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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17254
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NOVEN PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
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Delaware 59-2767632
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11960 S.W. 144th Street, Miami, Florida 33186
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(Address of principal executive office) (Zip Code)
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Registrant's telephone number, including area code: (305)253-5099
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered Pursuant to Section 12(g) of the Act:
Common Stock $.0001 Par Value
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(Title of class)
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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 | |
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (#229.405 of this Chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
YES | | NO |X|
The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 20, 1997 was $131,957,315, (See definition of
affiliate in Rule 405, 17 CFR 230.405).
As of March 20, 1997, 19,916,819 shares of common stock, $.0001 par
value, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
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Incorporated documents
(to the extent indicated herein) Part of Form 10-K
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Portions of the Definitive Proxy Part III
Statement for the 1997 Annual
Meeting of Shareholders Items 10-13
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NOVEN PHARMACEUTICALS, INC.
FORM 10-K
TABLE OF CONTENTS
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PART I Page
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 21
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . 25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . 26
PART III (omitted)
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . 26
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Item 1. Business
Noven is a leader in developing and manufacturing transdermal and
transoral drug delivery systems. These systems utilize an adhesive patch
containing medication which, when adhered to the skin or the mucosa of the oral
cavity, allows the delivery of drugs across the tissues and into the
bloodstream over an extended period of time. Noven has developed and patented
thin, solid state, multi-laminate transdermal and transoral drug delivery
systems that have a small surface area and are adaptable to deliver numerous
drug entities.
The Company's first product, an estrogen patch for the treatment of
menopausal symptoms, was launched in the U.S. in March, 1996 by Ciba-Geigy
Corporation ("Ciba- Geigy") under the trade name Vivelle(TM). (In December,
1996, Ciba- Geigy's parent corporation was merged with Sandoz S.A. to form
Novartis S.A. (hereinafter "Novartis"). All references to Novartis herein
shall include Ciba-Geigy Corporation). Novartis also launched the same product
in Canada in June, 1996. Rhone-Poulenc Rorer, Inc. ("RPR") has received
regulatory approval to market this product for the treatment of menopausal
symptoms in 30 countries and has launched the product under the trade name
Menorest in 13 countries including Germany, France and the United Kingdom.
Menorest has also been approved in 22 countries as a preventative treatment
for osteoporosis and Novartis is conducting clinical trials in the U.S. for
this indication.
The Company's other major development in hormonal replacement therapy
("HRT"), a combination patch of estrogen and progestogen, has completed Phase
III clinical trials in the U.S. and Europe. This product has significant
advantages over the estrogen replacement system, inasmuch as the combination of
the two hormones reduces the incidences of endometrial hyperplasia and in low
dosage forms, taken over several months, may eliminate bleeding for menopausal
women. RPR has worldwide marketing rights to this product, and it is
anticipated that regulatory filings will commence in Europe and the U.S. in the
summer of 1997. Finally, Noven has also developed a second generation estrogen
replacement system which has all of the beneficial features of its present
patch but is approximately one-third its size. Novartis has marketing rights
to this product in the U.S. and Canada and RPR has marketing rights in Japan.
Noven has retained marketing rights in all other territories.
DentiPatch(TM), the Company's novel transoral anesthetic delivery
system, was approved for marketing by the Food and Drug Administration ("FDA")
in May, 1996. Test marketing of this product by the Company commenced in the
second half of 1996. The Company anticipates launching this product on a
national basis in 1997. DentiPatch(TM), which contains lidocaine, the most
widely used injectable dental anesthetic, is indicated for the prevention of
pain from oral injection and for soft tissue dental procedures.
The Company is also developing a range of new products based on its
transdermal and transoral technologies, some of which will reach clinical
trials in 1997.
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The Company conducts its operations in Dade County, Florida. Commercial
production was initiated in Noven's original facility in 1995. The Company's
new manufacturing facility, located on approximately 15 acres, was approved by
the FDA in April, 1996 and is also in commercial production. This new
facility expands Noven's manufacturing capability from approximately 100
million patches to approximately 500 million patches per year. The further
development of existing facilities at the new site will significantly increase
Noven's manufacturing capacity to accommodate additional products under
development.
STRATEGY
Noven's strategy for continued growth is based on certain key
elements: a leadership position with its broad range of HRT products; the
successful commercialization of the unique DentiPatch(TM) system; an extensive
pipeline of transdermal and transoral drug delivery products under various
stages of development in a number of the largest therapeutic classes; and
finally, the possible acquisition of technologies and products which are
compatible with its long term plans to become a fully integrated pharmaceutical
company capable of developing, manufacturing and marketing alternative drug
delivery systems.
TRANSDERMAL DRUG DELIVERY
Transdermal drug delivery systems utilize an adhesive patch containing
medication which is administered through the skin and into the bloodstream over
an extended period of time. Transdermal drug delivery systems may offer
significant advantages over conventional oral and parenteral dosage forms,
including non-invasive administration, controlled delivery over an extended
period of time, improved patient compliance and avoidance of the problems and
adverse side-effects associated with oral and parenteral drug delivery.
Transdermal drug delivery also provides benefits to the pharmaceutical industry
by reducing costs and expanding the market for certain drugs.
Noven's patented, proprietary transdermal drug delivery systems
incorporate a thin, solid state, multi-laminate construction with a
drug-bearing interpolymeric adhesive. This transdermal drug delivery system,
or patch, has a finite area with a specific geometric shape. On one side the
patch has a release liner that, when removed, exposes a pressure- sensitive
adhesive. This adhesive functions as both the drug platform and as the means
of affixing the system to the patient's skin. The outside of the patch is
comprised of a specialized backing material that is specifically tailored to
the drug being delivered and the length of time the system is intended to be
worn. The patch can administer different amounts of drug needed by the
patient, and its shape is designed so that it can be worn comfortably. The
transdermal drug delivery system is packaged in a pouch designed to maintain
the system's stability and protect against contamination.
Noven's transdermal drug delivery systems are capable of being
modified so that they may be used to deliver various drugs. The techniques
utilized to modify the system include those which improve the solubility and
diffusability of drugs within the transdermal system and those which improve a
drug's percutaneous absorption by changing the skin's ability to retain
moisture; by
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softening the skin and improving the skin's permeability; by adding compounds
which may act as penetration assistants or hair follicle openers; or by
changing the skin's boundary layer.
TRANSORAL DRUG DELIVERY
Transoral drug delivery systems utilize a bio-adhesive patch
containing medication which, when moistened, adheres to the buccal mucosa.
These systems then administer the drug across the mucosa and into the
bloodstream. The buccal mucosa can be utilized as a drug delivery site due to
its thin structure and highly vascular property which allows larger drug
molecules, including peptides, proteins and carbohydrates, to be delivered into
the bloodstream in therapeutic quantities. Transoral drug delivery systems
also have many of the advantages associated with transdermal drug delivery,
including non-invasive administration and controlled delivery.
There has been only limited medical use of the buccal mucosal route
for drug administration, the best known example being nitroglycerin tablets,
which dissolve under the tongue and provide a rapid therapeutic response in
angina sufferers. Although drugs may pass from these tablet systems across the
mucosa into the bloodstream, certain potential disadvantages exist, such as
having to position the tablet against the mucosal in a constant fashion; the
drug dissolving into the saliva; or the drug being swallowed. A transoral
patch presents the advantage of focused drug delivery at the site of the
application of the patch in the mouth; saliva will not dilute the delivery of
the drug in the same way that it will for a transoral tablet. Transoral
patch technology might also provide an alternative to the parenteral
administration of large molecules such as peptides, proteins and carbohydrates.
Noven's first transoral delivery system is a patented, proprietary
technology consisting of a thin, solid state multi-laminate construction with a
drug-bearing bio-adhesive. The DentiPatch(TM) system is 2 cm(2) in area with a
protective liner on one side that, when removed, exposes an adhesive that is
then applied to the mucosa. The drug, which is contained in the adhesive, is
absorbed through the buccal mucosa over time. The outside of the patch is
comprised of a specialized backing material that is specifically tailored to
the drug being delivered, which in the case of the DentiPatch(TM), is
lidocaine. The patch is contained in a pouch to maintain its stability and to
protect against contamination.
This basic system can be modified to deliver various drugs. The
techniques used to modify the patch system might include those which improve
the solubility and diffusability of drugs within the adhesive matrix and the
release characteristics of the drug from the adhesive to the mucosa.
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PRODUCTS
The following table summarizes the status of products marketed,
approved and under development by the Company and is qualified by reference to
the more detailed descriptions elsewhere in this Prospectus.
