due for the first nine months; interest plus monthly principal payments equal to 1.67% of the loan amount were due for the period from the end of the interest-only period through December 2008; and interest plus straight-line amortization payments with respect to the remaining principal balance are due for the remainder of the term, through the loan’s maturity date in September 2010.

     The interest rate of the outstanding term loan is fixed at 10.32%. At the time of the final payment of the loan under the Credit Facility, the Company will pay an exit fee of $360,000, representing 3.0% of the original principal loan amount. Should any prepayment occur, the Company would be required to pay a prepayment penalty of 1.0% of any prepaid amount.

     As of June 30, 2010, the outstanding principal of the term loan was $1,371,000.

     The Company accrued for the $360,000 exit fee upon the closing of the Credit Facility. This fee, as well as other debt issuance costs incurred by the Company in securing the Credit Facility, were deferred and are included in prepaid expenses and other current assets in the Company’s balance sheet as of June 30, 2010 and December 31, 2009. These costs are being amortized over the term of the loan with such amortization included in interest expense in the Company’s statements of operations.

8. Shareholders’ Equity

Shelf Registration Statement

     On September 26, 2008, the Company filed a registration statement on Form S-3 with the SEC, which became effective on October 30, 2008. This shelf registration statement covers the issuance and sale by the Company of any combination of common stock, preferred stock, debt securities and warrants having an aggregate purchase price of up to $75 million. As of August 6, 2010, no securities have been issued under the registration statement.

Private Placement

     On March 11, 2008, the Company sold units representing an aggregate of 8,140,600 shares of its Common Stock, together with warrants to purchase an aggregate of 4,070,301 shares of its Common Stock, in a private placement, for a total purchase price of approximately $25.1 million. The Company received net proceeds of approximately $23.1 million from this private placement, after deducting the placement agent’s fees and other 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 under certain circumstances pursuant to cashless exercise provisions. As of August 6, 2010, no warrants have been exercised.

10

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

     Pursuant to the securities purchase agreement entered into in connection with the private placement, the Company filed a registration statement with the SEC on April 10, 2008, registering for resale the shares sold in the private placement and the private placement shares issuable under the warrants. The registration statement was declared effective by the SEC on April 28, 2008. The Company has agreed to use its reasonable best efforts to maintain the registration statement’s effectiveness until the earlier of (i) 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.

Share-Based Compensation

     The election of three new Class I directors at the Company’s 2010 annual meeting of shareholders resulted in a change in control of the Company’s board of directors as defined under the terms of certain outstanding stock option and restricted stock awards granted to employees and directors of the Company. As a result, on June 30, 2010, the date the election results of the annual meeting were certified, unvested stock options to purchase approximately 538,000 shares of the Company’s common stock and 25,000 shares of unvested restricted stock were automatically accelerated and vested in full. These accelerations resulted in a charge of $467,000 in the second quarter of 2010, of which $226,000 is included in selling, general and administrative expense and $241,000 is included in research and product development expense.

     The Company recognized share-based compensation in its statements of operations as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
	(Unaudited) (In thousands)
Selling, general and administrative	$	365	$	266	$	513	$	(302	)
Research and product development		342		151		442		315
Total	$	707	$	417	$	955	$	13

     The increase in total share-based compensation expense for the three month period ended June 30, 2010, compared with the three month period ended June 30, 2009 is attributable to the accelerated vesting of stock options and restricted stock recorded in the second quarter of 2010, as discussed above.

     The increase in total share-based compensation expense for the six month period ended June 30, 2010, compared with the six month period ended June 30, 2009, reflects credits recorded in the 2009 six month period totaling approximately $885,000, which were associated with the forfeiture of employee stock options in such period due to the staff reductions implemented by the Company in the first quarter of 2009 (see Note 10). The increase is also attributable to the accelerated vesting of stock options and restricted stock recorded in the second quarter of 2010, as discussed above. Partially offsetting these increases in expense in the second quarter of 2010, compared with the second quarter of 2009, was a reduction in expense due to the forfeiture of stock options that resulted from the staff reductions implemented by the Company in the fourth quarter of 2009 (see Note 10).

Rights Agreement

     On March 11, 2009, the Company adopted a rights plan pursuant to which it issued a dividend of one preferred share purchase right for each share of common stock held by Company shareholders of record on March 23, 2009. Each right entitled Company shareholders to purchase one one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock at a price of $12.50, subject to adjustment under certain circumstances. The rights expired July 1, 2010.

11

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

9. Cost of Revenues

	Three Months Ended					Six Months Ended
	June 30,				June 30,
	2010		2009		2010			2009
	(Unaudited) (In thousands)
Cost of royalties	$	104	$	95		$	198		$	207
Cost of product sales		142		143			329			325
Cost of collaborative licensing and development revenue		587		230			1,222			590
Total cost of revenues	$	833	$	468		$	1,749		$	1,122

     Cost of royalties consists of the amortization of deferred royalty termination costs and the amortization of certain patent costs associated with the Company’s TIMERx technology. Cost of product sales consists of the costs related to sales of formulated TIMERx material to the Company’s collaborators. Cost of collaborative licensing and development revenues consists of the Company’s expenses under its research and development collaboration agreements involving the development of product candidates using the Company’s TIMERx technology, and includes internal costs and outside contract services.

10. Restructuring Charges

     In the three month period ended March 31, 2009, the Company reduced the number of its employees from 60 to 49, as part of its efforts to aggressively manage its overhead cost structure. The terms of the severance agreements with the terminated employees included severance pay and continuation of certain benefits, including medical insurance, over the respective severance periods. In connection with these staff reductions, the Company recorded a severance charge in its statement of operations for the three month period ended March 31, 2009 of $550,000, of which $117,000 was unpaid as of June 30, 2009, but was paid over the remainder of 2009. Of such severance charge, $464,000 and $86,000 were recorded as selling, general and administrative expense, and research and product development expense, respectively. In addition, as a result of these terminations, in the first quarter of 2009, the Company recorded a non-cash credit of $885,000 associated with the forfeiture of stock options held by these former employees. Of such amount, $844,000 and $41,000 were recorded as credits to selling, general and administrative expense, and research and product development expense, respectively.

     In the fourth quarter of 2009, the Company reduced the number of its employees from 48 to 39, and consolidated its Danbury, Connecticut headquarters into its Patterson, New York facility. In connection with the terminations, the Company entered into severance arrangements with the terminated employees, which included severance pay and continuation of certain benefits, including medical insurance, over the respective severance periods. In connection with these severance arrangements and corporate office relocation, the Company recorded a restructuring charge in its statement of operations for the fourth quarter of 2009 of $326,000, all of which was paid as of June 30, 2010. Of such charge, $260,000 and $66,000 was recorded as selling, general and administrative expense, and research and product development expense, respectively. In addition, as a result of these terminations, in the fourth quarter of 2009, the Company recorded a non-cash credit of $105,000 associated with the forfeiture of stock options held by these former employees. Of such amount, $68,000 and $37,000 were recorded as credits to selling, general and administrative expense and research and product development expense, respectively, in the fourth quarter of 2009.

11. Income Taxes

     The Company maintains a full valuation allowance against substantially all of its deferred tax assets where realization of those assets remains uncertain. Accordingly, the Company has not reported any tax benefit relating to its remaining net operating loss (“NOL”) carryforwards and income tax credit carryforwards that may be utilized in future periods with the exception of the alternative minimum tax credit of $310,000 recognized in the six months ended June 30, 2010. The Company will continue to reassess the need for a valuation allowance on a quarterly basis. The Company assesses certain factors in determining the period in which it may reverse the valuation allowance, including: (i) a demonstration of sustained profitability; and (ii) the support of internal financial forecasts demonstrating the utilization of the NOLs prior to their expiration. If the Company determines that it is more likely than not that the deferred tax assets are realizable and that the reversal of the valuation reserves is appropriate, a

12

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

significant one-time benefit would be recognized against its income tax provision in the period that this determination is made.

     The Company’s effective tax rates for the three and six month periods ended June 30, 2010 and 2009 were zero. The effective tax rates differ from the federal statutory rate of 35% for 2010 and 34% for 2009 primarily due to valuation allowances recorded to offset deferred tax assets relating to the Company’s net operating loss carryforwards.

12. Supplemental Executive Retirement Plan and Deferred Compensation Plan

     The Company has a Supplemental Executive Retirement Plan (the “SERP”), a nonqualified plan, which covers the former Chairman and Chief Executive Officer of Penwest, Tod R. Hamachek. Under the SERP, the Company is obligated to pay Mr. Hamachek approximately $12,600 per month over the lives of Mr. Hamachek and his spouse. The actuarially determined liability for the SERP was approximately $2,046,000 and $2,066,000 as of June 30, 2010 and December 31, 2009, respectively, including the current portion of approximately $147,000 at June 30, 2010, and is included in deferred compensation in the Company’s condensed balance sheets. The Company has not funded this liability and no assets are held by the SERP. The Company uses a measurement date of December 31 for its SERP. The following disclosures summarize information relating to the SERP:

Components of net periodic benefit cost:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010		2009			2010		2009
	(Unaudited) (In thousands)
Interest cost	$	28	$	30		$	56	$	60
Amortization of prior service cost		—		(1	)		1		(1	)
Net periodic benefit cost	$	28	$	29		$	57	$	59

     In addition, the Company has a Deferred Compensation Plan (the “DCP”), a nonqualified plan which covers Mr. Hamachek. Under the DCP, the Company recognized interest expense of $10,000 and $13,000 for the three month periods ended June 30, 2010 and 2009, respectively and $21,000 and $28,000 for the six month period ended June 30, 2010 and 2009, respectively. The liability for the DCP was approximately $483,000 and $604,000 as of June 30, 2010 and December 31, 2009, respectively, including the current portion of approximately $144,000 at June 30, 2010, and is included in deferred compensation on the Company’s condensed balance sheets. The Company has not funded this liability and no assets are held by the DCP. In connection with the resignation and retirement of Mr. Hamachek, under the DCP, effective in May 2005, the Company commenced the payment of benefits to Mr. Hamachek, which are to be paid in ten annual installments, each approximating $140,000; however, these installments are recalculated annually based on market interest rates, as provided for under the DCP.

     The Company has two whole-life insurance policies held in a rabbi trust (the “Trust”), the cash surrender value or death benefits of which are held in trust for the SERP and DCP liabilities. Mr. Hamachek’s SERP and DCP benefit payments are being made directly from the assets in the Trust. The cash surrender value of these life insurance policies totaled $2,078,000 as of June 30, 2010 and $2,024,000 as of December 31, 2009. Trust assets, including $77,000 and $296,000 held in a money market account at June 30, 2010 and December 31, 2009, respectively, are included in other assets in the Company’s condensed balance sheets.

13. Comprehensive Income (Loss)

     Accumulated other comprehensive income consists of the following:

	June 30,		December 31,
	2010		2009
	(Unaudited) (In thousands)
Adjustment for funded status of post retirement plan	$	136	$	135
Unrealized gain on marketable securities		1		—
	$	137	$	135

13

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

     The components of comprehensive income (loss) are as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010		2009			2010		2009
	(Unaudited) (In thousands)
Net income (loss)	$	8,369	$	(2,138	)	$	12,239	$	(3,100	)
Amortization of prior service cost		—		(1	)		1		(1	)
Comprehensive income (loss)	$	8,369	$	(2,139	)	$	12,240	$	(3,101	)

14. Collaborative and Licensing Agreements

     The Company enters into collaborative and licensing agreements with pharmaceutical companies to in-license, develop, manufacture and/or market products that fit within its business strategy or to perform research and development for collaborators utilizing the Company’s drug delivery technology and formulation expertise.

   Endo Pharmaceuticals Inc.

     In September 1997, the Company entered into a strategic alliance agreement with Endo with respect to the development of Opana ER, an extended release formulation of oxymorphone hydrochloride using the Company’s TIMERx technology. This agreement was amended and restated in April 2002, and the Company further amended it in January 2007, July 2008, March 2009, April 2010 and June 2010.

     Under the agreement, the Company agreed to supply bulk TIMERx material to Endo, the selling price of which is contractually determined and may be adjusted annually, and Endo agreed to manufacture and market Opana ER in the United States. The Company 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 the Company, and that the Company and Endo would divide equally any fees, royalties, payments or other revenue received by the parties in connection with such licensing activities. In June 2009, Endo signed a collaboration agreement with Valeant to develop and commercialize Opana ER in Canada, Australia and New Zealand.

     Under the current terms of the Company’s agreement with Endo:

• Endo has agreed to pay the Company royalties on U.S. sales of Opana ER calculated based on a royalty rate starting at 22% of annual net sales of the product up to $150 million of annual net sales, with the royalty rate then increasing, based on agreed-upon levels of annual net sales achieved, from 25% up to a maximum of 30%. In the June 2010 amendment however, the parties agreed that the royalty rate would be fixed at 22% during the period from April 1, 2010 through December 31, 2012 (“the 2010-2012 Royalty Period”), provided that with respect to the fourth quarter of 2012, the rate would be adjusted to a rate that would result in the aggregate royalties paid to the Company for the 2010-2012 Royalty Period being $7.3 million less than the aggregate royalties that would otherwise have been paid to the Company if the royalty rate had not been fixed at 22%. The parties also agreed in the June 2010 amendment that the royalty rate on net sales of Opana ER would be fixed at 20% during 2013, provided that with respect to the fourth quarter of 2013, the rate would be adjusted to a rate that would result in the aggregate royalties paid to the Company for 2013 being $700,000 less than the aggregate royalties that would have been paid to the Company if the royalties had not been fixed at 20%.

• No royalty payments were due to the Company for the first $41 million of royalties that would otherwise have been payable to the Company beginning from the time of the product launch in July 2006 (the “Royalty Holiday”). In the third quarter of 2008, the Royalty Holiday ended. The Company recognized royalties from Endo related to sales of Opana ER of $12.3 million and $4.4 million for the three month periods ending June 30, 2010 and 2009, respectively, and $19.5 million and $4.4 million for the six month periods ended June 30, 2010 and 2009, respectively.

• The Company’s share of the development costs for Opana ER that it opted out of funding in April 2003 totaled $28 million and was recouped by Endo through a temporary 50% reduction in royalties. Commencing in the third quarter of 2008, the Company began to receive reduced royalty payments from Endo, with such temporary reductions to continue until the $28 million was fully recouped. In the three month period ended March 31,

14

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

	2010, Endo recouped the remaining balance of unfunded development costs of $3.7 million and as a result, the temporary 50% reduction in the royalty rate has ended.
•	Endo will pay the Company a percentage of any sublicense income it receives and milestone payments of up to $90 million based upon the achievement of agreed-upon annual net sales thresholds.

     In March 2009, the Company and Endo entered into a Third Amendment to the Amended and Restated Strategic Alliance Agreement with respect to Opana ER, effective January 1, 2009 (the “Third Amendment”). Under the terms of the Third Amendment, Endo agreed to directly reimburse the Company for costs and expenses incurred by the Company in connection with patent applications and patent maintenance related to Opana ER. If any of such costs and expenses are not reimbursed to the Company by Endo, the Company may bill Endo for these costs and expenses through adjustments to the pricing of TIMERx material that the Company supplies to Endo for use in Opana ER. In connection with the Third Amendment, Endo reimbursed the Company for such costs and expenses incurred prior to December 31, 2008, which had been capitalized as patent assets, in the amount of $206,000. Such payment, as well as reimbursement by Endo of an additional $23,000 in patent costs incurred prior to the Third Amendment, was received by the Company in the second quarter of 2009. The Company credited such reimbursements to its patent assets in 2009. Such patent related costs and expenses incurred by the Company subsequent to the Third Amendment have either been reimbursed or are expected to be reimbursed to the Company by Endo, with such reimbursements recorded by the Company as offsets to its costs.

     On June 8, 2009, Endo and Valeant signed a license agreement granting Valeant the exclusive right to develop and commercialize Opana ER in Canada, Australia and New Zealand (the “Valeant Agreement”). Under the terms of the Valeant Agreement, Valeant paid Endo an up-front fee of C$2 million, and agreed to make payments totaling up to C$1 million upon the achievement of sales milestones in Canada, and payments totaling up to AUS $1.1 million upon achievement of regulatory and sales milestones in Australia and New Zealand. In addition, Valeant agreed to pay tiered royalties ranging from 10% to 20% of annual net sales of Opana ER in each of the three countries, subject to royalty reductions upon patent expiration or generic entry. The Valeant Agreement also includes rights to Opana^®, the immediate release formulation of oxymorphone developed by Endo for which the Company has no rights to. In connection with the Valeant Agreement, the Company signed a supply agreement with Valeant, agreeing to supply bulk TIMERx material to Valeant for its use in manufacturing Opana ER under the Valeant Agreement, the selling price of which will approximate Penwest’s cost, as defined in the agreement, and may be adjusted annually. The supply agreement is for a ten year term and may be terminated upon the occurrence of certain events including Valeant’s discontinuation of marketing Opana ER in the licensed territories.

     In connection with the Valeant Agreement and the Company’s supply agreement with Valeant, on June 8, 2009, the Company and Endo signed a consent agreement, consenting to these arrangements and confirming the share of the payments to be made by Valeant that would be due to the Company. In July 2009, the Company received payment from Endo in the amount of $764,000 for the Company’s share of the up-front payment received by Endo under the Valeant Agreement, which amount the Company recorded as deferred revenue. The Company began to recognize revenue from this up-front payment in the third quarter of 2009, and expects to recognize revenue on the remainder of this payment ratably over the remaining estimated marketing period. The Company and Endo will share equally in the royalties and sales milestones received from Valeant for Opana ER under the terms of the Valeant Agreement. In the first quarter of 2010, Valeant filed a New Drug Submission for marketing approval for Opana ER in Canada.

     On April 8, 2010, the Company and Endo entered into a Fourth Amendment to the Amended and Restated Strategic Alliance Agreement (the “Fourth Amendment”). Under the terms of the Fourth Amendment, the Company granted Endo an exclusive license under various patents to make, use and commercialize in the United States additional extended-release products containing oxymorphone HCl. Endo may grant sublicenses under such license with the prior written consent of the Company, which the Company may not unreasonably withhold. Sales of such additional products in the United States will be aggregated with sales of Opana ER in the United States for purposes of determining royalties payable to the Company. The Company is entitled to the same portion of payments obtained by Endo from sublicensees with respect to such additional products in the United States as with respect to Opana ER in the United States.

15

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

     On June 8, 2010, the Company and Endo entered into a Fifth Amendment to the Amended and Restated Strategic Alliance Agreement (the “Fifth Amendment”). Under the terms of the Fifth Amendment, the Company and Endo amended the royalty rates provided for by the agreement in accordance with the description of the current financial terms described above.

  Edison Pharmaceuticals, Inc.

     On July 16, 2007, the Company entered into an agreement with Edison (the “Edison Agreement”), under which the Company and Edison agreed to collaborate on the development of Edison’s lead drug candidate, A0001, and up to one additional candidate of Edison’s. Under the terms of the Edison Agreement, the Company has exclusive worldwide rights to develop and commercialize A0001 and an additional compound of Edison’s, which the Company selected in 2009, for all indications, subject to the terms and conditions in the Edison Agreement. The Company is currently developing A0001 for patients with FA and MELAS syndrome. A0001 has been granted orphan drug designation by the FDA for treatment of inherited mitochondrial respiratory chain diseases and received fast track designation by the FDA for the treatment of FA.

     As consideration for the rights granted to the Company under the Edison Agreement, the Company paid Edison an up-front 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 Edison’s research and development. The Company is also required to make payments to Edison upon the achievement of specified milestones set forth in the Edison Agreement and to make royalty payments based on net sales of products containing A0001 and any other compound as to which the Company has exercised its option.

     On February 5, 2008, the Company loaned Edison $1.0 million pursuant to the loan agreement provisions of the Edison Agreement. The loan bears interest at an annual rate 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. During the first quarter of 2008, the Company recorded an impairment charge of $1.0 million to selling, general and administrative expense as a result of its collectability assessment of the loan to Edison. In addition, as a result of the Company’s continuing collectability assessment, the Company is not recognizing any accrued interest income on the loan to Edison. The amount of such accrued interest income not recognized by the Company approximated $24,000 and $22,000 for the three month periods ended June 30, 2010 and 2009, respectively, and $48,000 and $44,000 for the six month periods ended June 30, 2010 and 2009, respectively. Cumulatively, as of June 30, 2010, such accrued interest not recognized by the Company approximated $215,000.

     Under the Edison Agreement, the Company also agreed to pay Edison a total of $5.5 million over an 18-month research period to fund Edison’s discovery and research activities during the period. The funding was made in the form of payments made in advance each quarter. As of June 30, 2010, the Company had paid approximately $5.4 million of such amount, and no further research and development funding is currently owed to Edison in accordance with the May 5, 2009 agreement with Edison, described below. Research and development expense associated with the Edison collaboration, which included expenses relating to the development of A0001 and contract research and milestone payments to Edison were approximately $401,000 and $1.1 million for the three and six month periods ending June 30, 2010 and $1.5 million and $2.5 million, respectively, for the three and six months periods ended June 30, 2009. The Company had the option to extend the term of the research period for up to three consecutive six-month periods, subject to the Company’s funding of Edison’s activities in amounts to be agreed upon, but the Company did not exercise this option.

     In 2009, Edison presented the Company with an additional compound of Edison’s and the Company exercised its option to select this compound for all indications, subject to the terms and conditions in the Edison Agreement. Upon the selection of this additional compound, the Company made a milestone payment in the amount of $250,000 to Edison, which it recorded in research and product development expense in the third quarter of 2009.

     The license for the compounds under the Edison Agreement ends, on a country-by-country and product-by-product basis, when neither Edison nor the Company has any remaining royalty payment obligations to the other

16

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

with respect to such compound. Each party’s royalty payment obligation ends upon the later of the expiration of the last-to-expire claim of all licensed patents covering such party’s product or the expiration of the FDA’s designation of such product as an orphan drug. The Edison Agreement may be terminated by the Company with 120 days prior written notice to Edison. The Edison Agreement may also be terminated by either party in the event of the other party’s uncured material breach or bankruptcy.

     On May 5, 2009, the Company and Edison entered into an agreement under which Edison agreed that the Company could offset $550,000, and following that, the loan amount of $1.0 million plus accrued interest, against 50% of any future milestone and royalty payments which may be due to Edison under the terms of the Edison Agreement. The loan amount is otherwise due and payable by Edison according to the original loan terms under the loan agreement. In addition, the agreement provides that the Company has no further contractual payment obligations in connection with the research period. Following the milestone payment that the Company made to Edison in 2009 as noted above, $300,000 remains of the $550,000 offset provided for under the May 5, 2009 agreement.

  Mylan Pharmaceuticals Inc.

     On March 2, 2000, Mylan announced that it had signed a supply and distribution agreement with Pfizer to market generic versions of all three strengths (30 mg, 60 mg, 90 mg) of Pfizer’s generic Procardia XL. In connection with that agreement, Mylan decided not to market Nifedipine XL, a generic version of Procardia XL that the Company had developed in collaboration with Mylan. As a result, Mylan entered into a letter agreement with the Company under which Mylan agreed to pay Penwest a royalty on all future net sales of Pfizer’s generic version of Procardia XL 30 mg. The royalty percentage was comparable to the percentage called for in Penwest’s original agreement with Mylan for Nifedipine XL 30 mg. Mylan has retained the marketing rights to Nifedipine XL 30 mg. Mylan’s sales in the United States of Pfizer’s generic version of Procardia XL 30 mg totaled approximately $3.5 million and $7.1 million for the three and six month periods ended June 30, 2010, respectively. The term of the letter agreement continues until such time as Mylan permanently ceases to market Pfizer’s generic version of Procardia XL 30 mg.

     Royalties from Mylan were approximately $418,000 and $426,000 for the three month periods ended June 30, 2010 and 2009, respectively, and $853,000 and $776,000 for the six month periods ended June 30, 2010 and 2009, respectively.

     Mylan notified the Company that Mylan did not renew its supply and distribution agreement with Pfizer, and that the agreement expired in March 2010. As a result, the Company does not expect to receive royalties from Mylan on sales of Pfizer’s generic version of Procardia XL 30 mg with respect to any period after the third quarter of 2010.

     In October 2009, Mylan resolved a dispute with the Department of Justice (the “DOJ”) regarding Medicaid rebate classifications with respect to some of the products it sold from 2000 to 2004. One of these products was Pfizer’s generic version of Procardia XL. Following its settlement with the DOJ, Mylan delivered a letter to the Company seeking approximately $1.1 million plus interest from the Company. Mylan claims that if it had used the rebate classifications asserted by the DOJ, it would have paid the Company approximately $1.1 million less in royalties during the 2000 to 2004 period than it did pay. The Company has reviewed its agreement with Mylan and notified Mylan that it does not believe it is liable to Mylan for this claim.

  Drug Delivery Technology Collaborations

     The Company enters into development and licensing agreements with third parties under which the Company develops formulations of third parties’ or generic compounds, utilizing the Company’s TIMERx drug delivery technologies and formulation expertise. In connection with these agreements, the Company may receive nonrefundable up-front payments, which are recorded as deferred revenue upon receipt and are recognized as revenue over the respective contractual performance periods. Under these agreements, the Company may also be reimbursed for development costs incurred up to amounts specified in each agreement. Additionally, under these agreements, the Company may receive milestone payments upon the achievement of specified events. Finally, these agreements may provide for the Company to receive payments from the sale of bulk TIMERx material and royalties on product sales upon commercialization of the product. As of August 6, 2010, the Company has multiple drug delivery technology collaborations, including with Otsuka and a multi-drug agreement for generic products with Alvogen discussed below.

17

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

     In April 2010, the Company signed a drug development and commercialization agreement with Alvogen under which the Company and Alvogen have agreed to identify and select up to five compounds for generic development. Under this agreement, the Company agreed to formulate the agreed-upon compounds for which it will receive up-front as well as periodic payments, and may also receive milestone and royalty payments relating to the development of each compound. Alvogen is responsible for manufacturing, clinical trials and regulatory filings for each of the formulations, as well as for commercialization of the products worldwide.

15. Contingencies

     On November 12, 2008, the Company entered into executive retention agreements with each of its executive officers. These retention agreements replaced prior retention agreements with each of its executive officers that had been scheduled to expire on December 31, 2008. On March 10, 2010, the Company entered into amendments to these agreements. The retention agreements provide that if, within 18 months following a change in control of the Company, the executive’s employment is terminated by the Company other than for cause, death, or disability, or by the executive for good reason, as such terms are defined in the agreement, the executives are entitled to payments for severance and other benefits, including medical insurance, and the automatic vesting of all unvested stock options.

     The election of three new Class I directors at the 2010 annual meeting of shareholders resulted in a change in control of the Company under the retention agreements as of June 30, 2010, the date that the election results of the annual meeting were certified. As a result, under the executive retention agreements if, within 18 months of the June 30, 2010 change in control, an executive officer is terminated by the Company other than for cause, death, or disability, or by the executive for good reason, the Company would be obligated to pay the benefits provided for under these retention agreements which, as of June 30, 2010, the Company estimates would total approximately $3.4 million under all executive retention agreements.

     Substantial patent litigation exists in the pharmaceutical industry. Patent litigation generally involves complex legal and factual questions, and the outcome frequently is difficult to predict. An unfavorable outcome in any patent litigation involving the Company could cause the Company to be liable for substantial damages, alter its products or processes, obtain additional licenses and/or cease certain activities. Even if the outcome is favorable to the Company, the Company could incur substantial costs in litigating such matters.

  Impax ANDA Litigation

     On December 14, 2007, the Company received a notice from IMPAX Laboratories, Inc. (“IMPAX”), advising the Company of the FDA’s apparent acceptance for substantive review, as of November 23, 2007, of IMPAX’s amended ANDA for a generic version of Opana^® ER. IMPAX stated in its letter that the FDA requested IMPAX to provide notification to the Company and Endo of any Paragraph IV certifications submitted with its ANDA, as required under section 355(j) of the Federal Food, Drug and Cosmetics Act, or the FDC Act. Accordingly, IMPAX’s letter included notification that it had filed Paragraph IV certifications with respect to the Company’s U.S. Patent Nos. 7,276,250, 5,958,456 and 5,662,933, which cover the formulation of Opana^® ER. These patents are listed in the FDA’s Orange Book and expire in 2023, 2013 and 2013, respectively. Endo’s Opana^® ER product had new dosage form exclusivity that prevented final approval of any ANDA by the FDA until the exclusivity expired on June 22, 2009. In addition, because IMPAX’s application referred to patents owned by the Company and contained a Paragraph IV certification under section 355(j) of the FDC Act, the Company believes that IMPAX’s notice triggered the 45-day period under the FDC Act in which the Company and Endo could file a patent infringement action and trigger the automatic 30-month stay of approval. Subsequently, on January 25, 2008, the Company and Endo filed a lawsuit against IMPAX in the United States District Court for the District of Delaware in connection with IMPAX’s ANDA. The lawsuit alleges infringement of certain Orange Book-listed U.S. patents that cover the Opana^® ER formulation. In response, IMPAX filed an answer and counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange Book are invalid, not infringed and/or unenforceable.

     On June 16, 2008, the Company and Endo received a notice from IMPAX that it had filed an amendment to its ANDA containing Paragraph IV certifications for the 7.5 mg, 15 mg and 30 mg strengths of Opana^® ER. The notice covers the Company’s U.S. Patent Nos. 7,276,250, 5,958,456 and 5,662,933. Subsequently, on July 25, 2008, the

18

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

Company and Endo filed a lawsuit against IMPAX in the United States District Court for the District of Delaware in connection with IMPAX’s amended ANDA. The lawsuit alleges infringement of certain Orange Book-listed U.S. patents that cover the Opana^® ER formulation. In response, IMPAX filed an answer and counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange Book are invalid, not infringed and/or unenforceable. All three of these suits against IMPAX were transferred to the United States District Court for the District of New Jersey.

     On June 8, 2010, the Company and Endo settled the IMPAX litigation. Both sides dismissed their respective claims and counterclaims with prejudice. Under the terms of the settlement, IMPAX agreed not to challenge the validity or enforceability of Penwest’s patents relating to Opana^® ER with respect to IMPAX’s generic version of Opana ER and not to sell a generic version of Opana ER until January 1, 2013 or earlier under specified circumstances (such date being the “Commencement Date”). The Company and Endo agreed to grant IMPAX a license under the Opana Patents permitting the sale of generic Opana^® ER upon the Commencement Date. The license granted to IMPAX is non-exclusive except with respect to the 180 day period following the Commencement Date for those dosage strengths for which IMPAX is entitled to first-to-file exclusivity, during which period the license is exclusive as to all but the Opana ER branded product and licenses previously granted by the Company and Endo to ANDA holders.

     The settlement is subject to the review of the U.S. Federal Trade Commission and Department of Justice.

  Actavis ANDA Litigation

     In February 2008, the Company received a notice from Actavis South Atlantic LLC (“Actavis”) advising the Company of the filing by Actavis of an ANDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j) for a generic version of Opana^® ER. The Actavis Paragraph IV certification notice refers to the Company’s 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 or expired in 2008, 2013, 2013 and 2023, respectively. In addition to these patents, Opana^® ER has a new dosage form (referred to as NDA) exclusivity that prevents final approval of any ANDA by the FDA until the exclusivity expires on June 22, 2009. Subsequently, on March 28, 2008, the Company and Endo filed a lawsuit against Actavis in the U.S. District Court for the District of New Jersey in connection with Actavis’s ANDA. The lawsuit alleges infringement of an Orange Book-listed U.S. patent that covers the Opana^® ER formulation. On May 5, 2008, Actavis filed an answer and counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange Book are invalid, not infringed and/or unenforceable, as well as a claim of unfair competition against the Company and Endo.

     On or around June 2, 2008, the Company received a notice from Actavis that it had filed an amendment to its ANDA containing Paragraph IV certifications for the 7.5 mg and 15 mg dosage strengths of Opana^® ER. On or around July 2, 2008, the Company received a notice from Actavis that it had filed an amendment to its ANDA containing Paragraph IV certifications for the 30 mg dosage strength. Both notices cover the Company’s U.S. Patent Nos. 5,128,143, 7,276,250, 5,958,456 and 5,662,933. On July 11, 2008, the Company and Endo, filed suit against Actavis in the United States District Court for the District of New Jersey. The lawsuit alleges infringement of an Orange Book-listed U.S. patent that covers the Opana^® ER formulation. On August 14, 2008, Actavis filed an answer and counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange Book are invalid, not infringed and/or unenforceable, as well as a claim of unfair competition against the Company and Endo.

     On February 20, 2009, the Company and Endo settled all of the Actavis litigation. Both sides dismissed their respective claims and counterclaim with prejudice. Under the terms of the settlement, Actavis agreed not to challenge the validity or enforceability of the Company’s patents relating to Opana^® ER. The Company and Endo agreed to grant Actavis a license permitting the production and sale of generic Opana^® ER 7.5 and 15 mg tablets by the earlier of July 15, 2011, the last day Actavis would forfeit its 180-day exclusivity, and the date on which any third party commences commercial sales of Opana^® ER, but not before November 28, 2010. The Company and Endo also granted Actavis a license to produce and market other strengths of Opana^® ER generic on the earlier of July 15, 2011 and the date on which any third party commences commercial sales of a generic form of the drug.

     The settlement is subject to the review of the U.S. Federal Trade Commission and Department of Justice.

19

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

  Sandoz ANDA Litigation

     On July 14, 2008, the Company received a notice from Sandoz, Inc. (“Sandoz”) advising the Company of the filing by Sandoz of an ANDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j) with respect to Opana^® ER in 5 mg, 10 mg, 20 mg and 40 mg dosage strengths. The Sandoz Paragraph IV certification notice refers to the Company’s U.S. Patent Nos. 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 2013, 2013 and 2023, respectively. In addition to these patents, Opana^® ER has a new dosage form (NDA) exclusivity that prevents final approval of any ANDA by the FDA until the exclusivity expires on June 22, 2009. Subsequently, on August 22, 2008, the Company and Endo filed a lawsuit against Sandoz in the United States District Court for the District of Delaware in connection with Sandoz’s ANDA. The lawsuit alleges infringement of an Orange Book-listed U.S. patent that covers the Opana^® ER formulation. In response, Sandoz filed an answer and counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange Book are invalid, not infringed and/or unenforceable.

     On November 20, 2008, the Company received a notice from Sandoz that it had filed an amendment to its ANDA containing Paragraph IV certifications for the 7.5 mg, 15 mg and 30 mg dosage strengths of Opana^® ER. The notice covers the Company’s U.S. Patent Nos. 5,128,143, 7,276,250, 5,958,456 and 5,662,933. On December 30, 2008, the Company and Endo, filed suit against Sandoz in the United States District Court for the District of New Jersey. The lawsuit alleges infringement of an Orange Book-listed U.S. patent that covers the Opana^® ER formulation. In response, Sandoz filed an answer and counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange Book are invalid, not infringed and/or unenforceable. Both of these pending suits against Sandoz were transferred to the United States District Court for the District of New Jersey.

     On June 8, 2010, the Company and Endo settled the Sandoz litigation. Both sides dismissed their respective claims and counterclaims with prejudice. Under the terms of the settlement, Sandoz agreed not to challenge the validity or enforceability of Penwest’s patents relating to Opana^® ER. The Company and Endo agreed to grant Sandoz a license permitting the production and sale of all strengths of Opana^® ER commencing on September 15, 2012, or earlier under certain circumstances.

     The settlement is subject to the review of the U.S. Federal Trade Commission and Department of Justice.

  Barr ANDA Litigation

     On September 12, 2008, the Company received a notice from Barr Laboratories, Inc. (“Barr”) advising the Company of the filing by Barr of an ANDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j) with respect to Opana^® ER in a 40 mg dosage strength. On September 15, 2008, the Company received a notice from Barr that it had filed an ANDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j) with respect to Opana^® ER in 5 mg, 10 mg, and 20 mg dosage strengths. Both notices refer to the Company’s U.S. Patent Nos. 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 2013, 2013 and 2023, respectively. In addition to these patents, Opana^® ER had a new dosage form exclusivity that prevented final approval of any ANDA by the FDA until the exclusivity expired on June 22, 2009. Subsequently, on October 20, 2008, the Company and Endo filed a lawsuit against Barr in the United States District Court for the District of Delaware in connection with Barr’s ANDA. The lawsuit alleges infringement of certain Orange Book-listed U.S. patents that cover the Opana^® ER formulation. In response, Barr filed an answer and counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange Book are invalid, not infringed and/or unenforceable. This suit was transferred to the United States District Court for the District of New Jersey. On June 2, 2009, the Company received a notice from Barr that it had filed an ANDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j) with respect to Opana^® ER in 7.5 mg, 15 mg, and 30 mg dosage strengths. This notice also refers to the Company’s U.S. Patent Nos. 5,662,933, 5,958,456 and 7,276,250, which cover the formulation of Opana^® ER. On July 2, 2009, the Company and Endo filed a lawsuit against Barr in the United States District Court for the District of New Jersey in connection with Barr’s ANDA.

     On April 12, 2010, the Company and Endo settled the litigation with Barr. Under the terms of the settlement, Barr agreed not to challenge the validity or enforceability of the Company’s patents relating to the production and sale of

20

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

generic formulations of Opana^® ER and the Company and Endo agreed to grant Barr a license under the Orange-Book listed patents to sell a generic of Opana^® ER on or after September 15, 2012, or earlier under certain circumstances.

     The settlement is subject to the review of the U.S. Federal Trade Commission and Department of Justice.

  Roxane ANDA Litigation

     On December 29, 2009, the Company received a notice from Roxane Laboratories (“Roxane”) advising the Company of the filing by Roxane of an ANDA containing a Paragraph IV certification under 21 U.S.C. section 355(j) with respect to Opana^® ER in a 40 mg dosage strength. The notice refers to the Company’s U.S. Patent Nos. 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 2013, 2013, and 2023, respectively. Subsequently, on January 29, 2010, the Company and Endo filed a lawsuit against Roxane in the United States District Court for the District of New Jersey in connection with Roxane’s ANDA. The lawsuit alleges infringement of an Orange Book-listed U.S. patent that covers the Opana^® ER formulation.

     On or about March 18, 2010, the Company received a notice from Roxane that it had filed an amendment to its ANDA containing Paragraph IV certifications for the 5, 7.5, 10, 15, 20 and 30 mg dosage strengths of Opana^® ER. Subsequently, on April 16, 2010, the Company and Endo filed a lawsuit against Roxane in the United States District Court of the District of New Jersey in connection with Roxane’s amended ANDA. The lawsuit alleges infringement of an Orange Book-listed U.S. patent that covers the Opana^® ER formulation.

  Watson ANDA Litigation

     On January 20, 2010, the Company received a notice from Watson Laboratories, Inc. (“Watson”) advising the Company of the filing by Watson of an ANDA containing a Paragraph IV certification under 21 U.S.C. section 355(j) with respect to Opana^® ER in a 40 mg dosage strength. The notice refers to the Company’s U.S. Patent Nos. 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 2013, 2013, and 2023, respectively. Subsequently, on March 4, 2010, the Company and Endo filed a lawsuit against Watson in the United States District Court for the District of New Jersey, in connection with Watson’s ANDA. The lawsuit alleges infringement of certain Orange Book-listed U.S. patents that cover the Opana^® ER formulation. On March 19, 2010, the Company received a notice from Watson advising of the filing by Watson of an ANDA containing a Paragraph IV certification under 21 U.S.C. section 355 (j) with respect to Opana ER in 5, 7.5, 10, 15, 20 and 30 mg dosage strengths. Subsequently, on April 23, 2010, the Company and Endo filed a lawsuit against Watson in the United States District Court of the District of New Jersey in connection with Watson’s ANDA. The lawsuit alleges infringement of certain Orange Book-listed U.S. patents that cover the Opana ER formulation.

     The Company and Endo intend to pursue all available legal and regulatory avenues in defense of Opana^® ER, including enforcement of each Company’s intellectual property rights and approved labeling. The Company cannot, however, predict or determine the timing or outcome of any of these litigations but will explore all options as appropriate in the best interests of the Company.

  Tang/Edelman Shareholder Claim

     In March and April 2009, Tang Capital Partners, LP (“Tang Capital”) and Perceptive Life Sciences Master Fund Ltd. (“Perceptive”), the Company’s two largest shareholders, brought a total of three lawsuits against the Company; two in Thurston County, Washington, and one in King County, Washington. Following the 2009 dismissal of the two Thurston County actions and the May 2010 dismissal of the complaint in King County, as discussed below, none of these lawsuits remains pending. The lawsuits were brought in connection with a proxy contest initiated by Tang Capital and Perceptive.

