10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the Quarter Ended June 30, 2001

Commission File Number 0-13789

NASTECH PHARMACEUTICAL COMPANY INC.
(Exact name of registrant as specified in its charter)

Delaware	11-2658569
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
45 Adams Avenue, Hauppuage, New York	11788
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (631) 273-0101

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

	Name of each exchange
Title of each class	on which registered
Common Stock, $.006 par value	Nasdaq National Market

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 [ x ]      No [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Date	Class	Shares Outstanding
06/30/01	Common stock —$ .006 par value	7,894,127

NASTECH PHARMACEUTICAL COMPANY INC.
TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS Page

Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000				1
Consolidated Statements of Operations for the six months and three months ended June 30, 2001 (unaudited) and 2000 (unaudited)				2
Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2001 (unaudited) and the year ended December 31, 2000				3
Consolidated Statements of Cash Flows for the six months ended June 30, 2001 (unaudited) and 2000 (unaudited)				4
Notes to Financial Statements				5-6
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
	AND RESULTS OF OPERATIONS			7-8
ITEM  3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK				9
			PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS				10
ITEM 2 – CHANGES IN SECURITIES AND USE OF PROCEEDS				10
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES				10
ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS				10
ITEM 5 – OTHER INFORMATION				10
ITEM 6 – EXHIBITS AND REPORTS ON FORM 8-K				10
		SIGNATURES		11

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PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

NASTECH PHARMACEUTICAL COMPANY INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)

				June 30,			December 31,
				2001			2000
ASSETS
				(unaudited)
Current assets:
	Cash and cash equivalents			$	7,599		$	6,256
	Account receivable				86			74
	Royalties and fees receivable				672			1,201
	Inventories				145			174
	Prepaid expenses and other assets				96			190
	Total current assets				8,598			7,895
Property and equipment					5,324			5,259
	Less: Accumulated depreciation and amortization				2,088			1,694
			Property and equipment, net		3,236			3,565
Goodwill, net					119			147
Other assets					75			54
			Total assets	$	12,028		$	11,661
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	730		$	648
	Royalties payable				193			487
	Accrued expenses and sundry liabilities				943			961
			Total current liabilities		1,866			2,096
Commitments and contingencies
	Stockholders’ equity:
	Preferred stock, $.01 par value; authorized: 100,000 shares; issued and outstanding: none				—
	Common stock, $0.006 par value; authorized: 25,000,000 shares; issued: 7,940,292 shares at June 30, 2001 and 6,880,485 shares at December 31, 2000, respectively				48			41
	Additional paid-in capital				44,584			39,678
	Accumulated deficit				(34,381	)		(30,003	)
					10,251			9,716
	Less: Treasury stock, at cost, 46,165 and 77,000 shares at June 30, 2001 and December 31, 2000, respectively				89			151
		Total stockholders’ equity			10,162			9,565
		Total liabilities and stockholders’ equity		$	12,028		$	11,661

See accompanying notes to consolidated financial statements

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NASTECH PHARMACEUTICAL COMPANY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)

			Six Months Ended June 30,						Three Months Ended June 30,
			2001			2000*			2001			2000*
Revenues:
	Revenues from manufactured product		$	475		$	431		$	322		$	249
	License fee and royalty income			995			1,266			431			566
	Interest income			188			366			100			165
		Total revenues		1,658			2,063			853			980
Costs and expenses:
	Cost of product sales			225			163			120			94
	Research and development			3,849			4,132			1,823			2,004
	Royalties			453			608			193			263
	Sales and marketing			435			484			209			224
	General and administrative			1,074			1,102			571			647
		Total costs and expenses		6,036			6,489			2,916			3,232
Net loss			$	(4,378	)	$	(4,426	)	$	(2,063	)	$	(2,252	)
Net loss per common share-basic and diluted			$	(.59	)	$	(.71	)	$	(.26	)	$	(.36	)
Average shares outstanding-basic and diluted				7,362			6,194			7,797			6,199

*Reclassified

See accompanying notes to consolidated financial statements

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NASTECH PHARMACEUTICAL COMPANY INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Six Months Ended June 30, 2001 (unaudited) and
For the Year Ended December 31, 2000
(In Thousands, Except Share Data)

					Additional								Total
	Common stock				Paid-in		Accumulated			Treasury			Stockholders'
	Shares		Amount		Capital		Deficit			Stock			Equity
Balance, December 31, 1999		6,267,485	$	38	$	37,050	$	(20,312	)	$	(151	)	$	16,625
Common Stock issued for acquisition of Atossa HealthCare, Inc.		600,000		3		2,450		—			—			2,453
Value of warrants issued in connection with equity financing agreement		—		—		100		0			0			100
Compensation related to stock options				—		34		—			—			34
Shares issued in connection with exercise of stock options		13,000		—		44		—			—			44
Net loss year ended December 31, 2000		—		—		—		(9,691	)		0			(9,691	)
Balance, December 31, 2000		6,880,485	$	41	$	39,678	$	(30,003	)	$	(151	)	$	9,565
Private placement of common shares and warrants (unaudited)		1,017,361		7		4,542		0			0			4,549
Compensation related to stock options (unaudited)		—		—		145		—			—			145
Shares issued in connection with exercise of stock options (unaudited)		42,446		—		219		—			62			281
Net loss six months ended June 30, 2001 (unaudited)		—		—		—		(4,378	)		—			(4,378	)
Balance, June 30, 2001 (unaudited)		7,940,292	$	48	$	44,584	$	(34,381	)	$	(89	)	$	10,162

See accompanying notes to consolidated financial statements

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NASTECH PHARMACEUTICAL COMPANY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)

			Six Months Ended
			June 30,
			2001			2000
Operating activities:
	Net loss		$	(4,378	)	$	(4,426	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Compensation related to stock options		145			34
		Depreciation and amortization		422			360
	Changes in assets and liabilities:
		Accounts and other receivables		517			347
		Inventories		29			42
		Prepaid expenses and other assets		73			358
		Accounts payable		82			(1,001	)
		Royalties payable		(294	)		(394	)
		Accrued expenses and sundry liabilities		(18	)		210
Net cash used in operating activities				(3,422	)		(4,470	)
Investing activities:
	Property and equipment			(65	)		(472	)
	Short-term investments-redemptions			—			3,986
Net cash provided by (used in) investing activities				(65	)		3,514
Financing activities:
	Private placement of common shares			4,549			—
	Cost related to equity financing			—			(75	)
	Exercise of stock options			281			33
Net cash provided by (used in) financing activities				4,830			(42	)
Net increase (decrease) in cash and cash equivalents				1,343			(998	)
Cash and cash equivalents – beginning				6,256			10,652
Cash and cash equivalents – ending			$	7,599		$	9,654

