Penwest Shareholders Letter 2009

Dear Fellow Penwest Shareholder:

Over the past year, we have remained focused on achieving the goals set out in our business plan to create value for you, the shareholders of Penwest. Facing a challenging economic environment, and with limited cash resources and important decisions to be made in our business, we adopted a plan for 2009 with narrowed priorities and a set of clearly defined, measurable goals, and we set out to execute our plan. We believed that this plan would build shareholder value in the short-term and prepare the Company for long-term growth.

In 2009, our revenues were up substantially over 2008, while our SG&A and R&D expenses were down approximately 22% and 41%, respectively, and our net loss was cut by $25 million. We have now posted three consecutive quarters of profitability beginning with our third quarter of 2009, and we expect full-year profitability for 2010.

The market has, in turn, reflected our achievements as the value of your shares in Penwest has appreciated more than 100% since early 2009, when we began to implement our focused business plan. In addition, our board of directors has announced its intent to return cash to shareholders through a special dividend that the board intends to declare in the fourth quarter of 2010.

Looking Back
Last year was marked by significant accomplishments for the Company, with substantial progress in each of the primary areas of our business. Specifically, we:

• Continued to work with Endo to maximize the value of Opana ER through a collaboration for developing, marketing and selling the product. In 2009, we and Endo signed a licensing agreement with Valeant Pharmaceuticals for Canada, Australia and New Zealand, and we are continuing to support Endo’s efforts to license Opana ER elsewhere around the world.
  
  
• Took steps to protect the Opana ER franchise in the U.S. We recently announced a settlement of the Opana ER patent litigation with Barr Laboratories, Inc., which followed a previously announced settlement with Actavis South Atlantic LLC. Under the terms of the recent settlement with Barr, Penwest and Endo agreed to grant Barr a license to sell a generic version of Opana ER on or after September 15, 2012, or earlier under certain circumstances. Together with Endo, we are continuing the Opana ER patent litigation against other generic filers that we believe have infringed upon our patents, and we are prosecuting multiple additional patent applications that are not the subject of either the current litigation or the settlement agreements.
  
  
• Successfully completed our Phase Ib clinical trial of A0001 and advanced the compound into two separate Phase IIa trials. In the Phase Ib trial, A0001, a coenzyme Q10 analog demonstrated to improve mitochondrial function in-vitro, was well tolerated by subjects, and no serious adverse events were reported. In addition, we observed a dosedependent increase in exposure following repeat dosing and were able to establish a maximum tolerated dose. Based on these results, we designed and commenced two Phase IIa trials in two rare orphan disorders that currently have no approved treatments. One trial is in patients with Friedreich’s Ataxia, and the other is in patients with an A3243G mitochondrial DNA point mutation and impaired mitochondrial function typically associated with the MELAS syndrome. The trials are designed to demonstrate proof of concept regarding biological activity of the drug. We also selected an additional compound – a new chemical entity – from Edison Pharmaceuticals. We plan to decide the next steps for this compound based on the Phase IIa data from A0001.
  
  
• Further developed our drug delivery business based on the technology we used successfully with Opana ER. We achieved a success-based development milestone – and the accompanying payment – under our first collaboration agreement with Otsuka Pharmaceutical, entered into our third and fourth research and development agreements with Otsuka and, most recently, reached a multi-drug generics agreement with Alvogen, Inc. This new partnership allows us to leverage our drug delivery technology for the formulation of generic drugs, an important segment of the market for extended release technology.

We achieved these goals while right-sizing the organization to align with our current priorities and significantly reducing the Company’s combined SG&A and R&D expenses in 2009 by approximately 34% compared with 2008, and by 42% compared with 2007.

Moving Forward
To build upon our successes and deliver further growth, we are hard at work implementing a clearly-defined business plan for 2010. Our objectives include:

• Working closely with Endo to maximize the value of Opana ER.
  
  
• Completing both Phase IIa trials of A0001, analyzing the data and making a “go/no-go” decision on this compound by the third quarter of 2010.
  
  
• Exploring potential licensing opportunities for A0001 in anticipation of the completion of the Phase IIa trials.
  
  
• Growing the Company’s drug delivery business both by completing formulation work on compounds under development and by signing additional deals.
  
  
• Continuing to aggressively manage our expenses to ensure our costs are appropriate given our priorities.

I thank my colleagues at Penwest for their steadfast commitment to our Company and our mission on behalf of patients with unmet medical needs and their families. It is the hard work and dedication of our entire team that ensures our continued focus on our priorities for 2010 and beyond.

Our Board and management team are confident in Penwest's future and are energized by the progress the Company is making. We greatly appreciate your support as we continue to pursue the right path for Penwest to build value for all of Penwest's shareholders.

Sincerely,

Jennifer L. Good
President and Chief Executive Officer