##### 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)
  
   
  x o
   Large accelerated filer o
    
    Accelerated filer x
    
    Non-accelerated filer o
 o x
  Class
    
    Outstanding at July 31, 2007Common stock $.0001 par value
    
    24,851,829




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##### 



NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
  Page No.PART I  FINANCIAL INFORMATIONItem 1  Unaudited Condensed Consolidated Financial StatementsCondensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006
    
    
    3Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2  Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    16Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4  Controls and Procedures
    
    
    34PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    35Item 1A  Risk Factors
    
    
    35Item 4  Submission of Matters to a Vote of Security Holders
    
    
    38Item 5  Other Information
    
    
    39Item 6  Exhibits
    
    
    39SIGNATURES
    
    
    40EX-10.1 Letter Agreement between Shire and NovenEX-10.2 Amendment dated May 3, 2007, to Letter AgreementEX-10.3 Amendment dated June 4, 2007, to Letter AgreementEX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFO
 Cautionary Factors
 Trademark Information ® ® ® ® ®  ® ®
   
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
  
 NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
 Three Months
    
    
    Six Months2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Product revenues  Novogyne:Product sales
    
    $
    4,804
    
    
    $
    5,630
    
    
    $
    10,173
    
    
    $
    8,717Royalties
    
    
    1,899
    
    
    
    1,658
    
    
    
    3,664
    
    
    
    3,347Total product revenues  Novogyne
    
    
    6,703
    
    
    
    7,288
    
    
    
    13,837
    
    
    
    12,064Product revenues  third parties
    
    
    8,359
    
    
    
    6,016
    
    
    
    16,831
    
    
    
    9,887Total product revenues
    
    
    15,062
    
    
    
    13,304
    
    
    
    30,668
    
    
    
    21,951Contract and license revenues:Contract
    
    
    29
    
    
    
    404
    
    
    
    (101
    )
    
    
    1,068License
    
    
    3,748
    
    
    
    3,839
    
    
    
    7,587
    
    
    
    4,720Contract and license revenues
    
    
    3,777
    
    
    
    4,243
    
    
    
    7,486
    
    
    
    5,788Net revenues
    
    
    18,839
    
    
    
    17,547
    
    
    
    38,154
    
    
    
    27,739Expenses:Cost of products sold  Novogyne
    
    
    3,285
    
    
    
    4,459
    
    
    
    6,244
    
    
    
    6,602Cost of products sold  third parties
    
    
    6,029
    
    
    
    7,428
    
    
    
    11,997
    
    
    
    11,425Total cost of products sold
    
    
    9,314
    
    
    
    11,887
    
    
    
    18,241
    
    
    
    18,027Research and development
    
    
    3,185
    
    
    
    2,890
    
    
    
    6,651
    
    
    
    6,372Marketing, general and administrative
    
    
    5,709
    
    
    
    5,638
    
    
    
    11,130
    
    
    
    10,376Total expenses
    
    
    18,208
    
    
    
    20,415
    
    
    
    36,022
    
    
    
    34,775Income (loss) from operations
    
    
    631
    
    
    
    (2,868
    )
    
    
    2,132
    
    
    
    (7,036
    )Equity in earnings of Novogyne
    
    
    9,174
    
    
    
    6,762
    
    
    
    14,077
    
    
    
    11,089Interest income, net
    
    
    1,813
    
    
    
    1,111
    
    
    
    3,445
    
    
    
    1,722Income before income taxes
    
    
    11,618
    
    
    
    5,005
    
    
    
    19,654
    
    
    
    5,775Provision for income taxes
    
    
    4,042
    
    
    
    1,672
    
    
    
    7,042
    
    
    
    1,938Net income
    
    $
    7,576
    
    
    $
    3,333
    
    
    $
    12,612
    
    
    $
    3,837Basic earnings per share
    
    $
    0.31
    
    
    $
    0.14
    
    
    $
    0.51
    
    
    $
    0.16Diluted earnings per share
    
    $
    0.30
    
    
    $
    0.14
    
    
    $
    0.50
    
    
    $
    0.16Weighted average number of common shares
outstanding:Basic
    
    
    24,832
    
    
    
    23,685
    
    
    
    24,785
    
    
    
