##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
    NOVEN PHARMACEUTICALS, INC.
  STATE OF DELAWARE
    
    59-2767632(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 
  
  o x
 o o
  Large accelerated filer o
    
    Accelerated filer x
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o x
  Class
    
    Outstanding at July 31, 2009Common stock $.0001 par value
    
    25,082,398




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##### 



NOVEN PHARMACEUTICALS, INC.
  Page No.PART I - FINANCIAL INFORMATIONItem 1 - Unaudited Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008
    
    
    4Condensed Consolidated Statement of Changes in Stockholders Equity for the Six Months Ended June 30, 2009
    
    
    5Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28Item 3 - Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 4 - Controls and Procedures
    
    
    45PART II - OTHER INFORMATIONItem 1 - Legal Proceedings
    
    
    46Item 1A - Risk Factors
    
    
    47Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    48Item 4 - Submission of Matters to a Vote of Security Holders
    
    
    48Item 5 - Other Information
    
    
    49Item 6 - Exhibits
    
    
    49SIGNATURES
    
    
    50EX-31.1EX-31.2EX-32.1EX-32.2
  Cautionary Factors
 Trademark Information ® ® ®  ® ® ® ® ® ®
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Unaudited Condensed Consolidated Financial Statements
 NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 
 June 30,
    
    
    December 31,2009
    
    
    2008AssetsCurrent Assets:Cash and cash equivalents
    
    $
    69,773
    
    
    $
    62,875Investments in auction rate securities, current portion
    
    
    
    
    
    
    3,650Accounts receivable (less allowances of $548 at 2009
and $509 at 2008)
    
    
    6,063
    
    
    
    8,577Accounts receivable  Novogyne, net
    
    
    7,853
    
    
    
    6,510Inventories
    
    
    14,082
    
    
    
    13,924Net deferred income tax asset, current portion
    
    
    6,764
    
    
    
    7,026Prepaid income taxes
    
    
    5,602
    
    
    
    8,178Prepaid and other current assets
    
    
    2,789
    
    
    
    2,898112,926
    
    
    
    113,638Non-current Assets:Property, plant and equipment, net
    
    
    35,363
    
    
    
    34,886Investments in auction rate securities, non-current portion
    
    
    11,600
    
    
    
    11,810Investment in Novogyne
    
    
    25,049
    
    
    
    24,319Net deferred income tax asset, non-current portion
    
    
    64,054
    
    
    
    65,159Intangible assets, net
    
    
    34,568
    
    
    
    36,508Goodwill
    
    
    14,407
    
    
    
    14,407Deposits and other non-current assets
    
    
    715
    
    
    
    839185,756
    
    
    
    187,928$
    298,682
    
    
    $
    301,566Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable and accrued expenses
    
    $
    9,821
    
    
    $
    7,384Accrued compensation and related liabilities
    
    
    7,047
    
    
    
    7,958Other accrued liabilities
    
    
    13,443
    
    
    
    17,260Current portion of long-term obligations
    
    
    71
    
    
    
    3,396Deferred product revenue  Stavzor®
    
    
    1,865
    
    
    
    1,537Deferred license and contract revenues, current portion
    
    
    25,437
    
    
    
    25,45957,684
    
    
    
    62,994Non-current Liabilities:Long-term obligations, less current portion
    
    
    25
    
    
    
    27Deferred license and contract revenues, non-current portion
    
    
    64,782
    
    
    
    77,112Other non-current liabilities
    
    
    947
    
    
    
    99765,754
    
    
    
    78,136Total Liabilities
    
    
    123,438
    
    
    
    141,130Commitments and Contingencies (Note 14)Stockholders Equity:Preferred stock  authorized 100,000 shares par
value $.01 per share; no shares issued or outstanding
    
    
    
    
    
    
    Common stock  authorized 80,000,000 shares,
par value $.0001 per share; 25,351,332 and 25,235,763
issued at June 30, 2009 and December 31, 2008
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    126,330
    
    
    
    123,290Retained earnings
    
    
    54,035
    
    
    
    42,267Treasury stock, at cost - 322,345 shares at June 30, 2009
and December 31, 2008
    
    
    (5,124
    )
    
    
    (5,124
    )Common stock held in trust
    
    
    (1,858
    )
    
    
    (1,569
    )Deferred compensation obligation
    
    
    1,858
    
    
    
    1,569175,244
    
    
    
    160,436$
    298,682
    
    
    $
    301,566
 The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these financial statements.
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NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Product revenues  Novogyne:Product sales, net
    
    $
    7,406
    
    
    $
    5,553
    
    
    $
    12,886
    
    
    $
    7,984Royalties
    
    
    2,591
    
    
    
    2,349
    
    
    
    4,813
    
    
    
    4,529Total net product revenues  Novogyne
    
    
    9,997
    
    
    
    7,902
    
    
    
    17,699
    
    
    
    12,513Product revenues, net  third parties
    
    
    10,131
    
    
    
    11,641
    
    
    
    23,780
    
    
    
    23,226Total net product revenues
    
    
    20,128
    
    
    
    19,543
    
    
    
    41,479
    
    
    
    35,739License and contract revenues
    
    
    6,643
    
    
    
    5,060
    
    
    
    12,932
    
    
    
    10,346Total net revenues
    
    
    26,771
    
    
    
    24,603
    
    
    
    54,411
    
    
    
    46,085Costs and Expenses:Cost of products sold  Novogyne
    
    
    3,771
    
    
    
    3,463
    
    
    
    7,419
    
    
    
