##### 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, 2008
 Commission file number 0-17254
 NOVEN PHARMACEUTICALS, INC.
  STATE OF DELAWARE
    
    59-2767632(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 (Address of principal executive offices) (Zip Code)
 (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
  Class
    
    Outstanding at October 31, 2008Common stock $.0001 par value
    
    24,897,085




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##### 



NOVEN PHARMACEUTICALS, INC.
  Page No.PART I  FINANCIAL INFORMATIONItem 1 - Unaudited Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2008 and
December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2008 and 2007
    
    
    4Condensed Consolidated Statement of Changes in Stockholders Equity and
Comprehensive Income for the Nine Months Ended September 30, 2008
    
    
    5Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2008 and 2007
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28Item 3 - Quantitative and Qualitative Disclosures About Market Risk
    
    
    52Item 4 - Controls and Procedures
    
    
    52PART II  OTHER INFORMATIONItem 1 - Legal Proceedings
    
    
    53Item 1A - Risk Factors
    
    
    53Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    54Item 5 - Other Information
    
    
    54Item 6 - Exhibits
    
    
    55SIGNATURES
    
    
    56EX-10.1EX-10.2EX-31.1EX-31.2EX-32.1EX-32.2
  Cautionary Factors
 Trademark Information ® ® ®  ® ® ® ® ® ®
 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
  NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
   September 30,
    
    
    December 31,2008
    
    
    2007AssetsCurrent Assets:Cash and cash equivalents
    
    $
    65,288
    
    
    $
    13,973Short-term investments available-for-sale, at fair value
    
    
    
    
    
    
    21,565Accounts receivable (less allowances of $477 at 2008
and $252 at 2007)
    
    
    7,511
    
    
    
    6,956Accounts receivable  Novogyne, net
    
    
    6,156
    
    
    
    8,683Inventories
    
    
    15,162
    
    
    
    12,136Net deferred income tax asset, current portion
    
    
    10,703
    
    
    
    7,614Prepaid income taxes
    
    
    5,374
    
    
    
    4,925Prepaid and other current assets
    
    
    3,362
    
    
    
    5,251113,556
    
    
    
    81,103Non-current Assets:Property, plant and equipment, net
    
    
    34,921
    
    
    
    36,213Investments in auction rate securities
    
    
    15,460
    
    
    
    32,835Investment in Novogyne
    
    
    27,173
    
    
    
    24,310Net deferred income tax asset, non-current portion
    
    
    63,172
    
    
    
    58,053Intangible assets, net
    
    
    37,607
    
    
    
    38,773Goodwill
    
    
    14,407
    
    
    
    14,734Deposits and other non-current assets
    
    
    887
    
    
    
    677193,627
    
    
    
    205,595$
    307,183
    
    
    $
    286,698Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable and accrued expenses
    
    $
    9,285
    
    
    $
    8,399Accrued compensation and related liabilities
    
    
    5,718
    
    
    
    9,801Other accrued liabilities
    
    
    21,727
    
    
    
    15,270Current portion of long-term obligations
    
    
    3,420
    
    
    
    3,421Deferred product revenue  Stavzor®
    
    
    1,432
    
    
    
    Deferred license and contract revenues, current portion
    
    
    32,451
    
    
    
    20,18874,033
    
    
    
    57,079Non-current Liabilities:Long-term obligations, less current portion
    
    
    47
    
    
    
    8,438Deferred license and contract revenues, non-current portion
    
    
    82,621
    
    
    
    85,056Other non-current liabilities
    
    
    1,109
    
    
    
    1,83183,777
    
    
    
    95,325Total Liabilities
    
    
    157,810
    
    
    
    152,404Commitments and Contingencies (Note 14)Stockholders Equity:Preferred stock  authorized 100,000 shares par value $.01 per
share; no shares issued or outstanding
    
    
    
    
    
    
    Common stock  authorized 80,000,000 shares, par value
$.0001 per share; 25,219,370 and 24,881,867
issued at September 30, 2008 and December 31, 2007
    
    
    3
    
    
    
    2Additional paid-in capital
    
    
    121,848
    
    
    
    118,561Retained earnings
    
    
    33,161
    
    
    
    20,855Accumulated other comprehensive loss
    
    
    (515
    )
    
    
    Treasury stock, at cost - 322,345 shares at September 30, 2008
and December 31, 2007
    
    
    (5,124
    )
    
    
    (5,124
    )Common stock held in trust
    
    
    (1,412
    )
    
    
    (950
    )Deferred compensation obligation
    
    
    1,412
    
    
    
    950149,373
    
    
    
    134,294$
    307,183
    
    
    $
    286,698
 The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these financial statements.
 3




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NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Product revenues  Novogyne:Product sales, net
    
    $
    5,945
    
    
    $
    5,801
    
    
    $
    13,929
    
    
    $
    15,974Royalties
    
    
    2,258
    
    
    
    2,100
    
    
    
    6,787
    
    
    
    5,764Total net product revenues  Novogyne
    
    
    8,203
    
    
    
    7,901
    
    
    
    20,716
    
    
    
    21,738Product revenues, net  third parties
    
    
    11,131
    
    
    
    8,789
    
    
    
    34,357
    
    
    
    25,620Total net product revenues
    
    
    19,334
    
    
    
    16,690
    
    
    
    55,073
    
    
    
    47,358License and contract revenues
    
    
    6,371
    
    
    
    5,125
    
    
    
    16,717
    
    
    
    12,611Total net revenues
    
    
    25,705
    
    
    
    21,815
    
    
    
    71,790
    
    
    
    59,969Costs and Expenses:Cost of products sold  Novogyne
    
    
    3,994
    
    
    
    4,286
    
    
    
    10,783
    
    
    
    10,530Cost of products sold  third parties
    
    
    10,933
    
    
    
    5,525
    
    
    
    28,236
    
    
    
    17,522Total cost of products sold
    
    
    14,927
    
    
    
    9,811
    
    
    
    39,019
    
    
    
    28,052Acquired in-process research and
development
    
    
    
    
    
    
    100,150
    
    
    
    
    
    
    
    100,150Research and development
    
    
    4,041
    
    
    
    3,649
    
    
    
    10,653
    
    
    