    23,673Diluted
    
    
    25,379
    
    
    
    24,071
    
    
    
    25,381
    
    
    
    23,925
 The accompanying notes are an integral part of these statements.
 3




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NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
 June 30,
    
    
    December 31,2007
    
    
    2006AssetsCurrent Assets:Cash and cash equivalents
    
    $
    5,403
    
    
    $
    9,144Short-term investments available-for-sale, at fair value
    
    
    181,256
    
    
    
    144,455Trade receivable (less allowance for doubtful
accounts of $56 in 2007 and $67 in 2006)
    
    
    3,545
    
    
    
    5,038Milestone payment receivable  Shire
    
    
    25,000
    
    
    
    25,000Accounts receivable  Novogyne, net
    
    
    6,074
    
    
    
    7,693Inventories
    
    
    9,564
    
    
    
    8,651Net deferred income tax asset, current portion
    
    
    6,900
    
    
    
    4,400Prepaid income taxes
    
    
    7,565
    
    
    
    3,416Prepaid and other current assets
    
    
    3,240
    
    
    
    2,410248,547
    
    
    
    210,207Property, plant and equipment, net
    
    
    36,211
    
    
    
    37,010Other Assets:Investment in Novogyne
    
    
    22,006
    
    
    
    23,296Net deferred income tax asset
    
    
    12,469
    
    
    
    8,308Patent development costs, net
    
    
    2,396
    
    
    
    2,317Deposits and other assets
    
    
    1,768
    
    
    
    22738,639
    
    
    
    34,148$
    323,397
    
    
    $
    281,365Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable and accrued expenses
    
    $
    4,690
    
    
    $
    5,184Capital lease obligation  current portion
    
    
    126
    
    
    
    109Accrued compensation and related liabilities
    
    
    4,376
    
    
    
    5,308Other accrued liabilities
    
    
    4,743
    
    
    
    2,085Deferred rent credit
    
    
    89
    
    
    
    89Deferred contract revenues
    
    
    728
    
    
    
    1,527Deferred license revenues  current portion
    
    
    19,342
    
    
    
    15,08434,094
    
    
    
    29,386Long-Term Liabilities:Capital lease obligation
    
    
    204
    
    
    
    279Deferred license revenues
    
    
    87,343
    
    
    
    74,188Deferred contract revenues
    
    
    6,875
    
    
    
    Other liabilities
    
    
    1,165
    
    
    
    837129,681
    
    
    
    104,690Commitments and Contingencies (Note 11)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 24,851,104
at June 30, 2007 and 24,661,169 at December 31, 2006
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    114,871
    
    
    
    109,912Retained earnings
    
    
    78,843
    
    
    
    66,761Common stock held in trust
    
    
    (500
    )
    
    
    Deferred compensation obligation
    
    
    500
    
    
    
    193,716
    
    
    
    176,675$
    323,397
    
    
    $
    281,365
 The accompanying notes are an integral part of these statements.
 4




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NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
 2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    12,612
    
    
    $
    3,837Adjustments to reconcile net income to net cash flows
provided by operating activities:Depreciation, amortization and certain other noncash items
    
    
    2,539
    
    
    
    2,052Stock-based compensation expense
    
    
    1,976
    
    
    
    1,529Income tax benefits on exercise of stock options
    
    
    462
    
    
    
    256Excess tax deduction from exercise of stock options
    
    
    (392
    )
    
    
    (214
    )Deferred income tax benefit
    
    
    (6,661
    )
    
    
    (183
    )Recognition of deferred license revenues
    
    
    (7,587
    )
    
    
    (4,720
    )Equity in earnings of Novogyne
    
    
    (14,077
    )
    
    
    (11,089
    )Distributions from Novogyne
    
    
    10,975
    
    
    
    10,210Changes in operating assets and liabilities:Decrease (increase) in trade receivable, net
    
    
    1,493
    
    
    
    (2,947
    )Decrease in accounts receivable  Novogyne, net
    
    
    1,619
    
    
    
    1,845(Increase) decrease in inventories
    
    
    (913
    )
    
    
    29Decrease in prepaid income taxes
    
    
    243
    
    
    
    3,664Increase in prepaid and other current assets
    
    
    (830
    )
    