    6,789Cost of products sold  third parties
    
    
    9,346
    
    
    
    9,320
    
    
    
    17,114
    
    
    
    17,303Total cost of products sold
    
    
    13,117
    
    
    
    12,783
    
    
    
    24,533
    
    
    
    24,092Research and development
    
    
    3,751
    
    
    
    3,293
    
    
    
    8,404
    
    
    
    6,612Selling and marketing
    
    
    3,983
    
    
    
    5,336
    
    
    
    8,996
    
    
    
    10,159General and administrative
    
    
    8,651
    
    
    
    8,906
    
    
    
    15,699
    
    
    
    15,928Total costs and expenses
    
    
    29,502
    
    
    
    30,318
    
    
    
    57,632
    
    
    
    56,791Loss from operations
    
    
    (2,731
    )
    
    
    (5,715
    )
    
    
    (3,221
    )
    
    
    (10,706
    )Equity in earnings of Novogyne
    
    
    13,902
    
    
    
    12,429
    
    
    
    21,447
    
    
    
    20,696Interest and other income, net
    
    
    58
    
    
    
    500
    
    
    
    147
    
    
    
    1,122Loss on auction rate securities
    
    
    (210
    )
    
    
    
    
    
    
    (210
    )
    
    
    Income before income taxes
    
    
    11,019
    
    
    
    7,214
    
    
    
    18,163
    
    
    
    11,112Provision for income taxes
    
    
    3,748
    
    
    
    2,704
    
    
    
    6,395
    
    
    
    4,010Net income
    
    $
    7,271
    
    
    $
    4,510
    
    
    $
    11,768
    
    
    $
    7,102Basic earnings per share
    
    $
    0.29
    
    
    $
    0.18
    
    
    $
    0.48
    
    
    $
    0.29Diluted earnings per share
    
    $
    0.29
    
    
    $
    0.18
    
    
    $
    0.47
    
    
    $
    0.29Weighted average number of common shares
outstanding:Basic
    
    
    24,733
    
    
    
    24,603
    
    
    
    24,713
    
    
    
    24,582Diluted
    
    
    24,859
    
    
    
    24,754
    
    
    
    24,814
    
    
    
    24,710
 The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these financial statements.
 4




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NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 
 AdditionalCommon Stock
    
    Paid-in
    
    
    Retained
    
    
    TreasuryShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    Other
    
    
    TotalBalance at December 31, 2008
    
    
    24,913
    
    
    $
    3
    
    
    $
    123,290
    
    
    $
    42,267
    
    
    $
    (5,124
    )
    
    $
    
    
    
    $
    160,436Exercises of stock options/SSARs
    
    
    25
    
    
    
    
    
    
    
    262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    262Stock-based compensation expense and
issuance of shares to outside directors
    
    
    90
    
    
    
    
    
    
    
    2,670
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,670Issuance of SSARs in settlement of
executive bonus
    
    
    
    
    
    
    
    
    
    
    219
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219Tax benefit adjustments
    
    
    
    
    
    
    
    
    
    
    (111
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111
    )Common stock held in trust
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (289
    )
    
    
    (289
    )Deferred compensation obligation
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    289
    
    
    
    289Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,768
    
    
    
    
    
    
    
    
    
    
    
    11,768Balance at June 30, 2009
    
    
    25,028
    
    
    $
    3
    
    
    $
    126,330
    
    
    $
    54,035
    
    
    $
    (5,124
    )
    
    $
    
    
    
    $
    175,244
 The
accompanying notes to unaudited condensed consolidated financial statements are an integral part of this financial statement.
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NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 
 Six Months Ended June 30,2009
    
    
    2008Cash flows from operating activities:Net income
    
    $
    11,768
    
    
    $
    7,102Adjustments to reconcile net income to net cash flows provided
by (used in) operating activities:Depreciation and amortization
    
    
    3,899
    
    
    
    4,571Loss on disposal of property, plant and equipment
    
    
    82
    
    
    
    37Inventory write-offs
    
    
    4,169
    
    
    
    3,871Loss on auction rate securities
    
    
    210
    
    
    
    Stock based compensation expense
    
    
    2,670
    
    
    
    2,345Deferred income taxes
    
    
    1,256
    
    
    
    (6,946
    )Recognition of deferred license and contract revenues
    
    
    (12,932
    )
    
    
    (10,346
    )Equity in earnings of Novogyne
    
    
    (21,447
    )
    
    
    (20,696
    )Distributions from Novogyne
    
    
    18,497
    
    
    
    17,247Other noncash items
    
    
    (9
    )
    
    
    (40
    )Changes in operating assets and liabilities:Decrease (increase) in accounts receivable  trade, net
    
    
    2,514
    
    
    
    (1,346
    )Increase in milestone payment receivable  Shire
    
    
    
    
    
    
    (25,000
    )(Increase) decrease in accounts receivable  Novogyne, net
    
    
    (1,343
    )
    
    
    2,091Increase in inventories
    
    
    (3,319
    )
    
    
    (8,013
    )Decrease in prepaid income taxes
    
    
    4,796
    
    
    
    3,129Decrease in prepaid and other current assets
    
    
    109
    
    
    
    113Decrease (increase) in deposits and other assets
    
    
    166
    
    
    
    (176
    )Increase (decrease) in accounts payable and accrued expenses
    
    
    2,517
    
    
    
    (1,897
    )Decrease in accrued compensation and related liabilities
    
    
    (692
    )
    
    
    (4,324
    )(Decrease) increase in other accrued liabilities
    
    
    (4,781
    )
    
