##### 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 June 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)
  
   
  þ o
 þ o
  Class
    
    Outstanding at July 29, 2005Common stock $.0001 par value
    
    23,578,359




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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 Six Months Ended
June 30, 2005 and 2004
    
    
    3Condensed Balance Sheets as of June 30, 2005 and December 31, 2004
    
    
    4Condensed Statements of Cash Flows for the Six Months Ended
June 30, 2005 and 2004
    
    
    5Notes to Unaudited Condensed Financial Statements
    
    
    6Item 2 -Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    18Item 3 - Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 4 - Controls and Procedures
    
    
    38PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    40Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 4  Submission of Matters to a Vote of Security Holders
    
    
    41Item 6 - Exhibits
    
    
    42SIGNATURES
    
    
    43Certification of Principal Executive OfficerCertification of Principal Financial OfficerSection 906 Certification of Principal Executive OfficerSection 906 Certification of Principal Financial Officer
    2




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Item 1. Financial Statements
 NOVEN PHARMACEUTICALS, INC.
 
     Three Months
    
    Six Months2005
    
    2004
    
    2005
    
    2004Revenues:Product revenues  Novogyne:Product sales
    
    $
    4,714
    
    
    $
    4,886
    
    
    $
    9,692
    
    
    $
    10,694Royalties
    
    
    1,713
    
    
    
    1,608
    
    
    
    2,827
    
    
    
    2,498Total product revenues  Novogyne
    
    
    6,427
    
    
    
    6,494
    
    
    
    12,519
    
    
    
    13,192Product revenues  third parties
    
    
    3,933
    
    
    
    3,564
    
    
    
    7,971
    
    
    
    6,541Total product revenues
    
    
    10,360
    
    
    
    10,058
    
    
    
    20,490
    
    
    
    19,733Contract and license revenues:Contract
    
    
    429
    
    
    
    853
    
    
    
    1,024
    
    
    
    1,372License
    
    
    982
    
    
    
    1,044
    
    
    
    1,993
    
    
    
    1,980Contract and license revenues
    
    
    1,411
    
    
    
    1,897
    
    
    
    3,017
    
    
    
    3,352Net revenues
    
    
    11,771
    
    
    
    11,955
    
    
    
    23,507
    
    
    
    23,085Expenses:Cost of products sold
    
    
    5,124
    
    
    
    4,975
    
    
    
    10,881
    
    
    
    10,493Research and development
    
    
    3,145
    
    
    
    2,734
    
    
    
    6,155
    
    
    
    4,989Marketing, general and administrative
    
    
    4,189
    
    
    
    3,762
    
    
    
    8,244
    
    
    
    7,666Total expenses
    
    
    12,458
    
    
    
    11,471
    
    
    
    25,280
    
    
    
    23,148Income (loss) from operations
    
    
    (687
    )
    
    
    484
    
    
    
    (1,773
    )
    
    
    (63
    )Equity in earnings of Novogyne
    
    
    8,101
    
    
    
    8,228
    
    
    
    9,013
    
    
    
    8,865Interest income, net
    
    
    593
    
    
    
    184
    
    
    
    1,096
    
    
    
    340Income before income taxes
    
    
    8,007
    
    
    
    8,896
    
    
    
    8,336
    
    
    
    9,142Provision for income taxes
    
    
    2,886
    
    
    
    3,218
    
    
    
    3,004
    
    
    
    3,306Net income
    
    $
    5,121
    
    
    $
    5,678
    
    
    $
    5,332
    
    
    $
    5,836Basic earnings per share
    
    $
    0.22
    
    
    $
    0.24
    
    
    $
    0.23
    
    
    $
    0.25Diluted earnings per share
    
    $
    0.21
    
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.24Weighted average number of common shares
outstanding:Basic
    
    
    23,565
    
    
    
    23,386
    
    
    
    23,537
    
    
    
    23,226Diluted
    
    
    24,068
    
    
    
    24,387
    
    
    
    24,017
    
    
    
    24,334
 The accompanying notes are an integral part of these statements.
 3




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NOVEN PHARMACEUTICALS, INC.
 
