##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2002

Commission file number 0-17254

NOVEN PHARMACEUTICALS, INC.




(Exact name of registrant as specified in its charter)


|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|STATE OF DELAWARE                                              |  | 59-2767632                             
|                                                               |  |                                        
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification Number)

11960 S.W. 144th Street, Miami, FL 33186




(Address of principal executive offices) (Zip Code)


(305) 253-5099




(Registrants telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   
Yes   x   
No   o.

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the last practicable date.

|                              |  |                                
|----------------------------- |  | -------------------------------
|Class                         |  | Outstanding at October 31, 2002
|                              |  |                                
|Common stock $.0001 par value |  | 22,554,406                     





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TABLE OF CONTENTS



|                                         |                                                                                               |                                                   |  |  |  |  |  | 
|---------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION           
|                                         | Item 1. Financial Statements                                                                 
|                                         |                                                                                               | Condensed Statements of Operations               
|                                         |                                                                                               | Condensed Balance Sheets                         
|                                         |                                                                                               | Condensed Statements of Cash Flows               
|                                         |                                                                                               | Notes to Unaudited Condensed Financial Statements
|                                         | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                         | Item 3. Quantitative and Qualitative Disclosure About Market Risk                            
|PART II. OTHER INFORMATION              
|                                         | Item 1. Legal Proceedings                                                                    
|                                         | Item 4. Controls and Procedures                                                              
|                                         | Item 6. Exhibits and Reports on Form 8-K                                                     
|Signatures                              
|Certification of Chief Executive Officer
|Certification of Chief Financial Officer



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##### Table of Contents



NOVEN PHARMACEUTICALS, INC.

INDEX

|                               |                                                                                                |                                                                                                    |    |          |   | 
|------------------------------ | ---------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | -- | -------- | - | 
|                               |                                                                                                |                                                                                                    |    | Page No.
|                               |                                                                                                |                                                                                                    |    |         
|PART
I - FINANCIAL INFORMATION |                                                                                                |                                                                                                    |    |         
|                              
|                               | Item 1  Unaudited Condensed Financial Statements                                              |                                                                                                    |    |          |  
|                              
|                               |                                                                                                | Condensed Statements of Operations for the Three and Nine Months Ended
September 30, 2002 and 2001 |    |          | 3 | 
|                              
|                               |                                                                                                | Condensed Balance Sheets as of September 30, 2002 and December 31, 2001                            |    |          | 4 | 
|                              
|                               |                                                                                                | Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001           |    |          | 5 | 
|                              
|                               |                                                                                                | Notes to Unaudited Condensed Financial Statements                                                  |    |          | 6 | 
|                              
|                               | Item 2 - Managements Discussion and Analysis of Financial
Condition and Results of Operations |                                                                                                    |    | 10       |  
|                              
|                               | Item 3 - Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                    |    | 24       |  
|                              
|PART
II - OTHER INFORMATION    |                                                                                                |                                                                                                    |    |         
|                              
|                               | Item 1 - Legal Proceedings                                                                     |                                                                                                    |    | 25       |  
|                              
|                               | Item 4 - Controls and Procedures                                                               |                                                                                                    |    | 25       |  
|                              
|                               | Item 6 - Exhibits and Reports on Form 8-K                                                      |                                                                                                    |    | 25       |  
|                              
|SIGNATURES                     |                                                                                                |                                                                                                    | 26 |         
|                              
|CERTIFICATIONS                 |                                                                                                |                                                                                                    | 27 |         

2



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PART I. FINANCIAL INFORMATION




Item 1. Financial Statements

NOVEN PHARMACEUTICALS, INC.




Condensed Statements of Operations


Three and Nine Months Ended September 30,
(in thousands, except per share amounts)
(unaudited)


|                                                      |                                       |   |              |        |             |   |        |        |      |   |        |        |  |   |        |        | 
|----------------------------------------------------- | ------------------------------------- | - | ------------ | ------ | ----------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                      |                                       |   | Three Months |        | Nine Months
|                                                      |                                       |   |              |        |            
|                                                      |                                       |   | 2002         |        | 2001        |   | 2002   |        | 2001
|                                                      |                                       |   |              |        |             |   |        |        |     
|Revenues:                                             |                                       |   |              |        |             |   |        |        |      |   |        |        |  |   |        |       
|                                                      | Product sales                         |   | $            | 12,317 |             |   | $      | 9,705  |      |   | $      | 39,585 |  |   | $      | 33,569 | 
|                                                      | License revenue                       |   |              | 881    |             |   |        | 698    |      |   |        | 2,504  |  |   |        | 2,117  | 
|                                                      |                                       |   |              |        |             |   |        |        |      |   |        |        |  |   |        |       
|                                                      | Total revenues                        |   |              | 13,198 |             |   |        | 10,403 |      |   |        | 42,089 |  |   |        | 35,686 | 
|                                                     
|Expenses:                                             |                                       |   |              |        |             |   |        |        |      |   |        |        |  |   |        |       
|                                                      | Cost of products sold                 |   |              | 5,111  |             |   |        | 4,982  |      |   |        | 17,032 |  |   |        | 15,692 | 
|                                                      | Research and development              |   |              | 2,585  |             |   |        | 3,716  |      |   |        | 9,267  |  |   |        | 8,353  | 
|                                                      | Marketing, general and administrative |   |              | 3,492  |             |   |        | 3,383  |      |   |        | 10,104 |  |   |        | 9,219  | 
|                                                      |                                       |   |              |        |             |   |        |        |      |   |        |        |  |   |        |       
|                                                      | Total expenses                        |   |              | 11,188 |             |   |        | 12,081 |      |   |        | 36,403 |  |   |        | 33,264 | 
|                                                      |                                       |   |              |        |             |   |        |        |      |   |        |        |  |   |        |       
|Income (loss) from operations                         |                                       |   | 2,010        |        |             |   | (1,678 | )      |      |   | 5,686  |        |  |   | 2,422  |       
|                                                     
|Equity in earnings of Novogyne                        |                                       |   | 2,010        |        |             |   | 5,278  |        |      |   | 10,657 |        |  |   | 9,010  |       
|Interest income, net                                  |                                       |   | 223          |        |             |   | 398    |        |      |   | 625    |        |  |   | 1,499  |       
|                                                      |                                       |   |              |        |             |   |        |        |      |   |        |        |  |   |        |       
|Income before income taxes                            |                                       |   | 4,243        |        |             |   | 3,998  |        |      |   | 16,968 |        |  |   | 12,931 |       
|                                                     
|Provision for income taxes                            |                                       |   | 1,480        |        |             |   | 1,542  |        |      |   | 6,109  |        |  |   | 4,585  |       
|                                                      |                                       |   |              |        |             |   |        |        |      |   |        |        |  |   |        |       
|Net income                                            |                                       | $ | 2,763        |        |             | $ | 2,456  |        |      | $ | 10,859 |        |  | $ | 8,346  |       
|                                                      |                                       |   |              |        |             |   |        |        |      |   |        |        |  |   |        |       
|Basic earnings per share                              |                                       | $ | 0.12         |        |             | $ | 0.11   |        |      | $ | 0.48   |        |  | $ | 0.37   |       
|                                                      |                                       |   |              |        |             |   |        |        |      |   |        |        |  |   |        |       
|Diluted earnings per share                            |                                       | $ | 0.12         |        |             | $ | 0.10   |        |      | $ | 0.46   |        |  | $ | 0.35   |       
|                                                      |                                       |   |              |        |             |   |        |        |      |   |        |        |  |   |        |       
|Weighted average number of common shares
outstanding: |                                       |   |              |        |             |   |        |        |      |   |        |        |  |   |        |       
|                                                      | Basic                                 |   |              | 22,549 |             |   |        | 22,427 |      |   |        | 22,523 |  |   |        | 22,334 | 
|                                                      |                                       |   |              |        |             |   |        |        |      |   |        |        |  |   |        |       
|                                                      | Diluted                               |   |              | 23,127 |             |   |        | 23,542 |      |   |        | 23,424 |  |   |        | 23,571 | 
|                                                      |                                       |   |              |        |             |   |        |        |      |   |        |        |  |   |        |       

The accompanying notes are an integral part of these statements.

3



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NOVEN PHARMACEUTICALS, INC.
Condensed Balance Sheets
(in thousands, except share data)
(unaudited)

