Adhera Therapeutics, Inc. - Quarter Report: 2005 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

NASTECH PHARMACEUTICAL COMPANY INC.

(Exact name of registrant as specified in its charter)

Delaware		11-2658569
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3450 Monte Villa Parkway, Bothell, WA		98021
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (425) 908-3600

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

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
October 24, 2005		Common stock — $0.006 par value		20,651,472

 

 

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2004 and September 30, 2005		3
Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2004 and September 30, 2005		4
Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Loss for the nine months ended September 30, 2005		5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and September 30, 2005		6
Notes to Condensed Consolidated Financial Statements		7
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		14
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		25
ITEM 4 - CONTROLS AND PROCEDURES		25
PART II — OTHER INFORMATION
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		26
ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		26
ITEM 6 – EXHIBITS		27
SIGNATURES		27
EXHIBIT INDEX		28
EXHIBIT 10.18
EXHIBIT 10.33
EXHIBIT 10.34
EXHIBIT 10.35
EXHIBIT 10.36
EXHIBIT 10.37
EXHIBIT 10.38
EXHIBIT 10.39
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

Items 1, 3 and 5 of PART II have not been included as they are not applicable.

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY

		December 31,				September 30,
		2004				2005
ASSETS
Current assets:
Cash and cash equivalents		$	25,797			$	15,911
Restricted cash			9,000				998
Short term investments			39,677				50,204
Accounts receivable, net			—				582
Inventories			57				1,034
Prepaid expenses and other current assets			674				1,299
Total current assets			75,205				70,028
Property and equipment, net			5,160				7,956
Security deposits and other assets			410				431
Total assets		$	80,775			$	78,415
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,652			$	2,885
Accrued expenses and other liabilities			2,533				2,159
Notes payable			8,352				—
Deferred revenue — current portion			2,774				1,666
Capital lease obligations — current portion			1,532				2,193
Total current liabilities			16,843				8,903
Deferred revenue, net of current portion			3,483				2,967
Capital lease obligations, net of current portion			1,719				2,648
Other liabilities			582				722
Total liabilities			22,627				15,240
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value; 100,000 authorized: no shares issued and outstanding:			—				—
Common stock, $0.006 par value; 50,000,000 authorized: 17,895,976 and 20,637,232 shares outstanding at December 31, 2004 and September 30, 2005, respectively			107				124
Additional paid-in capital			142,853				174,985
Deferred compensation			(1,358	)			(5,181	)
Accumulated deficit			(83,453	)			(106,698	)
Accumulated other comprehensive loss			(1	)			(55	)
Total stockholders’ equity			58,148				63,175
Total liabilities and stockholders’ equity		$	80,775			$	78,415

See accompanying notes to condensed consolidated financial statements.

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2004				2005				2004				2005
Revenues		$	203			$	1,223			$	396			$	6,155
Operating expenses:
Cost of product revenue			126				—				190				—
Research and development			4,919				8,099				16,030				22,559
Sales and marketing			291				345				656				963
General and administrative			2,394				2,019				6,090				6,949
Total operating expenses			7,730				10,463				22,966				30,471
Loss from operations			(7,527	)			(9,240	)			(22,570	)			(24,316	)
Interest income			83				496				182				1,321
Interest and other expense, net			(111	)			(70	)			(302	)			(250	)
Net loss		$	(7,555	)		$	(8,814	)		$	(22,690	)		$	(23,245	)
Net loss per common share — basic and diluted		$	(0.57	)		$	(0.46	)		$	(1.83	)		$	(1.28	)
Shares used in computing net loss per share — basic and diluted			13,250				19,009				12,412				18,208

See accompanying notes to condensed consolidated financial statements.

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY

																						Accumulated
										Additional												Other				Total
		Common Stock								Paid-in				Deferred				Accumulated				Comprehensive				Stockholders’
		Shares				Amount				Capital				Compensation				Deficit				Loss				Equity
Balance December 31, 2004			17,895,976			$	107			$	142,853			$	(1,358	)		$	(83,453	)		$	(1	)		$	58,148
Proceeds from the issuance of common shares in connection with a public offering, net			1,725,000				10				21,638				—				—				—				21,648
Proceeds from the exercise of options and warrants			652,719				4				5,381				—				—				—				5,385
Compensation related to restricted stock			363,537				3				5,105				(4,102	)			—				—				1,006
Compensation related to stock options			—				—				8				279				—				—				287
Net loss			—				—				—				—				(23,245	)			—				(23,245	)
Change in unrealized loss on available-for-sale securities			—				—				—				—				—				(54	)			(54	)
Comprehensive loss			—				—				—				—				(23,245	)			(54	)			(23,299	)
Balance September 30, 2005			20,637,232			$	124			$	174,985			$	(5,181	)		$	(106,698	)		$	(55	)		$	63,175

See accompanying notes to condensed consolidated financial statements.

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended
		September 30,
		2004				2005
Operating activities:
Net loss		$	(22,690	)		$	(23,245	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash compensation related to stock options			378				287
Non-cash compensation related to restricted stock			252				1,006
Depreciation and amortization of property and equipment			1,083				1,289
Net loss on retirements of property and equipment			39				124
Changes in assets and liabilities:
Accounts receivable, net			(5,003	)			(582	)
Inventories			121				(977	)
Prepaid expenses and other assets			564				(646	)
Accounts payable			(572	)			1,233
Deferred revenue			4,996				(1,624	)
Accrued expenses and other liabilities			311				(234	)
Net cash used in operating activities			(20,521	)			(23,369	)
Investing activities:
Property and equipment acquisitions			(1,597	)			(4,209	)
Purchases of investments			(7,865	)			(104,280	)
Maturities of investments			10,300				93,699
Net cash provided by (used in) investing activities			838				(14,790	)
Financing activities:
Proceeds from notes payable			2,227				—
Restricted cash released			—				8,002
Payments on notes payable			(146	)			(8,352	)
Borrowings under capital lease obligations			1,423				2,940
Payments on capital lease obligations			(749	)			(1,350	)
Exercise of stock options			1,407				5,385
Public offering of common shares			—				21,648
Private placement of common shares			12,271				—
Net cash provided by financing activities			16,433				28,273
Net decrease in cash and cash equivalents			(3,250	)			(9,886	)
Cash and cash equivalents — beginning of period			16,792				25,797
Cash and cash equivalents — end of period		$	13,542			$	15,911
Supplemental disclosures of investing and financing activities:
Cash paid for interest		$	302			$	250
Non-cash investing activity:
Unrealized loss on available-for-sale securities			—			$	54

See accompanying notes to condensed consolidated financial statements.

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Business and Summary of Significant Accounting Policies

Business

     Nastech Pharmaceutical Company Inc., (“Nastech” or the “Company”) is a pharmaceutical company focusing on development and commercialization of innovative products based on proprietary molecular biology-based intranasal drug delivery technology for delivering both small and large molecule drugs. Using this technology, the Company creates or utilizes novel formulation components or excipients that can transiently manipulate or open “tight junctions” between cells in various tissues and thereby allow therapeutic drugs to reach the blood stream. Tight junctions are cell-to-cell connections in various tissues of the body, including epithelial and endothelial layers of the intranasal mucosa, the gastrointestinal tract, and the blood brain barrier. They function to provide barrier integrity and to regulate the transport and passage of molecules across these natural boundaries. This technology is the foundation of the Company’s intranasal drug delivery platform, although not all of the Company’s product candidates utilize this expertise. Generally, the Company seeks to apply its technology to compounds that the Company licenses to, or acquires from, collaborators or other third parties.

     The Company believes its intranasal drug delivery technology offers advantages over injectable routes for the administration of large molecules such as peptides and proteins. These advantages may include improved safety and clinical efficacy and increased patient compliance due to the elimination of injection site pain and avoidance of injection site irritation. In addition, the Company believes its intranasal drug delivery technology offers advantages over oral administration by providing for faster absorption into the bloodstream, reduced side effects and improved effectiveness by avoiding problems relating to gastrointestinal and liver metabolism. The Company is utilizing its technologies to develop commercial products, initially with collaboration partners. In select cases, the Company also plans to internally develop, manufacture and commercialize its products.

     The Company and its collaborative partners are developing a diverse portfolio of product candidates for multiple therapeutic areas including obesity, osteoporosis and breakthrough cancer pain. The Company’s lead product candidate, Peptide YY_3-36 (“PYY”) for obesity, is in Phase I clinical trials and is being developed with its collaboration partner, Merck & Co., Inc. (“Merck”). Additionally, the Company is developing two product candidates for the treatment of osteoporosis. Parathyroid Hormone (“PTH_(1-34)”) is in Phase I clinical trials, and the Company has filed an abbreviated new drug application (“ANDA”) for its generic calcitonin-salmon intranasal spray which the Company is developing with its collaboration partner Par Pharmaceutical, Inc. (“Par Pharmaceutical”). As of September 30, 2005, the Company had 30 patents issued and 172 patent applications filed to protect its proprietary technologies.

     As of September 30, 2005, the Company had an accumulated deficit of approximately $106.7 million and expects additional operating losses in the foreseeable future as it continues its research and development activities. The Company has funded its operating losses primarily through the sale of common stock in the public markets and private placements and also through revenues provided by its collaborative partners. The Company currently has an effective shelf registration statement with approximately $10.1 million remaining available pursuant to which the Company may issue and sell common stock and warrants, subject to market conditions and the Company’s capital needs. At September 30, 2005, the Company had cash, cash equivalents and short-term investments of approximately $67.1 million, including $1.0 million in restricted cash.