     On March 12, 2009, Tang Capital and Perceptive brought suit against the Company in the Superior Court of the State of Washington, Thurston County, (Tang Capital Partners, et al. v. Penwest Pharmaceuticals Co., No. 09-2-

21

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

00617-0), seeking declaratory and injunctive relief to uphold their claims that their notice of nomination of directors had satisfied the requirements set forth in the Company’s bylaws and requesting that the court issue an order preventing the Company from seeking to disallow or otherwise prevent or not recognize their nominations, or the casting of votes in favor of their designees, on the basis that they had not complied with the provisions of the Company’s bylaws or applicable state law. On March 13, 2009, Tang Capital and Perceptive moved for a preliminary injunction to enjoin the Company from mailing any ballots to shareholders that contained provisions to vote for director nominees and enjoining any shareholder vote on individuals nominated for the board of directors unless the three designees of Tang Capital and Perceptive were permitted to be nominated and votes were permitted to be cast in their favor, or a court resolved the merits of their declaratory judgment action described above. On March 20, 2009, the Company confirmed in writing that Tang Capital and Perceptive’s nomination notice had been timely received and that, assuming the accuracy and completeness of the information contained in their notice, their notice in all other respects met the requirements of the Company’s bylaws in regard to notices of intention to nominate. On March 23, 2009, Tang Capital and Perceptive withdrew their motion for injunctive relief, and on April 10, 2009, Tang Capital and Perceptive voluntarily dismissed the suit.

     On April 20, 2009, Tang Capital and Perceptive brought suit against the Company in the Superior Court of the State of Washington, King County, (Tang Capital Partners, et al. v. Penwest Pharmaceuticals Co.), No. 09-2-16472-0), seeking to enforce their alleged rights under the Washington Business Corporation Act to inspect certain Company documents (“the King County Action”). The Company’s position is that certain of the requested documents are outside the scope of documents for which the Washington Business Corporation Act permits a statutory inspection right and that certain of the conditions to qualify for statutory inspection rights have not been satisfied.

     On April 28, 2009, Tang Capital and Perceptive brought suit against the Company in the Superior Court of the State of Washington, Thurston County, (Tang Capital Partners, et al. v. Penwest Pharmaceuticals Co.), seeking either for the court to set the number of directors to be elected at the 2009 annual meeting of shareholders at three rather than two, or for the court to require the Company to waive the advance notice provisions of its bylaws to permit Tang Capital and Perceptive to include a proposal in which the required percentage for board approval of certain matters would be 81% or more, rather than 75% or more. On May 13, 2009, Tang Capital and Perceptive dismissed this Thurston County action, reasserting the same claims via an amended complaint in the King County Action. Tang Capital and Perceptive sought preliminary injunctive relief on their claims prior to the 2009 annual meeting of shareholders and the motion was denied by the court on May 22, 2009. The proposed bylaw amendment was not approved by the Company’s shareholders at the Company’s 2009 annual meeting of shareholders. By stipulation of the parties, the suit was dismissed without prejudice on May 13, 2010.

     The Company is also a party from time to time to certain other types of claims and proceedings in the ordinary course of business. The Company does not believe any of these matters will result, individually or in the aggregate, in a material adverse effect upon its financial condition or future results of operations.

16. Subsequent Events

     In July 2010, the Company determined that it would reduce its staff from 38 to 27 in the third quarter of 2010, as part of its continuing efforts to aggressively manage its overhead cost structure. In connection with these actions, the Company anticipates recording a restructuring charge in the third quarter of 2010 of approximately $250,000, which amount is net of a non-cash credit of approximately $10,000, associated with the expected forfeiture of certain stock options held by affected employees. This charge relates primarily to arrangements for severance pay and the continuation of certain benefits, including medical insurance, over the respective periods, and will be recorded primarily to research and product development expense.

22

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

      Overview

     We are a drug delivery company focused on applying our drug delivery technologies and drug formulation expertise to the formulation of product candidates under licensing collaborations (“drug delivery technology collaborations”). Our drug delivery technology is included in Opana^® ER, a product for the treatment of moderate to severe chronic pain marketed by Endo. We are also developing A0001, or a-tocopherolquinone, for the treatment of Friedreich’s Ataxia and MELAS syndrome.

     Opana^® ER is an extended release formulation of oxymorphone hydrochloride that we developed with Endo using our proprietary extended release 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 six month period ended June 30, 2010, we recognized $19.5 million in royalties from Endo related to sales of Opana ER. In June 2009, Endo signed an agreement with Valeant Pharmaceuticals International, or Valeant, to develop and commercialize Opana ER in Canada, Australia and New Zealand. In the first quarter of 2010, Valeant filed a New Drug Submission for marketing approval for Opana ER in Canada. Opana ER is not approved for sale in any country other than the United States.

     We are conducting two Phase IIa clinical trials of A0001. We are conducting one trial in patients with Friedreich’s Ataxia, or FA, a rare degenerative neuro-muscular disorder, and the second trial in patients with the A3243G mitochondrial DNA point mutation that is commonly associated with MELAS syndrome, a rare progressive neurodegenerative disorder. The goal of these trials is to determine if A0001 has a discernible impact in the treatment of patients with these disorders using various biochemical, functional and clinical measures. We expect data from both of these trials by the end of 2010. We are not conducting, and do not plan to conduct, any additional development work on A0001, other than the two Phase IIa trials until we review the results for both trials. We are currently seeking to license A0001 to a third party to complete further development and assume responsibility for the commercialization, manufacturing and marketing of this compound.

     We are a party to a number of collaborations involving the use of our proprietary extended release drug delivery technologies as well as our formulation development expertise. Under these collaborations, we are responsible for completing the formulation work on a product specified by our collaborator using our proprietary extended release drug delivery technology. If we successfully formulate the compound, we transfer the formulation to our collaborator, who is then responsible for the completion of the clinical development, manufacture and, ultimately, the commercialization of the product. Under the terms of these agreements, we may receive up-front fees, reimbursement of research and product development costs incurred, up to amounts specified in each agreement, and potential milestone payments upon the achievement of specified events. These agreements may also provide for us to receive payments from the sale of bulk TIMERx material and royalties on product sales upon commercialization of the product. We have drug delivery technology collaborations with Otsuka Pharmaceuticals Co., or Otsuka, and with Alvogen Inc., or Alvogen. In the three month period ended June 30, 2010, we achieved a development milestone under one of our collaborations with Otsuka, for which we received a milestone payment. In April 2010, we signed a drug development and commercialization agreement with Alvogen, under which we and Alvogen have agreed to identify and select up to five compounds for generic development. Under the agreement, we agreed to formulate the agreed-upon compounds for which we will receive up-front as well as periodic payments, and may receive milestone and royalty payments relating to the development of each compound. Alvogen is responsible for manufacturing, clinical trials and regulatory filings for each of the formulations, as well as for commercialization of the products worldwide.

     Endo. Under the terms of our collaboration with Endo, Endo is responsible for marketing and selling Opana ER. 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 in July 2006, a period we refer to as the “royalty holiday”. In the third quarter of 2008, the royalty holiday ended and we began earning royalties from Endo on sales of Opana ER. Since that time, we have recognized $43.9 million in royalties on sales of Opana ER, including $12.4 million and $19.5 million for the three and six month periods ended June 30, 2010, respectively. Endo also had the right under our agreement to recoup $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 paid to us. During the first

23

quarter of 2010, Endo recouped the remaining unfunded development costs and as a result, the temporary 50% reduction in the royalty rate ended.

     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 the United States will be divided equally between Endo and us. In June 2009, Endo and Valeant signed a license agreement, the Valeant Agreement, granting Valeant the exclusive right to develop and commercialize Opana ER in Canada, Australia and New Zealand. Under the terms of the Valeant Agreement, Valeant paid Endo an up-front fee of C$2 million, and agreed to make payments totaling up to C$1.0 million upon the achievement of sales milestones in Canada and payments totaling up to AUS$1.1 million upon the achievement of regulatory and sales milestones in Australia. In addition, Valeant agreed to pay tiered royalties ranging from 10% to 20% of annual net sales of Opana ER in each of the three countries, subject to royalty reductions upon patent expiry or generic entry. The Valeant Agreement also includes rights to Opana^®, the immediate release formulation of oxymorphone developed by Endo, for which we have no rights. We signed a supply agreement with Valeant, agreeing to supply bulk TIMERx material to Valeant for its use in manufacturing Opana ER under the Valeant Agreement. Under the supply agreement, we have agreed to be the exclusive supplier of bulk TIMERx material to Valeant. The price at which we will sell bulk TIMERx to Valeant will approximate our costs, as defined in the agreement, and may be adjusted annually. The supply agreement is for a ten year term and may be terminated upon the occurrence of certain events including Valeant’s discontinuation of marketing Opana ER in the licensed territories.

     In connection with the Valeant Agreement and our supply agreement with Valeant signed in June 2009, Endo and we signed a consent agreement consenting to these arrangements and confirming the share of the payments to be made by Valeant that would be due to us. In July 2009, we received payment from Endo in the amount of $764,000 for our share of the up-front payment received by Endo under the Valeant Agreement, which amount we recorded as deferred revenue. We began to recognize revenue from this up-front payment in the third quarter of 2009 and expect to recognize revenue on the remainder of this payment ratably over the remaining estimated marketing period. Endo and we will share equally in the royalties and sales milestones received from Valeant for Opana ER under the terms of the Valeant Agreement.

     In March 2009, we entered into a Third Amendment to the Amended and Restated Strategic Alliance Agreement with Endo, effective January 1, 2009, or the Third Amendment. Under the terms of the Third Amendment, Endo agreed to directly reimburse us for costs and expenses incurred by us in connection with patent applications and patent maintenance costs 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 Third Amendment, Endo reimbursed us for such costs and expenses incurred prior to December 31, 2008, which we had capitalized as patent assets, in the amount of $206,000. We received such payment, as well as reimbursement by Endo of an additional $23,000 in patent costs incurred prior to the Third Amendment, in the second quarter of 2009, at which time we credited such reimbursements to our patent assets. Patent-related costs and expenses that we incurred subsequent to the Third Amendment have either been reimbursed or are expected to be reimbursed to us by Endo, with these reimbursements recorded by us as offsets to our costs.

     On April 8, 2010, we entered into a Fourth Amendment to the Amended and Restated Strategic Alliance Agreement with Endo, or the Fourth Amendment. Under the terms of the Fourth Amendment, we granted Endo an exclusive license under various patents to make, use and commercialize in the United States additional extended-release products containing oxymorphone HCl. Endo may grant sublicenses under such license with the prior written consent by us, which we may not unreasonably withhold. Sales of such additional products in the United States will be aggregated with sales of Opana ER in the United States for purposes of determining royalties payable to us. We are entitled to the same portion of payments obtained by Endo from sublicensees with respect to such additional products in the United States as with respect to Opana ER in the United States.

     On June 8, 2010, we entered into a Fifth Amendment to the Amended and Restated Strategic Alliance Agreement with Endo. Under the terms of the Fifth Amendment, Endo and we agreed that (i) the royalty rate on net sales of Opana ER under the Strategic Alliance Agreement would be fixed at 22% during the period from April 1, 2010 through December 31, 2012 (the “2010-2012 Royalty Period”), provided that with respect to the fourth quarter of 2012, the rate would be adjusted to a rate that would result in the aggregate royalties paid to us for the 2010-2012

24

Royalty Period being $7.3 million less than such aggregate royalties would have been if the royalty rates had not been fixed at 22%, and (ii) the royalty rate on net sales of Opana ER under the Strategic Alliance Agreement would be fixed at 20% during 2013, provided that with respect to the fourth quarter of 2013, the rate would be adjusted to a rate that would result in the aggregate royalties paid to us for 2013 being $700,000 less than such aggregate royalties would have been if the royalty rates had not been fixed at 20%.

     A description of our agreement with Endo is included in Note 14, “Collaborative and Licensing Agreements” in “Part I. Item 1. – Notes to Condensed Financial Statements”.

     Edison. Under the terms of our agreement with Edison Pharmaceuticals, Inc., or Edison, or the Edison Agreement, we have exclusive, worldwide rights to develop and commercialize A0001 and one additional compound of Edison’s, which we selected in September 2009, for all indications, subject to the terms and conditions in the Edison Agreement. Upon our selection of this additional compound, we made a milestone payment in the amount of $250,000 to Edison, which we recorded as R&D expense in the third quarter of 2009 and paid to Edison in October 2009.

     On May 5, 2009, we and Edison entered into an agreement under which Edison agreed that we could offset $550,000, and following that, the $1.0 million principal amount of the loan we made to Edison in 2008, plus accrued interest, against 50% of any future milestone and royalty payments which may be due to Edison under the terms of the Edison Agreement. The loan amount is otherwise due and payable by Edison according to the original loan terms under the loan agreement. In addition, the agreement provides that we have no further research and development payment obligations in connection with the research period and the Edison Agreement. Following the milestone payment that we made to Edison in the fourth quarter of 2009 as noted above, $300,000 remains of the $550,000 offset provided for under the May 5, 2009 agreement.

     A description of the Edison Agreement is included in Note 14, “Collaborative and Licensing Agreements” in “Part I. Item 1. – Notes to Condensed Financial Statements”.

     Mylan. 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, which was approved by the FDA. In March 2000, Mylan 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. In October 2009, Mylan notified us that Mylan did not renew its supply and distribution agreement with Pfizer, and that the agreement expired in March 2010. As a result, we do not expect to receive royalties from Mylan on sales of Pfizer’s generic version of Procardia XL 30 mg with respect to any period after the third quarter of 2010.

     In October 2009, Mylan resolved a dispute with the Department of Justice regarding Medicaid rebate classifications with respect to some of the products it sold from 2000 to 2004. One of these products was Pfizer’s generic version of Procardia XL. Following the settlement, Mylan delivered a letter to us seeking approximately $1.1 million plus interest. Mylan claims that if it had used the rebate classifications asserted by the Department of Justice from 2000 to 2004, it would have paid us approximately $1.1 million less from 2000 to 2004 than it did pay us. We have reviewed our agreement with Mylan and have notified Mylan that we do not believe we are liable to Mylan for this claim.

     Restructuring Charges. In the first quarter of 2009, we reduced the number of our employees from 60 to 49, as part of our efforts to aggressively manage our overhead cost structure. We entered into severance arrangements with the terminated employees, which included severance pay and continuation of certain benefits, including medical insurance, over the respective severance periods. In connection with the severance arrangements, we recorded a severance charge in our statement of operations for the first quarter of 2009 of $550,000, all of which was paid in 2009. Of such severance charge, $464,000 and $86,000 were recorded as selling, general and administrative, or SG&A, expense and R&D expense, respectively, in the first quarter of 2009. In addition, as a result of these terminations, in the first quarter of 2009, we recorded a non-cash credit of $885,000 associated with the forfeiture of stock options held by these former employees. Of such amount, $844,000 and $41,000 were recorded as credits to SG&A expense and R&D expense, respectively, in the first quarter of 2009.

25

     In the fourth quarter of 2009, we reduced the number of our employees from 48 to 39 and consolidated our Danbury, Connecticut headquarters into our Patterson, New York facility as of approximately January 1, 2010. We entered into severance arrangements with the terminated employees, which included severance pay and continuation of certain benefits, including medical insurance, over the respective severance periods. In addition, we determined to defer any new development work on A0001, other than the two Phase IIa studies, pending review and analysis of the results of those studies. We recorded a restructuring charge in the fourth quarter of 2009 in the amount of $326,000, primarily for these severance agreements, all of which was paid as of June 30, 2010. Of such charge, $260,000 and $66,000 was recorded as SG&A expense and R&D expense, respectively.

     In July 2010, we determined that we would reduce our staff from 38 to 27 in the third quarter of 2010, as part of our continuing efforts to aggressively manage our overhead cost structure. In connection with these actions, we anticipate recording a restructuring charge in the third quarter of 2010 of approximately $250,000, which amount is net of a non-cash credit of approximately $10,000, associated with the expected forfeiture of certain stock options held by affected employees. This charge relates primarily to arrangements for severance pay and the continuation of certain benefits, including medical insurance, over the respective periods, and will be recorded primarily to research and product development expense.

     Share Based Compensation Charge. The election of new Class I directors at our 2010 annual meeting of shareholders resulted in a change in control of our board of directors, as defined under the terms of certain outstanding stock option and restricted stock awards granted to our employees and directors. As a result, on June 30, 2010, the date the election results were certified, unvested stock options to purchase approximately 538,000 shares of our common stock and 25,000 shares of unvested restricted stock were automatically accelerated and vested in full. These accelerations resulted in a charge in our statement of operations of $467,000 in the second quarter of 2010, of which $226,000 is included in selling, general and administrative expense and $241,000 is included in research and product development expense.

     Net Loss and Profitability

     We have incurred annual net losses since 1994 including net losses of $1.5 million, $26.7 million and $34.5 million during 2009, 2008 and 2007, respectively. As of June 30, 2010, our accumulated deficit was approximately $223 million. We currently generate revenues primarily from royalties received from Endo on Endo’s net sales of Opana ER and from Mylan on Mylan’s net sales of Pfizer’s generic version of Procardia XL 30 mg, from our drug delivery technology collaborations and, to a lesser extent, from bulk sales of TIMERx material to Endo for use in Opana ER. Since the third quarter of 2009, we have reported net income on a quarterly basis. We anticipate that, based upon our current operating plan, which includes expected royalties from third parties, we will achieve annual profitability in 2010. If we do not receive royalties from Endo for Opana ER in such amounts as forecasted and provided to us by Endo, or if we are unable to maintain our current operating expense level, we may not be able to maintain profitability on a quarterly basis or achieve profitability on an annual basis in 2010. However, even if we are profitable in 2010, we may not be able to sustain profitability on a quarterly or annual basis thereafter. Our future profitability will depend on numerous factors, including:

• the commercial success of Opana ER, and the amount of royalties on sales of Opana ER, which may be adversely affected by any potential generic competition or the marketing of competitive products;

• the prosecution, defense and enforcement of our patents and other intellectual property rights, such as our Orange Book listed patents for Opana ER, and the prosecution by us and Endo of additional patent applications with respect to Opana ER;

• our ability to enter into drug delivery technology collaborations and generate revenues under drug delivery technology collaborations;

• our ability to access funding support for A0001 from third party collaborators;

• the level of our investment in research and development activities, including the timing and costs of conducting clinical trials of A0001;

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• the level of our general and administrative expenses; and

• the successful development and commercialization of product candidates in our portfolio and products being developed for collaborations.

     Our results of operations may fluctuate from quarter to quarter depending on the amount and timing of royalties on sales of Opana ER, the volume and timing of shipments of bulk TIMERx material, including to Endo, the variations in payments under our drug delivery technology collaborations, and the amount and timing of our investment in research and development activities.

Critical Accounting Policies and Estimates

     The discussion and analysis of our financial condition and results of operations are based upon our condensed 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. Areas where significant judgments are made include, but are not limited to: revenue recognition, research and product development expenses, deferred taxes-valuation allowance, impairment of long-lived assets and share-based compensation. For a more detailed explanation of the judgments we make in these areas, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009.

Recent Accounting Pronouncements

     A detailed description of recent accounting pronouncements is included in Note 3, “Recent Accounting Pronouncements” in “Part I. Item 1. - Notes to Condensed Financial Statements”.

Results of Operations for the Three and Six Month Periods Ended June 30, 2010 and 2009

Revenues

	Three months			Three months		Six months			Six months
	ended		Percentage	ended		ended		Percentage	ended
	June 30,		increase	June 30,		June 30,		increase	June 30,
	2010		(decrease)	2009		2010		(decrease)	2009
	(In thousands, except percentages)
Royalties	$	12,717	162%	$	4,851	$	20,370	113%	$	9,573
Product sales		90	(43)		158		292	(14)		338
Collaborative licensing and development revenue		832	233		250		1,735	181		618
Total revenues	$	13,639	159%	$	5,259	$	22,397	113%	$	10,529

     Our royalties increased in the three and six month periods ended June 30, 2010, as compared to the three and six month periods ended June 30, 2009, reflecting increased royalties earned under our agreement with Endo on Endo’s net sales of Opana ER. For the 2010 three and six month periods, we recognized $12.3 million and $19.5 million, respectively, in royalties from Endo as compared to $4.4 million and $8.8 million, respectively, for the 2009 three and six month periods. This increase in royalties reflects both an increase in net sales of Opana ER as well as an increase in our royalty rate. In the three month period ended March 31, 2010, Endo recouped the remainder of the $28 million in development costs that Endo funded on our behalf, which resulted in an end to the temporary 50% reduction in the royalty rate we earn under our agreement. Mylan’s supply and distribution agreement with Pfizer expired in March 2010. As a result, we do not expect to receive royalties from Mylan on sales of Pfizer’s generic version of Procardia XL 30 mg with respect to any period after the third quarter of 2010.

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     Our product sales in the three and six month periods ended June 30, 2010 and 2009 consisted primarily of sales of formulated TIMERx material to Endo for use in Opana ER. Product sales were lower for the three and six month periods ended June 30, 2010 as compared to 2009 three and six month periods, primarily due to the timing of shipments to Endo. We expect product sales in the second half of 2010 to increase as compared to the first half of 2010 based on higher forecasted sales volumes of our TIMERx material to Endo.

     Revenue from collaborative licensing and development consists of the recognition of revenue relating to reimbursements of our expenses under our drug delivery technology collaborations, milestones and upfront payments from these collaborations. In the three month period ended June 30, 2010, we recognized a milestone payment we earned under one of our development collaborations with Otsuka. The increase in revenue for the three and six month periods ended June 30, 2010, compared with the three and six month periods ended June 30, 2009 reflects the recognition of this milestone payment and overall increased development activity under our drug delivery technology collaborations in effect during the 2010 three and six month periods, as described below under “Cost of Revenues,” resulting in a related increase in revenues during the 2010 three and six month periods.

Cost of Revenues

	Three months			Three months		Six months			Six months
	ended		Percentage	ended		ended		Percentage	ended
	June 30,		increase	June 30,		June 30,		increase	June 30,
	2010		(decrease)	2009		2010		(decrease)	2009
	(In thousands, except percentages)
Cost of royalties	$	104	9%	$	95	$	198	(4)%	$	207
Cost of product sales		142	(1)		143		329	1		325
Cost of collaborative licensing and development revenue		587	155		230		1,222	107		590
Total cost of revenues	$	833	78%	$	468	$	1,749	56%	$	1,122

     Cost of royalties consists of the amortization of deferred royalty termination costs associated with royalty termination agreements, and the amortization of certain patent costs associated with our TIMERx technology. The cost of royalties were comparable in the three and six month periods ended June 30, 2010 and 2009.

Cost of product sales consists of the costs related to sales of formulated TIMERx material, primarily to Endo for use in Opana ER. Cost of product sales was comparable for the three and six month periods ended June 30, 2010 and 2009. We expect cost of product sales in the second half of 2010 to increase as compared to the first half of 2010 based on higher forecasted shipments of our TIMERx material to Endo for Opana ER.

     Cost of collaborative licensing and development revenue consists of our expenses under our drug delivery technology collaborations, which are generally reimbursed by our collaborators, and which include allocations of internal research and product development, or R&D, expenses, including compensation and overhead costs associated with formulation activities under these collaborations, as well as contract and other outside service fees. These costs increased for the three and six month periods ended June 30, 2010 as compared to the three and six month period ended June 30, 2009 reflecting the increased level of development activity under our drug delivery technology collaboration agreements.

Selling, General and Administrative Expenses

	Three months			Three months		Six months			Six months
	ended		Percentage	ended		ended		Percentage	ended
	June 30,		increase	June 30,		June 30,		increase	June 30,
	2010		(decrease)	2009		2010		(decrease)	2009
	(In thousands, except percentages)
Selling, general and administrative expense		$  2,453	(25)%		$  3,283		$  4,099	(27)%		$  5,604

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     Selling, general and administrative, or SG&A, expenses for the three month period ended June 30, 2010 decreased compared with the three month period ended June 30, 2009 primarily due to lower professional fees incurred in connection with the 2010 proxy contest in which we were involved as compared to the fees incurred in connection with our 2009 proxy contest and related litigation, and lower compensation expenses as a result of staff reductions implemented in the fourth quarter of 2009. The costs of the 2010 proxy contest for the three month period ended June 30, 2010 was $821,000 as compared to $1.1 million for the cost of the 2009 proxy contest and related litigation. These lower costs were partially offset by the additional share-based compensation expense of $226,000 related to the accelerated vesting of stock options and restricted stock as a result of the change in control of our board of directors in June 2010.

     The decrease in SG&A expenses for six month period ended June 30, 2010, compared with the six month period ended June 30, 2009 was primarily due to lower compensation expenses as a result of staff reductions implemented in the first and fourth quarters of 2009, and lower professional fees incurred in connection with the Company’s 2010 proxy contest as compared to the fees we incurred in connection with the Company’s 2009 proxy contest and related litigation. The cost of the 2010 proxy contest for the six month period ended June 30, 2010 was $846,000 as compared to $1.3 million for the cost of 2009 proxy contest and related litigation. These decreases were partially offset by higher share-based compensation expense in the 2010 six month period, largely reflecting a non-cash credit of $844,000 recorded in the first quarter of 2009, which resulted from the forfeiture of stock options held by former employees in connection with our January 2009 staff reductions, and the additional share-based compensation expense related to the accelerated vesting of stock options and restricted stock from the change in control in our board of directors in June 2010.

     Given the additional expense in the first half of 2010 for our proxy contest and the additional share-based compensation expense for the accelerated vesting of stock options and restricted stock, we expect that SG&A expense in the second half of 2010 will decline as compared with the expense for the first half of 2010.

Research and Product Development Expenses

     R&D expenses were $1.9 million and $4.1 million for the three and six month periods ended June 30, 2010, respectively, compared with $3.4 million and $6.4 million for the three and six month periods ended June 30, 2009, respectively. The decreases reflect lower spending on the development of A0001 in the 2010 three and six month periods, lower compensation expenses due to staff reductions implemented in the first and fourth quarters of 2009 and increased allocations of internal R&D costs relating to our drug delivery technology collaborations to cost of revenues. These lower costs were partially offset by the additional share-based compensation expense related to the accelerated vesting of stock options due to the change in control of our board of directors in June 2010.

In the table below, R&D expenses are set forth in the following categories:

	Three months			Three months		Six months			Six months
	ended		Percentage	ended		ended		Percentage	ended
	June 30,		increase	June 30,		June 30,		increase	June 30,
	2010		(decrease)	2009		2010		(decrease)	2009
	(In thousands, except percentages)
A0001 costs	$	401	(74)%	$	1,521	$	1,077	(57)%	$	2,519
Other phase I products and internal costs		1,502	(21)		1,904		3,034	(22)		3,912
Total research and product development expense	$	1,903	(44)%	$	3,425	$	4,111	(36)%	$	6,431

In the preceding table, research and development expenses are set forth in the following categories:

• A0001— These expenses reflect our direct external expenses relating to the development of A0001. These expenses approximated 21% and 26%, respectively, of our R&D expenses for the three and six month periods ended June 30, 2010. These expenses for the three and six month periods ended June 30, 2010 decreased compared to the three and six month periods ended June 30, 2009 as we have not conducted any other development work for A0001 other than the two Phase IIa trials in 2010.

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In May 2008, we submitted an IND for A0001 for the treatment of symptoms associated with inherited mitochondrial respiratory chain diseases. In July 2008, we initiated a Phase Ia placebo-controlled, single ascending dose trial designed to evaluate the safety and tolerability of A0001 in healthy subjects, and to collect pharmacokinetic data. A0001 was well tolerated by all subjects across all dose groups and there were no drug-related serious adverse events. In June 2009, we completed a Phase Ib multiple ascending dose safety study of A0001 in healthy subjects. In the Phase Ib trial, the drug was well tolerated by subjects and no serious adverse events were reported. There was a dose-dependent increase in exposure approaching steady state following repeat dosing, and a maximum tolerated dose was established. We also completed long-term animal toxicology studies to support longer dosing in the clinical program, which we completed in the fourth quarter of 2009. In December 2009 and February 2010, we initiated two Phase IIa studies in patients with mitochondrial diseases, with one trial focused on patients with FA and another trial focused on patients with the A3243G mitochondrial DNA point mutation associated with MELAS syndrome. The goal of these trials will be to determine if A0001 has a discernible impact in the treatment of patients with these disorders using various biochemical, functional and clinical measures. We expect data from both of these trials by the fourth quarter of 2010. The Company is currently seeking to license A0001 to a third party to complete further development and assume responsibility for the commercialization, manufacturing and marketing of this compound.

•

Other Phase I Products and Internal Costs — These expenses reflect internal and external expenses not separately reported under a product development program noted above, and include the areas of pharmaceutical development, clinical and regulatory. The types of expenses included in internal expenses primarily are salary and benefits, share-based compensation costs, depreciation on purchased equipment, and the amortization or any write-downs of patent costs, other than product patent write-offs charged directly to a separately reported product development program, or amortization of patent costs relating to commercialized products, which are included in cost of revenues. The types of expenses included in external expenses are primarily related to preclinical studies, proof-of-principle biostudies conducted on our Phase I product candidates and payments to third parties for drug active. These costs decreased in the three and six month periods ended June 30, 2010, compared with the three and six month periods ended June 30, 2009 primarily as a result of lower compensation expenses in the three and six month periods ended June 30, 2010 due to staff reductions implemented in the first and fourth quarters of 2009, and increased allocations of internal R&D costs relating to our drug delivery technology collaborations to cost of revenues. These lower costs were partially offset by the additional share-based compensation expense related to the accelerated vesting of stock options due to the change in control of our board of directors in June 2010. We did not incur any expenses relating to Phase I product candidates during the three and six month periods ended June 30, 2010.

     Our product candidates may not advance through or into the clinical development process or be successfully developed, may not receive regulatory approval, or may not 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. Due to the variability in the length of time necessary to develop a product, the uncertainties related to the estimated cost of the development process and the uncertainties involved in obtaining governmental approval for commercialization, accurate and meaningful estimates of the ultimate cost to bring our product candidates to market are not available.

     In comparison to the first half of 2010, we expect R&D expense to increase over the second half of 2010 as we continue to conduct our Phase IIa trials of A0001. However, in comparison to the full year of 2009, we expect R&D expense for the full year of 2010 to reflect overall decreased levels, primarily due to overall lower expense on A0001. In addition, we expect that the staff reductions we implemented in the first and fourth quarters of 2009, as well as other efforts to closely manage our cost structure, including the consolidation of our Danbury, CT headquarters into our Patterson, NY laboratory and office facility, will also contribute to reduced R&D expense in 2010, compared with 2009. Our development efforts in the second half of 2010 are focused on completing the Phase IIa trials of A0001, analyzing the data and seeking to license A0001 to a third party to complete further development and assume responsibility for the commercialization, manufacturing and marketing of this compound.

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Share-Based Compensation

     The election of three new Class I directors at our 2010 annual meeting of shareholders resulted in a change in control of our board of directors under the terms of certain outstanding stock option and restricted stock awards granted to our employees and directors. As a result, on June 30, 2010, the date that the election results of the annual meeting were certified, stock options to purchase approximately 538,000 shares of our common stock and 25,000 shares of unvested restricted stock were automatically accelerated and vested in full. These accelerations resulted in a charge of $467,000 in the second quarter of 2010, of which $226,000 is included in SG&A expense and $241,000 is included in R&D expense.

     We recognized share-based compensation in our statements of operations as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
	(Unaudited) (In thousands)
Selling, general and administrative	$	365	$	266	$	513	$	(302	)
Research and product development		342		151		442		315
Total	$	707	$	417	$	955	$	13

     The increase in total share-based compensation expense for the three month period ended June 30, 2010, compared with the three month period ended June 30, 2009 is attributable to the accelerated vesting of stock options and restricted stock recorded in the second quarter of 2010, as discussed above.

     The increase in total share-based compensation expense for the six month period ended June 30, 2010, compared with the six month period ended June 30, 2009, reflects credits recorded in the 2009 six month period totaling approximately $885,000, which were associated with the forfeiture of employee stock options in such period due to the staff reductions we implemented in the first quarter of 2009. The increase is also attributable to the accelerated vesting of stock options and restricted stock recorded in the second quarter of 2010. These increases were partially offset by a reduction in expense due to the forfeiture of stock options that resulted from the staff reductions we implemented in the fourth quarter of 2009.

Tax Rates

     Our effective tax rates for the three and six month periods ended June 30, 2010 and 2009 were zero. Our effective tax rates differ from the federal statutory rate of 35% for 2010 and 34% for 2009 primarily due to valuation allowances recorded to offset deferred tax assets relating to our net operating loss carryforwards.

Liquidity and Capital Resources

Sources of Liquidity

     Since 1998, when we became an independent, publicly owned company, we have funded our operations and capital expenditures from the proceeds of the sale and issuance of shares of common stock, sales of excipients, the sale of our excipients business, sales of formulated bulk TIMERx material, royalties and milestone payments from Endo, Mylan and other collaborators, reimbursements of R&D costs from our drug delivery technology collaborators, and advances under credit facilities. As of June 30, 2010, we had cash, cash equivalents and short-term investments of approximately $14.4 million.

     Senior Secured Credit Facility. On March 13, 2007, we entered into a $24.0 million senior secured credit facility with Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., which was acquired by GE Capital in February 2008, and is now known as GE Business Financial Services Inc. The credit facility consists of: (i) a $12.0 million term loan advanced upon the closing of the credit facility and (ii) a $12.0 million term loan that we had the right to access until September 15, 2008, subject to conditions specified in the credit agreement. We did not access the second $12.0 million term loan prior to September 15, 2008, at which time it expired in accordance with the terms of the agreement.

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     Our outstanding term loan has a term of 42 months from the date of advance, with interest-only payments for the first nine months; interest plus monthly principal payments equal to 1.67% of the loan amount for the period from the end of the interest-only period through December 2008; and interest plus straight line amortization payments with respect to the remaining principal balance for the remainder of the term, through its maturity date in September 2010.

     The interest rate on our outstanding term loan is fixed at 10.32%. At the time of final payment of the loan we will pay an exit fee of 3.0% of the original principal loan amount. Should any prepayment occur, we are also required to pay prepayment penalties of 3.0% of any prepaid amount in the first year, 2.0% of any prepaid amount in the second year and 1.0% of any prepaid amount thereafter. As of June 30, 2010, $1,371,000 of the term loan was outstanding. Beginning January 2008, we began making monthly principal payments on this loan, in addition to the monthly interest payments. Beginning January 2009, the principal portion of our payments increased from their 2008 level to reflect the straight line amortization of the remaining principal amount outstanding, as noted above. Principal payments on the term loan subsequent to June 30, 2010 are expected to total approximately $1,371,000 through September 30, 2010, at which time, the loan amount will have been paid in full and the exit fee of $360,000 will be required to be paid.

Cash Flows

     We had net cash provided by operations of $5.5 million for the six month period ended June 30, 2010 that primarily resulted from our net income of $12.2 million, which included non-cash charges of $611,000 for depreciation and amortization, and $955,000 for share based compensation. Cash flow from operations also reflected an increase in receivables of $7.0 million primarily related to increased accrued royalties from Endo for the second quarter of 2010 and a $1.1 million decrease in accounts payable and accrued expenses primarily due to the net pay down of these liabilities and decreased operating expenses.

     Net cash used in investing activities was $1.1 million for the six month period ended June 30, 2010, reflecting purchases of marketable securities of $1.6 million less maturities of marketable securities of $490,000. Net cash used by financing activities was $2.6 million, reflecting the repayments of principal on our outstanding term loan described above of $2.7 million, partially offset by the cash received from the issuance of common stock through the exercise of stock options of $129,000.

Funding Requirements

     We anticipate that, based upon our current operating plan, our existing capital resources, together with expected royalties from third parties, will be sufficient to fund our operations on an ongoing basis through at least 2011, including paying off our credit facility with GE Business Financial Services Inc. and paying a special cash dividend as discussed below. If, however, we do not receive royalties from Endo for Opana ER in such amounts as we anticipate, based on forecasts we received from Endo, we may not be able to fund our ongoing operations through 2011 without seeking additional funding from the capital markets, and may not be able to declare and pay the special cash dividend.

     We have taken measures to reduce our spending and to manage our costs more closely, including the staff reductions that we implemented in the first and fourth quarters of 2009, as described above under the caption “Restructuring Charges”, and we have operated in 2009 and 2010 based on a narrowed set of priorities. In July 2010, we determined that we would reduce our staff further as part of our continuing efforts to manage our overheard costs. We did however, incur significant unplanned costs in connection with the proxy contests associated with our 2010 and 2009 annual meetings of shareholders and the related litigation. These costs, including legal and other advisory fees, totaled $846,000 for the six month period ended June 30, 2010 and $1.3 million for the six month period ended June 30, 2009, and for the 2009 six month period, included costs of litigation relating to three lawsuits brought by the shareholders who initiated the proxy contest, two of which lawsuits were dismissed in 2009 and one of which was dismissed in May 2010.

     Our board of directors currently intends to declare a special cash dividend in the fourth quarter of 2010. The Board announced that it expects that the special dividend would be between $0.50 and $0.75 per share in cash. However, any determination to pay a dividend and the size of that dividend would be subject to Endo’s net sales for

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Opana ER during the remainder of 2010 and any other events that may arise that would limit the availability of our cash resources for distribution. Our board of directors also plans to continue to consider additional cash dividends in future years as our cash resources warrant.

     We are also seeking to enter into collaboration and licensing agreements for the development and marketing of Opana ER in territories outside the United States with our partner Endo, and for nalbuphine ER, and to enter into additional drug delivery technology collaborations. These collaborations may provide additional funding for our operations.

     We expect that our total capital expenditures in 2010 will not exceed approximately $100,000.

     In connection with the expiration of our manufacturing agreement with Draxis, our contract manufacturer of TIMERx material in November 2009, we plan to increase our inventory levels of TIMERx material during the second half of 2010, which will require additional use of our cash resources. We signed a manufacturing agreement with Patheon Inc., or Patheon, in the second quarter of 2010. We have begun to work with Endo on the qualification of Patheon in connection with our supply of TIMERx material to Endo for Opana ER, which will require additional use of cash resources. We expect the qualification of Patheon will be completed by the second quarter of 2011.

     In 2010, as a result of our forecasted profitability and limitations on the amount of our net operating loss, or NOL, carryforwards, described under “Net Operating Loss Carryforwards” below, that we may use to offset our taxable income, we anticipate that we will be subject to federal alternative minimum tax under the Internal Revenue Code. Accordingly, in the first half of 2010, we made approximately $170,000 in federal income tax payments and expect to make additional income tax payments during the remainder of 2010, for a total of approximately $550,000 in estimated federal income tax payments for 2010.

     Requirements for capital in our business are substantial. Our potential need to seek additional funding will depend on many factors, including:

• the commercial success of Opana ER, and the amount of royalties from Endo’s sales of Opana ER, which may be adversely affected by any potential generic competition;

• the timing and amount of payments received under our drug delivery technology collaborative agreements;

• the results of our Phase IIa clinical trials of A0001, and our ability to license A0001 or otherwise to access funding and support for the development of A0001;

• our and Endo’s ability to enter into new collaborations for Opana ER outside the United States, and the structure and terms of any such agreements;

• our ability to access funding support for development programs from third party collaborators;

• our ability to enter into drug delivery technology collaborations, and the structure and terms of such collaborations;

• the level of our investment in capital expenditures for facilities or equipment; and

• our success in reducing our spending and managing our costs.

     We plan to meet our long-term cash requirements through our existing levels of cash and marketable securities, and our revenues, including royalties, from collaborative agreements.

     On September 26, 2008, we filed a registration statement on Form S-3 with the SEC, which became effective on October 30, 2008. This shelf registration statement covers the issuance and sale by us of any combination of

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common stock, preferred stock, debt securities and warrants having an aggregate purchase price of up to $75 million. No securities have been issued under this shelf registration statement.

     If we raise additional funds by issuing equity securities, further dilution to our then-existing shareholders may result. Additional debt financing, such as the credit facility noted above, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt or equity financing may contain terms, such as liquidation and other preferences, that are not favorable to us or our shareholders. If we raise additional funds through collaboration and licensing arrangements, or research and development arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, research programs or potential products, or grant licenses on terms that may not be favorable to us.

     We cannot be certain that additional financing will be available in amounts or on terms acceptable to us, if at all. In the current economic environment, market conditions have made it very difficult for companies such as ours to obtain equity or debt financing. We believe that any such financing that we could conduct would be on significantly unfavorable terms. If we seek but are unable to obtain 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, including our planned clinical trials, which could harm our financial condition and operating results.