    10,300Selling and marketing
    
    
    7,326
    
    
    
    3,103
    
    
    
    17,485
    
    
    
    3,564General and administrative
    
    
    11,147
    
    
    
    8,770
    
    
    
    27,075
    
    
    
    19,439Total costs and expenses
    
    
    37,441
    
    
    
    125,483
    
    
    
    94,232
    
    
    
    161,505Reversal of contingent milestone liability
    
    
    5,000
    
    
    
    
    
    
    
    5,000
    
    
    
    Loss from operations
    
    
    (6,736
    )
    
    
    (103,668
    )
    
    
    (17,442
    )
    
    
    (101,536
    )Equity in earnings of Novogyne
    
    
    13,849
    
    
    
    10,948
    
    
    
    34,545
    
    
    
    25,025Interest income, net
    
    
    344
    
    
    
    1,306
    
    
    
    1,466
    
    
    
    4,751Income (loss) before income taxes
    
    
    7,457
    
    
    
    (91,414
    )
    
    
    18,569
    
    
    
    (71,760
    )Provision (benefit) for income taxes
    
    
    2,253
    
    
    
    (32,377
    )
    
    
    6,263
    
    
    
    (25,335
    )Net income (loss)
    
    $
    5,204
    
    
    $
    (59,037
    )
    
    $
    12,306
    
    
    $
    (46,425
    )Basic earnings (loss) per share
    
    $
    0.21
    
    
    $
    (2.38
    )
    
    $
    0.50
    
    
    $
    (1.87
    )Diluted earnings (loss) per share
    
    $
    0.21
    
    
    $
    (2.38
    )
    
    $
    0.50
    
    
    $
    (1.87
    )Weighted average number of common shares
outstanding:Basic
    
    
    24,638
    
    
    
    24,792
    
    
    
    24,600
    
    
    
    24,787Diluted
    
    
    24,766
    
    
    
    24,792
    
    
    
    24,703
    
    
    
    24,787
 The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these
financial statements.
 4




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NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
    AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    TreasuryShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    Stock
    
    
    Other
    
    
    TotalBalance at December 31, 2007

    
    24,560
    
    
    $
    2
    
    
    $
    118,561
    
    
    $
    20,855
    
    
    $
    
    
    
    $
    (5,124
    )
    
    $
    
    
    
    $
    134,294Issuance of shares pursuant to employee
equity plan
    
    
    3
    
    
    
    1
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Stock-based compensation expense and
issuance of shares to officers and
outside directors
    
    
    334
    
    
    
    
    
    
    
    3,258
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,258Common stock held in trust
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (462
    )
    
    
    (462
    )Deferred compensation obligation
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    462
    
    
    
    462Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,306
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,306Other comprehensive income:Unrealized loss on investments in auction
rate securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (515
    )
    
    
    
    
    
    
    
    
    
    
    (515
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    11,791Balance at September 30, 2008
    
    
    24,897
    
    
    $
    3
    
    
    $
    121,848
    
    
    $
    33,161
    
    
    $
    (515
    )
    
    $
    (5,124
    )
    
    $
    
    
    
    $
    149,373
 The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these
financial statements.
 5




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NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
    Nine Months ended September 30,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    12,306
    
    
    $
    (46,425
    )Adjustments to reconcile net income (loss) to net cash flows
provided by operating activities:Depreciation, amortization and certain other noncash items
    
    
    6,665
    
    
    
    4,422Disposal of property, plant and equipment
    
    
    656
    
    
    
    46Inventory write-offs
    
    
    5,022
    
    
    
    1,068Reversal of contingent milestone liability
    
    
    (5,000
    )
    
    
    Stock-based compensation expense
    
    
    3,258
    
    
    
    3,118Acquired in-process research and development expense
    
    
    
    
    
    
    100,150Income tax benefits on exercise of stock options
    
    
    
    
    
    
    461Excess tax benefit from exercise of stock options
    
    
    
    
    
    
    (390
    )Deferred income tax benefit
    
    
    (8,208
    )
    
    
    (49,464
    )Recognition of deferred license and contract revenues
    
    
    (16,717
    )
    
    
    (12,611
    )Equity in earnings of Novogyne
    
    
    (34,545
    )
    
    
    (25,025
    )Distributions from Novogyne
    
    
    28,982
    
    
    
    18,465Changes in operating assets and liabilities:Increase in accounts receivable  trade, net
    
    
    (555
    )
    
    
    (375
    )Decrease in milestone payment receivable  Shire
    
    
    
    
    
    
    25,000Decrease in accounts receivable  Novogyne, net
    
    
    2,527
    
    
    
    790Increase in inventories
    
    
    (8,048
    )
    
    
    (2,813
    )Decrease in prepaid income taxes
    
    
    2,251
    
    
    
    4,505Decrease (increase) in prepaid and other current assets
    
    
    1,109
    
    
    
    (910
    )Increase in deposits and other assets
    
    
    (176
    )
    
    
    (2
    )Increase (decrease) in accounts payable and accrued
expenses
    
    
    1,258
    
    
    
    (4,983
    )Decrease in accrued compensation and related liabilities
    
    
    (4,046
    )
    
    
    (509
    )Increase in other accrued liabilities
    
    
    6,457
    
    
    
    11,244Increase in deferred license and contract revenues
    
    
    26,545
    
    
    
    31,620Increase in deferred product revenue  Stavzor ®
    
    
    1,432
    
    
    
    Increase in other liabilities
    
    
    145
    
    
    
    419Cash flows provided by operating activities
    
    
    21,318
    
    
    
    57,801Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (2,997
    )
    
    
    (2,257
    )Payments for intangible assets
    
    
    (1,734
    )
    
    
    (256
    )Acquisition of JDS, net of cash acquired
    
    
    
    
    
    
    (130,353
    )Purchase of company-owned life insurance
    
    
    (335
    )
    
    
    (260
    )Purchases of investments
    
    
    (62,800
    )
    
    
    (1,276,473
    )Proceeds from sale of investments
    
    
    101,225
    
    
    
    1,359,828Cash flows provided by (used in) investing activities
    
    
    33,359
    
    
    
    (49,771
    )Cash flows from financing activities:Issuance of common stock from exercise of stock options
    