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MARKETING/
PRODUCT INDICATION STATUS MILESTONES
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TRANSDERMAL/HRT
Estrogen/Vivelle(TM) Menopausal -FDA approved -Novartis--
and Menorest Symptoms U.S. and Canada
-Approved in 30 -RPR-- all other
foreign countries territories
-Commercial sales in
the United States,
Canada and 13 foreign
countries
Osteoporosis -Approved in 22 -Novartis--
foreign countries U.S. and Canada
-RPR--all other
territories
Combination Menopausal -Phase III clinical -RPR -- Worldwide
Estrogen/ Symptoms/ trials in U.S. and -NDA in U.S and
Progestogen Osteoporosis Europe completed regulatory filings in
-Phase II clinical Europe anticipated in
trials in Japan summer of 1997
Second Generation Menopausal -Novartis-- U.S. &
Estrogen Symptoms/ -Phase I clinical Canada
Osteoporosis trials completed -RPR -- Japan
-Regulatory filings
anticipated in
second half of 1997
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TRANSORAL
Lidocaine/ Dental Pain Control -FDA approved -Marketing
DentiPatch- -Filed in UK Commenced
(Undisclosed Systemic Drug -Pre-Clinical -Clinical trials to
Molecules) Delivery Development commence in second
half of 1997
OTHER
TRANSDERMALS
NSAID Musculoskeletal -Phase I clinical ----
(Undisclosed Disorders trials in U.S.
Molecules)
Nicotine Smoking Cessation -Phase I clinical ----
trials
Nitroglycerin Angina Pectoris -FDA tentative ----
approval
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HORMONAL PRODUCTS
MARKET OVERVIEW
There are more than 40 million post-menopausal women in the U.S. and
this group is expected to grow by 50% within the next decade. There are an
additional 60 million post-menopausal women in Europe. The Company estimates
that worldwide sales of all hormone replacement products, including those
delivered transdermally, are approximately $1.5 billion to $2.0 billion
annually. With the aging of the population worldwide, conditions and diseases
such as menopause, osteoporosis and heart disease, which may benefit from
hormone replacement therapy, will become significantly more prevalent.
Menopause begins when the ovaries cease to produce estrogen, or when
both ovaries are removed surgically prior to natural menopause. The most
common acute physical symptoms of natural or surgical menopause are hot flashes
and night sweats, which occur in up to 85% of menopausal women. One of the
most common problems, after hot flashes, is vaginal dryness. This condition,
which affects an estimated 25% percent of women, usually begins within five
years after menopause. Moderate-to-severe menopausal symptoms can be treated
by replacing the estrogen the body can no longer produce. Estrogen replacement
therapy relieves hot flashes and night sweats effectively, and prevents drying
and shrinking of the reproductive system.
Another condition related to the inability to produce estrogen is
osteoporosis, a progressive deterioration of the skeletal system through the
loss of bone mass. The loss of estrogen in menopause causes increased skeletal
resorption and decreased bone formation. According to the National
Osteoporosis Foundation, osteoporosis currently affects 25 million people and
contributes to approximately 1.5 million fractures annually in the U.S.
Morbidity and suffering associated with these fractures are substantial.
Estrogen replacement prevents the loss of bone mass and reduces the incidence
of vertebral and hip fractures in older women. Numerous medical studies and
the National Institutes of Health recommend estrogen replacement therapy as the
most effective method of preventing osteoporosis in post-menopausal women.
Heart disease is the number one killer of post-menopausal women in the
U.S. There have been in excess of 30 studies that provide evidence that
estrogen replacement therapy reduces cardiovascular disease by approximately
50% in post-menopausal women. A recent study conducted by the University of
Pittsburgh also concluded that heart disease deaths dropped by 30% in older
Caucasian women taking estrogen. Various reported studies have also shown
that estrogen replacement therapy may significantly reduce the risk of colon
cancer and have shown positive results in preventing or treating
osteoarthritis, Alzheimers, strokes, and tooth loss in menopausal women, as
well as post-partum depression.
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VIVELLE(TM) AND MENOREST TRANSDERMAL ESTROGEN DELIVERY SYSTEM
Noven's products are targeted to the expanding worldwide market for
hormonal replacement therapy. Noven's transdermal estrogen delivery system,
being sold by Novartis and RPR, is designed to offer a superior alternative to
all dosage forms, including other transdermal systems, either currently
in the market or under development.
Marketing rights to the Company's transdermal estrogen delivery system
have been licensed in the United States and Canada to Novartis and in all
other territories to RPR. This product has been approved for marketing by the
FDA, as well as by regulatory authorities in 30 foreign countries, for the
treatment of menopausal symptoms. This product has also been approved in 22
foreign countries for the prevention of osteoporosis. RPR is selling Noven's
transdermal estrogen delivery system under the trade name Menorest in thirteen
foreign countries, including France, Germany and the United Kingdom. In March
and June, 1996, Ciba-Geigy launched the sale of this product under the trade
name Vivelle(TM), as an alternative to its older patch, Estraderm(TM), in the
United States and Canada, respectively.
Vivelle(TM) and Menorest are available by prescription and utilize
Noven's advanced transdermal matrix technology. These products deliver 17-beta
estradiol, the primary estrogen produced by the ovaries, and are applied twice
weekly. Vivelle(TM) and Menorest are the only transdermal estrogen systems
currently in the market to offer up to four dosage strengths. This new
treatment option allows physicians to maintain patients on the lowest possible
dose of estrogen in a skin patch form. This product is also easy to wear due
to its small size and is less irritating than other similar systems.
TRANSDERMAL COMBINATION ESTROGEN / PROGESTOGEN DELIVERY SYSTEM
Noven has developed a combination patch containing 17-beta estradiol
and a progestogen, norethindrone acetate (NETA). This product is designed to
make hormone replacement therapy available to a greater portion of the female
population, including those who terminate HRT due to the adverse side effects
of continuous or irregular bleeding.
Estrogen is the only hormone that is required in hormone replacement
therapy to produce the benefits of menopausal symptom control, osteoporosis
prevention and cardiovascular protection. However, in that portion of the
female population (80%), who have not undergone hysterectomies, unopposed
estrogen has been associated with cancer of the endometrium, the lining of the
uterus. Those women who have an intact uterus would avoid these side effects
if they were to receive long-term HRT, in the form of combined estrogen and a
progestogen. The addition of a progestogen has been shown to reduce the
incidence of endometrial cancer to normal levels or even below that of the
general population. Further, continuous use of both estrogen and low dose
progestogen may be the way to eliminate the monthly menstrual cycle or
irregular bleeding. Combination therapy would provide long-term HRT treatment
opportunities to all postmenopausal women and could therefore, significantly
expand the total HRT market.
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This product has been licensed to RPR on a worldwide basis. Phase
III studies in the U.S. and Europe have been completed and the Company
anticipates that an NDA will be filed and European regulatory filings will
commence in 1997. This product is also in Phase II development in Japan.
SECOND GENERATION ESTROGEN
The Vivelle(TM) and Menorest products are state-of-the-art matrix patch
delivery systems for estrogen. However, Noven continues to make technological
breakthroughs and improvements in matrix patch technology which has resulted in
a second generation transdermal estrogen replacement system. This second
generation system, utilizing Dot Matrix(TM) technology, is only one-third
the area of a Vivelle(TM) or Menorest system at any given dosage level, yet
provides the same delivery of drug over a four day period. This new system is
even more flexible and comfortable to wear than the first generation product,
with a lower potential for skin irritation. In addition to these clear-cut
benefits in patient satisfaction and compliance, this product could provide
Noven with increased profitability through greater gross margins.
Novartis has the right to market the product in the U.S. and Canada
and RPR has marketing rights in Japan. Other markets are available for
licensing and negotiations between Noven and potential marketing partners are
ongoing. Phase I trials have been completed and it is anticipated that
regulatory submissions for this improved product will be made in the second
half of 1997.
TRANSORAL PRODUCTS
DENTIPATCH(TM) - TRANSORAL LIDOCAINE DELIVERY SYSTEM
Injections are rated as the most fear provoking stimulus in all of
dentistry; even the sight of the needle is a fear provoking event. These
phobias appear to be a major contributor to the avoidance of routine dental
care. According to the ADA national survey in 1990, there are approximately
1.2 billion dental procedures performed each year in the U.S. The Company
believes that approximately 450 million dental procedures performed each year
involving either injections or soft tissues might benefit from the DentiPatch
(TM)system.