Contractual Obligations

     Our outstanding contractual cash obligations include obligations under our operating leases primarily for our facility in Patterson, NY; purchase obligations primarily relating to preclinical and clinical development, and our drug delivery technology collaboration obligations; payments due under our credit facility relating to interest, principal and exit fees; and obligations under deferred compensation plans as discussed below. Following is a table summarizing our contractual obligations as of June 30, 2010, excluding our contingent obligations under the Edison agreement, and our executive and employee retention agreements discussed below (in thousands).

			Less Than		1-3		4-5		After 5
	Total		One Year		Years		Years		Years
Operating leases	$	113	$	113	$	—	$	—	$	—
Purchase obligations		3,801		3,801		—		—		—
Payments due under credit facility		1,755		1,755		—		—		—
Deferred compensation		2,528		291		582		582		1,073
Total	$	8,197	$	5,960	$	582	$	582	$	1,073

     We lease approximately 15,500 square feet of laboratory and office space in Patterson, New York. On November 3, 2009, we signed an extension to our lease for one year through December 31, 2010, with a renewal option for an additional one-year period.

      Deferred compensation reflects the commitments described below:

• We have a Supplemental Executive Retirement Plan, or SERP, a nonqualified plan which covers our former Chairman and Chief Executive Officer, Tod R. Hamachek. Under the SERP, effective in May 2005, we became obligated to pay Mr. Hamachek approximately $12,600 per month over the lives of Mr. Hamachek and his spouse.

• We also have a Deferred Compensation Plan, or DCP, a nonqualified plan which covers Mr. Hamachek. Under the DCP, effective in May 2005, we became obligated to pay Mr. Hamachek approximately $140,000 per year, including interest, in ten annual installments. However, these installments are recalculated annually based on market interest rates as provided for under the DCP.

     We do not fund these liabilities, and no assets are held by the plans. However, we have two whole-life insurance policies in a rabbi trust, the cash surrender value or death benefits of which are held in trust for the SERP and DCP liabilities. Mr. Hamachek’s SERP and DCP benefit payments are being made directly from the assets in the trust. As of June 30, 2010, the trust assets consisted of the cash surrender value of these life insurance policies totaling $2,078,000 and $77,000 held in a money market account for a total of $2,155,000.

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     Under the terms of the Edison agreement, we are obligated to make milestone payments to Edison upon the achievement of certain clinical and regulatory events. We will not be responsible for the payment of future milestone and/or royalty payments in the event that the development program is discontinued and the agreement is terminated prior to the achievement of these events. Preclinical and clinical development of drug candidates is a long, expensive and uncertain process. At any stage of the preclinical or clinical development process, we may decide to discontinue the development of A0001 or other drug candidates under the Edison agreement. The contractual obligations listed in the table above do not include any such future potential milestone or royalty payments to Edison.

     On November 12, 2008, we entered into executive retention agreements with each of our executive officers. These retention agreements replaced prior retention agreements with each of our executive officers that had been scheduled to expire on December 31, 2008. On March 10, 2010, we entered into amendments to these agreements. The retention agreements provide that, if, within 18 months following a change in control of our company, the executive’s employment is terminated by us other than for cause, death, or disability, or by the executive for good reason, as such terms are defined in the agreement, the executives are entitled to payments for severance and other benefits, including medical insurance, and the automatic vesting of all invested stock options.

     The election of three new Class I directors at the 2010 annual meeting of shareholders resulted in a change in control of our company under the retention agreements as of June 30, 2010, the date that the election results of the annual meeting were certified. As a result, under the executive retention agreements, if within 18 months of the June 30, 2010 change in control, an executive officer is terminated by us other than for cause, death, or disability, or by the executive for good reason, we would be obligated to pay the benefits provided for under these retention agreements which, as of June 30, 2010, we estimate would total approximately $3.4 million under all executive retention agreements. These contingent obligations are not included in the contractual obligations table above.

     In the second quarter of 2010, we entered into employee retention agreements with certain of our employees, providing for severance pay and continued medical insurance benefits upon termination without cause as defined in the agreements. We estimate that these contingent obligations total approximately $380,000 as of June 30, 2010, which amount is not included in the contractual obligations table above.

Net Operating Loss Carryforwards

     In 2008, we determined that an ownership change had occurred under Section 382 of the Internal Revenue Code, or Section 382. As a result, the utilization of our net operating loss, or NOL, carryforwards and other tax attributes through the date of ownership change will be limited to approximately $2.8 million per year over the subsequent 20 years into 2028. We also determined that we were in a “net unrealized built-in gain” position (for purposes of Section 382) at the time of the ownership change, which increased the annual limitation over the subsequent five years into 2013 by approximately $3.4 million per year. Accordingly, we have reduced our NOL carryforwards, and research and development tax credits to the amount that we estimate that we will be able to utilize in the future, if profitable, considering the above limitations. In accordance with ASC 740 “Income Taxes”, we provided a full valuation allowance against substantially all of our net deferred tax assets because it is not more likely than not that we will realize future benefits associated with deductible temporary differences and NOLs at June 30, 2010 and December 31, 2009.

     At December 31, 2009, we had federal NOL carryforwards of approximately $90.5 million for income tax purposes, which expire at various dates beginning in 2018 through 2029. At December 31, 2009, we had state NOL carryforwards of approximately $89.5 million, which expire at various dates beginning in 2023 through 2029. In addition, at December 31, 2009, we had federal research and development tax credit carryforwards of approximately $1.8 million, which expire beginning in 2028 through 2029. The NOLs incurred subsequent to the 2008 ownership change and through December 31, 2009 of $18.0 million are not limited on an annual basis. Pursuant to Section 382, subsequent ownership changes could further limit this amount. The use of the NOL carryforwards, and research and development tax credit carryforwards are limited to our future taxable earnings.

     For financial reporting purposes, at December 31, 2009 and 2008, respectively, valuation allowances of $43.3 million and $40.6 million have been recognized to offset net deferred tax assets, primarily attributable to our NOL carryforwards. As previously noted, in 2008, we reduced our tax attributes (NOLs and tax credits) as a result

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of our ownership change under Section 382 and the limitation placed on the utilization of our tax attributes, as a substantial portion of the NOLs and tax credits generated prior to the ownership change will likely expire unused. Accordingly, the NOLs were reduced by $123.0 million and the tax credits were reduced by $6.7 million upon the ownership change in 2008. Our valuation allowance increased (decreased) in 2009, 2008 and 2007 by $2.6 million, ($32.0) million and $9.9 million, respectively. The decrease in the valuation allowance in 2008 of $32.0 million was primarily due to the limitations placed on the utilization of our tax attributes as noted above.

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. Our operations are exposed to financial market risks, primarily changes in interest rates. Our outstanding term loan under our credit facility is at a fixed rate of interest and therefore, we do not believe that there is significant exposure to changes in interest rates under the term loan. Our interest rate risk primarily relates to our investments in marketable securities.

     The primary objectives for our investment portfolio are liquidity and safety of principal. Investments are made to achieve the highest rate of return, consistent with these two objectives. Our investment policy limits investments to specific types of instruments issued by institutions with investment grade credit ratings and places certain restrictions on maturities and concentration by issuer.

     At June 30, 2010, our marketable securities consisted primarily of debt securities issued by a U.S. government sponsored enterprise and corporate commercial paper, and approximated $1.3 million. These marketable securities had maturity dates of up to three months. Due to the relatively short-term maturities of these securities, management believes they have no significant market risk. At June 30, 2010, our marketable securities were carried at market value. Due to the nature of our cash equivalents, which are money market accounts at June 30, 2010, management believes they have no significant market risk. As of June 30, 2010, we had approximately $14.4 million in cash, cash equivalents and marketable securities, and accordingly, a sustained decrease in the rate of interest earned of 1% would have caused a decrease in the annual amount of interest earned of up to approximately $144,000. However, due to the minimal yields actually earned on our investments during 2010, the maximum impact to our investment earnings would have been approximately $3,000, which was our total investment income for the first half of 2010.

Item 4. Controls and Procedures

     (a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2010. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (or the Exchange Act) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a 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 U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2010, our chief executive officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

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       (b) Changes in Internal Control Over Financial Reporting. No change in our 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 June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Impax ANDA Litigation

     On December 14, 2007, we received a notice from IMPAX Laboratories, Inc., or IMPAX, advising us of the FDA’s apparent acceptance for substantive review, as of November 23, 2007, of IMPAX’s amended ANDA for a generic version of Opana^® ER. IMPAX stated in its letter that the FDA requested that IMPAX provide notification to us and Endo of any Paragraph IV certifications submitted with its ANDA, as required under section 355(j) of the Federal Food, Drug and Cosmetics Act, or the FDC Act. Accordingly, IMPAX’s letter included notification that it had filed Paragraph IV certifications with respect to our U.S. Patent Nos. 7,276,250, 5,958,456 and 5,662,933, which cover the formulation of Opana^® ER. These patents are listed in the FDA’s Orange Book and expire in 2023, 2013 and 2013, respectively. Endo’s Opana^® ER product had new dosage form exclusivity that prevented final approval of any ANDA by the FDA until the exclusivity expired on June 22, 2009. In addition, because IMPAX’s application referred to patents owned by us and contained a Paragraph IV certification under section 355(j) of the FDC Act, we believe that IMPAX’s notice triggered the 45-day period under the FDC Act in which Endo and we could file a patent infringement action and trigger the automatic 30-month stay of approval. Subsequently, on January 25, 2008, Endo and we filed a lawsuit against IMPAX in the United States District Court for the District of Delaware in connection with IMPAX’s ANDA. The lawsuit alleges infringement of certain Orange Book-listed U.S. patents that cover the Opana^® ER formulation. In response, IMPAX filed an answer and counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange Book are invalid, not infringed and/or unenforceable.

     On June 16, 2008, Endo and we received a notice from IMPAX that it had filed an amendment to its ANDA containing Paragraph IV certifications for the 7.5 mg, 15 mg and 30 mg strengths of Opana^® ER. The notice covers our U.S. Patent Nos. 7,276,250, 5,958,456 and 5,662,933. Subsequently, on July 25, 2008, Endo and we filed a lawsuit against IMPAX in the United States District Court for the District of Delaware in connection with IMPAX’s amended ANDA. The lawsuit alleges infringement of certain Orange Book-listed U.S. patents that cover the Opana^® ER formulation. In response, IMPAX filed an answer and counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange Book are invalid, not infringed and/or unenforceable. All three of these suits against IMPAX were transferred to the United States District Court for the District of New Jersey.

     On June 8, 2010, Endo and we settled the IMPAX litigation. Both sides dismissed their respective claims and counterclaims with prejudice. Under the terms of the settlement, IMPAX agreed not to challenge the validity or enforceability of our patents relating to Opana^® ER with respect to IMPAX’s generic version of Opana ER and not to sell a generic version of Opana ER until January 1, 2013 or earlier under specified circumstances (such date being the “Commencement Date”). Endo and we agreed to grant IMPAX a license under the Opana Patents permitting the sale of generic Opana^® ER upon the Commencement Date. The license granted to IMPAX is non-exclusive except with respect to the 180 day period following the Commencement Date for those dosage strengths for which IMPAX is entitled to first-to-file exclusivity, during which period the license is exclusive as to all but the Opana ER branded product and licenses previously granted by Endo and us to ANDA holders.

     The settlement is subject to the review of the U.S. Federal Trade Commission and Department of Justice.

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Actavis ANDA Litigation

     In February 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 a generic version of Opana^® ER. The Actavis Paragraph IV certification notice refers to our 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 or expired in 2008, 2013, 2013 and 2023, respectively. In addition to these patents, Opana^® ER has a new dosage form (referred to as NDA) exclusivity that prevents final approval of any ANDA by the FDA until the exclusivity expires on June 22, 2009. Subsequently, on March 28, 2008, Endo and we filed a lawsuit against Actavis in the United States District Court for the District of New Jersey, in connection with Actavis’s ANDA. The lawsuit alleges infringement of an Orange Book-listed U.S. patent that covers the Opana^® ER formulation. On May 5, 2008, Actavis filed an answer and counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange Book are invalid, not infringed and/or unenforceable, as well as a claim of unfair competition against the us and Endo.

     On or around June 2, 2008, we received a notice from Actavis that it had filed an amendment to its ANDA containing Paragraph IV certifications for the 7.5 mg and 15 mg dosage strengths of Opana^® ER. On or around July 2, 2008, we received a notice from Actavis that it had filed an amendment to its ANDA containing Paragraph IV certifications for the 30 mg dosage strength. Both notices cover our U.S. Patent Nos. 5,128,143, 7,276,250, 5,958,456 and 5,662,933. On July 11, 2008, Endo and we filed suit against Actavis in the United States District Court for the District of New Jersey. The lawsuit alleges infringement of an Orange Book-listed U.S. patent that covers the Opana^® ER formulation. On August 14, 2008, Actavis filed an answer and counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange Book are invalid, not infringed and/or unenforceable, as well as a claim of unfair competition against Endo and us.

     On February 20, 2009, Endo and we settled all of the Actavis litigation. Both sides dismissed their respective claims and counterclaim with prejudice. Under the terms of the settlement, Actavis agreed not to challenge the validity or enforceability of our patents relating to Opana^® ER. Endo and we agreed to grant Actavis a license permitting the production and sale of generic Opana^® ER 7.5 and 15 mg tablets by the earlier of July 15, 2011, the last day Actavis would forfeit its 180-day exclusivity, and the date on which any third party commences commercial sales of Opana^® ER, but not before November 28, 2010. Endo and we also granted Actavis a license to produce and market other strengths of Opana^® ER generic on the earlier of July 15, 2011 and the date on which any third party commences commercial sales of a generic form of the drug.

     The settlement is subject to the review of the U.S. Federal Trade Commission and Department of Justice.

Sandoz ANDA Litigation

     On July 14, 2008, we received a notice from Sandoz, Inc., or Sandoz, advising us of the filing by Sandoz of an ANDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j) with respect to Opana^® ER in 5 mg, 10 mg, 20 mg and 40 mg dosage strengths. The Sandoz Paragraph IV certification notice refers to our U.S. Patent Nos. 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 2013, 2013 and 2023, respectively. In addition to these patents, Opana^® ER has a new dosage form (NDA) exclusivity that prevents final approval of any ANDA by the FDA until the exclusivity expires on June 22, 2009. Subsequently, on August 22, 2008, Endo and we filed a lawsuit against Sandoz in the United States District Court for the District of Delaware in connection with Sandoz’s ANDA. The lawsuit alleges infringement of an Orange Book-listed U.S. patent that covers the Opana^® ER formulation. In response, Sandoz filed an answer and counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange Book are invalid, not infringed and/or unenforceable.

     On November 20, 2008, we received a notice from Sandoz that it had filed an amendment to its ANDA containing Paragraph IV certifications for the 7.5 mg, 15 mg and 30 mg dosage strengths of Opana^® ER. The notice covers our U.S. Patent Nos. 5,128,143, 7,276,250, 5,958,456 and 5,662,933. On December 30, 2008, Endo and we filed suit against Sandoz in the United States District Court for the District of New Jersey. The lawsuit alleges infringement of an Orange Book-listed U.S. patent that covers the Opana^® ER formulation. In response, Sandoz filed an answer and counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange

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Book are invalid, not infringed and/or unenforceable. Both of these pending suits against Sandoz were transferred to the United States District Court for the District of New Jersey.

     On June 8, 2010, Endo and we settled the Sandoz litigation. Both sides dismissed their respective claims and counterclaims with prejudice. Under the terms of the settlement, Sandoz agreed not to challenge the validity or enforceability of our patents relating to Opana^® ER. Endo and we agreed to grant Sandoz a license permitting the production and sale of all strengths of Opana^® ER commencing on September 15, 2012, or earlier under certain circumstances.

The settlement is subject to the review of the U.S. Federal Trade Commission and Department of Justice.

Barr ANDA Litigation

     On September 12, 2008, we received a notice from Barr Laboratories, Inc., or Barr, advising us of the filing by Barr of an ANDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j) with respect to Opana^® ER in a 40 mg dosage strength. On September 15, 2008, we received a notice from Barr that it had filed an ANDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j) with respect to Opana^® ER in 5 mg, 10 mg, and 20 mg dosage strengths. Both notices refer to our U.S. Patent Nos. 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 2013, 2013 and 2023, respectively. In addition to these patents, Opana^® ER had a new dosage form exclusivity that prevented final approval of any ANDA by the FDA until the exclusivity expired on June 22, 2009. Subsequently, on October 20, 2008, Endo and we filed a lawsuit against Barr in the United States District Court for the District of Delaware in connection with Barr’s ANDA. The lawsuit alleges infringement of certain Orange Book-listed U.S. patents that cover the Opana^® ER formulation. In response, Barr filed an answer and counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange Book are invalid, not infringed and/or unenforceable. This suit was transferred to the United States District Court for the District of New Jersey. On June 2, 2009, we received a notice from Barr that it had filed an ANDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j) with respect to Opana^® ER in 7.5 mg, 15 mg, and 30 mg dosage strengths. This notice also refers to our U.S. Patent Nos. 5,662,933, 5,958,456 and 7,276,250, which cover the formulation of Opana^® ER. On July 2, 2009, Endo and we filed a lawsuit against Barr in the United States District Court for the District of New Jersey in connection with Barr’s ANDA.

     On April 12, 2010, Endo and we settled the litigation with Barr. Under the terms of the settlement, Barr agreed not to challenge the validity or enforceability of our patents relating to the production and sale of generic formulations of Opana^® ER (oxymorphone hydrochloride) Extended Release Tablets CII, and Endo and we agreed to grant Barr a license under the Orange-Book listed patents to sell a generic of Opana^® ER on or after September 15, 2012, or earlier under certain circumstances.

     The settlement is subject to the review of the U.S. Federal Trade Commission and Department of Justice.

Roxane ANDA Litigation

     On December 29, 2009, we received a notice from Roxane Laboratories, or Roxane, advising us of the filing by Roxane of an ANDA containing a Paragraph IV certification under 21 U.S.C. section 355(j) with respect to Opana^® ER in a 40 mg dosage strength. The notice refers to our U.S. Patent Nos. 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 2013, 2013, and 2023, respectively. Subsequently, on January 29, 2010, Endo and we filed a lawsuit against Roxane in the United States District Court for the District of New Jersey in connection with Roxane’s ANDA. The lawsuit alleges infringement of an Orange Book-listed U.S. patent that covers the Opana^® ER formulation.

     In March 2010, we received a notice from Roxane that it had filed an amendment to its ANDA containing Paragraph IV certifications for the 5, 7.5, 10, 15, 20 and 30 mg dosage strengths of Opana^® ER. Subsequently, on April 16, 2010, Endo and we filed a lawsuit against Roxane in the United States District Court of the District of New Jersey in connection with Roxane’s amended ANDA. The lawsuit alleges infringement of an Orange Book-listed U.S. patent that covers the Opana^® ER formulation.

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Watson ANDA Litigation

     On January 20, 2010, we received a notice from Watson Laboratories Inc., or Watson, advising us of the filing by Watson of an ANDA containing a Paragraph IV certification under 21 U.S.C. section 355(j) with respect to Opana^® ER in a 40 mg dosage strength. The notice refers to our U.S. Patent Nos. 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 2013, 2013, and 2023, respectively. Subsequently, in March 2010, Endo and we filed a lawsuit against Watson in the United States District Court for the District of New Jersey, in connection with Watson’s ANDA. The lawsuit alleges infringement of certain Orange Book-listed U.S. patents that cover the Opana^® ER formulation. On March 19, 2010, we received a notice from Watson advising of the filing by Watson of an ANDA containing a Paragraph IV certification under 21 U.S.C. section 355 (j) with respect to Opana ER in 5, 7.5, 10, 15, 20 and 30 mg dosage strengths. Subsequently, on April 23, 2010, Endo and we filed a lawsuit against Watson in the United States District Court of the District of New Jersey in connection with Watson’s ANDA. The lawsuit alleges infringement of certain Orange Book-listed U.S. patents that cover the Opana ER formulation.

     We intend to pursue all available legal and regulatory avenues in defense of Opana^® ER, including enforcement of our intellectual property rights and approved labeling. We cannot, however, predict or determine the timing or outcome of any of these litigations but will explore all options as appropriate in the best interests of Endo and us.

Tang/Edelman Shareholder Claim

     In March and April 2009, Tang Capital and Perceptive, our two largest shareholders and each of which owns more than 20% of our outstanding securities, brought a total of three lawsuits against us in 2009: two in Thurston County, Washington and one in King County, Washington. Following the 2009 dismissal of the two Thurston County actions and the May 2010 dismissal of the complaint in King County, as discussed below, none of these lawsuits remains pending.

     On March 12, 2009, Tang Capital and Perceptive brought suit against us in the Superior Court of the State of Washington, Thurston County (Tang Capital Partners, et al. v. Penwest Pharmaceuticals Co., No. 09-2-00617-0), seeking declaratory and injunctive relief to uphold their claims that their nomination notice had satisfied the requirements set forth in our bylaws and requesting that the court issue an order preventing us from seeking to disallow or otherwise prevent or not recognize their nominations, or the casting of votes in favor of their designees, on the basis that they had not complied with the provisions of our bylaws or applicable state law. On March 13, 2009, Tang Capital and Perceptive moved for a preliminary injunction to enjoin us from mailing any ballots to shareholders that contain provisions to vote for director nominees and enjoining any shareholder vote on individuals nominated for the board of directors unless the three designees of Tang Capital and Perceptive are permitted to be nominated and votes are permitted to be cast in their favor, or a court resolves the merits of their declaratory judgment action described above. On March 20, 2009, we confirmed in writing that Tang Capital and Perceptive’s nomination notice had been timely received and that, assuming the accuracy and completeness of the information contained in their notice, their notice in all other respects met the requirements of our bylaws in regard to notices of intention to nominate. On March 23, 2009, Tang Capital and Perceptive withdrew their motion for injunctive relief, and on April 10, 2009, they voluntarily dismissed the suit.

     On April 20, 2009, Tang Capital and Perceptive brought suit against us in the Superior Court of the State of Washington, King County, (Tang Capital Partners, et al. v. Penwest Pharmaceuticals Co.), seeking to enforce their alleged rights under the Washington Business Corporation Act to inspect certain Company documents (the “King County Action”). Our position is that certain of the requested documents are outside the scope of documents for which the Washington Business Corporation Act permits a statutory inspection right and that certain of the conditions to qualify for statutory inspection rights have not been satisfied.

     On April 28, 2009, Tang Capital and Perceptive brought suit against us in the Superior Court of the State of Washington, Thurston County (Tang Capital Partners, et al. v. Penwest Pharmaceuticals Co.), seeking either for the court to set the number of directors to be elected at our 2009 annual meeting of shareholders at three rather than two, or for the court to require us to waive the advance notice provisions of our bylaws to permit Tang Capital and Perceptive to include a proposal in the proxy statement in which the required percentage for board approval of

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certain matters would be 81% or more, rather than 75% or more. On May 13, 2009, Tang Capital and Perceptive dismissed this Thurston County action reasserting the same claims via an amended complaint in the King County Action. Tang Capital and Perceptive sought preliminary injunctive relief on their claims prior to our 2009 annual meeting of shareholders and the motion was denied by the court on May 22, 2009. The proposed bylaw amendment and bylaw proposal were not approved by our shareholders at our 2009 annual meeting of shareholders.

     By stipulation of the parties, the suit was dismissed without prejudice on May 13, 2010.

Item 1A. Risk Factors

     Our business faces many risks. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer and the trading price of our common stock could decline. The following risks should be considered, together with all of the other information in this annual report before deciding to invest in our securities.

We have a history of net losses and may not be able to achieve or maintain profitability on an annual basis

     We have incurred annual net losses since 1994, including annual net losses of $1.5 million, $26.7 million and $34.5 million in 2009, 2008 and 2007, respectively. Net losses have had an adverse effect on our shareholders’ equity, total assets and working capital, and may continue to do so in the future. As of June 30, 2010, our accumulated deficit was approximately $223 million.

     We have been profitable on a quarterly basis since the third quarter of 2009, our first quarter of net profitability from continuing operations. If we do not receive royalties from Endo for Opana ER in such amounts as forecasted and provided to us by Endo, we may not be able to achieve profitability for the remaining individual quarters of 2010 or for the full year 2010. In addition, we may not be able to achieve profitability on a quarterly or annual basis in periods beyond 2010, and even if we are able to achieve such profitability, we may not be able to maintain it.

     Our future profitability will depend on numerous factors, including:

• the commercial success of Opana ER, and the amount of royalties on sales of Opana ER, which may be adversely affected by any potential generic competition;

• the prosecution, defense and enforcement of our patents and other intellectual property rights, such as our Orange Book listed patents for Opana ER, and the prosecution by us and Endo of additional patent applications with respect to Opana ER;

• our ability to enter into drug delivery technology collaborations and generate revenues under drug delivery collaborations;

• our ability to license or to access funding and support for A0001 from third party collaborators;

• the level of our investment in research and development activities, including the timing and costs of conducting clinical trials of A0001;

• the amount of our general and administrative expenses; and

• the successful development and commercialization of product candidates in our portfolio, and products being developed for collaborations.

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

     As of June 30, 2010, we had cash, cash equivalents and marketable securities of approximately $14.4 million.

     Requirements for capital in our business are substantial. Our potential need to seek additional funding will depend on many factors, including:

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• the commercial success of Opana ER, and the amount of royalties we receive on sales of Opana ER, which may be adversely affected by any potential generic competition;

• the timing and amount of payments received under our drug delivery technology collaboration agreements;

• the results of our Phase IIa clinical trials of A0001, and our ability to license or enter into collaborations for A0001 or otherwise access funding and support for the development of A0001;

• our and Endo’s ability to enter into collaborations for Opana ER outside the United States, and the structure and terms of any such agreements;

• our ability to access funding support for development programs from third party collaborators;

• our ability to enter into drug delivery technology collaborations, and the structure and terms of such collaborations;

• the level of our investment in capital expenditures for facilities and equipment; and

• our success in continuing to reduce our spending and managing our costs.

     We anticipate that, based upon our current operating plan, our existing capital resources, together with expected royalties from third parties, will be sufficient to fund our operations on an ongoing basis through at least 2011, including paying off our credit facility with GE Business Financial Services Inc. and paying a special cash dividend in the fourth quarter of 2010 that our board of directors intends to declare. If, however, we do not receive royalties from Endo for Opana ER in such amounts as we anticipate based on forecasts we received from Endo, we may not be able to fund our ongoing operations through 2011 without seeking additional funding from the capital markets and we may not be able to pay the special cash dividend.

     Under the current economic environment, market conditions have made it very difficult for companies like ours to obtain equity or debt financing in the capital markets. We believe that any such financing that we could obtain would be on significantly unfavorable terms. If we raise additional funds by issuing equity securities, further dilution to our then-existing shareholders may result. Additional debt financing, such as the credit facility noted below, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt or equity financing may contain terms, such as liquidation and other preferences, that are not favorable to us or our shareholders. If we raise additional funds through collaboration and licensing arrangements, or research and development arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, research programs or potential products, or grant licenses on terms that may not be favorable to us. If we seek but are unable to obtain additional financing, we may be required to delay, reduce the scope of, or eliminate our planned development activities, including our planned clinical trials, which could harm our financial condition and operating results.

Our ability to generate revenues depends heavily on the success of Opana ER

     We made a significant investment of our financial resources in the development of Opana ER. In the near term, our ability to generate significant revenues will depend primarily on the growth of Opana ER sales by Endo. Opana ER competes with a number of approved drugs manufactured and marketed by major pharmaceutical companies and generic versions of some of these drugs. Opana ER may have to compete against new drugs and generic versions of Opana ER that may enter the market in the future. If Opana ER sales do not grow steadily or substantially, it would have a material adverse effect on our business, financial condition and results of operations.

     The degree of market success of Opana ER depends on a number of factors, including:

• the safety and efficacy of Opana ER as compared to competing products;

• Endo’s ability to educate the medical community about the benefits, safety and efficacy of Opana ER;

• the effectiveness of Endo’s sales and marketing activities;

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• the potential impact of tamper resistant opioids being developed or newly available in the market;

• Endo’s ability to manufacture and maintain suitable inventory for sale on an ongoing basis;

• the reimbursement policies of government and third party payors with respect to Opana ER;

• the pricing of Opana ER;

• the level of stocking of Opana ER by wholesalers and retail pharmacies;

• the required risk evaluation management strategy currently being considered by the FDA; and

• the availability of generic versions of Opana ER and the timing of generic competition.

     IMPAX, Actavis, Sandoz, Barr, Roxane and Watson have each filed ANDA’s for generic versions of Opana ER that, together with their respective amendments, cover all seven strengths of Opana ER. Each of these ANDA filings contained paragraph IV certifications under the Hatch-Waxman Act. Endo and we have filed patent infringement lawsuits against each of Roxane and Watson in connection with their respective ANDAs. We have settled our litigation with IMPAX, Sandoz, Actavis and Barr. Descriptions of these lawsuits are included in “Part I. Item 3. — Legal Proceedings.”

     Endo and we intend to pursue all available legal and regulatory avenues defending Opana ER. Under the Hatch-Waxman Act, the FDA may not grant final approval of any of these ANDA’s for 30 months after the date we received the certifications. Following the expiration of the 30-month stay, the FDA could grant final marketing approval to any of these ANDAs whether or not the litigation is still pending. IMPAX did receive final marketing approval of its ANDA upon expiration of the 30-month stay in June 2010. However, under the terms of our settlement agreement, IMPAX has agreed not to market a generic version of Opana ER until January 2013. Because of IMPAX’s first-to-file status of the approved strengths of Opana ER, the other generic filers will not be able to launch their generic until IMPAX has had 180 days of market exclusivity. Under the terms of our agreement with Actavis, we granted Actavis a license to produce and market the 7.5 mg and 15 mg strengths as early as July 2011.

     If we are unsuccessful in our Hatch-Waxman patent lawsuits against Roxane and Watson, Opana ER could be subject to generic competition upon the conclusion of such lawsuits and the end of the thirty month stay. We expect that competition from one or more generic companies could cause significant erosion to the pricing of Opana ER, which in turn would adversely affect the royalties that we receive from Endo and our results of operations and financial condition.

     In the event that we are able to obtain regulatory approval of any of our other product candidates, the success of those products would also depend upon their acceptance by physicians, patients, third party payors or the medical community in general. There can be no assurance as to market acceptance of our drug products or our drug delivery technologies.

Our success depends on our ability, or our collaborator’s ability, to protect our patents and other intellectual property rights

     Our success depends in significant part on our ability, or our collaborator’s ability, to obtain patent protection for our products, both in the United States and in other countries, or on our collaborator’s ability to obtain patents with respect to products on which we are collaborating with them. Our success also depends on our and our collaborator’s ability to enforce these patents. Patent positions can be uncertain and may involve complex legal and factual questions. Endo and we have filed additional patent applications with respect to Opana ER which, if issued, could delay generic competition. However, patents may not be issued from these patent applications or any other patent applications that we own or license. If patents are issued, the claims allowed may not be as broad as we have anticipated and may not sufficiently cover our drug products or our technologies. In addition, issued patents that we own or license may be challenged, invalidated or circumvented and we may not be able to bring suit to enforce these patents.

     We have four issued U.S. patents listed in the Orange Book for Opana ER, the earliest of which already expired and the other three patents expire in 2013, 2013 and 2023, respectively. As the owner of the patents listed in the

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Orange Book for Opana ER, we have become a party to ongoing Hatch-Waxman patent litigation. Endo and we filed patent infringement suits against Roxane and Watson in connection with their respective ANDAs for their generic versions of Opana ER, and settled our litigation with IMPAX , Sandoz, Actavis and Barr. We believe that we are entitled to the “30-month stay” available under the Hatch-Waxman Act against each of Roxane and Watson because we initiated the suit within 45 days of our receipt of their respective notice letters. If we proceed with Hatch-Waxman litigation, we may not prevail on defending our patents. Litigation is inherently unpredictable and an unfavorable ruling may occur in this case. An unfavorable ruling or loss of the 30-month stay could subject Opana ER to earlier generic competition. We expect that generic competition would adversely affect the pricing of Opana ER, the royalties that we receive from Endo, and the results of our operations and financial condition.

     Our research, development and commercialization activities or any products in development may infringe or be claimed to infringe patents of competitors or other third parties. In such event, we may be ordered to pay such third parties’ lost profits or punitive damages. We may have to seek a license from a third party and pay license fees or royalties. Awards of patent damages can be substantial. Licenses may not be available at all or available on acceptable terms, or the licenses may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. If we or our collaborators are not able to obtain a license, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations.

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

We are dependent on our collaborators to develop, manufacture and commercialize our products

     We have historically collaborated with partners to facilitate the manufacture and commercialization of our products and product candidates. We continue to depend on our collaborators to manufacture, market and sell our products. In particular, we are dependent on Endo to manufacture, market and sell Opana ER in the United States, Valeant to develop, manufacture, market and sell Opana ER in Canada, Australia and New Zealand, and Otsuka and Alvogen to develop, manufacture, market and sell the drug products under the drug delivery technology collaborations.

     We have limited experience in manufacturing, marketing and selling pharmaceutical products. Accordingly, if we cannot maintain our existing collaborations or establish new collaborations with respect to our products, we will have to establish our own capabilities or discontinue commercialization of the affected products. Developing our own capabilities may be expensive and time consuming and could delay the commercialization of the affected products. There can be no assurance that we will be successful in developing these capabilities.

     Our existing collaborations may be subject to termination on short notice under certain circumstances such as upon a bankruptcy event or if we breach the agreement. If any of our collaborations are terminated, we may be required to devote additional internal resources to the product, seek a new collaborator on short notice or abandon the product. The terms of any additional collaborations or other arrangements that we establish may not be favorable to us.

     We are also at risk that these collaborations or other arrangements may not be successful. Factors that may affect the success of our collaborations include:

• Our collaborators may be pursuing alternative technologies or developing alternative products, either on their own or in collaboration with others, that may be competitive to the product on which we are collaborating, which could affect our collaborator’s commitment to our collaboration.

• Our collaborators may reduce marketing or sales efforts, or discontinue marketing or sales of our products, which could reduce the revenues we receive on the products.

• Our collaborators may pursue higher priority programs or change the focus of their commercialization

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programs, which could affect the collaborator’s commitment to us. Pharmaceutical and biotechnology companies re-evaluate their priorities from time to time, including following mergers and consolidations, which have been common in recent years in these industries.

•

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

We have limited experience in developing, manufacturing, marketing and selling pharmaceutical products

     We have limited experience in developing, manufacturing, marketing and selling pharmaceutical products. In the past, we have relied on our collaborators to conduct clinical trials, manufacture, market and sell our products. However, we are responsible for pharmaceutical and clinical development, seeking regulatory approvals, manufacturing and marketing of the product candidates we licensed from Edison. Accordingly, if we are unable to enter into a collaboration for these compounds and desire to develop, manufacture or market such compounds, we will have to continue to develop our own capabilities in these areas. If we cannot establish our own capabilities successfully and on a timely basis, we may not be able to develop or commercialize these drug candidates. Developing our own capabilities may be expensive and time consuming, and could delay the commercialization of these drug candidates.

The Drug Enforcement Administration, or DEA, limits the availability of the active drug substances used in Opana ER. As a result, Endo’s procurement quota may not be sufficient to meet commercial demand

     Under the Controlled Substances Act of 1970, the DEA regulates “controlled substances” as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances considered to present the lowest risk of abuse among such substances. The active drug substance in Opana ER, oxymorphone hydrochloride, is listed by the DEA as a Schedule II substance. Consequently, the manufacture, shipment, storage, sale, prescribing, dispensing and use of Opana ER are subject to a high degree of regulation. For example, all Schedule II drug prescriptions must be written and signed by a physician, physically presented to a pharmacist and may not be refilled without a new prescription.

     Furthermore, the DEA limits the availability of the active drug substance used in Opana ER. As a result, Endo’s procurement quota of the active drug substance may not be sufficient to meet commercial demands. Endo must apply to the DEA annually for the procurement quota in order to obtain the substance. Any delay or refusal by the DEA in establishing the procurement quota could cause trade inventory disruptions, which could have a material adverse effect on our business, financial condition and results of operations.

Misuse and/or abuse of Opana ER, which contains a narcotic ingredient, could subject us to additional regulations, including compliance with risk management programs, which may prove difficult or expensive for us to comply with, and we may face lawsuits as a result

     Opana ER contains a narcotic ingredient. Misuse or abuse of drugs containing narcotic ingredients can lead to physical or other harm. In the past few years, for example, reported misuse and abuse of OxyContin, a product containing the narcotic oxycodone, resulted in the strengthening of warnings on its labeling and other restrictions on the product. The sponsor of OxyContin also faced numerous lawsuits, including class action lawsuits, related to OxyContin misuse or abuse. Misuse or abuse of Opana ER could also lead to additional regulation of Opana ER and subject us to litigation.

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

     The pharmaceutical industry is highly competitive and is affected by new technologies, governmental regulations, healthcare legislation, availability of financing and other factors. Many of our competitors have:

• significantly greater financial, technical and human resources than we have and may be better equipped to develop, manufacture and commercialize drug products;

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• more extensive experience than we have in conducting preclinical studies and clinical trials, obtaining regulatory approvals, and manufacturing and marketing pharmaceutical products;

• competing products that have already received regulatory approval or are in late-stage development; or

• collaborative arrangements in our target markets with leading companies and research institutions.

     We face competition based on the safety and effectiveness of our products, the timing and scope of regulatory approvals, the availability and cost of supply, marketing and sales capabilities, reimbursement coverage, pricing, patent position and other factors. Our competitors may develop or commercialize more effective, safer or more affordable products, or obtain more effective patent protection. Accordingly, our competitors may commercialize products more rapidly or effectively than we do, which would adversely affect our competitive position, the likelihood that our product will achieve initial market acceptance and our ability to generate meaningful revenues from our products. Even if our products achieve initial market acceptance, competitive products may render our products obsolete or noncompetitive. If our products are rendered obsolete, we may not be able to recover the expenses of developing and commercializing those products.

     Opana ER faces competition from products with the same indications. For instance, Opana ER competes in the moderate-to-severe long acting opioid market with products such as OxyContin and MS Contin, Exalgo, Duragesic patch, Avinza and Kadian and the generic versions of some of these drugs. Opana ER may also be subject to competition from generic versions of the product, such as the generic versions being developed by IMPAX, Actavis, Sandoz, Barr, Roxane and Watson. Recently, tamper resistant formulations of morphine have been approved by the FDA and we are aware of tamper resistant formulations of other opioids that are under development or review by the FDA. We expect that these products will also compete against Opana ER.

     Products developed through our collaboration with Edison may compete against products being developed by numerous private and public companies for at least some of the indications we may pursue. Various companies and institutions are conducting studies in the area of inherited mitochondrial disease. At least two companies have announced that they are pursuing programs based upon mitochondrial respiratory chain disease pathways. Santhera Pharmaceuticals is currently conducting clinical trials of the coenzyme Q analog, idebenone for the diseases of Duchenne’s muscular dystrophy, MELAS and Leber’s Hereditary Optic Neuropathy. Santhera has received regulatory approval in Canada for idebenone to be sold as a treatment for FA under the brand name Catena^®. Repligen has recently filed an IND to conduct studies in FA of an HDAC inhibitor. If these companies, or any other companies developing products for mitochondrial diseases, are able to receive regulatory approvals for their products before we do, it may negatively impact our ability to receive regulatory approvals for our products if these products have orphan drug exclusivity or to achieve market acceptance of our products. If their products are more effective, safer or more affordable, our products may not be competitive.

     Our drug delivery technologies, and our efforts to enter into drug delivery technology collaborations, face competition from numerous public and private companies and their extended release technologies, including the oral osmotic pump (OROS) technology marketed by Johnson & Johnson, multiparticulate systems marketed by Elan Corporation plc, Biovail Corporation and KV Pharmaceutical Company, and traditional matrix systems marketed by SkyePharma plc, as well as a gastroretentive system by Depomed.

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

     In order to obtain regulatory approvals for the commercial sale of our products, we or our collaborators will be required to complete clinical trials in humans to demonstrate the safety and efficacy of the products. However, we may not be able to commence or complete these clinical trials in any specified time period, or at all, because FDA or other regulatory agencies, or an Institutional Review Board, or IRB, may object for various reasons.