    June 30, 2005
    
    December 31, 2004AssetsCurrent Assets:Cash and cash equivalents
    
    $
    33,333
    
    
    $
    93,958Short-term investments
    
    
    44,600
    
    
    
    Accounts receivable  trade (less allowance for doubtful
accounts of $86 in 2005 and $64 in 2004)
    
    
    5,290
    
    
    
    5,395Accounts receivable  Novogyne, net
    
    
    7,378
    
    
    
    10,098Inventories
    
    
    19,778
    
    
    
    15,988Net deferred income tax asset, current portion
    
    
    6,100
    
    
    
    6,700Prepaid income taxes
    
    
    6,407
    
    
    
    9,344Prepaid and other current assets
    
    
    2,688
    
    
    
    1,238125,574
    
    
    
    142,721Property, plant and equipment, net
    
    
    26,947
    
    
    
    22,587Other Assets:Investment in Novogyne
    
    
    24,863
    
    
    
    26,233Net deferred income tax asset
    
    
    8,782
    
    
    
    8,239Patent development costs, net
    
    
    2,197
    
    
    
    2,174Deposits and other assets
    
    
    22
    
    
    
    2135,864
    
    
    
    36,667$
    188,385
    
    
    $
    201,975Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable and accrued expenses
    
    $
    6,295
    
    
    $
    12,176Capital lease obligations  current portion
    
    
    118
    
    
    
    114Accrued liability  Shire
    
    
    4,979
    
    
    
    10,587Accrued compensation and related liabilities
    
    
    3,609
    
    
    
    5,762Other accrued liabilities
    
    
    2,734
    
    
    
    3,015Deferred rent credit
    
    
    89
    
    
    
    Deferred contract revenues
    
    
    1,853
    
    
    
    2,076Deferred license revenues  current portion
    
    
    10,018
    
    
    
    11,64229,695
    
    
    
    45,372Long-Term Liabilities:Capital lease obligations
    
    
    61
    
    
    
    121Deferred rent credit
    
    
    792
    
    
    
    Deferred license revenues
    
    
    22,252
    
    
    
    27,44352,800
    
    
    
    72,936Commitments and Contingencies (Note 12)
Stockholders Equity: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 23,576,820 at June 30, 2005 and
23,481,264 at December 31, 2004
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    89,450
    
    
    
    88,236Retained earnings
    
    
    46,133
    
    
    
    40,801135,585
    
    
    
    129,039$
    188,385
    
    
    $
    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
    
    $
    5,332
    
    
    $
    5,836Adjustments to reconcile net income to net cash flows
(used in) provided by operating activities:Depreciation and amortization
    
    
    1,134
    
    
    
    1,173Amortization of patent costs
    
    
    218
    
    
    
    186Amortization of non-competition agreement
    
    
    
    
    
    
    167Amortization of deferred rent credit
    
    
    (31
    )
    
    
    Income tax benefits on exercise of stock options
    
    
    154
    
    
    
    2,728Deferred income tax expense (benefit)
    
    
    57
    
    
    
    (3,079
    )Non-cash expense related to issuance of stock to outside
directors
    
    
    
    
    
    
    30Recognition of deferred license revenues
    
    
    (1,993
    )
    
    
    (1,980
    )Equity in earnings of Novogyne
    
    
    (9,013
    )
    
    
    (8,865
    )Distributions from Novogyne
    
    
    8,926
    
    
    
    12,263Changes in operating assets and liabilities:Decrease in
accounts receivable  trade, net
    
    
    105
    
    
    
    1,189Decrease in
accounts receivable  Novogyne, net
    
    
    2,720
    
    
    
    2,782Increase in inventories
    
    
    (3,790
    )
    
    
    (252
    )Decrease in prepaid income taxes
    
    
    4,394
    
    
    
    2,212Increase in prepaid and other current assets
    
    
    (1,450
    )
    
    
    (1,383
    )Increase in deposits and other assets
    
    
    (1
    )
    
    
    (6
    )(Decrease) increase in accounts payable
    
    
    (5,881
    )
    
    
    1,557(Decrease) increase in accrued liability  Shire
    
    
    (5,608
    )
    
    
    932Decrease in accrued compensation and related liabilities
    
    
    (2,153
    )
    
    
    (843
    )Decrease in other accrued liabilities
    
    
    (281
    )
    
    
    (872
    )(Decrease) increase in deferred contract revenue
    
    
    (223
    )
    
    
    1,803Increase in deferred license revenue
    
    
    
    
    
    
    6,500Direct expenses incurred in pursuit of
methylphenidate patch regulatory approval
    
    
    (4,822
    )
    
    
    (1,346
    )Cash flows (used in) provided by operating activities
    
    
    (12,206
    )
    
