##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2005
 Commission file number 0-17254
 NOVEN PHARMACEUTICALS, INC.
  STATE OF DELAWARE
    
    59-2767632(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
  (Address of principal executive offices) (Zip Code)
  (Registrants telephone number, including area code)
 þ o
 þ o
 o þ
  Class
    
    Outstanding at October 28, 2005Common stock $.0001 par value
    
    23,598,085




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NOVEN PHARMACEUTICALS, INC.
  Page No.PART I  FINANCIAL INFORMATIONItem 1  Unaudited Condensed Financial StatementsCondensed Statements of Operations for the Three and Nine Months Ended September 30, 2005 and 2004
    
    
    3Condensed Balance Sheets as of September 30, 2005 and December 31, 2004
    
    
    4Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004
    
    
    5Notes to Unaudited Condensed Financial Statements
    
    
    6Item 2
 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4  Controls and Procedures
    
    
    37PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    39Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 5  Other Information
    
    
    40Item 6  Exhibits
    
    
    40SIGNATURES
    
    
    41SECTION 302 CERTIFICATION OF THE CEOSECTION 302 CERTIFICATION OF THE CFOSECTION 906 CERTIFICATION OF THE CEOSECTION 906 CERTIFICATION OF THE CFO
    2




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NOVEN PHARMACEUTICALS, INC.
 
 
 Three Months
    
    
    Nine Months2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Product revenues  Novogyne:Product sales
    
    $
    4,740
    
    
    $
    4,364
    
    
    $
    14,432
    
    
    $
    15,058Royalties
    
    
    1,790
    
    
    
    1,411
    
    
    
    4,617
    
    
    
    3,909Total product revenues  Novogyne
    
    
    6,530
    
    
    
    5,775
    
    
    
    19,049
    
    
    
    18,967Product revenues  third parties
    
    
    3,917
    
    
    
    3,287
    
    
    
    11,888
    
    
    
    9,828Total product revenues
    
    
    10,447
    
    
    
    9,062
    
    
    
    30,937
    
    
    
    28,795Contract and license revenues:Contract
    
    
    769
    
    
    
    43
    
    
    
    1,793
    
    
    
    1,415License
    
    
    1,024
    
    
    
    996
    
    
    
    3,017
    
    
    
    2,976Contract and license revenues
    
    
    1,793
    
    
    
    1,039
    
    
    
    4,810
    
    
    
    4,391Net revenues
    
    
    12,240
    
    
    
    10,101
    
    
    
    35,747
    
    
    
    33,186Expenses:Cost of products sold
    
    
    15,289
    
    
    
    4,984
    
    
    
    26,170
    
    
    
    15,477Research and development
    
    
    3,953
    
    
    
    2,741
    
    
    
    10,108
    
    
    
    7,730Marketing, general and administrative
    
    
    4,237
    
    
    
    4,358
    
    
    
    12,481
    
    
    
    12,024Total expenses
    
    
    23,479
    
    
    
    12,083
    
    
    
    48,759
    
    
    
    35,231Loss from operations
    
    
    (11,239
    )
    
    
    (1,982
    )
    
    
    (13,012
    )
    
    
    (2,045
    )Equity in earnings of Novogyne
    
    
    8,081
    
    
    
    6,232
    
    
    
    17,094
    
    
    
    15,097Interest income, net
    
    
    512
    
    
    
    279
    
    
    
    1,608
    
    
    
    619Income (loss) before income taxes
    
    
    (2,646
    )
    
    
    4,529
    
    
    
    5,690
    
    
    
    13,671Provision (benefit) for income taxes
    
    
    (1,224
    )
    
    
    1,895
    
    
    
    1,780
    
    
    
    5,201Net income (loss)
    
    $
    (1,422
    )
    
    $
    2,634
    
    
    $
    3,910
    
    
    $
    8,470Basic earnings (loss) per share
    
    $
    (0.06
    )
    
    $
    0.11
    
    
    $
    0.17
    
    
    $
    0.36Diluted earnings (loss) per share
    
    $
    (0.06
    )
    
    $
    0.11
    
    
    $
    0.16
    
    
    $
    0.35Weighted average number of common shares
outstanding:Basic
    
    
    23,586
    
    
    
    23,416
    
    
    
    23,554
    
    
    
    23,290Diluted
    
    
    23,586
    
    
    
    24,361
    
    
    
    24,021
    
    
    
    24,344
 The accompanying notes are an integral part of these statements.
 3




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NOVEN PHARMACEUTICALS, INC.
 