     The Company faces certain risks and uncertainties regarding its ability to generate positive operating cash flow and profits. These risks include, but are not limited to, its ability to obtain additional capital, protect its patents and property rights, overcome uncertainties regarding its technologies, competition and technological change, obtain government approval for products and attract and retain key officers and employees. For a more thorough

discussion of risks and uncertainties facing the Company, investors should also read and carefully consider the risk factors in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2004.

Basis of Preparation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by accounting principles generally accepted in the United States for complete financial statements. 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, 2004, included in the Company’s 2004 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission (the “SEC”). The information furnished in this report reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for each period presented. The results of operations for the interim periods ended September 30, 2005 are not necessarily indicative of the results for the year ending December 31, 2005 or for any future period.

Reclassifications

     Certain reclassifications have been made to the 2004 information to conform to the current period presentation.

Recent Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (“FASB”) released its revised standard, Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), “Share-Based Payment.” SFAS 123R requires that a public entity measure the cost of equity-based service awards based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award or the vesting period. A public entity will initially measure the cost of liability-based service awards based on its current fair value and the fair value of that award will be re-measured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. In April 2005, the SEC released Staff Accounting Bulletin No. 107 providing additional guidance on the adoption of SFAS 123R and amended its previously adopted rule to modify compliance dates for SFAS 123R, requiring adoption for fiscal years beginning after June 15, 2005. The Company is evaluating SFAS 123R and believes it will likely result in recognition of additional non-cash stock-based compensation expense and, accordingly, would increase net loss in amounts which likely will be considered material.

     In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections”, (“SFAS 154”). SFAS 154 replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. The Company is required to adopt SFAS 154 in 2006. The Company’s results of operations and financial condition will only be impacted by SFAS 154 if the Company implements changes in accounting principles that are addressed by the standard or corrects accounting errors in future periods.

Principles of Consolidation

     The consolidated financial statements include the financial statements of Nastech Pharmaceutical Company Inc. and its wholly-owned subsidiary, Atossa HealthCare Inc. (collectively, “the Company”). All inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue Recognition

     Most of the Company’s revenues result from research and licensing arrangements. These research and licensing arrangements may include upfront non-refundable payments, development milestone payments, revenue from product manufacturing, payments for research and development services performed and product sales royalties or revenue. The Company’s revenue recognition policies are based on the requirements of Staff Accounting Bulletin No. 104 “Revenue Recognition,” and, for contracts with multiple deliverables, the Company determines the appropriateness of separate units of accounting and allocates arrangement consideration based on the fair value of the elements under guidance from Emerging Issues Task Force Issue 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables.” Under EITF 00-21, revenue arrangements with multiple deliverables are divided into separate units, if certain criteria are met, of accounting, such as product development and contract manufacturing. Revenue is allocated to these units based upon relative fair values with revenue recognition criteria considered separately for each unit.

     Nonrefundable upfront technology license fees, for product candidates where the Company is providing continuing services related to product development, are deferred and recognized as revenue over the development period or as the Company provides the services required under the agreement. The ability to estimate total development effort and costs can vary significantly for each product candidate due to the inherent complexities and uncertainties of drug development.

     Milestones, in the form of additional license fees, typically represent nonrefundable payments to be received in conjunction with the achievement of a specific event identified in the contract, such as initiation or completion of specified clinical development activities. The Company believes that a milestone represents the culmination of a distinct earnings process when it is not associated with ongoing research, development or other performance on the Company’s part. The Company recognizes such milestones as revenue when they become due and collection is reasonably assured. When a milestone does not represent the culmination of a distinct earnings process, revenue is recognized in manner similar to that of an upfront technology license fee.

     The timing and amount of revenue that the Company recognizes from licenses of technology, either from upfront fees or milestones where the Company is providing continuing services related to product development, is dependent upon on the Company’s estimates of filing dates or development costs. As product candidates move through the development process, it is necessary to revise these estimates to consider changes to the product development cycle, such as changes in the clinical development plan, regulatory requirements, or various other factors, many of which may be outside of the Company’s control. The impact on revenue of changes in the Company’s estimates and the timing thereof, is recognized prospectively, over the remaining estimated product development period.

     Royalty revenue is generally recognized at the time of product sale by the licensee.

     Revenue from research and development services performed is generally received for services performed under collaboration agreements, and is recognized at the time the services are performed. Payments received in excess of amounts earned are recorded as deferred revenue.

     Product sales revenue is recognized at the time the manufactured goods are shipped to the purchaser and title and risk of loss has transferred.

Income Taxes

     Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company continues to record a valuation allowance in the full amount of deferred tax assets since realization of such tax benefits is not considered to be more likely than not.

Stock-based Compensation

     The Company accounts for stock-based compensation using the intrinsic value method in accordance with APB No. 25, “Accounting for Stock Issued to Employees.” The Company follows the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and related pronouncements, which require the disclosure of pro forma net income and earnings per share as if the fair value-based method was utilized in measuring compensation expense.

     The per share weighted average fair value of stock options granted during the three months ended September 30, 2004 and 2005 was $7.66, and $10.36, respectively, and for the nine months ended September 30, 2004 and 2005 was $7.57 and $8.65, respectively, on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2004				2005				2004				2005
Expected dividend yield			0	%			0	%			0	%			0	%
Risk free interest rate			3.5	%			4.1	%			3.4	%			4.0	%
Expected stock volatility			81	%			77	%			82	%			79	%
Expected option life		5 years				6 years				5 years				6 years

     Had compensation cost been determined based on the fair value at the grant date for stock options under SFAS No. 123, net loss would have been reported as the pro forma amounts indicated below:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2004				2005				2004				2005
		(in thousands, except per share data)
Net loss as reported		$	(7,555	)		$	(8,814	)		$	(22,690	)		$	(23,245	)
Add: Stock-based employee compensation included in the reported net loss			335				536				630				1,293
Deduct: Stock-based employee compensation, determined under fair value-based methods			(1,232	)			(1,025	)			(3,596	)			(3,391	)
Pro forma net loss		$	(8,452	)		$	(9,303	)		$	(25,656	)		$	(25,343	)
Net Loss per share
Basic and diluted — as reported		$	(0.57	)		$	(0.46	)		$	(1.83	)		$	(1.28	)
Basic and diluted- pro forma		$	(0.64	)		$	(0.49	)		$	(2.07	)		$	(1.39	)

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, unvested restricted stock and warrants at September 30, 2004 and 2005 was not included in the net loss per share calculation for the

interim periods then ended as the effect would have been anti-dilutive. Outstanding warrants, employee stock options and unvested restricted stock totaled approximately 4.7 million and 4.6 million shares at September 30, 2004 and 2005, respectively.

Inventory

     At December 31, 2004 and September 30, 2005, net inventory balances were $0.1 million and $1.0 million and were composed of raw materials.

Note 2 — Contractual Agreements

     Merck — In September 2004, the Company entered into an Exclusive Development, Commercialization and License Agreement and a separate Supply Agreement (collectively, the “Agreements”) with Merck, for the global development and commercialization of PYY Nasal Spray, the Company’s Phase I product for the treatment of obesity. The Agreements provide that Merck will assume primary responsibility for conducting and funding clinical and non-clinical studies and regulatory approval, while the Company will be responsible for all manufacturing of PYY-related product. Merck will lead and fund commercialization, subject to the Company’s exercise of an option to co-promote the product in the United States.

     Under the Agreements, the Company received an initial cash payment of $5 million in 2004. The $5 million initial payment is being amortized over the estimated development period, a portion of which is recorded as deferred revenue in the accompanying condensed consolidated balance sheets. If certain development and approval milestones are achieved, the Company will be eligible to receive up to an additional $131 million from Merck. If certain sales-related milestones are achieved, the Company would be eligible to receive up to an additional $210 million from Merck subject to certain other conditions. In addition to the $5 million license fee, and the other items discussed above, Merck will pay the Company for manufacturing-related development activities and will purchase all clinical supply and finished product upon commercialization from the Company. The Company will also receive royalties on product sales.

     Thiakis Limited — In September 2004, the Company announced it acquired exclusive worldwide rights to the Imperial College Innovations and Oregon Health & Science University PYY patent applications in the field of intranasal delivery of PYY and the use of glucagons-like peptide-1 (GLP-1) used in conjunction with PYY for the treatment of obesity, diabetes and other metabolic conditions. Under the agreement, Nastech made an equity investment in and paid an initial license fee to Thiakis, Ltd. (“Thiakis”). The equity investment and initial license fee were expensed as research and development expenses by the Company in 2004. Under the agreement, Thiakis is entitled to receive an annual fee, additional milestone fees, patent-based royalties and additional equity investments based upon future progress of the intellectual property and product development.

     Par Pharmaceutical — In October 2004, the Company entered into a license and supply agreement with Par Pharmaceutical for the exclusive U.S. distribution and marketing rights to its generic calcitonin-salmon nasal spray. Under the terms of the agreement with Par Pharmaceutical, the Company will manufacture and supply finished generic calcitonin-salmon nasal spray product to Par Pharmaceutical, while Par Pharmaceutical will distribute the product in the U.S. The financial terms of the agreement include milestone payments, product transfer payments for manufactured product and profit sharing following commercialization. The Company filed its ANDA with the Food and Drug Administration (the “FDA”) in December 2003, which was accepted in February 2004.