DentiPatch(TM) was approved for marketing by the FDA in May, 1996 and
is the world's first approved oral transmucosal patch. The product is the
first topical anesthetic clinically proven to prevent injection pain when large
needles are inserted into the bone. It is indicated for the prevention of pain
from oral injections and soft tissue dental procedures. The DentiPatch(TM)
system is applied to the oral mucosa by the dentist or hygienist and quickly
releases lidocaine which passes into the soft tissues producing an anesthetic
effect. Benefits of this system include: (i) site-specific delivery providing
numbing only where needed; (ii) rapid onset in a few minutes with a duration
that lasts for 45 minutes throughout most procedures; (iii) increased patient
comfort resulting from minimizing fears and anxieties; (iv) enhanced practice
building as patients become more receptive to treatment recommendations; (v) no
cross-contamination as systems are individually and
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conveniently packaged; and (vi) low risk of toxicity as drug levels in
the bloodstream are only approximately one-twentieth that of an injection.
Noven commenced test marketing this product in the second half of 1996
and anticipates a commercial launch nationwide in the second quarter of 1997.
Additional products using the DentiPatch technology are currently
being developed to enhance Noven's dental business.
TRANSORAL DRUG DELIVERY PRODUCTS FOR OTHER INDICATIONS
Large, complex, biotechnology molecules such as peptides, proteins and
carbohydrates typically require an injectable route of delivery. When taken
orally (as capsules or tablets) they are broken down and largely inactivated in
the stomach and intestines. The transdermal route is usually unsuitable too,
as the molecules are often too large to pass through the skin intact. However,
transoral drug delivery, utilizing Noven's transoral patch technology, might
offer a viable alternative in several cases.
The lining of the mouth is thin and highly vascular and drugs can pass
across into the bloodstream rapidly without being subjected to breakdown in the
gastrointestinal tract. Noven's oral patch technology provides the opportunity
of focusing and maintaining a high concentration of drug against the mucosa to
maximize absorption. Noven has already proven the feasibility of the approach
with lidocaine, and is working on two readily available protein drugs. It is
anticipated that clinical data with these two protein drugs will be generated
in the second half of 1997.
There are a number of therapies that could benefit from the transoral
patch approach, including drugs in development for disorders of glucose
metabolism, hormone deficiency states and cardiovascular disease. Based on
data obtained from studies of the drugs Calcitonin and Vasopressin, Noven
intends to develop certain of these agents for transoral delivery, possibly in
collaboration with licensing partners.
OTHER TRANSDERMAL PRODUCTS
MUSCULOSKELETAL DISORDERS
Nonsteroidal Anti-Inflammatory Drugs ("NSAIDs") are indicated for a
wide range of disorders including musculoskeletal conditions ranging from
arthritis to soft tissue injuries. Several members of the NSAID class are also
available over-the-counter. As a class, NSAIDs sales exceed $3 billion
worldwide with musculoskeletal disorders encompassing approximately two thirds
of this market. Although extremely effective, the major drawback of NSAIDs is
a potential for irritation and even ulceration of the stomach lining, which can
be life-threatening. Transdermal delivery of a NSAID locally and directly to
the affected joint or tissue should prove therapeutically beneficial, with the
added advantage of a much lower potential for gastrointestinal side effects.
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The Company believes that this novel therapeutic approach could be a
valuable addition in the management of certain musculoskeletal disorders.
Noven has developed transdermal systems containing NSAIDs and is focusing on
one product which has completed preclinical testing. An IND for one agent was
filed in the fourth quarter of 1996 and clinical research will commence in the
first half of 1997.
NICOTINE
Transdermal nicotine is marketed by several companies as an aid to
smoking cessation for the relief of nicotine withdrawal symptoms. As a
prescription therapy, nicotine patches achieved only modest success. However,
with the recent recommendation for over the counter approval by the FDA
Advisory Panel of some products, with others expected to follow, this market
could expand significantly. Noven has developed a transdermal nicotine system
for a third party which is in Phase I clinical trials.
CARDIOVASCULAR DISEASE
Nitroglycerin, a drug used to control angina pectoris, is available
in several conventional dosage forms including sublingual tablets and other
oral and topical formulations. Many of these dosage forms, however, have
limitations. Therefore, transdermal drug delivery systems have become a widely
used form of nitroglycerin delivery. First introduced commercially in 1982,
transdermal nitroglycerin delivery systems are currently marketed by several
companies and according to published data, worldwide sales are in excess of
$600 million.
The Company has developed a transdermal nitroglycerin delivery system
which has all of the attributes of the most advanced systems currently on the
market, such as a small surface area, appropriate adhesive qualities and a
cosmetically attractive appearance. An ANDA was filed with the FDA for this
product in 1992. This product was tentatively approved in November 1996.
ANXIETY DISORDERS
Noven has developed a transdermal alprazolam delivery system for the
treatment of anxiety disorders. The transdermal delivery of alprazolam may
provide a more optimal delivery system with dosing intervals of once a day or
longer. IND was filed for this product with the FDA in December 1993.
Although further refinement of this product has occurred, the extent and pace
of further development will depend, in large measure, on the relative priority
attached to this product as compared to others.
OTHER DRUGS
Noven believes that a large number of currently available drugs which
are not patent protected, or will relatively soon lose patent protection, would
benefit from the addition of a transdermal line extension. In all cases these
drugs are currently only available in conventional
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delivery forms. These drugs cover a number of therapeutic areas, including a
range of cardiovascular disorders, pain control and central nervous system
disorders.
Preliminary work is ongoing and it is expected that feasibility
studies will commence on several of these agents by 1997. The Company intends
to further develop the most attractive products in 1998. The ability of Noven
to develop and commercialize these products depends, to a great extent, upon
the funds available for and dedicated to these products.
IONTOPHORETIC DRUG DELIVERY
Noven is also involved in the development of new technologies in the
transdermal drug delivery area, including iontophoresis. Iontophoresis is a
technique whereby positively or negatively charged drug molecules are driven by
a painless low level electric current from a transdermal device through the
skin and into the bloodstream. Certain higher molecular weight drugs, such as
those composed of peptides, may require modification of the barrier properties
of the skin in order to be delivered transdermally. Noven believes its
iontophoretic transdermal drug delivery system may accommodate these higher
molecular weight drugs and may thereby increase the number of drugs suitable
for transdermal delivery, possibly including certain genetically engineered
molecules. Although some work in this area may continue, Noven's other
priorities in the near future may slow the progress of Noven's work on this
technology.
RESEARCH AND DEVELOPMENT
Noven's research and development philosophy is based on the
identification of drugs that can be delivered either transdermally or
transorally and which can be developed rapidly. The majority of drugs that
Noven will work on are already established agents being delivered to patients
by means other than transdermally or transorally. Noven seeks therapies that
can be improved by using Noven's innovative technologies, and which have
substantial market potential.
Research and development currently involves twenty-four persons,
consisting of formulation experts, analytical chemists and a medical and
regulatory group.
MARKETING
Noven has licensed its transdermal estrogen delivery system worldwide
to two major pharmaceutical companies, Novartis and RPR, who are selling the
product in the U.S., Canada and other foreign countries. In addition, Noven
has licensed its transdermal combination estrogen/progestogen delivery system
worldwide to RPR and its second generation estrogen delivery system to
Novartis in the U.S. and Canada and to RPR in Japan. In May, 1996, RPR formed
a global strategic alliance with Novo Nordisk A/S to offer a comprehensive
range of hormone replacement therapies. The Company believes that this
development will enhance the marketing and sales of Menorest.
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The Company is currently developing and implementing its own marketing
and sales plan with respect to the DentiPatch(TM) system. This product became
available nationally in the second half of 1996. Initially, Noven marketed
this product regionally, and anticipates a national roll-out in the second
quarter of 1997. Noven is establishing an in-house sales department that
will include an Executive Director of Marketing & Sales, a Senior Director of
Sales, a national and six district sales managers, a product manager, a
professional programs team and marketing and sales support staff. The national
roll-out will combine the efforts of two of the largest dental dealer houses
and a specific periodontal sales force and two full time associates. The
marketing plan will focus primarily on dental schools and periodontists in
highly populated progressive areas and will emphasize "pain control" and soft
tissue procedures.
As Noven develops new products it will evaluate whether to license
products to a larger company with an established sales force or to develop its
own marketing and sales capabilities. The Company's evaluation will be
conducted on an individual product basis and will include consideration of the
estimated costs associated with sales, marketing and distribution. These
combined costs and the Company's financial position will be factored into the
decision of whether to license or directly market the product.
MANUFACTURING
Noven manufactures Menorest for RPR and Vivelle(TM)for Novartis
pursuant to certain supply agreements. These supply agreements govern
the specifications of the product, price, required quantities and other
aspects of the manufacturing relationship. The Novartis agreement is for a
term of three years terminating in March, 1999. The RPR agreement is for a
term coextensive with the term of the last to expire foreign patent related to
the Menorest product, presently approximately eighteen years.