    
    1,923Increase in deferred license and contract revenues
    
    
    580
    
    
    
    26,345Increase in deferred product revenue  Stavzor®
    
    
    328
    
    
    
    (Decrease) increase in other liabilities
    
    
    (74
    )
    
    
    97Cash flows provided by (used in) operating activities
    
    
    8,964
    
    
    
    (9,913
    )Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (2,185
    )
    
    
    (1,205
    )Payments for intangible assets
    
    
    (413
    )
    
    
    (152
    )Purchase of company-owned life insurance
    
    
    (53
    )
    
    
    (335
    )Purchases of investments
    
    
    
    
    
    
    (62,800
    )Proceeds from sale of investments
    
    
    3,650
    
    
    
    99,175Cash flows provided by investing activities
    
    
    999
    
    
    
    34,683Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    262
    
    
    
    10Payments of long-term obligations
    
    
    (3,327
    )
    
    
    (3,348
    )Cash flows used in financing activities
    
    
    (3,065
    )
    
    
    (3,338
    )Net increase in cash and cash equivalents
    
    
    6,898
    
    
    
    21,432Cash and cash equivalents, beginning of period
    
    
    62,875
    
    
    
    13,973Cash and cash equivalents, end of period
    
    $
    69,773
    
    
    $
    35,405
 The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these financial statements.
 6




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NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES  Notes to Unaudited Condensed Consolidated Financial Statements
 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
      7




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® ® ® ® ® ® ® ® ® ® ®
  2. RECENT ACCOUNTING PRONOUNCEMENTS:
    8




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9




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3. CASH FLOW INFORMATION:
 Income Tax and Interest Payments
  Non-cash
Investing Activities
   Non-cash Financing Activity
  4. INVESTMENTS AVAILABLE-FOR-SALE:
  11




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5. FAIR VALUE MEASUREMENTS:
   Balance at December 31, 2008
    
    $
    15,460Redemptions of investments at par value
    
    
    (3,650
    )Unrealized losses, other-than-temporary
    
    
    (210
    )Balance at June 30, 2009
    
    $
    11,600
 6. INVENTORIES:
  June 30,
    
    
    December 31,2009
    
    
    2008Finished goods
    
    $
    2,796
    
    
    $
    3,200Work in process
    
    
    3,300
    
    
    
    2,510Raw materials
    
    
    7,986
    
    
    
    8,214$
    14,082
    
    
    $
    13,924
 ® ® ® ®
 ® ®
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7. GOODWILL AND INTANGIBLE ASSETS:
   Weighted-Net
    
    
    AverageGross Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    RemainingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Life (years)As of June 30, 2009Patent development costs
    
    $
    5,342
    
    
    $
    (3,303
    )
    
    $
    2,039
    
    
    
    7.5Acquired product intangibles
    
    
    39,290
    
    
    
    (7,179
    )
    
    
    32,111
    
    
    
    8.5Non-competition agreements
    
    
    530
    
    
    
    (414
    )
    
    
    116
    
    
    
    1.0Favorable lease
    
    
    790
    
    
    
    (488
    )
    
    
    302
    
    
    
    1.3$
    45,952
    
    
    $
    (11,384
    )
    
    $
    34,568
    
    
    
    8.4As of December 31, 2008Patent development costs
    
    $
    4,929
    
    
    $
    (3,070
    )
    
    $
    1,859
    
    
    
    7.2Acquired product intangibles
    
    
    39,290
    
    
    
    (5,289
    )
    
    
    34,001
    
    
    
    9.0Non-competition agreements
    
    
    530
    
    
    
    (304
    )
    
    
    226
    
    
    
    1.3Favorable lease
    
    
    790
    
    
    
    (368
    )
    
    
    422
    
    
    
    1.8$
    45,539
    
    
    $
    (9,031
    )
    
    $
    36,508
    
    
    
    8.8
  13




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Remainder
    
    
    Years Ending December 31,of 2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014Cost of goods sold:Intellectual property
    
    $
    2,123
    
    
    $
    4,201
    
    
    $
    4,136
    
    
    $
    4,123
    
    
    $
    4,069
    
    
    $
    3,988General and administrative:Non-compete and favorable
lease agreements
    
    
    182
    
    
    
    236
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    2,305
    
    
    $
    4,437
    
    
    $
    4,136
    
    
    $
    4,123
    
    
    $
    4,069
    
    
    $
    3,988
 8. OTHER ACCRUED LIABILITIES:
  June 30,
    
    
    December 31,2009
    
    
    2008Income taxes payable
    
    $
    1,555
    
    
    $
    2,197Accrued medicaid and other rebates
    
    
    2,633
    
    
    
    2,726Accrued market withdrawal costs
    
    
    
    
    
    
    3,598Allowance for product returns
    
    
    2,931
    
    
    
    3,070Daytrana®peel force reserves
    
    
    1,008
    
    
    
    Other accrued liabilities
    
    
    5,316
    
    
    
    5,669Total other accrued liabilities
    
    $
    13,443
    
    
    $
    17,260
 9. EQUITY PLANS:
    14




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2009
    
    
    2008Volatility
    
    
    51.9
    %
    
    
    50.2
    %Risk free interest rate
    
    
    1.81
    %
    
    
    3.18
    %Expected life (years)
    
    
    4.0
    
    
    
    4.8Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Selling and marketing
    
    $
    156
    
    
    $
    169
    
    
    $
    322
    
    
    $
    323General and administrative
    
    
    878
    
    
    