    
    30
    
    
    
    2,531Purchase of treasury stock
    
    
    
    
    
    
    (5,124
    )Excess tax benefit from exercise of stock options
    
    
    
    
    
    
    390Payments of long-term obligations
    
    
    (3,392
    )
    
    
    (3,718
    )Cash flows used in financing activities
    
    
    (3,362
    )
    
    
    (5,921
    )Net increase in cash and cash equivalents
    
    
    51,315
    
    
    
    2,109Cash and cash equivalents, beginning of period
    
    
    13,973
    
    
    
    9,144Cash and cash equivalents, end of period
    
    $
    65,288
    
    
    $
    11,253
 The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these
financial statements.
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##### Table of Contents



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




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




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9




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3. CASH FLOW INFORMATION:
 Income Tax and Interest Payments
  Non-cash Operating Activities
  Non-cash Investing Activities
  4. INVESTMENTS AVAILABLE-FOR-SALE:
    10




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5. FAIR VALUE MEASUREMENTS:
  (i)
    
    Level 1  observable inputs such as quoted prices in active markets;(ii)
    
    Level 2  inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly; and(iii)
    
    Level 3  unobservable inputs for
which there is little or no market data, which require the reporting entity to develop
its own assumptions.
   Balance at December 31, 2007
    
    $
    54,400Purchases of investments
    
    
    550Sales of investments at par
    
    
    (38,975
    )Unrealized losses recorded as other comprehensive loss
    
    
    (515
    )Balance at September 30, 2008
    
    $
    15,460
 11




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##### Table of Contents



6. INVENTORIES:
  September 30,
    
    
    December 31,2008
    
    
    2007Finished goods
    
    $
    3,452
    
    
    $
    3,171Work in process
    
    
    2,216
    
    
    
    1,532Raw materials
    
    
    9,494
    
    
    
    7,433Total
    
    $
    15,162
    
    
    $
    12,136
 ®
 ® ®
 7. GOODWILL AND INTANGIBLE ASSETS:
   12




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
    
    As part of the JDS acquisition, a portion of the purchase price was placed in escrow to be
distributed upon final determination of the amount of net working capital purchased by
Noven. In June 2008, Noven reached a final agreement with the prior owners of JDS with
respect to the net working capital adjustment, which agreement resulted in a $1.1 million
payment to Noven from the escrow account. As a result of the working capital adjustment,
Noven adjusted the amount due from escrow by $1.0 million and recorded a corresponding
increase of $1.0 million to goodwill.
    
    Also as part of the JDS acquisition, Noven recognized a favorable lease asset related to
office space in New York and a liability for employee relocation costs, based on a
tentative determination that Noven would exit the New York location by May 2008. During the
second quarter of 2008, management decided to retain the New York office space through its
remaining contractual term and not to require relocation of the remaining personnel based
in New York. As a result of these decisions, Noven revised the value of the acquired
favorable lease asset and reversed the unused relocation liability, resulting in a $1.3
million reduction in goodwill.
  Weighted-Net
    
    
    AverageGross Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    RemainingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Life (years)As of September 30, 2008Patent development costs
    
    $
    4,777
    
    
    $
    (2,938
    )
    
    $
    1,839
    
    
    
    7.2Acquired product intangibles
    
    
    39,290
    
    
    
    (4,286
    )
    
    
    35,004
    
    
    
    9.0Non-competition agreements
    
    
    530
    
    
    
    (249
    )
    
    
    281
    
    
    
    1.6Favorable lease
    
    
    790
    
    
    
    (307
    )
    
    
    483
    
    
    
    2.0$
    45,387
    
    
    $
    (7,780
    )
    
    $
    37,607
    
    
    
    8.8As of December 31, 2007Patent development costs
    
    $
    4,542
    
    
    $
    (2,573
    )
    
    $
    1,969
    
    
    
    8.1Acquired product intangibles
    
    
    37,790
    
    
    
    (1,549
    )
    
    
    36,241
    
    
    
    10.0Non-competition agreements
    
    
    530
    
    
    
    (82
    )
    
    
    448
    
    
    
    2.4Favorable lease
    
    
    227
    
    
    
    (112
    )
    
    
    115
    
    
    
    0.8$
    43,089
    
    
    $
    (4,316
    )
    
    $
    38,773
    
    
    
    9.8
 ®
 13




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Remainder
    
    
    Years Ending December 31,of 2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013Cost of goods sold:Intellectual property
    
    $
    1,065
    
    
    $
    4,192
    
    
    $
    4,146
    
    
    $
    4,085
    
    
    $
    4,069
    
    
    $
    4,008General and administrative:Non-compete and
favorable
lease agreements
    
    
    116
    
    
    
    413
    
    
    
    236
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,181
    
    
    $
    4,605
    
    
    $
    4,382
    
    
    $
    4,085
    
    
    $
    4,069
    
    
    $
    4,008
 8. OTHER ACCRUED LIABILITIES:
  September 30,
    
    
    December 31,2008
    
    
    2007Income taxes payable
    
    $
    4,063
    
    
    $
    2,414Accrued medicaid and other rebates
    
    
    2,759
    
    
    
    4,065Accrued market withdrawal costs
    
    
    7,287
    
    
    
    3,300Allowance for product returns
    
    
    3,135
    
    
    
    1,875Other accrued liabilities
    
    
    4,483
    
    
    
    3,616Total other accrued liabilities
    
    $
    21,727
    
    
    $
    15,270
 9. EQUITY PLANS:
   WeightedAverageGrant-DateShares
    
    
    Fair ValueNonvested atDecember 31, 2007
    
    
    6
    
    
    $
    22.86Granted
    
    
    328
    
    
    
    9.90Vested
    
    
    (94
    )
    
    
    11.40Nonvested atSeptember 30, 2008
    
    
    240
    
    
    $
    9.67
 14




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##### Table of Contents



2008
    
    2007Volatility
    
    
    51.3
    %
    
    
    41.8
    %Risk free interest rate
    
    
    3.08
    %
    
    
    4.50
    %Expected life (years)
    
    
    4.8
    
    
    