Noven has the capacity of designing, developing, building and
maintaining its production equipment, including fabrication of replacement
parts where appropriate. Additionally, Noven's engineering expertise provides
valuable support to its research and development groups by rapidly fabricating
or modifying equipment essential in the product development program.
Noven's original facility in Dade County, which consists of
approximately 11,400 square feet, is fully equipped and has a manufacturing
capacity of approximately 100 million transdermal patches per year. This
facility has been approved to commercially manufacture Vivelle(TM) and Menorest
for Novartis and RPR, respectively, and has also received a pre-approval
inspection for the manufacture of the DentiPatch(TM) system and Noven's
transdermal nitroglycerin product.
Noven's newer 15 acre site in Dade County includes two adjacent
buildings, each with approximately 40,000 square feet. One of the buildings
has been fully renovated and equipped. This site was inspected and approved by
the FDA and the Medicines Control Agency of the United Kingdom and is currently
producing Menorest and Vivelle(TM) for commercial sale by its licensing
partners. The facility will have a capacity of approximately 400
million transdermal patches per
12
<PAGE> 17
year. It is anticipated that full development of this site, including
possible new construction on the property, can accommodate Noven's space
requirements for its foreseeable long term growth.
COMPETITION
Noven's operations are conducted in highly competitive areas. All
drug delivery products being developed by the Company will face competition
from both conventional forms of drug delivery (i.e., oral and parenteral), and
possibly alternate forms of drug delivery, such as controlled release oral
delivery, liposomes and implants.
Competition in drug delivery systems is generally based on a company's
marketing strength, product performance characteristics (i.e., reliability,
safety, patient convenience) and product price. Acceptance by physicians and
other health care providers including managed care groups is also critical to
the success of a product. In a highly competitive marketplace and with
evolving technology, there can be no assurances that additional product
introductions or developments by others will not render the Company's products
or technologies noncompetitive or obsolete.
Noven's transdermal delivery technology will face competition from
other transdermal products. Other companies, including Alza Corporation,
Cygnus Therapeutic Systems, Elan Corporation, plc, TheraTech, Inc., Ethical
Holdings, plc, Cilag, a division of Johnson & Johnson, Schering-Plough and 3M
Corp. are developing and marketing competing transdermal drug delivery
products. In January 1995, 3M Pharmaceuticals/Drug Delivery Systems and Berlex
Laboratories, Inc. announced the receipt of FDA approval to market an estradiol
transdermal system in the United States in two dosage strengths. Berlex
Laboratories, Inc., along with Forest Laboratories, Inc., have U.S. marketing
rights for this product. Commercial distribution of this transdermal delivery
product commenced in the second quarter of 1995. It is estimated that this
product has captured approximately twenty percent (20%) of the transdermal
estrogen market in the U.S., with the balance substantially held by
Estraderm(TM), a Novartis product. In addition, TheraTech, Inc.
announced in December, 1996 that it had received FDA approval to market its
transdermal estrogen system under the name Alora. It is anticipated that
Proctor and Gamble will commence marketing this product in the spring of 1997.
Noven has attempted to minimize certain competitive risks by its
technological innovativeness and by developing strategic alliances. For
example, Noven has aligned itself with two worldwide marketing organizations,
Novartis and RPR, for marketing its estrogen delivery system as Vivelle(TM) in
the U.S. and Canada and as Menorest elsewhere. In this regard,
Novartis' introduction of Vivelle(TM), as an alternative to Estraderm(TM),
should enhance the product's competitive position. Noven also believes
that its estrogen replacement system has certain competitive advantages due to
the product's characteristics, such as its small size, reduced irritation and
availability in several different dosages. Further, Noven believes that its
technological expertise in developing, manufacturing and commercializing other
transdermal hormonal systems, such as its combination estrogen/progestogen
delivery system and the second generation estrogen delivery system, will
enable it to successfully compete in the global marketplace.
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<PAGE> 18
Noven's transoral lidocaine delivery system, DentiPatch(TM), faces
competition from all other forms of topical anesthetics, such as gels, rinses
and swabs. Septodont and Astra are the largest suppliers of these forms of
anesthetics and it is unclear at this time how these competitors will respond
to the introduction of the DentiPatch(TM) system in the market. Noven's
competitive position will also be substantially affected by the product's
degree of acceptance in the dental community, and the time required to obtain
such acceptance.
PATENTS AND PROPRIETARY RIGHTS
Noven has obtained 11 U.S. patents relating to its transdermal and
transoral delivery systems and manufacturing processes and has over 100
pending patent applications worldwide.
As a result of the changes in the United States patent law under the
General Agreement on Tariffs and Trade and the accompanying Agreement on
Trade-Related Aspects of Intellectual Property Law, which took effect in their
entirety on January 1, 1996, the terms of some existing Noven patents have been
extended beyond the term of seventeen years from the date of grant. Noven
patents filed after June 7, 1997 will have a term of twenty years computed from
the effective filing date.
The Company is unaware of the existence of any challenges to the
validity of its patents or of any third party claim of patent infringement with
respect to its products. However, no assurance can be given that challenges
to its patents or claims of patent infringement will not be asserted in the
future. Although there is a statutory presumption as to a patent's validity,
the issuance of a patent is not conclusive as to such validity, or as to the
enforceable scope of the claims of the patent. There is no assurance that
Noven's patents or any future patents will prevent other companies from
developing similar or functionally equivalent products. Furthermore, there is
no assurance that any of the Company's future processes or products will be
patentable, that any pending or additional patents will be issued in any or all
appropriate jurisdictions or that Noven's processes or products will not
infringe upon the patents of third parties.
None of the drug chemical entities Noven uses for the products now in
clinical trials are patented in the U.S. However, some of the drugs which may
be incorporated in the Company's future products may be patented by others.
Therefore, the ability of Noven to market such products prior to the expiration
of such patents may depend, among other things, upon its ability to enter into
arrangements with the holders of such patents.
Noven also attempts to protect its proprietary information under trade
secret laws. Generally, Noven's agreements with each employee, licensing
partner, consultant, university, pharmaceutical company and agent contain
provisions designed to protect the confidentiality of its proprietary
information. There can be no assurance that these agreements will not be
breached, that the Company will have adequate legal remedies as a result
thereof, or that the Company's trade secrets will not otherwise become known or
be independently developed by others.
14
<PAGE> 19
GOVERNMENT REGULATION
United States
The marketing of pharmaceutical products requires the approval of the
FDA in the U.S. The FDA has established regulations, guidelines and safety
standards which apply to the pre-clinical evaluation, clinical testing,
manufacturing and marketing of pharmaceutical products. The process of
obtaining FDA approval for a new product may take several years and is likely
to involve the expenditure of substantial resources. The steps required before
a product can be produced and marketed for human use include: (i) pre-clinical
studies; (ii) submission to the FDA of an IND, which must become effective
before human clinical trials may commence in the U.S.; (iii) adequate and well
controlled human clinical trials; (iv) submission to the FDA of an NDA or, in
some cases, an ANDA; and (v) review and approval of the NDA or an ANDA by the
FDA.
An ANDA may be submitted for products that have the same active
ingredient(s), indication, route of administration, dosage form and dosage
strength as an existing FDA-approved product, if clinical studies have
demonstrated bio-equivalence of the new product to the FDA-approved product.
Under FDA ANDA regulations, companies that seek to introduce a generic product
must also certify that the product does not infringe on the approved product's
patent. In such circumstances, legal action may ensue to determine the
relative rights of the parties and the application of the patent. This patent
certification process may involve Noven's transdermal nitroglycerin product,
due to the FDA's full approval of another transdermal nitroglycerin product in
April, 1995. Accordingly, it is possible that Noven's ability to obtain FDA
approval for the marketing of its transdermal nitroglycerin product could
involve litigation over the applicability of another patent to Noven's product.
This type of litigation is already ongoing with respect to two other parties
efforts to commercialize a transdermal nitroglycerin delivery system. The
Company is assessing various alternatives in anticipation of these
developments.
An NDA generally is required for products with new active ingredients,
new indications, new routes of administration, new dosage forms or new
strengths. An NDA requires that complete clinical studies of a product's
safety and efficacy be submitted to the FDA, the cost of which is substantial.
These costs can be reduced, however, for delivery systems which utilize
approved drugs. Limited testing may begin on humans after submission and
approval of the IND.
Pre-clinical studies are conducted to obtain preliminary information
on a product's efficacy and safety. The results of these studies are submitted
to the FDA as part of the IND and are reviewed by the FDA before human clinical
trials begin. Human clinical trials may commence 30 days after receipt of the
IND by the FDA, unless the FDA objects to the commencement of clinical trials.