    1,159
    
    
    
    1,737
    
    
    
    1,627Research and development
    
    
    167
    
    
    
    85
    
    
    
    312
    
    
    
    176Total cost of products sold
    
    
    171
    
    
    
    74
    
    
    
    299
    
    
    
    219$
    1,372
    
    
    $
    1,487
    
    
    $
    2,670
    
    
    $
    2,345Tax benefit recognized related to
compensation expense
    
    $
    521
    
    
    $
    511
    
    
    $
    1,012
    
    
    $
    804
   15




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Weighted
    
    
    Weighted AverageStock
    
    
    Average
    
    
    Remaining
    
    
    AggregateOptions/
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicSSARs
    
    
    Price
    
    
    Life (years)
    
    
    ValueOutstanding at
beginning of period
    
    
    4,093
    
    
    $
    14.31Granted
    
    
    109
    
    
    
    9.71Exercised
    
    
    (25
    )
    
    
    10.43Canceled or expired
    
    
    (215
    )
    
    
    15.38Outstanding at end
of period
    
    
    3,962
    
    
    $
    14.15
    
    
    
    4.4
    
    
    $
    7,530Exercisable at end
of period
    
    
    1,781
    
    
    $
    16.25
    
    
    
    2.6
    
    
    $
    2,152Shares of common
stock reserved
    
    
    6,166
   Weighted AverageShares
    
    
    Grant-Date Fair ValueNonvested at
December 31, 2008
    
    
    221
    
    
    $
    9.43Granted
    
    
    91
    
    
    
    10.28Vested
    
    
    (59
    )
    
    
    10.67Nonvested at
June 30, 2009
    
    
    253
    
    
    $
    9.45
  16




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10. INCOME TAXES:
    17




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11. CONTRACT AND LICENSE AGREEMENTS:
  ® ® ®
  ® ® ®
 ® ® ® ® ® ® ® ®
 12. INVESTMENT IN VIVELLE VENTURES LLC (d/b/a NOVOGYNE):
  18




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Three Months
    
    
    Six Months2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Product sales
    
    $
    7,406
    
    
    $
    5,553
    
    
    $
    12,886
    
    
    $
    7,984Royalties
    
    
    2,591
    
    
    
    2,349
    
    
    
    4,813
    
    
    
    4,529$
    9,997
    
    
    $
    7,902
    
    
    $
    17,699
    
    
    $
    12,513Reimbursed expenses
    
    $
    8,753
    
    
    $
    7,381
    
    
    $
    16,899
    
    
    $
    14,653
   Three Months
    
    
    Six Months2009
    
    
    2008
    
    
    2009
    
    
    2008Gross revenues
    
    $
    56,435
    
    
    $
    50,054
    
    
    $
    104,665
    
    
    $
    95,348Sales allowances
    
    
    7,357
    
    
    
    5,702
    
    
    
    14,023
    
    
    
    11,555Sales return allowances
    
    
    1,118
    
    
    
    585
    
    
    
    2,491
    
    
    
    500Sales allowances and returns
    
    
    8,475
    
    
    
    6,287
    
    
    
    16,514
    
    
    
    12,055Net revenues
    
    
    47,960
    
    
    
    43,767
    
    
    
    88,151
    
    
    
    83,293Cost of sales
    
    
    9,441
    
    
    
    8,788
    
    
    
    17,518
    
    
    
    16,596Selling, general and
administrative expenses
    
    
    10,196
    
    
    
    9,798
    
    
    
    20,907
    
    
    
    18,810Income from operations
    
    
    28,323
    
    
    
    25,181
    
    
    
    49,726
    
    
    
    47,887Interest income
    
    
    67
    
    
    
    174
    
    
    
    161
    
    
    
    441Net income
    
    $
    28,390
    
    
    $
    25,355
    
    
    $
    49,887
    
    
    $
    48,328Novens equity in earnings
of Novogyne
    
    $
    13,902
    
    
    $
    12,429
    
    
    $
    21,447
    
    
    $
    20,696
  Investment in Novogyne, beginning of period
    
    $
    24,319Equity in earnings of Novogyne
    
    
    21,447Cash distributions from Novogyne
    
    
    (18,497
    )Deemed distribution by Novogyne for state
income tax payment
    
    
    (2,220
    )Investment in Novogyne, end of period
    
    $
    25,049
 19




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13. SHARE REPURCHASE PROGRAM:
  14. COMMITMENTS AND CONTINGENCIES:
    ® ® ® ®
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® ® ®
  ®
 ®
 ® ®
 ®
 ®
 ®
  21




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® ® ®
 ®
       22




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® ® ® ®
 ®
 ® ®
 ® ®
 ® ® ®
 ® ® ® ® ® ®
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®
 ® ® ® ®
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     24




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15. SEGMENT DATA:
  25




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Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net Revenues:Noven TransdermalsProduct revenues
    
    $
    14,542
    
    
    $
    12,968
    
    
    $
    29,319
    
    
    $
    23,459License and contract revenues
    
    
    6,643
    
    
    
    5,060
    
    
    
    12,932
    
    
    
    10,34621,185
    
    
    
    18,028
    
    
    
    42,251
    
    
    
    33,805Noven TherapeuticsProduct revenues
    
    
    5,586
    
    
    
    6,575
    
    
    
    12,160
    
    
    
    12,280Net revenues
    
    $
    26,771
    
    
    $
    24,603
    
    
    $
    54,411
    
    
    $
    46,085Segment profit (loss):Noven Transdermals
    
    $
    9,988
    
    
    $
    7,054
    
    
    $
    21,669
    
    
    $
    13,364Noven Therapeutics1
    
    
    (317
    )
    