|                                     |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |   |        |        | 
|------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | - | ------------------ | ------ | ----------------- | - | ------ | ------ | 
|                                     |  |                                                                                                                                                                             |                                                                                                   |   | September 30, 2002 |        | December 31, 2001
|                                     |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                  
|Assets                               |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  
|Current Assets:                      |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  
|                                     |  |                                                                                                                                                                             | Cash and cash equivalents                                                                         |   | $                  | 59,760 |                   |   | $      | 49,389 | 
|                                     |  |                                                                                                                                                                             | Accounts receivable  trade (less allowance for
doubtful accounts of $75 in 2002 and $28 in 2001) |   |                    | 3,521  |                   |   |        | 1,308  | 
|                                     |  |                                                                                                                                                                             | Accounts receivable  Novogyne                                                                    |   |                    | 2,328  |                   |   |        | 15,158 | 
|                                     |  |                                                                                                                                                                             | Inventories                                                                                       |   |                    | 7,180  |                   |   |        | 4,324  | 
|                                     |  |                                                                                                                                                                             | Net deferred income tax asset                                                                     |   |                    | 3,000  |                   |   |        | 4,800  | 
|                                     |  |                                                                                                                                                                             | Prepaid and other current assets                                                                  |   |                    | 1,032  |                   |   |        | 304    | 
|                                     |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  
|                                     |  |                                                                                                                                                                             | 76,821                                                                                            |   |                    |        | 75,283            |  
|Property, plant and equipment, net   |  |                                                                                                                                                                             | 15,718                                                                                            |   |                    |        | 15,699            |  
|Other Assets:                        |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  
|                                     |  |                                                                                                                                                                             | Investment in Novogyne                                                                            |   |                    | 30,973 |                   |   |        | 32,043 | 
|                                     |  |                                                                                                                                                                             | Net deferred income tax asset                                                                     |   |                    | 9,922  |                   |   |        | 10,150 | 
|                                     |  |                                                                                                                                                                             | Patent development costs, net                                                                     |   |                    | 1,969  |                   |   |        | 2,046  | 
|                                     |  |                                                                                                                                                                             | Deposits and other assets                                                                         |   |                    | 681    |                   |   |        | 1,007  | 
|                                     |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  
|                                     |  | $                                                                                                                                                                           | 136,084                                                                                           |   |                    | $      | 136,228           |  
|                                     |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  
|Liabilities and Stockholders Equity |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  
|Current Liabilities:                 |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  
|                                     |  | Accounts payable                                                                                                                                                            |                                                                                                   | $ | 5,624              |        |                   | $ | 5,620  |       
|                                     |  | Notes payable  current portion                                                                                                                                             |                                                                                                   |   | 8                  |        |                   |   | 252    |       
|                                     |  | Due to Aventis Pharmaceuticals                                                                                                                                              |                                                                                                   |   |                   |        |                   |   | 10,000 |       
|                                     |  | Accrued compensation and related liabilities                                                                                                                                |                                                                                                   |   | 4,085              |        |                   |   | 1,518  |       
|                                     |  | Other accrued liabilities                                                                                                                                                   |                                                                                                   |   | 2,448              |        |                   |   | 4,169  |       
|                                     |  | Deferred license revenue  current portion                                                                                                                                  |                                                                                                   |   | 3,526              |        |                   |   | 7,936  |       
|                                     |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  
|                                     |  |                                                                                                                                                                             | 15,691                                                                                            |   |                    |        | 29,495            |  
|Long-Term Liabilities:               |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  
|                                     |  | Notes payable                                                                                                                                                               |                                                                                                   |   | 7                  |        |                   |   | 13     |       
|                                     |  | Deferred license revenue                                                                                                                                                    |                                                                                                   |   | 26,801             |        |                   |   | 24,822 |       
|                                     |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  
|                                     |  |                                                                                                                                                                             | 42,499                                                                                            |   |                    |        | 54,330            |  
|Commitments and contingencies        |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  
|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 22,553,006 shares at September 30,
2002 and 22,481,977 at December 31, 2001 |                                                                                                   |   | 2                  |        |                   |   | 2      |       
|                                     |  | Additional paid-in capital                                                                                                                                                  |                                                                                                   |   | 78,222             |        |                   |   | 77,394 |       
|                                     |  | Retained earnings                                                                                                                                                           |                                                                                                   |   | 15,361             |        |                   |   | 4,502  |       
|                                     |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  
|                                     |  |                                                                                                                                                                             | 93,585                                                                                            |   |                    |        | 81,898            |  
|                                     |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  
|                                     |  | $                                                                                                                                                                           | 136,084                                                                                           |   |                    | $      | 136,228           |  
|                                     |  |                                                                                                                                                                             |                                                                                                   |   |                    |        |                   |  

The accompanying notes are an integral part of these statements.

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NOVEN PHARMACEUTICALS, INC.
Condensed Statements of Cash Flows
Nine Months Ended September 30,
(in thousands)
(unaudited)

|                                               |                                                                                   |                                                                     |                                                       |        |         |       |        |       |         |        |  
|---------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ----------------------------------------------------- | ------ | ------- | ----- | ------ | ----- | ------- | ------ | -
|                                               |                                                                                   |                                                                     |                                                       |        | 2002    |       | 2001  
|                                               |                                                                                   |                                                                     |                                                       |        |         |       |       
|Cash flows from operating activities:          |                                                                                   |                                                                     |                                                       |        |         |       |        |      
|                                               | Net income                                                                        |                                                                     | $                                                     | 10,859 |         |       | $      | 8,346 |        
|                                               | Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                     |                                                       |        |         |       |        |       |        
|                                               |                                                                                   | Depreciation and amortization                                       |                                                       |        | 1,623   |       |        |       | 1,730   |       
|                                               |                                                                                   | Amortization of patent costs                                        |                                                       |        | 231     |       |        |       | 169     |       
|                                               |                                                                                   | Amortization of non-competition agreement                           |                                                       |        | 300     |       |        |       | 133     |       
|                                               |                                                                                   | Deferred income tax provision                                       |                                                       |        | 2,099   |       |        |       | 699     |       
|                                               |                                                                                   | Recognition of deferred license revenue                             |                                                       |        | (2,504  | )     |        |       | (2,117  | )     
|                                               |                                                                                   | Equity in earnings of Novogyne                                      |                                                       |        | (10,657 | )     |        |       | (9,010  | )     
|                                               |                                                                                   | (Increase) decrease in accounts receivable  trade                  |                                                       |        | (2,213  | )     |        |       | 3,341   |       
|                                               |                                                                                   | Decrease (increase) in accounts receivable  Novogyne               |                                                       |        | 2,830   |       |        |       | (1,896  | )     
|                                               |                                                                                   | (Increase) decrease in inventories                                  |                                                       |        | (2,856  | )     |        |       | 1,341   |       
|                                               |                                                                                   | (Increase) decrease in prepaid and other current assets             |                                                       |        | (728    | )     |        |       | 99      |       
|                                               |                                                                                   | Decrease (increase) in deposits and other assets                    |                                                       |        | 26      |       |        |       | (1,131  | )     
|                                               |                                                                                   | Increase (decrease) in accounts payable                             |                                                       |        | 4       |       |        |       | (368    | )     
|                                               |                                                                                   | Increase (decrease) in accrued compensation and related liabilities |                                                       |        | 2,567   |       |        |       | (38     | )     
|                                               |                                                                                   | (Decrease) increase in other accrued liabilities                    |                                                       |        | (1,629  | )     |        |       | 4,164   |       
|                                               |                                                                                   | Increase in deferred license revenue                                |                                                       |        | 73      |       |        |       | 3,500   |       
|                                               |                                                                                   |                                                                     |                                                       |        |         |       |        |      
|                                               |                                                                                   |                                                                     | Cash flows provided by operating activities           |        |         | 25    |        |       |         | 8,962  |  
|                                              
|Cash flows from investing activities:          |                                                                                   |                                                                     |                                                       |        |         |       |        |      
|                                               |                                                                                   | Purchase of property, plant and equipment, net                      |                                                       |        | (1,642  | )     |        |       | (2,366  | )     
|                                               |                                                                                   | Investment in Novogyne                                              |                                                       |        |        |       |        |       | (15,680 | )     
|                                               |                                                                                   | Distribution from Novogyne                                          |                                                       |        | 11,727  |       |        |       | 13,080  |       
|                                               |                                                                                   | Payments for patent development costs                               |                                                       |        | (154    | )     |        |       | (179    | )     
|                                               |                                                                                   |                                                                     |                                                       |        |         |       |        |      
|                                               |                                                                                   |                                                                     | Cash flows provided by (used in) investing activities |        |         | 9,931 |        |       |         | (5,145 | )
|                                              
|Cash flows from financing activities:          |                                                                                   |                                                                     |                                                       |        |         |       |        |      
|                                               |                                                                                   | Issuance of common stock                                            |                                                       |        | 665     |       |        |       | 2,557   |       
|                                               |                                                                                   | Payments on notes payable                                           |                                                       |        | (250    | )     |        |       | (280    | )     
|                                               |                                                                                   |                                                                     |                                                       |        |         |       |        |      
|                                               |                                                                                   |                                                                     | Cash flows provided by financing activities           |        |         | 415   |        |       |         | 2,277  |  
|                                               |                                                                                   |                                                                     |                                                       |        |         |       |        |      
|Net increase in cash and cash equivalents      |                                                                                   |                                                                     | 10,371                                                |        |         |       | 6,094  |      
|                                              
|Cash and cash equivalents, beginning of period |                                                                                   |                                                                     | 49,389                                                |        |         |       | 40,976 |      
|                                               |                                                                                   |                                                                     |                                                       |        |         |       |        |      
|Cash and cash equivalents, end of period       |                                                                                   | $                                                                   | 59,760                                                |        |         | $     | 47,070 |      
|                                               |                                                                                   |                                                                     |                                                       |        |         |       |        |      

The accompanying notes are an integral part of these statements.

5



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NOVEN PHARMACEUTICALS, INC.
Notes to Unaudited Condensed Financial Statements

1.    DESCRIPTION OF BUSINESS:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Noven Pharmaceuticals, Inc. (Noven) was incorporated in Delaware in
1987 and is engaged in the research, development, manufacture and
marketing of prescription transdermal drug delivery products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | Noven and Novartis Pharmaceuticals Corporation (Novartis) entered
into a joint venture, Vivelle Ventures LLC (d/b/a Novogyne Pharmaceuticals)
(Novogyne), effective May 1, 1998, to market and sell womens
prescription healthcare products in the United States and Canada. These
products include Novens transdermal estrogen delivery systems marketed
under the brand names Vivelle® and Vivelle-Dot® and, effective March 30,
2001, Novens transdermal combination estrogen/progestin delivery system
marketed under the brand name CombiPatch®. Novogynes rights to
CombiPatch® were acquired from Aventis Pharmaceuticals, the U.S.
pharmaceuticals business of Aventis Pharma, AG (Aventis), in March 2001
in a series of transactions involving Noven, Novogyne, Novartis and
Aventis. Noven accounts for its 49% investment in Novogyne under the
equity method and reports its share of Novogynes earnings as Equity in
earnings of Novogyne on its Statements of Operations. Noven defers the
recognition of 49% of its profit on products sold to Novogyne until the
products are sold by Novogyne.