    
    20,732Cash flows from investing activities:Purchases of property, plant and equipment, net
    
    
    (4,582
    )
    
    
    (2,290
    )Payments for patent development costs, net
    
    
    (241
    )
    
    
    (285
    )Purchases of short-term investments
    
    
    (201,665
    )
    
    
    Proceeds from sale of short-term investments
    
    
    157,065
    
    
    
    Cash flows used in investing activities
    
    
    (49,423
    )
    
    
    (2,575
    )Cash flows from financing activities:Issuance of common stock from exercise of stock options
    
    
    1,060
    
    
    
    5,321Repayments of capital leases and notes payable
    
    
    (56
    )
    
    
    (49
    )Cash flows provided by financing activities
    
    
    1,004
    
    
    
    5,272Net (decrease) increase in cash and cash equivalents
    
    
    (60,625
    )
    
    
    23,429Cash and cash equivalents, beginning of period
    
    
    93,958
    
    
    
    83,381Cash and cash equivalents, end of period
    
    $
    33,333
    
    
    $
    106,810
 The accompanying notes are an integral part of these statements.
 5




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NOVEN PHARMACEUTICALS, INC.
 
 Notes to Unaudited Condensed Financial Statements
   ®  ®
      6




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7




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June 30,
    
    December 31,2005
    
    2004Finished goods
    
    $
    750
    
    
    $
    610Work in process
    
    
    8,958
    
    
    
    6,522Raw materials
    
    
    10,070
    
    
    
    8,856Total
    
    $
    19,778
    
    
    $
    15,988
   8




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Three Months
    
    Six Months2005
    
    2004
    
    2005
    
    2004Net income:As reported
    
    $
    5,121
    
    
    $
    5,678
    
    
    $
    5,332
    
    
    $
    5,836Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects
    
    
    (10,223
    )
    
    
    (984
    )
    
    
    (11,970
    )
    
    
    (1,724
    )Pro forma
    
    $
    (5,102
    )
    
    $
    4,694
    
    
    $
    (6,638
    )
    
    $
    4,112Basic earnings per share:As reported
    
    $
    0.22
    
    
    $
    0.24
    
    
    $
    0.23
    
    
    $
    0.25Pro forma
    
    $
    (0.22
    )
    
    $
    0.20
    
    
    $
    (0.28
    )
    
    $
    0.18Diluted earnings per share:As reported
    
    $
    0.21
    
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.24Pro forma
    
    $
    (0.22
    )
    
    $
    0.19
    
    
    $
    (0.28
    )
    
    $
    0.17
   9




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Non-cash Operating Activities
  Non-cash Investing Activities
    Endo Collaboration
 ® ® ®
  10




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Shire
  11




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P&G Pharmaceuticals Collaboration
 ® ®
   12




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##### Table of Contents



Three Months
    
    Six Months2005
    
    2004
    
    2005
    
    2004Revenues:Product sales
    
    $
    4,714
    
    
    $
    4,886
    
    
    $
    9,692
    
    
    $
    10,694Royalties
    
    
    1,713
    
    
    
    1,608
    
    
    
    2,827
    
    
    
    2,498$
    6,427
    
    
    $
    6,494
    
    
    $
    12,519
    
    
    $
    13,192Reimbursed expenses
    
    $
    6,378
    
    
    $
    5,973
    
    
    $
    13,620
    
    
    $
    12,262
   Three Months
    

Six Months2005
    
    2004
    
    2005
    
    2004Gross revenues
    
    $
    35,211
    
    
    $
    35,015
    
    
    $
    62,545
    
    
    $
    60,149Sales allowances
    
    
    3,676
    
    
    
    3,517
    
    
    
    7,071
    
    
    
    6,289Sales return allowances (reductions)
    
    
    (401
    )
    
    
    (717
    )
    
    
    865
    
    
    
    292Sales allowances and returns
    
    
    3,275
    
    
    
    2,800
    
    
    
    7,936
    
    
    
    6,581Net revenues
    
    
    31,936
    
    
    
    32,215
    
    
    
    54,609
    
    
    
    53,568Cost of sales
    
    
    5,762
    
    
    
    6,697
    
    
    
    10,317
    
    
    
    11,532Selling, general and
administrative expenses
    
    
    7,770
    
    
    
    6,937
    
    
    
    16,440
    
    
    