    
    (570
    )
    
    
    (787
    )
    
    
    (1,530
    )Equity in earnings of Novogyne
    
    
    13,902
    
    
    
    12,429
    
    
    
    21,447
    
    
    
    20,696Total segment profit
    
    $
    23,573
    
    
    $
    18,913
    
    
    $
    42,329
    
    
    $
    32,530Reconciliation of segment profit to
income before income taxes:Segment profit
    
    $
    23,573
    
    
    $
    18,913
    
    
    $
    42,329
    
    
    $
    32,530Research and development
    
    
    (3,751
    )
    
    
    (3,293
    )
    
    
    (8,404
    )
    
    
    (6,612
    )General and administrative
    
    
    (8,651
    )
    
    
    (8,906
    )
    
    
    (15,699
    )
    
    
    (15,928
    )Interest and other income, net
    
    
    58
    
    
    
    500
    
    
    
    147
    
    
    
    1,122Loss on auction rate securities
    
    
    (210
    )
    
    
    
    
    
    
    (210
    )
    
    
    Income before income taxes
    
    $
    11,019
    
    
    $
    7,214
    
    
    $
    18,163
    
    
    $
    11,112
 
 1
    
    Segment loss for Noven Therapeutics includes patent amortization of $0.9 million for each of the three months ended
June 30, 2009 and 2008, and $1.9 million and $1.8 million for the six months ended June 30, 2009 and 2008, respectively.  June 30,
    
    
    December 31,2009
    
    
    2008Noven Transdermals
    
    $
    56,488
    
    
    $
    56,362Noven Therapeutics
    
    
    53,524
    
    
    
    55,902Novogyne
    
    
    25,049
    
    
    
    24,319Assets not allocated to segments2
    
    
    163,621
    
    
    
    164,983Total Assets
    
    $
    298,682
    
    
    $
    301,566
 
 2
    
    Assets not allocated to segments consist primarily of cash and cash
equivalents, investments
in auction rate securities and deferred income taxes. 26




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16. SUBSEQUENT EVENT  MERGER AGREEMENT:
      27




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  
    
    An executive summary of our consolidated results of operations for the 2009 Quarter;
    
    A review of certain items that may affect the historical or future comparability of
our consolidated results of operations; and
    
    An analysis of our consolidated results of operations and our liquidity and capital
resources.
  Executive Summary
 The following Executive Summary is qualified in its entirety by the more detailed discussion
and analysis of our financial condition and results of operations appearing in this Item 2 as well
as in our Unaudited Condensed Consolidated Financial Statements and related notes included in this
Form 10-Q.
 ® ® ® ®
 ® ®
  ® ®
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® ®
  ® ® ® ®
  Certain Items that May Affect Historical or Future Comparability
  Daytrana ®
 ® ® ® ®
 ®
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##### Table of Contents



® ®
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##### Table of Contents



® ®
 Results of Operations
  Three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008
 Revenues
  Three Months
    
    
    
    
    
    
    Six MonthsEnded June 30,
    
    
    
    
    
    
    Ended June 30,2009
    
    
    2008
    
    
    % Change
    
    
    2009
    
    
    2008
    
    
    % ChangeNoven TransdermalsNovogyne:Product sales
    
    $
    7,406
    
    
    $
    5,553
    
    
    
    33
    %
    
    $
    12,886
    
    
    $
    7,984
    
    
    
    61
    %Royalties
    
    
    2,591
    
    
    
    2,349
    
    
    
    10
    %
    
    
    4,813
    
    
    
    4,529
    
    
    
    6
    %Product revenues  Novogyne
    
    
    9,997
    
    
    
    7,902
    
    
    
    27
    %
    
    
    17,699
    
    
    
    12,513
    
    
    
    41
    %Third Parties:Product sales
    
    
    4,469
    
    
    
    4,978
    
    
    
    -10
    %
    
    
    11,473
    
    
    
    10,779
    
    
    
    6
    %Royalties
    
    
    76
    
    
    
    88
    
    
    
    -14
    %
    
    
    147
    
    
    
    167
    
    
    
    -12
    %Product revenues  third parties
    
    
    4,545
    
    
    
    5,066
    
    
    
    -10
    %
    
    
    11,620
    
    
    
    10,946
    
    
    
    6
    %Total product revenues
    
    
    14,542
    
    
    
    12,968
    
    
    
    12
    %
    
    
    29,319
    
    
    
    23,459
    
    
    
    25
    %License and contract revenues
    
    
    6,643
    
    
    
    5,060
    
    
    
    31
    %
    
    
    12,932
    
    
    
    10,346
    
    
    
    25
    %Total Transdermals
    
    
    21,185
    
    
    
    18,028
    
    
    
    18
    %
    
    
    42,251
    
    
    
    33,805
    
    
    
    25
    %Noven TherapeuticsThird Parties:Product sales
    
    
    5,586
    
    
    
    6,575
    
    
    
    -15
    %
    
    
    12,160
    
    
    
    12,280
    
    
    
    -1
    %Net Revenues
    
    $
    26,771
    
    
    $
    24,603
    
    
    
    9
    %
    
    $
    54,411
    
    
    $
    46,085
    
    
    
    18
    %
 31




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##### Table of Contents



Net Revenues
 ® ® ® ® ®
 ®
 Product Revenues  Novogyne
 ® ® ® ®
 ® ® ® ®
 ® ® ® ®
 Product Revenues  Third Parties
 ® ® ® ® ® ® ®
 32