2.    BASIS OF PRESENTATION:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In managements opinion, the accompanying unaudited condensed financial
statements of Noven contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly, in all material
respects, the financial position of Noven as of September 30, 2002, and the
results of its operations for the three and nine months ended September 30,
2002 and 2001. Novens business is subject to numerous risks and
uncertainties including, but not limited to, those set forth in Novens
Annual Report on Form 10-K for the year ended December 31, 2001 (Form
10-K) as well as the risk that the results of recent and ongoing studies on
the adverse health effects of certain forms of hormone replacement therapy
(HRT) may result in lower sales by Noven or Novogyne in future periods and
the risk that the increase in inventory levels at Novogyne and Novogynes
trade customers may have a further material adverse impact on Novens
liquidity, results of operations and business. Accordingly, the results of
operations and cash flows for the three and nine months ended September 30,
2002 and 2001 are not, and should not be construed as, necessarily
indicative of the results of operations or cash flows which may be reported
for the remainder of 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Pursuant to such rules and
regulations, certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. The unaudited condensed financial statements should be read in
conjunction with the financial statements and the notes to the financial
statements included in Novens Form 10-K.

6



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| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accounting policies followed for interim financial reporting are
the same as those disclosed in Note 2 of the notes to the financial
statements included in Novens Form 10-K.

3.    INVENTORIES:



| |                                                                   
| | ------------------------------------------------------------------
| | The following are the major classes of inventories (in
thousands):

|                |  |               |       |              |  |   |       | 
|--------------- |  | ------------- | ----- | ------------ |  | - | ----- | 
|                |  | September 30, |       | December 31,
|                |  | 2002          |       | 2001        
|                |  |               |       |             
|Finished goods  |  | $             | 1,742 |              |  | $ | 458   | 
|Work in process |  |               | 2,462 |              |  |   | 1,140 | 
|Raw materials   |  |               | 2,976 |              |  |   | 2,726 | 
|                |  |               |       |              |  |   |       | 
|Total           |  | $             | 7,180 |              |  | $ | 4,324 | 
|                |  |               |       |              |  |   |       | 

4.    CASH FLOW INFORMATION:



| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cash payments for income taxes were $4.8 million in 2002 and $0.9
million in 2001. Cash payments for interest were $14,000 in 2002 and
$29,000 in 2001.                                                                                                                                              
|
| | In connection with the CombiPatch® transaction consummated in March
2001, a final $10.0 million quarterly installment of the purchase price was
paid by Novogyne directly to Aventis in March 2002.                                                                                                  
|
| | Noven recorded $0.2 million and $1.3 million in income tax benefits to
additional paid-in capital for the nine months ended September 30, 2002 and
2001, respectively, which were derived from the exercise of non-qualified
stock options and disqualifying dispositions of incentive stock options.

5.    LICENSE AGREEMENTS:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the fourth quarter of 2001, Noven received a $5.0 million milestone
payment from Novartis Pharma AG (Novartis AG) under the Estradot® license
agreement even though the regulatory approval that was to trigger the
milestone payment had not yet been received. Novartis AG received the
applicable regulatory approval in the first quarter of 2002. Accordingly,
the $5.0 million payment was deferred at December 31, 2001 and is being
recognized as license revenue beginning in the first quarter of 2002
through the fourth quarter of 2010.

6.    INVESTMENT IN NOVOGYNE:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Noven shares in the earnings of Novogyne, after satisfaction of an
annual preferred return of $6.1 million to Novartis, according to an
established formula. Novens share of Novogynes earnings increases as
Novogynes product sales increase, subject to a cap of 49%. Novogyne
produced sufficient income in the first quarters of 2002 and 2001 to meet
Novartis annual preferred return for those years and for Noven to
recognize earnings from Novogyne under the formula.

7



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| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | During the three and nine months ended September 30, 2002 and 2001,
Noven had the following transactions with Novogyne (in thousands):

|                           |  |              |       |             |  |      |       |      |  |   |        |  |  |   |        | 
|-------------------------- |  | ------------ | ----- | ----------- |  | ---- | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                           |  | Three Months |       | Nine Months
|                           |  |              |       |            
|                           |  | 2002         |       | 2001        |  | 2002 |       | 2001
|                           |  |              |       |             |  |      |       |     
|Revenue:                   |  |              |       |             |  |      |       |      |  |   |        |  |  |   |        | 
|Trade product              |  | $            | 5,583 |             |  | $    | 2,895 |      |  | $ | 16,187 |  |  | $ | 6,981  | 
|Sample product and other   |  |              | 1,213 |             |  |      | 90    |      |  |   | 3,906  |  |  |   | 1,667  | 
|Royalty                    |  |              | 808   |             |  |      | 1,320 |      |  |   | 3,590  |  |  |   | 3,086  | 
|                           |  |              |       |             |  |      |       |      |  |   |        |  |  |   |        | 
|                           |  | $            | 7,604 |             |  | $    | 4,305 |      |  | $ | 23,683 |  |  | $ | 11,734 | 
|                           |  |              |       |             |  |      |       |      |  |   |        |  |  |   |        | 
|Reimbursed expenses:       |  |              |       |             |  |      |       |      |  |   |        |  |  |   |        | 
|Services                   |  | $            | 4,750 |             |  | $    | 5,016 |      |  | $ | 14,193 |  |  | $ | 11,970 | 
|Product specific
marketing |  |              | 1,970 |             |  |      | 2,455 |      |  |   | 6,155  |  |  |   | 4,294  | 
|                           |  |              |       |             |  |      |       |      |  |   |        |  |  |   |        | 
|                           |  | $            | 6,720 |             |  | $    | 7,471 |      |  | $ | 20,348 |  |  | $ | 16,264 | 
|                           |  |              |       |             |  |      |       |      |  |   |        |  |  |   |        | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of September 30, 2002, Noven had amounts due from Novogyne of $2.3
million for products sold to, and marketing expenses reimbursable by,
Novogyne. At December 31, 2001, Noven had amounts due from Novogyne of
$15.2 million, of which $10.0 million related to the license of CombiPatch®
(which amount was satisfied in March 2002 with the payment of the final
quarterly installment of the CombiPatch® purchase price) and the balance of
which represented amounts due for products sold to, and marketing expenses
reimbursable by, Novogyne.
|
| | The unaudited condensed Statements of Operations of Novogyne for the
three and nine months ended September 30, 2002 and 2001 are as follows (in
thousands):                                                                                                                                                                                                                                                                                                                                                                                             

|                                             |  |              |        |             |  |      |        |      |  |   |        |  |  |   |        | 
|-------------------------------------------- |  | ------------ | ------ | ----------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                             |  | Three Months |        | Nine Months
|                                             |  |              |        |            
|                                             |  | 2002         |        | 2001        |  | 2002 |        | 2001
|                                             |  |              |        |             |  |      |        |     
|Revenues                                     |  | $            | 21,507 |             |  | $    | 28,472 |      |  | $ | 81,936 |  |  | $ | 63,192 | 
|Cost of sales                                |  |              | 6,031  |             |  |      | 5,199  |      |  |   | 17,485 |  |  |   | 11,273 | 
|Selling, general and
administrative expenses |  |              | 9,757  |             |  |      | 9,748  |      |  |   | 30,705 |  |  |   | 22,870 | 
|Amortization of intangible assets            |  |              | 1,545  |             |  |      | 1,548  |      |  |   | 4,635  |  |  |   | 3,089  | 
|                                             |  |              |        |             |  |      |        |      |  |   |        |  |  |   |        | 
|Income from operations                       |  |              | 4,174  |             |  |      | 11,977 |      |  |   | 29,111 |  |  |   | 25,960 | 
|Interest income                              |  |              | 73     |             |  |      | 52     |      |  |   | 237    |  |  |   | 675    | 
|                                             |  |              |        |             |  |      |        |      |  |   |        |  |  |   |        | 
|Net income                                   |  | $            | 4,247  |             |  | $    | 12,029 |      |  | $ | 29,348 |  |  | $ | 26,635 | 
|                                             |  |              |        |             |  |      |        |      |  |   |        |  |  |   |        | 

8



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Subject to the approval of Novogynes management committee, cash may
be distributed to Novartis and Noven based upon a contractual formula. For
the nine months ended September 30, 2002 and 2001, Noven received
distributions of $11.7 million and $13.1 million from Novogyne,
respectively. These amounts were recorded as reductions in the investment
in Novogyne when received. There were no distributions from Novogyne for
the three months ended September 30, 2002 or 2001.
|
| | In connection with the CombiPatch® transaction, for the nine months
ended September 30, 2001, Noven contributed $15.7 million to Novogyne.
This amount was recorded as an increase in the investment in Novogyne when
paid.                                                                                                                                                                                                                                                            

7.    COMMITMENTS AND CONTINGENCIES:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | With respect to the securities complaints filed in November and
December 2001 and January 2002, previously reported in Novens Form 10-K,
on March 12, 2002, the Court entered an order consolidating all of the
captioned actions into a single consolidated action, appointing lead
plaintiffs counsel, and directing lead plaintiffs counsel to file a
single amended and consolidated complaint. On April 11, 2002, the
plaintiffs filed a Consolidated Amended Class Action Complaint
styled In Re
Noven Pharmaceuticals, Inc. Securities Litigation (the Consolidated
Amended Complaint). On May 13, 2002, the defendants filed Motions to
Dismiss, seeking to have the Court dismiss the Consolidated Amended
Complaint with prejudice. The plaintiffs have filed with the Court a
Memorandum in opposition to the defendants motions and have requested oral
argument with regard to defendants motions. On July 26, 2002, defendants
filed reply Memoranda with regard to their motions. These developments did
not have a material effect on the action or on Novens financial position
or results of operations.
|
| | Noven believes the lawsuit is without merit, and intends to vigorously
defend the lawsuit, but its outcome cannot be predicted. The lawsuit, if
determined adversely to Noven, could have a material adverse effect on
Novens financial position and results of operations. Novens ultimate
liability with respect to the lawsuit is presently not determinable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Noven is a party to other pending legal proceedings arising in the
normal course of business, none of which Noven believes is material to its
financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