 
 September 30, 2005
    
    
    December 31, 2004AssetsCurrent Assets:Cash and cash equivalents
    
    $
    32,340
    
    
    $
    93,958Short-term investments
    
    
    50,825
    
    
    
    Accounts receivable  trade (less allowance for doubtful
accounts of $53 in 2005 and $64 in 2004)
    
    
    2,965
    
    
    
    5,395Accounts receivable  Novogyne, net
    
    
    6,779
    
    
    
    10,098Accounts receivable  Endo
    
    
    4,467
    
    
    
    Inventories
    
    
    6,420
    
    
    
    15,988Net deferred income tax asset, current portion
    
    
    7,900
    
    
    
    6,700Prepaid income taxes
    
    
    6,814
    
    
    
    9,344Prepaid and other current assets
    
    
    2,368
    
    
    
    1,238120,878
    
    
    
    142,721Property, plant and equipment, net
    
    
    32,069
    
    
    
    22,587Other Assets:Investment in Novogyne
    
    
    23,778
    
    
    
    26,233Net deferred income tax asset
    
    
    7,728
    
    
    
    8,239Patent development costs, net
    
    
    2,250
    
    
    
    2,174Deposits and other assets
    
    
    18
    
    
    
    2133,774
    
    
    
    36,667$
    186,721
    
    
    $
    201,975Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable and accrued expenses
    
    $
    6,830
    
    
    $
    12,176Capital lease obligations  current portion
    
    
    119
    
    
    
    114Accrued liability  Shire
    
    
    4,979
    
    
    
    10,587Accrued compensation and related liabilities
    
    
    4,167
    
    
    
    5,762Other accrued liabilities
    
    
    3,126
    
    
    
    3,015Deferred rent credit
    
    
    89
    
    
    
    Deferred contract revenues
    
    
    1,335
    
    
    
    2,076Deferred license revenues  current portion
    
    
    9,670
    
    
    
    11,64230,315
    
    
    
    45,372Long-Term Liabilities:Capital lease obligations
    
    
    30
    
    
    
    121Deferred rent credit
    
    
    770
    
    
    
    Deferred license revenues
    
    
    21,228
    
    
    
    27,44352,343
    
    
    
    72,936Commitments and Contingencies (Note 12)Stockholders Equity:Preferred stock  authorized 100,000 shares of $.01 par
value; no shares issued or outstanding
    
    
    
    
    
    
    Common stock  authorized 80,000,000 shares,
par value $.0001 per share; issued and
outstanding 23,597,785 at September 30, 2005 and
23,481,264 at December 31, 2004
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    89,665
    
    
    
    88,236Retained earnings
    
    
    44,711
    
    
    
    40,801134,378
    
    
    
    129,039$
    186,721
    
    
    $
    201,975
 The accompanying notes are an integral part of these statements.
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NOVEN PHARMACEUTICALS, INC.
 
 
 2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    3,910
    
    
    $
    8,470Adjustments to reconcile net income to net cash flows
(used in) provided by operating activities:Depreciation and amortization
    
    
    1,892
    
    
    
    1,665Write-off of fentanyl inventories deemed non-saleable
    
    
    9,475
    
    
    
    Amortization of patent costs
    
    
    334
    
    
    
    285Amortization of non-competition agreement
    
    
    
    
    
    
    167Amortization of deferred rent credit
    
    
    (53
    )
    
    
    Income tax benefits on exercise of stock options
    
    
    228
    
    
    
    3,007Deferred income tax expense (benefit)
    
    
    (689
    )
    
    
    2,985Non-cash expense related to issuance of stock to outside
directors
    
    
    
    
    
    
    30Recognition of deferred license revenues
    
    
    (3,017
    )
    