    4.0Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Selling and marketing
    
    $
    6
    
    
    $
    111
    
    
    $
    329
    
    
    $
    333General and
administrative
    
    
    726
    
    
    
    783
    
    
    
    2,353
    
    
    
    2,039Research and
development
    
    
    113
    
    
    
    127
    
    
    
    289
    
    
    
    381Total cost of
products sold
    
    
    68
    
    
    
    121
    
    
    
    287
    
    
    
    365$
    913
    
    
    $
    1,142
    
    
    $
    3,258
    
    
    $
    3,118Tax benefit
recognized related
to
compensation
expense
    
    $
    279
    
    
    $
    359
    
    
    $
    1,083
    
    
    $
    1,020
  15




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##### Table of Contents



WeightedWeighted
    
    
    
    
    
    
    AverageAverage
    
    
    Aggregate
    
    
    RemainingOptions/
    
    
    Exercise
    
    
    Intrinsic
    
    
    ContractualSSARs
    
    
    Price
    
    
    Value
    
    
    TermOutstanding atDecember 31, 2007
    
    
    3,511
    
    
    $
    16.83Granted
    
    
    593
    
    
    
    10.11Exercised
    
    
    (3
    )
    
    
    10.60
    
    
    $
    3Canceled and expired
    
    
    (548
    )
    
    
    18.08Outstanding atSeptember 30, 2008
    
    
    3,553
    
    
    $
    15.64
    
    
    $
    1,337
    
    
    
    3.9Outstanding and exercisable
at end of the period
    
    
    2,209
    
    
    $
    17.24
    
    
    $
    294
    
    
    
    2.6
  10. INCOME TAXES:
   16




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11. CONTRACT AND LICENSE AGREEMENTS:
  ® ®
 17




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##### Table of Contents



®
  ® ® ®
 ®
 
    
    $1.0 million milestone payable if annual net sales of Pexeva®equal or
exceed $7.0 million but are less than $8.0 million in each of 2007 or 2008, which
milestone payment is increased to $2.0 million if annual net sales exceed $8.0
million in each of 2007 or 2008. Pexeva® net sales exceeded the $8.0
million threshold for 2007 and are expected to exceed such thresholds in 2008.
    
    $1.25 million milestone payable for each of the first two years if annual net
sales of Pexeva®equal or exceed $10.0 million from 2007 to 2017.
Pexeva® net sales exceeded this threshold for 2007 and are expected to exceed such thresholds in 2008.
    
    $5.0 million milestone payable in the first year that annual net sales of
Pexeva® (or any paroxetine mesylate product) equal or exceed $30.0
million from 2007 through 2017.
 ® ® ®
 ®
  ®
 18




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##### Table of Contents



®
   12. INVESTMENT IN VIVELLE VENTURES LLC (d/b/a NOVOGYNE):
   Three Months
    
    
    Nine Months2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Product sales
    
    $
    5,945
    
    
    $
    5,801
    
    
    $
    13,929
    
    
    $
    15,974Royalties
    
    
    2,258
    
    
    
    2,100
    
    
    
    6,787
    
    
    
    5,764$
    8,203
    
    
    $
    7,901
    
    
    $
    20,716
    
    
    $
    21,738Reimbursed expenses
    
    $
    6,770
    
    
    $
    6,940
    
    
    $
    21,424
    
    
    $
    21,046
  19




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Three Months
    
    
    Nine Months2008
    
    
    2007
    
    
    2008
    
    
    2007Gross revenues
    
    $
    53,281
    
    
    $
    45,224
    
    
    $
    148,629
    
    
    $
    125,432Sales allowances
    
    
    7,024
    
    
    
    5,770
    
    
    
    18,579
    
    
    
    16,769Sales return allowances
    
    
    432
    
    
    
    781
    
    
    
    931
    
    
    
    772Sales allowances and returns
    
    
    7,456
    
    
    
    6,551
    
    
    
    19,510
    
    
    
    17,541Net revenues
    
    
    45,825
    
    
    
    38,673
    
    
    
    129,119
    
    
    
    107,891Cost of sales
    
    
    8,893
    
    
    
    8,152
    
    
    
    25,489
    
    
    
    22,994Selling, general and
administrative expenses
    
    
    9,013
    
    
    
    8,278
    
    
    
    27,823
    
    
    
    27,990Income from operations
    
    
    27,919
    
    
    
    22,243
    
    
    
    75,807
    
    
    
    56,907Interest income
    
    
    341
    
    
    
    286
    
    
    
    782
    
    
    
    783Net income
    
    $
    28,260
    
    
    $
    22,529
    
    
    $
    76,589
    
    
    $
    57,690Novens equity in earnings of Novogyne
    
    $
    13,849
    
    
    $
    10,948
    
    
    $
    34,545
    
    
    $
    25,025
  Investment in Novogyne, beginning of period
    
    $
    24,310Equity in earnings of Novogyne
    
    
    34,545Cash distributions from Novogyne
    
    
    (28,982
    )Deemed distribution by Novogyne for state
income tax payment
    
    
    (2,700
    )Investment in Novogyne, end of period
    
    $
    27,173
  13. SHARE REPURCHASE PROGRAM:
  20




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14. COMMITMENTS AND CONTINGENCIES:
    ® ® ®
 ® ® ® ®
  ®
 ®
 21




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##### Table of Contents



® ®
 ®
  ® ® ®
 ®
    ® ® ® ®
 22




---



##### Table of Contents



®
 ® ®
 ® ® ® ® ®
 ® ® ® ® ® ®
 ®
 23




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##### Table of Contents



®
    ®
    24




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##### Table of Contents



15. SEGMENT DATA:
  25




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,(in thousands):
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Noven Transdermals:Product revenues
    
    $
    14,527
    
    
    $
    13,365
    
    
    $
    37,986
    
    
    $
    44,033License and contract revenues
    
    
    6,371
    
    
    
    5,125
    
    
    
    16,717
    
    
    
    12,611Net revenues
    
    
    20,898
    
    
    
    18,490
    
    
    
    54,703
    
    
    
    56,644Cost of products sold
    
    
    (13,024
    )
    
    
    (8,998
    )
    
    
    (33,058
    )
    
    
    (27,239
    )Selling and marketing
    
    
    (48
    )
    