     Even if we complete a clinical trial of one of our potential products, the clinical trial may not prove that our product is safe or effective to the extent required by the FDA, the European Medicines Agency, or EMEA, or other regulatory agencies to approve the product. We or our collaborators may decide, or regulators may require us or our collaborators, to conduct additional clinical trials. For example, Endo received an approvable letter for Opana ER from the FDA in response to its NDA for Opana ER, which required Endo to conduct an additional clinical trial and

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which significantly delayed the approval of Opana ER. In addition, regulators may require post-marketing testing and surveillance to monitor the safety and efficacy of a product after commercialization.

     Some of the drug candidates we may develop will be in the early stages of development. There will be limited information and understanding of the safety and efficacy of these drug candidates. There may not be any clinical data available. We will have to conduct preclinical testing and clinical trials to demonstrate the safety and efficacy of these drug candidates. 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, the IRB or the FDA may suspend or terminate 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, or difficulties retaining study participants, may result in increased costs, program delays or program termination.

     If clinical trials do not show any potential product to be safe or efficacious, if we are required to conduct additional clinical trials or other testing of our products in development beyond those that we currently contemplate or if we are unable to successfully complete our clinical trials or other testing, we may:

• be delayed in obtaining marketing approval for our products;

• not be able to obtain marketing approval for our products; or

• not be able to obtain approval for indications that are as broad as intended.

     Our product development costs may also increase if we experience delays in testing or approvals. In addition, significant delays in clinical trials could allow our competitors to bring products to market before we do and impair our ability to commercialize our products.

We may not be able to obtain orphan drug exclusivity for our products. If our competitors are able to obtain orphan drug exclusivity for their products, we may not be able to have our competitive products approved by the applicable regulatory authority for a significant period of time

     We have received orphan drug designation for A0001 from the FDA for the treatment of inherited mitochondrial respiratory chain diseases. We plan to file for orphan drug status for A0001 in the European Union. The FDA and the European Union regulatory authorities grant orphan drug designation to drugs intended to treat a rare disease or condition. In the United States, orphan drug designation is generally for drugs intended to treat a disease or condition that affects fewer than 200,000 or more than 200,000 individuals and for which there is no reasonable expectation that the cost of developing and making available in the United States a product for this type of disease or condition will be recovered from sales in the United States for the product. In the European Union, orphan drug designation is for drugs intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than five in 10,000 individuals, or of life-threatening, seriously debilitating or serious and chronic conditions and without incentives it is unlikely that sales of the drug in the European Union would be sufficient to justify developing the drug.

     Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to orphan drug exclusivity. Orphan drug exclusivity means that another application to market the same drug for the same indication may not be approved for a period of up to 10 years in the European Union, and for a period of seven years in the United States, except in limited circumstances, such as a showing of clinical superiority over the product with orphan drug exclusivity. Obtaining orphan drug designations and orphan drug exclusivity for our products for the treatment of inherited mitochondrial respiratory chain diseases may be critical to the success of these products. If our competitor receives marketing approval before we do for a drug that is considered the same as our drug candidate for the same indication

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we are pursuing, we will be prevented from receiving marketing approval for our drug candidate during the orphan drug exclusivity period of the competitor.

     Even if we obtain orphan drug exclusivity for any of our potential products, we may not be able to maintain it. If a competitor product, containing the same drug as our product and seeking approval for the same indication, is shown to be clinically superior to our product, any orphan drug exclusivity we have obtained will not block the approval of such competitor product. In addition, if a competitor develops a different drug for the same indication as our approved indication, our orphan drug exclusivity will not prevent the competitor drug from obtaining marketing approval.

     Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. Obtaining orphan drug designation may not provide us with a material commercial advantage.

Even if we are able to obtain regulatory approvals for any of our product candidates, if they exhibit harmful side effects after approval, our regulatory approvals could be revoked or otherwise negatively impacted, and we could be subject to costly and damaging product liability claims

     Even if we receive regulatory approval for A0001 or any other product candidate that we develop, we will have tested them in only a small number of carefully selected patients during our clinical trials. If our applications for marketing are approved and more patients from the general population begin to use our products, new risks and side effects associated with our products may be discovered. As a result, regulatory authorities may revoke their approvals. In addition, we may be required to conduct additional clinical trials, make changes in labeling of our products, reformulate our products or make changes and obtain new approvals for our and our suppliers’ manufacturing facilities. We might have to withdraw or recall our products from the marketplace. We may also experience a significant drop in the potential sales of our product if and when regulatory approvals for such products are obtained, experience harm to our reputation in the marketplace or become subject to lawsuits, including class actions. Any of these results could decrease or prevent any sales of our approved products or substantially increase the costs and expenses of commercializing and marketing our products.

Our controlled release drug delivery technologies rely on the ability to control the release of the active drug substances, and our business would be harmed if it was determined that there were circumstances under which the active drug substances from one of our extended release products would be released rapidly into the blood stream

     Our controlled release products and product candidates rely on our ability to control the release of the active drug substance. Some of the active ingredients in our controlled release products, including Opana ER, contain levels of active drug substance that could be harmful, even fatal, if the full dose of active drug substance were to be released over a short period of time, which is referred to as dose-dumping.

     In 2005, Purdue Pharma voluntarily withdrew from the market its product Palladone^® (hydromorphone hydrochloride extended release capsules), after acquiring new information that serious and potentially fatal adverse reactions can occur when the product is taken together with alcohol. The data, gathered from a study testing the potential effects of the drug with alcohol use, showed that when Palladone is taken with alcohol, the extended release mechanism can fail and may lead to dose-dumping. In anticipation of questions from the FDA with respect to the potential dose-dumping effect of Opana ER given the FDA’s experience with Palladone, Endo conducted both in vitro and human testing of the effect of alcohol on Opana ER. In the in vitro testing, Endo did not find any detectible effect of alcohol on the time release mechanism of the product. In the human testing in the presence of alcohol, there was evidence of an increase in blood levels. The FDA received this data before approving the NDA and required that the Opana ER labeling specifically warn against taking the drug with alcohol of any kind.

We are subject to extensive government regulation, including the requirement of approval before our products may be marketed. Even if we obtain marketing approval, our products will be subject to ongoing regulatory review

     We, our collaborators, our products, and our product candidates are subject to extensive regulation by governmental authorities in the United States and other countries. Failure to comply with applicable requirements

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could result in warning letters, fines and other civil penalties, delays in approving or refusal to approve a product candidate, product recall or seizure, withdrawal of product approvals, interruption of manufacturing or clinical trials, operating restrictions, injunctions and criminal prosecution.

     Our products cannot be marketed in the United States without FDA approval. Obtaining FDA approval requires substantial time, effort and financial resources, and there can be no assurance that any approval will be granted on a timely basis, if at all. We have had only limited experience in preparing applications and obtaining regulatory approvals. If the FDA does not approve our product candidates or does not approve them in a timely fashion, our business and financial condition may be adversely affected. Furthermore, the terms of marketing approval of any application, including the labeling content, may be more restrictive than we desire and could affect the marketability of our products.

     Certain products containing our controlled release technologies require the submission of a full NDA. A full NDA must include complete reports of preclinical, clinical and other studies to prove to the FDA’s satisfaction that the product is safe and effective. These studies may involve, among other things, full clinical testing, which requires the expenditure of substantial resources. The drug candidates we are developing in collaboration with Edison will also require submission of full NDAs. In certain other cases when we seek to develop a controlled release formulation of an FDA-approved drug with the same active drug substance, we may be able to rely, in part, on previous FDA determinations of safety and efficacy of the approved drug to support a section 505(b)(2) NDA. We can provide no assurance, however, that the FDA will accept a submission of a section 505(b)(2) NDA for any particular product. Even if the FDA did accept such a submission, the FDA may not approve the application in a timely manner or at all. The FDA may also require us to perform additional studies to support the modifications of the reference listed drug.

     In addition, both before and after regulatory approval, we, our collaborators, our products, and our product candidates are subject to numerous FDA regulations, among other things, covering testing, manufacturing, quality control, cGMP, adverse event reporting, labeling, advertising, promotion, distribution and export of drug products. We and our collaborators are subject to surveillance and periodic inspection by the FDA to ascertain compliance with these regulations. The relevant law and regulations may also change in ways that could affect us, our collaborators, our products and our product candidates. Failure to comply with regulatory requirements could have a material adverse impact on our business.

We may become involved in patent litigation or other proceedings relating to our products or processes, which could result in liability for damages or termination of our development and commercialization programs

     The pharmaceutical industry has been characterized by significant litigation, 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 intellectual property rights.

• If our competitors file patent applications that claim technology also claimed by us, we or our collaborators may participate in interference or opposition proceedings to determine the priority of invention.

• If third parties initiate litigation claiming that our processes or products infringe their patent or other intellectual property rights, we and our collaborators will need to defend our rights in such proceedings.

     An adverse outcome in any litigation or other proceeding could subject us to significant liabilities and/or 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. We could incur significant costs in participating or assisting in the litigation. In the case of the generic litigation involving Opana ER, our collaborator Endo is bearing all litigation costs. However, on other products we develop, we may be required to incur these costs to defend our patents. Our competitors may have substantially greater resources to

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sustain the cost of such litigation and proceedings more effectively than we can. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete 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 materials or other products we are developing. Since September 1999, we have relied on Draxis for the bulk manufacture of our TIMERx materials. Our agreement with Draxis expired in November 2009. We believe that there are a limited number of manufacturers that comply with cGMP regulations and are capable of manufacturing our TIMERx materials. We signed a manufacturing agreement with Patheon, in the second quarter of 2010 on terms that are comparable to our manufacturing agreement with Draxis. However, we may not be able to qualify Patheon on a timely basis, if at all. Since the expiration of our manufacturing and supply agreement, Draxis has continued to honor our outstanding purchase orders, which we expect will provide us with a sufficient amount of TIMERx material to satisfy the current forecasted requirements until Endo and we have completed the qualification of Patheon, which we expect by the second quarter of 2011.

     However, if Draxis ceases to honor our purchase orders or if we are unable to successfully complete the qualification of Patheon as a supplier on a timely basis, or at all, we may not be able to comply with our supply obligations to Endo and Valeant with respect to Opana ER, which could adversely affect sales of Opana ER, and our supply obligations to Otsuka and Alvogen, which could delay or otherwise adversely affect the clinical development of products being developed under our collaborations with Otsuka and Alvogen.

     We are not a party to any agreements with our third-party manufacturers for A0001, except for purchase orders or similar arrangements. If we are unable to enter into longer-term manufacturing arrangements for A0001 on acceptable terms, particularly as it advances through clinical development, our business and the development and commercialization of A0001 could be materially adversely affected.

     In addition, any third parties we rely on for supply of our TIMERx materials or other products may not perform. Any failures by third party manufacturers may delay the development of products or the submission for regulatory approval, impair our or our collaborators’ ability to commercialize products as planned and deliver products on a timely basis, require us or our collaborators to cease distribution, or recall some or all batches of products or otherwise impair our competitive position, which could have a material adverse effect on our business, financial condition and results of operations.

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

• we or our collaborators may not be able to meet commercial demands for Opana ER or our other products in development;

• we may not be able to initiate or continue clinical trials on our collaborations for products that are under development; and

• we may be delayed in submitting applications for regulatory approvals of our products.

     We may not be able to successfully develop our own manufacturing capabilities. If we decide to develop our own manufacturing capabilities, we will need to recruit qualified personnel, and build or lease the requisite facilities and equipment we currently do not have. Moreover, it may be very costly and time consuming to develop such capabilities.

     The manufacture of our products is subject to regulations by the FDA and similar agencies in foreign countries. For example, the FDA and other regulatory authorities require that our products and product candidates be manufactured in accordance with current Good Manufacturing Practices, or cGMPs, and similar foreign standards.

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Any delay in complying or failure to comply with such manufacturing regulations by us or our third-party manufacturers 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 materials

     Our TIMERx drug delivery systems are based on a hydrophilic matrix combining a heterodispersed mixture primarily composed of two polysaccharides, xanthan gum and locust bean gum, in the presence of dextrose. These gums are also used in our Geminex, gastroretentive and SyncroDose drug delivery systems. We purchase these gums from a primary 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. Any interruption in these supplies could have a material adverse effect on our ability to manufacture bulk TIMERx materials for delivery to our collaborators.

We may lose business opportunities as a result of healthcare reform and the expansion of managed-care organizations.

     Numerous governments, including the U.S. government, have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and drug companies.

     In March 2010, the U.S. Congress passed and President Obama signed into law the Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act. These healthcare reform laws are intended over time to expand health insurance coverage, impose health industry cost containment measures, impose new taxes and fees on certain sectors of the health industry; and impose additional health policy reforms. This legislation may significantly impact the pharmaceutical industry. We are presently uncertain as to the effects of the recently enacted legislation on our business and are unable to predict what legislative proposals will be adopted in the future, if any.

     In addition, new laws or regulations may create a risk of liability, increase our costs or limit our service offerings. The U.S. Congress has also considered and may adopt legislation that could have the effect of putting downward pressure on the prices that pharmaceutical companies can charge for prescription drugs. Various state legislatures and European and Asian governments may consider various types of healthcare reform in order to control growing healthcare costs. We expect Endo to experience pricing pressure with respect to Opana ER. We may experience similar pressure for other products for which we obtain marketing approvals in the future due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals.

     In addition to healthcare reform proposals, the expansion of managed-care organizations in the healthcare market and managed-care organizations’ efforts to cut costs by limiting expenditures on pharmaceuticals could result in pharmaceutical companies spending less on research and development. If this were to occur, we would have fewer business opportunities and our revenue could decrease, possibly materially.

If we or our collaborators fail to obtain an adequate level of reimbursement by governmental or third party payors for Opana ER or any other products we develop, we may not be able to successfully commercialize the affected product

     The availability of reimbursement by governmental and other third party payors affects the market for any pharmaceutical products, including Opana ER. These third party payors continually attempt to contain or reduce the costs of health care by challenging the prices charged for pharmaceutical products. Reimbursement in the United States, Europe or elsewhere may not be available for Opana ER or any products we may develop or, if already available, may be decreased in the future. We may not get reimbursement or reimbursement may be limited if authorities, private health insurers and other organizations are influenced by existing drugs and prices in determining our reimbursement.

     In certain countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals and the level of reimbursement are subject to governmental control. In some countries, it can take an extended

51

period of time to establish and obtain reimbursement, and reimbursement approval may be required at the individual patient level, which can lead to further delays. In addition, in some countries, it may take an extended period of time to collect payment even after reimbursement has been established. Neither we nor our collaborators may be able to sell products profitably if access to managed care or government formularies is restricted or denied, or 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 that are inherent in the testing, manufacturing, marketing and sale of pharmaceutical products. Product liability claims might be made by consumers, healthcare providers, other pharmaceutical companies, or third parties that sell our products. These claims may be made even with respect to those products that are manufactured in regulated facilities or that otherwise possess regulatory approval for commercial sale.

     We are currently covered by primary product liability insurance in the amounts of $15 million per occurrence and $15 million annually in the aggregate on a claims-made basis, and by excess product liability insurance in the amounts of $5 million per occurrence and $5 million annually in the aggregate. This coverage may not be adequate to cover all 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 potential liability claims. Claims that are not covered by product liability insurance could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to retain our key personnel and continue to attract additional professional staff, we may not be able to maintain or expand our business

     Because of the scientific nature of our business, our ability to develop products and compete with our current and future competitors will remain highly dependent upon our ability to attract and retain qualified scientific, technical and managerial personnel. The loss of key scientific, technical or managerial personnel, or the failure to recruit additional key personnel, could have a material adverse effect on our business. We do not have employment agreements with our key executives and we cannot guarantee that we will succeed in retaining all of our key personnel. There is intense competition for qualified personnel in our industry, and there can be no assurance that we will be able to continue to attract and retain the qualified personnel necessary for the success of our business. Our recent reductions in the numbers of our employees could adversely affect our ability to hire and retain key personnel.

The market price of our common stock may be volatile

     The market price of our common stock, like the market prices for securities of other pharmaceutical, biopharmaceutical and biotechnology companies, has been volatile. For example, the high and low closing prices of our common stock were $3.74 per share and $1.93 per share, respectively, during the twelve months ended June 30, 2010. On August 2, 2010, the closing market price of our common stock was $3.48. The market from time to time experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The market price of our common stock may also fluctuate as a result of our operating results, sales of Opana ER, our patent litigation, future sales of our common stock, announcements of technological innovations, new therapeutic products or new generic products by us or our competitors, announcements regarding collaborative agreements, clinical trial results, government regulations, developments in patent or other proprietary rights of us or our collaborators, public concern as to the safety of drugs developed by us or others, changes in reimbursement policies, comments made by securities analysts and other general market conditions.

Specific provisions of our Articles of Incorporation and Bylaws and the laws of Washington State make a takeover of Penwest or a change in control or management of Penwest more difficult

     Various provisions of our Articles of Incorporation, our Bylaws and the laws of the State of Washington 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

52

that they may deem to be in their best interest. We may in the future adopt measures that may have the effect of deterring hostile takeovers, or delaying or preventing changes in control or management of our company.

Item 6. Exhibits

     See the 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.

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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.

	PENWEST PHARMACEUTICALS CO.
Date:  August 6, 2010	/s/ Jennifer L. Good
	Jennifer L. Good
	President and Chief Executive Officer

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EXHIBIT INDEX

Exhibit
Number	Description
10.1†	Manufacturing Services Agreement dated June 7, 2010 between the Registrant and Patheon Inc.
10.2	Fourth Amendment, dated April 18, 2010, to the Amended and Restated Strategic Alliance Agreement, dated as of April 2, 2002, by and between the Registrant and Endo Pharmaceuticals Inc.
10.3	Fifth Amendment, dated June 8, 2010, to the Amended and Restated Strategic Alliance Agreement, dated as of April 2, 2002, by and between the Registrant and Endo Pharmaceuticals Inc.
10.4†	Settlement and License Agreement dated as of June 8, 2010 by and among the Registrant, Endo Pharmaceuticals Inc. and IMPAX Laboratories, Inc.
31	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

† Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Commission.

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EX-10.1

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omission.

Exhibit 10.1

Manufacturing Services Agreement

June 7, 2010

Table of Contents

ARTICLE 1 INTERPRETATION	1
1.1 Definitions	1
1.2 Currency	5
1.3 Sections and Headings; Interpretation	5
1.4 Singular Terms	6
1.5 Schedules	6
ARTICLE 2 PATHEON’S MANUFACTURING SERVICES	6
2.1 Manufacturing Services	6
ARTICLE 3 PENWEST’S OBLIGATIONS	7
3.1 Payment	7
ARTICLE 4 PRICING AND COMPONENT COSTS	7
4.1 First Year Pricing	7
4.2 Price Adjustments — Subsequent Years’ Pricing	7
4.3 Price Adjustments — Current Year Pricing	8
4.4 Adjustments Due to Technical Changes	8
4.5 Audit Rights	9
4.6 Limitation on Price Adjustments	9
ARTICLE 5 ORDERS, SHIPMENT, INVOICING, PAYMENT	9
5.1 Orders and Forecasts	9
5.2 Orders	11
5.3 Shipments	11
5.4 On Time Delivery	11
5.5 Invoices and Payment	12
ARTICLE 6 PRODUCT CLAIMS, FAILURE TO SUPPLY AND RECALLS	12
6.1 Product Claims	12
6.2 Product Recalls and Product Returns	13
6.3 Patheon’s Responsibility for Defective and Recalled Products	14

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6.4 Failure to Supply	14
6.5 Disposition of Defective or Recalled Products	15
6.6 Healthcare Provider or Patient Questions and Complaints	16
6.7 Sole Remedy	16
ARTICLE 7 CO-OPERATION	16
7.1 Quarterly Review	16
7.2 Governmental Agencies	16
7.3 Records and Accounting by Patheon	16
7.4 Inspection	17
7.5 Access to the Facility; Audit Rights	17
7.6 Notification of Regulatory Inspections	17
7.7 Reports	17
7.8 FDA Filings	17
ARTICLE 8 TERM AND TERMINATION	18
8.1 Initial Term	18
8.2 Termination for Cause	18
8.3 Termination by Penwest	19
8.4 Obligations on Termination	19
ARTICLE 9 REPRESENTATIONS, WARRANTIES AND COVENANTS	20
9.1 Authority	20
9.2 Penwest Warranties	20
9.3 Patheon Warranties	21
9.4 Debarred Persons	21
9.5 Permits	21
9.6 No Warranty	21
ARTICLE 10 REMEDIES AND INDEMNITIES	22
10.1 Consequential Damages	22
10.2 Limitation of Liability	22
10.3 Patheon	22

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10.4 Penwest	23
ARTICLE 11 CONFIDENTIALITY	24
11.1 Confidentiality	24
ARTICLE 12 DISPUTE RESOLUTION	24
12.1 Commercial Disputes	24
12.2 Technical Dispute Resolution	25
ARTICLE 13 MISCELLANEOUS	25
13.1 Inventions	25
13.2 Intellectual Property	26
13.3 Insurance	26
13.4 Independent Contractors	26
13.5 No Waiver	26
13.6 Assignment	26
13.7 Force Majeure	26
13.8 Additional Product	27
13.9 Notices	27
13.10 Severability	28
13.11 Entire Agreement	29
13.12 Other Terms	29
13.13 No Third Party Benefit or Right	29
13.14 Use of Penwest Name	29
13.15 Governing Law	29
13.16 Language Clause	29
13.17 Execution in Counterparts	29

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MANUFACTURING SERVICES AGREEMENT

     THIS MANUFACTURING SERVICES AGREEMENT (the “Agreement”) is made as of this 7^th day of June, 2010 (the “Effective Date”)

B E T W E E N:

PATHEON INC.,

a corporation existing under the laws of Canada and having offices at 2100 Syntex Court, Mississauga, Ontario L5N 7K9, Canada,

(“Patheon”),

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PENWEST PHARMACEUTICALS CO.,

a corporation existing under the laws of the state of Washington, USA, and having offices at 2981 Route 22, Suite 2, Patterson, NY 12563, USA,

(“Penwest”).

     THIS AGREEMENT WITNESSES THAT in consideration of the rights conferred and the obligations assumed herein, and for other good and valuable consideration (the receipt and sufficiency of which are acknowledged by each Party), and intending to be legally bound the Parties agree as follows:

ARTICLE 1

INTERPRETATION

1.1 Definitions.

     The following terms will, unless the context otherwise requires, have the respective meanings set out below and grammatical variations of these terms will have corresponding meanings.

“Act” means the United States Food, Drug and Cosmetic Act, as amended from time to time, and the regulations promulgated thereunder.

“Affiliate” means, with respect to either Party, any other corporation or business entity that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Party. For purposes of this definition, the term “control” means direct or indirect ownership of more than fifty percent (50%) of the securities or other ownership interests representing the equity voting stock or general partnership or membership interest of such entity or the power to direct or cause the direction of the management or policies of such entity, whether through the ownership of voting securities, by contract, or otherwise.

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“Annual Report” means the annual report to the FDA prepared by Penwest regarding the Product as described in Title 21 of the United States Code of Federal Regulations, Section 314.81(b)(2).

“Annual Product Review Report” means the annual product review report prepared by Patheon as described in Title 21 of the United States Code of Federal Regulations, Section 211.180(e).

“Authority” means any governmental or Regulatory Authority, department, body or agency or any court, tribunal, bureau, commission or other similar body, whether federal, state, provincial, county or municipal.

“Batch” means a specific quantity of Product that is intended to have uniform character and quality, within specified limits, and is produced according to a single manufacturing order during the same cycle of manufacture.

“Bill Back Items” means the expenses for all Third Party supplier fees [**] and which are not (a) included as Components, (b) identified on Schedule C as included in the Price or (c) included in the annual stability testing in accordance with this Agreement and Schedule D. For example, Bill Back Items includes [**].

“Breach Notice” has the meaning specified in Section 8.2(a).

“Business Day” means a day other than a Saturday, Sunday or a day that is a statutory holiday in the Province of Ontario, Canada or a state or federal holiday in the state of New York, USA.

“Competitor of Patheon” has the meaning specified in Section 8.2(d).

“Components” means, collectively, all packaging components, raw materials, and ingredients (including labels, product inserts and other labelling for the Products), required to manufacture the Product in accordance with the Specifications.

“Confidentiality Agreement” means the agreement about the non-disclosure of confidential information between Patheon and Penwest dated May 29, 2009. A true and accurate copy of the Confidentiality Agreement is attached hereto as Schedule G.

“Current Good Manufacturing Practices” or “cGMPs” or “GMP” means current good manufacturing practices, as applicable in accordance with the country(ies) in which Product will be manufactured or distributed, the practices set out in the guidelines (i) published as the Good Manufacturing Practices for Drug Manufacturers and Importers by the HPFBI, as amended from time to time, with respect to Product manufactured or distributed in Canada, (ii) for the manufacture of pharmaceutical products and the Current Good Manufacturing Practices as defined in United States 21 CFR 210, et seq., as amended from time to time, with respect to Product manufactured or distributed in the United States, and (iii) the EU Guidelines to Good Manufacturing Practice for Medical Products for Human and Veterinary Use, as amended from time to time, with respect to Product manufactured or distributed in the European Union, and, in any event, (iv) such other relevant good manufacturing practices as required by applicable Laws, including the latest Health Canada, FDA and EMEA guidance documents pertaining to manufacturing and quality control practice, all as updated, amended and revised from time to time.

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“Deficiency Notice” has the meaning specified in Section 6.1(a).

“Delivery Date” means the date scheduled for shipment of Product under a Firm Order as set forth in Section 5.1(e).

“Effective Date” has the meaning set forth in the first paragraph of this Agreement.

“EMEA” means the European Medicines Agency.

“Facility” means the facility owned and operated by Patheon that is located at 111 Consumers Drive, Whitby, Ontario, L1N 5Z5, or such other manufacturing site agreed to by the Parties in writing in accordance with Section 2.1.

“Failure to Supply” has the meaning specified in Section 6.4(a).

“FDA” means the United States Food and Drug Administration.

“Firm Order” has the meaning specified in Section 5.1(c).

“First Firm Order” has the meaning specified in Section 5.1(b).

“Force Majeure Event” has the meaning specified in Section 13.7(a).

“Health Canada” means the section of the Canadian Government known as Health Canada and includes, among other departments, the Therapeutic Products Directorate and the Health Products and Food Branch Inspectorate.

“Incoterms 2000” means the International Commercial Terms published by the International Chamber of Commerce, as amended from time to time, codifying the contractual rules for the interpretation of standardized commercial terms for transactions. Where referenced, the relevant provisions of Incoterms 2000 shall be deemed to have been incorporated by reference in this Agreement except in so far as they may conflict with any other provision of this Agreement, in which case the Agreement provision shall prevail.

“Initial Manufacturing Month” has the meaning specified in Section 5.1(b).

“Initial Manufacturing Period” has the meaning specified in Section 5.1(b).

“Initial Term” has the meaning specified in Section 8.1.

“Intellectual Property” means rights in patents, patent applications, formulae, trade-marks, trade-mark applications, trade-names, Inventions, copyrights, industrial designs, trade secrets, and know how.

“Invention” means information about any innovation, improvement, development, discovery, computer program, device, trade secret, method, know-how, process, technique or the like, whether or not written or otherwise fixed in any form or medium, regardless of the media on which it is contained and whether or not patentable or copyrightable.

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“Inventory” means all inventories of Components and work-in-process produced or held by Patheon for the manufacture of Product.

“Late Delivery” has the meaning specified in Section 5.4(b).

“Laws” means any law, statute, rule, regulation, guideline (including Current Good Manufacturing Practices), ordinance or other pronouncement of any Governmental Authority having the effect of law in the United States, Canada, or any other relevant country or any territory in the world, or any domestic or foreign state, province, county, city or other political subdivision.

“Manufacturing Process” means the manufacturing process for TIMERx^®-N, including the manufacturing process-schematic, set forth on Schedule B-2.

“Manufacturing Services” means the Product manufacturing, quality control, quality assurance, stability testing, packaging, supply and related services set forth in Schedule B-1.

“Party” means either Patheon or Penwest, individually; “Parties” means Patheon and Penwest, collectively.

“Patheon Intellectual Property” means Intellectual Property, other than the Penwest Intellectual Property that is (a) generated or derived by Patheon before performing any Manufacturing Services, (b) developed by Patheon while performing the Manufacturing Services, or (c) otherwise generated or derived by Patheon in its business.

“Penwest Intellectual Property” means Intellectual Property (a) generated or derived by Penwest before entering into this Agreement or at any time during the Term, or (b) [**] while performing any Manufacturing Services that is [**] (i) any Product or an improvement thereto, including, for purposes of clarity, the composition, formulation, use or method of manufacture of any Product, or (ii) the Manufacturing Process or an improvement to the Manufacturing Process.

“Price” means the price measured in Canadian Dollars to be charged by Patheon for performing the Manufacturing Services as set forth in Schedule C. For purposes of clarity, the Price set forth on Schedule C incorporates the cost of Components and the items identified on Schedule C.

“Product(s)” means TIMERx^â-N, as set forth on Schedule A, together with any additional products the Parties agree in writing to add to Schedule A pursuant to Section 13.8.

“Product Forecast” and “Extended Product Forecast” have the meanings specified in Section 5.1(a) and 5.1(d).

“Quality Agreement” means the agreement (the form of which is set forth in Schedule E) between the Parties setting out the quality assurance standards for the Manufacturing Services to be performed by Patheon for Penwest.

“Recall” means any action (i) by Penwest to recover title to or possession of quantities of the Products sold or shipped to Third Parties (including the voluntary withdrawal of Products from the market); or (ii) by any Regulatory Authorities to detain or destroy any of the Products. Recall will

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also include any action by either Party to refrain from selling or shipping quantities of the Products to Third Parties which would have been subject to a Recall if sold or shipped.

“Regulatory Authority” means the FDA, EMEA and Health Canada and any other regulatory agencies competent to grant marketing approvals for pharmaceutical products including the Products.

“Remediation Period” has the meaning specified in Section 8.2(a).

“RFID” means Radio Frequency Identification Devices which (at present or in the future) may be affixed to Products or Components to assist in inventory control, tracking, and identification.

“Specifications” means the specifications for TIMERx^®-N set forth on Schedule A.

“Technical Dispute” has the meaning specified in Section 12.2.

“Term” has the meaning specified in Section 8.1.

“Third Party” means any person or entity other than the Parties or their Affiliates.

“Third Party IP Rights” means the Intellectual Property of any Third Party.

“TIMERx^â-N” means TIMERx^â-N, as used in several marketed pharmaceutical products as of the Effective Date, and meeting the Specifications.

“TIMERx^â-N Formulation” means the TIMERx^â-N formulation set forth on Schedule A.

“Year” means, in the first year of this Agreement the period from the Effective Date up to and including December 31 of the same calendar year, and thereafter will mean a calendar year.

1.2 Currency.

     Unless otherwise indicated, all monetary amounts are expressed in this Agreement in Canadian dollars.

1.3 Sections and Headings; Interpretation.

     The division of this Agreement into Articles, Sections, Subsections, and Schedules and the insertion of headings are for convenience of reference only and will not affect the interpretation of this Agreement. Unless otherwise indicated, any reference in this Agreement to a Section or Schedule refers to the specified Section or Schedule to this Agreement. In this Agreement, the terms “this Agreement,” “hereof,” “herein,” “hereunder” and similar expressions refer to this Agreement and not to any particular part, Section or Schedule of this Agreement. The terms of this Agreement represent the results of negotiations between the Parties and their representatives, each of which has been represented by counsel of its own choosing, and neither of which has acted under duress or compulsion, whether legal, economic or otherwise. Accordingly, the terms of this Agreement shall be interpreted and construed in accordance with their usual and customary meanings, and each of the Parties hereto hereby waives the application in connection with the interpretation and construction of this Agreement of any rule of Law to

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the effect that ambiguous or conflicting terms or provisions contained in this Agreement shall be interpreted or construed against the Party whose attorney prepared the executed draft or any earlier draft of this Agreement.

     Except where the context otherwise requires, (a) any definition of or reference to any agreement, instrument or other document refers to such agreement, instrument other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein or therein), (b) any reference to any Law refers to such Law as from time to time enacted, repealed or amended, (c) the words “include,” “includes,” “including,” “exclude,” “excludes,” and “excluding,” shall be deemed to be followed by the phrase “but not limited to,” “without limitation” or words of similar import, and (d) the word “or” is used in the inclusive sense (and/or).

1.4 Singular Terms.

     Except as otherwise expressly stated or unless the context otherwise requires, all references to the singular will include the plural and vice versa.

1.5 Schedules.

     The following Schedules are attached to, incorporated in, and form part of this Agreement:

Schedule A	—	Product Specifications and Formulation
Schedule B-1	—	Manufacturing Services
Schedule B-2	—	Manufacturing Process and Process Schematic
Schedule C	—	Product Prices
Schedule D	—	Annual Stability Testing Protocol and Costs
Schedule E	—	Quality Agreement
Schedule F	—	Technical Dispute Resolution
Schedule G	—	Confidentiality Agreement
Schedule H	—	Shipping Logistics Protocol

ARTICLE 2

PATHEON’S MANUFACTURING SERVICES

2.1 Manufacturing Services.

     Patheon will perform the Manufacturing Services and supply Product to Penwest for the fees specified in Schedule C and Schedule D and in accordance with the terms of this Agreement. Patheon will bear all of its own costs and expenses incurred in performing the Manufacturing Services unless otherwise specifically provided for in this Agreement. Subject to Section 6.4 (Failure to Supply), the Manufacturing Services shall be performed at the Facility; provided that Patheon may change the Facility only with the prior written consent of Penwest, this consent not to be unreasonably withheld. If Manufacturing Services have not started within [**] after the Effective Date, Patheon may amend the fees set out in Schedule C.

     Commencing on the date that the Facility is approved by the FDA for the manufacture of the Product for use in finished pharmaceutical products for commercial sale, Patheon will be the sole manufacturer of Product purchased by Penwest in any Year for the United States and Canada. However,

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Patheon acknowledges that Penwest may qualify an alternative supplier (i) where Penwest’s agreements with its Third Party customer(s) require Penwest to qualify more than one supplier of Product, (ii) where a pharmaceutical product comprising the Product that is developed, manufactured or commercialized by a Penwest customer is unable to meet the applicable pharmaceutical product specifications and such failure is due to the failure of Patheon to perform the Manufacturing Services in accordance with the Specifications, the Manufacturing Process, cGMP’s, and applicable laws or because the Product did not conform to the Specifications at the time of shipment      , or (iii) if a Failure to Supply occurs. If required by an agreement between Penwest and its Third Party customer(s) or for the reasons specified in clause (ii) of this paragraph, or if a Failure to Supply occurs, Penwest shall be entitled to obtain Product from another supplier, provided, however, that once Patheon is able to supply Penwest’s requirements for Product meeting the Specifications on the Delivery Date for [**] consecutive Firm Orders, then, unless precluded by an agreement between Penwest and its Third Party customer(s), Patheon shall be Penwest’s sole manufacturer once again. Products in addition to TIMERx^â-N may be added to this Agreement as specified in Section 13.8.

ARTICLE 3

PENWEST’S OBLIGATIONS

3.1 Payment.

     Penwest will pay Patheon for performing the Manufacturing Services according to the prices specified in Schedule C and Schedule D. These prices may be subject to adjustments to the extent provided in Article 4 of this Agreement. Penwest will also pay Patheon for any Bill Back Items as specified herein.

ARTICLE 4

PRICING AND COMPONENT COSTS

4.1 First Year Pricing.

     The Price for the Product for the first Year are listed in Schedule C and are subject to the adjustments set forth in Sections 4.2 and 4.3.

4.2 Price Adjustments – Subsequent Years’ Pricing.

     After the first Year of the Agreement, Patheon may adjust the Price effective January 1^st of each Year as follows:

(a)	Manufacturing Costs. Patheon may adjust the Price for inflation, based upon the [**], unless the Parties otherwise agree in writing. On or about [**] of each Year, Patheon will give Penwest a statement setting forth the calculation for the inflation adjustment to be applied in calculating the Price for the next Year.
(b)	Component Costs. If Patheon incurs an increase in Component costs during the Year, it may increase the Price for the next Year [**]. Similarly, if Patheon obtains a decrease in Component costs during the Year, it shall decrease the Price for the next Year [**]. On or about [**] of each Year, Patheon will give Penwest information about the [**], provided,

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however that, subject to Section 4.5, Patheon will not be required to give information to Penwest that is subject to obligations of confidentiality between Patheon and its suppliers.

(c)

Pricing Basis. Penwest acknowledges that the Price in any Year is quoted based upon the annual volume as set forth on Schedule C. Penwest acknowledges and agrees, from and after Penwest places its first purchase order pursuant to this Agreement, if the forecast for a Year significantly decreases (a change of [**] percent ([**]%) or greater measured by volume) from the Product Forecast for the prior Year, and Patheon can demonstrate that such decreased volume will result in increased manufacturing costs to Patheon (other than due to increased Component costs which are addressed separately in Section 4.2(b)), Patheon may adjust the Price upward. Similarly, if the forecast for a Year significantly increases (a change of [**]%) or greater measured by volume) from the Product Forecast for the prior Year, and such increased volume will result in decreased manufacturing costs to Patheon (other than due to decreased Component costs which are addressed separately in Section 4.2(b)), Patheon shall adjust the Price downward. Patheon shall provide Penwest with evidence to reasonably demonstrate the Price adjustment, or (if applicable) to support a finding of no Price adjustment; provided, however that, subject to Section 4.5, Patheon will not be required to give information to Penwest that is subject to obligations of confidentiality between Patheon and its suppliers.

     For all Price adjustments under this Section 4.2, Patheon will deliver to Penwest on or about October 1^st of each Year a revised Schedule C to be effective for the next Year.

4.3 Price Adjustments – Current Year Pricing.

     During any Year of this Agreement, the Prices set out in Schedule C will be adjusted as follows:

(a)

Extraordinary Increases in Component Costs. If, at any time, market conditions result in Patheon’s cost of Components being materially greater than normal forecasted increases, then Patheon will be entitled to an adjustment to the Price for any affected Product to compensate it for the increased Component costs. Changes materially greater than normal forecasted increases will have occurred if: (i) the cost of a Component increases by [**] percent ([**]%) or more of the cost for that Component upon which the most recent fee quote was based; or (ii) the aggregate cost for all Components required to manufacture a Product increases by [**] percent ([**]%) or more of the total Component costs for the Product upon which the most recent fee quote was based. If Component costs have been previously adjusted to reflect an increase in the cost of one or more Components, the adjustments set out in (i) and (ii) above will operate based on the last cost adjustment for the Components. The foregoing provisions of this Section 4.3(a) notwithstanding, in no event shall Component costs be increased pursuant to both this Section 4.3 and Section 4.2(b) with respect to the same Component cost increase.

(b)

For a Price adjustment under this Section 4.3, Patheon will deliver to Penwest a revised Schedule C and budgetary pricing information, adjusted Component costs or other documents reasonably sufficient to demonstrate that a Price adjustment is justified; provided however that, subject to Section 4.5, Patheon will have no obligation to provide any supporting documents that are subject to obligations of confidentiality between

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Patheon and its suppliers. The revised Price will be effective for any Product ordered on or after the first day of the month following Penwest’s receipt of the revised Schedule C.

4.4 Adjustments Due to Technical Changes.

     Amendments to the Specifications or the Quality Agreement requested by Penwest will only be implemented following a technical and cost review by Patheon and are subject to Penwest and Patheon reaching agreement on Price changes required because of the amendment. Amendments to the Specifications or the Quality Agreement requested by Patheon will only be implemented following the written approval of Penwest. If Penwest accepts a proposed Price change, the proposed change in the Specifications will be implemented, and the Price change will become effective, only for those orders of Products that are manufactured under the revised Specifications. In addition, Penwest agrees to purchase, at Patheon’s cost (including all costs incurred by Patheon for the purchase and handling of the Inventory), all Inventory used under the “old” Specifications and purchased or maintained by Patheon in order to fill Firm Orders, if the Inventory can no longer be used under the revised Specifications. Open purchase orders for Components no longer required under any revised Specifications that were placed by Patheon with suppliers in order to fill Firm Orders will be cancelled where possible, and if the orders may not be cancelled without penalty, will be assigned to and satisfied by Penwest. Patheon agrees to use commercially reasonable efforts to minimize Penwest’s costs under this Section 4.4.