    14,562Amortization of intangible assets
    
    
    1,545
    
    
    
    1,545
    
    
    
    3,090
    
    
    
    3,090Income from operations
    
    
    16,859
    
    
    
    17,036
    
    
    
    24,762
    
    
    
    24,384Interest income
    
    
    42
    
    
    
    13
    
    
    
    135
    
    
    
    53Net income
    
    $
    16,901
    
    
    $
    17,049
    
    
    $
    24,897
    
    
    $
    24,437Novens equity in earnings of Novogyne
    
    $
    8,101
    
    
    $
    8,228
    
    
    $
    9,013
    
    
    $
    8,865
  Investment in Novogyne, beginning of period
    
    $
    26,233Equity in earnings of Novogyne
    
    
    9,013Cash distributions from Novogyne
    
    
    (8,926
    )Non-cash distribution from Novogyne (Note 8)
    
    
    (1,457
    )Investment in Novogyne, end of period
    
    $
    24,863
  13




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HT Studies
  ® ® ® ® ®
 Production Issues
  
 14




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##### Table of Contents



         
 ® ® ® ®
  Supply Agreement
 ® 
 15




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Litigation, Claims and Assessments


® ®


®


®  ®




Contract and License Agreements




Fentanyl Inventories




16



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##### Table of Contents



Internal Revenue Service Audit
  Facility Lease
  17




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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
 ®  ®
 ®  ® ®
 ®  ® ®  ®
  18




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®   ®
 ® ® ®
 Certain Items That Affect or Could Affect Historical or Future Comparability
 Stock Options
   19




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##### Table of Contents



Production Issues
            
 ® ® ® ®
 20




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##### Table of Contents



Shire
    Endo
 ® ® ®
  21




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DEA Quota
  22




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Results of Operations
 Three and six months ended June 30, 2005 compared to the three and six months ended June 30,
2004
 Revenues
  Three Months
    
    Six Months2005
    
    2004
    
    % Change
    
    2005
    
    2004
    
    % ChangeProduct revenues  Novogyne:Product sales
    
    $
    4,714
    
    
    $
    4,886
    
    
    
    (4
    %)
    
    $
    9,692
    
    
    $
    10,694
    
    
    
    (9
    %)Royalties
    
    
    1,713
    
    
    
    1,608
    
    
    
    7
    %
    
    
    2,827
    
    
    
    2,498
    
    
    
    13
    %6,427
    
    
    
    6,494
    
    
    
    (1
    %)
    
    
    12,519
    
    
    
    13,192
    
    
    
    (5
    %)Product revenues  third parties:Product sales
    
    
    3,858
    
    
    
    3,489
    
    
    
    11
    %
    
    
    7,823
    
    
    
    6,327
    
    
    
    24
    %Royalties
    
    
    75
    
    
    
    75
    
    
    
    0
    %
    
    
    148
    
    
    
    214
    
    
    
    (31
    %)3,933
    
    
    
    3,564
    
    
    
    10
    %
    
    
    7,971
    
    
    
    6,541
    
    
    
    22
    %Total product revenues
    
    
    10,360
    
    
    
    10,058
    
    
    
    3
    %
    
    
    20,490
    
    
    
    19,733
    
    
    
    4
    %Contract and license revenues:Contract
    
    
    429
    
    
    
    853
    
    
    
    (50
    %)
    
    
    1,024
    
    
    
    1,372
    
    
    
    (25
    %)License
    
    
    982
    
    
    
    1,044
    
    
    
    (6
    %)
    
    
    1,993
    
    
    
    1,980
    
    
    
    1
    %1,411
    
    
    
    1,897
    
    
    
    (26
    %)
    
    
    3,017
    
    
    

    3,352
    
    
    
    (10
    %)Net revenues
    
    $
    11,771
    
    
    $
    11,955
    
    
    
    (2
    %)
    
    $
    23,507
    
    
    $
    23,085
    
    
    
    2
    %
 Net Revenues
  ® 
 Product
Revenues  Novogyne
 ®  ® ® 
  23




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®  ® ® 
 ®  ® 
 Product
Revenues  Third Parties
 ® ®
 ® ®
 ®
 24




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##### Table of Contents



Contract and License Revenues
  Gross Margin
  Three Months
    
    Six Months2005
    
    2004
    
    % Change
    
    2005
    
    2004
    
    % ChangeTotal product revenues
    
    $
    10,360
    
    
    $
    10,058
    
    
    