    
    (2,976
    )Equity in earnings of Novogyne
    
    
    (17,094
    )
    
    
    (15,097
    )Distributions from Novogyne
    
    
    18,092
    
    
    
    12,263Changes in operating assets and liabilities:Decrease in
accounts receivable  trade, net
    
    
    2,430
    
    
    
    1,726Decrease in
accounts receivable  Novogyne, net
    
    
    3,319
    
    
    
    1,832Increase in accounts receivable  Endo
    
    
    (4,467
    )
    
    
    Decrease (increase) in inventories
    
    
    93
    
    
    
    (124
    )Decrease (increase) in prepaid income taxes
    
    
    3,987
    
    
    
    (2,891
    )Increase in prepaid and other current assets
    
    
    (1,130
    )
    
    
    (964
    )Decrease (increase) in deposits and other assets
    
    
    3
    
    
    
    (7
    )(Decrease) increase in accounts payable and accrued expenses
    
    
    (5,346
    )
    
    
    1,602(Decrease) increase in accrued liability  Shire
    
    
    (5,608
    )
    
    
    3,914(Decrease) increase in accrued compensation and related liabilities
    
    
    (1,595
    )
    
    
    1,468Increase (decrease) in other accrued liabilities
    
    
    111
    
    
    
    (1,972
    )(Decrease) increase in deferred contract revenue
    
    
    (741
    )
    
    
    1,760Increase in deferred license revenue
    
    
    
    
    
    
    6,500Direct expenses incurred in pursuit of
methylphenidate patch regulatory approval
    
    
    (5,170
    )
    
    
    (6,729
    )Cash flows (used in) provided by operating activities
    
    
    (1,036
    )
    
    
    16,914Cash flows from investing activities:Purchases of property, plant and equipment, net
    
    
    (10,462
    )
    
    
    (5,004
    )Payments for patent development costs, net
    
    
    (410
    )
    
    
    (422
    )Purchases of short-term investments
    
    
    (340,590
    )
    
    
    Proceeds from sale of short-term investments
    
    
    289,765
    
    
    
    Cash flows used in investing activities
    
    
    (61,697
    )
    
    
    (5,426
    )Cash flows from financing activities:Issuance of common stock from exercise of stock options
    
    
    1,201
    
    
    
    5,552Repayments of capital leases and notes payable
    
    
    (86
    )
    
    
    (74
    )Cash flows provided by financing activities
    
    
    1,115
    
    
    
    5,478Net (decrease) increase in cash and cash equivalents
    
    
    (61,618
    )
    
    
    16,966Cash and cash equivalents, beginning of period
    
    
    93,958
    
    
    
    83,381Cash and cash equivalents, end of period
    
    $
    32,340
    
    
    $
    100,347
 The accompanying notes are an integral part of these statements.
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NOVEN PHARMACEUTICALS, INC.
 
 Notes to Unaudited Condensed Financial Statements
 1.
    
    DESCRIPTION OF BUSINESS:
  ®  ®
 2.
    
    BASIS OF PRESENTATION:
   3.
    
    CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
  6




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4.
    
    RECENT ACCOUNTING PRONOUNCEMENTS:
    7




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5.
    
    RECLASSIFICATIONS:
  6.
    
    INVENTORIES:
  September 30,
    
    
    December 31,2005
    
    
    2004Finished goods
    
    $
    915
    
    
    $
    610Work in process
    
    
    1,601
    
    
    
    6,522Raw materials
    
    
    3,904
    
    
    
    8,856Total
    
    $
    6,420
    
    
    $
    15,988
   8




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7.
    