See accompanying notes to consolidated financial statements

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NASTECH PHARMACEUTICAL COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 – General

      The accompanying unaudited financial information should be read in conjunction with the audited financial statements, including the notes thereto, as of and for the year ended December 31, 2000, included in the Company’s 2000 annual report filed on Form 10-K. The consolidated financial statements include the financial statements of Nastech and its wholly owned subsidiary, Atossa HealthCare Inc. All intercompany balances and transactions have been eliminated in consolidation.

      The information furnished in this report reflects all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. The results of operations for the six-month period ended June 30, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2001.

      In 2001, we changed our presentation of revenue received under our license agreement with Schwarz Pharma on Nascobal. Revenue from the sale of Nascobal to Schwarz Pharma and royalties from Schwarz Pharma’s sale of the product are reflected as “revenues from manufactured product” in the accompanying consolidated statements of operations. Previously, Nascobal royalty income was included in “license fee and royalty income” and sales of Nascobal were included in “product sales”. Prior year amounts have been reclassified to reflect the new classification.

Note 2 – Business

      Historically, our business involves research, development, manufacturing and commercialization of nasally administered forms of prescription pharmaceuticals. By using biophysics, physical chemistry and pharmacology in drug development, we seek to maximize therapeutic efficacy and safety, which sometimes involve a change in route of administration.

      We have an accumulated deficit of $34.4 million as of June 30, 2001. We expect operating losses in the foreseeable future as we continue our research toward the development of commercial products. Our development efforts and the future revenues from sales of these products are expected to generate contract research, milestones, license fees, royalties and manufacturing product sales for us. We have financed our operations primarily through the sale of common stock in the public market and also through revenues resulting from royalties provided by our collaborative partners and, to a lesser extent, from sales of manufactured product.

      We face certain risks and uncertainties regarding future profitability that arise from our ability to obtain additional funding, protection of patents and property rights, uncertainties regarding our technologies, competition and technological change, government regulations including the need for product approvals, and attracting and retaining key officers and employees.

      As of June 30, 2001 we have $6.7 million of working capital. In the past, we received significant revenues from royalties for Stadol NS. The patent on Stadol NS expires in August 2001. We will not receive any royalties after the patent expiry. This event should adversely affect the recording of revenue and contribution to operations in the second half of year 2001. In March and May 2001, we raised approximately $4.5 million in net proceeds through a private placement as discussed in Note 4 below. In July 2000, we entered into an equity line of credit that will allow us to issue during a 3-year term up to 1.2 million shares of common stock to an investor that are discounted from the fair market value on the date of issuance. We believe that our current cash position and the funds that can be drawn down under the equity line of credit will provide us with adequate working capital through at least March 31, 2002. In the event they do not provide us with adequate working capital, we would be required to curtail or reduce our research and development efforts.

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Note 3 – Net Loss per Common Share

      Basic and diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the periods. The effect of employee stock options and warrants totaling approximately 2.8 million and 1.3 million at June 30, 2001 and 2000, respectively, were not included in the net loss per share calculation because their effect would have been antidilutive.

Note 4 – Private Placement of Shares of Common Stock and Warrants

      In March and May 2001, we raised a total of approximately $4.5 million in net proceeds through a private placement of approximately one million shares of our common stock to a group of investors. In connection with the private placement, we also issued to the investors and placement agent warrants to purchase 595,155 shares of our common stock at an exercise price of $6.34 per share. The warrants are exercisable for a period of five years. The capital will be used to fund ongoing research and development and working capital.

Note 5 – Stock Option Plans

      On May 2, 2001, the Board of Directors increased the lives of the option awards granted to Board Members upon separation from the Board of Directors from 90 days to 24 months but not beyond the original life of the options. The modification to the vesting caused a new measurement date for the options which resulted in an incremental intrinsic value of $231,000. A charge will be recognized if a separation event occurs. Since no Board Member terminated their service to the Company, no charge was recorded for the three and six month periods ended June 30, 2001. In addition, no charge will be incurred if the options expire or if the Board Members exercise their options before they terminate their services.

Note 6 – RECENT ACCOUNTING PRONOUNCEMENTS

      In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations” (“SFAS 141”), and SFAS No. 142, “Goodwill And Other Intangible Assets” (“SFAS 142”). SFAS 141 addresses the accounting for acquisitions of businesses and is effective for acquisitions occurring on or after July 1, 2001. SFAS 142 addresses the method of identifying and measuring goodwill and other intangible assets acquired in a business combination, eliminates further amortization of goodwill, and requires periodic evaluations of impairment of goodwill balances. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. We are currently assessing the adoption of SFAS 141 and SFAS 142. We amortize approximately $14,000 per quarter of goodwill.

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                 RESULT OF OPERATIONS

      Statements contained herein that are not historical fact may be 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, that are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those projected or suggested in any forward-looking statement made by the Company. These factors include, but are not limited to: (i) the Company’s ability to successfully complete product research and development, including pre-clinical and clinical studies and commercialization; (ii) the Company’s ability to obtain required governmental approvals, including product and patent approvals; (iii) the Company’s ability to attract and/or maintain its key officers and employees and manufacturing, sales, distribution and marketing partners, (iv) the Company’s ability to develop and commercialize its products before its competitors, and (v) the Company’s ability to obtain additional funding. In addition, significant fluctuations in quarterly results may occur as a result of varying milestone payments and the timing of costs and expenses related to the Company’s research and development program. Additional factors that would cause actual results to differ materially from those projected or suggested in any forward-looking statements are contained in the Company’s filings with the Securities and Exchange Commission, including those factors discussed under the caption “Risk Factors” in the Company’s most recent Annual Report on Form 10-K.