8.    NEW ACCOUNTING STANDARDS:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Correction.This Statement eliminates extraordinary accounting
treatment for reporting gain or loss on debt extinguishment, and amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. The provisions of this Statement are effective for
Noven with the beginning of fiscal year 2003; however, early application of
the Statement is encouraged. Debt extinguishments reported as extraordinary
items prior to scheduled or early adoption of this Statement would be
reclassified in most cases following adoption. Noven does not anticipate a
significant impact on its results of operations from adopting this
Statement.
|
| | In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities.This Statement requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon managements commitment to an exit plan, which
is generally before an actual liability has been incurred. Adoption of this
Statement is required with the beginning of fiscal year 2003. This
Statement will impact the timing of exit or disposal activities reported by
Noven after adoption.                                                                                                                                                                                                                                                                       

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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion and analysis should be read in conjunction with
the financial statements, the related notes and managements discussion and
analysis of financial condition and results of operations included in Novens
Form 10-K for the year ended December 31, 2001 and the condensed financial
statements and related notes included in Item 1 of this Quarterly Report on
Form 10-Q. Except for historical information contained herein, the matters
discussed in this report are forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, but are not limited to, statements
about Novens and its licensees respective plans, objectives, expectations,
estimates, strategies, prospects, product approvals and development plans, and
anticipated financial results. These statements are typically identified by
the use of terms such as anticipates, believes, estimates, expects,
intends, may, plans, could, should, will, would and similar
words. These statements are based on Novens current expectations and beliefs
concerning future events and are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed herein. Noven
does not undertake to update any of these forward-looking statements or to
announce the results of any revisions to these forward-looking statements
except as required by law.

In addition to the important factors described in Novens Form 10-K for
the year ended December 31, 2001, the following important factors, among
others, could cause Novens actual results to differ materially from those
expressed in any forward-looking statements: uncertainties associated with the
impact on the HRT market of published studies regarding the adverse health
effects of certain forms of HRT; uncertainties associated with future
prescription trends for CombiPatch®, Vivelle® family, Estalis® and Estradot®,
including risks relating to declining physician or patient preference for HRT
as a result of the published studies referred to above; risks associated with
the commercialization of Novens products, including CombiPatch®, Estradot®,
Estalis®, and MethyPatch®; risks and uncertainties associated with the impact
of a Novogyne competitors strategy of increasing market share by heavily
discounting product sales to managed care organizations; risks associated with
the expected launch in 2003 of an estrogen cream product, which is a new dosage
form in this category; risks associated with a recent significant increase in
the level of Vivelle® returns to Novogyne, higher than desirable trade customer
inventory levels of Vivelle® and higher than desirable inventory levels at
Novogyne; risks and uncertainties relating to Novens dependence on
Novartis to monitor trade inventory levels for Novogyne; uncertainties concerning the timing
and extent of Estradot® regulatory approvals and launch orders and Estalis®
orders and commercialization efforts by Novartis AG; uncertainties associated
with the timing, cost and outcomes of clinical trials and product development,
including the regulatory review process for Novens MethyPatch® and any future
generations of Novens combination estrogen/progestin patch; risks and
uncertainties associated with product liability claims that may be brought
against Noven as a result of published studies regarding the adverse health
effects of HRT; Novens dependence on strategic alliances and its relationships
with its licensees, and the vulnerability of Noven to the risks and
uncertainties of its licensees businesses, inventory requirements and
marketing strategies; the risk that Novens licensees may favor their own
competitive products over the products licensed from Noven; risks associated
with the ongoing public debate in the United States regarding the
appropriateness of using methylphenidate and other medications to treat
children with ADHD; the limited ability of Noven to forecast accurately
international product orders from Novartis AG; expected fluctuations in
quarterly revenue and research and development expenses, including fluctuations
in revenues resulting from factors not within

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Novens control and the timing of royalty reconciliations and payments
under Novens license agreements; risks and uncertainties relating to the fact
that a majority of Novens cash flow is dependent upon
Novogynes ability to pay distributions to Noven; the potential impact of
MethyPatch® launch preparation expenses on Novens financial results; the
inherent risk associated with forecasting sales of a new product such as
MethyPatch®; the effect of changes in taxation or accounting principles
generally accepted in the United States (including changes in accounting
principles relating to the accounting treatment for employee stock options);
and economic, competitive, governmental and technological factors affecting
Novens operations, markets, products, prices and prospects.

HRT Studies

In July 2002, the National Institutes of Health (NIH) released data from
its Womens Health Initiative (WHI) study on the risks and benefits
associated with long-term use of oral HRT by healthy women. The NIH announced
that it was discontinuing the arm of the study investigating the use of oral
estrogen/progestin combination HRT products after an average follow-up period
of 5.2 years because the product used in the study was shown to cause an
increase in the risk of invasive breast cancer. The study also found an
increased risk of stroke, heart attacks and blood clots and concluded that
overall health risks exceeded benefits from use of combined estrogen plus
progestin for an average of 5.2 year follow-up among healthy postmenopausal
women. Also in July 2002, results of an observational study sponsored by the
National Cancer Institute (NCI) on the effects of estrogen replacement
therapy (ERT) were announced. The main finding of the study was that
postmenopausal women who used ERT for 10 or more years had a higher risk of
developing ovarian cancer than women who never used HRT. In October 2002, a
significant HRT study being conducted in the United Kingdom was also halted.
Novens transdermal HRT products differ from the products used in the WHI study
and the primary products observed in the NCI and United Kingdom studies. There
are, however, no studies comparing the safety of Novens products
against other HRT therapies.

Although the range of consequences of these studies and the public debate
they have inspired cannot be predicted, it is possible that they could result
in a significant permanent decrease in the market for Novens HRT products
either as physicians withdraw their patients from HRT or as women elect to
discontinue HRT on their own. It is also possible that health care regulators
in the United States and abroad, as a result of these findings, could modify
the permitted use of the products by mandatory product label changes, or remove
the products from the market. Health care regulators also could delay the
approval of new HRT products, such as those presently under development by
Noven and Novartis AG, or require that any new HRT products be subject to more
extensive or more rigorous study and testing prior to being approved. Further,
because these studies show that certain uses of certain HRT products may result
in a higher likelihood of certain adverse health effects, it is possible that
Noven could be named as a defendant in product liability lawsuits relating to
its HRT products.

Other studies evaluating HRT are currently underway or in the planning
stages. In particular, the estrogen-only arm of the WHI study is ongoing.
Noven is unable to predict the effect of these study results on the short and
long-term prospects for the HRT market, generally, or for the market for
Novens transdermal HRT products, specifically. However, since
publication of the WHI and NCI study data, United States prescriptions
have declined for substantially all HRT

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products, including Novens products.
If the ongoing estrogen-only arm of the WHI study or any other currently ongoing HRT study is halted, the market for HRT
products, including Novens, both in the United States and abroad, could be
further adversely impacted. Currently, Novens liquidity, results of
operations and business prospects are almost entirely dependent on sales of,
and license royalties and fees related to the sales of, transdermal HRT
products. Accordingly, any further adverse change in the market for HRT
products (including any adverse changes resulting from the foregoing studies)
could have a material adverse impact on Novens liquidity, results of
operations and business prospects.

Novogyne Inventory and Sales

Under the terms of the Novogyne joint venture, Novartis is responsible for
distribution of Novogynes products, including Vivelle®, and for selling
Novogynes products to its trade customers. Novartis regularly
reports inventory information to the Novogyne Management Committee. Novartis has reported
that trade inventory levels of Vivelle® in the aggregate are higher than in
prior periods and appear to have grown to levels that exceed current demand.
In each of the first three quarters of 2002, Novogyne increased its reserve for
sales allowances and returns. In the third quarter, the increase was
significantly higher than in the first and second quarters.

In addition, inventory levels at Novogyne have increased and are higher
than desirable. To begin to align inventories with current demand, Novogyne is
curtailing product shipments to its trade customers, and Noven is deferring
product shipments to Novogyne. These actions will adversely impact Noven and
Novogynes financial results. Sales of Novogynes products in future periods
will be adversely impacted as trade customers reduce their inventories to
historical levels (or even lower as a result of the recent studies) and as
Novogyne and Noven take affirmative steps to reduce inventory levels. Sales
from Noven to Novogyne, and Novens gross margin on sales, will also be
adversely impacted, both as a result of declining orders from trade customers
seeking to reduce their inventory levels (which would reduce Novogynes sales)
and Novogynes higher than normal inventory levels (which would reduce Novens
sales to Novogyne). A decline in prescriptions of Novogynes HRT products,
whether as a result of the recent or ongoing studies or otherwise, could
further exacerbate this situation. Noven is unable to predict either the
timing or the magnitude of the impact of this situation on future sales and
results of operations.

MethyPatch®

In the first quarter of 2002, Noven completed a second Phase III clinical
trial for MethyPatch®, and Novens review of the primary efficacy data from the
trial indicates that MethyPatch® reduces the symptoms of Attention Deficit
Hyperactivity Disorder (ADHD). Noven filed a New Drug Application (NDA)
with the United States Food and Drug Administration (FDA) in June 2002. If
Novens MethyPatch® NDA is approved, Noven intends to establish its own sales
force to market the product. In such event, Noven would expect that its sales
and marketing expenses would increase during the remainder of 2002 and into
2003 as it prepares for the expected commercialization of the product in late
2003. No assurance can be given that the product will be approved by the FDA
or that, if approved, it will be marketed successfully. The FDA will
examine efficacy data from the recently completed Phase III study together
with safety and other data from this and other MethyPatch® studies sponsored by
Noven, and there can be no assurance that the FDA will deem all of such data
sufficient to approve the product for marketing or to authorize the products
use in the manner described by Noven. Noven believes that MethyPatch® is the
first transdermal ADHD product submitted to FDA for approval, and there can be
no assurance that the

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FDA will not have questions or raise objections that
could delay or prevent an approval. Additionally, there can be no assurance
that the FDA will not place conditions or restrictions on any approval that it
may grant, which conditions or restrictions could adversely affect the market
potential of MethyPatch®.