    
    (332
    )
    
    
    (455
    )
    
    
    (793
    )Equity in earnings of Novogyne
    
    
    13,849
    
    
    
    10,948
    
    
    
    34,545
    
    
    
    25,025Segment contribution
    
    
    21,675
    
    
    
    20,108
    
    
    
    55,735
    
    
    
    53,637Noven Therapeutics:Product revenues
    
    
    4,807
    
    
    
    3,325
    
    
    
    17,087
    
    
    
    3,325Cost of products sold
    
    
    (1,903
    )
    
    
    (813
    )
    
    
    (5,961
    )
    
    
    (813
    )Acquired in-process research and
development
    
    
    
    
    
    
    (100,150
    )
    
    
    
    
    
    
    (100,150
    )Selling and marketing
    
    
    (7,278
    )
    
    
    (2,771
    )
    
    
    (17,030
    )
    
    
    (2,771
    )Reversal of contingent milestone
liability
    
    
    5,000
    
    
    
    
    
    
    
    5,000
    
    
    
    Segment contribution
    
    
    626
    
    
    
    (100,409
    )
    
    
    (904
    )
    
    
    (100,409
    )Unallocated income (expense):Research and development
    
    
    (4,041
    )
    
    
    (3,649
    )
    
    
    (10,653
    )
    
    
    (10,300
    )General and administrative
    
    
    (11,147
    )
    
    
    (8,770
    )
    
    
    (27,075
    )
    
    
    (19,439
    )Interest income, net
    
    
    344
    
    
    
    1,306
    
    
    
    1,466
    
    
    
    4,751Income (loss) before income taxes
    
    $
    7,457
    
    
    $
    (91,414
    )
    
    $
    18,569
    
    
    $
    (71,760
    )
  September 30,
    
    
    December 31,2008
    
    
    2007Noven Transdermals
    
    $
    86,635
    
    
    $
    83,912Noven Therapeutics
    
    
    56,302
    
    
    
    57,893Assets not allocated to segments1
    
    
    164,246
    
    
    
    144,893Total Assets
    
    $
    307,183
    
    
    $
    286,698
 
 1 Assets not allocated to segments consist primarily of cash and cash
equivalents, investments in auction rate securities and deferred income
taxes. 26




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16.
SUBSEQUENT EVENT  TERMINATION AGREEMENT:
  27




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  
    
    An executive summary of our consolidated results of operations for the 2008 Quarter;
    
    An overview of Noven and our Novogyne joint venture;
    
    An overview of Noven Therapeutics;
    
    A review of certain items that may affect the historical or future comparability of our
consolidated results of operations;
    
    An analysis of our consolidated results of operations and our liquidity and capital
resources; 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 unaudited condensed consolidated financial statements and related notes included in this Form 10-Q .
 ® ® ® ®
 ®
 ® ® ® ®
 28




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##### Table of Contents



® ® ® ®
 ® ®
 ®
 ®
  ® ® ® ®
 ® ®
   ®
 29




---



##### Table of Contents



Overview of Noven and our Novogyne Joint Venture
  ® ®
  Overview of Noven Therapeutics
 ® ® ®
 Certain Items that May Affect Historical or Future Comparability
  30




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##### Table of Contents



Acquisition of JDS Pharmaceuticals, LLC in 2007
   Remainder
    
    
    Years Ending December 31,of 2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013Cost of goods sold:Intellectual property
    
    $
    1,065
    
    
    $
    4,192
    
    
    $
    4,146
    
    
    $
    4,085
    
    
    $
    4,069
    
    
    $
    4,008General and administrative:Non-compete and favorable
lease agreements
    
    
    116
    
    
    
    413
    
    
    
    236
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,181
    
    
    $
    4,605
    
    
    $
    4,382
    
    
    $
    4,085
    
    
    $
    4,069
    
    
    $
    4,008
  ®
 Daytrana ®
 ® ® ® ®
 ®
 31




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® ®
 ® ® ® ® ®
 ® ® ® ® ® ®
 ®
  32




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®
 Results of Operations
  ®
 33




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,(in thousands):
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Noven Transdermals:Product revenues
    
    $
    14,527
    
    
    $
    13,365
    
    
    $
    37,986
    
    
    $
    44,033License and contract revenues
    
    
    6,371
    
    
    
    5,125
    
    
    
    16,717
    
    
    
    12,611Net revenues
    
    
    20,898
    
    
    
    18,490
    
    
    
    54,703
    
    
    
    56,644Cost of products sold
    
    
    (13,024
    )
    
    
    (8,998
    )
    
    
    (33,058
    )
    
    
    (27,239
    )Selling and marketing
    
    
    (48
    )
    
    
    (332
    )
    
    
    (455
    )
    
    
    (793
    )Equity in earnings of Novogyne
    
    
    13,849
    
    
    
    10,948
    
    
    
    34,545
    
    
    
    25,025Segment contribution
    
    
    21,675
    
    
    
    20,108
    
    
    
    55,735
    
    
    
    53,637Noven Therapeutics:Product revenues
    
    
    4,807
    
    
    
    3,325
    
    
    
    17,087
    
    
    
    3,325Cost of products sold
    
    
    (1,903
    )
    
    
    (813
    )
    
    
    (5,961
    )
    
    
    (813
    )Acquired in-process research and
development
    
    
    
    
    
    
    (100,150
    )
    
    
    
    
    
    
    (100,150
    )Selling and marketing
    
    
    (7,278
    )
    
    
    (2,771
    )
    
    
    (17,030
    )
    
    
    (2,771
    )Reversal of contingent milestone
liability
    
    
    5,000
    
    
    
    
    
    
    
    5,000
    
    
    
    Segment contribution
    
    
    626
    
    
    
    (100,409
    )
    
    
    (904
    )
    
    
    (100,409
    )Unallocated income (expense):Research and development
    
    
    (4,041
    )
    
    
    (3,649
    )
    
    
    (10,653
    )
    
    
    (10,300
    )General and administrative
    
    
    (11,147
    )
    
    
    (8,770
    )
    
    
    (27,075
    )
    
    
    (19,439
    )Interest income, net
    
    
    344
    
    
    
    1,306
    
    
    