Results of Operations

Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000

      Revenues decreased by $405,000, or 20%, to $1.7 million primarily as a result of a decline in royalty income from BMS on sales of Stadol®NS™, which decreased $320,000, or 26%, to $929,000. Total revenues from Schwarz Pharma on Nascobal® were $475,000, an increase of 9%, compared to $431,000 in 2000.

      Total costs and expenses decreased by $453,000, or 7%, to $6.0 million in 2001. The decrease arises primarily from:

      Cost of product sales increased by $62,000, or 38% to $225,000, as a result of increased units sold and the write-off of costs associated with a production batch failing product release standards.

      Research and development expense decreased by $283,000, or 6.9% to $3.8 million primarily as a result of a reduction in operating expenses and the Company’s clinical program in the prior year for intranasal scopolamine, offset to some degree by increased costs associated with multiple non-clinical and clinical research and development programs.

      Royalty expense decreased by $155,000, or 25%, to $453,000 as a result of the decrease in sales of Stadol NS by BMS and the related royalty payable to the University of Kentucky Research Foundation (UKRF) under a separate agreement between the Company and UKRF. Royalty expense increases or decreases approximately in proportion to royalty income associated with Stadol NS.

      Sales and marketing costs decreased $49,000, or 10%, to $435,000 primarily from a decrease in market research costs.

      General and administrative expense decreased $28,000, or 3%, to $1.1 million principally as a result of the $284,000 of compensation expense incurred in conjunction with the contractual obligations with the estate of the deceased CEO in the prior year, offset by severance to former officers of the Company and amortization of goodwill in the current period.

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Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000

      Revenues decreased by $127,000 or 13%, to $853,000 primarily as a result of a decline in royalty income from BMS on sales of Stadol NS, which declined $160,000, or 29%, to $398,000. Total revenues from Schwarz Pharma on Nascobal® were $322,000,an increase of 29%, compared to $249,000 in 2000.

      Total costs and expenses decreased by $316,000, or 10%, to $2.9 million in 2001. The decrease arises primarily from:

      Research and development expense decreased by $181,000, or 9%, to $1.8 million primarily as a result of decreased operating expenses offset by increased costs associated with multiple development programs.

      Royalty expense decreased by $70,000, or 27%, to $193,000 as a result of the decrease in sales of Stadol NS by BMS and the related royalty payable to the University of Kentucky Research Foundation (UKRF) under a separate agreement between the Company and UKRF. Royalty expense increases or decreases approximately in proportion to royalty income associated with Stadol NS.

      General and administrative expense decreased $76,000, or 12%, to $571,000 principally as a result of the $284,000 of compensation expense incurred in conjunction with the contractual obligations with the estate of the deceased CEO in the prior year, offset primarily by severance to a former officer of the Company and amortization of goodwill in the current period.

Liquidity and Capital Resources

      At June 30, 2001, our liquidity included cash and cash equivalents of $7.6 million compared to $6.3 million at December 31, 2000. We have an accumulated deficit of $34 million and expect operating losses in the foreseeable future as we continue our research toward the development of commercial products. Our development efforts and the future revenues from sales of these products are expected to generate contract research, milestones, license fees, royalties and manufacturing product sales for us. We have financed our operations primarily through the sale of common stock and warrants in the public market and also through revenues resulting from royalties provided by our collaborative partners and, to a lesser extent, from sales of manufactured product. Account, royalties and fee receivables at June 30, 2001 consist principally of receivables pursuant to the BMS and Schwarz Pharma agreements.

      At June 30, 2001, we have $6.7 million of working capital. In the past, we received significant royalties for Stadol NS. The patent on Stadol NS expires in August 2001 and royalties on Stadol NS will cease at that time. We expect that this event should adversely affect the recording of revenue and contribution to operations in the second half of year 2001.

      In July 2000, we entered into an equity line of credit agreement. Under the equity line, we have the option, at our discretion, to issue during a three-year term up to 1.2 million shares of our common stock to an investor at prices that are discounted from the fair market value on the date of issuance.

      In March and May 2001, we raised approximately $4.5 million in net proceeds through a private placement of approximately one million shares of common stock to a group of investors. In connection with the private placement, we also issued to the investors and placement agent warrants to purchase 595,155 shares of our common stock at an exercise price of $6.34 per share.

      We believe that our current cash position and the funds that can be drawn down under the equity line will provide us with adequate working capital through at least March 31, 2002. In the event they do not provide us with adequate working capital, we may be required to curtail or reduce our research and development activities.

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company’s cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in highly-rated investment grade commercial paper and money market funds. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes.

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

                  None

ITEM 2 – CHANGES IN SECURITIES AND USE OF PROCEEDS

                  The Company filed Form S-3 with the SEC in connection with registration of additional shares and warrants under its private placement.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

                  None

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                  In June 2001, the shareholders of the Company approved the following proposals:

                  1) Election of eight (8) directors, each to hold office for a term of one (1) year or until their respective
                       successors have been duly elected or appointed; and

                  2) Appointment of KPMG LLP as the Company’s independent auditors for the year ending
                       December 31, 2001.

ITEM 5 – OTHER INFORMATION

                  None

ITEM 6 – EXHIBITS AND REPORTS ON FORM 8-K

            Exhibit 10:13: Employment agreement of Andrew Zinzi, the Company’s Chief Financial Officer.
            Reports on Form 8-K:  none

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SIGNATURES

     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, duly authorized, in Hauppauge, State of New York, on August 13, 2001.

Nastech Pharmaceutical Company Inc.

By:                                                       /s/Steven C. Quay, M.D., Ph.D.
                    Steven C. Quay, M.D., Ph.D.