    
    (1,057
    )Increase in deposits and other assets
    
    
    
    
    
    
    (15
    )Decrease in accounts payable and accrued expenses
    
    
    (494
    )
    
    
    (6,179
    )Decrease in accrued compensation and related liabilities
    
    
    (932
    )
    
    
    (2,164
    )Increase in other accrued liabilities
    
    
    2,128
    
    
    
    375Increase (decrease) in deferred contract revenue, net
    
    
    6,076
    
    
    
    (930
    )Increase in deferred license revenue
    
    
    25,000
    
    
    
    51,000Increase in other liabilities
    
    
    342
    
    
    
    92Amounts recoverable from Shire and offset against
deferred license revenue related to Daytrana approval
    
    
    
    
    
    
    14Cash flows provided by operating activities
    
    
    33,579
    
    
    
    45,405Cash flows from investing activities:Purchases of property, plant and equipment, net
    
    
    (1,421
    )
    
    
    (4,405
    )Payments for patent development costs, net
    
    
    (348
    )
    
    
    (416
    )Payments for deferred acquisition costs
    
    
    (1,241
    )
    
    
    Purchase of company-owned life insurance
    
    
    (260
    )
    
    
    (185
    )Purchases of short-term investments
    
    
    (767,769
    )
    
    
    (685,035
    )Proceeds from sale of short-term investments
    
    
    730,864
    
    
    
    588,275Cash flows used in investing activities
    
    
    (40,175
    )
    
    
    (101,766
    )Cash flows from financing activities:Issuance of common stock from exercise of stock options
    
    
    2,521
    
    
    
    822Excess tax benefit from exercise of stock options
    
    
    392
    
    
    
    214Payments under capital leases
    
    
    (58
    )
    
    
    (69
    )Cash flows provided by financing activities
    
    
    2,855
    
    
    
    967Net decrease in cash and cash equivalents
    
    
    (3,741
    )
    
    
    (55,394
    )Cash and cash equivalents, beginning of period
    
    
    9,144
    
    
    
    66,964Cash and cash equivalents, end of period
    
    $
    5,403
    
    
    $
    11,570
 The accompanying notes are an integral part of these statements.
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NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES  Notes to Unaudited Condensed Consolidated Financial Statements
 1.
    
    DESCRIPTION OF BUSINESS:
  ® ® ®
  2.
    
    BASIS OF PRESENTATION:
   3.
    
    RECLASSIFICATIONS:
  6




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4.
    
    CASH FLOW INFORMATION:Income Tax and Interest Payments
  Non-cash Operating Activities
  5.
    
    RECENT ACCOUNTING PRONOUNCEMENTS:
  6.
    
    INVENTORIES:
  June 30,
    
    
    December 31,2007
    
    
    2006Finished goods
    
    $
    2,327
    
    
    $
    893Work in process
    
    
    2,273
    
    
    
    2,851Raw materials
    
    
    4,964
    
    
    
    4,907Total
    
    $
    9,564
    
    
    $
    8,651
   
 
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7.
    
    EMPLOYEE STOCK PLANS:
    2007WeightedAverageGrant-DateShares
    
    
    Fair ValueNonvested at
December 31, 2006
    
    
    8
    
    
    $
    17.47Granted
    
    
    26
    
    
    
    22.86Vested
    
    
    (14
    )
    
    
    19.80Forfeited
    
    
    
    
    
    
    Nonvested at
June 30, 2007
    
    
    20
    
    
    $
    22.86
 8




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2007
    
    
    2006Volatility
    
    
    45.8
    %
    
    
    55.1
    %Risk free interest rate
    
    
    4.59
    %
    
    
    4.95
    %Expected life (years)
    
    
    5
    
    
    
    5
  Three Months
    
    
    Six Months2007
    
    
    2006
    
    
    2007
    
    
    2006Marketing, general and administrative
    
    $
    739
    
    
    $
    745
    
    
    $
    1,478
    
    
    $
    1,142Research and development
    
    
    127
    
    
    
    133
    
    
    
    254
    
    
    
    224Total cost of products sold
    
    
    122
    
    
    
    102
    
    
    
    244
    
    
    