    EMPLOYEE STOCK PLANS:
   9




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Three Months
    
    
    Nine Months2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss):As reported
    
    $
    (1,422
    )
    
    $
    2,634
    
    
    $
    3,910
    
    
    $
    8,470Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects
    
    
    (149
    )
    
    
    (1,565
    )
    
    
    (12,119
    )
    
    
    (3,289
    )Pro forma
    
    $
    (1,571
    )
    
    $
    1,069
    
    
    $
    (8,209
    )
    
    $
    5,181Basic earnings (loss) per share:As reported
    
    $
    (0.06
    )
    
    $
    0.11
    
    
    $
    0.17
    
    
    $
    0.36Pro forma
    
    $
    (0.07
    )
    
    $
    0.05
    
    
    $
    (0.35
    )
    
    $
    0.22Diluted earnings (loss) per share:As reported
    
    $
    (0.06
    )
    
    $
    0.11
    
    
    $
    0.16
    
    
    $
    0.35Pro forma
    
    $
    (0.07
    )
    
    $
    0.04
    
    
    $
    (0.35
    )
    
    $
    0.21
   10




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8.
    
    CASH FLOW INFORMATION:
  Non-cash Operating Activities
  Non-cash Investing Activities
   9.
    
    CONTRACT AND LICENSE AGREEMENTS:
 Endo Collaboration
    11




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Shire Collaboration
    12




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P&G Pharmaceuticals Collaboration
   
 10.
    
    INVESTMENT IN VIVELLE VENTURES LLC (d/b/a NOVOGYNE):
   Three Months
    
    
    Nine Months2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Product sales
    
    $
    4,740
    
    
    $
    4,364
    
    
    $
    14,432
    
    
    $
    15,058Royalties
    
    
    1,790
    
    
    
    1,411
    
    
    
    4,617
    
    
    
    3,909$
    6,530
    
    
    $
    5,775
    
    
    $
    19,049
    
    
    $
    18,967Reimbursed expenses
    
    $
    6,576
    
    
    $
    6,657
    
    
    $
    20,196
    
    
    $
    18,919
   13




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Three Months
    
    
    Nine Months2005
    
    
    2004
    
    
    2005
    
    
    2004Gross revenues
    
    $
    37,974
    
    
    $
    34,314
    
    
    $
    100,519
    
    
    $
    94,463Sales allowances
    
    
    4,007
    
    
    
    3,123
    
    
    
    11,078
    
    
    
    9,412Sales return allowances
    
    
    192
    
    
    
    3,676
    
    
    
    1,057
    
    
    
    3,968Sales allowances and returns
    
    
    4,199
    
    
    
    6,799
    
    
    
    12,135
    
    
    
    13,380Net revenues
    
    
    33,775
    
    
    
    27,515
    
    
    
    88,384
    
    
    
    81,083Cost of sales
    
    
    6,395
    
    
    
    5,394
    
    
    
    16,712
    
    
    
    16,926Selling, general and
administrative expenses
    
    
    9,187
    
    
    
    7,957
    
    
    
    25,627
    
    
    
    22,519Amortization of intangible assets
    
    
    1,545
    
    
    
    1,545
    
    
    
    4,635
    
    
    
    4,635Income from operations
    
    
    16,648
    
    
    
    12,619
    
    
    
    41,410
    
    
    
    37,003Interest income
    
    
    201
    
    
    
    50
    
    
    
    336
    
    
    
    103Net income
    
    $
    16,849
    
    
    $
    12,669
    
    
    $
    41,746
    
    
    $
    37,106Novens equity in earnings of Novogyne
    
    $
    8,081
    
    
    $
    6,232
    
    
    $
    17,094
    
    
    $
    15,097
  Investment in Novogyne, beginning of period
    
    $
    26,233Equity in earnings of Novogyne
    
    
    17,094Cash distributions from Novogyne
    
    
    (18,092
    )Non-cash distribution from Novogyne (Note 8)
    
    
    (1,457
    )Investment in Novogyne, end of period
    
    $
    23,778
  11.
    
    SHARE REPURCHASE PROGRAM:
 
 14




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12.
    