     Questcor Pharmaceuticals, Inc. — In June 2003, the Company completed the sale of certain assets relating to its Nascobal® brand products, including the Nascobal® (Cyanocobalamin USP) nasal gel, to Questcor Pharmaceuticals, Inc. (“Questcor”). The Company filed a New Drug Application (a “NDA”) of a nasal spray product configuration of Nascobal® in 2003 and will continue to prosecute the pending U.S. patents for the Nascobal® nasal spray product on behalf of Questcor. The Company recognized a gain of approximately $4.2 million on the sale of the assets in 2003. The gain was calculated as $14 million in non-contingent proceeds, less the net book value of the assets of $8.1 million, less costs and fees.

     Under the terms of the Asset Purchase Agreement, between the Company and Questcor, Questcor paid the Company $9 million at closing, $3 million in September 2003 and approximately $2.2 million in December 2003. Questcor has also agreed to make payments of: (i) $2 million contingent upon FDA approval of a New Drug Application (“NDA”) for the Nascobal® nasal spray product; and (ii) $2 million contingent upon issuance of a U.S. patent for the Nascobal® nasal spray product. FDA approval for the Nascobal® nasal spray product was granted in January 2005. A $2 million payment was received from Questcor in February 2005 and recognized as revenue in the three months ended March 31, 2005.

     In connection with the sale, Questcor and the Company entered into an agreement (the “Security Agreement”) pursuant to which Questcor granted the Company a collateral interest in all the assets related to the Nascobal® (Cyanocobalamin USP) nasal gel acquired by Questcor.

     Under the terms of a supply agreement between the parties, subject to certain limitations, the Company is obligated to manufacture and supply all of Questcor’s requirements and Questcor is obligated to purchase from the Company all of its requirements for the Nascobal® nasal gel and the Nascobal® nasal spray.

     See Note 4 – Subsequent Event for additional information related to the assignment of the Questcor agreements to QOL Medical, LLC in October 2005.

     Alnylam Pharmaceuticals, Inc. — On July 20, 2005, the Company announced that it had acquired an exclusive InterfeRx™ license from Alnylam Pharmaceuticals, Inc. (“Alnylam”) to discover, develop, and commercialize RNAi therapeutics directed against TNF-alpha, a protein associated with inflammatory diseases including rheumatoid arthritis. The initial license fee was expensed as research and development expenses by the Company in the three month period ended September 30, 2005. Under the agreement, Alnylam received an initial license fee from Nastech and is entitled to receive annual and milestone fees and royalties on sales of any products covered by the licensing agreement.

Note 3 — Stockholders’ Equity

     Common Stock Offerings — In June 2004, the Company completed the public offering of 1,136,364 shares of its common stock at a public offering price of $11.00 per share, and warrants to purchase up to 511,364 shares of common stock at an exercise price of $14.40 per share, pursuant to its $30 million effective shelf registration statement. The offering resulted in gross proceeds of approximately $12.5 million to the Company prior to the deduction of fees and commissions of $229,000. The warrants vested on December 25, 2004, and are exercisable until June 25, 2009. At September 30, 2005, no warrants issued in connection with this offering have been exercised.

     In December 2004, the Company completed the public offering of 4,250,000 shares of its common stock at a public offering price of $13.50 per share pursuant to its $80 million effective shelf registration statement. The offering resulted in gross proceeds of approximately $57.4 million to the Company, prior to the deduction of fees and commissions of approximately $4.5 million.

     On August 30, 2005 the Company completed the public offering of 1,725,000 shares of its common stock at a public offering price of $13.50 per share pursuant to its $80 million effective shelf registration statement and a $0.7 million post effective amendment filed on August 25, 2005 pursuant to Rule 462(b) of the Securities Act of 1933, as amended (“the Securities Act”). The offering resulted in gross proceeds of approximately $23.3 million to the Company, prior to the deduction of fees and commissions of approximately $1.6 million.

     SEC Shelf Registration Statements — Shelf registration statements enable the Company to raise capital from the offering of securities covered by the shelf registration statements from time to time and through one or more methods of distribution, subject to market conditions and cash needs.

     The Company currently has one remaining effective shelf registration statement on Form S-3. On December 18, 2003 the Company filed a shelf registration statement with the SEC, which was declared effective by the SEC on January 14, 2004, pursuant to which it may issue common stock or warrants, up to an aggregate of $30 million. At September 30, 2005, the amount remaining available on this shelf registration statement was approximately $10.1 million.

     On September 30, 2004 the Company filed a separate shelf registration statement with the SEC, which was declared effective by the SEC on October 8, 2004, pursuant to which it may issue common stock, warrants or debt securities, up to an aggregate of $80 million. On August 25, 2005, the Company filed a post-effective amendment to the shelf registration pursuant to Rule 462(b) of the Securities Act to increase the total by approximately $0.7 million. On August 30, 2005, the Company utilized the previously remaining $22.6 million and the additional $0.7 million in a public offering of its common stock. At September 30, 2005, the amount remaining available on this shelf registration statement was zero.

     Increase in Authorized Shares — On July 20, 2005, the stockholders of the Company approved an increase in the number of authorized shares of common stock from 25,000,000 to 50,000,000.

     Equity Compensation Awards

     Stock Option Plans. In June 2004, the Company established the 2004 Stock Incentive Plan (the “2004 Plan”) under which a total of 600,000 shares were originally reserved for issuance. On July 20, 2005, stockholders approved amendments to the 2004 Plan, including an amendment to increase the number of shares authorized for issuance under the 2004 Plan by 750,000 shares to 1,350,000 shares. In addition, on October 5, 2005, the Board of Directors adopted an amendment to the 2004 Plan that provides for discretionary vesting of restricted stock awards. As of September 30, 2005, 537,072 shares of restricted common stock have been issued under the 2004 Plan which vest between one and four years, including 168,000 shares of restricted common stock granted on July 20, 2005 to the Company’s Chairman of the Board, President and Chief Executive Officer as a component of his employment agreement that was executed on June 3, 2005. Additionally, on July 20, 2005, 600,000 options to purchase shares of common stock were granted to the Company’s Chairman of the Board, President and Chief Executive Officer as a component of his employment agreement that was executed on June 3, 2005. These option grants vest annually in four equal installments. At September 30, 2005, no other options had been awarded under the 2004 Plan and there were 240,843 authorized shares available for future issuance.

     In 2002, the Company established the 2002 Stock Option Plan, pursuant to which options to purchase an aggregate of 1,329,667 shares of common stock were outstanding and 56,999 authorized shares were available for future issuance as of September 30, 2005.

     In 2000, the Company established the 2000 Nonqualified Stock Option Plan, pursuant to which options to purchase an aggregate of 559,266 shares of common stock were outstanding and 86,856 authorized shares were available for future issuance as of September 30, 2005. On July 20, 2005, 61,500 options to purchase shares of common stock were granted to non-employee directors from the 2000 Plan.

     In 1990, the Company established the 1990 Stock Option Plan, pursuant to which options to purchase an aggregate of 100,000 shares of common stock were outstanding and no shares were available for future issuance as of September 30, 2005.

     In addition, in 2002 the Company approved and ratified the issuance of 561,719 stock options outside the plans to certain executive officers in connection with the commencement of their employment with the Company. The Company has filed separate registration statements on Form S-8 registering awards under each of the Company’s equity compensation plans and the 561,719 options awarded outside the plans. In July 2005, the Company’s Chairman of the Board, President and Chief Executive Officer exercised options to purchase common stock scheduled to expire on August 7, 2005, including 106,719 at an exercise price of $4.09 per share, 200,000 at an

exercise price of $12.00 per share and 54,154 at an exercise of $15.00 per share resulting in proceeds to the Company of $3,648,791. Of the total of 360,873 options exercised, 286,154 shares were sold. An additional 45,846 of these options expired unexercised on August 7, 2005. At September 30, 2005, options to purchase 125,000 shares remained outstanding related to these awards.

     Restricted Stock Awards. Pursuant to certain restricted stock awards granted under to the Company’s 2004 Plan, the Company has issued shares of restricted stock to certain employees and members of the board of directors. Non-cash compensation expense is being recognized on a straight-line basis over the applicable vesting periods of one to four years of the restricted shares based on the fair value of such restricted stock on the grant date. On July 20, 2005, 61,500 shares of restricted stock were granted to non-employee directors vesting on the earlier of the first anniversary of the date of grant or the date of the Company’s next annual meeting of Stockholders and 168,000 shares of restricted common stock vesting in equal annual installments over four years were granted to the Company’s Chairman of the Board, President and Chief Executive Officer as a component of his employment agreement that was executed on June 3, 2005. Additional information on restricted shares is as follows:

		Nine Months Ended
		September 30,
		2004				2005
Unvested restricted shares outstanding, beginning of period			0				145,620
Restricted shares issued			133,420				389,052
Restricted shares forfeited			0				(25,515	)
Restricted shares lapsed (vested in period)			0				(82,823	)
Unvested restricted shares outstanding, end of period			133,420				426,334
Non-cash restricted stock compensation expense, net of forfeitures		$	252,000			$	1,006,000

Note 4 — Subsequent Event

     Questcor assignment to QOL Medical, LLC – On October 17, 2005, with the consent of the Company, Questcor assigned all of its rights and obligations under the Questcor Asset Purchase and Supply Agreements dated June 2003 to QOL Medical, LLC (“QOL”). The Company received $2.0 million from Questcor on October 19, 2005 in consideration for its consent to the assignment and in connection with the Company entering into an agreement with QOL which modified certain terms of the Asset Purchase and Supply Agreements.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

     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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 us. These factors include, but are not limited to: (i) our ability to obtain additional funding; (ii) our ability to attract and/or maintain manufacturing, research, development and commercialization partners; (iii) our and/or a partner’s ability to successfully complete product research and development, including pre-clinical and clinical studies and commercialization; (iv) our and/or a partner’s ability to obtain required governmental approvals, including product and patent approvals; and (v) our and/or a partner’s ability to develop and commercialize products that can compete favorably with those of competitors. In addition, significant fluctuations in quarterly results may occur as a result of the timing of milestone payments, the recognition of revenue from milestone payments and other sources not related to product sales to third parties, and the timing of costs and expenses related to our research and development programs. Additional factors that would cause actual results to differ materially from those projected or suggested in any forward-looking statements are contained in our filings with the

Securities and Exchange Commission, including those factors discussed under the captions “Forward-Looking Information” and “Risk Factors” in our most recent Annual Report on Form 10-K/A, which we urge investors to consider. We undertake no obligation to publicly release revisions in such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events or circumstances, except as otherwise required by securities and other applicable laws.