    163$
    988
    
    
    $
    980
    
    
    $
    1,976
    
    
    $
    1,529Tax benefit recognized related to
compensation expense
    
    $
    302
    
    
    $
    239
    
    
    $
    661
    
    
    $
    358
   9




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2007WeightedWeighted
    
    
    
    
    
    
    AverageAverage
    
    
    Aggregate
    
    
    RemainingOptions/
    
    
    Exercise
    
    
    Intrinsic
    
    
    ContractualSSARs
    
    
    Price
    
    
    Value
    
    
    TermOutstanding at
beginning of the period
    
    
    3,275
    
    
    $
    19.26Granted
    
    
    4
    
    
    
    23.08Exercised
    
    
    (161
    )
    
    
    15.82
    
    
    $
    1,576Canceled and expired
    
    
    (18
    )
    
    
    17.37Outstanding at end
of the period
    
    
    3,100
    
    
    $
    19.46
    
    
    $
    16,181
    
    
    
    3.6Outstanding and exercisable
at end of the period
    
    
    1,988
    
    
    $
    21.33
    
    
    $
    8,014
    
    
    
    2.8Vested or expected to vest
at end of the period
    
    
    2,708
    
    
    $
    19.64
    
    
    $
    13,767
    
    
    
    3.5
  8.
    
    ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES:
   10




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9.
    
    CONTRACT AND LICENSE AGREEMENTS:Daytrana
    
 Amphetamine Transdermal System
 
 11




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##### Table of Contents



10.
    
    INVESTMENT IN VIVELLE VENTURES LLC (d/b/a NOVOGYNE):
   Three Months
    
    
    Six Months2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Product sales
    
    $
    4,804
    
    
    $
    5,630
    
    
    $
    10,173
    
    
    $
    8,717Royalties
    
    
    1,899
    
    
    
    1,658
    
    
    
    3,664
    
    
    
    3,347$
    6,703
    
    
    $
    7,288
    
    
    $
    13,837
    
    
    $
    12,064Reimbursed expenses
    
    $
    7,021
    
    
    $
    6,648
    
    
    $
    14,106
    
    
    $
    13,918
   Three Months
    
    
    Six Months2007
    
    

2006
    
    
    2007
    
    
    2006Gross revenues
    
    $
    42,915
    
    
    $
    35,665
    
    
    $
    80,208
    
    
    $
    72,934Sales allowances
    
    
    6,837
    
    
    
    3,546
    
    
    
    10,999
    
    
    
    7,339Sales return allowances
    
    
    (60
    )
    
    
    1,487
    
    
    
    (9
    )
    
    
    3,383Sales allowances and returns
    
    
    6,777
    
    
    
    5,033
    
    
    
    10,990
    
    
    
    10,722Net revenues
    
    
    36,138
    
    
    
    30,632
    
    
    
    69,218
    
    
    
    62,212Cost of sales
    
    
    7,795
    
    
    
    7,162
    
    
    
    14,842
    
    
    
    14,683Selling, general and
administrative expenses
    
    
    9,579
    
    
    
    9,596
    
    
    
    19,712
    
    
    
    18,753Income from operations
    
    
    18,764
    
    
    
    13,874
    
    
    
    34,664
    
    
    
    28,776Interest income
    
    
    165
    
    
    
    162
    
    
    
    497
    
    
    
    314Net income
    
    $
    18,929
    
    
    $
    14,036
    
    
    $
    35,161
    
    
    $
    29,090Novens equity in earnings of Novogyne
    
    $
    9,174
    
    
    $
    6,762
    
    
    $
    14,077
    
    
    $
    11,089
 12




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Investment in Novogyne, beginning of period
    
    $
    23,296Equity in earnings of Novogyne
    
    
    14,077Cash distributions from Novogyne
    
    
    (10,975
    )Non-cash distribution from Novogyne (Note 4)
    
    
    (4,392
    )Investment in Novogyne, end of period
    
    $
    22,006
  11.
    
    COMMITMENTS AND CONTINGENCIES:HT Studies
   ® ® ® ® ®
 13




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Production Issues
  
 Supply Agreement
 ® ®
 Litigation, Claims and Assessments
 ®
 ®
 ® ®
 ® ® ®
 14




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
  12.
    