By:                                                       /s/ Andrew Zinzi
                    Andrew Zinzi
                   Chief Financial Officer
     (Principal Financial and Accounting Officer)

-11- EX-10.13 3 w52281ex10-13.txt EMPLOYMENT AGREEMENT 1 EXHIBIT: 10:13 EMPLOYMENT AGREEMENT AGREEMENT, dated this 2nd day of May, 2001 between Nastech Pharmaceutical Company Inc., a Delaware corporation ("Employer") with offices at 45 Adams Avenue, Hauppauge, NY and Andrew P. Zinzi ("Employee"). W I T N E S S E T H : WHEREAS, the Employee is currently employed as Chief Financial Officer ("CFO") for the Employer and the Employer and Employee wish to enter into an employment and compensation arrangement on the following terms and conditions: 1. Employment. Subject to the terms and conditions of this Agreement, including specifically Section 12, Employer agrees to employ Employee for a period commencing from the effective date of this Agreement and ending December 31, 2003 to serve as the Chief Financial Officer ("CFO") with direct report to Employer's Chief Executive Officer. Employee hereby accepts such employment and agrees to devote his full time and best efforts to the duties provided herein. In future periods, unless otherwise terminated by the Employer or Employee as noted in this Agreement, parties agree to renegotiate in good faith Employee's Employment Agreement at least four months prior to the Agreement's expiration date. 2. Compensation. For services rendered to Employer, beginning January 1, 2001, Employer shall compensate Employee with a salary, payable in accordance with Employer's standard payroll practices in effect, from time to time, of $215,000 per annum, adjusted January 1, 2003 for a cost of living increase. . The Employee shall also be entitled to annual incentive compensation of up to forty (40%) of the applicable base salary if the Employer's objectives, as set forth in a separate schedule and approved by the Compensation Committee of the Employer no later than sixty (60) days following the end of the Employer's fiscal year, are achieved. In 2001, the Employee's incentive compensation shall be based upon activities as presented to, and approved by, the Compensation Committee. 3. Stock Options. As further compensation, Employee's stock options may be increased (1) 2 during the term of this Agreement, as determined by Employer in its sole discretion. 4. Expenses. Employer shall pay or reimburse Employee for all expenses normally reimbursed by Employer, reasonably incurred by him in furtherance of his duties hereunder and authorized and approved by the Employer upon submission by him of vouchers or an itemized list thereof prepared in compliance with such rules relating thereto as the Employer may, from time to time, adopt and as may be required in order to permit such payments as proper deductions to Employer under the Internal Revenue Code of 1986, as amended, and the rule and regulations adopted pursuant thereto now or hereafter in effect. 5. Benefits. The Employee shall be entitled to participate in or be covered by any Health and/or Retirement and Executive Compensation plans adopted by the Employer from time to time. 6. Insurance and Indemnity. The Employer shall use its best efforts to maintain, at its expense, officers and directors fiduciary liability insurance covering the Employee in an amount not less than $5 million. The Employer shall also indemnity the Employee, to the fullest extent permitted by law, from any liability asserted against or incurred by the Employee, including attorney's costs, in his capacity as an officer of Employer. This indemnity shall survive termination of the Agreement. 7. Noncompetition. A. The Employee agrees that, except in accordance with his duties under this Agreement on behalf of the Employer, he will not during the term of this Agreement: Participate in, be employed in any capacity by, serve as director, consultant, agent or representative for, or have any material direct interest in any enterprise (other than as a passive investor in a publicly traded company) which is engaged in the business of distributing, selling or otherwise trading in products which are competitive to any of the Employer's technology or products distributed, sold or otherwise traded in by the Employer during the term of the Employee's employment with the Employer, or which are competitive to any products being actively developed, with the bona fide intent to market same, by the Employer during the term of the Employee's employment with the Employer; B. The Employee hereby agrees that damages and any other remedy available at law would be inadequate to redress or remedy any loss or damage suffered by the Employer upon any (2) 3 breach of the terms of this Section 7 by the Employee, and the Employee therefore agrees that the Employer, in addition to recovering on any claim for damages or obtaining any other remedy available at law, also may enforce the terms of this Section 7 by injunction or specific performance, and may obtain any other appropriate remedy available in equity. 8. Assignment of Patents. Employee shall disclose fully to the Employer any and all discoveries of a scientific nature relating to Employer's business he shall make and any and all ideas, concepts or inventions of a scientific nature relating to Employer's business which he shall conceive or make during his period of employment, or during the period of six months after his employment shall terminate, which are in whole or in part the result of his work with the Employer. Such disclosure is to be made promptly after each discovery or conception, and the discovery, idea, concept or invention will become and remain the property of the Employer, whether or not patent applications are filed thereon. Upon request and at the expense of the Employer, the Employee shall make application through the patent solicitors of the Employer for letters patent of the United States and any and all other countries at the discretion of the Employer on such discoveries, ideas and inventions, and to assign all such applications to the Employer, or at its order, forthwith, without additional payment by the Employer during his period of employment and for reasonable compensation for time actually spent by the Employee at such work at the request of the Employer after the termination of the employment. He is to give the Employer, its attorneys and solicitors, all reasonable assistance in preparing and prosecuting such applications and, on request of the Employer, to execute all papers and do all things that may be reasonably necessary to protect the right of the Employer and vest in it or its assigns the discoveries, ideas or inventions, applications and letters patent herein contemplated. Said cooperation shall also include all actions reasonably necessary to aid the Employer in the defense of its rights in the event of litigation. (3) 4 9. Trade Secrets. (a) In the course of the term of this Agreement, it is anticipated that the Employee shall have access to secret or confidential technical and commercial information, records, data, specifications, systems, formulas, methods, plans, policies, inventions, material and other knowledge ("Confidential Material") owned by the Employer and its subsidiaries. The Employee recognizes and acknowledges that included within the Confidential Material are the Employer's confidential commercial information, technology, methods of manufacture, clinical studies, pre-clinical data and related materials, all as they may exist from time to time, and that they are valuable special and unique aspects of the Employer's business. All such Confidential material shall be and remain the property of the Employer. Except as required by his duties to the Employer, the Employee shall not, directly or indirectly, either during the term of his employment or at any time thereafter, disclose or disseminate to anyone or make use of, for any purpose whatsoever, any Confidential Material. Upon termination of his employment, the Employee shall promptly deliver to the Employer all Confidential Material (including all copies thereof) which are in the possession or under the control of the Employee. The Employee shall not be deemed to have breached this Section 9 if the Employee shall be specifically compelled by lawful order of any judicial, legislative, or administrative authority or body to disclose any confidential material or else face civil or criminal penalty or sanction. (b) The Employee hereby agrees that damages and any other remedy available at law would be inadequate to redress or remedy any loss or damage suffered by the Employer upon any breach of the terms of this Section 9 by the Employee, and the Employee therefore agrees that the Employer, in addition to recovering on any claim for damages or obtaining any other remedy available at law, also may enforce the terms of this Section 9 by injunction or specific performance, and may obtain any other appropriate remedy available in equity. 10. Vacation. Employee shall be entitled to vacation (with a minimum of three weeks vacation which shall not accrue or accumulate from year to year, except as provided by Employer), sick days, personal days and holidays as shall be governed by Employer's standard personnel policies, which shall be provided to Employee. 