     We are a pharmaceutical company focusing on development and commercialization of innovative products based on proprietary molecular biology-based intranasal drug delivery technology for delivering both small and large molecule drugs. Using this technology, we create or utilize novel formulation components or excipients that can transiently manipulate or open “tight junctions” between cells in various tissues and thereby allow therapeutic drugs to reach the blood stream. Tight junctions are cell-to-cell connections in various tissues of the body, including epithelial and endothelial layers of the intranasal mucosa, the gastrointestinal tract, and the blood brain barrier. They function to provide barrier integrity and to regulate the transport and passage of molecules across these natural boundaries. This technology is the foundation of our intranasal drug delivery platform, although some of our product candidates utilize our expertise outside this area. Generally, we seek to apply our technology to compounds that we license to, or acquire from, collaborators or other third parties.

     We believe our intranasal drug delivery technology offers advantages over injectable routes for the administration of large molecules such as peptides and proteins. These advantages may include improved safety and clinical efficacy and increased patient compliance due to the elimination of injection site pain and avoidance of injection site irritation. In addition, we believe our intranasal drug delivery technology offers advantages over oral administration by providing for faster absorption into the bloodstream, reduced side effects and improved effectiveness by avoiding problems relating to gastrointestinal and liver metabolism. We are utilizing our technologies to develop commercial products with collaboration partners or, in select cases, we also plan to internally develop, manufacture and commercialize our products.

Merck Partnership

     The strategic collaboration that we entered into with Merck in September 2004, which included upfront and potential license and milestone payments aggregating up to $346 million, is an example of how we have applied our molecular-biology based tight junction technology to identify a formulation of our lead product candidate, PYY, that we believe can be developed into a viable therapeutic drug for the treatment of obesity. We possess a broad and effective PYY intellectual property estate. Under our collaborative arrangement, Merck will assume primary responsibility for conducting and funding clinical and regulatory development, while we will be responsible for all manufacturing of PYY-related product. Merck will lead and fund world-wide commercialization, and we have the right to co-promote the product in the United States. Under our agreement with Merck, we received an initial cash payment of $5 million. If certain development and approval milestones are achieved, we will be eligible to receive up to $131 million from Merck. If certain sales-related milestones are achieved, we will be eligible to receive up to an additional $210 million from Merck subject to certain other conditions. Merck will also pay us for manufacturing-related development activities and will purchase from us all clinical supply and finished product. We will also receive royalties on product sales based on certain sales-related thresholds.

     On January 26, 2005, we announced that Merck initiated a Phase I study for PYY intranasal spray for the treatment of obesity. This study being conducted by Merck builds upon our previous PYY clinical programs, under which more than 60 subjects have received more than 900 doses of intranasal PYY or matching placebo.

     We believe our collaboration with Merck demonstrates we have taken a significant step toward becoming a leader in the development of innovative, intranasal drug delivery products and technologies. We also believe this collaboration partnership demonstrates the value PYY holds as a potential treatment option for obesity.

PTH_(1-34) Development

     PTH_(1-34) is part of the naturally occurring human parathyroid hormone that helps regulate calcium and phosphorus metabolism. PTH_(1-34) is the same active ingredient that is being marketed as Forteo™ by Eli Lilly & Company (“Lilly”). We have developed a proprietary intranasal formulation of PTH_(1-34) and have filed two U.S. Patent Applications and one Paris Convention Treaty (“PCT”) Application consisting of an aggregate of 107 claims.

     We launched the clinical program for PTH_(1-34) intranasal spray in the second quarter of 2004 and have completed three Phase I clinical trials. At September 30, 2005 we have one additional Phase I clinical trial in progress. In September 2005 we completed a pharmacokinetic study in healthy human subjects and initiated a follow-on pharmacokinetic study in the elderly. The studies are part of the previously announced clinical development program supporting a 505(b)(2) submission to the FDA for approval. Our clinical trials to date provide the basis for formulation optimization of our PTH_(1-34) intranasal spray. In March 2005, we met with the FDA at which time they advised us that, based on their current interpretation of FDA regulations, we may submit a Section 505(b)(2) application for our PTH_(1-34) intranasal spray, which generally is less costly and time-consuming than preparing a full new drug application that includes results from all new studies and new information because the FDA can rely on its previous findings on the safety and effectiveness of Forteo™.

Par Pharmaceutical Partnership

     Under our collaborative arrangement with Par Pharmaceutical that we entered into in October 2004, we granted Par Pharmaceutical the exclusive U.S. distribution and marketing rights to our generic calcitonin-salmon intranasal spray. Under the terms of the agreement with Par Pharmaceutical, we will be responsible for obtaining FDA approval, manufacturing and supplying finished generic calcitonin-salmon intranasal spray product to Par Pharmaceutical. Par Pharmaceutical will distribute the product in the United States. The financial terms of the agreement include milestone payments, product transfer payments for manufactured product and profit sharing upon commercialization.

     In December 2003, we filed with the FDA an ANDA for a generic calcitonin-salmon intranasal spray for the treatment of osteoporosis, and in February 2004, the FDA accepted the filing of our ANDA for the product. The FDA also has conducted a successful Pre-Approval Inspection of our generic calcitonin-salmon intranasal spray manufacturing facility with no cited deviations from current Good Manufacturing Practices (“cGMP”). On September 2, 2005, a citizens’ petition was filed with the FDA requesting that the FDA not approve the ANDA as filed prior to additional studies for safety and bioequivalence. We filed a response with the FDA to the citizens’ petition on October 13, 2005. At this time we are not able to determine whether or not this petition or other factors will delay the approval process for the ANDA.

Product Portfolio Expansion Strategy

     To expand our product portfolio, we engage in a variety of pre-clinical initiatives, alone and with partners, to explore the range of potential therapeutic applications of our tight junction technology. Certain of these initiatives include funded feasibility studies where our tight junction drug delivery technology is combined with already approved therapeutics, or product candidates currently in development to determine if formal pre-clinical studies are warranted. We are currently participating in four feasibility studies with four different partners to evaluate the development of proprietary formulations for the intranasal delivery of the following: 1) an injected compound for the treatment of type 2 diabetes; 2) an oral compound for the treatment of Alzheimer’s disease; 3) an injected compound not related to PYY for the treatment of obesity; and 4) an injected compound for the treatment of serum anemia. Feasibility studies, typically lasting under a year, allow us to efficiently evaluate opportunities where our tight junction technology provides therapeutic and commercial promise. In addition to collaborative feasibility studies, in October 2005 we announced the initiation of our own project to evaluate intranasal insulin.

     We are also applying our drug delivery technology to a promising new class of therapeutics based on RNA interference (“RNAi”). Small interfering RNAs (“siRNAs”) are double-stranded RNA molecules 20-22 nucleotides in length that are able to silence a specific gene and reduce the amount of the disease-causing protein the gene

produces. The application of RNAi in this manner requires the ability to deliver RNAi-based therapeutics inside the cells where the target proteins are produced. We have established a research and development program to enhance systematic delivery of this potential new class of therapeutic drugs.

     As part of our RNAi strategy, on July 20, 2005, we entered into a license agreement with Alnylam Pharmaceuticals, Inc. (“Alnylam”), a biopharmaceutical company focused on developing RNAi based drugs, pursuant to Alnylam’s InterfeRx™ licensing program. Under the license, we acquired the exclusive rights to discover, develop and commercialize RNAi therapeutics directed against TNF-alpha, a protein associated with inflammatory diseases including rheumatoid arthritis. Under our agreement with Alnylam, we paid an initial license fee to Alnylam, and we are obligated to pay annual and milestone fees and royalties on sales of any products covered by the license agreement.

     As of September 30, 2005, we had an accumulated deficit of $106.7 million and expect additional operating losses in the foreseeable future as we continue our research and development activities. Our development efforts and the future revenues from sales of these products are expected to generate contract research revenues, milestone payments, license fees, royalties and manufactured product sales for us. As of September 30, 2005, we had approximately $67.1 million in cash, cash equivalents and short-term investments including $1.0 million in restricted cash. We believe, although there can be no assurance, that our current cash position provides us with adequate working capital for at least the next 12 months, or longer depending upon the degree to which we exploit our various current opportunities that are in the pipeline and the success of our collaborative arrangements. This belief is based, in part, on the assumption that we have completed and are planning to enter into various collaborations to accelerate our research and development programs which will provide us with additional financing. To the extent these collaborations do not proceed as planned, we may be required to reduce our research and development activities or, if necessary and possible, raise additional capital from new investors or in the public markets.