    SUBSEQUENT EVENT:
    15




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Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
  
    
    An executive summary of our results of operations for the 2007 Quarter;
    
    An overview of Noven and our Novogyne joint venture;
    
    A review of certain items that may 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 how we apply our critical accounting estimates;
    
    A discussion of recently-issued accounting standards; and
    
    An outlook that includes our current financial guidance.
  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 financial statements and related notes included in this Form 10-Q .
  
     16




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®
  ® 
  Overview of Noven and Our Novogyne Joint Venture
  ® ® ® ® ®
 ® ® ®
  17




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® ® ® ® ® ® ® ®
 ® ® ®
 Certain Items that May Affect Historical or Future Comparability
  Daytrana 
 
 18




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##### Table of Contents



 
   
  
 Amphetamine Transdermal System
 
 JDS Pharmaceuticals, LLC
  19




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20




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Results of Operations
 Three and six months ended June 30, 2007 compared to the three and six months ended June 30,
2006
 Revenues
  Three Months
    
    
    Six Months2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    % ChangeProduct revenues  Novogyne:Product sales
    
    $
    4,804
    
    
    $
    5,630
    
    
    
    (15
    %)
    
    $
    10,173
    
    
    $
    8,717
    
    
    
    17
    %Royalties
    
    
    1,899
    
    
    
    1,658
    
    
    
    15
    %
    
    
    3,664
    
    
    
    3,347
    
    
    
    9
    %6,703
    
    
    
    7,288
    
    
    
    (8
    %)
    
    
    13,837
    
    
    
    12,064
    
    
    
    15
    %Product revenues  third parties:Product sales
    
    
    8,271
    
    
    
    5,931
    
    
    
    39
    %
    
    
    16,684
    
    
    
    9,731
    
    
    
    71
    %Royalties
    
    
    88
    
    
    
    85
    
    
    
    4
    %
    
    
    147
    
    
    
    156
    
    
    
    (6
    %)8,359
    
    
    
    6,016
    
    
    
    39
    %
    
    
    16,831
    
    
    
    9,887
    
    
    
    70
    %Total product revenues
    
    
    15,062
    
    
    
    13,304
    
    
    
    13
    %
    
    
    30,668
    
    
    
    21,951
    
    
    
    40
    %Contract and license revenues:Contract
    
    
    29
    
    
    
    404
    
    
    
    (93
    %)
    
    
    (101
    )
    
    
    1,068
    
    
    
    (109
    %)License
    
    
    3,748
    
    
    
    3,839
    
    
    
    (2
    %)
    
    
    7,587
    
    
    
    4,720
    
    
    
    61
    %3,777
    
    
    
    4,243
    
    
    
    (11
    %)
    
    
    7,486
    
    
    
    5,788
    
    
    
    29
    %Net revenues
    
    $
    18,839
    
    
    $
    17,547
    
    
    
    7
    %
    
    $
    38,154
    
    
    $
    27,739
    
    
    
    38
    %
 Net Revenues
  ® ®
  ®
 Product Revenues  Novogyne
 ® ® ® ® ® ®
 ® ® ®
 21




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##### Table of Contents



®
 ®
  Product Revenues  Third Parties
 ® ® ® ® 
  ®   ®
   
 Contract and License Revenues
   22




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##### Table of Contents




 Gross Margin
 
   Three Months
    
    
    Six Months2007
    
    
    2006
    
    
    2007
    
    
    2006Overall
Gross Margin:Product revenues
    
    $
    15,062
    
    
    $
    13,304
    
    
    $
    30,668
    
    
    $
    21,951Cost of products sold
    
    
    9,314
    
    
    
    11,887
    
    
    
    18,241
    
    
    
    18,027Gross profit (product revenues
    
    
    5,748
    
    
    
    1,417
    
    
    
    12,427
    
    
    
    3,924less cost of products sold)Gross margin (gross profit as a
percentage of product revenues)
    
    
    38
    %
    
    
    11
    %
    
    
    41
    %
    
    
    18
    %
 Three Months
    
    
    Six Months2007
    
    
    2006
    
    
    2007
    
    
    2006Gross Margin Novogyne:Product revenues
    
    $
    6,703
    
    
    $
    7,288
    
    
    $
    13,837
    
    
    $
    12,064Cost of products sold
    
    
    3,285
    
    
    