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##### Table of Contents



® ®
 ®
 ®  ® ® ® ® ® ® ®
 ®  ® ® ® ® ® ® ®
 ® ® ® ® ® ® ® ® ® ®
 License and Contract Revenues
  33




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##### Table of Contents



®
 ®
 Gross to Net Revenues
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofgross
    
    
    
    
    
    
    gross
    
    
    
    
    
    
    gross
    
    
    
    
    
    
    gross2009
    
    
    revenues
    
    
    2008
    
    
    revenues
    
    
    2009
    
    
    revenues
    
    
    2008
    
    
    revenuesNoven Transdermals:Gross revenues
    
    $
    21,293
    
    
    
    100
    %
    
    $
    18,386
    
    
    
    100
    %
    
    $
    42,428
    
    
    
    100
    %
    
    $
    34,399
    
    
    
    100
    %Sales returns allowances
    
    
    (108
    )
    
    
    1
    %
    
    
    (358
    )
    
    
    2
    %
    
    
    (177
    )
    
    
    0
    %
    
    
    (594
    )
    
    
    2
    %Net revenues
    
    $
    21,185
    
    
    
    99
    %
    
    $
    18,028
    
    
    
    98
    %
    
    $
    42,251
    
    
    
    100
    %
    
    $
    33,805
    
    
    
    98
    %Noven Therapeutics:Gross revenues
    
    $
    8,580
    
    
    
    100
    %
    
    $
    10,133
    
    
    
    100
    %
    
    $
    18,111
    
    
    
    100
    %
    
    $
    19,641
    
    
    
    100
    %Cash discounts
    
    
    (180
    )
    
    
    2
    %
    
    
    (193
    )
    
    
    2
    %
    
    
    (352
    )
    
    
    2
    %
    
    
    (385
    )
    
    
    2
    %Medicaid, Medicare & State
program rebates and credits including
redemption offers
    
    
    (1,550
    )
    
    
    18
    %
    
    
    (1,289
    )
    
    
    13
    %
    
    
    (3,588
    )
    
    
    20
    %
    
    
    (3,578
    )
    
    
    18
    %Chargebacks
    
    
    (384
    )
    
    
    4
    %
    
    
    (365
    )
    
    
    4
    %
    
    
    (547
    )
    
    
    3
    %
    
    
    (632
    )
    
    
    3
    %Wholesaler fees
    
    
    (459
    )
    
    
    5
    %
    
    
    (608
    )
    
    
    6
    %
    
    
    (848
    )
    
    
    5
    %
    
    
    (1,202
    )
    
    
    6
    %Sales returns allowances
    
    
    (421
    )
    
    
    5
    %
    
    
    (1,103
    )
    
    
    11
    %
    
    
    (616
    )
    
    
    3
    %
    
    
    (1,564
    )
    
    
    8
    %Sales and returns allowances
    
    
    (2,994
    )
    
    
    35
    %
    
    
    (3,558
    )
    
    
    35
    %
    
    
    (5,951
    )
    
    
    33
    %
    
    
    (7,361
    )
    
    
    37
    %Net revenues
    
    $
    5,586
    
    
    
    65
    %
    
    $
    6,575
    
    
    
    65
    %
    
    $
    12,160
    
    
    
    67
    %
    
    $
    12,280
    
    
    
    63
    %
 ® ®
 34




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##### Table of Contents



Gross Margin
    Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    
    
    
    
    2008
    
    
    
    
    
    
    2009
    
    
    
    
    
    
    2008Noven TransdermalsNovogyne:Product revenues
    
    $
    9,997
    
    
    
    
    
    
    $
    7,902
    
    
    
    
    
    
    $
    17,699
    
    
    
    
    
    
    $
    12,513Cost of products sold
    
    
    3,771
    
    
    
    
    
    
    
    3,463
    
    
    
    
    
    
    
    7,419
    
    
    
    
    
    
    
    6,789Gross profit
    
    
    6,226
    
    
    
    62
    %
    
    
    4,439
    
    
    
    56
    %
    
    
    10,280
    
    
    
    58
    %
    
    
    5,724
    
    
    
    46
    %Third parties:Product revenues
    
    
    4,545
    
    
    
    
    
    
    
    5,066
    
    
    
    
    
    
    
    11,620
    
    
    
    
    
    
    
    10,946Cost of products sold
    
    
    7,426
    
    
    
    
    
    
    
    7,298
    
    
    
    
    
    
    
    13,163
    
    
    
    
    
    
    
    13,245Gross profit (loss)
    
    
    (2,881
    )
    
    
    -63
    %
    
    
    (2,232
    )
    
    
    -44
    %
    
    
    (1,543
    )
    
    
    -13
    %
    
    
    (2,299
    )
    
    
    -21
    %Total Noven Transdermals:Product revenues
    
    
    14,542
    
    
    
    
    
    
    
    12,968
    
    
    
    
    
    
    
    29,319
    
    
    
    
    
    
    
    23,459Cost of products sold
    
    
    11,197
    
    
    
    
    
    
    
    10,761
    
    
    
    
    
    
    
    20,582
    
    
    
    
    
    
    
    20,034Gross profit
    
    
    3,345
    
    
    
    23
    %
    
    
    2,207
    
    
    
    17
    %
    
    
    8,737
    
    
    
    30
    %
    
    
    3,425
    
    
    