    COMMITMENTS AND CONTINGENCIES:
 HT Studies
  ® ® ® ® ®
 Production Issues
          
 15




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 
 ®
 ® ® ® ® ® ® ® ® ®
  Supply Agreement
 ® 
 Litigation, Claims and Assessments
 ®
 ®  ®
 16




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Contract and License Agreements
  Internal Revenue Service Audit
  Facility Lease
  17




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##### Table of Contents



18




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
  
    
    An overview of Noven and our Novogyne joint venture;
    
    A review of certain items that affect the historical or future comparability of our
results of operations;
    
    An analysis of our results of operations and our liquidity and capital resources;
    
    A discussion of recently issued accounting standards and the application of our
critical accounting policies;
    
    An outlook that includes our current financial guidance for 2005; and
    
    A review of cautionary factors that could have a material adverse effect on our
business, financial condition and results of operations.
  Overview
 ®  ®
 ®  ® ®
 ®  ® ®  ®
  19




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®   ®
 ® ® ®
 Certain Items That Affect or Could Affect Historical or Future Comparability
 Endo
   20




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Shire
    21




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##### Table of Contents



Stock Options
  SFAS 123(R)
 Production Issues
  
 22




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##### Table of Contents



         
 ® ® ® ® ® ® ® ® ®
  23




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Results of Operations
 Three and nine months ended September 30, 2005 compared to the three and nine months ended
September 30, 2004
 Revenues
  Three Months
    
    
    Nine Months2005
    
    
    2004
    
    
    % Change
    
    
    2005
    
    
    2004
    
    
    % ChangeProduct revenues  Novogyne:Product sales
    
    $
    4,740
    
    
    $
    4,364
    
    
    
    9
    %
    
    $
    14,432
    
    
    $
    15,058
    
    
    
    (4
    %)Royalties
    
    
    1,790
    
    
    
    1,411
    
    
    
    27
    %
    
    
    4,617
    
    
    
    3,909
    
    
    
    18
    %6,530
    
    
    
    5,775
    
    
    
    13
    %
    
    
    19,049
    
    
    
    18,967
    
    
    
    0
    %Product revenues  third parties:Product sales
    
    
    3,823
    
    
    
    3,287
    
    
    
    16
    %
    
    
    11,646
    
    
    
    9,614
    
    
    
    21
    %Royalties
    
    
    94
    
    
    
    
    
    
    
    N/M
    
    
    
    242
    
    
    
    214
    
    
    
    13
    %3,917
    
    
    
    3,287
    
    
    
    19
    %
    
    
    11,888
    
    
    
    9,828
    
    
    
    21
    %Total product revenues
    
    
    10,447
    
    
    
    9,062
    
    
    
    15
    %
    
    
    30,937
    
    
    
    28,795
    
    
    
    7
    %Contract and license revenues:Contract
    
    
    769
    
    
    
    43
    
    
    
    N/M
    
    
    
    1,793
    
    
    
    1,415
    
    
    
    27
    %License
    
    
    1,024
    
    
    
    996
    
    
    
    3
    %
    
    
    3,017
    
    
    
    2,976
    
    
    
    1
    %1,793
    
    
    
    1,039
    
    
    
    73
    %
    
    
    4,810
    
    
    
    4,391
    
    
    
    10
    %Net revenues
    
    $
    12,240
    
    
    $
    10,101
    
    
    
    21
    %
    
    $
    35,747
    
    
    $
    33,186
    
    
    
    8
    %
   Net Revenues
  ® 
 Product Revenues  Novogyne
 ®  ® ® 
 24




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®   ® 
 ®  ®
 Product Revenues  Third Parties
 ® ®
 ® ®
 ® ®
 Contract and License Revenues
  25




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##### Table of Contents



Gross Margin
  Three Months
    
    
    Nine Months2005
    
    
    2004
    
    
    % Change
    
    
    2005
    
    
    2004
    
    
    % ChangeTotal product revenues
    
    $
    10,447
    
    
    $
    9,062
    
    
    
    15
    %
    
    $
    30,937
    
    
    $
    28,795
    
    
    
    7
    %Cost of products sold
    
    
    15,289
    
    
    
    4,984
    
    
    
    207
    %
    
    
    26,170
    
    
    
    15,477
    
    
    
    69
    %Gross profit (loss) (product revenues
less cost of products sold)
    
    
    (4,842
    )
    
    
    4,078
    
    
    
    (219
    %)
    
    
    4,767
    
    
    
    13,318
    
    
    
    (64
    %)Gross margin (gross profit (loss) as a
percentage of product revenues)
    