    4,459
    
    
    
    6,244
    
    
    
    6,602Gross profit (product revenues
    
    
    3,418
    
    
    
    2,829
    
    
    
    7,593
    
    
    
    5,462less cost of products sold)Gross margin (gross profit as a
percentage of product revenues)
    
    
    51
    %
    
    
    39
    %
    
    
    55
    %
    
    
    45
    %
 23




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##### Table of Contents



Three Months
    
    
    Six Months2007
    
    
    2006
    
    
    2007
    
    
    2006Gross Margin Third Parties:Product revenues
    
    $
    8,359
    
    
    $
    6,016
    
    
    $
    16,831
    
    
    $
    9,887Cost of products sold
    
    
    6,029
    
    
    
    7,428
    
    
    
    11,997
    
    
    
    11,425Gross profit/(loss) (product revenues
    
    
    2,330
    
    
    
    (1,412
    )
    
    
    4,834
    
    
    
    (1,538
    )less cost of products sold)Gross margin/(loss) (gross profit as a
percentage of product revenues)
    
    
    28
    %
    
    
    (23
    %)
    
    
    29
    %
    
    
    (16
    %)
 
   
 
      
  24




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##### Table of Contents



Operating Expenses
  Three Months
    
    
    Six Months2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    % ChangeResearch and development
    
    $
    3,185
    
    
    $
    2,890
    
    
    
    10
    %
    
    $
    6,651
    
    
    $
    6,372
    
    
    
    4
    %Marketing, general and
administrative
    
    
    5,709
    
    
    
    5,638
    
    
    
    1
    %
    
    
    11,130
    
    
    
    10,376
    
    
    
    7
    %
 Research and Development
  
 Marketing, General and Administrative
  Other Income and Expenses
 Interest Income
  Income Taxes
  25




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##### Table of Contents



Equity in Earnings of Novogyne
   Three Months
    
    
    Six Months2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    % ChangeGross revenues1
    
    $
    42,915
    
    
    $
    35,665
    
    
    
    20
    %
    
    $
    80,208
    
    
    $
    72,934
    
    
    
    10
    %Sales allowances
    
    
    6,837
    
    
    
    3,546
    
    
    
    93
    %
    
    
    10,999
    
    
    
    7,339
    
    
    
    50
    %Sales returns allowances
    
    
    (60
    )
    
    
    1,487
    
    
    
    (104
    %)
    
    
    (9
    )
    
    
    3,383
    
    
    
    (100
    %)Sales and returns allowances
    
    
    6,777
    
    
    
    5,033
    
    
    
    35
    %
    
    
    10,990
    
    
    
    10,722
    
    
    
    2
    %Net revenues
    
    
    36,138
    
    
    
    30,632
    
    
    
    18
    %
    
    
    69,218
    
    
    
    62,212
    
    
    
    11
    %Cost of sales
    
    
    7,795
    
    
    
    7,162
    
    
    
    9
    %
    
    
    14,842
    
    
    
    14,683
    
    
    
    1
    %Gross profit
    
    
    28,343
    
    
    
    23,470
    
    
    
    21
    %
    
    
    54,376
    
    
    
    47,529
    
    
    
    14
    %Gross margin percentage
    
    
    78
    %
    
    
    77
    %
    
    
    
    
    
    
    79
    %
    
    
    76
    %Selling, general and
administrative expenses
    
    
    9,579
    
    
    
    9,596
    
    
    
    (0
    %)
    
    
    19,712
    
    
    
    18,753
    
    
    
    5
    %Income from operations
    
    
    18,764
    
    
    
    13,874
    
    
    
    35
    %
    
    
    34,664
    
    
    
    28,776
    
    
    
    20
    %Interest income
    
    
    165
    
    
    
    162
    
    
    
    2
    %
    
    
    497
    
    
    
    314
    
    
    
    58
    %Net income
    
    $
    18,929
    
    
    $
    14,036
    
    
    
    35
    %
    
    $
    35,161
    
    
    $
    29,090
    
    
    
    21
    %Novens equity in earnings of Novogyne
    
    $
    9,174
    
    
    $
    6,762
    
    
    
    36
    %
    
    $
    14,077
    
    
    $
    11,089
    
    
    