4.5 Audit Rights.

     Not more than once in any Year, Penwest, through the use of an independent Third Party auditor who has executed a confidentiality agreement providing Patheon with protections substantially similar to the Confidentiality Agreement, may audit Patheon records as reasonably necessary to substantiate (i) the cost components (as described in this Article 4) of the then-current Product Price (as set forth on Schedule C), (ii) prices for Components, Bill Back Items and the validation services set forth on Schedule D, or (iii) any Component or Price adjustments pursuant to Sections 4.2, 4.3 and/or 4.4. Any such audit shall be conducted upon reasonable advance notice to Patheon during Patheon’s normal business hours. For greater certainty Penwest acknowledges that the Patheon Confidential Information provided to the Third Party auditor cannot be shared with or provided to Penwest, and that the Third Party auditor is there simply to verify adjustments to the foregoing Product Prices, prices for Components, Bill Back Items, or the validation services. The audit shall be at the expense of Penwest, unless the audit reveals that, with respect to the period under audit, Penwest has been overcharged by [**] percent ([**]%) or more with respect to, as applicable, (1) the Product Price, (2) Components, (3) Bill Back Items, (4) the validation services identified on Schedule D, or (5) Component or Price adjustments pursuant to Sections 4.2, 4.3 or 4.4, in which event Patheon shall (a) pay or reimburse Penwest for the reasonable expenses of such audit and (b) within [**] days after completion of the audit, pay Penwest the amount of the overpayment plus interest determined in accordance with Section 5.5, applied to Patheon, mutatis mutandis.

4.6 Limitation on Price Adjustments.

     For purposes of clarity, except where Sections 4.3 or 4.4 apply, the Product Price shall be determined and adjusted no more often than annually at the start of each Year (i.e., the adjusted Price shall become effective on January 1st). Patheon shall provide Penwest with written notice of each such adjustment on or before October 1^st of the previous Year and such price adjustment shall be effective in the next Year. The Parties shall review and discuss any such adjustment based on actual and substantiated changes to the cost Components described in this Article 4.

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ARTICLE 5

ORDERS, SHIPMENT, INVOICING, PAYMENT

5.1 Orders and Forecasts.

(a)	Rolling [**] Month Forecast. Within [**] days after the Effective Date, Penwest will give Patheon a non-binding [**] month forecast of the volume of Product that Penwest expects to order in the first [**] months of commercial manufacture of the Product under this Agreement (the “Product Forecast”), it being understood that Penwest anticipates its first Product order will be for a Delivery Date no sooner than January 1, 2011. The Product Forecast will be routinely updated by Penwest on or before the Friday of the 3rd week of each month on a rolling forward basis and will be known as the Product Forecast. The most recent [**] month Product Forecast will prevail.
(b)	Firm Orders for Initial Manufacturing Month. At least [**] months before the start of commercial manufacture of the Product by Patheon pursuant to this Agreement, Penwest will update the Product Forecast for the first [**] months of manufacture of the Product (the “Initial Manufacturing Period”). The first month of this updated Product Forecast (“Initial Manufacturing Month”) will constitute a firm written order in the form of a purchase order or otherwise (“First Firm Order”) by Penwest to purchase and, when accepted by Patheon, for Patheon to manufacture the quantity of the Product. Penwest may cancel any Batches from the First Firm Order at no cost if notice of cancellation is received by Patheon [**] days or more before the scheduled Delivery Date under the First Firm Order. Penwest may cancel any Batches from the First Firm Order if notice of cancellation is received by Patheon more than [**] days but fewer than [**] days before the scheduled Delivery Date under the First Firm Order, but Penwest will pay Patheon C$[**] for each cancelled Batch. The Parties agree that this payment will be considered liquidated damages for Patheon’s loss of manufacturing capacity due to Penwest’s cancellation of manufacturing and will not be considered a penalty. If the First Firm Order is changed or adjusted as described above, then the initial Product Forecast will also be adjusted as necessary. The cancellation rights in this Section 5.1(b) are subject to Penwest retaining responsibility for any costs or expenses actually incurred or irrevocably committed by Patheon under this Agreement before it received notice of the cancellation, provided that Patheon agrees to use commercially reasonable efforts to minimize Penwest’s costs under this Section 5.1(b).
(c)	Firm Orders Thereafter. After the Initial Manufacturing Month, on a rolling basis during the Term of this Agreement, on or before the Friday of the third week of each month, Penwest will issue an updated Product Forecast and the first [**] months of that updated forecast will constitute a firm written order in the form of a purchase order or otherwise (“Firm Order”) by Penwest to purchase and, when accepted by Patheon, for Patheon to manufacture and deliver the agreed quantity of the Products on a date not less than [**] months after the first day of the month immediately following the date that the Firm Order is submitted. Firm Orders submitted to Patheon will specify Penwest’s purchase order number, quantities by Product type, monthly delivery schedule and Delivery Dates, and any other elements necessary to ensure the timely manufacture and shipment of the Products. Upon Patheon’s acceptance of a Firm Order, the quantities of Products ordered will be firm and binding on Penwest and Patheon, and may not be reduced by

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	Penwest. Patheon shall use commercially reasonable efforts to meet any request by Penwest to increase the amount of Product to be supplied pursuant to any Firm Order.
(d)	Two Year Forecast. On or before the 10th day of June of each Year (or, in the case of the first Year of this Agreement, within [**] days after the Effective Date), Penwest will give Patheon a written, non-binding two-year forecast, broken down by quarters for the second year of the forecast, of the volume of each Product Penwest then anticipates will be required to be manufactured and delivered to Penwest during the two-year period (the “Extended Product Forecast”).
(e)	Acceptance of Firm Order. Patheon will accept Firm Orders by promptly sending a written acknowledgement to Penwest; provided that Patheon’s failure to deliver a written acceptance of the purchase order within [**] Business Days after its receipt of the Firm Order shall constitute Patheon’s deemed acceptance of the purchase order. The acknowledgement will include, subject to confirmation from Penwest, the Delivery Date for the Product ordered. Once agreed by the Parties pursuant to this Section 5.1(e), the Delivery Date may be amended by written agreement of the Parties or as set forth in Section 5.1(b).

5.2 Orders.

     Penwest may only order Manufacturing Services for a minimum of at least [**] of Product, and may not order Manufacturing Services for partial or incomplete Batches.

5.3 Shipments.

(a)

Shipments of Product will be made [**] (INCOTERMS 2000) Facility’s loading dock, unless otherwise mutually agreed. Risk of loss or of damage to Products will remain with Patheon until Patheon loads the Products onto the carrier’s vehicle for shipment at the Facility loading dock, at which time risk of loss or damage will transfer to Penwest. Patheon will, in accordance with Penwest’s instructions and as agent for Penwest, (i) arrange for shipping to be paid by Penwest and (ii) at Penwest’s risk and expense, obtain any export licence or other official authorization necessary to export the Products. Penwest will arrange for insurance and will select the freight carrier used by Patheon to ship Products and may monitor Patheon’s shipping and freight practices as they pertain to this Agreement. Products will be transported in accordance with the Specifications.

(b)

Product shall not be shipped to Penwest or its designated shipping point unless and until (i) all applicable Batch records, certificates of analysis and other certificates have been provided to and reviewed by Penwest, and (ii) Penwest’s quality assurance representative has performed Product release on such quantities of Product for shipment, in the case of both (i) and (ii), in accordance with the procedures set forth in the Quality Agreement. Penwest agrees that it shall review all Batch records and other certificates within [**] Business Days after receipt of such documents from Patheon.

5.4 On Time Delivery.

(a) Patheon and Penwest understand that there may be uncertainties and necessary adjustments in production schedules during the Initial Manufacturing Period. The Parties

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agree that they will work together closely to expedite deliveries and manage the scheduling of the initial Product launch. However, if, during the Initial Manufacturing Period, Patheon is unable to deliver the quantity of Product ordered under a Firm Order, within [**] Business Days after the scheduled Delivery Date (a “Late Initial Delivery Date”), Penwest will receive a credit from Patheon for the Initial Late Delivery that will be applied against the purchase price under Penwest’s next Firm Order. The credit will be [**] percent ([**]%) of the Price of the quantities of Product not delivered by Patheon under the Firm order on the Initial Delivery Date (i.e. Penwest Credit = (quantity Ordered in the Firm Order – Actual Delivery Quantities of Product) x Price x [**]%).

(b)

If, after the Initial Manufacturing Period, Patheon is unable to deliver the quantity of Product ordered under a Firm Order on the Scheduled Delivery Date (a “Late Delivery”), Penwest shall receive a credit from Patheon for the Late Delivery, as specified in the following table, which will be applied against the purchase price under the next Firm Order:

If Scheduled Shipment Date Is:	Delay Fee Due:
More than [**] days after the scheduled Delivery Date	[**]
more than [**] days, but [**] days or less, after the scheduled Delivery Date	[**]
[**] days or less after the scheduled Delivery Date	[**]

(c)

A late delivery of less than [**] days will not be a material breach of this Agreement by Patheon for the purposes of Section 8.2.

(d)

For clarity, a Late Delivery will not include any delay in shipment of Product caused by events outside of Patheon’s reasonable control or ability to plan for, including but not limited to a Force Majeure Event, a delay in Product release approval from Penwest or unanticipated supply availability or shipment delays from approved Component vendors. Promptly after becoming aware of potential disruptions or changes to the normal availability of Components from approved vendors, Patheon shall provide written notice thereof to Penwest, and Patheon shall thereafter use commercially reasonable efforts, in consultation with Penwest, to increase Patheon’s inventory of the applicable Component(s) or ordering lead time for the applicable Component(s).

5.5 Invoices and Payment.

     Invoices will be sent by fax or email to the fax number or email address given by Penwest to Patheon in writing. Invoices will be sent when the Product is manufactured and released by Patheon to Penwest. Patheon will also submit to Penwest, with each shipment of Product, a duplicate copy of the invoice covering the shipment. Each invoice will, to the extent applicable, identify Penwest’s purchase order number, Product numbers, names and quantities, unit price, freight charges, and the total amount to be paid by Penwest. Penwest will pay all undisputed invoices for Product(s) actually delivered to

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Penwest within [**] days after the date thereof. Interest on past due accounts for undisputed amounts will accrue at [**]% per month which is equal to an annual rate of [**]%, or, if lower, the highest rate permitted by applicable Law. The Late Delivery credits set forth in this Article 5 are only available to Penwest if all outstanding undisputed invoices have been paid in full or are within [**] days outstanding from the invoice date when the Late Delivery occurs.

ARTICLE 6

PRODUCT CLAIMS, FAILURE TO SUPPLY AND RECALLS

6.1 Product Claims.

(a)	Product Claims. Penwest has the right to reject any portion of any shipment of Products that deviates from the Specifications, the Manufacturing Process, cGMPs, or applicable Laws without invalidating any remainder of the shipment. Penwest will inspect the Products manufactured by Patheon for obvious defects or damage upon receipt, and will give Patheon written notice (a “Deficiency Notice”) of all claims for Products that deviate from the Specifications, the Manufacturing Process, cGMPs, or applicable Laws within [**] days after Penwest’s receipt thereof (or, in the case of any defects not reasonably susceptible to discovery upon receipt of the Product, within [**] days after discovery by Penwest or its customer, but not after the expiration date of the Product). Should Penwest fail to give Patheon the Deficiency Notice within the applicable [**] or [**] day period, then the delivery will be deemed to have been accepted by Penwest on either the [**] or [**] day after delivery or discovery, as applicable.
(b)	Determination of Deficiency. Upon receipt of a Deficiency Notice, Patheon will have [**] days to advise Penwest by notice in writing that it disagrees with the contents of the Deficiency Notice. If Penwest and Patheon fail to agree within [**] days after Patheon’s notice to Penwest as to whether any Products identified in the Deficiency Notice deviate from the Specifications, the Manufacturing Process, cGMPs, or applicable Laws, then the Parties will mutually select an independent laboratory to evaluate whether the Products deviate from the Specifications, the Manufacturing Process, cGMPs, or applicable Laws. This evaluation will be binding on the Parties. If the evaluation certifies that any Products deviate from the Specifications, the Manufacturing Process, cGMPs, or applicable Laws, Penwest may reject those Products in the manner contemplated in this Section 6.1 and [**]. If the evaluation does not so certify for any of the Products, then Penwest will be deemed to have accepted delivery of the Products on the [**] day after delivery (or, in the case of any defects not reasonably susceptible to discovery upon receipt of the Product, on the [**] day after discovery thereof by Penwest or its customer(s), but not after the expiration date of the Product) and, as between Penwest and Patheon, [**].
(c)	Shortages. If a shipment of Product fails to conform to the ordered quantity to be delivered, in addition to its obligations under Sections 5.4(a) and 5.4(b), Patheon shall replace such Product within [**] days after the applicable Delivery Date, [**].
(d)	Notwithstanding the existence of a dispute concerning Product rejected by Penwest, pending resolution of such dispute, Patheon shall, as promptly as possible, but in any event within [**] days after issue by Penwest of a purchase order for additional Product of

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the type and quantity claimed to be rejected as contemplated by this Section 6.1, deliver such additional Product to Penwest.

(e)

Penwest acknowledges that the time frames to provide replacement Product outlined in clauses (c) and (d) above are subject to Patheon being able to procure the required Components for such additional Product; provided that, promptly after the first indication that a Product deficiency or shortage may occur, Patheon shall use commercially reasonable efforts to obtain additional Component supply sufficient to satisfy its actual or potential obligations to provide replacement Product in accordance with clauses (c) and (d) above.

6.2 Product Recalls and Product Returns.

(a)

Patheon and Penwest will each maintain records necessary to permit a Recall of any Products delivered to Penwest or customers of Penwest. Each Party will promptly notify the other by telephone (to be confirmed in writing) of any information which might affect the marketability, safety or effectiveness of the Products or which might result in the Recall or seizure of the Products. Upon receiving this notice or upon this discovery, each Party will stop making any further shipments of any quantities of the applicable Product in its possession or control until a decision has been made whether a Recall or some other corrective action is necessary. As between the Parties, the decision to initiate a Recall or to take some other corrective action, if any, will be made and implemented by Penwest. Patheon shall cooperate with Penwest in the event of any Recall, and shall provide such reasonable assistance in connection therewith as Penwest may reasonably request.

(b)

Penwest will have the responsibility for handling all customer returns of Product. Patheon will give Penwest any assistance that Penwest may reasonably require to handle the returns.

6.3 Patheon’s Responsibility for Defective and Recalled Products.

     (a) Defective Product. If Penwest rejects Products under Section 6.1 and the deviation is determined to have arisen from Patheon’s failure to provide the Manufacturing Services in accordance with the Specifications, cGMPs, this Agreement or applicable Laws, or because the Product did not conform to the Specifications at the time of shipment, [**] defective Products. If [**], Patheon will promptly, at Penwest’s election, either: (i) [**]; Patheon will make every effort to provide replacement Product within [**] days after receipt of Penwest’s Deficiency Notice; provided, that promptly after receipt of a Deficiency Notice from Penwest, Patheon shall use commercially reasonable efforts to obtain additional Component supply sufficient to satisfy its obligations to provide replacement Product requested by Penwest pursuant to this Section 6.3(a).

     (b) Recalls. If a Recall or return results from, or arises out of, a failure by Patheon to perform the Manufacturing Services in accordance with the Specifications, the Manufacturing Process, cGMPs, or applicable Laws, or because the Product did not conform to the Specifications at the time of shipment, Patheon will be responsible for the [**] of the Recall or return and will use its commercially reasonable efforts to replace the Recalled or returned Products with new Products as soon as reasonably practicable. If Patheon is unable to replace the Recalled or returned Products within [**] days, then, upon Penwest’s request Patheon shall reimburse Penwest for the Price that Penwest paid to Patheon for the Product and

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the Manufacturing Services (including stability testing, if applicable) for the affected Products. In all other circumstances, Recalls, returns or other corrective actions will be made at Penwest’s cost and expense.

6.4 Failure to Supply.

(a) A Failure to Supply shall have occurred under this Agreement under any of the following circumstances (a“Failure to Supply”):

(i)	Patheon fails to deliver a shipment of Product by the Delivery Date, and fails to replace such Product shipment within [**]) days after the scheduled Delivery Date; or
(ii)	Patheon fails to ship the complete number of ordered Batches by the Delivery Date, and Patheon fails to ship the remaining Batches within [**] days after the scheduled Delivery Date, and such failure occurs (A) with respect to Product shipments over [**] consecutive calendar quarters during any Year, or (B) with respect to [**] or more Product shipments in any Year; or
(iii)	Product delivered to Penwest or to a Penwest customer is determined to be defective for a reason set forth in the first Sentence of Section 6.3(a), and there are [**] or more such deliveries of defective Product in any one Year.

(b)

If a Failure to Supply occurs, then Penwest or its Affiliates, itself or on behalf of its licensees or customers, may at its election, (i) require Patheon to qualify, as soon as reasonably practicable and at Patheon’s cost, a second Patheon facility to manufacture and supply Product to Penwest hereunder, it being understood that Penwest shall have the right to approve such second Patheon facility, such approval not to be unreasonably withheld or delayed; and/or (ii) retain a Third Party to manufacture and supply the requirements of Penwest and its Affiliates’, licensees’ and customers’ requirements for Product.

(c)

Except as set forth in this Agreement, Patheon will not be liable to Penwest nor have any responsibility to Penwest for any deficiencies in, or other liabilities associated with, any Product manufactured by it (collectively, “Product Claims”). For greater certainty, Patheon will have no obligation for any Product Claims to the extent the Product Claim (i) is caused by deficiencies in the Specifications as provided to Patheon by Penwest, the safety, efficacy, or marketability of the Products or any distribution thereof; provided that the Product was manufactured in accordance with the Manufacturing Process, the Specifications, cGMPs and applicable Laws, and conformed to the Specifications at the time of shipment; (ii) results from a defect in a Component that is not reasonably discoverable by Patheon using the test methods set forth in the Specifications, (iii) results from Components supplied by Penwest that is not reasonably discoverable by Patheon using the test methods set forth in the Specifications, (iv) is caused by actions of Third Parties occurring after the Product is shipped by Patheon under Section 5.3, (v) is due to packaging design or labelling defects or omissions for which Patheon has no responsibility; provided that the Product was manufactured in accordance with the Manufacturing Process, the Specifications, cGMPs and applicable Laws, and conformed to the Specifications at the time of shipment, (vi) is due to any unascertainable reason despite Patheon having performed the Manufacturing Services in accordance with the

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Specifications, cGMP’s, the Manufacturing Process and applicable Laws and despite the Product having met the Specifications at the time of shipment, or (vii) is due to a breach by Penwest of its obligations under this Agreement.

6.5 Disposition of Defective or Recalled Products.

     Penwest will not dispose of any damaged, defective, returned, or Recalled Products for which it intends to assert a claim against Patheon without Patheon’s prior written authorization to do so. Alternatively, Patheon may instruct Penwest to return the Products to Patheon. Patheon will bear the cost of disposition for any damaged, defective, returned or Recalled Products for which it bears responsibility under this Agreement. In all other circumstances Penwest will bear the cost of disposition, including all applicable fees for Manufacturing Services, for any damaged, defective, returned or Recalled Product.

6.6 Healthcare Provider or Patient Questions and Complaints.

     As between the Parties, Penwest will have the sole responsibility for responding to questions and complaints from its customers. Questions or complaints received by Patheon from Penwest’s customers, healthcare providers or patients will be promptly referred to Penwest. Patheon will co-operate as reasonably required to allow Penwest to determine the cause of and resolve any questions and complaints. This assistance will include follow-up investigations, including testing. In addition, Patheon will give Penwest all mutually agreed upon information that will enable Penwest to respond properly to questions or complaints about the Products as set forth in the Quality Agreement. Unless it is determined that the cause of the complaint resulted from a failure by Patheon to perform the Manufacturing Services in accordance with the Specifications, the Manufacturing Process, cGMPs, and applicable Laws, or because the Product does not meet the Specifications, all costs incurred under this Section 6.6 will be borne by Penwest.

6.7 Sole Remedy.

     Except for the indemnity set forth in Section 10.3 and subject to the limitations set forth in Sections 10.1 and 10.2, the remedies described in this Article 6 will be Penwest’s sole remedy for any failure by Patheon to provide the Manufacturing Services in accordance with the Specifications, the Manufacturing Process, cGMPs or applicable Laws.

ARTICLE 7

CO-OPERATION

7.1 Quarterly Review.

     Each Party will forthwith upon execution of this Agreement appoint one of its employees to be a relationship manager responsible for liaison between the Parties. The relationship managers will meet not less than quarterly to review the current status of the business relationship and manage any issues that have arisen.

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7.2 Governmental Agencies.

     Subject to Section 7.8, Patheon may communicate with any Authority, including governmental agencies responsible for granting Regulatory Approval for the Products, regarding the manufacture of the Products if, in the opinion of Patheon’s counsel, the communication is necessary to comply with the terms of this Agreement or the requirements of applicable Law. Unless in the reasonable opinion of its counsel there is a legal prohibition against doing so, Patheon will provide Penwest with prior written notice of such proposed communications, and will permit Penwest to accompany Patheon or take part in any communications with the Authority (as applicable), and to receive copies of all communications to and from the Authority.

7.3 Records and Accounting by Patheon.

     Patheon will keep records of the manufacture, testing, and shipping of the Products, and retain samples of the Products as are necessary to comply with manufacturing regulatory requirements applicable to Patheon, as well as to assist with resolving Product complaints and other similar investigations. Copies of the records and samples will be retained for a period of one year following the date of Product expiry, or longer if required by applicable Laws, at which time Penwest will be contacted concerning the delivery and destruction of the documents or samples of Products.

7.4 Inspection.

     Penwest may inspect Patheon reports and records relating to this Agreement during normal business hours and with reasonable advance notice, but a Patheon representative must be present during the inspection.

7.5 Access to the Facility; Audit Rights.

     Patheon will give Penwest (or its designee, provided that such designee is not a direct Competitor of Patheon (as defined in Section 8.2(d)) reasonable access at mutually agreeable times to the areas of the Facility in which the Products are manufactured, stored, handled, or shipped to permit Penwest to verify that the Manufacturing Services are being performed in accordance with the Specifications, cGMPs, and applicable Laws. But, with the exception of “for-cause” audits, Penwest will be limited each Year to one cGMP-type audit, lasting no more than two days, and involving no more than two auditors. Penwest may request additional cGMP-type audits, additional audit days, or the participation of additional auditors subject to payment to Patheon of a fee of $[**] for each additional audit day and $[**] per audit day for each additional auditor. The right of access set forth in this Section 7.5 will not include a right to access or inspect Patheon’s financial records.

7.6 Notification of Regulatory Inspections.

     Patheon will notify Penwest at least five (5) Business Days prior to any inspections by any Regulatory Authority or other Authority involving the Product or the Facility as it relates to the Product, and Penwest (or its designee) shall have the right to appoint a representative to attend any such inspection as an observer. Patheon will also notify Penwest of receipt of any form 483’s or warning letters or any other regulatory action regarding the manufacture of the Product or the Facility as it relates to the Product.

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7.7 Reports.

     Patheon will supply, on an annual basis, all Product data in its control, including release test results, complaint test results, and all investigations (in manufacturing, testing, and storage), that Penwest reasonably requires in order to complete any filing under any applicable regulatory regime, including any Annual Report that Penwest is required to file with the FDA. At Penwest’s request, Patheon will provide a copy of the Annual Product Review Report to Penwest at no additional cost. Any additional report requested by Penwest beyond the scope of cGMPs and customary FDA requirements will be subject to an additional commercially reasonable fee to be agreed upon by Patheon and Penwest in good faith.

7.8 FDA Filings.

(a)	Regulatory Authority. As between the Parties, Penwest will have sole responsibility for filing all documents with all Regulatory Authorities and taking any other actions that may be required for the receipt or maintenance of Regulatory Authority approval for the commercial manufacture of the Product. Patheon will assist Penwest, to the extent consistent with Patheon’s obligations under this Agreement, to obtain Regulatory Authority approval for the commercial manufacture of Product at the Facility as quickly as reasonably possible.
(b)	Verification of Data. At least [**] Business Days prior to filing with the Regulatory Authority any documentation which is or is equivalent to the FDA’s Drug Master File (DMF), Penwest will provide a designated representative of Patheon with a copy of any portions of such DMF filing that contain data generated by Patheon pursuant to this Agreement. Any such information disclosed to Patheon pursuant to this Section 7.8(b) shall be the Confidential Information of Penwest and shall be used by Patheon solely to verify that such portions of the DMF accurately describe the Patheon-generated data, Manufacturing Services that Patheon has performed and the Manufacturing Processes that Patheon has applied under this Agreement. Penwest shall consider in good faith any comments to such DMF filing provided by Patheon, it being understood that Penwest shall have no obligation to incorporate such comments into, or to modify, such DMF filings. Patheon will not assume any liability or responsibility whatsoever for delays or otherwise should Penwest choose not to incorporate comments or modify the DMF filings as per Patheon’s suggestion.
(c)	Penwest Responsibility. For clarity, the Parties agree that in reviewing the documents referred to in clause (b) above, Patheon’s role will be limited to verifying the accuracy of the description of the work undertaken or to be undertaken by Patheon. Subject to the foregoing, Patheon will not assume any responsibility for the accuracy of any application for receipt of an approval by a Regulatory Authority. Penwest is solely responsible for the preparation and filing of the application for approval by the Regulatory Authorities and any relevant costs will be borne by Penwest.
(d)	Inspection by Regulatory Authorities. If Penwest does not give Patheon the documents requested under clause (b) above within the time specified and if Patheon reasonably believes that Patheon’s standing with a Regulatory Authority may be jeopardized, Patheon may, in its sole discretion, delay or postpone any inspection by the Regulatory Authority until Patheon has reviewed the requested documents and is satisfied with their contents.

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ARTICLE 8

TERM AND TERMINATION

8.1 Initial Term.

     This Agreement will become effective as of the Effective Date and will continue until December 31, 2016 (the “Initial Term”), unless terminated earlier by one of the Parties in accordance herewith. This Agreement will automatically continue after the Initial Term for successive terms of two (2) years each unless either Party gives written notice to the other Party of its intention to terminate this Agreement at least eighteen (18) months prior to the end of the then current term (the Initial Term, together with any extensions thereto, the “Term”).

8.2 Termination for Cause.

(a)	Either Party at its sole option may terminate this Agreement upon written notice where the other Party has failed to remedy a material breach of any of its representations, warranties, or other obligations under this Agreement within 60 days following receipt of a written notice (the “Remediation Period”) of the breach that expressly states that it is a notice under this Section 8.2(a) (a “Breach Notice”).
(b)	Either Party at its sole option may immediately terminate this Agreement upon written notice, but without prior advance notice, to the other Party if: (i) the other Party is declared insolvent or bankrupt by a court of competent jurisdiction; (ii) a voluntary petition of bankruptcy is filed in any court of competent jurisdiction by the other Party; or (iii) this Agreement is assigned by the other Party for the benefit of creditors.
(c)	Penwest may terminate this Agreement as to any Product upon thirty (30) days prior written notice if any Regulatory Authority takes any action, or raises any objection, that prevents Penwest from importing, exporting, purchasing, or selling the Product. But if this occurs, Penwest will still fulfill all of its obligations under Section 8.4 below.
(d)	Patheon may terminate this Agreement upon six (6) months prior written notice to Penwest if Penwest assigns under Section 13.6 any of its rights under this Agreement to an assignee that in the opinion of Patheon acting reasonably and in good faith is (i) not a credit worthy substitute for Penwest or (ii) is a Competitor of Patheon. As used in this Agreement, “Competitor of Patheon” means a corporation that [**].

8.3 Termination by Penwest.

(a)	Penwest may terminate this Agreement at any time upon twelve (12) months written notice to Patheon.
(b)	Penwest may terminate this Agreement by written notice to Patheon at any time (i) if Patheon is unable to successfully validate the Manufacturing Process, or (ii) if Patheon has not obtained approval as a manufacturer of the Product, including approval of the Patheon Facility by the FDA or any other applicable Regulatory Authority, on or before December 31, 2010.

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(c) Penwest will give at least six (6) months advance notice if it intends to no longer order Manufacturing Services for a Product due to the Product’s discontinuance in the market.

8.4 Obligations on Termination.

     If this Agreement is completed, expires, or is terminated in whole or in part for any reason, then:

(a)	Penwest will take delivery of and pay for all undelivered Products that (i) are manufactured or packaged under a Firm Order, (ii) conform to the Specifications at the time of shipment, and (iii) were manufactured in accordance with the Manufacturing Process, cGMP and applicable Laws, at the Price in effect at the time the Firm Order was placed;
(b)	Penwest will satisfy the purchase price payable under Patheon’s orders with suppliers of Components, if the orders were made by Patheon in reliance on Firm Orders;
(c)	Penwest acknowledges that no Competitor of Patheon will be permitted access to the Facility; and
(d)	Penwest will make commercially reasonable efforts, at its own expense, to remove from Patheon site(s), within [**] days after the effective date of termination any Product or work-in-process produced or held by Patheon for the manufacture of the Product and located at a Patheon site or that is otherwise under Patheon’s care and control (“Penwest Property”). If Penwest fails to remove the Penwest Property within [**] days following the completion, termination, or expiration of the Agreement Penwest will pay Patheon $[**] per pallet, per month, one pallet minimum ($[**] per pallet, per month, one pallet minimum, for any of the Penwest Property that contains controlled substances or requires refrigeration) thereafter for storing the Penwest Property and will assume any Third Party storage charges invoiced to Patheon regarding the Penwest Property. Patheon will invoice Penwest for the storage charges as set forth in Section 5.5 of this Agreement.

Any termination or expiration of this Agreement will not affect any outstanding obligations or payments due hereunder prior to the termination or expiration, nor will it prejudice any other remedies that the Parties may have under this Agreement. For greater certainty, expiration or termination of this Agreement for any reason will not affect the obligations and responsibilities of the Parties under Articles 1, 6, 9, 10, 11, 12 and 13, and Sections 5.3, 5.4, 5.5, 7.7 and this Section 8.4 all of which survive any such expiration or termination.

ARTICLE 9

REPRESENTATIONS, WARRANTIES AND COVENANTS

9.1 Authority.

     Each Party covenants, represents, and warrants that it has the full right and authority to enter into this Agreement and that it is not aware of any impediment that would inhibit its ability to perform its obligations hereunder.

9.2 Penwest Warranties.

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     Penwest represents and warrants as of the Effective Date that:

(a) Non-Infringement.

(i)	Penwest has the right to disclose the Specifications to Patheon;
(ii)	Except with respect to the Patheon Intellectual Property as to which Penwest makes no representations or warranties, Penwest is not aware of any Intellectual Property of any Third Party that is necessary for Penwest to make, have made, use or sell the Product, as contemplated hereby;
(iii)	Penwest is not aware of any action or other legal proceedings alleging that Third Party Intellectual Property rights would be infringed by the manufacturing of the Product as contemplated by this Agreement; and

(b) Quality and Compliance.

(i) the Specifications for all Products conform to all applicable cGMPs and applicable Laws.

9.3 Patheon Warranties.

     Patheon covenants, represents, and warrants that:

(a)	All Product manufactured in accordance with this Agreement will (i) be manufactured in accordance with the Specifications, the Manufacturing Process, cGMPs, and all Regulatory Approvals and Laws (to the extent applicable at the time of Manufacture), (ii) will conform to the Specifications at the time of shipment, and (ii) be delivered free from all liens, encumbrances, restrictions and security interests;
(b)	any Patheon Intellectual Property used by Patheon to perform the Manufacturing Services (i) is Patheon’s or its Affiliate’s unencumbered property, (ii) may be lawfully used by Patheon, and (iii) does not infringe any Third Party IP Rights;
(c)	Patheon shall hold, and shall continue to hold during the Term, all material licenses necessary or required for the performance of the Manufacturing Services and the performance of its obligations hereunder; and
(d)	As of the Effective Date, Patheon is not aware of Intellectual Property of any Third Party that is necessary for Patheon to manufacture the Product in accordance with the Manufacturing Process as contemplated by this Agreement;
(e)	the Facility, all equipment and tooling utilized in the manufacture of Products hereunder, and the procedures and processes (including installation, operation and performance qualifications) instituted by Patheon in connection herewith are, and shall continue during the Term, to be in material compliance with all applicable Laws and maintained in good operating condition.

- 21 -

9.4 Debarred Persons.

     Patheon represents and warrants as of the Effective Date that neither it, nor any of its officers, directors or employees expected to perform Manufacturing Services under this Agreement has been debarred or convicted of a crime which could lead to debarment, under 21 USC §§335(a) and (b), or other applicable Laws. Patheon covenants that it will not in the performance of its obligations under this Agreement use the services of any person debarred or suspended under 21 U.S.C. §335(a) or (b). Patheon represents that it does not currently have, and covenants that it will not hire, as an officer or an employee any person who has been convicted of a felony under the laws of the United States for conduct relating to the regulation of any drug product under the Act.

9.5 Permits.

     Penwest will be solely responsible for obtaining or maintaining, on a timely basis, any permits or other regulatory approvals for the Products or the Specifications, including all marketing and post-marketing approvals.

     Patheon will maintain at all relevant times all governmental permits, licenses, approval, and authorities required to enable it to lawfully and properly perform the Manufacturing Services.

9.6 No Warranty.

     PATHEON MAKES NO WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, BY FACT OR LAW, OTHER THAN THOSE EXPRESSLY SET FORTH IN THIS AGREEMENT. PATHEON MAKES NO WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR WARRANTY OF MERCHANTABILITY FOR THE PRODUCT.

ARTICLE 10

REMEDIES AND INDEMNITIES

10.1 Consequential Damages.

     Under no circumstances whatsoever will either Party be liable to the other Party in connection with this Agreement in contract, tort, negligence, breach of statutory duty, or otherwise for (i) any (direct or indirect) loss of profits, of production, of anticipated savings, of business, or goodwill or (ii) for any other liability, damage, costs, or expense of any kind incurred by the other Party of an indirect or consequential nature, regardless of any notice of the possibility of these damages.

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10.2 Limitation of Liability.

Except with respect to each Party’s indemnification obligations with respect to Third Party claims hereunder, and excluding Patheon’s liability for replacement Product under Article 6, each Party’s total liability for damages sustained by the other Party pursuant to this Agreement in any given Year shall be [**].

10.3 Patheon.

(a)

Patheon agrees to defend, indemnify, and hold Penwest, its officers, employees, and agents harmless against any and all losses, damages, costs, claims, demands, judgments and liability to, from and in favour of Third Parties (together “Losses”) resulting from, or relating to any claim of personal injury or property damage to the extent that the injury or damage is the result of (i) a failure by Patheon to perform the Manufacturing Services in accordance with the Specifications, the Manufacturing Process, cGMPs, and applicable Laws, (ii) the gross negligence or wilful misconduct of Patheon, or (iii) a breach of this Agreement by Patheon, including any representation or warranty of Patheon contained herein, and in each case, except to the extent that the losses, damages, costs, claims, demands, judgments, and liability are due to the negligence or wrongful act(s) of Penwest, its officers, employees, agents, or Affiliates.

(b)

If Penwest intends to claim indemnification under Section 10.3(a), Penwest shall promptly notify Patheon in writing of any claim, lawsuit or other action in respect of which Penwest intends to claim such indemnification, and shall use commercially reasonable efforts to mitigate the effects of the claim. Penwest shall permit Patheon, at its discretion, to settle any such claim, lawsuit or other action and agrees to the complete control of such defense or settlement by Patheon; provided, however, that in order for Patheon to exercise such rights, such settlement shall not adversely affect Penwest’s rights under this Agreement or impose any obligations on Penwest in addition to those set forth herein. No such claim, lawsuit or other action shall be settled without the prior written consent of the Patheon, and Patheon shall not be responsible for any legal fees or other costs incurred other than as provided herein. Penwest shall cooperate fully with Patheon and its legal representatives in the investigation and defense of any claim, lawsuit or other action covered by this indemnification, all at the reasonable expense of Patheon. Penwest shall have the right, but not the obligation, to be represented by counsel of its own selection and expense.

10.4 Penwest.

(a) Penwest agrees to defend, indemnify, and hold Patheon, its officers, employees, and agents harmless against any and all Losses resulting from any claim of personal injury or property damage to the extent such injury or damage is the result of (i) a breach of this Agreement by Penwest, including any representation or warranty of Penwest contained herein, (ii) any claim that the Specifications or the Manufacturing Process for the Product do not conform to all applicable cGMPs and other applicable Laws, (iii) any claim that Product conforming to the Specifications, and labelled and manufactured in accordance with the Specifications, the Manufacturing Process, cGMPs and applicable Laws, is not safe for human consumption, (iv) any claim that the composition or method of use of the Product infringes the intellectual property rights of any Third Party, or (v) the gross

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negligence or wilful misconduct of Penwest, except to the extent in each case that the losses, damages, costs, claims, demands, judgments, and liability are due to the negligence or wrongful act(s) of Patheon, its officers, employees, or agents.

(b)

If Patheon intends to claim indemnification under Section 10.4(a), Patheon shall promptly notify Penwest in writing of any claim, lawsuit or other action in respect of which Patheon intends to claim such indemnification, and shall use commercially reasonable efforts to mitigate the effects of the claim. Patheon shall permit Penwest, at its discretion, to settle any such claim, lawsuit or other action and agrees to the complete control of such defense or settlement by Penwest; provided, however, that in order for Penwest to exercise such rights, such settlement shall not adversely affect Patheon’s rights under this Agreement or impose any obligations on Patheon in addition to those set forth in this Agreement. No such claim, lawsuit or other action shall be settled without the prior written consent of Penwest, and Penwest shall not be responsible for any legal fees or other costs incurred other than as provided herein. Patheon shall cooperate fully with Penwest and its legal representatives in the investigation and defense of any claim, lawsuit or other action covered by this indemnification, all at the reasonable expense of Penwest. Patheon shall have the right, but not the obligation, to be represented by counsel of its own selection and expense.

ARTICLE 11

CONFIDENTIALITY

11.1 Confidentiality.

     The Confidentiality Agreement will apply to all information provided by one Party to the other Party pursuant to this Agreement. The terms of the Confidentiality Agreement are deemed to be incorporated herein by reference; provided, that (i) notwithstanding any provisions of the Confidentiality Agreement to the contrary, the Purpose, as defined in the Confidentiality Agreement, shall be deemed to include the Parties’ respective activities under this Agreement or the Quality Agreement, and (ii) the term “Confidential Information” set forth in the Confidentiality Agreement shall be deemed to include all information, know-how and technology provided by one Party to the other Party pursuant to this Agreement or the Quality Agreement. If the Confidentiality Agreement expires or terminates prior to the expiration or termination of this Agreement, then the terms of the Confidentiality Agreement will nonetheless continue to govern the Parties’ obligations of confidentiality for the Term of this Agreement and for five (5) years thereafter. Notwithstanding the foregoing provisions of this Section 11.1, either Party may disclose Confidential Information of the other Party or the terms of this Agreement or the Quality Agreement if such Party reasonably determines, based on advice from its counsel, that it is required to make such disclosure by applicable Law or legal process, including by the rules or regulations of the United States Securities and Exchange Commission (the “SEC”) or similar regulatory agency in a country other than the United States or of any stock exchange, in which event such Party shall (a) provide prior notice of such intended disclosure to such other Party sufficiently in advance (to the extent practicable) to enable the other Party to seek confidential treatment or other protection for the Confidential Information subject to such requirement unless the disclosing Party is prevented by Law from providing such advance notice, (b) shall disclose only such Confidential Information of such other Party as such disclosing Party reasonably determines is required to be disclosed, and shall (c) use commercially reasonable efforts to seek confidential treatment of any terms of this Agreement or the

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Quality Agreement that such other Party considers particularly sensitive from the SEC, similar regulatory agencies in countries other than the United States, or any stock exchange.

ARTICLE 12

DISPUTE RESOLUTION

12.1 Commercial Disputes.

     If any dispute arises out of this Agreement (other than a dispute under Section 6.1(b) or a Technical Dispute, as defined herein), the Parties will first try to resolve it amicably. In that regard, any Party may send a notice of dispute to the other, and each Party will appoint, within ten Business Days from receipt of the notice of dispute, a single representative having full power and authority to solve the dispute. The representatives will meet as necessary in order to resolve the dispute. If the representatives fail to resolve the matter within one month from their appointment, or if a Party fails to appoint a representative within the ten Business Day period set forth above, the dispute will immediately be referred to the Chief Executive Officer (or another officer as he/she may designate) of each Party who will meet and discuss as necessary to try to resolve the dispute amicably. Should the Parties fail to reach a resolution under this Section 12.1, the dispute will be referred to a court of competent jurisdiction in accordance with Section 13.15.