11. Termination. (4) 5 (a) Employee's employment with Employer shall be at will. Either Employer or the Employee may terminate this Agreement and Employee's employment at any time, with or without Cause or Good Reason (as such terms are defined below), in its or his sole discretion, upon thirty (30) days prior written notice of termination. (b) Without limiting the foregoing Section 12(a), (i) the Employee may terminate his employment with the Employer at any time for Good Reason, or (ii) the Employer may terminate his employment at any time for Cause. Good Reason shall mean death, Disability (as defined below) or a termination of employment as a result of a substantial diminution in the Employee's responsibilities, or a reduction in base salary or a demotion in title as CFO or demotion in position as CFO of a publicly held company, or a change in reporting position to someone other than the Chief Executive Officer ("CEO"). Cause shall mean (i) the Employee's willful, repeated or neglectful failure to perform his duties hereunder or to comply with any reasonable or proper direction given by or on behalf of the Employer's Chief Executive Officer and approved by the Board of Directors following five (5) days written notice to such effect, other than any Employee's refusal to execute any document or statement that contains erroneous or misleading financial information; (ii) the Employee being guilty of serious misconduct on the Company's premises or elsewhere, whether during the performance of his duties or not, which may cause damage to the reputation of the Employer or render it difficult for the Employee to satisfactorily continue to perform his duties; (iii) the Employee being found guilty in a criminal court of any offense of a nature likely to affect the reputation of the Employer or to prejudice its interests if the Employee were to continue to be employed by the Employer; (iv) the Employee's commission of any act of fraud, theft or dishonesty, or any intentional tort against the Company; or (v) the Employee's violation of any of the material terms, covenants, representations or warranties contained in this Agreement. (c) "Disability" shall mean that the Employee, in the good faith determination of the Board of Directors of the Employer, is unable to render services of the character contemplated hereby and that such inability (i) may be expected to be permanent, or (ii) may be expected to continue for a period of at least three (3) consecutive months (or for shorter periods totaling more than six (6) months during any period of twelve consecutive months). Termination resulting from Disability may only be effected after at least thirty (30) days written notice by the Employer of its intention to terminate the Employee's employment. (5) 6 (d) "Termination Date" shall mean (i) if this Agreement is terminated on account of death, the date of death; (ii) if this Agreement is terminated for Disability, the date established by the Company pursuant to Section 11(c) hereof; (iii) if this Agreement is terminated by the Employer, the date on which a notice of termination is given to the Employee; (iv) if the Agreement is terminated by the Employee, the date the Employee ceases work. 12. Severance. (a) If (i) the Employer terminates the employment of the Employee against his will and without Cause, or (ii) the Employee terminates his employment for Good Reason, the Employee shall be entitled to receive salary, incentive compensation and vacation accrued through the Termination Date plus nine month's salary payable in one lump-sum at the Termination Date and all stock options shall become exercisable and shall remain exercisable for a period of two years after such Termination Date. Notwithstanding the foregoing, the Employer shall not be required to pay any severance pay for any period following the Termination Date if the Employer violates the provisions of Section 8, Section 9 or Section 10 of this Agreement. In such event, the Employer shall provide written notice to the Employee detailing such violation. (b) If (i) the Employee voluntarily terminates his employment other than for Good Reason, or (ii) the Employee is terminated by the Employer for Cause, then the Employee shall be entitled to receive salary, incentive compensation and accrued vacation through the Termination Date plus all stock options that are exercisable shall remain exercisable for a period of one year after such Termination Date. (c) In addition to the provisions of Section 12(a) and 12(b) hereof, to the extent COBRA shall be applicable to the Employer or as provided by law, the Employee shall be entitled to continuation of group health plan benefits for a period of one (1) year following the Termination Date if the Employee makes the appropriate conversion and payments. (d) The Employee acknowledges that, upon termination of his employment, he is entitled to no other compensation, severance or other benefits other than those specifically set forth in this Agreement or the Stock Option Agreement. (6) 7 13. Payment and Other Provisions After Change of Control (a) In the event Employee's employment with the Employer is terminated following the occurrence of a Change of Control (other than as a consequence of death or disability) either (x) by the Employer for any reason other than for Cause, or (y) by Employee for Good Reason, then Employee shall be entitled to receive from the Employer, in lieu of the severance payment otherwise payable pursuant to Section 12, the following: (i) Base Salary: Employee's annual base salary as in effect at the date of termination shall be paid on the date of termination; (ii) Incentive Compensation: The amount of the Employee's target incentive compensation under the applicable Incentive Compensation Plan for the fiscal year in which the date of termination occurs, shall be paid on the date of termination; and (iii) Other Benefits: Notwithstanding the vesting period provided for in the Employer's Stock Option Plan and any related stock option agreements between the Employer and the Employee for stock options ("options") granted Employee by the Employer all of options shall be fully vested and exercisable for a period of two years from the Termination Date. (b) For purposes of this Agreement, the term "Change in Control" shall mean: (i) The acquisition, other than from the Employer, by any individual, entity or group (within the meaning of Rule 13d-3 promulgated under the Exchange Act or any successor provision) of 50% or more of either (a) the then outstanding shares of Common Stock of the Employer or (b) the combined voting power of the then outstanding voting securities of the Employer entitled to vote generally in the election of directors (the "Voting Securities"). (ii) Individuals who, as of the Effective Date of this Agreement, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board. (iii) Approval by the Shareholders of the Employer of a reorganization, merger or consolidation (a "Business Combination"), in each case, with respect to which all or substantially all holders of the outstanding Common Stock or Voting Securities immediately prior to such Business Combination do not, following such Business Combination, beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock or the combined voting power of the then Voting Securities entitled to vote generally in the election of directors, as the case may be, of the Employer resulting from the Business Combination, or (iv) (a) a complete liquidation or dissolution of the Employer or (b) a sale or other disposition of all or substantially all of the assets of the Employer with respect to which, following such sale or disposition, more than 60% of, respectively, the then outstanding Common Shares or Voting Securities is then owned beneficially, directly or indirectly, (7) 8 by all or substantially all of the equity holders, respectively, of the Common Shares or Voting Securities immediately prior to such sale or disposition in substantially the same proportion as their ownership of the Common Shares or Voting Securities, as the case may be, immediately prior to such sale or disposition. (c) In the event that involuntary termination of Employee as CFO occurs subsequent to change in senior management or the appointment of a new Chairman of the Board of Directors, the Company would (i) continue to pay base salary and health benefits for the remaining term of this Agreement, provided the Employee remains unemployed in the official capacity as a CFO, and such payments would not be less than six months salary and benefits, and (ii) all stock options currently outstanding would become vested and exercisable through December 31, 2003. 14. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered or certified mail, return receipt requested to his residence in the case of the Employee, or to its principal office in the case of the Employer, or to such other addresses as they may respectively designate in writing. 15. Entire Agreement; Waiver. This Agreement contains the entire understanding of the parties and may not be changed orally but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. Waiver of or failure to exercise any rights provided by this Agreement in any respect shall not be deemed a waiver of any further or future rights. 16. Assignment. Employee's rights hereunder are personal to and shall not be transferable nor assignable by the Employee. This Agreement shall bind and inure to the benefit of the Employee and the Employer and their respective legal representatives, successors and assigns. 17. Arbitration. Any and all claims, disputes, or controversies arising out of or related to this Agreement, or the breach thereof, shall be resolved exclusively by arbitration in Suffolk County, New York, in accordance with the rules of the American Arbitration Association then in existence. The determination or award rendered therein shall be binding and conclusive upon the parties, and judgment may be entered thereon in accordance with applicable law in any court having jurisdiction. No party shall be entitled to seek or be awarded punitive damages. (8) 9 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 19. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, NASTECH PHARMACEUTICAL COMPANY INC. has caused this instrument to be signed by a duly authorized officer and the Employee has hereunto set his hand the day and year first above written. NASTECH PHARMACEUTICAL COMPANY INC. By /s/ Steven C. Quay --------------------------- STEVEN C. QUAY /s/ Andrew P. Zinzi - -------------------------------- ANDREW P. ZINZI (9) -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.13