    27
    %
 
 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. 26




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##### Table of Contents



Novogyne Net Revenues
  ® ® ® ® ® ®
 ® ® ® ® ® ® ®
   Three Months
    
    
    Six Months2007
    
    
    2006
    
    
    2007
    
    
    2006Changes in allowances for returns
primarily of expiring product
    
    $
    (60
    )
    
    $
    1,487
    
    
    $
    (9
    )
    
    $
    3,383Actual returns primarily for expiring product
    
    $
    (645
    )
    
    $
    (1,149
    )
    
    $
    (1,474
    )
    
    $
    (2,320
    )
 ® ®
 27




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##### Table of Contents



Novogyne Gross Margin
  ®
 Novogyne Selling, General and Administrative Expenses
   Liquidity and Capital Resources
  June 30, 2007
    
    
    December 31, 2006Cash and cash equivalents
    
    $
    5,403
    
    
    $
    9,144Short-term investments
    
    
    181,256
    
    
    
    144,455Working capital
    
    
    214,453
    
    
    
    180,821
  Six Months2007
    
    
2006Cash flows:Operating activities
    
    $
    33,579
    
    
    $
    45,405Investing activities
    
    
    (40,175
    )
    
    
    (101,766
    )Financing activities
    
    
    2,855
    
    
    
    967
 Operating Activities
  28




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##### Table of Contents



 
 Investing Activities
    Financing Activities
  Short-Term and Long-Term Liquidity
    29




---



##### Table of Contents



    
  
    30




---



##### Table of Contents



Aggregate Contractual Obligations
  Critical Accounting Estimates
  Accounting for Uncertainty in Income Taxes
  31




---



##### Table of Contents



Recent Accounting Pronouncements
  Outlook
  
    
    acquisitions of products, companies, or technologies or other transactions (other than
the proposed acquisition of JDS);
    
    changes in Novens or Novogynes accounting or accounting principles or any of the
estimates or judgments underlying our critical accounting policies;
    
    regulatory or technological developments;
    
    changes in the supply of, demand for, or distribution of our products (including any
changes resulting from competitive products, product recalls, or new study results);
    
    negative actions with respect to our applications for methylphenidate quota or other
disruptions in supplies of raw materials;
    
    changes in our business relationships/collaborations; or
    
    changes in the economy or the health care sector generally.
  Daytrana     
 32




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##### Table of Contents



HT Product Revenues
 Gross Margin  Transdermal Operations.   
 Research and Development Expense.
 Marketing, General and Administrative Expense.
 Stock-Based Compensation Expenses.
 Novogyne.
 Tax Matters.
 Capital Expenditures
 JDS  Related Guidance.
 
    
    aggregate product revenues from sales of JDSs
Pexeva® and Lithobid® products in the $11
million range;
 
    
    research and development expense associated with the products in the JDS development
pipeline in the $6 million range; and
 33




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##### Table of Contents




    
    selling, general and administrative expenses associated with JDSs operations in the $10
million range, which expenses should be largely offset by expected gross profit from
Pexeva®
and
Lithobid®,
excluding amortization and integration-related expenses associated
with the JDS acquisition.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  34




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  Certificates
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  ® ® ®
  
  
 Item 1A. Risk Factors
  35




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##### Table of Contents



We may not close the JDS acquisition in a timely manner or at all.
  We may not realize the expected benefits of our proposed acquisition of JDS.
  
    
    the failure of ongoing and planned clinical trials and the risk that results
from early-stage clinical trials may not be indicative of results in later-stage trials;
    
    the unproven safety and efficacy of products under development;
    
    the difficulty of predicting FDA approvals, including the timing of approval
and that approval may not be granted at all;
    
    while FDA approval may be granted, the possibility that any expected period
of exclusivity may not be realized and that we may not be able to produce commercially
viable quantities;
    
    the difficulty of predicting acceptance and demand for new pharmaceutical products;
    
    the impact of competitive products and pricing;
    
    the possibility that any product launch may be delayed or that product
acceptance may be less than anticipated;
    
    the possibility that patent applications may not result in issued patents,
and that issued patents may not be enforceable or could be invalidated;
    
    the commercial markets that we intend to enter with new products may not
develop in the manner or to the extent that we anticipate; and
    
    the potential negative impact of competitive responses to our sales,
marketing and strategic efforts.
  36