Human clinical trials are typically conducted in three sequential
phases, but the phases may overlap. Phase I trials consist of testing the
product primarily for safety in a small number of patients at one or more
doses. In Phase II trials, the safety and efficacy of the product are
evaluated
15
<PAGE> 20
in a patient population somewhat larger than the Phase I trials. Phase III
trials typically involve additional testing for safety and clinical
efficacy in an expanded population at different test sites. A clinical plan,
or protocol, accompanied by the approval of the institution participating in
the trials, must be reviewed by the FDA prior to commencement of each phase of
the clinical trials. The FDA may order the temporary or permanent
discontinuation of a clinical trial at any time.
The results of product development and pre-clinical and clinical
studies are submitted to the FDA as an NDA or an ANDA for approval. If an
application is submitted, there can be no assurance that the FDA will review
and approve the NDA or an ANDA in a timely manner. The FDA may deny an NDA or
an ANDA if applicable regulatory criteria are not satisfied or it may require
additional clinical testing. Even if such data is submitted, the FDA may
ultimately deny approval of the product. Further, if there are any
modifications to the drug, including changes in indication, manufacturing
process, labeling, or a change in a manufacturing facility, an NDA or an ANDA
supplement may be required to be submitted to the FDA. Product approvals may
be withdrawn after the product reaches the market if compliance with regulatory
standards is not maintained or if problems occur regarding the safety or
efficacy of the product. The FDA may require testing and surveillance programs
to monitor the effect of products which have been commercialized, and has the
power to prevent or limit further marketing of these products based on the
results of these post-marketing programs.
The Prescription Drug User Fee Act of 1992 (the "Fee Act") authorized
the FDA to collect three types of fees from prescription drug manufacturers:
(1) one-time application fees imposed upon submission to the FDA for approval,
(2) establishment fees, and (3) product fees which are imposed annually.
Payment of application fees are required for each human drug application
including an NDA, certain ANDAs, certain initial certification/approval of
certain antibiotic drugs, and licensure under the Public Health Service Act of
certain biological products. The Fee Act also mandates a fee on supplements
(containing clinical data) to human drug applications. The amount of the fee
is dependent on whether the application is accompanied by clinical data on
safety and efficacy (other than bioavailability or bioequivalence studies).
Through September 30, 1996 the application fee for human drug applications was
$204,000, while applications without clinical data and supplements with
clinical data were one-half of that fee. Payment of establishment fees are
required for prescription drug establishments at which at least one
prescription drug product is manufactured. Through September 30, 1996 the
establishment fee was $135,300. Payment of product fees are required for each
strength and dosage form of an approved prescription drug product at $12,600
through September 30, 1996. The corresponding fees for the period from
October 1, 1996 through December 31, 1996 were $205,000, $115,700 and $13,200.
The Fee Act provides for fee exceptions, waivers and reductions, including
payment deferrals under certain circumstances, primarily for the benefit of
small businesses. While Noven will endeavor to request such fee exceptions,
waivers and reductions where it believes it can demonstrate eligibility, there
is no assurance that the FDA will grant any such request.
Foreign and domestic manufacturing facilities are subject to periodic
inspections for compliance with the FDA's GMP regulations and each domestic
drug manufacturing facility must
16
<PAGE> 21
be registered with the FDA. In complying with standards set forth in
these regulations, manufacturers must continue to expend time, money and effort
in the area of quality assurance to insure full technical compliance.
Facilities handling controlled substances, such as Noven, must be licensed by
the U.S. Drug Enforcement Administration ("DEA"). The Company has produced
transdermal drug delivery products in accordance with the FDA's GMP regulations
for clinical trials, manufacturing process validation studies and commercial
sale.
Noven's activities are subject to various federal, state and local
laws and regulations regarding occupational safety, laboratory practices,
environmental protection and hazardous substance control, and may be subject to
other present and possible future local, state, federal and foreign
regulations. Under certain of these laws, Noven could be liable for
substantial costs and penalties in the event that waste is disposed of
improperly. Noven utilizes one waste management firm to provide for proper
disposal of hazardous waste. The Company believes that its hazardous waste
disposal procedure prevents improper disposal.
Foreign
Noven intends to have its products marketed in certain foreign
countries. Therefore, approval by these countries' regulatory authorities must
be obtained. The approval procedures vary from country to country, and the
time required for approval may be longer or shorter than that required for FDA
approval. Even after foreign approvals are obtained, further delays may be
encountered before products may be marketed. For example, many countries
require additional governmental approval for price reimbursement under national
health insurance systems. Such approval can be critical to any extensive
marketing of drug products in such countries. If practical and acceptable to
the FDA, Noven intends to design its FDA protocols for the clinical studies of
its products to permit acceptance of the data by foreign regulatory authorities
and to thereby reduce the risk of duplication of clinical studies. However,
additional studies may be required to obtain foreign regulatory approval.
Further, some foreign regulatory agencies may require additional studies
involving patients located in their countries.
As a result of the enactment of the FDA Export Reform & Enhancement
Act of 1996, a drug not yet approved in the United States may be exported to
certain foreign markets as long as the product: (i) is approved by the
importing nation; (ii) is labeled for export and (iii) the product is not in
conflict with the laws of the country to which it is intended for export.
EMPLOYMENT
The Company employs approximately one hundred and forty people;
approximately fifty-eight are engaged in manufacturing and process
development, twenty-four in research and development, thirty-eight in medical
affairs, regulatory affairs, quality assurance and quality control and
twenty-one in marketing and administration. Most of the Company's scientific
and engineering employees have had prior experience with pharmaceutical or
medical product companies. No
17
<PAGE> 22
employee is represented by a union and Noven has never experienced a
work stoppage. The Company believes its employee relations are excellent.
INSURANCE
The Company has procured general liability insurance, in an amount of
$8 million per incident and $9 million in the aggregate per annum. This policy
provides coverage on an occurrence basis and is subject to annual renewal. The
Company has also procured product liability insurance in an amount of $12
million per incident and $12 million in the aggregate per annum. This policy
provides coverage on a claims made basis and is subject to annual renewal. No
assurance can be given that the coverage limits will be adequate.
Item 2. Properties.
The Company owns a 20,000+ square foot building which is used for
laboratory, engineering, office and administrative purposes on one and one-half
acres. The Company also owns 9.5 acres of vacant land that could accommodate
160,000+ square feet of new buildings for a variety of manufacturing,
warehousing and developmental purposes. RPR owns, on a contiguous site, two
existing buildings of approximately 80,000+ square feet on four acres. One of
the buildings is being used by Noven for manufacturing purposes. The other
building is presently utilized for engineering. The RPR facility is leased to
the Company for a term of 31.5 years on favorable terms. The lease grants
Noven a purchase option. RPR may terminate the lease prior to the expiration
of its term upon termination or expiration of the license agreement entered
into in June 1992. These facilities, it is believed, will provide sufficient
space for the Company's projected growth in the foreseeable future.
The Company leases real property at 13300 Southwest 128th Street,
Miami, Florida, under standard leases that expire on December 31, 1998. The
aggregate annual rental under these leases is approximately $186,000 per year,
subject to certain adjustments. Substantially all of the approximately 11,400
square feet under lease at this location is used for manufacturing and
packaging.
The Company believes that its existing properties are well maintained
and in good operating condition and that there is no excessive obsolescence.
Item 3. Legal Proceedings.
The Company is not a party to any legal proceedings and to the
knowledge of the Company, none are threatened.
Item 4. Submission of Matters to a Vote of Security Holders.
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<PAGE> 23
The Company did not submit any matters to a vote of stockholders
during the fourth quarter of the fiscal year ended December 31, 1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Market Information
The following table sets forth, for the periods indicated, the high
and low sale prices for the Common Stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
High Price Low Price
---------- ---------
<S> <C> <C>
First Quarter, 1995 12 3/8 6 1/2
Second Quarter, 1995 9 1/8 6 3/4
Third Quarter, 1995 11 7
Fourth Quarter, 1995 11 1/2 8 1/4
First Quarter, 1996 16 1/2 10 7/8
Second Quarter, 1996 18 3/4 10 1/2
Third Quarter, 1996 16 3/8 11 1/4
Fourth Quarter, 1996 16 1/4 8 3/4
</TABLE>
(b) Holders.
As of December 31, 1996, the number of stockholders of record was 636
and the approximate number of beneficial owners was 4,737.
(c) Dividends.
The Company has never paid a cash dividend on its Common Stock,
intends to retain all earnings for the operation and expansion of its business
and does not anticipate paying cash dividends in the future. Any future
declaration and payment of dividends will be determined by the Board of
Directors in light of conditions then existing, including the Company's
earnings, financial condition, capital requirements, as well as such other
factors as the Company's Board of Directors may consider.