    
    -46
    %
    
    
    45
    %
    
    
    
    
    
    
    15
    %
    
    
    46
    %
  Operating Expenses
  Three Months
    
    
    Nine Months2005
    
    
    2004
    
    
    % Change
    
    
    2005
    
    
    2004
    
    
    % ChangeResearch and development
    
    $
    3,953
    
    
    $
    2,741
    
    
    
    44
    %
    
    $
    10,108
    
    
    $
    7,730
    
    
    
    31
    %Marketing, general and
administrative
    
    
    4,237
    
    
    
    4,358
    
    
    
    (3
    %)
    
    
    12,481
    
    
    
    12,024
    
    
    
    4
    %
 Research and Development
  Marketing, General and Administrative
  26




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##### Table of Contents



Other Income and Expenses
 Income Taxes
    Equity in Earnings of Novogyne
  27




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##### Table of Contents



Three Months
    
    
    Nine Months2005
    
    
    2004
    
    
    % Change
    
    
    2005
    
    
    2004
    
    
    
    % ChangeGross
revenues(1)
    
    $
    37,974
    
    
    $
    34,314
    
    
    
    11
    %
    
    $
    100,519
    
    
    $
    94,463
    
    
    
    6
    %Sales allowances
    
    
    4,007
    
    
    
    3,123
    
    
    
    28
    %
    
    
    11,078
    
    
    
    9,412
    
    
    
    18
    %Sales returns allowances
    
    
    192
    
    
    
    3,676
    
    
    
    (95
    %)
    
    
    1,057
    
    
    
    3,968
    
    
    
    (73
    %)Sales and returns allowances
    
    
    4,199
    
    
    
    6,799
    
    
    
    (38
    %)
    
    
    12,135
    
    
    
    13,380
    
    
    
    (9
    %)Net revenues
    
    
    33,775
    
    
    
    27,515
    
    
    
    23
    %
    
    
    88,384
    
    
    
    81,083
    
    
    
    9
    %Cost of sales
    
    
    6,395
    
    
    
    5,394
    
    
    
    19
    %
    
    
    16,712
    
    
    
    16,926
    
    
    
    (1
    %)Gross profit
    
    
    27,380
    
    
    
    22,121
    
    
    
    24
    %
    
    
    71,672
    
    
    
    64,157
    
    
    
    12
    %Gross margin percentage
    
    
    81
    %
    
    
    80
    %
    
    
    
    
    
    
    81
    %
    
    
    79
    %Selling, general and
administrative expenses
    
    
    9,187
    
    
    
    7,957
    
    
    
    15
    %
    
    
    25,627
    
    
    
    22,519
    
    
    
    14
    %Amortization of intangible asset
    
    
    1,545
    
    
    
    1,545
    
    
    
    
    
    
    
    4,635
    
    
    
    4,635
    
    
    
    Income from operations
    
    
    16,648
    
    
    
    12,619
    
    
    
    32
    %
    
    
    41,410
    
    
    
    37,003
    
    
    
    12
    %Interest income
    
    
    201
    
    
    
    50
    
    
    
    302
    %
    
    
    336
    
    
    
    103
    
    
    
    226
    %Net income
    
    $
    16,849
    
    
    $
    12,669
    
    
    
    33
    %
    
    $
    41,746
    
    
    $
    37,106
    
    
    
    13
    %Novens equity in earnings of Novogyne
    
    $
    8,081
    
    
    $
    6,232
    
    
    
    30
    %
    
    $
    17,094
    
    
    $
    15,097
    
    
    
    13
    %
 
 (1)
    
    Novogynes gross revenues, which are calculated by adding sales allowances and sales
returns allowances to net revenues, are discussed in this section because Novens
management believes it is a useful measure to evaluate and compare Novogynes sales period
to period in light of the significant historic fluctuations in Novogynes sales allowances
and returns. Novogyne Net Revenues
  ®  ® ®
  ® ®  ® ®
 28




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##### Table of Contents



®
   Three Months
    
    
    Nine Months2005
    
    
    2004
    
    
    2005
    
    
    2004Changes in allowances for returns of expiring product
    
    $
    192
    
    
    $
    3,676
    
    
    $
    1,120
    
    
    $
    7,068Changes in allowances for returns for product recalls
    
    
    