---



##### Table of Contents



We expect to record a significant loss in the reporting period that we close the JDS acquisition
due to a one-time charge for purchased in-process research and development.
  Our proposed acquisition of JDS is expected to dilute our earnings for an undetermined period
of time.
  Our proposed acquisition of JDS may expose us to unexpected costs and liabilities.
  Our proposed acquisition of JDS will result in a substantial increase in our intangible assets,
which will subject us to the risk of impairment charges.
  We may not successfully integrate JDS into our existing business, or such integration may be more
costly or more difficult than expected.
  
    
    retaining key customer and vendor relationships;
    
    the necessity of coordinating geographically disparate organizations,
systems and facilities;
    
    consolidating corporate and administrative functions and eliminating redundancies;
    
    limiting the diversion of management resources necessary to facilitate the integration;
 37




---



##### Table of Contents




    
    implementing compatible information and communication systems, as well as
common operating procedures;
    
    creating compatible financial controls and comparable human resource
management practices;
    
    expenses of any undisclosed or potential legal liabilities;
    
    preserving, and preventing disruption of, the important contractual and
other relationships of each company; and
    
    assimilating and retaining employees with diverse business backgrounds.
   
 Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    Election of the Board of Directors:
 For
    
    
    WithheldSidney Braginsky
    
    
    21,347,632
    
    
    
    516,980John G. Clarkson, M.D.
    
    
    21,581,662
    
    
    
    282,950Donald A. Denkhaus
    
    
    21,796,633
    
    
    
    67,979Pedro P. Granadillo
    
    
    21,582,662
    
    
    
    281,950Robert G. Savage
    
    
    21,582,862
    
    
    
    281,750Robert C. Strauss
    
    
    21,488,579
    
    
    
    376,033Wayne P. Yetter
    
    
    21,621,036
    
    
    
    243,576
 2.
    
    Proposal to approve an amendment to the Noven Pharmaceuticals, Inc. 1999
Long-Term Incentive Plan:
 For
    
    Against
    
    Abstained
    
    Broker Non-Vote17,507,033
    
    
    1,034,299
    
    
    
    14,068
    
    
    
    3,309,212
 38




---



##### Table of Contents



3.
    
    Proposal to approve the material terms of the performance goals under the
Noven Pharmaceuticals, Inc. 1999 Long-Term Incentive Plan:
 For
    
    Against
    
    Abstained
    
    Broker Non-Vote18,105,560
    
    435,796
    
    14,044
    
    3,309,212
 4.
    
    Proposal to ratify and approve appointment of Deloitte & Touche LLP as
the independent accountants for 2007:
 For
    
    Against
    
    Abstained
    
    Broker Non-Vote21,551,284
    
    298,368
    
    14,467
    
    493
 
 Item 5. Other Information
  
 Item 6. Exhibits
 10.1
    
    Letter Agreement between Shire US Inc. and Noven related to Development
of Amphetamine Transdermal Delivery System, dated June 15, 2004 (with certain
provisions omitted pursuant to Rule 24b-2).*10.2
    
    Amendment dated May 3, 2007, to Letter Agreement between Shire US Inc.
and Noven related to Development of Amphetamine Transdermal Delivery System dated
June 15, 2004 (with certain provisions omitted pursuant to Rule 24b-2).*10.3
    
    Amendment dated June 4, 2007, to Letter Agreement between Shire US Inc.
and Noven related to Development of Amphetamine Transdermal Delivery System dated
June 15, 2004 (with certain provisions omitted pursuant to Rule 24b-2).*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 2002.31.2
    
    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 2002.32.1
    
    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 2002.**32.2
    
    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.**
 
 *
    
    Certain exhibits and schedules to this document have not been filed. The Registrant agrees to furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.**
    
    Pursuant to Item 601(b)(32) of Regulation S-K, this exhibit is furnished rather than
filed with this Form 10-Q. 39




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##### Table of Contents



NOVEN PHARMACEUTICALS, INC.Date: August 7, 2007
    By:
    /s/ Diane M. BarrettDiane M. BarrettVice President and
Chief Financial Officer 40