    15
    %Noven TherapeuticsProduct revenues
    
    
    5,586
    
    
    
    
    
    
    
    6,575
    
    
    
    
    
    
    
    12,160
    
    
    
    
    
    
    
    12,280Cost of products sold
    
    
    1,920
    
    
    
    
    
    
    
    2,022
    
    
    
    
    
    
    
    3,951
    
    
    
    
    
    
    
    4,058Gross profit
    
    
    3,666
    
    
    
    66
    %
    
    
    4,553
    
    
    
    69
    %
    
    
    8,209
    
    
    
    68
    %
    
    
    8,222
    
    
    
    67
    %Total CompanyProduct revenues
    
    
    20,128
    
    
    
    
    
    
    
    19,543
    
    
    
    
    
    
    
    41,479
    
    
    
    
    
    
    
    35,739Cost of products sold
    
    
    13,117
    
    
    
    
    
    
    
    12,783
    
    
    
    
    
    
    
    24,533
    
    
    
    
    
    
    
    24,092Gross profit
    
    $
    7,011
    
    
    
    35
    %
    
    $
    6,760
    
    
    
    35
    %
    
    $
    16,946
    
    
    
    41
    %
    
    $
    11,647
    
    
    
    33
    %
 35




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##### Table of Contents



®
 ® ®
 ® ®
 ® ® ® ® ® ®
 ®
 36




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##### Table of Contents



Operating Expenses
  Three Months
    
    
    
    
    
    
    Six MonthsEnded June 30,
    
    
    
    
    
    
    Ended June 30,2009
    
    
    2008
    
    
    % Change
    
    
    2009
    
    
    2008
    
    
    % ChangeResearch and development
    
    $
    3,751
    
    
    $
    3,293
    
    
    
    14
    %
    
    $
    8,404
    
    
    $
    6,612
    
    
    
    27
    %Selling and marketing
    
    
    3,983
    
    
    
    5,336
    
    
    
    -25
    %
    
    
    8,996
    
    
    
    10,159
    
    
    
    -11
    %General and administrative
    
    
    8,651
    
    
    
    8,906
    
    
    
    -3
    %
    
    
    15,699
    
    
    
    15,928
    
    
    
    -1
    %
 Research and Development
  Selling and Marketing
 ®
 General and Administrative
 ® ®
 ® ®
 37




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##### Table of Contents



Other Income and Expenses
 Interest and Other Income
  Income Taxes
  Equity in Earnings of Novogyne
  38




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##### Table of Contents



Three Months
    
    
    
    
    
    
    Six MonthsEnded June 30,
    
    
    
    
    
    
    Ended June 30,2009
    
    
    2008
    
    
    % Change
    
    
    2009
    
    
    2008
    
    
    % ChangeGross revenues
    
    $
    56,435
    
    
    $
    50,054
    
    
    
    13
    %
    
    $
    104,665
    
    
    $
    95,348
    
    
    
    10
    %Sales allowances
    
    
    7,357
    
    
    
    5,702
    
    
    
    29
    %
    
    
    14,023
    
    
    
    11,555
    
    
    
    21
    %Sales returns allowances
    
    
    1,118
    
    
    
    585
    
    
    
    91
    %
    
    
    2,491
    
    
    
    500
    
    
    
    N/MSales allowances and returns
    
    
    8,475
    
    
    
    6,287
    
    
    
    35
    %
    
    
    16,514
    
    
    
    12,055
    
    
    
    37
    %Net revenues
    
    
    47,960
    
    
    
    43,767
    
    
    
    10
    %
    
    
    88,151
    
    
    
    83,293
    
    
    
    6
    %Cost of sales
    
    
    9,441
    
    
    
    8,788
    
    
    
    7
    %
    
    
    17,518
    
    
    
    16,596
    
    
    
    6
    %Selling, general and
administrative expenses
    
    
    10,196
    
    
    
    9,798
    
    
    
    4
    %
    
    
    20,907
    
    
    
    18,810
    
    
    
    11
    %Income from operations
    
    
    28,323
    
    
    
    25,181
    
    
    
    12
    %
    
    
    49,726
    
    
    
    47,887
    
    
    
    4
    %Interest income
    
    
    67
    
    
    
    174
    
    
    
    -61
    %
    
    
    161
    
    
    
    441
    
    
    
    -63
    %Net income
    
    $
    28,390
    
    
    $
    25,355
    
    
    
    12
    %
    
    $
    49,887
    
    
    $
    48,328
    
    
    
    3
    %Novens equity in earnings
of Novogyne
    
    $
    13,902
    
    
    $
    12,429
    
    
    
    12
    %
    
    $
    21,447
    
    
    $
    20,696
    
    
    
    4
    %
  Novogyne Net Revenues
  ® ® ® ® ®
 ® ® ® ® ® ®
 39




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Sales returns allowances included in net revenues
    
    $
    1,118
    
    
    $
    585
    
    
    $
    2,491
    
    
    $
    500Actual returns primarily for expiring product
    
    
    (865
    )
    
    
    (889
    )
    
    
    (1,971
    )
    
    
    (1,499
    )Change in allowances for returns primarily for
expiring product
    
    $
    253
    
    
    $
    (304
    )
    
    $
    520
    
    
    $
    (999
    )
 ®
 Novogyne Gross Margin
  Novogyne Selling, General and Administrative Expenses
   40




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##### Table of Contents



Liquidity and Capital Resources
  June 30,
    
    
    December 31,2009
    
    
    2008Cash and cash equivalents
    
    $
    69,773
    
    
    $
    62,875Short-term investments
    
    
    