Results of Operations

Three and nine months ended September 30, 2002 compared to three and nine
months ended September 30, 2001

Revenues:

Total revenues for the three and nine months ended September 30, 2002 and
2001 are summarized as follows (dollar amounts in thousands):

|                                                        |  |              |        |             |  |        |        |      |  |            |    |        |  |   |        |   |  |   |        |            |  |  |    |  
|------------------------------------------------------- |  | ------------ | ------ | ----------- |  | ------ | ------ | ---- |  | ---------- | -- | ------ |  | - | ------ | - |  | - | ------ | ---------- |  |  | -- | -
|                                                        |  | Three Months |        | Nine Months
|                                                        |  |              |        |            
|                                                        |  |              |        |             |  |        |        |      |  | Percentage |    |        |  |   |        |   |  |   |        | Percentage
|                                                        |  | 2002         |        | 2001        |  | Change |        | 2002 |  | 2001       |    | Change
|                                                        |  |              |        |             |  |        |        |      |  |            |    |       
|Product sales                                           |  | $            | 12,317 |             |  | $      | 9,705  |      |  |            | 27 | %      |  | $ | 39,585 |   |  | $ | 33,569 |            |  |  | 18 | %
|License revenue                                         |  |              | 881    |             |  |        | 698    |      |  |            | 26 | %      |  |   | 2,504  |   |  |   | 2,117  |            |  |  | 18 | %
|                                                        |  |              |        |             |  |        |        |      |  |            |    |        |  |   |        |   |  |   |        |            |  |  |    |  
|Total revenue                                           |  | $            | 13,198 |             |  | $      | 10,403 |      |  |            | 27 | %      |  | $ | 42,089 |   |  | $ | 35,686 |            |  |  | 18 | %
|                                                        |  |              |        |             |  |        |        |      |  |            |    |        |  |   |        |   |  |   |        |            |  |  |    |  
|Gross profit (product sales less
cost of products sold) |  | $            | 7,206  |             |  | $      | 4,723  |      |  |            | 53 | %      |  | $ | 22,553 |   |  | $ | 17,877 |            |  |  | 26 | %
|                                                        |  |              |        |             |  |        |        |      |  |            |    |        |  |   |        |   |  |   |        |            |  |  |    |  
|Gross margin
(as a percentage of product
sales)         |  |              | 59     | %           |  |        | 49     | %    |  |            |    |        |  |   | 57     | % |  |   | 53     | %          |  |  |    |  
|                                                        |  |              |        |             |  |        |        |      |  |            |    |        |  |   |        |   |  |   |        |            |  |  |    |  

The increase in total revenues for the three months ended September 30,
2002 over the same period in 2001 was primarily attributable to an increase in
product sales. Product sales were higher in 2002 than 2001 as a result of
increases in sales of Vivelle-Dot® and Vivelle® to Novogyne and sales of
Estradot® to Novartis AG (which commenced in the first quarter of 2002),
partially offset by lower sales of CombiPatch® to Novogyne.

The increase in total revenues for the nine months ended September 30,
2002 over the same period in 2001 was primarily attributable to the same
factors stated above, offset by lower sales of Menorest® and Estalis® outside
the United States. In addition, product sales for the nine months ended
September 30, 2001 included $1.4 million in minimum fee payments related to the
sales of Menorest® in certain European countries in 2000. This minimum fee
payment did not recur in 2002.

As noted above, trade inventory levels of Vivelle® in the aggregate are
higher than in prior periods and appear to have grown to levels that exceed
current demand. In each of the first three
quarters of 2002, Novogyne increased its reserve for sales allowances and
returns. In the third quarter, the increase was significantly higher than in
the first and second quarters. In addition, inventory levels at Novogyne have
also increased and are higher than desirable. Accordingly, to the extent that
Novens revenues were increased by sales that resulted in those higher
inventory levels, sales in future periods will be adversely impacted.

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Gross Margin:

Novens gross margin was 59% (or gross profit of $7.2 million) for the
three months ended September 30, 2002 versus 49% (or gross profit of $4.7
million) for the three months ended September 30, 2001. The increase in gross
margin was primarily due to increases in production volume resulting in more
favorable overhead absorption and favorable product mix as Noven sold more
product in the United States.

Novens gross margin was 57% (or gross profit of $22.6 million) for the
nine months ended September 30, 2002 versus 53% (or gross profit of $17.9
million) for the nine months ended September 30, 2001. The increase in gross
margin was primarily due to favorable product mix as Noven sold more product in
the United States and to increases in production volume resulting in more
favorable overhead absorption, partially offset by a lower minimum fee payment
in the 2002 period.

As trade customers or Novogyne reduce their orders in an attempt to return
their inventories to desirable levels or as Novogyne takes affirmative steps to
reduce trade customer inventory levels, Novens gross margin (and gross profit)
for future periods will be adversely impacted.

Operating Expenses:

Operating expenses for the three and nine months ended September 30, 2002
and 2001 are summarized as follows (dollar amounts in thousands):

|                                      |  |              |       |             |  |        |       |      |  |            |     |        |  |   |        |  |  |   |       |            |  |  |    |  
|------------------------------------- |  | ------------ | ----- | ----------- |  | ------ | ----- | ---- |  | ---------- | --- | ------ |  | - | ------ |  |  | - | ----- | ---------- |  |  | -- | -
|                                      |  | Three Months |       | Nine Months
|                                      |  |              |       |            
|                                      |  |              |       |             |  |        |       |      |  | Percentage |     |        |  |   |        |  |  |   |       | Percentage
|                                      |  | 2002         |       | 2001        |  | Change |       | 2002 |  | 2001       |     | Change
|                                      |  |              |       |             |  |        |       |      |  |            |     |       
|Research and development              |  | $            | 2,585 |             |  | $      | 3,716 |      |  |            | (30 | %)     |  | $ | 9,267  |  |  | $ | 8,353 |            |  |  | 11 | %
|Marketing, general and
administrative |  |              | 3,492 |             |  |        | 3,383 |      |  |            | 3   | %      |  |   | 10,104 |  |  |   | 9,219 |            |  |  | 10 | %

Research and Development

The $1.1 million, or 30%, decrease in research and development expenses
for the three months ended September 30, 2002 compared to the same period in
2001 was primarily attributable to a decrease in clinical study expenses for
MethyPatch® due to the timing of clinical trials. The $0.9 million, or 11%,
increase in research and development expenses for the nine months ended
September 30, 2002 over the same period in 2001 was primarily attributable to
increases in purchases of materials and personnel costs for new product
development.

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Marketing, General and Administrative Expenses

The $0.1 million, or 3%, increase in marketing, general and administrative
expenses for the three months ended September 30, 2002 over the same period in
2001 was primarily attributable to increases in pre-launch marketing expenses
for MethyPatch®, offset by lower outside consulting services related to the
implementation of Novens enterprise resource planning system and nonrecurring
reserves for obsolete production equipment in the prior year. The $0.9 million,
or 10%, increase in marketing, general and administrative expenses for the nine
months ended September 30, 2002 over the same period in 2001 was primarily
attributable to the same factors.

Interest Income:

Interest income, net, decreased approximately $0.2 million and $0.9
million, or 44% and 58%, for the three and nine months ended September 30,
2002, respectively, compared to the same periods in 2001, primarily due to
lower interest rates.

Income Taxes:

Novens effective tax rate decreased to 34.9% for the three months ended
September 30, 2002 from 38.6% for the three months ended September 30, 2001 and
increased to 36.0% for the nine months ended September 30, 2002 from 35.5% for
the nine months ended September 30, 2001. The provision for income taxes is
based on the Federal statutory and state income tax rates. In addition, net
deferred income tax assets are measured using the average graduated tax rate
for the estimated amount of annual taxable income in the years that the
liability is expected to be settled or the asset recovered. The effect of
adjusting the expected tax rate related to the net deferred income tax assets
is included in the provision for income taxes. As of September 30, 2002, Noven
had a net deferred tax asset of $12.9 million. Realization of this deferred
tax asset depends upon the generation of sufficient future taxable income.
Although realization is not assured, management believes it is more likely than
not that the deferred income tax asset will be realized based upon estimated
future taxable income.

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Equity in Earnings of Novogyne:

Noven shares in the earnings of Novogyne, after satisfaction of an annual
preferred return of $6.1 million to Novartis, according to an established
formula. Novogyne produced sufficient income in the first quarters of 2002 and
2001 to meet Novartis annual preferred return for those years and for Noven to
recognize earnings from Novogyne under the formula. Noven reports its share of
Novogynes earnings as Equity in earnings of Novogyne on its Statements of
Operations.