12.2 Technical Dispute Resolution.

     If a dispute arises (other than disputes under Sections 6.1(b) or 12.1) between the Parties that is exclusively related to technical aspects of the manufacturing, packaging, labelling, quality control testing, handling or storage of Products under this Agreement (a “Technical Dispute”), the Parties will make all reasonable efforts to resolve the dispute by amicable negotiations. In that regard, senior representatives of each Party will, as soon as practicable and in any event no later than ten (10) Business Days after a written request from either Party to the other, meet in good faith to resolve any Technical Dispute. If, despite this meeting, the Parties are unable to resolve a Technical Dispute within a reasonable time, and in any event within thirty (30) Business Days after the written request, the Technical Dispute will, at the request of either Party, be referred for determination to an expert in accordance with Schedule F. If the Parties cannot agree that a dispute is a Technical Dispute, Section 12.1 will prevail. For greater certainty, the Parties agree that the release of the Products for sale or distribution under the applicable marketing approval for the Products will not by itself indicate compliance by Patheon with its obligations for the Manufacturing Services and further that nothing in this Agreement (including Schedule F) will remove or limit the authority of the relevant qualified person (as specified by the Quality Agreement) to determine whether the Products are to be released for sale or distribution.

ARTICLE 13

MISCELLANEOUS

13.1 Inventions.

(a) For the term of this Agreement, Penwest hereby grants to Patheon a non-exclusive, paid-up, royalty-free, non-transferable license of Penwest’s Intellectual Property which Patheon must use in order to perform the Manufacturing Services.

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(b)	All Penwest Intellectual Property, will be the exclusive property of Penwest. Patheon hereby assigns its entire right, title and interest in and to the Penwest Intellectual Property to Penwest, and agrees to execute all documents and take such other actions as are reasonably necessary to effectuate the forgoing assignment obligations.
(c)	All Patheon Intellectual Property will be the exclusive property of Patheon. Patheon hereby grants to Penwest a perpetual, irrevocable, non-exclusive, paid-up, royalty-free, transferable license to under the Patheon Intellectual Property used by Patheon to in the performance of the Manufacturing Services or the manufacture of Products pursuant to this Agreement, to manufacture or have manufactured Product(s). Upon the reasonable request of Penwest, Patheon shall transfer to Penwest any tangible manifestations of the Patheon Intellectual Property, and shall provide Penwest with reasonable access to Patheon employees or agents, to enable Penwest to exercise the foregoing license.
(d)	Each Party will be solely responsible for the costs of filing, prosecution, and maintenance of patents and patent applications on its own Inventions.
(e)	Either Party will give the other Party written notice, as promptly as practicable, of all Inventions which can reasonably be deemed to constitute improvements or other modifications of the Products or processes or technology owned or otherwise controlled by the Party.

13.2 Intellectual Property.

     Subject to Section 13.1, all Penwest Intellectual Property will be owned by Penwest and all Patheon Intellectual Property will be owned by Patheon. Except as otherwise expressly provided in this Agreement, neither Party has, nor will it acquire, any interest in any of the other Party’s Intellectual Property unless otherwise expressly agreed to in writing. Neither Party will use any Intellectual Property of the other Party, except as specifically authorized by the other Party or as required for the performance of its obligations under this Agreement.

13.3 Insurance.

     Each Party will maintain commercial general liability insurance, including blanket contractual liability insurance covering the obligations of that Party under this Agreement through the term of this Agreement and for a period of [**] years thereafter. This insurance will have policy limits of not less than (i) $[**] for each occurrence for personal injury or property damage liability; and (ii) $[**] in the aggregate per annum for product and completed operations liability. Claims made coverage is acceptable, if occurrence coverage isn’t reasonably available. If requested, each Party will give the other a certificate of insurance evidencing the above and showing the name of the issuing company, the policy number, the effective date, the expiration date, and the limits of liability. The insurance certificate will further provide for a minimum of [**] days’ written notice to the insured of a cancellation of the insurance. If a Party is unable to maintain the insurance policies required under this Agreement, then the Party will forthwith notify the other Party in writing and the Parties will in good faith negotiate appropriate amendments to the insurance provision of this Agreement in order to provide adequate assurances. [**].

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13.4 Independent Contractors.

     The Parties are independent contractors and this Agreement will not be construed to create between Patheon and Penwest any other relationship such as, by way of example only, that of employer-employee, principal agent, joint-venturer, co-partners, or any similar relationship, the existence of which is expressly denied by the Parties.

13.5 No Waiver.

     Either Party’s failure to require the other Party to comply with any provision of this Agreement will not be deemed a waiver of the provision or any other provision of this Agreement.

13.6 Assignment.

     Neither this Agreement, nor any of either Party’s rights hereunder, may be assigned or otherwise transferred by either Party without the prior written consent of the other Party, which consent will not be unreasonably withheld; provided that either Party shall have the right to assign or transfer its rights or obligations under this Agreement, in whole or in part, to an affiliated entity or to a successor to all or substantially all of its assets or business relating to this Agreement, whether by sale, merger, operation of law or otherwise provided that such successor executes documentation by which it agrees to be bound by the terms and conditions of this Agreement.

13.7 Force Majeure.

(a)	Neither Party will be liable for the failure to perform its obligations under this Agreement if the failure is caused by an event beyond that Party’s reasonable control and is not caused by the act or omission of that Party, including strikes or other labour disturbances, lockouts, riots, quarantines, communicable disease outbreaks, wars, acts of terrorism, fires, floods, storms, interruption of or delay in transportation, or lack of or inability to obtain fuel, power or components or compliance with any order or regulation of any government entity acting within colour of right (a “Force Majeure Event”). A Party claiming a right to excused performance under this Section 13.7 will immediately notify the other Party in writing of the extent of its inability to perform, which notice will specify the event beyond its reasonable control that prevents the performance. Neither Party will be entitled to rely on a Force Majeure Event to relieve it from an obligation to pay money (including any interest for delayed payment) which would otherwise be due and payable under this Agreement.
(b)	A Party shall be deemed not to be in default with respect to non-performance of any of its obligations under this Agreement, if and so long as such non-performance is due in whole or in some material way to an event of Force Majeure and that Party has used commercially reasonable efforts to remove the event of Force Majeure and to perform its obligations under the Agreement.
(c)	Subject to Section 13.7(b), if Patheon is unable to supply Penwest with its requirements of Products by reason of Force Majeure, Force Majeure shall excuse Patheon’s performance until the Force Majeure has ceased and for a reasonable period of time thereafter, to allow Patheon to restore itself to the position it was in with respect to the manufacture of Products immediately prior to the Force Majeure. Within ninety (90) days

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of notification by Patheon that it is able to resume the necessary supply of the Products to Penwest, Penwest shall resume obtaining its requirements of Product from Patheon pursuant to this Agreement. Penwest shall be excused from its obligation set forth in Section 2.1 hereof during Patheon’s inability to manufacture the Products as a result of a Force Majeure event, until the cessation of such Force Majeure event in accordance with this Section 13.7(c) and thereafter as specified in Section 2.1. Patheon shall suffer no penalty or incur any liability for its inability to perform hereunder by reason of Force Majeure.

(d)

If a Party fails to perform any of its obligations under this Agreement by reason of Force Majeure and such non-performance continues for a period of one hundred and eighty (180) days after the first occurrence of the event of Force Majeure, the other Party may terminate this Agreement by providing written notice to that effect to the non-performing Party. In the event of such termination, both Parties’ respective rights and obligations under this Agreement shall terminate except for any amounts previously due and owing by one Party to the other and except for any other obligations which this Agreement expressly provides shall survive termination.

13.8 Additional Product.

     Additional products may be added to this Agreement and the additional products will be governed by the general conditions hereof with any special terms (including price) governed by amendments to Schedules A, B-1, B-2, C and D as applicable.

13.9 Notices.

     Any notice, approval, instruction or other written communication required or permitted hereunder will be sufficient if made or given to the other Party by personal delivery, by telecopy, facsimile communication, or confirmed receipt electronic mail or by sending the same by first class mail, postage prepaid to the respective addresses, telecopy or facsimile numbers or electronic mail addresses set forth below:

If to Penwest:

Penwest Pharmaceuticals Co., Inc.

2981 Route 22, Suite 2

Patterson, NY 12563-2335

Attn.: Kevin Fitzmaurice,

Director, Technical Operations

Facsimile: (845) 878-3420

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A Party may change its address for notice by notifying the other Party at any time in accordance with the provisions of this Section 13.9.

If to Patheon:

Patheon Inc.

2100 Syntex Court

Mississauga, Ontario L5N 7K9

Canada

Attention: Law Department

Telecopier No.: 905.812.6613

With a copy to:

Patheon Inc.

4721 Emperor Boulevard

Research Triangle Park,

NC 27703

Attention: General Counsel

Telecopier No.: 919-474-2269

Email address: Doaa.Fathallah@patheon.com

or to any other addresses, telecopy or facsimile numbers or electronic mail addresses given to the other Party in accordance with the terms of this Section 13.9. Notices or written communications made or given by personal delivery, telecopy, facsimile, or electronic mail will be deemed to have been sufficiently made or given when sent (receipt acknowledged), or if mailed, five days after being deposited in the United States or Canada, mail, postage prepaid or upon receipt, whichever is sooner.

13.10 Severability.

     If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid, illegal, or unenforceable in any respect, that determination will not impair or affect the validity, legality, or enforceability of the remaining provisions hereof, because each provision is separate, severable, and distinct.

13.11 Entire Agreement.

     This Agreement, together with the Quality Agreement and the Confidentiality Agreement, constitutes the full, complete, final and integrated agreement between the Parties relating to the subject matter hereof and supersedes all previous written or oral negotiations, commitments, agreements, transactions, or understandings concerning the subject matter hereof. Any modification, amendment, or supplement to this Agreement must be in writing and signed by authorized representatives of both Parties. In case of conflict, the prevailing order of documents will be this Agreement, the Quality Agreement and the Confidentiality Agreement.

13.12 Other Terms.

     No terms, provisions or conditions of any purchase order or other business form or written authorization used by Penwest or Patheon will have any effect on the rights, duties, or obligations of the

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Parties under or otherwise modify this Agreement, regardless of any failure of Penwest or Patheon to object to the terms, provisions, or conditions unless the document specifically refers to this Agreement and is signed by both Parties.

13.13 No Third Party Benefit or Right.

     For greater certainty, nothing in this Agreement will confer or be construed as conferring on any Third Party any benefit or the right to enforce any express or implied term of this Agreement.

13.14 Use of Penwest Name.

     Patheon will not make any use of Penwest’s name, trademarks or logo or any variations thereof, alone or with any other word or words, without the prior written consent of Penwest, which consent will not be unreasonably withheld. Despite this, Penwest agrees that Patheon may include Penwest’s name and logo in customer lists or related marketing and promotional material for the purpose of identifying users of Patheon’s Manufacturing Services.

13.15 Governing Law.

     This Agreement will be construed and enforced in accordance with the laws of the State of New York, U.S.A., without reference to any of its conflicts of laws provisions that would require the application of the laws of any other jurisdiction. The UN Convention on Contracts for the International Sale of Goods will not apply to this Agreement.

13.16 Language Clause.

     The Parties have requested that this Agreement and all ancillary documents be drawn up in the English language only. Les Parties ont exigé que cette entente ainsi que tous les documents y afférent soient rédigés en anglais seulement.

13.17 Execution in Counterparts.

     This Agreement may be executed in two or more counterparts, by original or facsimile signature, each of which will be deemed an original, but all of which together will constitute one and the same instrument.

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     IN WITNESS WHEREOF, the duly authorized representatives of the Parties have executed this Agreement as of the Effective Date.

PATHEON INC.
by	/s/ Eric W. Evans
by	Eric W. Evans, Chief Financial Officer
PENWEST PHARMACEUTICALS CO.
by	/s/ Amale Hawi
by	Amale Hawi, SVP, Pharmaceutical Development

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SCHEDULE A

PRODUCT SPECIFICATIONS AND FORMULATION

[**]

A total of 3 pages were omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

A-1

SCHEDULE B-1

Manufacturing Services

(1) Quality Control and Quality Assurance. Patheon will perform the quality control and quality assurance testing specified in the Quality Agreement. Batch review and release to Penwest will be the responsibility of Patheon’s quality assurance group. Patheon will perform its Batch review and release responsibilities in accordance with Patheon’s standard operating procedures. Each time Patheon ships Product to Penwest, it will provide Penwest with a certificate of analysis and certificate of compliance including a statement that the Batch has been manufactured and tested in accordance with Specifications, the Manufacturing Process, cGMPs, and all applicable Laws, and that the Product conforms to the Specifications. The form and style of Batch documents, including Batch production records, lot packaging records, equipment set up control, operating parameters, and data printouts, raw material data, and laboratory notebooks are the exclusive property of Patheon. Specific Product related information contained in those Batch documents is Penwest property.

(2) Components. Patheon will purchase and test all Components [**] and as required by the Specifications.

(3) Packaging. Patheon will package the Products as set out in the Specifications. Penwest will be responsible for the cost of artwork development. Patheon will determine and imprint the Batch numbers and expiration dates for each Product shipped. The Batch numbers and expiration dates will be affixed on the Products and on the shipping carton of each Product as outlined in the Specifications and as required by the Manufacturing Process, cGMPs and applicable Laws. Penwest may, in its sole discretion, make changes to labels, product inserts, and other packaging for the Products. Those changes will be submitted by Penwest to all applicable governmental agencies and other Third Parties responsible for the approval of the Products. Penwest will be responsible for the cost of labelling obsolescence when changes occur. Patheon’s name will not appear on the label or anywhere else on the Products unless required by applicable Laws or Patheon consents in writing to the use of its name .

(4) Bill Back Items. Bill Back Items will be charged to Penwest at Patheon’s cost plus a [**]% handling fee.

Manufacturing Assumptions. Patheon will use the following manufacturing equipment train in the Manufacturing Process and for production of the TIMERx^â-N Product.

[**]

• There will be [**]. Final blending will be performed in the [**].

• Single Batch manufacturing runs are anticipated. Each Batch will yield approximately [**] kilograms of TIMERx^â-N.

• Patheon assumes that the TIMERx^â-N Formulation does not absorb/adsorb to any metal, glass or other components used during the processing and analytical testing of the Batch.

• Patheon assumes the current cleaning procedure is adequate and full cleaning occurs after each campaign.

B-1 - 1

• A manufacturing yield of [**] percent ([**]%) is expected based on Penwest’s prior experience with the Manufacturing Process.

• Patheon shall conduct finished Product testing on all Product Batches, in accordance with the Manufacturing Process, cGMPs and Specifications, such testing to include: [**].

• As per Penwest, granulation will be bulk packaged into approximately [**] drums double lined with [**].

(5) Stability Samples and Testing. Patheon will complete stability testing on each Batch. The process and details for conducting stability testing will be determined by the Parties and set forth in a stability protocol. If a confirmed stability test failure occurs Patheon will notify Penwest within [**], after which Patheon and Penwest will jointly determine the procedure and methods to be undertaken to investigate the cause of the failure, including which Party will bear the cost of the investigation. Patheon will not be liable for the cost of the investigation unless it has failed to perform the Manufacturing Services in accordance with the Specifications, the Manufacturing Process, cGMP’s and applicable Laws or the Product fails to conform to the Specifications. Patheon will give Penwest all stability test data and results at Penwest’s request.

(6) Packing and Shipping. TIMERx^â-N Product will be bulk packaged by Patheon into drums double lined with [**] bags.

B-1 - 2

SCHEDULE B-2

Manufacturing Processes and Process Schematic

[**]

A total of 4 pages were omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

C-1

SCHEDULE C

PRODUCT PRICES

Product	Year 2010 Prices/per kg
TIMERxâ-N ([**] kg/Batch)	C$[**]/kg*

* Initial pricing assumes an annual volume of [**] kg

The following cost items are included in the Price for the Products:

• Product manufactured, tested and packaged under the Agreement

• Standard certificate of analysis (“COA”)

• Standard certificate of compliance (“COC”)

• GMP required retention samples

• Copies of deviation reports

• Batch Production Records (“BPR”)/Lot Packaging Records (“LPR”) copies for all Batches produced

• One label copy change per Year

• BPR/LPR changes, one major change per Year

• Common HPLC/GC columns, reagents, and lab supplies

• Copy of the Annual Product Review Report

• Product Approval Inspection (“PAI”) and copy of FDA Report

• Simple, routine statistical review

• Storage of Production Test Record (“PTR”) batches and other experimental batches for three months

• Storage of registration batches and other experimental batches for two years or until Product approval, whichever comes first

• Routine sampling and analysis as part of Product manufacture and release

• [**]

B-1 - 2

SCHEDULE D

ANNUAL STABILITY TESTING PROTOCOL AND COSTS

Product Information

Product Name/Strength: TIMERx-N	Study Initiation:
	Sample Type:
	GMP — specification #:
Product Lot #	Primary Packaging: [**]
Batch Size: [**] Kg	Secondary Packaging:[**]
Manufacturer:	Packager:

Storage Conditions

Condition	12 month	24 month	36 month	48 month	60 month
[**]	[**]	[**]	[**]	[**]	[**]
Other:

Test Requirements

All of the following tests are performed at each time point:

[**].

Sample Requirements

Condition	12 month	24 month	36 month	48 month	60 month	Total
[**]	[**]	[**]	[**]	[**]	[**]	[**]
Other:
Grand Total:						[**]

Comments *[**]	Approvals
[**].	Pharmaceutics	Date
	QA/QC	Date

D-1

1. 2010 Annual Stability (FUST)

Stability samples will be tested as per the methods and acceptance criteria outlined in the TIMERx-N Control and Stability Procedure. Patheon will prepare a stability protocol outlining the product description, storage conditions and pullpoints.

Note: One batch in a given production year will be placed on FUST.

The following tests will be completed at each pullpoint:

•	[**]	•	[**]
•	[**]	•	[**]
•	[**]	•	[**]
•	[**]	•	[**]

For requested changes that affect the type of testing to be performed at a given pull point, the price per sample may be re-evaluated and a formal quote may be issued to capture any additional work. Alternatively, a discount for work not performed may be applied to the invoice without a formal quote. Stability cost will be reviewed on a per annual basis.

D-2

2. Fee Summary for Overall Budget

BUDGET SUMMARY

Penwest Pharmaceutical Company
TIMERx-N

THE FOLLOWING COSTS ARE ALL QUOTED IN:           USD

All amounts quoted are valid for [**] days from the date of this Proposal.

STABILITY — COMMERCIAL USD

ACTIVITY		PRICE
Number of Lots
Total Samples
	Subtotal
Protocol Generation	$[**]

Pullpoint Month

T = 1

T = 3

T = 6

T = 9

T = 12

T = 18

T = 24

T = 36

T = 48

T = 60

[**]

x

x

x

x

x

Samples per pullpoint

1

1

1

1

1

Microbiology

x

x

x

x

x

Cost per pullpoint (Milestone Price)

[**]

$[**]

$[**]

$[**]

$

[**]

$[**]

$

[**]

$

[**]

$

[**]

$

[**]

Total

$

[**]

BUDGET TOTAL

USD

$

[**]

D-3

SCHEDULE E

Quality Agreement
Commercial Product

Between

Penwest Pharmaceuticals Co.,
a corporation existing under the laws of the state of Washington, USA and having
offices at 2981 Route 22, Suite 2, Patterson, NY 12563, USA
(hereinafter referred to as “Penwest”)

-and-

Patheon Inc.,
a corporation existing under the laws of Canada and having offices at 2100
Syntex Court, Mississauga, Ontario L5N 7K9, Canada,
(hereinafter referred to as “Patheon”)

Specific sites covered under this Agreement:
Patheon Whitby
111 Consumers Road
Whitby, ON
L1N5Z5

Effective Date: June 7, 2010

Version: QG01-05-T001-01

TABLE OF CONTENTS

SECTION 1: PREMISES AND AGREEMENT	3
SECTION 2: RESPONSIBILITIES TABLE	3
SECTION 3: GENERAL	5
SECTION 4: DESCRIPTION OF RESPONSIBILITIES	6
SECTION 5: APPENDICES	20

APPENDIX A:	PRODUCT(S)
APPENDIX B:	QUALITY CONTACTS
APPENDIX C:	PATHEON APPROVED VENDOR LIST
APPENDIX D:	CLIENT APPROVED VENDOR LIST
APPENDIX E:	PATHEON APPROVED CONTRACT LABORATORIES LIST

Page 2 of 25

SECTION 1: PREMISES AND AGREEMENT

     PREMISES. Under the Manufacturing Services Agreement dated June 7, 2010 and the TIMERx^®-N Technology Transfer and Manufacturing Services Agreement dated October 30, 2009, in each case by and between Patheon and Penwest (the “MSA”, the “Technology Transfer Agreement” and this “Quality Agreement”, respectively), Patheon agreed to perform Manufacturing Services (as defined in the MSA and the Technology Transfer Agreement) for the Products identified in Appendix A, attached hereto, in accordance with the terms and conditions of the MSA, the Technology Transfer Agreement and this Quality Agreement.

     The Parties desire to allocate the responsibility for procedures and Specifications impacting on the identity, strength, quality and purity of the Products.

     Capitalized terms not otherwise defined herein shall have the meaning specified in the MSA or, if not defined in the MSA, as defined in the Technology Transfer Agreement.

     In the event of any conflict between the terms of this Quality Agreement and the MSA or the Quality Agreement and the Technology Transfer Agreement, the order of precedence shall be: (i) the MSA and this Quality Agreement, or (ii) the Technology Transfer Agreement and this Quality Agreement.

     AGREEMENT. NOW THEREFORE in consideration of the Premises and rights conferred and the obligations assumed under the MSA, the Technology Transfer Agreement and this Quality Agreement, and for other good and valuable consideration (the receipt and sufficiency of which are acknowledged by each Party), and intending to be legally bound, the Parties agree as follows:

SECTION 2: RESPONSIBILITIES TABLE

     Patheon will be responsible for all the operations that are marked with “X” in the column titled “Patheon” and Penwest will be responsible for all the operations that are marked with “X” in the column titled “Penwest”. If marked with “(X)”, cooperation is required from the designated Party.

Section No.	Subject / Terms	Penwest			Patheon
4.1 Quality Management
4.1.1	cGMP, Health and Safety Compliance		X		X
4.1.2	Penwest Audit Rights		X
4.1.3	Subcontracting		(X	)	X
4.1.4	Self-Inspection				X

Page 3 of 25

Section No.	Subject / Terms	Penwest			Patheon
4.2 Regulatory Requirements
4.2.1	Permits and Manufacturing License(s)				X
4.2.2	Regulatory Filing /Registration Change Control		X		(X)
4.2.3	Regulatory Compliance				X
4.2.4	Government Agency Inspections, Communications and Requisitions		(X	)	X
4.3 Component Control
4.3.1	Test Methods and Specifications		X		(X)
4.3.2	Component Destruction		(X	)	X
4.3.3	Vendor Audit Responsibility		X		X
4.3.4	Penwest Furnished Components		X
4.3.5	Incoming Component Release				X
4.4 Building, Facilities, Utilities and Equipment
4.4.1	General				X
4.4.2	Equipment, Calibration and Preventative Maintenance				X
4.4.3	Environmental Monitoring Program				X
4.5 Product Controls
4.5.1	Master Batch Record		(X	)	X
4.5.2	Reprocessing and Rework		(X	)	X
4.5.3	Personnel Training				X
4.6 Packaging, Labeling and Printed Components
4.6.1	Packaging Documentation		(X	)	X
4.6.2	Printed Components and Artwork		X		(X)
4.6.3	Test Methods		X		(X)
4.7 Exception Reports (Deviations / Investigations)
4.7.1	Manufacturing Instruction Deviations		(X	)	X
4.7.2	Notification of Deviations				X
4.8 Release of Product
4.8.1	Test Methods and Specifications		X		(X)
4.8.2	Batch Release for Shipment				X
4.8.3	Certificate of Compliance				X
4.8.4	Product Release		X
4.9 Validation

Page 4 of 25

Section No.	Subject / Terms	Penwest			Patheon
4.9.1	Master Validation Plan		(X	)	X
4.9.2	Cleaning Validation Program		(X	)	X
4.9.3	Analytical Method and Process Transfer		X
4.10 Change Control
4.10.1	General		X		X
4.11 Documentation
4.11.1	Record Retention				X
4.12 Laboratory Controls
4.12.1	Specifications and Test Methods		X		X
4.12.2	Out of Specifications (OOS) /Out of Trend (OOT)		(X	)	X
4.12.3	Method Transfer of Validated Methods		X		X
4.13 Stability
4.13.1	Sample Storage				X
4.13.2	Stability Studies and Protocol		X		X
4.13.3	Stability Failures		(X	)	X
4.13.4	Termination of the MSA or the Technology Transfer Agreement				X
4.14 Annual Product Review
4.14.1	General		X		(X)
4.15 Storage and Distribution
4.15.1	General				X
4.15.2	Product Storage and Shipment Changes		(X	)	X
4.15.3	Product Quarantine				X
4.16 Product Complaints
4.16.1	Complaint Investigation		X		(X)
4.17 Product Recall
4.18 Retention Samples
4.18.1	Component Retention Samples				X

SECTION 3: GENERAL

3.1 Any communications about the subject matter of this Agreement will be directed, in the first instance, to the person(s) identified in Appendix B. A Party may change its designed representatives identified on Appendix B by written notice to the other Party in accordance with Section 13.9 of the MSA.

Page 5 of 25

3.2	If any provision of this Agreement should be or found invalid, or unenforceable by applicable Law, the rest of the Agreement will remain valid and binding and the Parties will negotiate a valid provision which meets as close as possible the objective of the invalid provision.
3.3	Any amendment of this Agreement will be made in writing and signed by both Parties; provided that (i) either Party may change its designated representative(s) identified on Appendix B by written notice to the other Party in accordance with Section 13.9 of the MSA.
3.4	This Quality Agreement will become effective on the Effective Date (set forth on the cover page of this Agreement) and will remain in effect until the termination or expiration of both the Technology Transfer Agreement and the MSA (the “Term”).

SECTION 4: DESCRIPTION OF RESPONSIBILITIES

4.1 Quality Management.

4.1.1	cGMP, Health and Safety Compliance.
	Patheon will conduct operations in compliance with all applicable Laws, including environmental, occupational health and safety Laws.

4.1.2

Penwest Audit Rights.

Patheon will give Penwest and its customer’s reasonable access at mutually agreeable times to the areas of the Manufacturing Facility in which the Product is manufactured, stored, handled, tested or shipped to permit Penwest and its customers to verify that the Manufacturing Services are being performed in accordance with the Specifications, cGMPs and applicable Laws. Penwest’s audit right (as described above) is limited to one audit each calendar year for up to [**] calendar days and involving no more than [**] auditors; provided that Penwest and its customers shall have the right to conduct additional “for-cause” audits. Penwest may request additional cGMP-type audits, additional audit days, or the participation of additional auditors subject to payment. The fees associated with these additional cGMP audits are specified in the MSA. The right of access set forth in this Section 4.1.2 will not include a right to access or inspect Patheon’s financial records.

4.1.3	Subcontracting.
	Patheon shall not have the right to subcontract, in whole or in part, its obligations under this Quality Agreement, without the prior written consent of Penwest, which consent Penwest may withhold

Page 6 of 25

in its sole discretion. Appendix E lists the Patheon approved contract laboratories list.

4.1.4	Self-Inspection.
	Patheon will perform self-inspections of its premises, facilities, and processes used to manufacture, package, test, and store Penwest’s Components and/or finished Products in accordance with Patheon’s written standard operating procedures (“SOPs”) to ensure compliance with cGMP and this Quality Agreement.

4.2 Regulatory Requirements.

4.2.1	Permits and Manufacturing Licenses.
	Patheon will obtain and maintain the appropriate manufacturing license(s) to enable Patheon to perform its obligations under the MSA, the Technology Transfer Agreement and this Agreement, as set forth in Sections 9.3(e) and 9.5 of the MSA and in Sections 10.2(b) and 10.2(c) of the Technology Transfer Agreement.

4.2.2

Regulatory Filing / Registration Change Control.

Penwest will determine whether changes to the Product or related to the Product will impact the current DMF and will apply for and receive approval for any required manufacturing amendment, change or addition to the Product DMF. Upon request, Patheon will provide assistance in the preparation and review of pertinent sections of new or supplemental regulatory applications before filing. Penwest will provide Patheon with copies of relevant sections of the Product DMF filings, as set forth in Section 7.8(b) of the MSA and Section 11.2 of the Technology Transfer Agreement. Penwest is responsible for all communications with Regulatory Authorities as well as for the approval, maintenance, and updating of the current DMF.

4.2.3	Regulatory Compliance.
	Patheon will ensure that Product(s) are manufactured and tested in strict compliance with cGMP for the manufacture of finished Product) as applicable, Regulatory Approvals and applicable Laws.

4.2.4	Government Agency Inspections, Communication and Requisitions.
	Patheon will permit all relevant inspections by Regulatory Authorities of premises, procedures, and documentation.

Page 7 of 25

Patheon will notify Penwest within three (3) Business Days after receipt of any notice of inspection from a Regulatory Authority and within one (1) Business Day after any Regulatory Authority request for Product samples, Batch documentation, or other information related to the Product.

Patheon will notify Penwest within one (1) Business Day after receipt of any Form 483’s warning letter or the like from any Regulatory Authority that relates to the Product; or if the supply of Product will be affected, or if the facilities used to produce, test or package the Product will be affected.

The responses from Patheon related to the Product will be reviewed and approved by Penwest prior to submission to the Regulatory Authority.

4.3 Component Control.

4.3.1

Test Methods and Specifications.

Penwest will give Patheon a copy of the Specifications and test methods to be used if Penwest issues Component Specifications. Patheon will create internal test methods and specifications in support of the Components; provided that all QC testing for Components will be conducted by Patheon using the methods and Specifications provided by Penwest to Patheon, or otherwise approved by Penwest in writing. Raw materials used in manufacture of Products hereunder shall be released as per USP/NF/EP or to Penwest’s specifications, as approved in writing by Penwest.

4.3.2	Component Destruction.
	Patheon has the right to either return to Penwest or dispose of any outdated or rejected Components. If Components are disposed of, disposal will be consistent with the nature of the Components and sent to a permitted waste disposal facility. Prior to such disposal:

Page 8 of 25

(i)	Patheon will send notice to Penwest about Patheon’s intent to dispose of the Component. If no direction is received from Penwest, Patheon will dispose of the Component no sooner than [**] days after the date of the notice.
(ii)	The Components will be disposed and destroyed in compliance with local environmental regulations and other applicable Laws, and performed in a secure and legal manner that prevents unauthorized use or diversion.

Patheon will maintain destruction records in accordance with Patheon’s SOP’s.

4.3.3 Vendor Audit Responsibility.

(i) Excipient Vendors:

a.	If Penwest stipulates an excipient vendor, Penwest will audit and approve the manufacturers/supplier and ensure cGMP compliance in accordance with Section 4.3.4 of this Agreement. The Penwest stipulated vendor(s) will be included on Penwest’s approved vendor list (attached hereto as Appendix D).
b.	If Patheon stipulates the excipient vendor, Patheon will audit and approve the manufacturers/supplier and ensure cGMP compliance in accordance with Patheon’s SOP. The Patheon stipulated vendor(s) will be included on Patheon’s approved vendor list (attached hereto as Appendix C).

(ii) Packaging Component Vendors:

a.	If Penwest stipulates a packaging Component vendor, Penwest will audit and approve the manufacturer/supplier and ensure cGMP compliance. The Penwest stipulated vendor(s) will be included on the approved vendor list (attached hereto as Appendix D).
b.	If Patheon stipulates the packaging Component vendor, Patheon will audit and approve the manufacturer/supplier and ensure cGMP compliance in accordance with Patheon’s SOP. The Patheon stipulated vendor(s) will be included on the approved supplier list (Appendix C).

Page 9 of 25

4.3.4	Penwest Furnished Components.
	Penwest is responsible for vendor qualification of Penwest furnished Components and for providing a certificate of compliance confirming the following:

(i)

That the Components are compliant with the provisions outlined in the “Note for Guidance on minimizing the risk of transmitting spongiform encephalopathy agents via human and veterinary medicinal products” (EMEA/410/01, Rev.2 or update)”; and

(ii)

A residual solvent certificate confirming that there is no potential for specific toxic solvents listed in the USP / ICH residual solvents Class I, Class II or Class III to be present and the Components, if tested, will comply with established USP / ICH requirements. If any of the solvents listed in the USP / ICH residual solvents Class I, Class II or Class III are used in the manufacture or are generated in the Manufacturing Process, solvents of concern will be indicated.

4.3.5	In-Coming Component Release.
	Prior to its use in the manufacture of any Product all Component(s) will be inspected, tested and released by Patheon against the Specification approved by Penwest.

4.4 Building, Facilities, Utilities and Equipment.

4.4.1	General.
	All buildings and facilities used in the manufacturing, packaging, testing and storage of any Components and/or Product will be of suitable size, construction and location to facilitate cleaning, and will be maintained in a good state of repair. Maintenance and cleaning records will be kept in accordance with Patheon’s SOP’s.

4.4.2

Equipment, Calibration and Preventative Maintenance.

All equipment used in the manufacturing, packaging, testing and stage of any Components and/or Product will be suitable for its intended use and appropriately located to allow for cleaning and maintenance. Calibration and maintenance records will be kept according to Patheon SOP’s for all critical equipment. Patheon will calibrate instrumentation and qualify computer systems used in the manufacture and testing of the Product in accordance with Patheon’s SOP’s.

Page 10 of 25

4.4.3	Environmental Monitoring Program.
	Patheon will perform and maintain an environmental monitoring program. The collected data will be reviewed and interpreted by the responsible person within Patheon’s quality unit. Any out of limit results impacting the Product will be reported immediately to Penwest and managed appropriately in accordance with Patheon SOPs.

4.5 Production Controls.

4.5.1	Master Batch Record.
	Penwest will provide the Product Specifications to Patheon and Patheon will manufacture Product in accordance with the Specifications.
	Patheon is responsible for preparing the Master Batch Records for the Product; provided however that both Patheon and Penwest are responsible for reviewing and approving such Master Batch Records prior to the manufacture of the Product.
	Patheon will not make changes to the approved Master Batch Records except through the established Patheon change control system, and all master document revisions will be approved by Penwest’s quality unit. Any changes made to approved Master Batch Records (prior to master revisions) must be reviewed and approved by Penwest’s quality unit prior to implementation.

4.5.2	Reprocessing and Rework.
	Patheon will not reprocess or rework the Product without the prior written consent of Penwest.
	Reprocessing is defined as the introduction of material back into the process and repeating a step, (e.g., redrying, remilling) using the same equipment and techniques of the established Manufacturing Process.
	Rework is defined as the introduction of material to one or more processing steps that are different from the established Manufacturing Process.

4.5.3	Personnel Training.
	Patheon will provide appropriate training for all employees. Each person engaged in the manufacture, packaging, testing, storage, and shipping of the Product will have the education, training, and

Page 11 of 25

experience necessary, consistent with cGMP and safety training requirements. All training will be documented and available upon request by Penwest.

4.6 Packaging, Labeling and Printed Components.

4.6.1

Packaging Documentation.

Penwest will provide Patheon with the Specifications for all packaging Components. Patheon will create internal test methods and specifications in support of the packaging Components; provided that all QC testing for Components will be conducted by Patheon using the methods and Specifications provided by Penwest to Patheon, or otherwise approved by Penwest in writing. Packaging Components used during the manufacture of Products hereunder shall be released as per USP/NF/EP or to Penwest’s specifications, as approved in writing by Penwest.

4.6.2	Printed Components and Artwork.
	Penwest will provide artwork and labeling text (drum label) specifications to Patheon. Patheon will create the labeling proofs which must be reviewed and approved in writing in advance by Penwest.

4.6.3	Test Methods.
	Penwest will provide test methods for packaging Components to Patheon. Where applicable, Patheon will provide test methods and validation for packaging Components purchased from vendors on the Patheon approved vendor list only (Appendix C).

4.7 Exception Reports (Deviations / Investigations).

4.7.1	Manufacturing Instruction Deviations.
	Patheon will document, investigate and resolve deviations from the approved Manufacturing Process, the Specifications and cGMP in accordance with Patheon’s SOP’s. Patheon will report all deviation report (“DR”) type deviations to Penwest’s responsible person. Patheon will provide copies of all DR’s to Penwest as part of the executed Batch record.

4.7.2	Notification of Deviations.
	Patheon will notify Penwest, via email, within [**] if any deviation occurs during manufacture of the Product.

Page 12 of 25

4.8 Release of Product.

4.8.1	Test Methods and Specifications.
	Penwest will provide to Patheon the finished Product Specifications and will supply validated analytical test methods to Patheon for the finished Product. Penwest and Patheon will perform a method transfer as considered necessary.

4.8.2

Batch Release for Shipment.

Batch review and release for shipment to Penwest will be the responsibility of Patheon’s Quality Assurance department who will act in accordance with Patheon’s SOP’s. Any problem discovered by Patheon likely to cause rejection of the Product will be communicated to Penwest directly along with any supporting documentation (i.e., OOS, Non-Conforming Report, etc.) of the problem. The communication should occur within one (1) Business Day after the discovery of the problem. The Product will be immediately placed in quarantine until a joint Patheon/Penwest material review board convenes to determine the final disposition of the Product. For each lot manufactured, Patheon will send via overnight mail (i.e: Fed Ex) a copy of the Batch record, certificate of analysis and other certificates in order to perform the Product Release to the attention of Penwest QA.

4.8.3	Certificate of Compliance.
	For each Batch released by Patheon for shipment to Penwest, Patheon will deliver to Penwest a certificate of compliance that will include a statement that the Batch has been manufactured in accordance with cGMPs, the Manufacturing Process and the Specifications.

4.8.4

Product Release.

Product shall not be shipped to Penwest or its designated shipping point unless and until (i) all applicable Batch records, certificates of analysis and other certificates have been provided to and reviewed by Penwest, and (ii) Penwest’s quality assurance representative has performed product release on such quantities of Product for shipment, in the case of both (i) and (ii), in accordance with the procedures set forth in this Quality Agreement. Penwest agrees that it shall review all Batch records and other certificates within 10 days after receipt of such documents from Patheon.

Page 13 of 25

4.9 Validation.

4.9.1	Master Validation Plan.
	Patheon will establish applicable master validation plans and maintain a validation program for the Product. Penwest will review and approve the master validation plan, performance qualification and process validation protocols and reports for the Product.

4.9.2	Cleaning Validation Program.
	Penwest will provide to Patheon toxicological information (if applicable) to be used in the development of a cleaning program. Patheon will maintain an appropriate cleaning and cleaning validation program.

4.9.3	Analytical Method and Process Transfer.
	Penwest must ensure that its analytical methods and manufacturing procedures) are validated. If the methods and procedures are not validated by Penwest, then Patheon may assist in validation development with the costs being borne by Penwest.

4.10 Change Control.

4.10.1	General.
	Patheon will notify and obtain approval from Penwest before implementing any proposed changes to the Process, Components, testing, equipment or the Facility as it pertains to the Product.
	Penwest will be responsible for submitting the proper amendments to the Regulatory Authorities for any changes to the current DMF for the Product.
	Following validation of a process change, Patheon will deliver a copy of the related validation report to Penwest and the associated stability data, if applicable, as it becomes available.

4.11 Documentation.

4.11.1	Record Retention.
	Patheon will maintain all Batch records for a minimum of [**] after the applicable Product expiration date and supply all these records to Penwest upon request.

Page 14 of 25

Patheon will maintain records and evidence on the testing of Components, packaging/labeling and other Components for [**] years after the applicable Components were last used in the manufacture of the Product.

At the end of the above noted retention period, Penwest will be contacted concerning the future storage or destruction of the documents.

4.12 Laboratory Controls.

4.12.1	Specifications and Test Methods.
	Patheon will test and approve the finished Product in accordance with the approved Specifications, cGMP, analytical methods, and Patheon’s SOP’s.

4.12.2	Out of Specifications (OOS) / Out of Trend (OOT).
	Patheon will notify Penwest’s quality unit of confirmed out-of-Specification (“OOS”) or out-of-trend (“OOT”) results within one (1) Business Day. Patheon will generate a DR type deviation as per Patheon SOP’s and obtain approval of the DR from Penwest’s responsible person within their quality unit.

4.12.3	Method Transfer of Validated Methods.
	Penwest will provide Patheon with validated test methods for non-compendial excipients. Penwest will transfer the validated methods to Patheon using approved protocols.

4.13 Stability.

4.13.1	Sample Storage.
	Patheon will store stability samples as defined in the current MSA or Technology Transfer Agreement.