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<PAGE> 24
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA
The selected financial data presented below are derived from the
financial statements of the Company. The financial statements for the years
ended December 31, 1994, 1995 and 1996 and the reports thereon, are included
elsewhere in this Form 10-K. The selected financial data as of December 31,
1992 and 1993 are derived from financial statements previously filed with the
Commission and not included in this Form 10-K. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Financial
Statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues:
Product Sales $ -- $ -- $ 295 $ 8,747 $19,652
License revenue 1,927 3,125 4,155 1,703 815
Interest income 803 624 1,214 1,682 1,177
Other income 192 345 381 52 --
------- ------- ------- ------- -------
Total 2,922 4,094 6,045 12,184 21,644
Expenses:
Cost of products
sold -- -- 148 4,814 10,020
Research and
development 4,127 5,161 8,036 10,509 8,730
Marketing, general and
administrative 1,836 2,244 2,805 3,442 4,878
------- ------- ------ ------- -------
Total 5,963 7,405 10,989 18,765 23,628
Net loss $(3,041) $(3,311) $(4,944) $(6,581) $(1,984)
======= ======= ======= ======= =======
Net loss per share $ (.21) $ (.21) $ (.28) $ (.34) $ (.10)
======= ======= ======= ======= =======
Weighted average
shares of common
stock and common
stock equivalents 14,761 15,925 17,440 19,237 19,800
</TABLE>
20
<PAGE> 25
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 20,781 $ 14,822 $ 35,047 $ 27,560 $24,859
Total assets 23,289 29,860 54,365 48,646 44,229
Long-term obligations -- -- -- -- --
Accumulated deficit (7,228) (10,539) (15,483) ( 22,063) (24,047)
Total stockholders'
equity 20,740 20,693 44,546 38,030 36,077
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
From inception (1987) through 1994, the Company primarily engaged in
the research and development of transdermal drug delivery systems. During
this period, the Company's revenues were principally generated by license fees,
milestone payments pursuant to various license agreements and interest earned
on funds raised through the sale of its common stock. In 1995, due to the
receipt of regulatory approvals for its transdermal estrogen delivery system, a
significant portion of the Company revenues were derived from the sale of this
product to the Company's two licensing partners. In 1996, revenues from the
sale of these products increased substantially as the Company's licensing
partners initiated marketing and distribution.
Noven expects that revenues from product sales to its licensing
partners will fluctuate from quarter and year to year depending upon various
factors not in Noven's control, including, but not limited to, the inventory
requirements of each licensing partner at different times throughout the year,
possible special selling efforts undertaken by each licensing partner at
different times during the year, and, in the case of RPR, the introduction of
the product into new territories.
Noven experienced fluctuations in sales of its transdermal estrogen
delivery systems, Vivelle(TM) and Menorest, to its licensing partners from
the first three quarters to the last quarter of 1996, and into the first quarter
of 1997, when sales to these licensing partners declined. Although in-market
sales of Noven's transdermal estrogen delivery system continue to increase on a
global basis, it is anticipated that inventory balancing by the Company's
licensing partners will result in significantly lower levels of reorders during
the first half of 1997, causing losses. After this circumstance has been
corrected, Noven expects that product sales to its licensing partners will
significantly increase in the second half of 1997.
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<PAGE> 26
Noven also expects to generate revenues in 1997 from licensing
agreements with respect to products under development, although such revenues
will fluctuate from period to period depending upon such factors as the number
of new agreements finalized, timely achievement of milestones and strategic
decisions affecting self-funding of products.
Finally, during calendar year 1996, the Company commenced the
marketing of its Denti-Patch(TM) system. It is anticipated that significant
revenues will be generated from the sale of this product commencing in the
second half of 1997.
RESULTS OF OPERATIONS
1996 Compared to 1995
Total revenues increased approximately 78% from approximately
$12,184,000 in 1995 to approximately $21,644,000 in 1996. The increase in
revenues from $8,748,000 in 1995 to $19,652,000 in 1996 was primarily a
result of the increase in product sales of the Company's transdermal estrogen
delivery system to its two licensing partners. Royalties from transdermal
estrogen delivery systems are included in product sales.
License revenues decreased approximately 52% from approximately
$1,703,000 in 1995 to approximately $815,000 in 1996. Interest income
decreased approximately 30% from approximately $1,682,000 in 1995 to
approximately $1,178,000 in 1996 due to lower average security balances.
Cost of product sold increased approximately 108% from approximately
$4,814,000 in 1995 to approximately $10,021,000 in 1996. The gross margin
percentage was approximately 49% in 1996 and approximately 45% in 1995. The
gross margins vary depending on the amount of product sold to each licensing
partner and manufacturing efficiencies, including those relating to production
volumes.
Research and development expenses decreased approximately 17% from
approximately $10,509,000 in 1995 to approximately $8,730,000 in 1996.
The decrease in research and development expenses was attributable to less
process development activity and a reduced amount of costs associated with the
validation of manufacturing equipment and facilities. In 1996 research and
development expenses for new product development continued at the same rate as
in 1995. New product development included work related to the transoral dental
anesthetic system (DentiPatch(TM)), an estrogen/progestogen combination delivery
system, a second generation estrogen delivery system, a transdermal system
delivering a nonsteroidal anti-inflammatory drug, an albuterol delivery system
and a nicotine delivery system. Marketing, general and administrative expenses
increased approximately 42% from approximately $3,442,000 in 1995 to
approximately $4,878,000 in 1996. The increase in marketing, general and
administrative expenses was primarily due to initial marketing expense to
support the launch of the DentiPatch(TM) system and increases in staffing and
associated office expenses.
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<PAGE> 27
1995 Compared to 1994
Total revenues increased approximately 102% from approximately
$6,045,000 in 1994 to approximately $12,184,000 in 1995. The increase in
revenues during 1995 was primarily a result of the increase in product sales of
the Company's transdermal estrogen delivery system to its licensing partners
from $295,000 in 1994 to $8,748,000 in 1995. Royalties for product sold to one
licensee will be recognized after the product is launched. License revenues
decreased approximately 59% from approximately $4,155,000 in 1994 to
approximately $1,703,000 in 1995. Interest income increased approximately 39%
from approximately $1,214,000 in 1994 to approximately $1,682,000 in 1995
primarily as a result of the investment of the proceeds of the 1994 public
offering of common stock.
Cost of product sold increased from approximately $148,000 in 1994 to
approximately $4,814,000 in 1995. The gross margin percentage was 50% in 1994
and 45% in 1995. These manufacturing costs and attendant gross margins were
primarily attributable to expenses incurred in the early stages of
manufacturing the transdermal estrogen delivery systems.
Research and development expenses increased approximately 31% from
approximately $8,036,000 in 1994 to approximately $10,509,000 in 1995. The
increase in research and development expenses was attributable to new product
development, manufacturing process engineering and development costs,
preproduction start-up expense and the hiring of additional staff for new and
existing programs. New product development included the transoral dental
anesthetic system and the transdermal estrogen/progestogen combination delivery
system. Preproduction start-up includes the costs associated with staffing,
obtaining regulatory approvals and preparing for product commercialization.
Marketing, general and administrative expenses increased approximately 23% from
approximately $2,805,000 in 1994 to approximately $3,442,000 in 1995 primarily
because of increases in staffing, recruiting expenses and professional fees.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through public
offerings of common stock, including the exercise of warrants issued in
connection with the first such offering, private placements of its equity
securities, license and contract revenues, and interest income. However, since
the launch of its first commercial product in 1995, the Company's operations
have been principally financed increasingly by revenues from the sale of its
transdermal estrogen delivery system to its licensing partners. The Company
has neither utilized debt nor has it engaged in significant commercial lease
transactions to finance its operations. As of December 31, 1996 and 1995, the
Company had approximately $19,149,000 and $24,013,000 respectively, in cash
and securities held to maturity.
23
<PAGE> 28
Net cash used in operating activities for the year ended December 31,
1996 was approximately $3,353,000 compared to approximately $9,375,000 for the
year ended December 31, 1995. Cash used in 1996 was primarily due to decreases
in accounts payable and accrued liabilities, along with the net operating loss
and increases in accounts receivable, partially offset by a decrease in
inventories. In 1995 net cash used by operating activities was primarily
attributable to the net operating loss along with increases in inventories and
accounts receivable, partially offset by increases in accounts payable and
accrued liabilities.
During the year ended December 31, 1996, the Company's investing
activities used approximately $7,352,000, compared to approximately $13,371,000
in the prior year. Net cash used during 1996 in investing activities was
primarily for the purchase of securities held to maturity and additionally for
commercial manufacturing equipment, improvements at the new manufacturing site
and investments in patents. New cash provided in 1995 resulted primarily from
the sale of securities held to maturity to finance operating activities,
partially offset by capital expenditures for manufacturing equipment, buildout
of manufacturing facilities and investments in patents. As of December 31,
1996 the Company had no significant commitments for capital expenditures.