     In June 2004, we completed the public offering of 1,136,364 shares of our common stock at a public offering of $11.00 per share, and warrants to purchase up to 511,364 shares of common stock at an exercise price of $14.40 per share, pursuant to our $30 million shelf registration statement that was declared effective by the SEC on January 14, 2004. The offering resulted in gross proceeds of approximately $12.5 million to us prior to the deduction of fees and commissions of $229,000. The warrants vested on December 25, 2004, and are exercisable until June 25, 2009. At September 30, 2005, the amount remaining available on this shelf registration statement was approximately $10.1 million.

     In December 2004, we completed the public offering of 4,250,000 shares of our common stock at a public offering price of $13.50 per share pursuant to our $80 million shelf registration statement that was declared effective by the SEC on October 8, 2004. The offering resulted in gross proceeds of approximately $57.4 million to us, prior to the deduction of fees and commissions of approximately $4.5 million.

     On August 30, 2005 we completed the public offering of 1,725,000 shares of our common stock at a public offering price of $13.50 per share pursuant to our $80 million effective shelf registration statement and a $0.7 million post effective amendment filed on August 25, 2005 pursuant to Rule 462(b) of the Securities Act. The offering resulted in gross proceeds of approximately $23.3 million to the Company, prior to the deduction of fees and commissions of approximately $1.6 million. At September 30, 2005, the amount remaining available on this shelf registration statement was zero.

Critical Accounting Policies and Estimates

     We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the periods presented. Actual results could differ significantly

from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting estimates which are those that are most important to the portrayal of our financial condition and results of operations and which require our most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We also have other policies that we consider key accounting policies; however, these policies do not meet the definition of critical accounting estimates, because they do not generally require us to make estimates or judgments which are difficult or subjective.

     Revenue Recognition

     Most of our revenues result from research and licensing arrangements. These research and licensing arrangements may include upfront non-refundable payments, development milestone payments, revenue from product manufacturing, payments for research and development services performed and product sales royalties or revenue. Our revenue recognition policies are based on the requirements of SEC Staff Accounting Bulletin No. 104 “Revenue Recognition,” and, for contracts with multiple deliverables, we allocate arrangement consideration based on the fair value of the elements under guidance from Emerging Issues Task Force Issue 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables.” Under EITF 00-21, revenue arrangements with multiple deliverables may be divided into separate units of accounting such as product development and contract manufacturing. Revenue is allocated to these units based upon relative fair values with revenue recognition criteria considered separately for each unit.

     Stock-Based Compensation

     We apply Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”, and related interpretations in accounting for our stock-based employee compensation plans, rather than the alternative fair value accounting method provided for under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, (“SFAS 123”). In the Notes to Condensed Consolidated Financial Statements, we provide pro-forma disclosures in accordance with SFAS 123 and related pronouncements. Under APB 25, compensation expense is recorded on the date of grant of an option to an employee or member of the Board only if the fair market value of the underlying stock at the time of grant exceeds the exercise price. In addition, we have granted options to certain outside consultants, which are required to be measured at fair value and recognized as compensation expense in our Condensed Consolidated Statements of Operations. We apply the Black-Scholes option-pricing model for estimating the fair value of options, which involves a number of judgments and variables including estimates of the life of the options and expected volatility which are subject to significant change. A change in the fair value estimate could have a significant effect on the amount of compensation expense calculated.

     In June 2004, our 2004 Stock Incentive Plan was approved by our shareholders and, subsequently, restricted stock grants have been issued to certain directors and employees. Non-cash compensation expense is being recognized over the applicable vesting periods of one to four years of the restricted shares.

     In December 2004, the FASB released its revised standard, SFAS No. 123R (“SFAS 123R”), “Share-Based Payment.” SFAS 123R requires that a public entity measure the cost of equity-based service awards based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award or the vesting period. A public entity will initially measure the cost of liability-based service awards based on its current fair value and the fair value of that award will be re-measured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. In April 2005, the SEC released Staff Accounting Bulletin No. 107 providing additional guidance on the adoption of SFAS 123R and amended its previously adopted rule to modify the compliance dates for SFAS 123R, requiring adoption for fiscal years beginning after June 15, 2005. We are evaluating SFAS 123R and believe it will likely result in recognition of additional non-cash stock-based compensation expense and, accordingly, would increase net loss in amounts which likely will be considered material.

     Income Taxes

     A critical estimate is the full valuation allowance for deferred taxes that was recorded based on the uncertainty that such tax benefits will be realized in future periods. To the extent we achieve sustained profitability, such deferred tax valuation allowance could be reversed.

     Clinical Trial Expenses

     Clinical trial expenses, which are included in research and development expenses, represent obligations resulting from our contracts with various clinical research organizations in connection with conducting clinical trials for our product candidates. We recognize expenses for these contracted activities based on a variety of factors, including actual and estimated labor hours, clinical site initiation activities, patient enrollment rates, estimates of external costs and other activity-based factors. We believe that this method best approximates the efforts expended on a clinical trial with the expenses we record. We adjust our rate of clinical expense recognition if actual results differ from our estimates.

Results of Operations

Revenue and cost of revenue

     Our revenue consists of product sales and license and research fees. Revenue totaled approximately $1.2 million for the three months ended September 30, 2005, an increase of approximately $1 million over the prior year period. The increase is due primarily to the recognition of current period research and development fees and recognition of deferred license fees received from Merck, Par Pharmaceutical and other collaborative partners over the estimated remaining development periods. For the nine months ended September 30, 2005, revenue increased by approximately $5.8 million compared to the prior year period to approximately $6.2 million due primarily to receipt and recognition of a $2.0 million milestone payment received from Questcor in addition to the recognition of current period research and development fees and of deferred license fees received in 2004 from Merck, Par Pharmaceutical and other collaborative partners over the estimated development periods.

     Our product revenue consists of sales of Nascobal® nasal gel to Questcor. During the three- and nine-month periods ended September 30, 2004, we recognized approximately $180,000 and $300,000 of product revenue, respectively, under the supply agreement. During the interim periods ended September 30, 2005, we did not produce or ship any Nascobal® nasal gel. Cost of product revenue as a percent of product revenue was 70% for the three months ended September 30, 2004 and 63% for the nine months ended September 30, 2004. Effective in October 2005, the distribution of our Nascobal® nasal gel and spray products has been transferred from Questcor to QOL. (See Subsequent Event Note 4 to our Condensed Consolidated Financial Statements.) We expect to receive continued product revenue under a new QOL supply agreement.

Research and development

     Research and development expense consists primarily of salaries and other personnel-related expenses, costs of clinical trials, consulting and other outside service, laboratory supplies, facilities costs, FDA filing fees and other costs. Research and development expense by project as a percentage of total research and development project expense, and total research and development expense, are as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2004				2005				2004				2005
Peptide YY			36	%			22	%			49	%			16	%
Calcitonin			23	%			18	%			17	%			30	%
Tight Junctions and RNAi			24	%			29	%			16	%			25	%
PTH(1-34)			4	%			17	%			5	%			15	%

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2004				2005				2004				2005
Apomorphine			4	%			—	%			5	%			—	%
Other R&D projects (1)			9	%			14	%			8	%			14	%
			100	%			100	%			100	%			100	%
			(dollars in thousands)
Total R&D expense		$	4,919			$	8,099			$	16,030			$	22,559
Dollar increase							3,180								6,529
Percentage increase							65	%							41	%

     The $3.2 million increase in the three-month period ended September 30, 2005 over the same period in 2004 resulted primarily from the following costs:

	•		personnel-related expenses increased to $3.4 million from $2.2 million due to increased personnel in support of our research and development programs;
	•		costs of clinical trials, consulting, outside services and laboratory and manufacturing supplies increased to $2.6 million from $1.4 million due to a clinical study for calcitonin and other projects under development;
	•		facilities-related costs increased to $1.2 million from $0.8 million due to rent and related expenses on additional space leased in the Bothell facility and increased depreciation and maintenance on equipment; and
	•		administrative costs increased to $0.9 million from $0.5 million due primarily to patent license fees incurred.

     The $6.5 million increase in the nine-month period ended September 30, 2005 over the same period in 2004 resulted primarily from the following costs:

	•		personnel-related expenses increased to $9.4 million from $6.5 million due to increased personnel in support of our research and development programs;
	•		costs of clinical trials, consulting, outside services and laboratory and manufacturing supplies increased to $8.4 million from $6.1 million due to a clinical study for calcitonin and more projects under development;
	•		facilities-related costs increased to $3.5 million from $2.5 million due to rent and related expenses on additional space leased in the Bothell facility and increased depreciation and maintenance on equipment; and;
	•		administrative costs increased to $1.2 million from $0.9 million due primarily to patent license fees incurred.