    
    
    
    
    
    
    
    (63
    )
    
    
    (3,100
    )Net change in sales returns allowances
    
    $
    192
    
    
    $
    3,676
    
    
    $
    1,057
    
    
    $
    3,968Actual returns for expiring product
    
    $
    (1,174
    )
    
    $
    (1,615
    )
    
    $
    (2,869
    )
    
    $
    (6,074
    )Actual returns for product recalls
    
    
    
    
    
    
    (91
    )
    
    
    (40
    )
    
    
    (2,620
    )Actual returns for the period
    
    $
    (1,174
    )
    
    $
    (1,706
    )
    
    $
    (2,909
    )
    
    $
    (8,694
    )
 ® 
 Novogyne Gross Margin
 
 
 Novogyne Selling, General and Administrative Expenses
  29




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##### Table of Contents



Novogyne Amortization of Intangible Asset
 ® ®
 Liquidity and Capital Resources
  September 30, 2005
    
    
    December 31, 2004Cash and cash equivalents
    
    $
    32,340
    
    
    $
    93,958Short-term investments
    
    
    50,825
    
    
    
    Working capital
    
    
    90,563
    
    
    
    97,349
  Nine Months2005
    
    

2004Cash flows:Operating activities
    
    $
    (1,036
    )
    
    $
    16,914Investing activities
    
    
    (61,697
    )
    
    
    (5,426
    )Financing activities
    
    
    1,115
    
    
    
    5,478
 Operating Activities
   30




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##### Table of Contents



Investing Activities
   Financing Activities
  Short-Term and Long-Term Liquidity
    31




---



##### Table of Contents



32




---



##### Table of Contents



New Accounting Standards
   33




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##### Table of Contents



Outlook
  
    
    transactions;
    
    changes in Novens or Novogynes accounting or accounting principles or any of the
estimates or judgments underlying its critical accounting policies;
    
    regulatory, technological or clinical study developments;
    
    changes in the supply of, demand for, or distribution of our HT products (including any
changes resulting from product recalls, competitive HT products, or new HT study results);
    
    changes in our business relationships/collaborations; or
    
    changes in the economy or the health care sector generally.
  Novogyne.
 34




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##### Table of Contents



HT Product Revenues
 Contract
and License Revenues.
 Research and Development.
 Marketing, General and Administrative Expense.
 Capital
Expenditures
 Fentanyl.
 Effective
Tax Rate.
 Novogyne Sales Force.
 Cautionary Factors that May Impact Future Results
  35




---



##### Table of Contents



HT Market, ®
 Regulatory Matters,
 Production Matters,
 Our Partners, 
 36




---



##### Table of Contents



Methylphenidate
Patch,
 Fentanyl Patch,
 Other Matters,
 
 Item 3. Quantitative and Qualitative Disclosure About Market Risk
  
 Item 4. Controls and Procedures
  37




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##### Table of Contents



38




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 ®
 ®  ®
 
 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
    
    
    Program(1)July 1, 2005 to
July 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23,711,040August 1, 2005 to
August 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23,711,040September 1, 2005 to
September 30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23,711,040Totals
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23,711,040
 
 (1)
    
    In March 2003, we announced a stock repurchase program authorizing the repurchase of up
to $25.0 million of our Common Stock. There is no expiration date specified for this
program. 39




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##### Table of Contents



Item 5. Other Information
  
 Item 6. Exhibits
 31.1
    
    Certification of Robert C. Strauss, President, Chief Executive Officer
and Chairman of the Board, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Diane M. Barrett, 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 200232.1
    
    Certification of Robert C. Strauss, President, Chief Executive Officer
and Chairman of the Board, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Diane M. Barrett, 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
 40




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##### Table of Contents



Signatures
  NOVEN PHARMACEUTICALS, INC.Date:
    
    November 4, 2005
    
    
    
    
    
    By: /s/ Diane M. BarrettDiane M. BarrettVice President andChief Financial Officer
 41