   1
                                                                  EXHIBIT: 10:13

                              EMPLOYMENT AGREEMENT

        AGREEMENT, dated this 2nd day of May, 2001 between Nastech
Pharmaceutical Company Inc., a Delaware corporation ("Employer") with offices at
45 Adams Avenue, Hauppauge, NY and Andrew P. Zinzi ("Employee").


                              W I T N E S S E T H :

        WHEREAS, the Employee is currently employed as Chief Financial Officer
("CFO") for the Employer and the Employer and Employee wish to enter into an
employment and compensation arrangement on the following terms and conditions:

1. Employment. Subject to the terms and conditions of this Agreement, including
specifically Section 12, Employer agrees to employ Employee for a period
commencing from the effective date of this Agreement and ending December 31,
2003 to serve as the Chief Financial Officer ("CFO") with direct report to
Employer's Chief Executive Officer. Employee hereby accepts such employment and
agrees to devote his full time and best efforts to the duties provided herein.
In future periods, unless otherwise terminated by the Employer or Employee as
noted in this Agreement, parties agree to renegotiate in good faith Employee's
Employment Agreement at least four months prior to the Agreement's expiration
date.

        2. Compensation. For services rendered to Employer, beginning January 1,
2001, Employer shall compensate Employee with a salary, payable in accordance
with Employer's standard payroll practices in effect, from time to time, of
$215,000 per annum, adjusted January 1, 2003 for a cost of living increase. .

        The Employee shall also be entitled to annual incentive compensation of
up to forty (40%) of the applicable base salary if the Employer's objectives, as
set forth in a separate schedule and approved by the Compensation Committee of
the Employer no later than sixty (60) days following the end of the Employer's
fiscal year, are achieved. In 2001, the Employee's incentive compensation shall
be based upon activities as presented to, and approved by, the Compensation
Committee.

        3.  Stock Options.  As further compensation, Employee's stock options
may be increased


                                      (1)
   2

during the term of this Agreement, as determined by Employer in its sole
discretion.

        4. Expenses. Employer shall pay or reimburse Employee for all expenses
normally reimbursed by Employer, reasonably incurred by him in furtherance of
his duties hereunder and authorized and approved by the Employer upon submission
by him of vouchers or an itemized list thereof prepared in compliance with such
rules relating thereto as the Employer may, from time to time, adopt and as may
be required in order to permit such payments as proper deductions to Employer
under the Internal Revenue Code of 1986, as amended, and the rule and
regulations adopted pursuant thereto now or hereafter in effect.

        5.  Benefits.  The Employee shall be entitled to participate in or be
covered by any Health and/or Retirement and Executive Compensation plans adopted
by the Employer from time to time.

        6. Insurance and Indemnity. The Employer shall use its best efforts to
maintain, at its expense, officers and directors fiduciary liability insurance
covering the Employee in an amount not less than $5 million. The Employer shall
also indemnity the Employee, to the fullest extent permitted by law, from any
liability asserted against or incurred by the Employee, including attorney's
costs, in his capacity as an officer of Employer. This indemnity shall survive
termination of the Agreement.

        7.  Noncompetition.

        A.     The Employee agrees that, except in accordance with his duties
under this Agreement on behalf of the Employer, he will not during the term of
this Agreement:

        Participate in, be employed in any capacity by, serve as director,
consultant, agent or representative for, or have any material direct interest in
any enterprise (other than as a passive investor in a publicly traded company)
which is engaged in the business of distributing, selling or otherwise trading
in products which are competitive to any of the Employer's technology or
products distributed, sold or otherwise traded in by the Employer during the
term of the Employee's employment with the Employer, or which are competitive to
any products being actively developed, with the bona fide intent to market same,
by the Employer during the term of the Employee's employment with the Employer;

        B. The Employee hereby agrees that damages and any other remedy
available at law would be inadequate to redress or remedy any loss or damage
suffered by the Employer upon any



                                      (2)
   3

breach of the terms of this Section 7 by the Employee, and the Employee
therefore agrees that the Employer, in addition to recovering on any claim for
damages or obtaining any other remedy available at law, also may enforce the
terms of this Section 7 by injunction or specific performance, and may obtain
any other appropriate remedy available in equity.