The financial results of Novogyne for the three and nine months ended
September 30, 2002 and 2001 are summarized as follows (dollar amounts in
thousands):

|                                       |  |                                              |                         |   |        |              |       |             |        |        |     |      |     |            |        |        |        |        |       |   |        |        |    |            |     |    |   | 
|-------------------------------------- |  | -------------------------------------------- | ----------------------- | - | ------ | ------------ | ----- | ----------- | ------ | ------ | --- | ---- | --- | ---------- | ------ | ------ | ------ | ------ | ----- | - | ------ | ------ | -- | ---------- | --- | -- | - | 
|                                       |  |                                              |                         |   |        | Three Months |       | Nine Months
|                                       |  |                                              |                         |   |        |              |       |            
|                                       |  |                                              |                         |   |        |              |       |             |        |        |     |      |     | Percentage |        |        |        |        |       |   |        |        |    | Percentage
|                                       |  |                                              |                         |   |        | 2002         |       | 2001        |        | Change |     | 2002 |     | 2001       |        | Change
|                                       |  |                                              |                         |   |        |              |       |             |        |        |     |      |     |            |        |       
|Novogynes Summary Results:            |  |                                              |                         |   |        |              |       |             |        |        |     |      |     |            |        |        |        |        |       |   |        |        |    |           
|                                       |  | Revenues                                     |                         | $ | 21,507 |              |       | $           | 28,472 |        |     |      | (24 | %)         |        | $      | 81,936 |        |       | $ | 63,192 |        |    |            | 30  | % 
|                                       |  | Cost of sales                                |                         |   | 6,031  |              |       |             | 5,199  |        |     |      | 16  | %          |        |        | 17,485 |        |       |   | 11,273 |        |    |            | 55  | % 
|                                       |  |                                              |                         |   |        |              |       |             |        |        |     |      |     |            |        |        |        |        |       |   |        |        |    |            |     |   
|                                       |  |                                              | Gross profit            |   |        | 15,476       |       |             |        | 23,273 |     |      |     | (34        | %)     |        |        | 64,451 |       |   |        | 51,919 |    |            |     | 24 | %
|                                       |  |                                              | Gross margin percentage |   |        | 72           | %     |             |        | 82     | %   |      |     |            |        |        |        | 79     | %     |   |        | 82     | %  |            |     |    |  
|                                       |  | Selling, general and administrative
expenses |                         |   | 9,757  |              |       |             | 9,748  |        |     |      |    |            |        |        | 30,705 |        |       |   | 22,870 |        |    |            | 34  | % 
|                                       |  | Amortization of intangible assets            |                         |   | 1,545  |              |       |             | 1,548  |        |     |      |    |            |        |        | 4,635  |        |       |   | 3,089  |        |    |            | 50  | % 
|                                       |  |                                              |                         |   |        |              |       |             |        |        |     |      |     |            |        |        |        |        |       |   |        |        |    |            |     |   
|                                       |  |                                              | Income from operations  |   |        | 4,174        |       |             |        | 11,977 |     |      |     | (65        | %)     |        |        | 29,111 |       |   |        | 25,960 |    |            |     | 12 | %
|                                       |  | Interest income                              |                         |   | 73     |              |       |             | 52     |        |     |      | 40  | %          |        |        | 237    |        |       |   | 675    |        |    |            | (65 | %)
|                                       |  |                                              |                         |   |        |              |       |             |        |        |     |      |     |            |        |        |        |        |       |   |        |        |    |            |     |   
|                                       |  |                                              | Net income              |   | $      | 4,247        |       |             | $      | 12,029 |     |      |     | (65        | %)     |        | $      | 29,348 |       |   | $      | 26,635 |    |            |     | 10 | %
|                                       |  |                                              |                         |   |        |              |       |             |        |        |     |      |     |            |        |        |        |        |       |   |        |        |    |            |     |   
|Novens equity in earnings of Novogyne |  | $                                            | 2,010                   |   |        | $            | 5,278 |             |        |        | (62 | %)   |     | $          | 10,657 |        |        | $      | 9,010 |   |        |        | 18 | %         
|                                       |  |                                              |                         |   |        |              |       |             |        |        |     |      |     |            |        |        |        |        |       |   |        |        |    |            |     |   

The decrease in Novogynes revenues of $7.0 million, or 24%, for the three
months ended September 30, 2002 as compared to the same period in 2001 is
primarily attributable to higher sales allowances and returns and decreased
sales of each of Novogynes products. Revenues for the three months ended
September 30, 2002 and 2001 are net of sales allowances and returns of $9.4
million and $4.3 million, respectively. The increase in sales allowances and
returns is due primarily to higher returns of Vivelle®. The increase in
Novogynes revenues of $18.7 million, or 30%, for the nine months ended
September 30, 2002 as compared to the same period in 2001 is primarily
attributable to increased sales of Vivelle-Dot® and Vivelle® and the addition
of CombiPatch® (licensed by Novogyne in March 2001) offset by higher sales
allowances and returns. Revenues for the nine months ended September 30, 2002
and 2001 are net of sales allowances and returns of $20.4 million and $10.2
million, respectively. The increase in sales allowances and returns is
primarily attributable to increased sales of all products and higher returns of
Vivelle®.

Novogynes gross margin was 72% (or gross profit of $15.5 million) for the
three months ended September 30, 2002 versus 82% (or gross profit of $23.3
million) for the three months ended September 30, 2001. Novogynes gross
margin was 79% (or gross profit of $64.5 million) for the nine months ended
September 30, 2002 versus 82% (or gross profit of $51.9 million) for the nine
months ended September 30, 2001. The decrease in gross margin is primarily
attributable to higher sales allowances and returns in 2002, an increase in
inventory obsolescence reserves for 2002 and the addition of CombiPatch® in
March 2001.

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Novogynes selling, general and administrative expenses remained
relatively consistent, increasing to $9.8 million for the three months ended
September 30, 2002 from $9.7 million in 2001. Novogynes selling, general and
administrative expenses increased to $30.7 million for the nine months ended
September 30, 2002 from $22.9 million in 2001 primarily due to higher
promotional expenses, an approximate 20% increase in the size of the Novogyne
sales force, higher royalties to Noven on product sales and higher sample
expense.

Novogyne amortized $1.5 million related to the CombiPatch® acquisition
cost during the three months ended September 30, 2002 and 2001, respectively,
and $4.6 million and $3.1 million during the nine months ended September 30,
2002 and 2001, respectively. CombiPatch® was licensed by Novogyne in March
2001.

Liquidity and Capital Resources

As of September 30, 2002 and December 31, 2001, Noven had $59.8 million
and $49.4 million in cash and cash equivalents, and working capital of $61.1
million and $45.8 million, respectively.

Cash provided by (used in) operating, investing and financing activities
for the nine months ended September 30, 2002 and 2001 is summarized as follows
(amounts in thousands):

|            |                      |  |      |       |      |  |   |        |  
|----------- | -------------------- |  | ---- | ----- | ---- |  | - | ------ | -
|            |                      |  | 2002 |       | 2001
|            |                      |  |      |       |     
|Cash flows: |                      |  |      |       |      |  |   |       
|            | Operating activities |  | $    | 25    |      |  | $ | 8,962  |  
|            | Investing activities |  |      | 9,931 |      |  |   | (5,145 | )
|            | Financing activities |  |      | 415   |      |  |   | 2,277  |  

Operating Activities:

Net cash provided by operating activities for the nine months ended
September 30, 2002 primarily resulted from changes in working capital due to
the timing and amount of product shipments resulting in a higher inventory
balance and the timing and amounts paid for income taxes, research and
development, sales and marketing expenses and personnel costs. A non-cash
operating item (equity in earnings of Novogyne of $10.7 million) constituted
approximately 63% of Novens income before income taxes of $17.0 million.

Net cash provided by operating activities for the nine months ended
September 30, 2001 included the receipt of a one-time license fee in the amount
of $3.5 million from Aventis in connection with the CombiPatch® license
transaction. Operating results and changes in working capital accounted for
most of the remaining increase.

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Investing Activities:

Net cash provided by investing activities for the nine months ended
September 30, 2002 was primarily attributable to a distribution received from
Novogyne of $11.7 million, partially offset by the purchase of fixed assets and
payments for patent development costs.

Net cash of approximately $5.1 million was used in investing activities
during the first nine months of 2001. During that period, Noven received
distributions totaling $13.1 million from Novogyne. In connection with the
CombiPatch® transaction, Noven contributed $15.7 million to Novogyne as its
proportionate share of the payments to Aventis. In addition, Noven purchased
$2.4 million in property, plant and equipment, net, of which the most
significant asset related to software for the enterprise resource planning
system.

Financing Activities:

Net cash provided by financing activities for the nine months ended
September 30, 2002 was primarily attributable to cash received in connection
with the issuance of common stock from the exercise of stock options, partially
offset by the payoff of all borrowings under a master lease facility in March
2002.

Net cash provided by financing activities for the nine months ended
September 30, 2001 was attributable to cash received in connection with the
issuance of common stock from the exercise of stock options, partially offset
by payments made on notes payable.

Short-Term and Long-Term Liquidity:

In December 2000, Noven entered into a secured revolving credit facility
(the Credit Facility) providing for borrowings of up to the lesser of $10.0
million or eligible accounts receivable. The term of the Credit Facility was
extended in March 2002, and it will now terminate in April 2003. The Credit
Facility bears interest at LIBOR plus 1.50% (3.319% at September 30, 2002). At
September 30, 2002 and December 31, 2001, there were no amounts outstanding
under the Credit Facility. Terms of the Credit Facility include, among other
things, minimum net worth, revenue and operating results requirements, as well
as certain financial ratios, measured on a quarterly basis.

Novens principal sources of short-term liquidity are existing cash, cash
generated from product sales, fees and royalties under license agreements,
distributions from Novogyne, and, if necessary, borrowings under its Credit
Facility. As discussed above, for the nine months ended September 30, 2002,
approximately 63% of Novens income before income taxes was comprised of equity
in earnings of Novogyne, and, presently, Novens short-term liquidity is almost
entirely dependent on sales of, license royalties and fees related to sales of,
transdermal HRT products. Any continued decrease in the sales of those
products by Noven or its licensees or increase in returns of products to
Novogyne (including any such changes resulting from the results of the recent
or ongoing HRT studies discussed above or decreases resulting from Novogyne
and/or Novogynes trade customers reducing their inventory levels), the failure
of the transdermal HRT market to resume its prior growth trends, or the
inability or failure of Novogyne to pay distributions would have a material
adverse effect on Novens short-term liquidity and require Noven to rely more
heavily on its existing cash reserves or on borrowings under its Credit
Facility to support its operations and business. Although Noven expects to
receive distributions from Novogyne, Noven did not receive such a

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distribution during the three months ended September 30, 2002, and there
can be no assurance that Novogyne will have sufficient profits or cash flow to
pay distributions or that Novogynes Management Committee will authorize such
distributions. In addition, sales and marketing expenses for MethyPatch® and
capital expenditures in anticipation of the launch of MethyPatch® are expected
to increase over the next twelve months, and such increase could have a
material adverse effect on Novens liquidity until such time, if any, as sales
of MethyPatch® offset such expenses.