    1,466
    
    
    
    4,751Income (loss) before income taxes
    
    $
    7,457
    
    
    $
    (91,414
    )
    
    $
    18,569
    
    
    $
    (71,760
    )
 34




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##### Table of Contents



Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
 Revenues
  Three Months
    
    
    
    
    
    
    Nine MonthsEnded September 30,
    
    
    %
    
    
    Ended September 30,
    
    
    %2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    ChangeNoven TransdermalsNovogyne:Product sales
    
    $
    5,945
    
    
    $
    5,801
    
    
    
    2
    %
    
    $
    13,929
    
    
    $
    15,974
    
    
    
    -13
    %Royalties
    
    
    2,258
    
    
    
    2,100
    
    
    
    8
    %
    
    
    6,787
    
    
    
    5,764
    
    
    
    18
    %Product revenues  Novogyne
    
    
    8,203
    
    
    
    7,901
    
    
    
    4
    %
    
    
    20,716
    
    
    
    21,738
    
    
    
    -5
    %Third Parties:Product sales
    
    
    6,236
    
    
    
    5,372
    
    
    
    16
    %
    
    
    17,015
    
    
    
    22,056
    
    
    
    -23
    %Royalties
    
    
    88
    
    
    
    92
    
    
    
    -4
    %
    
    
    255
    
    
    
    239
    
    
    
    7
    %Product revenues  third parties
    
    
    6,324
    
    
    
    5,464
    
    
    
    16
    %
    
    
    17,270
    
    
    
    22,295
    
    
    
    -23
    %Total product revenues
    
    
    14,527
    
    
    
    13,365
    
    
    
    9
    %
    
    
    37,986
    
    
    
    44,033
    
    
    
    -14
    %License and contract revenues
    
    
    6,371
    
    
    
    5,125
    
    
    
    24
    %
    
    
    16,717
    
    
    
    12,611
    
    
    
    33
    %Total Transdermals
    
    
    20,898
    
    
    
    18,490
    
    
    
    13
    %
    
    
    54,703
    
    
    
    56,644
    
    
    
    -3
    %Noven TherapeuticsThird Parties:Product sales
    
    
    4,807
    
    
    
    3,325
    
    
    
    45
    %
    
    
    17,087
    
    
    
    3,325
    
    
    
    414
    %Net Revenues
    
    $
    25,705
    
    
    $
    21,815
    
    
    
    18
    %
    
    $
    71,790
    
    
    $
    59,969
    
    
    
    20
    %
 Net Revenues
 ® ®
 ® ® ®
 35




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##### Table of Contents



Product Revenues  Novogyne
 ® ® ® ®
 ® ®
 ® ® ®
 Product Revenues  Third Parties
 ® ® ® ® ® ® ®
 ® ® ® ® ® ® ®
 ® ® ®
 36




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##### Table of Contents



® ® ® ®
 ® ® ® ® ® ® ®
 License and Contract Revenues
  ®
 ®
 37




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##### Table of Contents



Gross to Net Revenues
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofgross
    
    
    
    
    
    
    gross
    
    
    
    
    
    
    gross
    
    
    
    
    
    
    gross2008
    
    
    revenues
    
    
    2007
    
    
    revenues
    
    
    2008
    
    
    revenues
    
    
    2007
    
    
    revenuesNoven Transdermals:Gross revenues
    
    $
    22,147
    
    
    
    100
    %
    
    $
    19,332
    
    
    
    100
    %
    
    $
    56,546
    
    
    
    100
    %
    
    $
    57,486
    
    
    
    100
    %Sales returns allowances
    
    
    (1,249
    )
    
    
    -6
    %
    
    
    (842
    )
    
    
    -4
    %
    
    
    (1,843
    )
    
    
    -3
    %
    
    
    (842
    )
    
    
    -1
    %Net revenues
    
    $
    20,898
    
    
    
    94
    %
    
    $
    18,490
    
    
    
    96
    %
    
    $
    54,703
    
    
    
    97
    %
    
    $
    56,644
    
    
    
    99
    %Noven Therapeutics:Gross revenues
    
    $
    9,208
    
    
    
    100
    %
    
    $
    5,066
    
    
    
    100
    %
    
    $
    28,849
    
    
    
    100
    %
    
    $
    5,066
    
    
    
    100
    %Cash discounts
    
    
    (190
    )
    
    
    -2
    %
    
    
    (99
    )
    
    
    -2
    %
    
    
    (575
    )
    
    
    -2
    %
    
    
    (99
    )
    
    
    -2
    %Medicaid, Medicare & State
program rebates and credits
including redemption offers
    
    
    (2,168
    )
    
    
    -24
    %
    
    
    (1,164
    )
    
    
    -23
    %
    
    
    (5,746
    )
    
    
    -20
    %
    
    
    (1,164
    )
    
    
    -23
    %Chargebacks
    
    
    (307
    )
    
    
    -3
    %
    
    
    (89
    )
    
    
    -2
    %
    
    
    (939
    )
    
    
    -3
    %
    
    
    (89
    )
    
    
    -2
    %Wholesaler fees
    
    
    (90
    )
    
    
    -1
    %
    
    
    (198
    )
    
    
    -4
    %
    
    
    (1,292
    )
    
    
    -4
    %
    
    
    (198
    )
    
    
    -4
    %Sales returns allowances
    
    
    (1,646
    )
    
    
    -18
    %
    
    
    (191
    )
    
    
    -4
    %
    
    
    (3,210
    )
    
    
    -11
    %
    
    
    (191
    )
    
    
    -4
    %Sales and returns allowances
    
    
    (4,401
    )
    
    
    -48
    %
    
    
    (1,741
    )
    
    
    -34
    %
    
    
    (11,762
    )
    
    
    -41
    %
    
    
    (1,741
    )
    
    
    -34
    %Net revenues
    
    $
    4,807
    
    
    
    52
    %
    
    $
    3,325
    
    
    
    66
    %
    
    $
    17,087
    
    
    
    59
    %
    
    $
    3,325
    
    
    
    66
    %
 Gross Margin
 ® ® ®
  38




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Noven TransdermalsNovogyne:Product revenues
    
    $
    8,203
    
    
    
    
    