        8. Assignment of Patents. Employee shall disclose fully to the Employer
any and all discoveries of a scientific nature relating to Employer's business
he shall make and any and all ideas, concepts or inventions of a scientific
nature relating to Employer's business which he shall conceive or make during
his period of employment, or during the period of six months after his
employment shall terminate, which are in whole or in part the result of his work
with the Employer. Such disclosure is to be made promptly after each discovery
or conception, and the discovery, idea, concept or invention will become and
remain the property of the Employer, whether or not patent applications are
filed thereon. Upon request and at the expense of the Employer, the Employee
shall make application through the patent solicitors of the Employer for letters
patent of the United States and any and all other countries at the discretion of
the Employer on such discoveries, ideas and inventions, and to assign all such
applications to the Employer, or at its order, forthwith, without additional
payment by the Employer during his period of employment and for reasonable
compensation for time actually spent by the Employee at such work at the request
of the Employer after the termination of the employment. He is to give the
Employer, its attorneys and solicitors, all reasonable assistance in preparing
and prosecuting such applications and, on request of the Employer, to execute
all papers and do all things that may be reasonably necessary to protect the
right of the Employer and vest in it or its assigns the discoveries, ideas or
inventions, applications and letters patent herein contemplated. Said
cooperation shall also include all actions reasonably necessary to aid the
Employer in the defense of its rights in the event of litigation.



                                      (3)
   4

        9.  Trade Secrets.

        (a) In the course of the term of this Agreement, it is anticipated that
the Employee shall have access to secret or confidential technical and
commercial information, records, data, specifications, systems, formulas,
methods, plans, policies, inventions, material and other knowledge
("Confidential Material") owned by the Employer and its subsidiaries. The
Employee recognizes and acknowledges that included within the Confidential
Material are the Employer's confidential commercial information, technology,
methods of manufacture, clinical studies, pre-clinical data and related
materials, all as they may exist from time to time, and that they are valuable
special and unique aspects of the Employer's business. All such Confidential
material shall be and remain the property of the Employer. Except as required by
his duties to the Employer, the Employee shall not, directly or indirectly,
either during the term of his employment or at any time thereafter, disclose or
disseminate to anyone or make use of, for any purpose whatsoever, any
Confidential Material. Upon termination of his employment, the Employee shall
promptly deliver to the Employer all Confidential Material (including all copies
thereof) which are in the possession or under the control of the Employee. The
Employee shall not be deemed to have breached this Section 9 if the Employee
shall be specifically compelled by lawful order of any judicial, legislative, or
administrative authority or body to disclose any confidential material or else
face civil or criminal penalty or sanction.

        (b) The Employee hereby agrees that damages and any other remedy
available at law would be inadequate to redress or remedy any loss or damage
suffered by the Employer upon any breach of the terms of this Section 9 by the
Employee, and the Employee therefore agrees that the Employer, in addition to
recovering on any claim for damages or obtaining any other remedy available at
law, also may enforce the terms of this Section 9 by injunction or specific
performance, and may obtain any other appropriate remedy available in equity.

        10. Vacation. Employee shall be entitled to vacation (with a minimum of
three weeks vacation which shall not accrue or accumulate from year to year,
except as provided by Employer), sick days, personal days and holidays as shall
be governed by Employer's standard personnel policies, which shall be provided
to Employee.

        11.  Termination.


                                      (4)
   5

        (a) Employee's employment with Employer shall be at will. Either
Employer or the Employee may terminate this Agreement and Employee's employment
at any time, with or without Cause or Good Reason (as such terms are defined
below), in its or his sole discretion, upon thirty (30) days prior written
notice of termination.

        (b) Without limiting the foregoing Section 12(a), (i) the Employee may
terminate his employment with the Employer at any time for Good Reason, or (ii)
the Employer may terminate his employment at any time for Cause. Good Reason
shall mean death, Disability (as defined below) or a termination of employment
as a result of a substantial diminution in the Employee's responsibilities, or a
reduction in base salary or a demotion in title as CFO or demotion in position
as CFO of a publicly held company, or a change in reporting position to someone
other than the Chief Executive Officer ("CEO"). Cause shall mean (i) the
Employee's willful, repeated or neglectful failure to perform his duties
hereunder or to comply with any reasonable or proper direction given by or on
behalf of the Employer's Chief Executive Officer and approved by the Board of
Directors following five (5) days written notice to such effect, other than any
Employee's refusal to execute any document or statement that contains erroneous
or misleading financial information; (ii) the Employee being guilty of serious
misconduct on the Company's premises or elsewhere, whether during the
performance of his duties or not, which may cause damage to the reputation of
the Employer or render it difficult for the Employee to satisfactorily continue
to perform his duties; (iii) the Employee being found guilty in a criminal court
of any offense of a nature likely to affect the reputation of the Employer or to
prejudice its interests if the Employee were to continue to be employed by the
Employer; (iv) the Employee's commission of any act of fraud, theft or
dishonesty, or any intentional tort against the Company; or (v) the Employee's
violation of any of the material terms, covenants, representations or warranties
contained in this Agreement.

        (c) "Disability" shall mean that the Employee, in the good faith
determination of the Board of Directors of the Employer, is unable to render
services of the character contemplated hereby and that such inability (i) may be
expected to be permanent, or (ii) may be expected to continue for a period of at
least three (3) consecutive months (or for shorter periods totaling more than
six (6) months during any period of twelve consecutive months). Termination
resulting from Disability may only be effected after at least thirty (30) days
written notice by the Employer of its intention to terminate the Employee's
employment.



                                      (5)
   6

        (d) "Termination Date" shall mean (i) if this Agreement is terminated on
account of death, the date of death; (ii) if this Agreement is terminated for
Disability, the date established by the Company pursuant to Section 11(c)
hereof; (iii) if this Agreement is terminated by the Employer, the date on which
a notice of termination is given to the Employee; (iv) if the Agreement is
terminated by the Employee, the date the Employee ceases work.