     We expect a continued increase in research and development expense in the foreseeable future as we continue to expand our research and development activities primarily relating to our PYY and PTH_(1-34) product candidates and our RNAi research programs. However, we do not anticipate incurring any significant research and development expenses in the foreseeable future relating to the development of our apomorphine or beta interferon product candidates until, and only if, we are able to identify a partner to continue development of either such product candidate. These expenditures are subject to uncertainties in timing and cost to completion. We test compounds in numerous preclinical studies for safety, toxicology and efficacy. We then conduct early stage clinical trials for each drug candidate. If we are not able to engage a collaboration partner prior to the commencement of later stage clinical trials, or if we decide to pursue a strategy of maintaining commercialization rights to a program, we may fund these trials ourselves. As we obtain results from trials, we may elect to discontinue or delay clinical trials for certain products in order to focus our resources on more promising products. Completion of clinical trials by us and our collaboration partners may take several years or more, but the length of time varies substantially according to the type, complexity, novelty and intended use of a drug candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including:

	•		the number of sites included in the clinical trials;
	•		the length of time required to enroll suitable patient subjects;
	•		the number of patients that participate in the trials;
	•		the duration of patient follow-up that seems appropriate in view of results; and
	•		the number and complexity of safety and efficacy parameters monitored during the study.

     Except for Nascobal® nasal spray, which received FDA approval in January 2005, none of our other current product candidates has received FDA or foreign regulatory marketing approval. In order to achieve marketing approval, the FDA or foreign regulatory agencies must conclude that our and our collaboration partners’ clinical data establishes the safety and efficacy of our drug candidates. Furthermore, our strategy includes entering into collaborations with third parties to participate in the development and commercialization of our products. In the event that the collaboration partner has control over the development process for a product, the estimated completion date would largely be under control of such partner. We cannot forecast with any degree of certainty how such collaboration arrangements will affect our development plans or capital requirements.

     As a result of the uncertainties discussed above, we are often unable to determine the duration and completion costs of our research and development projects or when and to what extent we will receive cash inflows from the commercialization and sale of a product.

Sales and marketing

     Sales and marketing expense consists primarily of salaries and other personnel-related expenses, consulting, sales materials, trade shows and advertising. Total sales and marketing expense and dollar and percentage changes are as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2004				2005				2004				2005
		(dollars in thousands)
Total sales and marketing expense		$	291			$	345			$	656			$	963
Dollar increase							54								307
Percentage increase							19	%							47	%

     The increases in the three- and nine-month periods ended September 30, 2005 over the same periods in 2004 resulted primarily from increased business development personnel costs and increases in spending on market research, conference related activities and business development efforts. We expect sales and marketing costs, which include business development staff and activities, to continue to increase in the foreseeable future to support activities associated with partnering our other drug candidates.

General and administrative

     General and administrative expense consists primarily of salaries and other personnel-related expenses to support our research and development activities, amortization of non-cash stock option and restricted stock compensation, professional fees such as accounting and legal, corporate insurance and facilities costs. Total general and administrative expense and dollar and percentage changes are as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2004				2005				2004				2005
		(dollars in thousands)
Total general and administrative expense		$	2,394			$	2,019			$	6,090			$	6,949
Dollar increase (decrease)							(375	)							859
Percentage increase							(16	%)							14	%

     The $0.4 million decrease in the three-month period ended September 30, 2005 from the same period in 2004 was due primarily to lower spending on legal fees on patents and collaborations, partially offset by increased compensation-related expenses related to the hiring of additional personnel supporting R&D and compliance activities, non-cash depreciation and stock compensation expense. The $0.9 million increase in the nine-month period ended September 30, 2005 over the same period in 2004 was due primarily to increased compensation-related expenses related to the hiring of additional personnel supporting R&D and compliance activities, legal and

accounting fees, corporate insurance, non-cash depreciation and stock compensation expense. We expect general and administrative expenses to remain stable or to increase in the foreseeable future, depending on the growth of our research and development and other corporate activities.

Interest Income

     We earn interest income on our invested cash and investments. The following table sets forth information on interest income, average funds available for investment and average interest rate earned:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2004				2005				2004				2005
		(dollars in thousands)
Interest income		$	83			$	496			$	182			$	1,321
Average funds available for investment		$	22,200			$	59,800			$	20,400			$	61,400
Average interest rate, annualized			1.5	%			3.3	%			1.2	%			2.9	%

     The increase in interest income in the three- and nine-month periods ended September 30, 2005 over the same periods in 2004 was due primarily to higher average balances available for investment in the current year periods and, to a lesser extent, increases in prevailing market interest rates.

Interest Expense

     We incur interest expense on our capital leases and, previously, on our notes payable. The following table sets forth information on interest expense, average borrowings and average interest rate incurred:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2004				2005				2004				2005
		(dollars in thousands)
Interest expense (excluding other expense, net)		$	111			$	75			$	302			$	265
Avg. borrowings under capital leases and notes payable		$	11,400			$	4,300			$	10,400			$	5,400
Average interest rate, annualized			4	%			7	%			4	%			7	%

     The decreases in interest expense in the three- and nine-month periods ended September 30, 2005 over the same periods in 2004 was due to an overall reduction in borrowings partially offset by higher average borrowing rates. In June 2003, we entered into a note payable with Wells Fargo bank at a rate of LIBOR plus 0.75%. As of December 31, 2004, the balance on the note payable with Wells Fargo was $8,352,000 and the interest rate was approximately 3.3% per annum. Approximate average interest rates on the Wells Fargo note in the three- and nine-month periods ended September 30, 2004 were 3.3% and 2.4%, respectively. In February 2005, the Wells Fargo note was paid off in full and canceled. As a result of this note repayment, our average loan balances have decreased when comparing the current year periods to the prior year periods. Interest rates on outstanding borrowings under the GE Capital leases range from 8.3% to 10%.

Liquidity and Capital Resources

Cash Requirements

     Our capital requirements consist primarily of the need for working capital, including funding research and development activities and capital expenditures for the purchase of equipment. From time to time, we may also require capital for investments involving acquisitions and strategic relationships. We have an accumulated deficit of approximately $106.7 million as of September 30, 2005, and expect additional operating losses in the foreseeable future as we continue to expand our research and development activities. In addition, we are planning to enter into

various collaborations in furtherance of our research and development programs, and we may be required to reduce our research and development activities or raise additional funds from new investors or in the public markets.

     Sources and Uses of Cash

     We have financed our operations primarily through the sale of common stock and warrants through private placements and in the public markets, revenues received from our collaboration partners, equipment financing facilities and notes payable.

     In December 2003, we filed a shelf registration statement with the SEC, which was declared effective by the SEC in January 2004, pursuant to which we may issue common stock or warrants, up to an aggregate of $30 million. In September 2004 we filed another shelf registration statement with the SEC, which was declared effective by the SEC in October 2004, pursuant to which we may issue common stock, warrants or debt securities, up to an aggregate of $80 million. These shelf registration statements enable us to raise capital from the offering of securities covered by the shelf registration statements, as well as any combination thereof, from time to time and through one or more methods of distribution, subject to market conditions and our cash needs.

     In June 2004, we completed the public offering of 1,136,364 shares of our common stock at a public offering price of $11.00 per share, and warrants to purchase up to 511,364 shares of common stock at an exercise price of $14.40 per share, pursuant to our $30 million effective shelf registration statement. The offering resulted in gross proceeds of approximately $12.5 million to us prior to the deduction of fees and commissions of $229,000. The warrants vested on December 25, 2004, and are exercisable until June 25, 2009. At September 30, 2005, the amount remaining available on this shelf registration statement was approximately $10.1 million.

     In December 2004, we completed the public offering of 4,250,000 shares of our common stock at a public offering price of $13.50 per share pursuant to our $80 million effective shelf registration statement. The offering resulted in gross proceeds of approximately $57.4 million to us, prior to the deduction of fees and commissions of $4.5 million. On August 30, 2005 we completed the public offering of 1,725,000 shares of our common stock at a public offering price of $13.50 per share pursuant to our $80 million effective shelf registration statement and a $0.7 million post effective amendment filed on August 25, 2005 pursuant to Rule 462(b) of the Securities Act. The offering resulted in gross proceeds of approximately $23.3 million to the Company, prior to the deduction of fees and commissions of approximately $1.6 million. At September 30, 2005, the amount remaining available on this shelf registration statement was zero.

     Our research and development efforts and collaborative arrangements with our partners enable us to generate contract research revenues, milestone payments, license fees, royalties and manufactured product sales, including:

	•		Under our collaborative arrangement with Merck, we received an initial cash payment of $5 million in October 2004. The $5 million initial payment is being amortized over the estimated development period. We are also eligible to receive milestone payments upon achievement of specified product development goals or sales targets. If certain development and approval milestones are achieved, we will be eligible to receive up to $131 million from Merck. If certain sales related milestones are achieved, we will be eligible to receive up to an additional $210 million from Merck, subject to certain other conditions. Merck will also pay us for manufacturing-related development activities and will purchase from us clinical supply and finished product. We will also receive royalties on product sales based on certain sales-related thresholds.
	•		Under our collaborative arrangement with Par Pharmaceutical, we received an initial cash payment which is being amortized over the estimated development period. We believe, although there can be no assurance, that in the future we will receive additional revenue from Par Pharmaceutical in the form of milestone payments, product transfer payments for manufactured product and a profit sharing upon commercialization of generic calcitonin-salmon intranasal spray.

•

In January 2005, we received FDA approval of our Nascobal® nasal spray and we received a $2 million payment from Questcor in February 2005.

     Total sources and uses of cash for the nine-month periods ending September 30, 2004 and 2005 are as follows:

		Nine Months Ended
		September 30,
		2004				2005
		(dollars in thousands)
Cash used in operating activities		$	(20,521	)		$	(23,369	)
Cash provided by (used in) investing activities			838				(14,790	)
Cash provided by financing activities			16,433				28,273
Net decrease in cash and cash equivalents		$	(3,250	)		$	(9,886	)

     Our operating activities used cash of $23.4 million in the nine months ended September 30, 2005 compared to $20.5 million in the nine months ended September 30, 2004. Cash used in operating activities relates primarily to funding net losses, adjusted by changes in balance sheet account balances and partially offset by non-cash charges related to depreciation and amortization of property and equipment and stock compensation. We expect to use cash for operating activities in the foreseeable future as we continue our research and development activities.