Net cash provided by financing activities of $31,000 and $65,000 for
the years ended December 31, 1996 and 1995 respectively, resulted from the
exercise of options in the employee stock option plan.
The Company expects to incur additional costs related to product
development activities, increased marketing, general and administrative
expenses and the completion of its manufacturing facilities. Although the
Company believes that existing cash, anticipated contract and manufacturing
revenues will be adequate for the foreseeable future, circumstances could arise
which may result in a desire to raise additional capital. There can be no
assurance that such capital will be available to acceptable terms, or at all.
FORWARD LOOKING STATEMENTS
From time to time, Noven may publish forward looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, usage and development
activities and some other matters. The words "may", "will", "expect",
"anticipate", "continue", "estimate", "project", "intend" and similar
expressions are intended to identify such forward looking statements. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward looking statements. In order to comply with the terms of the safe
harbor, Noven notes that a variety of factors could cause its actual results
and experience to differ materially from anticipated results and other
expectations expressed by Noven's forward looking statements. The risks and
uncertainties that may effect the operations, performance, development and
results of Noven's business, include the following:
1. Dependence upon RPR and Novartis, its two licensing partners,
with respect to (i) the commercialization and marketing of certain transdermal
hormonal products and (ii) obtaining
24
<PAGE> 29
regulatory approval of certain other transdermal hormonal products.
Noven's revenues in any period can be materially affected by the sales and
marketing performance of either or both of its licensing partners.
2. Uncertainties regarding (i) the market share for Noven's
transdermal hormonal products which can be captured by Noven's licensing
partners, and (ii) the market for the Denti-Patch(TM) product and Noven's
ability to successfully establish and effectuate a marketing program.
3. Unanticipated difficulties associated with the manufacturing
process of Menorest and Vivelle for its licensing partners as well as its
Denti Patch(TM) product, that could result in delays in delivery and shortages
of product.
4. Competition from other entities engaged in transdermal and/or
transoral research, development, manufacturing and marketing, as well as other
entities engaged in alternative drug delivery technologies.
5. Difficulties associated with (i) identifying appropriate
licensing partners capable of meeting the financial requirements of research
and development and/or marketing new products, and (ii) consummating
satisfactory licensing agreements.
6. The time required to obtain regulatory approval of products
and its associated expenses.
7. The possible exposure to product liability suits in excess of
insurance policy limits or excluded from insurance coverage.
Readers are cautioned not to place undue reliance on forward looking
statements when made, which speak only as of the date made. Noven undertakes
no obligation to publicly release the results of any revision of these forward
looking statements to reflect events or circumstances after the date they are
made or to reflect the occurrence of unanticipated events. Also, unless
expressly stated, Noven does not adopt projections, forecasts or other forward
looking statements which may be disseminated from time to time by analysts and
other third parties.
Item 8. Financial Statements and Supplementary Data
25
<PAGE> 30
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT AUDITORS'
Deloitte & Touche LLP F-1
FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1996 and 1995 F-2
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-3
Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994 F-4
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-5
Notes to Financial Statements F-6
</TABLE>
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
Not applicable
PART III
Omitted pursuant to General Instruction G(3) to Form 10-K
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) 1. Financial Statements included in Part II of this
Report.
26
<PAGE> 31
2. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
<S> <C>
3.1 --Certificate of Incorporation of the Registrant dated April
10, 1987 and January 28, 1987, incorporated by reference to
Exhibit 3(a) of Registration Statement on Form S-18
(Commission File No. 33-20331-A).
3.2 --Amendments to Certificate of Incorporation of the Registrant
dated April 10, 1987 and January 28, 1988, incorporated by
reference to Exhibit 3(b) of Registration Statement on Form
S-18 (Commission File No. 33-20331-A).
3.3 --Amendment to Certificate of Incorporation of the Registrant
dated June 21, 1991, incorporated by reference to Exhibit 3.3
of Registration Statement on Form S-2 (Commission File No.
33-45784).
3.4 --Amendment to Certificate of Incorporation of the Registrant
dated August 17, 1992, incorporated by reference to Exhibit
3.4 of Form 10-K filed with the Securities and Exchange
Commission on March 31, 1994.
3.5 --By-laws of the Registrant, as amended and restated as of
April 28, 1992, incorporated by reference to Exhibit 3.5 of
Form 10-K filed with the Securities and Exchange Commission on
March 31, 1994.
3.6 --Amendment to Certificate of Incorporation of the Registrant
dated August 2, 1994 incorporated by reference to Exhibit 3.6
of Form 10-K filed with the Securities and Exchange Commission
on March 31, 1995.
10.2 --Agreement between the Registrant and Rorer Group, Inc. (now
known as Rhone-Poulenc Rorer, Inc.) dated April 27, 1989 (with
certain provisions omitted pursuant to Rule 24b-2), as amended
on June 22, 1990 (with certain provisions omitted pursuant to
Rule 24b-2), incorporated by reference to Exhibit 10-2 of Form
10-K filed with the Securities and Exchange Commission on
March 31, 1996.
10.3 --Amended and Restated Stock Option Plan of the Registrant,
incorporated by reference to Exhibit 10.10 of Form 10-K for
the year ended December 31, 1990 filed with the Securities and
Exchange Commission on March 28, 1991, as further amended on
June 23, 1992 and incorporated by reference to the 1992 Proxy
Statement filed with the Securities and Exchange Commission on
April 30, 1992.
</TABLE>
27
<PAGE> 32
<TABLE>
<S> <C>
10.5 --Parkside Plaza Office Lease between Maxine Chin and
the Registrant dated April 1, 1991, incorporated by
reference to Exhibit 10-5 of Form 10-K filed with the
Securities and Exchange Commission on March 31, 1996.
10.6 --Parkside Plaza Office Lease between James/ W. Keen and the
Registrant dated July 2, 1992, incorporated by reference to
Exhibit 10-6 of Form 10-K filed with the Securities and
Exchange Commission on March 31, 1996.
10.7 --Parkside Plaza Office Lease between Mark Rubino and the
Registrant dated November 28, 1990, incorporated by reference
to Exhibit 10-7 of Form 10-K filed with the Securities and
Exchange Commission on March 31, 1996.
10.8 --Parkside Plaza Office Lease between Bud Eiskant and the
Registrant dated June 1, 1990, incorporated by reference to
Exhibit 10-8 of Form 10-K filed with the Securities and
Exchange Commission on March 31, 1996.
10.9 --License Agreement between the Registrant and Ciba-Geigy
Corporation dated November 15, 1991 (with certain provisions
omitted pursuant to Rule 406) incorporated by reference to
Exhibit 10.9 of Amendment No. 1 to Registration Statement on
Form S-2 (Commission File No. 33-45784).
10.12 --Warrant and Warrant Agreement between the Registrant and
Ciba-Geigy Corporation dated November 15, 1991, incorporated
by reference to Exhibit 10.12 of Registration Statement on
Form S-2 (Commission File No. 33-45784).
10.13 --License Agreement and Supply Agreement between the
Registrant and Rhone-Poulenc Rorer Pharmaceuticals Inc. dated
June 26, 1992 (with certain provisions omitted pursuant to
Rule 24b-2), incorporated by reference to Exhibit 10.13 of
Form 10-K for the year ended December 31, 1992, filed with
the Securities and Exchange Commission on March 31, 1993.
10.14 --Warrant and Warrant Agreement between the Registrant and
Rhone-Poulenc Rorer Pharmaceuticals Inc. dated June 26, 1992,
incorporated by reference to Exhibit 10.14 of Form 10-K for
the year ended December 31, 1992, filed with the Securities
and Exchange Commission on March 31, 1993.
10.15 --Parkside Plaza Office Lease between Scott E. Stuckey and
Annamarie Stuckey and Registrant dated July 27, 1992,
incorporated by reference to Exhibit 10.15 of Form 10-K for
the year ended December 31, 1992, filed with the Securities
and Exchange Commission on March 31, 1993.
10.16 --Parkside Plaza Office Lease between Lawrence T. Deddy,
Trustee and the Registrant dated July 29, 1992, incorporated
by reference to Exhibit 10.16 of Form
</TABLE>
28
<PAGE> 33
<TABLE>
<S> <C>
10-K for the year ended December 31, 1992, filed with the
Securities and Exchange Commission on March 31, 1993.
10.17 --Agreement between the Registrant and Turnpike-McNeil
Development Limited dated January 29, 1993 (re: real
property), incorporated by reference to Exhibit 10.17 of Form
10-K for the year ended December 31, 1992, filed with the
Securities and Exchange Commission on March 31, 1993.