4.13.2	Stability Studies and Protocol.
	Stability Studies will be conducted in accordance with the MSA or the Technology Transfer Agreement, as applicable.

4.13.3	Stability Failures.
	Patheon will notify Penwest of any stability failure for Product supplied to Penwest. If a result indicates that a Product has failed

Page 15 of 25

to remain within stability Specifications, Patheon will notify Penwest within one (1) Business Day.

     4.13.4 Termination of the MSA or the Technology Transfer Agreement.

If the MSA or the Technology Transfer Agreement is terminated, Patheon will continue to provide Penwest with stability data supporting the acceptability of the Product until all Product distributed by Penwest has reached the end of its shelf-life.

4.14 Annual Product Review.

     4.14.1 General.

Penwest will complete the annual Product review in accordance with requirements of the Product Regulatory Approval. Patheon will provide copies of all information and correspondence necessary to support the annual Product reviews when requested by Penwest.

4.15 Storage and Distribution.

     4.15.1 General.

Patheon will ship Product in accordance with the agreed qualified transportation requirements provided by Penwest to Patheon.

     4.15.2 Product Storage and Shipment Changes.

Patheon will communicate any proposed changes in storage or shipping to Penwest for review and approval, such approval not to be unreasonably withheld.

     4.15.3 Product Quarantine.

Patheon will have a system in place for assuring that Penwest unreleased Product is not shipped unless authorized by Penwest’s quality unit.

4.16 Product Complaints.

     4.16.1 Complaint Investigation.

Penwest will investigate and resolve all medical and non-medical Product complaints. Patheon will investigate all Patheon manufacturing and packaging type Product complaints related to the Manufacturing Services provided. The timing of the complaint investigations will be within 30 days. If the complaint is deemed to be critical in nature, then both Parties will agree to a shorter

Page 16 of 25

timeframe. Penwest will retrieve complaint sample(s) and forward them to Patheon in a timely manner to facilitate a complete and comprehensive investigation.

4.17 Product Recall.

Product Recalls shall be addressed in accordance with Sections 6.2, 6.3 and 6.5 of the MSA.

4.18 Retention Samples.

     4.18.1 Component Retention Samples.

Patheon will keep a retention sample of each Component received by Patheon and used to manufacture the Product. The retention sample will consist of at least [**] the necessary quantity for all Quality Control tests required to determine whether the Components meets required specifications.

The retention samples will be stored by Patheon under controlled conditions in accordance with cGMP storage requirements for [**]. The retention samples will be made available by Patheon to Penwest, if requested

     4.18.2 Finished Product Retention Samples.

Retention samples of finished Product will be retained by Patheon for one (1) year past Product expiry or such longer period as required by applicable Law.

Page 17 of 25

SECTION 5: MISCELLANEOUS

5.1 Additional Product.

     Additional products may be added to this Agreement by amending Appendix A hereof, and upon such amendment the additional products will be deemed Products under this Agreement and shall be governed by the general conditions hereof.

5.2 Notices.

     Except as otherwise expressly set forth in this Quality Agreement, any notice, approval, instruction or other written communication required or permitted hereunder will be made in accordance with Section 13.9 of the MSA.

5.3 Entire Agreement.

     This Agreement, together with the Master Services Agreement, the Technology Transfer Agreement and the Confidentiality Agreement, constitutes the full, complete, final and integrated agreement between the Parties relating to the subject matter hereof and supersedes all previous written or oral negotiations, commitments, agreements, transactions, or understandings concerning the subject matter hereof. Any modification, amendment, or supplement to this Agreement must be in writing and signed by authorized representatives of both Parties. In case of conflict, the prevailing order of documents will be the Master Services Agreement or the Technology Transfer Agreement (as applicable), this Quality Agreement and the Confidentiality Agreement.

5.4 Other Terms.

     Sections 13.1, 13.4, 13.5, 13.6, 13.10, 13.12, 13.13, 13.14, 13.15, 13.16 and 13.17 of the Master Services Agreement shall apply to this Agreement, and are hereby incorporated herein by reference.

Page 18 of 25

     IN WITNESS WHEREOF, the Parties have caused their duly authorized officer to execute and deliver this Quality Agreement as of the Effective Date:

Penwest Pharmaceuticals Co.
By:	/s/ Paula D. Buckley	Date:	June 8, 2010
	/s/ (Paula D. Buckley, Vice President QA/QC)
Patheon Inc.
By:	/s/ Brian J. Dale	Date:	June 7, 2010
	(Brian J. Dale, Director Quality Operations)

Page 19 of 25

SECTION 6: APPENDICES

• Appendix A: Product(s)

• Appendix B: Quality Contacts

• Appendix C: Patheon Approved Supplier List

• Appendix D: Penwest Approved Supplier List

• Appendix E: Patheon Approved Contract Laboratories List

Page 20 of 25

APPENDIX A: PRODUCT(S)

Products(s)	Galenic Form	Dosage (Strength)
TIMERx-N

A-1

APPENDIX B: QUALITY CONTACTS

	Patheon	Penwest
Responsibility	Quality Assurance	Quality Assurance
Name	[**]	[**]
Title	[**]	[**]
Phone	[**]	[**]
Fax		[**]
E-mail	[**]	[**]
Address	[**]	[**]
Responsibility	Regulatory Affairs	Regulatory Affairs
Name	[**]	[**]
Title	[**]	[**]
Phone	[**]	[**]
Fax		[**]
E-mail	[**]	[**]
Address	[**]	[**]
Responsibility	Product Complaints	Audits
Name	[**]	[**]
Title		[**]
Phone		[**]
Fax		[**]
E-mail		[**]
Address		[**]
Responsibility	Product Release	Product Release
Name	[**]	[**]
Title		[**]
Phone		[**]
Fax		[**]
E-mail		[**]
Address		[**]
Responsibility	Account Manager	Account Manager
Name	[**]	[**]
Title	[**]	[**]
Phone	[**]	[**]
Fax		[**]
E-mail	[**]	[**]
Address	[**]	[**]

B-1

APPENDIX C: PATHEON APPROVED VENDOR LIST

Raw Material/Component	Supplier
[**]	[**]

C-1

APPENDIX D: PENWEST APPROVED VENDOR LIST

Raw Material/Component	Supplier
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]

D-1

APPENDIX E: PATHEON APPROVED CONTRACT LABORATORIES LIST

Contract Laboratory	Address	Contact Information
[**]	[**]	[**]
[**]	[**]	[**]
[**]	[**]	[**]
[**]	[**]	[**]
[**]	[**]	[**]
[**]	[**]	[**]
[**]	[**]	[**]
[**]	[**]	[**]
[**]	[**]	[**]
[**]	[**]	[**]

     This list does not include any contract laboratories specified by individual clients of Patheon.

E-1

SCHEDULE F

TECHNICAL DISPUTE RESOLUTION

     Technical Disputes which cannot be resolved by negotiation as provided in Section 12.2 of this Agreement will be resolved in the following manner:

1. Appointment of Expert. Within [**] Business Days after a Party requests under Section 12.2 that an expert be appointed to resolve a Technical Dispute, the Parties will jointly appoint a mutually acceptable expert with experience and expertise in the subject matter of the dispute. If the Parties are unable to so agree within the [**] Business Day period, or in the event of disclosure of a conflict by an expert under Paragraph 2 hereof which results in the Parties not confirming the appointment of the expert, then an expert (willing to act in that capacity hereunder) will be appointed by an experienced arbitrator on the roster of the International Chamber of Commerce.

2. Conflicts of Interest. Any person appointed as an expert will be entitled to act and continue to act as an expert even if at the time of his appointment or at any time before he gives his determination, he has or may have some interest or duty which conflicts or may conflict with his appointment if before accepting the appointment (or as soon as practicable after he becomes aware of the conflict or potential conflict) he fully discloses the interest or duty and the Parties will, after the disclosure, have confirmed his appointment.

3. Not Arbitrator. No expert will be deemed to be an arbitrator and the provisions of the Arbitration Act (Ontario) or of any other applicable statute (foreign or domestic) and the law relating to arbitration will not apply to the expert or the expert’s determination or the procedure by which the expert reaches his determination under this Schedule F.

4. Procedure. Where an expert is appointed:

(a) Timing. The expert will be so appointed on condition that (i) he or she promptly fixes a reasonable time and place for receiving representations, submissions or information from the Parties and that he or she issues the authorizations to the Parties and any relevant Third Party for the proper conduct of his or her determination and any hearing and (ii) he or she renders his decision (with full reasons) within [**] Business Days (or another other date as the Parties and the expert may agree) after receipt of all information requested by him or her under Paragraph 4(b) hereof.

(b) Disclosure of Evidence. The Parties undertake one to the other to give to any expert all the evidence and information within their respective possession or control as the expert may reasonably consider necessary for determining the matter before him or her, which information such Party will disclose promptly and in any event within [**] Business Days after a written request from the relevant expert to do so.

(c) Advisors. Each Party may appoint any counsel, consultants and advisors as it feels appropriate to assist the expert in his or her determination and so as to present their respective cases so that at all times the Parties will co-operate and seek to narrow and limit the issues to be determined.

F-1

(d) Appointment of New Expert. If within the time specified in Paragraph 4(a) above the expert will not have rendered a decision in accordance with his or her appointment, a new expert may (at the request of either Party) be appointed and the appointment of the existing expert will thereupon cease for the purposes of determining the matter at issue between the Parties save this if the existing expert renders his or her decision with full reasons prior to the appointment of the new expert, then this first decision will have effect and the proposed appointment of the new expert will be withdrawn.

(e) Final and Binding. The determination of the expert will, except for fraud or manifest error, be final and binding upon the Parties.

(f) Costs. Each Party will [**] for any matter referred to an expert hereunder and, in the absence of express provision in the Agreement to the contrary, [**].

For greater certainty, the release of the Products for sale or distribution under the applicable marketing approval for the Products will not by itself indicate compliance by Patheon with its obligations for the Manufacturing Services and further that nothing in this Agreement (including this Schedule F) will remove or limit the authority of the relevant qualified person (as specified by the Quality Agreement) to determine whether the Products are to be released for sale or distribution.

F-2

SCHEDULE G

CONFIDENTIALITY AGREEMENT

[To be provided.]

G-1

SCHEDULE H

SHIPPING LOGISTICS PROTOCOL

Shipping will be carried out under the following terms and conditions:

Exports of Products from Canada to the United States

1. Shipping terms will be [**] (INCOTERMS 2000), the Facility.

2. Patheon, as the exporter of record from Canada, will carry out all customs formalities necessary to export the Products including declaring the value of the Products being exported from Canada by completing a B-13 Export Declaration form which will be completed showing Patheon as the exporter of record of the Products with a value equivalent to the Price of the Products to Penwest.

3. Patheon will report exports directly to Canada Revenue Agency and Statistics Canada at the time of shipment from the Facility.

H-1

[CLIENT LETTERHEAD]

Form of Logistics Routing Guide

Patheon Inc.
[INSERT ADDRESS]

Attention:                     , A/M

1. Routine Routing/Shipping Instructions

The following lists the recommended agents and procedures for shipments of [PRODUCT NAME] from Patheon’s manufacturing site at [INSERT SITE ADDRESS], Ontario, Canada to [INSERT DESTINATION NAME AND ADDRESS].

AGENTS:

• Freight forwarder  Contact:            PH: ( )

• Customs broker     Contact:            PH: ( )

Questions concerning transport logistics should be directed to [CLIENT CONTACT INFO].

The following documents must be provided to the carrier for transport and customs purposes:

• Proforma Invoice

• Bill of Lading (“B/L”)

• Applicable Permits/Declarations

• Packing List

• If eligible, NAFTA Certificate of Origin will be provided in blanket form yearly to [INSERT CLIENT’S NAME] or [INSERT CLIENT’S NAME] broker.

Upon shipment departure from Patheon, a full set of documents must also be faxed to the following individuals:

• [INSERT CLIENT CONTACT FAX OR EMAIL]

Freight is shipped to:

[INSERT DESTINATION NAME AND ADDRESS]

Information to be provided on Proforma Invoice.

• Net Quantity

• Patheon Code & Lot Number

• Penwest Lot Number/ purchase order (“PO”)Number

• C$ / Unit Including Assist Value & Toll Manufacturing Charge

• HTS (Harmonize Tariff Schedule)#

• NDC/IND/ANDA

• FDA Product Code

• Ship Date

• Patheon Bill of Lading Number

• Gross Weight

• Number of Pallets

Assist Values:

Information to be provided on Bill of Lading:

• B/L Number

• Carrier

• Origin Point

• Shipper Information

• Consignee

• Consignee Address

• Ship Date

• Number of Pallets

• Gross Weight

• PO Number for each Product/Lot

• Description of Goods Indication PC, Lot Number Quantity

• Seal Number

• Freight Terms (FCA)

• Carrier Signature

Information to be provided on Packing List:

• Ship date

• Bill of Lading Number

• Number of Pallets

• Weight

• Product Description

• Patheon Code Number, if applicable

• Patheon Lot Number, if applicable

• Number of Full Cartons (drums if bulk) x Quantity Per Carton

• Number of Partial Cartons (drums if bulk) x Quantity Per Carton

• Total Number of Cartons with Total Quantity Shipped

2. Non-Routine Routing/Shipping Instructions

As non-standard shipments are unique, the specific situations are to be discussed and agreed to by both Patheon and Penwest prior to shipment. Examples of non-standard shipments are shipping study samples, clinical/development Batches, etc.

Yours truly,

                                                                                
AUTHORIZED SIGNATORY

CLIENT NAME

EX-10.2

Exhibit 10.2

FOURTH AMENDMENT
TO THE AMENDED AND RESTATED STRATEGIC ALLIANCE AGREEMENT

     This Fourth Amendment to the Amended and Restated Strategic Alliance Agreement (this “Amendment”), effective as of April 8, 2010 (the “Amendment Date”) is made by and among Penwest Pharmaceuticals Co., a Washington Corporation with its principal place of business at 2981 Route 22, Patterson, New York 12563 (“Penwest”) and Endo Pharmaceuticals Inc., a Delaware corporation with its principal place of business at 100 Endo Boulevard, Chadds Ford, Pennsylvania 19317 (“Endo”), and amends the Amended and Restated Strategic Alliance Agreement, dated April 2, 2002, between Penwest and Endo (as amended) (the “Strategic Alliance Agreement”). Penwest and Endo are referred to in this Amendment as the “Parties” and individually as a “Party”. Any capitalized terms used but not defined herein will have the meaning ascribed to such terms in the Strategic Alliance Agreement.

RECITALS

     WHEREAS, Penwest and Endo are parties to the Strategic Alliance Agreement, pursuant to which the Parties intended that Endo would have an exclusive license to certain Penwest Product Technology, Penwest Patents and Penwest Confidential Information in the relevant field of use;

     WHEREAS, on June 22, 2006, the FDA approved Endo’s new drug application No. 21-610 for OPANA^® ER tablets, which contain oxymorphone hydrochloride, under § 505(b) of the Federal Food, Drug and Cosmetic Act, 21 U.S.C. § 355(b), for the relief of moderate-to-severe pain in patients requiring continuous, around-the-clock opioid treatment for an extended period of time;

     WHEREAS, Endo submitted information regarding certain of the Penwest patents (including United States Patent Nos. 5,662,933 (the “‘933 Patent”) and 5,958,456 (the “‘456 Patent” and each of the ‘933 Patent and the ‘456 Patent, a “Patent”))) to the FDA for listing in its publication, the Approved Drug Products with Therapeutic Equivalence Evaluations (referred to as the “Orange Book”), with respect to OPANA^® ER tablets;

     WHEREAS, at least six generic companies have filed Abbreviated New Drug Applications (“ANDAs”) seeking approval to engage in the commercial manufacture, use, and sale of oxymorphone hydrochloride extended-release tablets, as generic versions of OPANA^® ER tablets, prior to the expiration of certain of the Penwest Patents (as defined in the Strategic Alliance Agreement) listed in the Orange Book with respect thereto;

     WHEREAS, Endo and Penwest have brought suit against each of those generic companies pursuant to the Hatch-Waxman Act for infringement of the ‘456 and/or ‘933 Patents, and in each instance, Endo and Penwest alleged that Penwest is the owner and assignee of those Patents, and that Endo is an exclusive licensee of the Patents in the relevant field of use pursuant to the Strategic Alliance Agreement with Penwest;

     WHEREAS, Endo and Penwest reached an agreement to settle their claims against Actavis South Atlantic LLC (“Actavis”), one of the generic companies they sued for patent infringement, and in connection therewith, entered into a Settlement and License Agreement with Actavis;

     WHEREAS, pursuant to the Settlement and License Agreement with Actavis, Endo and Penwest granted Actavis a non-exclusive license to the ‘456 Patent, effective as of the Commencement Date defined therein (“Actavis License Commencement Date”), along with a covenant not to sue Actavis for infringement of the ‘933 Patent with respect to certain activities that Actavis may undertake on or after the Actavis License Commencement Date;

     WHEREAS, the Actavis License Commencement Date has not yet occurred, such that there is no person or entity other than Endo that has a license to the ‘456 or ‘933 Patents within the relevant field of use which is effective as of the Amendment Date;

     WHEREAS, Impax Laboratories, Inc. (“Impax”), one of the generic companies that Endo and Penwest have sued for patent infringement, recently asserted for the first time that Endo lacks standing to sue for infringement of the ‘456 and ‘933 Patents because it does not have an appropriate exclusive license to those Patents within a relevant field of use;

     WHEREAS, Endo and Penwest disagree with Impax, and hereby confirm that it was and always has been the Parties’ intent that Endo would have an exclusive license to the Penwest Patents (as defined in the Strategic Alliance Agreement), including the ‘456 and ‘933 Patents, in the relevant field of use;

     WHEREAS, to clarify their intent and in order avoid further litigation and expense over Endo’s standing to sue for infringement of the ‘456 and ‘933 Patents, the Parties hereby enter into this Amendment;

     NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth below, the Parties agree as follows:

1. Amendments to Strategic Alliance Agreement. Penwest and Endo hereby amend the Strategic Alliance Agreement as follows, solely with respect to the United States, such amendments to become effective as of the Amendment Date:

     (a) Endo License. Section 6 of the Strategic Alliance Agreement is amended by adding the following:

“6.3.1.1. Subject to the non-exclusive license granted to Actavis pursuant to the Actavis Settlement and License Agreement, which license is not effective as of the Amendment Date and shall not become effective until the Actavis License Commencement Date, Penwest hereby grants to Endo an exclusive license under the

2

Penwest Patents to Endo to make, have made, use, sell, offer for sale, and import in the United States solid-dosage forms of extended-release pharmaceutical products for oral administration in humans containing Oxymorphone (or Oxymorphone metabolites, Oxymorphone derivatives and/or Oxymorphone salts) as the only active therapeutic drug substance (but excluding the Product) which fall within the scope of the Penwest Patents (“Licensed Oxymorphone Product”). Such license does not extend to the making of TIMERx or Formulated TIMERx (which is covered by Section 6.6 hereto), but does cover the incorporation of the same into any Licensed Oxymorphone Product and the sale of the same as part of the Licensed Oxymorphone Product. Such license shall be exclusive even as to Penwest and its Affiliates, and Endo shall have the right to grant sublicenses under this Section 6.3 with the prior written consent of Penwest, which consent shall not be unreasonably withheld. Penwest will, throughout the License Term, promptly notify Endo of all Penwest Patents referred to in Section 1.32 of the Definitions Exhibit and provide Endo with access to all of the same, solely for use within the scope of the license stated in this section.”

     (b) Endo’s Continuing License. Section 6.7 of the Strategic Alliance Agreement is amended by adding the words “and Licensed Oxymorphone Products” after the first three occurrences of the word “Product” (i.e., through Section 6.7.2) in such Section.

     (c) Infringement. Section 11.1 of the Strategic Alliance Agreement is amended by replacing the first sentence of such Section in its entirety with the following:

“11.1 Notice of Infringement. Penwest shall promptly inform Endo of any suspected infringement of any of the Penwest Patents or Penwest Product Technology Patents or the infringement or misappropriation of the TIMERx Production Technology or Penwest Product Technology by a third party, to the extent such infringement or misappropriation involves the manufacture, use or sale of the Product, a substitutable or directly competitive product in the Territory, or any Licensed Oxymorphone Product (“Covered Infringement”).”

     (d) Patent Enforcement Litigation. Section 11.7 of the Strategic Alliance Agreement is amended by adding the words “or a Licensed Oxymorphone Product” after each occurrence of the word “Product” in such Section.

     (e) Definition of Exclusivity Period. Section 1.20 of the Definitions Exhibit of the Strategic Alliance Agreement is amended by adding the words “and Licensed Oxymorphone Products” after the word “Product” in such Section.

     (f) Financials for Licensed Oxymorphone Product. Sections 1.45, 4.5.1, 4.6.1, 4.8 and 4.11 of the Strategic Alliance Agreement are amended by adding the words “or Licensed Oxymorphone Product” after each occurrence of the word “Product” in such Sections.

3

2. Entire Agreement. Except as expressly amended by this Amendment, no other portion of the Strategic Alliance Agreement is amended and all of the terms, covenants and conditions of the Strategic Alliance Agreement shall remain in full force and effect to the same extent as if fully set forth herein. For the avoidance of doubt, nothing in Section 1 shall amend the Strategic Alliance Agreement with respect to any country in the Territory other than the United States, and Section 6.4 of the 2002 Agreement shall continue to operate as it did immediately prior to the 2007 Amendment Effective Date.. The Parties agree that all references in the Strategic Alliance Agreement to “this Agreement” shall be deemed to include the provisions of this Amendment.

3. Governing Law. This Amendment and all matters or issues collateral thereto shall be governed by and construed in accordance with the laws of the State of New York without regard to its conflict of laws rules.

4. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall constitute an original but all of which together shall constitute but a single document.

     IN WITNESS WHEREOF, the Parties hereto have caused this Amendment to be duly executed as of the day and year first above written.

PENWEST PHARMACEUTICALS CO.		ENDO PHARMACEUTICALS INC.
By:	/s/ Jennifer L. Good	By:	/s/ Caroline B. Manogue
Name: Jennifer L. Good		Name: Caroline B. Manogue
Title: President and CEO		Title: Executive VP, Chief Legal Officer, and Secretary

4

EX-10.3

Exhibit 10.3

FIFTH AMENDMENT TO THE AMENDED AND RESTATED STRATEGIC
ALLIANCE AGREEMENT

     This Fifth Amendment to the Amended and Restated Strategic Alliance Agreement (this “Amendment”) dated as of June 8, 2010 is made by and between PENWEST PHARMACEUTICALS CO., a corporation organized and existing under the laws of the State of Washington, with its principal place of business at 2981 Route 22, Patterson, New York 12563 (“Penwest”), and ENDO PHARMACEUTICALS INC., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 100 Endo Boulevard, Chadds Ford, Pennsylvania 19317 (“Endo”), and amends the Amended and Restated Strategic Alliance Agreement, dated April 2, 2002, between Penwest and Endo (as amended, the “Strategic Alliance Agreement”). Any capitalized terms used but not defined in this Amendment will have the meaning ascribed to such terms in the Strategic Alliance Agreement. Penwest and Endo are referred to in this Amendment as the “Parties” and individually as a “Party”. Any capitalized terms used but not defined herein will have the meaning ascribed to such terms in the Strategic Alliance Agreement.

     In consideration of the mutual covenants and conditions herein set forth, the receipt and sufficiency of which consideration is hereby acknowledged, the Parties agree as follows:

1. AMENDMENT TO ROYALTIES

     1.1 Effective April 1, 2010 and continuing through December 31, 2012 (the “First Royalty Reduction Period”), the Royalty rate set forth in Section 4.5.1 of the Strategic Alliance Agreement with respect to the Product shall not exceed 22% as a percentage of U.S. Product Net Sales during such period, subject to the following sentences. During the fourth calendar quarter of 2012, Penwest and Endo shall calculate the difference between the amount of Royalties for Product that would have been payable by Endo to Penwest during the First Royalty Reduction Period through the third calendar quarter of 2012 as if the Royalty rate had not been capped at 22% as provided in the first sentence of this paragraph and the amount of Royalties payable during such period giving effect to the 22% cap on the Royalty rate as provided in this paragraph. The Royalty rate on U.S. Product Net Sales shall be adjusted during the fourth calendar quarter of 2012 to such percentage of U.S. Product Net Sales for Product for such calendar quarter as will result in the Royalties payable by Endo to Penwest in respect to U.S. Product Net Sales for Product to be $7,300,000 lower for the First Royalty Reduction Period than the aggregate Royalties would have been for Product for such period had the Royalty rate not been adjusted for such period as provided in this paragraph; provided, however, that Penwest shall have no obligation to make any payment to Endo as a result of the adjustments in this paragraph.

     1.2 Effective January 1, 2013 and continuing through December 31, 2013 (the “Second Royalty Reduction Period”), the Royalty rate set forth in Section 4.5.1 of the Strategic Alliance Agreement with respect to the Product shall not exceed 20% as a percentage of U.S.

-1-

Product Net Sales during such period, subject to the following sentences. During the fourth calendar quarter of 2013, Penwest and Endo shall calculate the difference between the amount of Royalties for Product that would have been payable by Endo to Penwest for the Second Royalty Reduction Period through the third calendar quarter of 2013 as if the Royalty rate had not been capped at 20% as provided in the first sentence of this paragraph and the amount of Royalties payable during such period giving effect to the 20% cap on the Royalty rate as provided in this paragraph. The Royalty rate on U.S. Product Net Sales shall be adjusted for the fourth calendar quarter of 2013 to such percentage of U.S. Product Net Sales for Product during such period as will result in the aggregate Royalties payable by Endo to Penwest in respect to U.S. Product Net Sales for Product to be $700,000 lower for the Second Royalty Reduction Period than the aggregate Royalties would have been for Product for such period had the Royalty rate not been adjusted for such period as provided in this paragraph; provided, however, that Penwest shall have no obligation to make any payment to Endo as a result of the adjustments in this paragraph.

     1.3 Notwithstanding any other provision to the contrary, the Parties agree that sales of those Impax Products (as defined in the Settlement Agreement) which are covered only by the Existing Patents (as defined in the Settlement Agreement) and sold during the applicable Exclusivity Period (as defined in the Settlement Agreement) shall not be considered sales of Licensed Oxymorphone Products and no financial consideration, including, without limitation, royalties or sales milestones, shall be due to Penwest with respect to such sales. For all other Impax Product sales, any payments received by Endo from Impax with respect to such sales shall be deemed to be “Applicable Sublicense Consideration” and Penwest shall be entitled to payment thereon pursuant to the Agreement. Penwest shall not be entitled to payment of any kind with respect to the sale of any Licensed Oxymorphone Products for which Endo receives no consideration. “Settlement Agreement” means the Settlement and License Agreement entered into among Penwest, Endo and Impax Laboratories, Inc. (“Impax”) concurrently herewith.

     1.4 The Parties agree that Endo shall be solely responsible for all payments to Impax pursuant to the Settlement Agreement and that Endo may not deduct such payments from Net Sales or offset such payments against any amounts owed by Endo to Penwest pursuant to the Strategic Alliance Agreement.

2. MISCELLANEOUS

     2.1 Except as set forth herein, no other portion of the Strategic Alliance Agreement is hereby amended and the terms of the Strategic Alliance Agreement shall continue in full force and effect. All references in the Strategic Alliance Agreement to “this Agreement” shall be deemed to include the provisions of this Amendment.

     2.2 This Amendment, together with the Strategic Alliance Agreement, constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral between the Parties with respect to the subject matter hereof.

     2.3 Any terms of this Amendment may be amended, modified or waived only in a writing signed by both Parties.

-2-

     2.4 This Amendment shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without regard to its conflict of laws rules.

     2.5 Neither Party shall issue any press release or make any public announcements regarding the subject matter of this Amendment and related provisions of the Strategic Alliance Agreement, as amended hereby, without the prior written consent of the other Party, which will not be unreasonably withheld; provided, however, that notwithstanding the foregoing, either Party shall have the right to issue press releases and to make public announcements regarding the subject matter of this Amendment and related provisions of the Strategic Alliance Agreement, as amended hereby, without the consent of the other Party in order to comply with disclosure obligations that are imposed by applicable law, regulation or legal process, including without limitation by rules and regulations under applicable securities laws and by rules and regulations of any stock exchange or NASDAQ, provided that the Party complying with any such disclosure requirement shall, if practicable, provide the other Party with an opportunity to review and comment on the content of any such disclosure, to the extent such content has not previously been disclosed publicly.

[Remainder of Page Intentionally Left Blank]

-3-

IN WITNESS WHEREOF, the Parties have executed this Agreement on the date first above written.

ENDO PHARMACEUTICALS INC.
By:	/s/ David P. Holveck
Name and Title: President and CEO
Date: June 7, 2010
PENWEST PHARMACEUTICALS CO.
By:	Jennifer L. Good
Name and Title: President and CEO
Date: June 8, 2010

-4-

EX-10.4

Exhibit 10.4

CONFIDENTIAL
EXECUTION VERSION

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

SETTLEMENT AND LICENSE AGREEMENT

This SETTLEMENT AND LICENSE AGREEMENT (“Agreement”), effective as of the Effective Date (as defined below), is made by and among Endo Pharmaceuticals Inc., a Delaware corporation having its principal place of business at 100 Endo Boulevard, Chadds Ford, PA 19317 (“Endo”), Penwest Pharmaceuticals Co., a Washington corporation having its principal place of business at 2981 Route 22, Suite 2, Patterson, NY 12563 (“Penwest”), and Impax Laboratories, Inc., a Delaware corporation having its principal place of business at 30831 Huntwood Avenue, Hayward, California 94544 (“Impax”). Endo, Penwest and Impax are hereinafter collectively referred to as the “Parties”, and each individually as a “Party”.

RECITALS

     WHEREAS, Endo, Penwest and Impax are parties to patent infringement litigations in the United States District Court for the District of New Jersey (as further defined below, the “New Jersey Actions”); and

     WHEREAS, the Parties seek to resolve the New Jersey Actions without further litigation.

     NOW, THEREFORE, in consideration of the covenants, conditions and obligations expressed herein, and intending to be legally bound thereby, the Parties hereto agree as follows:

ARTICLE I.
DEFINITIONS

     Section 1.1. Definitions. The following terms will have the meanings provided below:

     “Affiliate” means any person, corporation, company, partnership, joint venture or other entity controlling, controlled by or under common control with the applicable party. For such purpose, the term “control” means the holding of fifty percent (50%) or more of the common voting stock or ordinary shares in, or the right to appoint fifty percent (50%) or more of the directors of, or otherwise possessing the power to direct or cause the direction of the management and policies of the said corporation, company, partnership, joint venture or entity.

     “Agreement” has the meaning specified in the introductory paragraph hereof.

     “ANDA” means an Abbreviated New Drug Application, as defined in 21 U.S.C. 355(j) et seq., and the regulations promulgated thereunder.

     “Commencement Date” means:

     (a) with respect to the 5mg, 10mg, 20mg, 30mg and 40mg dosage strengths of the Impax Product and any future dosage strengths of the Impax Product under the Impax

Settlement and License Agreement

ANDA for which Impax obtains first applicant status as described in Section 505(j)(5)(B)(iv) of the FD&C Act, the date that is the earliest of:

          (i) January 1, 2013;

          (ii) thirty (30) days after the date of a final federal court decision that is no longer subject to appeal (other than by a petition for writ of certiorari) holding all asserted and adjudicated claims of the Opana^® ER Patents to be (A) invalid or unenforceable in any lawsuit or (B) non-infringed in a lawsuit involving Endo and/or Penwest in response to a filing by a Third Party under Section 505(j) of the FD&C Act referencing the Opana^® ER Product; and

          (iii) the date that the patent information submitted under Section 505(b) of the FD&C Act is withdrawn by Endo and/or Penwest (21 U.S.C. § 355(j)(5)(D)(i)(I)); and

     (b) with respect to the 7.5mg and 15mg dosage strengths of the Impax Product and any future dosage strengths of the Impax Product under the Impax ANDA for which Impax does not obtain first applicant status as described in Section 505(j)(5)(B)(iv) of the FD&C Act, the date that is the earliest of:

          (i) January 1, 2013;

          (ii) the date of a final federal court decision that is no longer subject to appeal (other than by a petition for writ of certiorari) holding all asserted and adjudicated claims of the Opana^® ER Patents to be (A) invalid or unenforceable in any lawsuit or (B) non-infringed in a lawsuit involving Endo and/or Penwest in response to a filing by a Third Party under Section 505(j) of the FD&C Act referencing the Opana^® ER Product; and

          (iii) the date on which a Third Party commences commercial sale of an FDA approved generic extended release oxymorphone product that is AB rated to Opana^® ER Product, provided that if such commercial sale is made at risk, and Endo and/or Penwest are successful in causing such commercial sale to halt, then the Commencement Date will be deemed not to have occurred and Impax will not launch or continue selling the Impax Product as a result of such commercial sale.

     “Covenant Not To Sue” has the meaning specified in Section 4.1(b).

     “Dismissal Date” means the date on which the Stipulation of Dismissal and Order attached hereto as Appendix A is approved and entered as an order of the court by the court in the New Jersey Actions.

     “DOJ” has the meaning specified in Section 2.1.

     “Effective Date” means June 8, 2010.

     “Endo” has the meaning specified in the introductory paragraph hereof.

Page 2

Settlement and License Agreement

     “Endo Credit” means an amount equal to the product obtained by multiplying (i) the difference between the [**] and the [**] by (ii) the [**]. For the sake of clarity, if the difference reflected in clause (i) were [**], then clause (i) would be equal to [**], and not [**].

     “Endo Net Sales” means the gross amounts invoiced by Endo for the sale of Endo Products by Endo to Third Parties, less deductions customarily deducted by Endo in the ordinary course in accordance with U.S. generally accepted accounting principles, consistently applied, throughout the period beginning July 1, 2010 and ending on the day before the Commencement Date.

     “Endo Product” means the Opana^® ER Products for which Impax has obtained first applicant status, as described in Section 505(j)(5)(B)(iv) of the FD&C Act.

     “Exclusivity Period” has the meaning specified in Section 4.1(c).

     “Existing Patents” has the meaning specified in Section 4.1(a).

     “FDA” means the United States Food and Drug Administration and any successor agency or authority thereto.

     “FD&C Act” means the Federal Food, Drug and Cosmetic Act, 21 U.S.C. § 301 et seq.

     “FDB Data” means data maintained by First DataBank, Incorporated relating to the sale of pharmaceutical drug products in the Territory.

     “FTC” has the meaning specified in Section 2.1.

     “Impax” has the meaning specified in the introductory paragraph hereof.

     “Impax ANDA” means ANDA No. 79-087, and any amendments or supplements thereto.

     “Impax Parties” has the meaning specified in Section 4.1(b).

     “Impax Product” means any product that (i) is the subject of the Impax ANDA as of the Effective Date, or (ii) is the subject of the Impax ANDA and which is substantially equivalent to those products that are the subject of the Impax ANDA as of the Effective Date, including any future dosage strengths of the product that is the subject of the Impax ANDA as of the Effective Date. For clarity, a product will be considered “substantially equivalent” to those products that are the subject of the Impax ANDA as of the Effective Date if regulatory approval of such product by the FDA would not require the performance of any additional bioequivalence studies (other than bioequivalence studies required by the FDA for new dosage strengths of or new reference listed drug descriptions for the product that is the subject of the Impax ANDA as of the Effective Date or any other changes that do not substantially change the formulation of the products subject to the Impax ANDA), and if its formulation is substantially the same

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formulation as the products that are the subject of the Impax ANDA as of the Effective Date.

     “IMS Data” means data maintained by IMS Health Incorporated relating to the sale of pharmaceutical drug products in the Territory.

     “License” has the meaning specified in Section 4.1(a).

     “License Term” has the meaning specified in Section 4.2(a).

     “Licensed Patents” has the meaning specified in Section 4.1(a).

     “Market Share Profit Factor” means the factor obtained by multiplying [**] (generic substitution rate) by [**].

     “Market Share Profit Value” means the factor obtained by multiplying: [**].

[**]	[**]	[**]
		[**]

     “NDA” means a New Drug Application, as defined in 21 U.S.C. 355(b) et seq., and the regulations promulgated thereunder.

     “Net Sales” means the gross amount invoiced by or on behalf of Impax for the sale of Impax Products to Third Parties, less deductions for: (i) normal and customary trade, cash and quantity discounts actually given, credits, price adjustments or allowances for damaged Impax Products, returns or rejections of Impax Products, free goods valued at transfer price provided in lieu of discounts or rebates; (ii) chargeback payments and rebates (or the equivalent thereof) granted to group purchasing organizations, managed health care organizations or to federal, state/provincial, local and other governments, including their agencies, or to trade customers and other price reduction programs customary to the trade or required by law; (iii) freight, shipping insurance and other transportation expenses directly related to the sale (if actually borne by Impax without reimbursement from any Third Party); (iv) required sales and distribution commissions/fees payable to any Third Party providing sales or distribution services to Impax; (v) sales, value-added and excise taxes, tariffs and duties, surcharges and other taxes and government charges directly related to the sale, to the extent such items are included in the gross invoice price and actually borne by Impax without reimbursement from any Third Party (but not including taxes assessed against the income derived from such sale); (vi) administrative fees, marketing fees and other similar fees, payments or credits paid to unaffiliated Third Parties customary to the trade or required by law to the extent such fees, payments and credits are customarily deducted from gross sales, and (vii) commercially reasonable write-offs for doubtful accounts for Impax Product sold by or on behalf of Impax. Net Sales shall be determined in all cases in accordance with U.S. generally accepted accounting principles.

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     “New Jersey Actions” means Endo Pharmaceuticals Inc. and Penwest Pharmaceuticals Co. v. Impax, Civil Action Nos. 09-831, 09-832 and 09-833 (KSH-PS).

     “Opana^® ER Generic Product” means any generic version of an Opana^® ER Product that is the subject of an application filed under Section 505(b)(2) or Section 505(j) of the FD&C Act.

     “Opana^® ER Patents” means U.S. Patents 5,662,933, 5,958,456 and 7,276,250, and any U.S. patents resulting from any reissue or reexamination thereof.

     “Opana^® ER Product” means any product marketed and/or sold under the Opana^® NDA.

     “Opana^® NDA” means NDA No. 21-610 and any amendments or supplements thereto.

     “Orange Book” means the FDA publication Approved Drug Products with Therapeutic Equivalence Evaluations.

     “Paragraph IV Certification” means a paragraph IV certification under Section 505(j)(2)(A)(vii)(IV) of the FD&C Act (21 U.S.C. § 355(j)(2)(A)(vii)(IV)).

     “Party” and “Parties” have the meanings specified in the introductory paragraph hereof.

     “Pending Applications” has the meaning specified in Section 4.1(a).

     “Penwest” has the meaning specified in the introductory paragraph hereof.

     “Person” means any person, corporation, partnership, joint venture, association, joint-stock company, trust or unincorporated organization.

     “Pre-Impax Amount” means, expressed as a percentage, [**] or (ii) if the Commencement Date is earlier than January 1, 2013 pursuant to the terms hereof, the [**], divided by the [**].

     “Prescription Sales” means for any month, the sum of, for each strength of the Endo Product, (i) [**] Data multiplied by (ii) [**].

     “Quarterly Peak” means the highest Prescription Sales of the Endo Product during any calendar quarter period from July 1, 2010 through September 30, 2012, or the last day of the full calendar quarter described in clause (ii) of the defined term Pre-Impax Amount.

     “Territory” means the United States of America, its territories, districts, possessions and commonwealths, including the Commonwealth of Puerto Rico.

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     “Third Party” means any Person other than Impax, Endo, Penwest and their respective Affiliates.

     “Trigger Threshold” means [**] percent ([**]%).

ARTICLE II.
SUBMISSION TO U.S. GOVERNMENT

     Section 2.1. Submission To U.S. Government. The Parties will submit this Agreement and any ancillary and other related agreements thereto to the Antitrust Division of the United States Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”) for review as promptly as practical after the Effective Date, and in any event within the period prescribed by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 and other applicable law. Each of the Parties will use its respective reasonable best efforts to fully cooperate with any investigation that may ensue as a result of such submission. If any government investigation or litigation is instituted, each Party will use its respective reasonable efforts to defend this Agreement and any ancillary and other related agreements thereto in any such investigation or litigation, and to resist and contest any proposals or efforts to materially alter the terms thereof so as to permit the Parties to fulfill their obligations under and to obtain the full benefits contemplated by this Agreement and any ancillary and other related agreements thereto, including using their reasonable efforts to promptly meet in good faith to renegotiate and modify this Agreement, provided that such modifications do not materially change the economic value of the transactions contemplated hereby. Each Party reserves the right to communicate with the FTC or DOJ regarding such filings as it believes appropriate. Each Party shall keep the other Parties reasonably informed of such communications and shall not disclose any confidential information of the other Parties without such other Parties’ consent, which will not be unreasonably withheld or delayed.