    
    $
    7,901
    
    
    
    
    
    
    $
    20,716
    
    
    
    
    
    
    $
    21,738Cost of products sold
    
    
    3,994
    
    
    
    
    
    
    
    4,286
    
    
    
    
    
    
    
    10,783
    
    
    
    
    
    
    
    10,530Gross profit
    
    
    4,209
    
    
    
    51
    %
    
    
    3,615
    
    
    
    46
    %
    
    
    9,933
    
    
    
    48
    %
    
    
    11,208
    
    
    
    52
    %Third Parties:Product revenues
    
    
    6,324
    
    
    
    
    
    
    
    5,464
    
    
    
    
    
    
    
    17,270
    
    
    
    
    
    
    
    22,295Cost of products sold
    
    
    9,030
    
    
    
    
    
    
    
    4,712
    
    
    
    
    
    
    
    22,275
    
    
    
    
    
    
    
    16,709Gross profit (loss)
    
    
    (2,706
    )
    
    
    -43
    %
    
    
    752
    
    
    
    14
    %
    
    
    (5,005
    )
    
    
    -29
    %
    
    
    5,586
    
    
    
    25
    %Total Noven Transdermals:Product revenues
    
    
    14,527
    
    
    
    
    
    
    
    13,365
    
    
    
    
    
    
    
    37,986
    
    
    
    
    
    
    
    44,033Cost of products sold
    
    
    13,024
    
    
    
    
    
    
    
    8,998
    
    
    
    
    
    
    
    33,058
    
    
    
    
    
    
    
    27,239Gross profit
    
    
    1,503
    
    
    
    10
    %
    
    
    4,367
    
    
    
    33
    %
    
    
    4,928
    
    
    
    13
    %
    
    
    16,794
    
    
    
    38
    %Noven TherapeuticsProduct revenues
    
    
    4,807
    
    
    
    
    
    
    
    3,325
    
    
    
    
    
    
    
    17,087
    
    
    
    
    
    
    
    3,325Cost of products sold
    
    
    1,903
    
    
    
    
    
    
    
    813
    
    
    
    
    
    
    
    5,961
    
    
    
    
    
    
    
    813Gross profit
    
    
    2,904
    
    
    
    60
    %
    
    
    2,512
    
    
    
    76
    %
    
    
    11,126
    
    
    
    65
    %
    
    
    2,512
    
    
    
    76
    %Total CompanyProduct revenues
    
    
    19,334
    
    
    
    
    
    
    
    16,690
    
    
    
    
    
    
    
    55,073
    
    
    
    
    
    
    
    47,358Cost of products sold
    
    
    14,927
    
    
    
    
    
    
    
    9,811
    
    
    
    
    
    
    
    39,019
    
    
    
    
    
    
    
    28,052Gross profit
    
    $
    4,407
    
    
    
    23
    %
    
    $
    6,879
    
    
    
    41
    %
    
    $
    16,054
    
    
    
    29
    %
    
    $
    19,306
    
    
    
    41
    %
 ®
 ® ® ® ®
  39




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##### Table of Contents



® ® ® ® ® ®
 ® ® ® ® ® ® ® ® ® ® ® ® ® ®
 ®
  Operating Expenses
  Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2008
    
    2007
    
    % Change
    
    2008
    
    2007
    
    % ChangeResearch and development
    
    $
    4,041
    
    
    $
    3,649
    
    
    
    11
    %
    
    $
    10,653
    
    
    $
    10,300
    
    
    
    3
    %Acquired in-process
research and development
    
    
    
    
    
    
    100,150
    
    
    
    N/M
    
    
    
    
    
    
    
    100,150
    
    
    
    N/MSelling and marketing
    
    
    7,326
    
    
    
    3,103
    
    
    
    136
    %
    
    
    17,485
    
    
    
    3,564
    
    
    
    391
    %General and administrative
    
    
    11,147
    
    
    
    8,770
    
    
    
    27
    %
    
    
    27,075
    
    
    
    19,439
    
    
    
    39
    %
 
 N/M  Not Meaningful 40




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##### Table of Contents



Research and Development
  Acquired In-Process Research and Development
  Selling and Marketing
 ®
 General and Administrative
  ® ®
 Reversal of Contingent Milestone Liability
 ®
 41




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##### Table of Contents



Other Income and Expenses
 Interest Income
  Income Taxes
  Equity in Earnings of Novogyne
  42




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    % ChangeGross revenues
    
    $
    53,281
    
    
    $
    45,224
    
    
    
    18
    %
    
    $
    148,629
    
    
    $
    125,432
    
    
    
    18
    %Sales allowances
    
    
    7,024
    
    
    
    5,770
    
    
    
    22
    %
    
    
    18,579
    
    
    
    16,769
    
    
    
    11
    %Sales returns allowances
    
    
    432
    
    
    
    781
    
    
    
    -45
    %
    
    
    931
    
    
    
    772
    
    
    
    21
    %Sales and returns allowances
    
    
    7,456
    
    
    
    6,551
    
    
    
    14
    %
    
    
    19,510
    
    
    
    17,541
    
    
    
    11
    %Net revenues
    
    
    45,825
    
    
    
    38,673
    
    
    
    18
    %
    
    
    129,119
    
    
    
    107,891
    
    
    
    20
    %Cost of sales
    
    
    8,893
    
    
    
    8,152
    
    
    
    9
    %
    
    
    25,489
    
    
    
    22,994
    
    
    
    11
    %Gross profit
    
    
    36,932
    
    
    
    30,521
    
    
    
    21
    %
    
    
    103,630
    
    
    
    84,897
    
    
    
    22
    %Gross margin percentage
    
    
    81
    %
    
    
    79
    %
    
    
    
    
    
    
    80
    %
    
    
    79
    %Selling, general and
administrative expenses
    
    
    9,013
    
    
    
    8,278
    
    
    
    9
    %
    
    
    27,823
    
    
    
    27,990
    
    
    
    -1
    %Income from operations
    
    
    27,919
    
    
    
    22,243
    
    
    
    26
    %
    
    
    75,807
    
    
    
    56,907
    
    
    
    33
    %Interest income
    
    
    341
    
    
    
    286
    
    
    