    
    
    
    3,650Working capital
    
    
    55,242
    
    
    
    50,644
  June 30,
    
    
    December 31,2009
    
    
    2008Cash and cash equivalents
    
    $
    69,773
    
    
    $
    62,875Investments in auction rate securities:Current
    
    
    
    
    
    
    3,650Non-current
    
    
    11,600
    
    
    
    11,810Total cash and cash equivalents and investments
    
    $
    81,373
    
    
    $
    78,335
  2009
    
    
    2008Cash flows:Operating activities
    
    $
    8,964
    
    
    $
    (9,913
    )Investing activities
    
    
    999
    
    
    
    34,683Financing activities
    
    
    (3,065
    )
    
    
    (3,338
    )Net Cash Flows
    
    $
    6,898
    
    
    $
    21,432
 Operating Activities


®


41



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##### Table of Contents



Investing Activities
    Financing Activities
  Short-Term and Long-Term Liquidity
  ®
  ® ® ® ®
 42




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##### Table of Contents



® ® ® ® ®
 ® ®
   Balance at December 31, 2008
    
    $
    15,460Redemptions of investments at par value
    
    
    (3,650
    )Unrealized losses, other-than-temporary
    
    
    (210
    )Balance at June 30, 2009
    
    $
    11,600
    43




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##### Table of Contents



Aggregate Contractual Obligations
   44




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##### Table of Contents



Critical Accounting Estimates
  Recent Accounting Pronouncements
  Outlook
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  45




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  Certifications
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  ®
 ®
 ®
  46




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##### Table of Contents



Item 1A. Risk Factors
  We have entered into a merger agreement with Hisamitsu which, if consummated, will result in
Noven no longer being a publicly traded company. We cannot assure that the tender offer and
subsequent planned merger will be successfully consummated.
  47




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number ofShares
    
    
    ApproximatePurchased as
    
    
    Dollar ValuePart of
    
    
    That May YetTotal Number of
    
    
    Average Price
    
    
    Publicly
    
    
    be PurchasedShares
    
    
    Paid
    
    
    Announced
    
    
    under thePurchased
    
    
    Per Share
    
    
    Program
    
    
    Program1April 1, 2009 to
April 30, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,876,238May 1, 2009 to
May 31, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,876,238June 1, 2009 to
June 30, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,876,238Totals
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,876,238
 
 1
    
    In September 2007, we established a stock repurchase program authorizing the repurchase
of up to $25.0 million of our common stock. During the third quarter of 2007, Noven
repurchased 322,345 shares of its common stock at an aggregate price of approximately $5.1
million. There is no expiration date specified for this program. 
 Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    Election of the Board of Directors:
 For
    
    
    WithheldPeter Brandt
    
    
    21,103,644
    
    
    
    704,216John G. Clarkson, M.D.
    
    
    18,490,371
    
    
    
    3,317,489Donald A. Denkhaus
    
    
    21,102,327
    
    
    
    705,533Pedro P. Granadillo
    
    
    19,820,597
    
    
    
    1,987,263Phillip M. Satow
    
    
    20,973,766
    
    
    
    834,094Robert G. Savage
    
    
    19,665,356
    
    
    
    2,142,504Wayne P. Yetter
    
    
    21,078,356
    
    
    
    729,504
 48




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##### Table of Contents



2.
    
    Proposal to approve Novens 2009 Equity Incentive Plan:
 For
    
    Against
    
    Abstained
    
    Broker Non-Vote13,619,989
    
    5,496,721
    
    46,575
    
    2,644,576
 3.
    
    Proposal to ratify and approve the appointment of Deloitte & Touche LLP as Novens independent registered public accounting firm for 2009:
 For
    
    Against
    
    Abstained
    
    Broker Non-Vote21,613,527
    
    156,289
    
    38,044
    
    0
 
 Item 5. Other Information
  
 Item 6. Exhibits
 2.1
    
    Agreement and Plan of Merger among Noven and Hisamitsu Pharmaceutical Co.,
Inc., Hisamitsu U.S., Inc. and Northstar Merger Sub, Inc. dated July 14, 2009
(incorporated by reference to Exhibit 2.1 of Novens Form 8-K dated July 15, 2009).4.1
    
    Amendment No. 2 to Rights Agreement between Noven and American Stock
Transfer & Trust Company, LLC dated July 14, 2009 (incorporated by reference to
Exhibit 4.1 of Novens Form 8-K dated July 15, 2009).10.1
    
    Noven Pharmaceuticals, Inc. 2009 Equity Incentive Plan (incorporated by
reference to Novens definitive Proxy Statement dated April 9, 2009, for the Annual
Meeting of Stockholders held on May 22, 2009).10.2
    
    Amended and Restated Employment Agreement between Noven and Jeffrey F.
Eisenberg dated July 14, 2009 (incorporated by reference to Exhibit 10.1 of Novens
Form 8-K dated July 15, 2009).31.1
    
    Certification of Peter Brandt, President and Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Michael D. Price, Vice President and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Peter Brandt, 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.*32.2
    
    Certification of Michael D. Price, Vice President and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
 
 *
    
    Pursuant to Item 601(b)(32) of Regulation S-K, this exhibit is furnished rather than filed with
this Form 10-Q. 49




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##### Table of Contents



Signatures
  NOVEN PHARMACEUTICALS, INC.Date: August 6, 2009
    By:
    /s/ Michael D. PriceMichael D. PriceVice President and
Chief Financial Officer 50