    3
    %
    
    $
    20,490
    
    
    $
    19,733
    
    
    
    4
    %Cost of products sold
    
    
    5,124
    
    
    
    4,975
    
    
    
    3
    %
    
    
    10,881
    
    
    
    10,493
    
    
    
    4
    %Gross profit (product revenues
less cost of products sold)
    
    
    5,236
    
    
    
    5,083
    
    
    
    3
    %
    
    
    9,609
    
    
    
    9,240
    
    
    
    4
    %Gross margin (gross profit as a
percentage of product revenues)
    
    
    51
    %
    
    
    51
    %
    
    
    
    
    
    
    47
    %
    
    
    47
    %Increase (decrease) in deferred profit on
sales of product to Novogyne
    
    
    148
    
    
    
    (43
    )
    
    
    N/M
    
    
    
    290
    
    
    
    175
    
    
    
    N/MGross margin excluding impact of
deferred profit
    
    
    52
    %
    
    
    50
    %
    
    
    
    
    
    
    48
    %
    
    
    48
    %
 
     25




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Operating Expenses
  Three Months
    
    Six Months2005
    
    2004
    
    % Change
    
    2005
    
    2004
    
    % ChangeResearch and development
    
    $
    3,145
    
    
    $
    2,734
    
    
    
    15
    %
    
    $
    6,155
    
    
    $
    4,989
    
    
    
    23
    %Marketing, general and
administrative
    
    
    4,189
    
    
    
    3,762
    
    
    
    11
    %
    
    
    8,244
    
    
    
    7,666
    
    
    
    8
    %
 Research and Development
  Marketing, General and Administrative
   Other Income and Expenses
 Income Taxes
  26




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##### Table of Contents



Equity in Earnings of Novogyne
   Three Months
    
    Six Months2005
    
    2004
    
    % Change
    
    2005
    
    2004
    
    % ChangeGross revenues(1)
    
    $
    35,211
    
    
    $
    35,015
    
    
    
    1
    %
    
    $
    62,545
    
    
    $
    60,149
    
    
    
    4
    %Sales allowances
    
    
    3,676
    
    
    
    3,517
    
    
    
    5
    %
    
    
    7,071
    
    
    
    6,289
    
    
    
    12
    %Sales returns allowances (reductions)
    
    
    (401
    )
    
    
    (717
    )
    
    
    (44
    %)
    
    
    865
    
    
    
    292
    
    
    
    196
    %Sales and returns allowances
    
    
    3,275
    
    
    
    2,800
    
    
    
    17
    %
    
    
    7,936
    
    
    
    6,581
    
    
    
    21
    %Net revenues
    
    
    31,936
    
    
    
    32,215
    
    
    
    (1
    %)
    
    
    54,609
    
    
    
    53,568
    
    
    
    2
    %Cost of sales
    
    
    5,762
    
    
    
    6,697
    
    
    
    (14
    %)
    
    
    10,317
    
    
    
    11,532
    
    
    
    (11
    %)Gross profit
    
    
    26,174
    
    
    
    25,518
    
    
    
    3
    %
    
    
    44,292
    
    
    
    42,036
    
    
    
    5
    %Gross margin percentage
    
    
    82
    %
    
    
    79
    %
    
    
    
    
    
    
    81
    %
    
    
    78
    %Selling, general and administrative expenses
    
    
    7,770
    
    
    
    6,937
    
    
    
    12
    %
    
    
    16,440
    
    
    
    14,562
    
    
    
    13
    %Amortization of intangible asset
    
    
    1,545
    
    
    
    1,545
    
    
    
    
    
    
    
    3,090
    
    
    
    3,090
    
    
    
    Income from operations
    
    
    16,859
    
    
    
    17,036
    
    
    
    (1
    %)
    
    
    24,762
    
    
    
    24,384
    
    
    
    2
    %Interest income
    
    
    42
    
    
    
    13
    
    
    
    223
    %
    
    
    135
    
    
    
    53
    
    
    
    155
    %Net income
    
    $
    16,901
    
    
    $
    17,049
    
    
    
    (1
    %)
    
    $
    24,897
    
    
    $
    24,437
    
    
    
    2
    %Novens equity in earnings of Novogyne
    
    $
    8,101
    
    
    $
    8,228
    
    
    
    (2
    %)
    
    $
    9,013
    
    
    $
    8,865
    
    
    