    19
    %
    
    
    782
    
    
    
    783
    
    
    
    0
    %Net income
    
    $
    28,260
    
    
    $
    22,529
    
    
    
    25
    %
    
    $
    76,589
    
    
    $
    57,690
    
    
    
    33
    %Novens equity in earnings of Novogyne
    
    $
    13,849
    
    
    $
    10,948
    
    
    
    26
    %
    
    $
    34,545
    
    
    $
    25,025
    
    
    
    38
    %
 Novogyne Net Revenues
  ® ® ® ® ®
 ® ® ® ® ®
  43




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Sales returns allowances included in
net revenues
    
    $
    432
    
    
    $
    781
    
    
    $
    931
    
    
    $
    772Actual returns primarily for expiring product
    
    
    (944
    )
    
    
    (880
    )
    
    
    (2,443
    )
    
    
    (2,354
    )Change in allowances for returns
primarily for expiring product
    
    $
    (512
    )
    
    $
    (99
    )
    
    $
    (1,512
    )
    
    $
    (1,582
    )
  Novogyne Gross Margin
 ®
 Novogyne Selling, General and Administrative Expenses
   44




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##### Table of Contents



Liquidity and Capital Resources
  September 30,
    
    December 31,2008
    
    2007Cash and cash equivalents
    
    $
    65,288
    
    
    $
    13,973Short-term investments
    
    
    
    
    
    
    21,565Working capital
    
    
    39,523
    
    
    
    24,024
  September 30,
    
    
    December 31,2008
    
    
    2007Cash and cash equivalents
    
    $
    65,288
    
    
    $
    13,973Investment in auction rate securities:Current
    
    
    
    
    
    
    21,565Non-current
    
    
    15,460
    
    
    
    32,835Total cash and cash equivalents and investments
    
    $
    80,748
    
    
    $
    68,373
  2008
    
    
    2007Cash flows:Operating activities
    
    $
    21,318
    
    
    $
    57,801Investing activities
    
    
    33,359
    
    
    
    (49,771
    )Financing activities
    
    
    (3,362
    )
    
    
    (5,921
    )Net cash flow
    
    $
    51,315
    
    
    $
    2,109
 Operating Activities
 ®
 45




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##### Table of Contents



Investing Activities
  ®
  Financing Activities
   Short-Term and Long-Term Liquidity
    46




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##### Table of Contents



®
 ® ® ® ®
 ®
 ® ® ®
 ® ®
 ®
  47




---



##### Table of Contents



Balance at December 31, 2007
    
    $
    54,400Purchases of investments
    
    
    550Sales of investments at par
    
    
    (38,975
    )Unrealized losses recorded as other comprehensive loss
    
    
    (515
    )Balance at September 30, 2008
    
    $
    15,460
   ® ®
     48




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##### Table of Contents



Aggregate Contractual Obligations
  Critical Accounting Estimates
  Recent Accounting Pronouncements
  Outlook
  
    
    acquisitions of products, companies, or technologies or other transactions;
 
    
    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;
 49




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##### Table of Contents




    
    changes in the supply of, demand for, or distribution of our products (including any
changes resulting from competitive products, unexpected product recalls/withdrawals, or new study
results);
 
    
    negative actions with respect to our applications for methylphenidate quota or other
disruptions in supplies of raw materials;
 
    
    adverse actions by the FDA in connection with the January 2008 warning letter or
otherwise;
 
    
    changes in our business relationships/collaborations; or
 
    
    changes in the economy or the health care sector generally.
   Net Revenues. ® ® ® ® ®
 Pexeva ® Recognition ®
 Gross Margin. ® ®
 Research and Development Expense.
 Selling, General and Administrative Expense. ® ®
 50




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##### Table of Contents



Equity in Earnings of Novogyne.
 Interest Income.
 51




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosure About Market Risk
  
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  Certifications
  52




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 ® ® ®
 ®
 
 
 Item 1A. Risk Factors
  The recent volatility in the financial markets could adversely affect us or our partners, customers
or suppliers
  53




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number ofShares
    
    
    ApproximatePurchased as
    
    
    Dollar ValuePart of
    
    
    That May YetTotal Number of
    
    
    Average Price
    
    
    Publicly
    
    
    be PurchasedShares
    
    
    Paid
    
    
    Announced
    
    
    under thePurchased
    
    
    Per Share
    
    
    Program
    
    
    Program(1)July 1, 2008 to
July 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,876,238August 1, 2008 to
August 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,876,238September 1, 2008 to
September 30, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,876,238Totals
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,876,238
 
 (1)
    
    In September 2007, we announced a stock repurchase program authorizing the repurchase of up
to $25.0 million of our common stock. During the third quarter of 2007,
we repurchased 322,345 shares of our common stock at an aggregate price of approximately $5.1
million. There is no expiration date specified for this program. 
 Item 5. Other Information
   54




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##### Table of Contents



Item 6.
    
    Exhibits10.1
    
    Development and License Agreement between Noven Pharmaceuticals, Inc. and Procter &
Gamble Pharmaceuticals, Inc., dated June 30, 2008 (with certain provisions omitted pursuant to
Rule 24b-2).10.2
    
    Supply Agreement among Noven Pharmaceuticals, Inc., Procter & Gamble Pharmaceuticals,
Inc. and P&G Pharmaceuticals, S.A.R.L., dated August 14, 2008 (with certain provisions
omitted pursuant to Rule 24b-2).10.3
    
    Credit Agreement between Noven Pharmaceuticals, Inc. and SunTrust Bank, dated July 31,
2008 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Noven
Pharmaceuticals, Inc. filed on August 6, 2008).31.1
    
    Certification of Peter Brandt, President and Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Michael D. Price, Vice President and Chief Financial Officer, pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Peter Brandt, President and Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    Certification of Michael D. Price, Vice President and Chief Financial Officer, pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
 *
    
    Pursuant to Item 601(b)(32) of Regulation S-K, this exhibit is furnished rather than filed with
this Form 10-Q. 55




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##### Table of Contents



Signatures
  NOVEN PHARMACEUTICALS, INC.Date: November 10, 2008
    By:
    /s/ Michael D. PriceMichael D. PriceVice President and
Chief Financial Officer 56