        12.    Severance.

        (a) If (i) the Employer terminates the employment of the Employee
against his will and without Cause, or (ii) the Employee terminates his
employment for Good Reason, the Employee shall be entitled to receive salary,
incentive compensation and vacation accrued through the Termination Date plus
nine month's salary payable in one lump-sum at the Termination Date and all
stock options shall become exercisable and shall remain exercisable for a period
of two years after such Termination Date. Notwithstanding the foregoing, the
Employer shall not be required to pay any severance pay for any period following
the Termination Date if the Employer violates the provisions of Section 8,
Section 9 or Section 10 of this Agreement. In such event, the Employer shall
provide written notice to the Employee detailing such violation.

        (b) If (i) the Employee voluntarily terminates his employment other than
for Good Reason, or (ii) the Employee is terminated by the Employer for Cause,
then the Employee shall be entitled to receive salary, incentive compensation
and accrued vacation through the Termination Date plus all stock options that
are exercisable shall remain exercisable for a period of one year after such
Termination Date.

        (c) In addition to the provisions of Section 12(a) and 12(b) hereof, to
the extent COBRA shall be applicable to the Employer or as provided by law, the
Employee shall be entitled to continuation of group health plan benefits for a
period of one (1) year following the Termination Date if the Employee makes the
appropriate conversion and payments.

        (d) The Employee acknowledges that, upon termination of his employment,
he is entitled to no other compensation, severance or other benefits other than
those specifically set forth in this Agreement or the Stock Option Agreement.



                                      (6)
   7

13.     Payment and Other Provisions After Change of Control

        (a) In the event Employee's employment with the Employer is terminated
following the occurrence of a Change of Control (other than as a consequence of
death or disability) either (x) by the Employer for any reason other than for
Cause, or (y) by Employee for Good Reason, then Employee shall be entitled to
receive from the Employer, in lieu of the severance payment otherwise payable
pursuant to Section 12, the following:

               (i)    Base Salary: Employee's annual base salary as in effect at
the date of termination shall be paid on the date of termination;

               (ii)   Incentive Compensation: The amount of the Employee's
target incentive compensation under the applicable Incentive Compensation Plan
for the fiscal year in which the date of termination occurs, shall be paid on
the date of termination; and

               (iii) Other Benefits: Notwithstanding the vesting period provided
for in the Employer's Stock Option Plan and any related stock option agreements
between the Employer and the Employee for stock options ("options") granted
Employee by the Employer all of options shall be fully vested and exercisable
for a period of two years from the Termination Date.

        (b)    For purposes of this Agreement, the term "Change in Control"
shall mean:

(i)        The acquisition, other than from the Employer, by any individual,
           entity or group (within the meaning of Rule 13d-3 promulgated under
           the Exchange Act or any successor provision) of 50% or more of either
           (a) the then outstanding shares of Common Stock of the Employer or
           (b) the combined voting power of the then outstanding voting
           securities of the Employer entitled to vote generally in the election
           of directors (the "Voting Securities").
(ii)       Individuals who, as of the Effective Date of this Agreement,
           constitute the Board (the "Incumbent Board") cease for any reason to
           constitute at least a majority of the Board.
(iii)      Approval by the Shareholders of the Employer of a reorganization,
           merger or consolidation (a "Business Combination"), in each case,
           with respect to which all or substantially all holders of the
           outstanding Common Stock or Voting Securities immediately prior to
           such Business Combination do not, following such Business
           Combination, beneficially own, directly or indirectly, more than 60%
           of, respectively, the then outstanding shares of common stock or the
           combined voting power of the then Voting Securities entitled to vote
           generally in the election of directors, as the case may be, of the
           Employer resulting from the Business Combination, or
(iv)       (a) a complete liquidation or dissolution of the Employer or (b) a
           sale or other disposition of all or substantially all of the assets
           of the Employer with respect to which, following such sale or
           disposition, more than 60% of, respectively, the then outstanding
           Common Shares or Voting Securities is then owned beneficially,
           directly or indirectly,


                                      (7)
   8

           by all or substantially all of the equity holders, respectively, of
           the Common Shares or Voting Securities immediately prior to such
           sale or disposition in substantially the same proportion as
           their ownership of the Common Shares or Voting Securities, as
           the case may be, immediately prior to such sale or disposition.

           (c) In the event that involuntary termination of Employee as CFO
occurs subsequent to change in senior management or the appointment of a new
Chairman of the Board of Directors, the Company would (i) continue to pay base
salary and health benefits for the remaining term of this Agreement, provided
the Employee remains unemployed in the official capacity as a CFO, and such
payments would not be less than six months salary and benefits, and (ii) all
stock options currently outstanding would become vested and exercisable through
December 31, 2003.

        14. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered or
certified mail, return receipt requested to his residence in the case of the
Employee, or to its principal office in the case of the Employer, or to such
other addresses as they may respectively designate in writing.

        15. Entire Agreement; Waiver. This Agreement contains the entire
understanding of the parties and may not be changed orally but only by an
agreement in writing, signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought. Waiver of or failure to
exercise any rights provided by this Agreement in any respect shall not be
deemed a waiver of any further or future rights.

        16. Assignment.  Employee's rights hereunder are personal to and shall
not be transferable nor assignable by the Employee. This Agreement shall bind
and inure to the benefit of the Employee and the Employer and their respective
legal representatives, successors and assigns.

        17. Arbitration. Any and all claims, disputes, or controversies arising
out of or related to this Agreement, or the breach thereof, shall be resolved
exclusively by arbitration in Suffolk County, New York, in accordance with the
rules of the American Arbitration Association then in existence. The
determination or award rendered therein shall be binding and conclusive upon the
parties, and judgment may be entered thereon in accordance with applicable law
in any court having jurisdiction. No party shall be entitled to seek or be
awarded punitive damages.



                                      (8)
   9

        18. Governing Law.  This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.

        19. Counterparts.  This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together will constitute
one and the same instrument.

        IN WITNESS WHEREOF, NASTECH PHARMACEUTICAL COMPANY INC. has caused this
instrument to be signed by a duly authorized officer and the Employee has
hereunto set his hand the day and year first above written.

NASTECH PHARMACEUTICAL COMPANY INC.

By /s/  Steven C. Quay
  ---------------------------
    STEVEN C. QUAY

   /s/ Andrew P. Zinzi
- --------------------------------
    ANDREW P.  ZINZI






                                      (9)