    2
    %
 
 (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. 27




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##### Table of Contents



Novogyne Net Revenues
  ® ®  ® ® ®
  ® ®  ® ®
   Three Months
    
    Six Months2005
    
    2004
    
    2005
    
    2004Changes in allowances for returns of expiring product
    
    $
    (338
    )
    
    $
    1,683
    
    
    $
    928
    
    
    $
    3,392Changes in allowances for returns for product recalls
    
    
    (63
    )
    
    
    (2,400
    )
    
    
    (63
    )
    
    
    (3,100
    )Net change in sales returns allowances
    
    $
    (401
    )
    
    $
    (717
    )
    
    $
    865
    
    
    $
    292Actual returns for expiring product
    
    $
    (767
    )
    
    $
    (2,186
    )
    
    $
    (1,695
    )
    
    $
    (4,459
    )Actual returns for product recalls
    
    
    (40
    )
    
    
    (522
    )
    
    
    (40
    )
    
    
    (2,529
    )Actual returns for the period
    
    $
    (807
    )
    
    $
    (2,708
    )
    
    $
    (1,735
    )
    
    $
    (6,988
    )Balance of sales returns allowances at June 30,
    
    
    
    
    
    
    
    
    
    $
    8,299
    
    
    $
    7,544
 ®
 28




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##### Table of Contents



Novogyne Gross Margin
 
 Novogyne Selling, General and Administrative Expenses
   Novogyne Amortization of Intangible Asset
 ® ®
 Liquidity and Capital Resources
  June 30, 2005
    
    December 31, 2004Cash and cash equivalents
    
    $
    33,333
    
    
    $
    93,958Short-term investments
    
    
    44,600
    
    
    
    Working capital
    
    
    95,879
    
    
    
    97,349
 29




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##### Table of Contents



Six Months2005
    
    2004Cash flows:Operating activities
    
    $
    (12,206
    )
    
    $
    20,732Investing activities
    
    
    (49,423
    )
    
    
    (2,575
    )Financing activities
    
    
    1,004
    
    
    
    5,272
 Operating Activities
   Investing Activities
   Financing Activities
  Short-Term and Long-Term Liquidity
  30




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31




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##### Table of Contents



New Accounting Standards
  32




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##### Table of Contents



Critical Accounting Estimates
  33




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##### Table of Contents



Inventories
  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



Potential Impact of Fentanyl Revenues
 HT Product Revenues
 Contract and License Revenues.
 Research and Development.
 Marketing, General and Administrative Expense.
 Capital Expenditures
 Cautionary Factors that May Impact Future Results
  35




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##### Table of Contents



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




---



##### Table of Contents




 Methylphenidate
Patch,
 Fentanyl Patch,
 Other Matters,
 37




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosure About Market Risk
  
 Item 4. Controls and Procedures
    38




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39




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 ® ®
 ®
 ®  ®
 40




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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 YetAverage Price
    
    Publicly
    
    be PurchasedTotal Number of
    
    Paid
    
    Announced
    
    under theShares Purchased
    
    Per Share
    
    Program
    
    Program(1)April 1, 2005 to
April 30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23,711,040May 1, 2005 to
May 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23,711,040June 1, 2005 to
June 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. 
 Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    Election of Directors
 For
    
    WithheldSidney Braginsky
    
    
    20,364,456
    
    
    
    1,141,507John G. Clarkson, M.D.
    
    
    20,361,322
    
    
    
    1,144,641Donald A. Denkhaus
    
    
    21,290,551
    
    
    
    215,412Pedro P. Granadillo
    
    
    20,400,385
    
    
    
    1,105,578Robert G. Savage
    
    
    20,365,612
    
    
    
    1,140,351Robert C. Strauss
    
    
    21,264,118
    
    
    
    241,845Wayne P. Yetter
    
    
    21,170,582
    
    
    
    335,381
 2.
    
    Ratification of the Appointment of Deloitte & Touche LLP as Novens
Independent Registered Public Accounting Firm for 2005
 For
    
    Against
    
    Abstained21,410,565
    
    
    
    79,021
    
    
    
    16,377
 41




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##### Table of Contents



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
 42




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##### Table of Contents



Signatures
  NOVEN PHARMACEUTICALS, INC.Date: August 5, 2005
    
    By:
    
    /s/ Diane M. BarrettDiane M. BarrettVice President andChief Financial Officer
 43