Noven believes that it will have sufficient cash available to meet its
operating needs and anticipated short-term capital requirements. For the long
term, Noven intends to utilize funds derived from the above sources, as well as
funds generated through sales of products under development or products that
Noven may license or acquire from others. Noven expects that such funds will
be comprised of payments received pursuant to future licensing arrangements, as
well as Novens direct sales of its own products. Noven expects that its cash
requirements will continue to increase, primarily to fund clinical studies for
products under development, for plant and equipment to expand production
capacity and for MethyPatch® sales and marketing expenses. There can be no
assurance that Noven will successfully complete the development of such
products, that Noven will obtain regulatory approval for any such products,
that any approved product may be produced in commercial quantities, at
reasonable costs, and be successfully marketed, or that Noven will successfully
negotiate future licensing or product acquisition arrangements. Because much of
the cost associated with product development is incurred prior to product
launch, if Noven is unable to launch additional commercially viable products
that it develops or that it licenses or acquires from others, Noven will have
incurred the up-front costs associated with product development or acquisition
without the benefit of the liquidity generated by sales of those products,
which could adversely affect Novens long-term liquidity needs.

In addition, Noven is unable to predict the effect of the results of the
discontinued and ongoing HRT studies discussed above on the short and long-term
prospects for the HRT market, generally, or for the market for Novens
transdermal HRT products, specifically. Accordingly, Noven is not able to
predict the result that those studies may have on Novens short-term or
long-term liquidity, results of operations and business prospects.

To the extent that capital requirements exceed available capital, Noven
will seek alternative sources of financing to fund its operations. In addition
to the Credit Facility, which expires in April 2003, alternative financing may
be needed to fund further activities. No assurance can be given that
alternative financing will be available, if at all, in a timely manner, or on
favorable terms. If Noven is unable to obtain satisfactory alternative
financing, Noven may be required to delay or reduce its proposed expenditures,
including expenditures for research and development and plant and equipment, in
order to meet its future cash requirements.

New Accounting Standards

In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Correction.This Statement eliminates extraordinary accounting treatment for
reporting gain or loss on debt extinguishment, and amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of this Statement are effective for Noven with the beginning of
fiscal year 2003; however, early application of the Statement is encouraged.
Debt extinguishments reported as extraordinary items prior to scheduled or
early adoption of this Statement would be reclassified in most cases
following adoption. Noven does not anticipate a significant impact on its
results of operations from adopting this Statement.

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In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities.This Statement requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon managements commitment to an exit plan, which is generally before
an actual liability has been incurred. Adoption of this Statement is required
with the beginning of fiscal year 2003. This Statement will impact the timing
of exit or disposal activities reported by Noven after adoption.

Critical Accounting Policies

Novens discussion and analysis of its financial condition and results of
operations are based upon its condensed financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States for interim reporting. The preparation of these condensed
financial statements requires Noven to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, Noven
evaluates its estimates, including those related to allowance for doubtful
accounts, inventories, intangible assets, accrued liabilities, income and other
tax accruals, revenue recognition and contingencies and litigation. Noven
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Many of
Novens critical accounting policies are those which Noven believes require the
most subjective or complex judgments; often as a result of the need to make
estimates about the effect of matters that are inherently uncertain. As a
result, applying different assumptions or estimates in the application of those
critical accounting policies could result in materially different amounts being
reported in Novens financial results. A discussion of Novens critical
accounting policies, the underlying judgments and uncertainties affecting their
application and the likelihood that materially different amounts would be
reported under different conditions or using different assumptions, is as
follows:

Revenue Recognition:

Substantially all of Novens product sales are to its licensees, Novogyne
and Novartis AG. Revenues from product sales are recognized at the time of
shipment. However, as discussed in Note 1 to the condensed financial statements
included in Item 1 of this Quarterly Report on Form 10-Q, Noven defers the
recognition of 49% of the profit on its product sales to Novogyne until those
products are sold by Novogyne. Certain license agreements provide for an
adjustment to the price of the product based upon the licensees actual sales
price. Noven records such adjustments to revenues at the time that the
information necessary to make the determination is received from the licensees.
Certain license agreements entitle Noven to minimum fees. Noven records
revenue related to minimum fees when sufficient supporting data is provided by
the licensee. If the minimum fees are not determinable, Noven records these
fees on a cash basis. These fees are included in product sales. Royalty
revenue consists of royalties payable by Novogyne from sales of Vivelle® and
Vivelle-Dot® in the United States and Canada. Royalty revenue is recognized
when earned and determinable and is included in product sales.

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License revenue consists of up-front, milestone and similar payments under
license agreements and is recognized when earned under the terms of the
applicable agreements. In most cases, license revenue is deferred and
recognized over the estimated product life cycle or the length of relevant
patents, whichever is shorter. These estimates of product life cycle or the
length of relevant patents may prove to be inaccurate, in which case any
resulting adjustments to the associated license revenue would be recognized in
Novens revenue at the time of such determination.

Contract revenue consists of contract development fees and milestone
payments earned under contracts with third parties. Noven recognizes revenue
under the agreements as the work is performed. These estimates of work
completed under the contract may prove to be inaccurate, in which case any
resulting adjustments to contract revenue recorded would be recognized in
Novens revenue at the time of such determination. Deferred revenue represents
the portion of all refundable and nonrefundable payments received that have not
been earned. Costs incurred in performing contract development services are
included in research and development expenses. Refundable development and
license fee payments are deferred until the specified performance criteria are
achieved. Contract revenue is included in product sales.

Fair Value of Stock Options:

Noven has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related Interpretations in
accounting for its employee stock options as allowed pursuant to FASB Statement
No. 123. Accordingly, no compensation expense has been recognized in the three
and nine months ended September 30, 2002 and 2001 and for the years ended
December 31, 2001, 2000 and 1999.

Novens accounting for its employee stock options complies with accounting
practices generally accepted in the United States. However, from time to time,
proposals have been put forth to change the method of accounting for employee
stock options that, if adopted, would require Noven to include the fair value
of employee stock options in its compensation expense. As a result of recent
events in the business and financial community of the United States, Congress,
the Securities and Exchange Commission and the accounting profession have been
engaged in the process of reevaluating practices concerning employee
compensation and its accounting, and several new proposals concerning the
proper accounting for employee stock options have recently been put forth. It
is not possible to predict whether any such proposal will ultimately be
adopted, or, if such a policy is adopted, what its requirements may be.
However, it is possible that Noven may in the future be required under
accounting principles generally accepted in the United States to include the
fair value of its employee stock options in its compensation expense.

Had compensation cost for Novens stock option plans been determined on
the basis of the fair value at the grant date for awards under those plans,
consistent with FASB Statement No. 123 and Novens existing valuation method
for its employee stock options, the Black-Scholes option pricing model, Noven
estimates that its net income for the years ended December 31, 2001, 2000 and
1999 would have been reduced by 50%, 16% and 20%, respectively. However, FASB
Statement No. 123 requires the use of option valuation models that require the
input of highly subjective assumptions, including expected stock price
volatility, and to date, a uniform standard for calculating the fair value of
employee stock options in accordance with FASB Statement No. 123 has not been
adopted. Because Novens stock options have characteristics significantly
different from traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in managements
opinion, the existing models do not necessarily provide a reliable measure

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of the fair value of its employee stock options. In addition, the effect
of applying the fair value method of accounting for stock options on reported
net income for 2001, 2000 and 1999 may not be representative of the effects for
future years because outstanding options vest over a period of several years
and additional awards are generally made each year.

Income Taxes:

Accounting principles generally accepted in the United States require that
Noven not record a valuation allowance against its net deferred tax asset if it
is more likely than not that Noven will be able to generate sufficient future
taxable income to utilize its net deferred tax asset. Although realization is
not assured, Noven believes it is more likely than not that the net deferred
income tax asset will be realized based upon estimated future taxable income of
Noven and, accordingly, no valuation allowance for the net deferred income tax
asset was deemed necessary. Subsequent revisions to the estimated net
realizable value of the net deferred tax asset could cause Novens provision
for income taxes to vary significantly from period to period.

Investment in Novogyne:

Noven and Novartis entered into a joint venture (Novogyne), effective May
1, 1998, to market and sell womens prescription healthcare products in the
United States and Canada. Noven accounts for its 49% investment in Novogyne
under the equity method and reports its share of Novogynes earnings as Equity
in earnings of Novogyne on its Condensed Statements of Operations. Noven
defers the recognition of 49% of its profit on products sold to Novogyne until
the products are sold by Novogyne.

As of September 30, 2002, Novogyne had a long-term asset of $52.5 million
related to the acquisition of the marketing rights to CombiPatch®. Accounting
principles generally accepted in the United States require that Novogyne record
this asset at cost and that the asset be tested for recoverability whenever
events or changes in circumstances indicate that its carrying amount may not be
recoverable. Testing for impairment requires Novogyne to estimate the
undiscounted future cash flow of the asset and compare that amount to the
carrying value of the asset. If such analysis indicates that a possible
impairment exists (undiscounted future cash flows are less than the carrying
value), Novogyne would be required to estimate the fair value of the asset.
The determination of fair value of this asset involves numerous uncertainties
because there is no viable actively traded market for the marketing rights of a
pharmaceutical product. As permitted by accounting principles generally
accepted in the United States, Novogyne determines the estimated fair value of
the marketing rights of CombiPatch® utilizing a discounted cash flows analysis.
A discounted cash flow analysis values an asset on the basis of the net
present value of the cash expected to be generated by that asset over its
estimated useful life. This analysis requires Novogyne to make a number of
significant assumptions and judgments. For example, estimates need to be made
regarding prescription growth, sales price and unit cost among many other
factors including the applicable discount rate to be applied to the estimated
cash generated by the marketing rights. If there is a material change in any
of these assumptions, Novogyne may be required to record a valuation allowance,
which would adversely affect Novogynes operating results during the period in
which the determination or allowance were made, and would, consequently, also
reduce the amount of Novens earnings attributable to its investment in
Novogyne for that period and the amount of Novens investment in Novogyne.
Neither Noven nor Novogyne is able to predict the effect of the results of the
recently discontinued and currently ongoing HRT studies on the short and
long-term

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prospects for the HRT market, generally, or for the market for CombiPatch®
specifically. Any adverse change in the market for HRT products (including any
adverse changes resulting from the foregoing studies) could have a material
adverse impact on the ability of Novogyne to recover its investment in its
marketing rights of CombiPatch® which could require Novogyne to impair that
asset.