     Section 2.2. No Prejudice. If at any time this Agreement or any ancillary or other related agreements thereto is rendered null and void with respect to the Territory or any portion thereof by the actions of a Third Party or government entity, it is the intent of the Parties that (i) no Party will be in any way prejudiced with respect to its claims, causes of action, defenses and counterclaims in the New Jersey Actions in such jurisdiction or otherwise, (ii) no consent judgment, order or dismissal entered by a Party pursuant to this Agreement in the Territory or portion thereof, as applicable, will be deemed an admission on the part of such Party, (iii) the Parties will be free to assert any and all claims and defenses with respect to the reinstated portion of the New Jersey Actions in any future litigation, and (iv) the provisions of Section 8.3 shall apply.

ARTICLE III.
SETTLEMENT; DISMISSAL OF ACTION

     Section 3.1. Required Filings. No later than three (3) days after the Effective Date, Impax, Endo and Penwest will execute and deliver to the other Parties, or cause their respective attorneys of record in the New Jersey Actions to execute and deliver to

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the other Parties, the Stipulation of Dismissal and Order attached hereto as Appendix A, pursuant to which the New Jersey Actions will be dismissed with prejudice and without costs, and the attorneys for Endo and Penwest shall submit such executed Stipulation of Dismissal and Order to the court in the New Jersey Actions. If for any reason the court in the New Jersey Actions does not approve the Stipulation of Dismissal and Order and enter it as an order of the court, the Parties agree to confer promptly in good faith in an effort to modify the Stipulation of Dismissal and Order and this Agreement or take such other action as is required to overcome the court’s objections.

     Section 3.2. Impax Sale Commencement Date. Subject to this Section 3.2, Impax agrees, on behalf of itself and its Affiliates, not to, prior to the applicable Commencement Date, directly or indirectly market, offer to sell, sell, import, manufacture or have manufactured in or for the Territory any Opana^® ER Generic Product, or directly or indirectly assist or authorize any Third Party to do any of the foregoing. Impax shall have the right to make commercially reasonable preparations prior to the Commencement Date as set forth below. Nothing in this Agreement shall preclude Impax or its Affiliates from manufacturing, having manufactured, importing or marketing the Impax Products in or for the Territory for a reasonable period of time, as set forth below, prior to the applicable Commencement Date solely for the purpose of allowing Impax and its Affiliates to prepare for the commercial sale of such Impax Products for delivery in the Territory for sale only on and after the Commencement Date pursuant to Section 4.1 or for purposes of conducting activities protected under 35 U.S.C. § 271(e)(1). A reasonable period of time for purposes of the foregoing sentence shall be no more than [**] days prior to the anticipated applicable Commencement Date for the marketing of and offers to sell the Impax Products and a commercially reasonable period of time prior to the anticipated applicable Commencement Date for the manufacturing and importing of the Impax Products. Impax will provide notice to Endo and Penwest as soon as practicable, and in any event prior to launch of the Impax Product, if it believes that the Commencement Date will be earlier than January 1, 2013. Impax acknowledges and agrees that Endo and Penwest would be irreparably harmed should Impax breach the first sentence of this Section 3.2. Nothing in the Agreement shall prohibit or preclude Impax from exercising its rights under 35 U.S.C. § 271(e)(1).

     Section 3.3. No Challenge to Opana^® ER Patents. From and after the Effective Date, Impax agrees, on behalf of itself and its Affiliates, not to, directly or indirectly, challenge the validity or enforceability of the Licensed Patents with respect to any product that is the subject of the Impax ANDA or the infringement of the Licensed Patents by the manufacture, use and sale of any product that is the subject of the Impax ANDA, including by suing, directly or indirectly, Endo, Penwest or any of their respective Affiliates in any action in any forum seeking an order or decision that any of the Licensed Patents is invalid or unenforceable with respect to any product that is the subject of the Impax ANDA or that the manufacture, use or sale of any product that is the subject of the Impax ANDA does not infringe the Licensed Patents. Further, Impax will not, and will cause its Affiliates to not, directly or indirectly, participate in or support any such challenges relating to any Opana^® ER Generic Product by any Person. Notwithstanding the foregoing, nothing herein shall prevent Impax from (a) maintaining the Paragraph IV Certifications contained in the Impax ANDA, (b) amending the Impax

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ANDA, such as to include future Opana^® ER Product dosages, or a Paragraph IV Certification to any patents that may be listed in the Orange Book for the Opana^® ER Product, or (c) challenging the Licensed Patents with respect to any product that is not the subject of the Impax ANDA.

     Section 3.4. Costs; Dismissals. All dismissals of all claims and counterclaims specified in Section 3.1 will be without costs to any Party and will include an irrevocable release by each Party, on behalf of itself and its Affiliates, of all claims for attorneys’ fees. Each Party will bear its own costs in connection with entering into this Agreement and the negotiation and submission of the dismissals specified in Section 3.1.

     Section 3.5. No Implied Consents. Nothing herein will be deemed to be Endo’s or Penwest’s consent to or approval of any ANDA or similar application or filing by Impax or any of its Affiliates in any foreign jurisdiction, or to permit Impax or any of its Affiliates the right to reference or cross-reference any Endo NDA, Penwest NDA or similar application or filing.

     Section 3.6. Releases. (a) Except for the obligations created under this Agreement, and unless this Agreement is terminated pursuant to Section 8.2, Impax, on behalf of itself and its Affiliates, predecessors, successors and assigns, and all other Persons claiming by, through and under them, does hereby fully, finally release and forever discharge, relinquish and acquit, effective on the Dismissal Date, Endo and Penwest and their respective past and present Affiliates and their respective, predecessors, successors, assigns and their respective past and present Affiliates, shareholders, predecessors, successors, assigns, employees, officers, directors, principals, agents, attorneys, accountants, representatives, insurers, manufacturers, suppliers, importers, distributors and customers from any and all claims, rights, causes of action, counterclaims, defenses and liabilities whatsoever that, in each case accrued prior to the Effective Date, whether based on federal, state, local, statutory or common law or any other law, rule or regulation, whether known or unknown, (i) that in any way arise out of, or are related to, any cause of action asserted in the New Jersey Actions; (ii) that relate to the Impax Products and could have been asserted in the New Jersey Actions now or upon the approval of the Impax Products; or (iii) that in any way arise out of, or are related to, the marketing or sale of Opana^® ER Products, or the acquisition, listing in the FDA’s Orange Book or enforcement of the Opana^® ER Patents, including without limitation any antitrust or unfair competition claims. Nothing in this release shall preclude Impax from asserting the invalidity, unenforceability or non-infringement of the Opana^® ER Patents, any continuations, continuations-in-part, or divisionals thereof, and any patents and patent applications owned or controlled by, or licensed to, Endo or Penwest (or their respective Affiliates) in any future litigation concerning any product that is not the subject of the Impax ANDA.

          (b) Except for the obligations created under this Agreement, and unless this Agreement is terminated pursuant to Section 8.2, Endo and Penwest, on behalf of themselves and their respective Affiliates, predecessors, successors and assigns, and all other Persons claiming by, through and under them, do hereby fully, finally release and forever discharge, relinquish and acquit effective on the Dismissal Date, Impax and its

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predecessors, successors, assigns and their respective past and present Affiliates, shareholders, predecessors, successors, assigns, employees, officers, directors, principals, agents, attorneys, accountants, representatives, insurers, manufacturers, suppliers, importers, distributors and customers from any and all claims, rights, causes of action, counterclaims, defenses and liabilities whatsoever that, in each case accrued prior the Effective Date, whether based on federal, state, local, statutory or common law or any other law, rule or regulation, whether known or unknown, (i) that in any way arise out of, or are related to, any cause of action asserted in the New Jersey Actions; (ii) that relate to the Impax Products and could have been asserted in the New Jersey Actions now or upon the approval of the Impax Products, including without limitation any antitrust or unfair competition claims relating thereto; or (iii) that relate to any activities in respect of the products that are the subject of the Impax ANDA that were engaged in by Impax or its Affiliates prior to the Effective Date and that would have given rise to a claim of infringement of the Licensed Patents. Nothing in this release shall preclude Endo or Penwest from asserting the Opana^® ER Patents, any continuations, continuations-in-part, or divisionals thereof, and any patents and patent applications owned or controlled by, or licensed to, Endo or Penwest (or their respective Affiliates) in any future litigation concerning any product that is not the subject of the Impax ANDA.

ARTICLE IV.
LICENSE AND COVENANT NOT TO SUE

     Section 4.1. License; Covenant Not To Sue. (a) Subject to the terms and conditions herein, each of Endo and Penwest, on behalf of itself and its respective Affiliates, hereby grants to Impax and its Affiliates, effective only on and after the applicable Commencement Date (subject to Impax’s permitted pre-Commencement Date activities set forth in Section 3.2), and Impax hereby accepts (on behalf of itself and its Affiliates), a non-transferable (except in accordance with Section 9.6), non-sublicensable and royalty-free (except as set forth in Section 4.3) license (the “License”), under the Opana^® ER Patents, any continuations, continuations in part, or divisionals thereof, and any patents and patent applications owned by Endo or Penwest (or their respective Affiliates) to the extent that Endo and/or Penwest has the right to grant a sublicense to such patents and applications that cover or could potentially cover the manufacture, use, sale, offer for sale, importation, marketing or distribution of products (or any components thereof) that are the subject of the Impax ANDA (the issued patents being the “Existing Patents” and the patent applications (and any patents issued thereunder) being the “Pending Applications” and the Existing Patents and Pending Applications being collectively the “Licensed Patents”), during the License Term, to make, have made, offer to sell, sell, have sold, market, distribute, import and use the Impax Products solely in or for the Territory.

          (b) Each of Endo and Penwest, on behalf of itself and its Affiliates and its officers and directors, covenants that it will not sue or assert any claim against, or otherwise participate in any action or proceeding against Impax or its Affiliates or their successors and permitted assigns or any of Impax’s suppliers, distributors, wholesalers or customers (collectively, the “Impax Parties”), or cause or authorize any person or entity to do any of the foregoing, in each case claiming or otherwise asserting that the

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manufacture, use, sale, offer for sale, importation, marketing or distribution of Impax Products in or for the Territory on or after the applicable Commencement Date (subject to Impax’s or its Affiliates’ permitted pre-Commencement Date activities set forth in Section 3.2 and except for any activities in respect of the products that are the subject of the Impax ANDA that were engaged in by Impax or its Affiliates prior to the Effective Date and that would have given rise to a claim of infringement of the Licensed Patents) by or on behalf of Impax, infringes the Licensed Patents or any patents or patent applications licensed to Endo or Penwest (or their respective Affiliates) that cover or could potentially cover the manufacture, use, sale, offer for sale, importation, marketing or distribution of products (or any components thereof) that are the subject of the Impax ANDA, so long as Impax is in compliance with the terms of this Agreement (the “Covenant Not to Sue”).

          (c) The License granted in this Agreement to Impax is non-exclusive, except as provided in this Section 4.1(c). Endo and Penwest agree that, for the Exclusivity Period (as defined below), the License granted to Impax covering the 5mg, 10mg, 20mg, 30mg and 40mg dosage strengths of the Impax Product, and any future dosage strengths of the Impax Product under the Impax ANDA for which Impax obtains first applicant status as described in Section 505(j)(5)(B)(iv) of the FD&C Act, shall be exclusive as to all but (i) the Opana ER^® Product and any Opana ER^®-branded products that are not sold as generic products and (ii) generic products covered by agreements executed by Endo and/or Penwest and a Third Party that holds an ANDA referencing the Opana^® ER Product as of or prior to the Effective Date. The “Exclusivity Period” for each such dosage strength of the Impax Product is defined as starting on the Commencement Date and ending on the earlier of (x) 12:01 A.M. EST on the day after the 180-day period described in 21 U.S.C. § 355(j)(5)(B)(iv) for such dosage strength; and (y) 12:01 A.M. EST on the day after the FDA determines that the 180-day period described in 21 U.S.C. § 355(j)(5)(B)(iv) for such dosage strength has been forfeited by the occurrence of any event, including those described in 21 U.S.C. § 355(j)(5)(D)(i)(I)-(IV). Prior to the expiration of the Exclusivity Period, neither Endo nor Penwest nor any of their respective Affiliates shall (A) sell, offer to sell, import, or distribute any generic version of products that are the subject of the Opana^® NDA, (B) license or authorize any Third Party to sell, offer to sell, import or distribute any generic version of products that are the subject of the Opana^® NDA, and/or (C) sell or license or authorize under the Opana^® ER Patents any Third Party to sell an Opana^® ER Generic Product in or for the Territory, except as provided for herein. Notwithstanding the foregoing, nothing in this Agreement shall prohibit Endo or Penwest from entering into bona fide settlements with Third Parties relating to ANDAs filed by such Third Parties in relation to the Opana^® ER Product, which settlements may include licenses and covenants not to sue under the Opana^® ER Patents; provided, however, that such settlement or any other agreement entered into by Endo or Penwest with any such Third Party shall not grant any right or license authorizing such Third Party to make, have made, use, sell, offer to sell, import or distribute products that are the subject of the Opana^® NDA. Following the expiration of the Exclusivity Period with respect to the dosage strengths referenced above, and at all times with respect to the 7.5mg and 15mg dosage strengths of the Impax Product and any other dosage strengths of the Impax Product under the Impax ANDA for which Impax

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does not obtain first applicant status as described in Section 505(j)(5)(B)(iv) of the FD&C Act, the License granted to Impax shall be non-exclusive.

          (d) Impax, Endo and Penwest each agrees to negotiate in good faith an amendment to the terms of the License to any patents which issue from any Pending Applications for the time period following the Exclusivity Period.

          (e) For avoidance of doubt, and notwithstanding anything to the contrary in this Agreement, the License and Covenant Not To Sue do not grant to Impax any rights or immunities, or impose on Impax any restrictions, with respect to any products other than the Impax Products, including any combination products.

          (f) In the event that the Commencement Date has occurred and the License has become effective due to an at-risk launch by a Third Party of an FDA-approved generic extended release oxymorphone product that is AB-rated to Opana^® ER, and Endo and Penwest are successful in stopping such Third Party that engaged in such at-risk launch from selling such generic extended release oxymorphone product in the Territory, Endo and Penwest may, at their discretion, suspend the Commencement Date upon written notice to Impax, in which case Impax immediately shall, subject to Section 3.2, cease making, using, shipping, distributing, selling and/or offering to sell the Impax Products until such time as the License becomes effective again due to the triggering of the Commencement Date, provided that any activities conducted by Impax or any of its Affiliates prior to such suspension shall remain subject to the License and Covenant Not to Sue.

          (g) Impax will have no right or immunity under the License or the Covenant Not To Sue to, market, offer to sell or sell the Impax Products to any Person outside of the Territory or to any Person that Impax knows, or should reasonably be expected to know, may, directly or indirectly, market, offer to sell, sell or use any of the Impax Products outside of the Territory. Notwithstanding the foregoing, nothing herein shall be construed as an admission or waiver as to any factual or legal matter by any Party or their Affiliates with respect to any products other than Impax Products, or to any jurisdiction outside of the Territory (including without limitation, with respect to any ex-U.S. equivalents of any generic oxymorphone products or any ex-U.S. patents or patent applications.)

     Section 4.2. License Term. The term of the License (“License Term”) will commence on the applicable Commencement Date for each Impax Product and will continue, unless earlier suspended or terminated pursuant to this Agreement, until the expiration of all claims of the Licensed Patents.

     Section 4.3. Royalties. Impax agrees to pay to Endo a royalty on all Net Sales of Impax Products (for which dosage strengths Impax has obtained first applicant status, as described in Section 505(j)(5)(B)(iv) of the FD&C Act) sold by or on behalf of Impax during the Exclusivity Period. Such royalties shall be calculated as follows: if Endo Net Sales of Endo Products for the [**], then Impax shall pay to Endo a royalty of [**] percent ([**]%) on Net Sales of Impax Products (for which dosage strengths Impax has

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obtained first applicant status, as described in Section 505(j)(5)(B)(iv) of the FD&C Act) during the Exclusivity Period. Otherwise, no royalty shall be due. Such royalty shall be paid by Impax to Endo within ninety (90) days after the end of the Exclusivity Period by wire transfer to an account specified by Endo in writing to Impax, and shall be accompanied by a written report specifying in reasonable detail the amount of such Net Sales during the Exclusivity Period and the royalty payable therefor.

     Section 4.4. Endo Credit. If the [**] is less than the [**], then [**] shall pay to [**] shall pay [**] the amount under this Section 4.4, if any, within ninety (90) days after [**] with written documentation of all of the amounts referenced in this Section 4.4.

     Section 4.5. Steering Committee. Promptly after the Effective Date, the Parties will form a committee (the “Steering Committee”), equally represented by Endo and Impax, to meet within forty-five (45) days after the end of each quarter, beginning with the quarter ending June 30, 2010, to determine in good faith [**], if any. In making such determination, the Steering Committee shall rely on [**], or such other market data as may be determined by the Steering Committee, and shall agree on the methodology for calculating [**].

     Section 4.6. Opana^® ER Patents. As among the Parties, Endo and/or Penwest will have the sole right, but not the obligation, to prosecute, maintain, enforce and defend the Opana^® ER Patents in its sole discretion. Impax will have no right to prosecute, maintain, enforce or defend the Opana^® ER Patents.

     Section 4.7. No Implied Rights. Except as expressly provided in Section 4.1, Endo and Penwest do not grant to Impax or any of its Affiliates or any other Person any license, right or immunity, whether by implication, estoppel or otherwise, other than as expressly granted herein. Impax will not use the name, insignia or symbols of Endo, Penwest or any of their respective Affiliates for any purpose whatsoever without Endo’s or Penwest’s, as the case may be, prior written consent. No rights are granted under this Agreement by Endo or Penwest to Impax to the use of any of Endo’s, Penwest’s or their respective Affiliates’ trademarks, or any other trademark confusingly similar thereto, and all rights to those trademarks are expressly reserved by Endo and Penwest, as the case may be. Nothing herein will be deemed to require Endo or Penwest to provide any know-how or other Confidential Information to Impax.

     Section 4.8. Governmental Approvals. Endo and Penwest make no representation that, as of the Commencement Date, Impax will be able to launch any Impax Products. Impax agrees that, notwithstanding anything to the contrary herein, it will not sell any Impax Products prior to obtaining FDA approval to sell the Impax Products. Impax will be solely responsible for, and will bear all costs involved in, the registration and approval of the Impax Products with any governmental regulatory agencies.

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     Section 4.9. Transfers. To the extent Endo, Penwest or any of their respective Affiliates assign, license, sublicense or otherwise transfer any right, title or interest in or to the Opana^® NDA or the Opana^® ER Patents, or any other patents or patent applications or regulatory exclusivities subject to same, to any Third Party, Endo and Penwest, on behalf of themselves and their respective Affiliates, will make such assignment, license, sublicense or other transfer subject to any restrictions or limitations under the License, waivers and Covenant Not To Sue granted herein.

     Section 4.10. FDA Cooperation. (a) Within five (5) business days of Impax’s request, Endo shall provide the FDA with written confirmation of the Commencement Date and the license, covenants and waivers herein, including, where applicable, written confirmation that the Commencement Date is before January 1, 2013, and including, where applicable, written confirmation that the restriction specified in the Stipulation of Dismissal and Order does not bar entry by Impax on a date prior to January 1, 2013. Concurrently with such request, Impax shall provide to Endo the desired form of written confirmation to be provided to the FDA.

          (b) Endo and/or Penwest shall waive any period of regulatory exclusivity to the extent such exclusivity would preclude or impede the launch of the Impax Product as of the Commencement Date. Endo and/or Penwest shall provide reasonable cooperation to Impax in connection with such waiver, including by (i) submitting a mutually agreeable notice to FDA of the existence of such waiver and (ii) not opposing the approval of Impax Product effective as of the Commencement Date based on any applicable regulatory exclusivity in force at the time. Such notice will be delivered by Endo to FDA within five (5) business days of receipt of written request from Impax, provided that the form of such notice has been agreed to as set forth above, such agreement not to be unreasonably withheld, delayed or conditioned. For purposes of clarity, nothing in this Section 4.10(b) is intended to or does accelerate the Commencement Date.

     Section 4.11. NDC. Endo shall at all times during the term of this Agreement maintain (or otherwise not change the status of) the National Drug Code(s) in respect of the Opana^® ER Product until the end of the Exclusivity Period, unless otherwise directed by the FDA.

ARTICLE V.
CONFIDENTIALITY

     Section 5.1. Publicity. No Party or any of its Affiliates or representatives may make any press release or public announcement concerning the existence or terms of this Agreement without the other Parties’ prior written consent, except for subsequent disclosure of information which is substantially similar to publicly available information that has previously been disclosed as permitted by this Section 5.1 or by Section 5.2. The terms of this Agreement, and all confidential information exchanged by the Parties during the course of the negotiations of the transactions contemplated hereby (“Confidential Information”), will remain strictly confidential, and neither the contents of this Agreement, the subject matter hereof or the Confidential Information will be, directly or

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indirectly, discussed with or disclosed to any Third Party, other than those employees, officers, directors and advisors of each Party who need to know such information for the sole purpose of effecting the intent of this Agreement and who agree to keep such information confidential and who agree to be bound by the terms of this Article V to the same extent as if they were parties hereto, provided that this Agreement may be disclosed to governmental authorities as contemplated by Section 2.1, and this Agreement and the Confidential Information may be disclosed as permitted by Section 5.2 and in connection with pending litigation over the Opana^® ER Product and/or Opana^® ER Patents. If a Party is contacted by any media outlets or press regarding the New Jersey Action, such Party may confirm that the New Jersey Actions have been settled without disclosing any terms of this Agreement or the terms of this settlement except to the extent permitted under this Section 5.1.

     Section 5.2. Required Disclosure. If a Party concludes in good faith that it is required by applicable law, FDA rule or requirement, rules or regulations promulgated by the U.S. Securities and Exchange Commission or any other governmental authority, regulatory agency or self-regulatory body, or legal proceeding or order by a court of competent jurisdiction to disclose the terms of this Agreement, the Party required to make such disclosure will (a) endeavor to obtain confidential treatment of the terms of this Agreement; and (b) include in such disclosure only the information that, after consultation with counsel, such Party believes is required to be disclosed.

ARTICLE VI.
REPRESENTATIONS AND WARRANTIES

     Section 6.1. Representations as to Endo and Penwest. Each of Endo and Penwest hereby represents and warrants to Impax as of the Effective Date as follows:

          (a) it has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder, and the execution, delivery and performance of this Agreement has been duly and validly authorized by it. Upon execution and delivery of this Agreement by it, this Agreement will constitute a legal, valid and binding agreement, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforceability of creditors’ rights generally and other general equitable principles which may limit the right to obtain certain remedies;

          (b) neither the execution and delivery of this Agreement, nor consummation of the transactions contemplated herein requires it to obtain any permits, authorizations or consents from any governmental body or from any other person, firm or corporation other than such permits, authorizations or consents as it has already obtained;

          (c) it has the right to grant to Impax the License and the Covenant Not To Sue;

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          (d) it has not assigned or otherwise transferred to any Person any of its claims, rights, causes of action, counterclaims or defenses that are covered by the release granted under Section 3.6(b); and

          (e) it has not licensed or authorized any Third Party or Affiliate to sell, offer to sell, import or distribute any generic version of products that are the subject of the Opana^® NDA.

     Section 6.2. Representations as to Impax. Impax represents and warrants to Endo and Penwest as of the Effective Date as follows:

          (a) Impax has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder, and the execution, delivery and performance of this Agreement has been duly and validly authorized by Impax. Upon execution and delivery of this Agreement by Impax, this Agreement will constitute a legal, valid and binding agreement of Impax, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforceability of creditors’ rights generally and other general equitable principles which may limit the right to obtain certain remedies;

          (b) neither the execution and delivery of this Agreement nor consummation of the transactions contemplated herein requires Impax to obtain any permits, authorizations or consents from any governmental body or from any other person, firm or corporation;

          (c) to its knowledge, Impax has produced to Endo and Penwest in the New Jersey Actions a full and complete copy of the Impax ANDA, including all amendments and supplements thereto, as of the Effective Date; and

          (d) Impax has not assigned or otherwise transferred to any Person any of its claims, rights, causes of action, counterclaims or defenses that are covered by the release granted under Section 3.6(a).

     Section 6.3. Disclaimer. ENDO AND PENWEST ARE LICENSING THE LICENSED PATENTS TO IMPAX ON AN “AS IS” BASIS. ENDO AND PENWEST MAKE NO WARRANTIES EITHER EXPRESS OR IMPLIED OF ANY KIND, AND HEREBY EXPRESSLY DISCLAIM ANY WARRANTIES, REPRESENTATIONS OR GUARANTEES OF ANY KIND AS TO THE LICENSED PATENTS AND THE SUBJECT OF ANY LICENSE OR COVENANT NOT TO SUE HEREUNDER, INCLUDING BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, FITNESS, ADEQUACY OR SUITABILITY FOR A PARTICULAR PURPOSE, USE OR RESULT, AND ANY WARRANTIES OF FREEDOM OF INFRINGEMENT OF ANY PATENTS, COPYRIGHTS, TRADE SECRETS OR OTHER PROPRIETARY RIGHTS. NEITHER ENDO, PENWEST, NOR ANY EMPLOYEE OR AGENT OF EITHER OF THEM, SHALL HAVE ANY LIABILITY TO IMPAX, OR ITS AFFILIATES, OR ANY OTHER PERSON ARISING OUT OF THE USE OF THE LICENSED PATENTS, INCLUDING TO THE LACK OF MERCHANTABILITY, INADEQUACY OR UNSUITABILITY OF THE LICENSED

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PATENTS FOR ANY PARTICULAR PURPOSE OR TO PRODUCE ANY PARTICULAR RESULT, OR FOR ANY LATENT DEFECTS THEREIN. ENDO AND PENWEST AND THEIR AFFILIATES, EMPLOYEES, AGENTS, OFFICERS AND DIRECTORS SHALL NOT BE LIABLE IN ANY WAY WHATSOEVER FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES SUFFERED BY IMPAX OR ANY THIRD PARTY IN CONNECTION WITH THIS AGREEMENT, INCLUDING LOST PROFITS OR BUSINESS REVENUE OR OTHER ECONOMIC LOSS OF ANY KIND WHATSOEVER, WHETHER OR NOT SUCH DAMAGES ARE FORESEEABLE OR ENDO, PENWEST OR THEIR AFFILIATES, EMPLOYEES, AGENTS, OFFICERS OR DIRECTORS HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

ARTICLE VII.
INDEMNITY

     Indemnification. Impax will indemnify and defend Endo, Penwest and their respective Affiliates and the directors, officers and employees of Endo, Penwest and any such Affiliates, and hold each of them harmless from and against any and all claims, suits, losses, liabilities, damages and expenses (including reasonable attorneys’ fees and costs and the costs of enforcing this indemnity) incurred by any of them arising from or occurring as a result of any claims, demands, actions and other proceedings of a Third Party, whether for any actual or alleged product defect, product liability or other related claims, relating to any Impax Product. Any indemnitee that intends to claim indemnification under this Article VII promptly will notify Impax in writing of each claim in respect of which the indemnitee or any of its Affiliates, or their directors, officers or employees intend to claim such indemnification, provided that the failure to provide such notice shall not release Impax from its obligations under this Article VII except to the extent that Impax is actually and materially prejudiced thereby. The indemnitee under this Section and its Affiliates, officers, directors, employees and agents will reasonably cooperate with Impax and its legal representatives, at Impax’s expense, in the investigation and defense of any claim or loss covered by this indemnification.

ARTICLE VIII.
TERMINATION

     Section 8.1. Term. The term of this Agreement will commence on the Effective Date and, unless terminated in accordance with this Agreement, will continue through the License Term.

     Section 8.2. Termination. Endo and Penwest each may terminate this Agreement upon written notice effective immediately if (i) Impax or any of its Affiliates breaches the first sentence of Section 3.2, (ii) Impax or any of its Affiliates challenges the validity or enforceability of the Licensed Patents with respect to any product that is the subject of the Impax ANDA, or the infringement of the Licensed Patents by any product that is the subject of the Impax ANDA, or if Impax or any of its Affiliates participates in or supports, directly or indirectly, any such challenges with respect to any Opana^® ER Generic Product by any Third Party, except Impax shall be permitted to maintain the

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Paragraph IV Certifications contained in the Impax ANDA, or (iii) Impax or any of its Affiliates makes, has made, uses, offers for sale, sells or imports in the Territory, directly or indirectly, any Opana^® ER Generic Product or assists or authorizes any Third Party to do any of the foregoing prior to the Commencement Date, subject to Impax’ allowed pre-Commencement Date activities outlined in Section 3.2 and except for any such activities relating to products that are the subject of the Impax ANDA that were engaged in by Impax or its Affiliates prior to the Effective Date and that would have given rise to a claim of infringement of the Licensed Patents. For the sake of clarity, nothing in this Section 8.2(b) shall permit termination if Impax asserts the invalidity, unenforceability or non-infringement of the Licensed Patents in any future litigation concerning any product that is not the subject of the Impax ANDA.

     A termination of this Agreement by one Party shall be deemed to be a termination of this Agreement as to all Parties.

     Section 8.3. Effect of Termination. If this Agreement is terminated pursuant to Section 8.2, (a) Endo and Penwest will have the right to recommence or refile the New Jersey Actions; (b) each Party consents, with respect to any such refiled New Jersey Actions, to (i) the exclusive jurisdiction of the United States District Court for the District of New Jersey, and irrevocably and unconditionally waives any objection to the laying of venue in such court or that the New Jersey Actions has been brought in an inconvenient forum, and (ii) waive any statute of limitations defenses in connection with such recommenced or refiled New Jersey Actions; (c) the License and Covenant Not To Sue automatically and immediately will terminate; and (d) Impax would have the right to defend itself on any basis, including challenging the validity and enforceability of the Opana^® ER Patents or the non-infringement thereof. Termination or expiration of this Agreement shall not release any Party from liability (in an action at law or otherwise) for any obligations, liabilities or damages incurred prior to such termination and arising out of a breach of any of its representations, warranties, covenants or agreements set forth in this Agreement.

     Section 8.4. Survival. Sections 2.2, 3.4, 3.5, 3.6, 6.1, 6.2, 6.3, 8.3, 8.4 and Articles I, V and VII will survive the expiration or termination of this Agreement.

ARTICLE IX.
MISCELLANEOUS

     Section 9.1. Governing Law; Jurisdiction. The validity and interpretation of this Agreement and the legal relations of the Parties to it will be governed exclusively by the internal laws, and not the law of conflicts, of the State of New Jersey.

     Section 9.2. Notices. All notices, requests and other communications hereunder will be in writing, will be addressed to the receiving Party’s address set forth below or to such other address as a Party may designate by notice hereunder, and will be either (a) delivered by hand, (b) made by facsimile transmission (to be followed with written confirmation by the delivering Party), (c) sent by private courier service providing evidence of receipt, or (d) sent by registered or certified mail, return receipt

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requested, postage prepaid. The addresses and other contact information for the Parties are as follows:

For Impax:	Impax Laboratories, Inc. 121 New Britain Blvd. Chalfont, PA 18914 Facsimile No.: (215) 933-0333 Attn: Chris Mengler, President, Generic Division
with a copy (which shall not constitute notice) to:	Impax Laboratories, Inc. 30831 Huntwood Avenue Hayward, CA 94544 Facsimile No.: (510) 471-3200 Attn: Margaret Snowden,           Vice President, Intellectual Property
For Endo:	Endo Pharmaceuticals Inc. 100 Endo Boulevard Chadds Ford, PA 19317 Facsimile No.: (610) 558-9682 Attn: President
with a copy to:	Endo Pharmaceuticals Inc. 100 Endo Boulevard Chadds Ford, PA 19317 Facsimile No.: (610) 558-9684 Attn: Chief Legal Officer
For Penwest:	Penwest Pharmaceuticals Co. 2981 Route 22 Suite 2 Patterson, NY 12563 Attn: President & CEO

or to such other addresses as will have been subsequently furnished by written notice to the other Parties.

     Section 9.3. Entire Agreement; Waiver. This Agreement, including the Appendix attached hereto, together with the Development Agreement between Endo and Impax, dated as of the date hereof, contains the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior drafts or understandings. No change, modification, amendment or waiver of any obligation, term or provision contained herein will be valid or enforceable unless the same is reduced to writing and

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signed by a duly authorized representative of each of the Parties to be bound hereby. The waiver by a Party to this Agreement of a breach of any provision set forth herein or of any right contained herein will not operate as or be construed as a continuing waiver or a waiver of any subsequent breach or right granted herein.

     Section 9.4. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed be an original, but all of which together will constitute one agreement.

     Section 9.5. No Third Party Beneficiaries. Except as expressly provided herein, nothing is intended or will be construed to confer upon any person or entity other than the Parties hereto and their successors or assigns, any rights or remedies under or by reason of this Agreement.

     Section 9.6. Assignment. This Agreement will be binding upon and inure to the benefit of the Parties and their permitted successors and assigns. This Agreement and the rights granted herein may not be assigned or transferred (whether by contract, operation of law or otherwise) by any Party without the prior written consent of the other Parties, provided that this Agreement shall be assignable by a Party (a) to an Affiliate or (b) in connection with the sale of all or substantially all of the assets of the business of such Party to which this Agreement relates, and provided further that (i) the Party whose assets are being sold notifies the other Parties of any such assignment of this Agreement in writing (including the identity of the assignee) and (ii) the purchaser of those assets provides written confirmation that it agrees to assume all of the assigning Party’s obligations hereunder. The covenants, rights and obligations of each Party under this Agreement shall remain binding upon such Party notwithstanding any assignment or transfer of this Agreement by such Party as permitted by this Section 9.6, and also shall inure to the benefit of and be binding upon any permitted assignee or transferee of this Agreement.

     Section 9.7. Irreparable Harm. Each Party acknowledges and agrees that, in the event of any threatened or actual breach by it of the first sentence of Section 3.2, Section 3.3 or Article V, the other Parties will suffer immediate and irreparable injury not fully compensable by monetary damages and for which the other Parties may not have an adequate remedy at law. Accordingly, each Party agrees that if one of the other Parties institutes an action or proceeding to enforce any provisions of this Agreement, such other Party or Parties will be entitled to seek injunctive or other equitable relief as may be necessary or appropriate to enjoin, prevent or curtail any such breach or threatened breach. The foregoing will be in addition to and without prejudice to such other rights as each Party may have under this Agreement, at law or in equity.

     Section 9.8. Expenses. Each Party will pay its own expenses incurred in connection with its negotiation of this Agreement and the consummation of the transactions contemplated hereby.

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     Section 9.9. Headings. The headings contained in this Agreement are for convenience of reference only and will not affect the meaning or interpretation of this Agreement.

     Section 9.10. Construction. References to any NDA or ANDA in this Agreement include, unless expressly indicated otherwise, all replacements and successors and all amendments and supplements to the foregoing. The term “including” means “including, without limitation,” and “herein”, “hereof”, and “hereunder” refer to this Agreement as a whole.

[Remainder of page left blank]

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IN WITNESS WHEREOF, the Parties have executed this Agreement on the date first above written.

ENDO PHARMACEUTICALS INC.
By:	/s/ David P. Holveck
Name and Title: David P. Holveck, President & CEO
Date: June 7, 2010
PENWEST PHARMACEUTICALS CO.
By:	/s/ Jennifer L. Good
Name and Title: Jennifer L. Good, President & CEO
Date: June 8, 2010
IMPAX LABORATORIES, INC.
By:	/s/ Arthur A. Koch, Jr.
Name and Title: Arthur A. Koch, Jr., SVP-CFO
Date: June 8, 2010

Settlement and License Agreement

APPENDIX A

STIPULATION OF DISMISSAL AND ORDER

UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

ENDO PHARMACEUTICALS INC.		)
and PENWEST PHARMACEUTICALS CO.,		)
		)
	Plaintiffs,	)
		)	C.A. No. 09-831-KSH-PS
v.		)	C.A. No. 09-832-KSH-PS
		)	C.A. No. 09-833-KSH-PS
IMPAX LABORATORIES, INC.,		)
		)
	Defendant.	) ) )

     WHEREAS, plaintiffs allege that Penwest Pharmaceuticals Co. (“Penwest”) is the assignee and owner of U.S. Patents 5,662,933, 5,958,456 and 7,276,250 (the “Asserted Patents”), and that Endo Pharmaceuticals Inc. (“Endo”) is an exclusive licensee of the Asserted Patents in the relevant field of use pursuant to a strategic alliance agreement with Penwest;

     WHEREAS, defendant Impax Laboratories, Inc. (“Impax”) has submitted to the U.S. Food and Drug Administration Abbreviated New Drug Application No. 79-087 (“Impax ANDA”) for approval to market and sell generic oxymorphone HCl extended-release tablets; and

     WHEREAS, Endo, Penwest and Impax have entered into a Settlement and License Agreement, dated as of June 8, 2010 (“Settlement and License Agreement”), pursuant to which the parties have resolved the above-referenced action and Plaintiffs have granted to Impax a license under the Asserted Patents in the United States.

     NOW, THEREFORE, Endo, Penwest and Impax stipulate that:

Settlement and License Agreement

1.	Impax, its Affiliates and their respective officers, agents, servants, employees and attorneys will not, until the applicable Commencement Date (as defined in the Settlement and License Agreement), engage in the manufacture, use, marketing, offer for sale, or sale in the United States, or importation into the United States, of any generic version of the Opana® ER product, except that (a) Impax shall be permitted to manufacture and market (but not use or sell) such products for a reasonable period of time prior to the applicable Commencement Date solely for the purpose of selling such products only on or after the Commencement Date, as set forth in the Settlement and License Agreement, and (b) Impax may conduct, directly or indirectly, any activities protected under 35 U.S.C. § 271(e)(1). The foregoing shall terminate automatically upon the applicable Commencement Date for each product as defined in the Settlement and License Agreement.
2.	Pursuant to Rules 41(a)(1) and 41(c) of the Federal Rules of Civil Procedure, plaintiffs, Endo, Penwest and Impax hereby stipulate and agree that the above actions C.A. Nos. 09-831, 09-832 and 09-833 -KSH-PS, including all claims, counterclaims and affirmative defenses between Plaintiffs and Impax, are dismissed with prejudice, except as provided for in sections 2.2 and 8.3 of the Settlement and License Agreement.
3.	Each party shall bear its own costs, expenses and attorneys’ fees in connection with the above-referenced actions.
4.	The parties waive any right of appeal from this Stipulation of Dismissal and Order.
5.	The Court retains jurisdiction over this Stipulation of Dismissal and Order, and the interpretation of the Settlement and License Agreement as it pertains to this Stipulation of Dismissal and Order, in the event of any dispute concerning it.

Settlement and License Agreement

     IT IS SO ORDERED, this                      day of                                         , 2010.

Hon. Katharine S. Hayden, U.S.D.J.

Stipulated as to form and entry:

Dechert llp
Attorneys for Plaintiffs Endo Pharmaceuticals, Inc. and Penwest Pharmaceuticals, Co.	Attorneys for Defendant and Counterclaim Plaintiff Impax Laboratories, Inc.

By:	/s/ Robert D. Rhoad	By:
Robert D. Rhoad 902 Carnegie Center Suite 500 Princeton, NJ 08540 Telephone: (609) 955-3200 Martin J. Black DECHERT LLP Cira Centre 2929 Arch Street Philadelphia, PA 19104-2808 Telephone: (215) 994-4000

EX-31

Exhibit 31

CERTIFICATION

I, Jennifer L. Good, in my capacity as principal executive officer and principal financial officer of Penwest Pharmaceuticals Co., certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q, (“this report”) of Penwest Pharmaceuticals Co. (the “registrant”);
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2010	/s/ Jennifer L. Good
	Jennifer L. Good
	President and Chief Executive Officer (Principal Executive Officer and Principal Financial Officer)

EX-32

Exhibit 32

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(b) OF THE
SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350

     In connection with the Quarterly Report on Form 10-Q of Penwest Pharmaceuticals Co. (the “Company”) for the period ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Jennifer L. Good, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 6, 2010	/s/ Jennifer L. Good
	Jennifer L. Good
	President and Chief Executive Officer (Principal Executive Officer and Principal Financial Officer)