     Our investing activities used cash of $14.8 million in the nine months ended September 30, 2005, compared to providing $0.8 million in the nine months ended September 30, 2004. Changes in cash from investing activities are due primarily to purchases of short-term investments net of maturities and investments in property and equipment. We expect to continue to invest in our research and development infrastructure, including the purchase of equipment to support our research and development activities.

     Our financing activities provided cash of $28.3 million in the nine months ended September 30, 2005, compared to $16.4 million in the nine months ended September 30, 2004. Cash provided in the 2004 period primarily resulted from an increase in borrowing of $2.2 million and net proceeds from a private placement of common shares of approximately $12.3 million. During the nine months ended September 30, 2005, we received net proceeds of approximately $21.7 million, we repaid approximately $8.4 million on our Revolving Line of Credit and we drew down approximately $2.9 million on a capital lease facility. As a result of the loan payoff, our restricted cash balance decreased by $8.0 million.

     Liquidity

     We had a working capital (current assets minus current liabilities) surplus of $61.1 million as of September 30, 2005 and $58.4 million as of December 31, 2004. As of September 30, 2005, we had approximately $67.1 million in cash, cash-equivalents and investments, including $1.0 million in restricted cash. We believe, although there can be no assurance, that our current cash position provides us with adequate working capital for at least the next 12 months, or longer depending upon the degree to which we exploit our various current opportunities that are in the pipeline and the success of our collaborative arrangements. This belief is based, in part, on the assumption that we have completed and are planning to enter into various collaborations to accelerate our research and development programs which will provide us with additional financing. To the extent these collaborations do not proceed as planned, we may be required to reduce our research and development activities or, if necessary and possible, raise additional capital from new investors or in the public markets.

     As of September 30, 2005, we had unused capital lease credit lines of approximately $1.1 million out of total available credit lines of approximately $4.0 million. Our available capital lease line of $4.0 million expires December 31, 2005 and is available for use in financing equipment and leasehold assets. Our loan balance of approximately $8.4 million at December 31, 2004 was paid in full and canceled in February 2005.

     Contractual Obligations

     Our contractual obligations have changed since December 31, 2004 to September 30, 2005 as follows:

	•		At September 30, 2005 we have a zero balance in notes payable compared to approximately $8.6 million (including accrued interest) at December 31, 2004 due to the payoff of the note in February 2005;
	•		At September 30, 2005 our operating lease obligations decreased to approximately $19.8 million (through January 2016) from approximately $20.4 million at December 31, 2004. This is due to one facility lease renewal and one new warehouse lease adding approximately $0.7 million in rental payments through June 2010, partially offset by approximately $1.3 million in rents paid during the nine months ended September 30, 2005;
	•		Our capital lease obligations increased by approximately $2.2 million to approximately $5.5 million (including future interest payments) at September 30, 2005 due to approximately $2.9 million in new leases signed offset by payments made during the nine months ended September 30, 2005; and
	•		Our purchase obligations increased by approximately $3.4 million to approximately $3.6 million at September 30, 2005 due to purchase order activity (primarily for calcitonin and PYY) during the nine months ended September 30, 2005.

Off-Balance Sheet Arrangements

     As of September 30, 2005, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our exposure to market rate risk for changes in interest rates relates primarily to our investment of cash in excess of near term requirements. We have a prescribed methodology whereby we invest our excess cash in debt instruments of U.S. Government agencies and high quality corporate issuers (Standard & Poor’s “A” rating and higher or Moody’s Investors Service A2 rating and higher). To mitigate market risk, securities have a maturity date within 18 months, no category of issue can exceed 50% of the portfolio, and holdings of any one issuer excluding the U.S. Government does not exceed 20% of the portfolio. Periodically, the portfolio is reviewed and adjusted if the credit rating of a security held has deteriorated. Because of the relatively short maturities of our investments, we do not expect interest rate fluctuations to materially affect the aggregate value of our financial assets. We do not utilize derivative financial instruments.

ITEM 4 – CONTROLS AND PROCEDURES

     (a) Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of senior management, including the Company’s Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Company’s Chief Executive Officer and Interim Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing the information that the Company is required to disclose in reports filed under the Securities Exchange Act of 1934, as amended.

     (b) Internal Control Over Financial Reporting. There have been no changes in the Company’s internal controls over financial reporting or in other factors during the fiscal quarter ended September 30, 2005, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting subsequent to the date the Company carried out its most recent evaluation.

PART II – OTHER INFORMATION

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Warrants. During the three months ended September 30, 2005 the Company issued 20,255 shares of common stock to a holder of common stock warrants (the “Warrants”) upon the exercise of such Warrants in a private offering pursuant to Section 4(2) of the Securities Act. The holder of the Warrants was an accredited investor under Rule 501 of the Securities Act. The Company has registered the resale of such shares under the Securities Act. The Warrants were exercisable for an equal number of shares of common stock at an exercise price of $6.3375 per share.

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

Our stockholders approved the following proposals at our Annual Meeting of Stockholders held on Wednesday, July 20, 2005:

1)

The election of the following eleven (11) directors, each to hold office for a term of one (1) year or until their respective successors have been duly elected or appointed:

Nominee		Votes FOR				Votes WITHHELD
Dr. Steven C. Quay			16,812,873				565,445
Susan B. Bayh			17,278,657				99,661
J. Carter Beese, Jr.			16,755,739				622,579
Dr. Alexander D. Cross			17,283,349				94,969
Dr. Ian R. Ferrier			16,708,284				670,034
Myron Z. Holubiak			16,785,906				592,412
Leslie D. Michelson			16,808,981				569,337
John V. Pollock			16,786,506				591,812
Gerald T. Stanewick			16,809,475				568,843
Bruce R. Thaw			16,816,075				562,243
Devin N. Wenig			16,740,351				637,967

2)

The appointment of KPMG LLP as our independent registered public accountants for the year ending December 31, 2005:

Votes FOR		Votes AGAINST				Votes ABSTAINED				Broker NON-VOTES
17,281,295			69,519				27,504				0

3)

The approval of a proposed change to our capital structure increasing the number of authorized shares of common stock from 25,000,000 to 50,000,000:

Votes FOR		Votes AGAINST				Votes ABSTAINED				Broker NON-VOTES
16,513,141			824,594				40,583				0

4)

The approval of a proposed Restated Certificate of Incorporation of the Company, including certain changes to modernize, clarify and otherwise make our current Certificate of Incorporation consistent with our Amended and Restated Bylaws and Delaware law:

Votes FOR		Votes AGAINST				Votes ABSTAINED				Broker NON-VOTES
9,700,758			360,103				46,535				7,270,922

5)

The approval of amendments to our 2004 Stock Incentive Plan, including an increase in the number of shares authorized by 750,000 shares, from 600,000 shares to 1,350,000 shares:

Votes FOR		Votes AGAINST				Votes ABSTAINED				Broker NON-VOTES
9,003,741			1,001,134				102,521				7,270,922

ITEM 6 – EXHIBITS

The exhibits required by this item are set forth in the Exhibit Index attached hereto.

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 Bothell, State of Washington, on November 2, 2005.

		NASTECH PHARMACEUTICAL COMPANY INC.
		By:		/s/ Steven C. Quay
				Steven C. Quay, M.D., Ph.D.
				Chairman of the Board, President and Chief Executive Officer
		By:		/s/ Philip C. Ranker
				Philip C. Ranker
				VP Finance and Interim Chief Financial Officer

EXHIBIT INDEX

Exhibit
No.		Description
2.1		Agreement and Plan of Reorganization, dated August 8, 2000, among the Company, Atossa Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of the Company, and Atossa HealthCare, Inc. (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated August 8, 2000, and incorporated herein by reference).
2.2		Asset Purchase Agreement, dated September 30, 2002, with Schwarz Pharma, Inc.(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated September 30, 2002 and incorporated herein by reference).
3.1		Restated Certificate of Incorporation of the Company dated July 20, 2005 (filed as Exhibit 3.1 to our Current Report on Form 8-K dated July 20, 2005, and incorporated herein by reference).
3.2		Amended and Restated Bylaws of the Company dated August 11, 2004 (filed as Exhibit 3.10 to our Registration Statement on Form S-3, File No. 333-119429, and incorporated herein by reference).
4.1		Investment Agreement, dated as of February 1, 2002, by and between the Company and Pharmacia & Upjohn Company (filed as Exhibit 4.1 to the Company Current Report on Form 8-K dated February 1, 2002 and incorporated herein by reference).
4.2		Rights Agreement, dated February 22, 2000, between the Company and American Stock Transfer & Trust Company as Rights Agent (filed as Exhibit 1 to our Current Report on Form 8-K dated February 22, 2000 and incorporated herein by reference).
4.3		Securities Purchase Agreement dated as of June 25, 2004 (filed as Exhibit 99.2 to our Current Report on Form 8-K dated June 25, 2004 and incorporated herein by reference).
4.4		Form of Warrant (filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K dated June 25, 2004 and incorporated herein by reference).
10.1		Lease Agreement for facilities at 45 Davids Drive, Hauppauge, NY, effective as of July 1, 2005 (filed as Exhibit 10.30 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by reference).
10.2		Lease Agreement, dated April 23, 2002, with Phase 3 Science Center LLC, Ahwatukee Hills Investors LLC and J. Alexander’s LLC (filed as Exhibit 10.26 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2002 and incorporated herein by reference).
10.3		First Amendment dated June 17, 2003, to Lease Agreement dated April 23, 2002, with Phase 3 Science Center LLC, Ahwatukee Hills Investors LLC and J. Alexander’s LLC (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2003 and incorporated herein by reference).
10.4		Second Amendment, dated February 4, 2004, to Lease Agreement dated April 23, 2002, with Phase 3 Science Center LLC, Ahwatukee Hills Investors LLC and J. Alexander’s LLC (filed as Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference).
10.5		Lease Agreement for facilities at 80 Davids Drive, Hauppauge, NY, effective as of July 1, 2005 (filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2005 and incorporated herein by reference).
10.6		Amended and Restated Employment Agreement, dated May 2, 2002, with Dr. Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.27 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended

Exhibit
No.		Description
		March 31, 2002 and incorporated herein by reference).
10.7		Employment Agreement dated June 3, 2005 by and between Nastech Pharmaceutical Company Inc. and Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 3, 2005 and incorporated herein by reference).
10.8		Employment Agreement with Gregory L. Weaver, dated April 30, 2002 (filed as Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2002 and incorporated herein by reference).
10.9		Change-in-Control Severance Agreement with Gregory L. Weaver, dated July 31, 2002 (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2002 and incorporated herein by reference).
10.10		Agreement, Release and Waiver dated Sept. 7, 2005 by and between Nastech Pharmaceutical Company Inc. and Mr. Gregory L. Weaver (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 7, 2005 and incorporated herein by reference).
10.11		Termination and Mutual Release Agreement, dated September 30, 2002, with Schwarz Pharma, Inc. (Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated September 30, 2002 and incorporated herein by reference).
10.12		Divestiture Agreement, dated January 24, 2003, with Pharmacia & Upjohn Company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 24, 2003 and incorporated herein by reference).
10.13		Nastech Pharmaceutical Company Inc. 1990 Stock Option Plan (filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-8, File No. 333-28785, and incorporated herein by reference).
10.14		Amended and Restated Nastech Pharmaceutical Company Inc. 2000 Nonqualified Stock Option Plan (filed as Exhibit 4.4 to the Company’s Registration Statement on Form S-8, File No. 333-49514, and incorporated herein by reference).
10.15		Nastech Pharmaceutical Company Inc. 2002 Stock Option Plan (filed as Exhibit 10.28 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2002 and incorporated herein by reference).
10.16		Nastech Pharmaceutical Company Inc. 2004 Stock Incentive Plan (filed as Exhibit 99 to the Company’s Registration Statement on Form S-8, File No. 333-118206, and incorporated herein by reference).
10.17		Amendment No. 1 to Nastech Pharmaceutical Company Inc. 2004 Stock Incentive Plan (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K dated July 20, 2005 and incorporated herein by reference).
10.18		Amendment No. 2 to Nastech Pharmaceutical Company Inc. 2004 Stock Incentive Plan. (2)
10.19		Restricted Stock Grant Agreement effective July 20, 2005 by and between Nastech Pharmaceutical Company Inc. and Dr. Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 20, 2005 and incorporated herein by reference).
10.20		Incentive Stock Option Grant Agreement effective July 20, 2005 by and between Nastech Pharmaceutical Company Inc. and Dr. Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated July 20, 2005 and incorporated herein by reference).

Exhibit
No.		Description
10.21		Non-Qualified Stock Option Grant Agreement effective July 20, 2005by and between Nastech Pharmaceutical Company Inc. and Dr. Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated July 20, 2005 and incorporated herein by reference).
10.22		Stock option agreement with Gregory L. Weaver (filed as Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference).
10.23		Restricted Stock Grant Agreement effective May 25, 2005 by and between Nastech Pharmaceutical Company Inc. and Mr. Gregory L. Weaver (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 25, 2005 and incorporated herein by reference).
10.24		Stock Option Agreement dated as of May 25, 2005 between Nastech Pharmaceutical Company Inc. and Mr. Gregory L. Weaver (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated May 25, 2005 and incorporated herein by reference).
10.25		Restricted Stock Grant Agreement effective January 21, 2005 by and between Nastech Pharmaceutical Company Inc. and Mr. Gordon Brandt, M.D. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 21, 2005 and incorporated herein by reference).
10.26		Stock Option Agreement dated as of January 21, 2005 between Nastech Pharmaceutical Company Inc. and Mr. Gordon Brandt, M.D. (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated January 21, 2005 and incorporated herein by reference).
10.27		Restricted Stock Grant Agreement effective January 21, 2005 by and between Nastech Pharmaceutical Company Inc. and Mr. Paul H. Johnson, Ph.D. (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated January 21, 2005 and incorporated herein by reference).
10.28		Stock Option Agreement dated as of January 21, 2005 between Nastech Pharmaceutical Company Inc. and Mr. Paul H. Johnson, Ph.D. (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K dated January 21, 2005 and incorporated herein by reference).
10.29		Restricted Stock Grant Agreement effective October 5, 2005 by and between Nastech Pharmaceutical Company Inc. and Dr. Paul H. Johnson, Ph.D. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 5, 2005 and incorporated herein by reference).
10.30		Stock Option Agreement effective October 5, 2005 by and between Nastech Pharmaceutical Company Inc. and Dr. Paul H. Johnson, Ph.D. (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated October 5, 2005 and incorporated herein by reference).
10.31		Restricted Stock Grant Agreement effective May 25, 2005 by and between Nastech Pharmaceutical Company Inc. and Mr. David E. Wormuth (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated May 25, 2005 and incorporated herein by reference).
10.32		Stock Option Agreement dated as of May 25, 2005 between Nastech Pharmaceutical Company Inc. and Mr. David E. Wormuth (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K dated May 25, 2005 and incorporated herein by reference).
10.33		Restricted Stock Grant Agreement effective August 11, 2004 by and between Nastech Pharmaceutical Company Inc. and Mr. Bruce R. York. (2)
10.34		Stock Option Agreement dated as of August 25, 2004 between Nastech Pharmaceutical Company Inc. and Mr. Philip C. Ranker. (2).
10.35		Restricted Stock Grant Agreement effective August 25, 2004 by and between Nastech Pharmaceutical

Exhibit
No.		Description
		Company Inc. and Mr. Philip C. Ranker. (2)
10.36		Restricted Stock Grant Agreement effective July 1, 2005 by and between Nastech Pharmaceutical Company Inc. and Mr. Philip C. Ranker. (2)
10.37		Restricted Stock Grant Agreement effective July 1, 2005 by and between Nastech Pharmaceutical Company Inc. and Mr. Bruce R. York. (2)
10.38		Restricted Stock Grant Agreement effective September 7, 2005 by and between Nastech Pharmaceutical Company Inc. and Mr. Philip C. Ranker. (2)
10.39		Restricted Stock Grant Agreement effective September 7, 2005 by and between Nastech Pharmaceutical Company Inc. and Mr. Bruce R. York. (2)
10.40		Asset Purchase Agreement dated June 16, 2003, by and between the Company and Questcor Pharmaceuticals, Inc. (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated June 17, 2003 and incorporated herein by reference).
10.41		Form of Purchase Agreement (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K dated September 4, 2003 and incorporated herein by reference).
10.42		Form of Warrant (filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K dated September 4, 2003, and incorporated herein by reference).
10.43		Revolving Line of Credit Agreement with Wells Fargo Bank, dated December 19, 2003 (filed as Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference).
10.44		Addendum to Promissory Note with Wells Fargo Bank, dated January 20, 2004 (filed as Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference).
10.45		Security Agreement Securities Account with Wells Fargo Bank, dated December 19, 2003 (filed as Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference).
10.46		Addendum to Security Agreement: Securities Account with Wells Fargo Bank, dated December 19, 2003 (filed as Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference).
10.47		Revolving Line of Credit Agreement with Wells Fargo Bank, dated October 20, 2004 (filed as Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference).
10.48		Exclusive Development, Commercialization and License Agreement by and between Merck & Co., Inc. and the Company effective as of September 24, 2004 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 24, 2004 and incorporated herein by reference). (1)
10.49		Supply Agreement by and between the Company and Merck & Co., Inc. effective as of September 24, 2004 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated September 24, 2004 and incorporated herein by reference). (1)
10.50		License and Supply Agreement by and between Par Pharmaceutical, Inc. and Nastech Pharmaceutical Company Inc. effective as of October 22, 2004 (filed as Exhibit 10.1 to the Company’s Current Report

Exhibit
No.		Description
		on Form 8-K dated October 22, 2004 and incorporated herein by reference). (1)
10.51		Agreement dated as of September 23, 2005 by and between Nastech Pharmaceutical Company Inc. and QOL Medical, LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 17, 2005 and incorporated herein by reference). (1)
31.1		Certification of the Company’s Chairman of the Board, President and Chief Executive Officer pursuant to Rules 13a–14 and 15d-14 under the Securities Exchange Act of 1934, as amended. (2)
31.2		Certification of the Company’s Interim Chief Financial Officer pursuant to Rules 13a–14 and 15d-14 under the Securities Exchange Act of 1934, as amended. (2)
32.1		Certification of the Company’s Chairman of the Board, President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
32.2		Certification of the Company’s Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)