Novogyne records its sales net of sales allowances for chargebacks,
Medicaid rebates, managed healthcare rebates, cash discounts, product returns
and other allowances. The returns portion of the sales allowance is based in
part on Novartis returned goods policy. Novartis controls and maintains the
reserves associated with such sales allowances and returns on behalf of
Novogyne and pays all monies owed and issues credits to individual customers as
deemed necessary. The contracts that underlie these transactions are
maintained by Novartis for its business as a whole and those transactions
relating to Novogyne are estimated by Novartis. Based on an analysis of the
underlying activity, the amounts recorded by Novogyne represents Novartis best
estimate of these charges that apply to sales of Novogyne. However, neither
Novogyne nor Noven can control Novartis analysis of the underlying activity or
its application of that analysis to Novogyne. If Novartis materially changes
the assumptions it uses in allocating reserves or in the actual determination
of the gross reserve, Novogyne may be required to record an additional reserve
allowance on its financial statements, which would adversely affect Novogynes
operating results during the period in which the determination or reserve were
made, and would, consequently also reduce Novens earnings attributable to its
investment in Novogyne for that period.

The critical accounting policies discussed herein are not intended to be a
comprehensive list of all of Novens accounting policies. In many cases, the
accounting treatment of a particular transaction is specifically dictated by
accounting principles generally accepted in the United States, with no need for
managements judgment in their application. There are also areas in which
managements judgment in selecting any available alternative would not produce
a materially different result.

Outlook

The forecasts provided in this section supersede forecasts provided in
Novens prior Quarterly Reports on Form 10-Q and Annual Report on Form 10-K.

For the fourth quarter of 2002, Noven expects to report revenues in the
$12 million range. Fourth quarter 2002 operating expenses should
be in line with the first three quarters of 2002. For full year 2002, Noven expects to report revenues in the
$54 million range. Novens 2003 first quarter revenues are expected to be
lower than the 2002 fourth quarter.

HRT Market

In assessing Novens financial prospects for 2003, there is considerable
uncertainty regarding the impact of the HRT studies (as described above) on the
market for Novens HRT products. Until sufficient HRT prescription trends and
other information become available, Noven is unable to predict what impact
these study results will have on Noven or Novogynes revenues and earnings for
2003 or thereafter.

In addition, Noven cannot predict the impact that the HRT studies may have
on the market for HRT products outside the United States, on Novartis AGs global HRT
strategy, on development plans involving Novens HRT products, or on the
commercialization of Novens international products. In

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October 2002, Noven
received a $1.0 million milestone payment from Novartis AG relating to the
continuing development of a next-generation transdermal estrogen-progestin
patch. Diminished demand for HRT products outside the United States, or any change in
strategy that has the effect of delaying or limiting commercialization of
Novens international products, could have a material adverse effect on Novens
business and prospects.

International Product Launches

Novartis AG began European launches of Estradot® in the first quarter of
2002, and Noven expects Novartis AGs launches to continue through 2003.
Although Novartis AG has advised Noven that it expects to receive government
approvals of Estradot® in time for planned launches, not all approvals have
been received and there is no assurance that remaining approvals will be
received on a timely basis or at all, or if they are received, that the product
will be launched. In addition, Novartis does not have HRT sales resources in
all countries in which the product is intended to be launched, and the
establishment of such resources may delay launches. Failure to receive
approvals or establish sales resources on a timely basis could adversely affect
Novartis AGs launch plans for Estradot®, which would adversely impact Novens
Estradot® sales. The timing of Novartis AGs product launches, and the various
factors that influence that timing, are outside the control of Noven.

MethyPatch®

Noven is currently incurring sales, marketing and other expenses in
anticipation of a MethyPatch® approval and launch in the second half of 2003.
These expenses are expected to cause Novens marketing, general and
administrative expenses for 2003 to increase as compared to 2002. There can be
no assurance that MethyPatch® will be approved or launched in this time frame
or at all. Due in part to school-year seasonality in the market for ADHD
medications, the timing of a MethyPatch® approval and launch will affect the
timing and magnitude of MethyPatch® revenues and launch-related expenses.

Clinical Spending

Noven expects to begin and/or advance clinical trials for the development
of new prescription transdermal therapies over the next several quarters.
These projects may increase Novens research and development expense in 2003 as
compared to 2002. Future levels of research and development expenditures will
depend on, among other things, the status of products under development and the
outcome of clinical trials, strategic decisions by management, the consummation
of new collaborative arrangements and Novens liquidity. Novens research and
development expenses may vary significantly from quarter to quarter depending
on product development cycles and the timing of clinical studies.




Item 3. Quantitative and Qualitative Disclosure About Market Risk

Noven had no variable rate debt outstanding during the nine months ended
September 30, 2002. Therefore, changes in interest rates did not affect
interest expense, earnings or cash flows in 2002. Market risks relating to
Novens operations may result from changes in LIBOR interest rates if Noven
borrows under its Credit Facility. Noven cannot predict market fluctuations
in interest rates
and their impact on any variable rate debt that Noven may have outstanding
from time to time, nor can there be any assurance that fixed rate long-term
debt will be available at favorable rates, if at all.

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PART II. OTHER INFORMATION




Item 1. Legal Proceedings

With respect to the cases styled Deborah A. Kaliser v. Noven
Pharmaceuticals, Inc., Robert C. Strauss, James B. Messiry and Steven
Sablotsky; Bernard Middleton et. al., v. Noven Pharmaceuticals, Inc., Robert C.
Strauss, James B. Messiry, and Steven Sablotsky; Evelyne Shabo, et.
al., v.
Noven Pharmaceuticals, Inc., Robert C. Strauss, James B. Messiry, and Steven
Sablotsky; Leah Constantine, et. al., v. Noven Pharmaceuticals, Inc., Robert C.
Strauss, James B. Messiry, and Steven Sablotsky; and Joseph A. Papa, et. al.,
v. Noven Pharmaceuticals, Inc., Robert C. Strauss, James B. Messiry, and Steven
Sablotsky, previously reported in Novens Annual Report on Form 10-K for the
year ended December 31, 2001, on March 12, 2002, the Court entered an order
consolidating all of the captioned actions into a single consolidated action,
appointing lead plaintiffs counsel, and directing lead plaintiffs counsel to
file a single amended and consolidated complaint. On April 11, 2002, the
plaintiffs filed a Consolidated Amended Class Action Complaint styled In Re
Noven Pharmaceuticals, Inc. Securities Litigation (the Consolidated Amended
Complaint). On May 13, 2002, the defendants filed Motions to Dismiss, seeking
to have the Court dismiss the Consolidated Amended Complaint with prejudice.
The plaintiffs have filed with the Court a Memorandum in opposition to the
defendants motions and have requested oral argument with regard to defendants
motions. On July 26, 2002, defendants filed reply Memoranda with regard to
their motions. These developments did not have a material effect on the action
or on Novens financial position or results of operations.

Noven believes the lawsuit is without merit, and intends to vigorously
defend the lawsuit, but its outcome cannot be predicted. The lawsuit, if
determined adversely to Noven, could have a material adverse effect on Novens
financial position and results of operations. Novens ultimate liability, if
any, with respect to the lawsuit is presently not determinable.




Item 4. Controls and Procedures

Within the 90 days prior to the date of this report, Noven carried out an
evaluation, under the supervision and with the participation of Novens
management, including Novens Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of Novens disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that Novens disclosure controls and procedures are effective in timely
alerting them to material information relating to Noven required to be included
in Novens periodic Securities and Exchange Commission filings. No significant
changes were made in Novens internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.




Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

|     |  |                                                                                                                                                                                                           
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|99.1 |  | 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
|    
|99.2 |  | Certification of James B. Messiry, 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                   

(b)  Reports on Form 8-K



| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | No reports on Form 8-K were filed by the Registrant during the three
months ended
September 30, 2002.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|      |  |                  |  |                             |  |                                                            
|----- |  | ---------------- |  | --------------------------- |  | -----------------------------------------------------------
|      |  |                  |  | NOVEN PHARMACEUTICALS, INC.
|     
|Date: |  | November 4, 2002 |  | By:                         |  | /s/ James B. Messiry                                       
|      |  |                  |  |                             |  |                                                            
|      |  |                  |  |                             |  | James B. Messiry
Vice President and
Chief Financial Officer

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Certifications
Certification of Principal Executive Officer

I, Robert C. Strauss, President, Chief Executive Officer and Chairman of the
Board of Noven Pharmaceuticals, Inc., certify that:

1) I have reviewed this quarterly report on Form 10-Q of Noven Pharmaceuticals,
Inc.;

2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4) The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5) The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6) The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

/s/ Robert C. Strauss




Name: Robert C. Strauss
Title:   President, Chief Executive Officer and Chairman of the Board
Date:   November 4, 2002


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Certifications
Certification of Principal Financial Officer

I, James B. Messiry, Vice President and Chief Financial Officer of Noven
Pharmaceuticals, Inc., certify that:

1) I have reviewed this quarterly report on Form 10-Q of Noven Pharmaceuticals,
Inc.;

2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4) The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5) The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6) The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

/s/ James B. Messiry




Name: James B. Messiry
Title:   Vice President and Chief Financial Officer
Date:   November 4, 2002


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