10.18 --Agreement between the Registrant and Turnpike-McNeil
Development Limited dated January 29, 1993 (re: real property
and building), incorporated by reference to Exhibit 10.18 of
Form 10-K for the year ended December 31, 1992, filed with the
Securities and Exchange Commission on March 31, 1993.
10.19 --Warrant issued to Ciba-Geigy Corporation dated April 1,
1993, incorporated by reference to Exhibit 10.19 of Form 10-K
for the year ended December 31, 1993, filed with the
Securities and Exchange Commission on March 31, 1994.
10.20 --Industrial Lease between Rhone-Poulenc Rorer Pharmaceuticals
Inc. and the Registrant dated March 23, 1993 and effective
February 16, 1993 (with certain provisions omitted pursuant to
Rule 24b-2), incorporated by reference to Exhibit 10.20 of
Form 10-K for the year ended December 31, 1993, filed with the
Securities and Exchange Commission on March 31, 1994.
10.21 --Second Amendment dated May 13, 1993 to Agreement between the
Registrant and Rhone-Poulenc Rorer, Inc. (successor to Rorer
Group, Inc.) dated April 27, 1989 (with certain provisions
omitted pursuant to Rule 24b-2), incorporated by reference to
Exhibit 10.21 of Form 10-K for the year ended December 31,
1993, filed with the Securities and Exchange Commission on
March 31, 1994.
10.22 --Amendment dated May 17, 1994 to Warrant dated November 15,
1991 issued to Ciba-Geigy Corporation incorporated by
reference to Exhibit 10.22 of Form 10-K for the year ended
December 31, 1994, filed with the Securities and Exchange
Commission on March 31, 1995.
10.23 --Warrant issued to Ciba-Geigy Corporation dated November 28,
1994 incorporated by reference to Exhibit 10.23 of Form 10-K
for the year ended December 31, 1994, filed with the
Securities and Exchange Commission on March 31, 1995.
10.24 --Employment Agreement between Steven Sablotsky and the
Registrant dated December 31, 1994 incorporated by reference
to Exhibit 10.24 of Form 10-K for the year ended December 31,
1994, filed with the Securities and Exchange Commission on
March 31, 1995.
</TABLE>
29
<PAGE> 34
<TABLE>
<S> <C>
10.25 --Employment Agreement between Mitchell Goldberg and
the Registrant dated December 31, 1994 incorporated
by reference to Exhibit 10.25 of Form 10-K for the
year ended December 31, 1994, filed with the
Securities and Exchange Commission on March 31, 1995.
10.26 --Employment Agreement between Colin A. Norris and the
Registrant dated February 1, 1995, incorporated by reference
to Exhibit 10-26 of Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange Commission on
March 31, 1996.
10.27 --Supply Agreement between the Registrant and Ciba-Geigy
Corporation, Pharmaceuticals Division, dated August 31, 1995
and effective March, 1996 (certain portions have been omitted
pursuant to Rule 24b-2), incorporated by reference to
Exhibit 10.27 of Form 10-Q(A-2) for the quarter ended March
31, 1996, filed with the Securities and Exchange Commission on
November 1, 1996.
10.28 --Amendment dated May 6, 1996 to the June 9, 1994 Amendment
to the License Agreement and the Supply Agreement, each
dated April 27, 1989 by and between the Company and
Rhone-Poulenc Rorer, Inc. (with certain portions omitted
pursuant to Rule 24b-2), incorporated by reference to Exhibit
10.28 of Form 10-Q(A) for the quarter ended June 30, 1996,
filed with the Securities and Exchange Commission on December
3, 1996.
27 --Financial Data Schedule (For S.E.C. use only).
(b) Reports on Form 8-K-None.
</TABLE>
30
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 28, 1997 NOVEN PHARMACEUTICALS, INC.
By:/s/ Steven Sablotsky
--------------------------
STEVEN SABLOTSKY, Chairman
of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
By: /s/ Steven Sablotsky
------------------------- Principal Executive March 28, 1997
Steven Sablotsky Officer and Director
(Chairman of the
Board and President)
By: /s/ William A. Pecora
------------------------- Principal Financial March 28, 1997
William A. Pecora and Accounting Officer
(Chief Financial Officer)
By: /s/ Mitchell Goldberg
------------------------- Director March 28, 1997
Mitchell Goldberg
(Executive Vice
President)
By: /s/ Sheldon H. Becher
------------------------ Director March 28, 1997
Sheldon H. Becher
</TABLE>
33
<PAGE> 36
<TABLE>
<S> <C> <C>
By: /s/ Sidney Braginsky Director March 28, 1997
----------------------
Sidney Braginsky
By: /s/ Lawrence J. Dubow
---------------------- Director March 28, 1997
Lawrence J. Dubow
</TABLE>
34
<PAGE> 37
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Noven Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Noven Pharmaceuticals, Inc.
("Noven") as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of Noven's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Noven Pharmaceuticals, Inc. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Miami, Florida
February 14, 1997
F-1
<PAGE> 38
NOVEN PHARMACEUTICALS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,456,826 $ 16,131,263
Securities held to maturity 13,692,010 7,881,397
Accounts receivable 3,366,489 2,512,561
Inventories 4,151,020 5,069,946
Prepaid and other current assets 248,357 258,220
------------- -------------
Total current assets 26,914,702 31,853,387
------------- -------------
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 18,574,875 17,506,935
Less: accumulated depreciation and amortization 2,873,401 1,974,138
------------- -------------
Total net property and equipment 15,701,474 15,532,797
------------- -------------
OTHER ASSETS:
Patent development costs, net 1,547,434 1,218,630
Deposits and other assets 65,128 40,738
------------- -------------
Total other assets 1,612,562 1,259,368
------------- -------------
TOTAL $ 44,228,738 $ 48,645,552
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 2,055,780 $ 4,293,185
------------- -------------
DEFERRED LICENSE REVENUE 6,096,015 6,322,011
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Preferred stock - authorized 100,000 shares of
$.01 par value; no shares issued or outstanding
Common stock - authorized 30,000,000 shares
of $.0001 par value; issued and outstanding
19,831,538 shares in 1996 and 19,674,144 in 1995 1,983 1,967
Additional paid-in capital 60,122,275 60,091,751
Accumulated deficit (24,047,315) (22,063,362)
------------- -------------
Total stockholders' equity 36,076,943 38,030,356
------------- -------------
TOTAL $ 44,228,738 $ 48,645,552
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 39
NOVEN PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
REVENUES:
<S> <C> <C> <C>
Product sales $19,651,872 $ 8,747,965 $ 294,814
License revenue 814,996 1,702,780 4,155,163
Interest income 1,177,535 1,681,688 1,213,479
Other income 51,908 381,095
------------ ------------ ------------
Total revenues 21,644,403 12,184,341 6,044,551
------------ ------------ ------------
EXPENSES:
Cost of products sold 10,020,614 4,814,349 147,866
Research and development 8,729,709 10,508,763 8,035,782
Marketing, general and administrative 4,878,033 3,441,837 2,805,128
------------ ------------ ------------
Total expenses 23,628,356 18,764,949 10,988,776
------------ ------------ ------------
NET LOSS $(1,983,953) $(6,580,608) $(4,944,225)
------------ ------------ ------------
NET LOSS PER SHARE $ (0.10) $ (0.34) $ (0.28)
------------ ------------ ------------
WEIGHTED AVERAGE SHARES
OF COMMON STOCK AND
COMMON STOCK EQUIVALENTS 19,800,115 19,236,807 17,439,955
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 40
NOVEN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 16,148,000 $1,615 $31,230,400 $(10,538,529) $20,693,486
---------- ------ ----------- ------------ -----------
Issuance of 441,068 shares of
stock pursuant to stock
option plan, net 441,068 44 16,585 16,629
Sale of 2,250,000 shares of
common stock in a public
offering , net 2,250,000 225 28,317,348 28,317,573
Grant of stock purchase warrant 462,500 462,500
Net loss (4,944,225) (4,944,225)
---------- ------ ----------- ------------ -----------
BALANCE, DECEMBER 31, 1994 18,839,068 1,884 60,026,833 (15,482,754) 44,545,963
---------- ------ ----------- ------------ -----------
Issuance of 726,347 shares of
stock pursuant to stock
option plan, net 726,347 72 64,929 - 65,001
Issuance of 108,729 shares for
acquisition of property
and equipment 108,729 11 (11)
Net loss (6,580,608) (6,580,608)
---------- ------ ----------- ------------ -----------
BALANCE, DECEMBER 31, 1995 19,674,144 1,967 60,091,751 (22,063,362) 38,030,356
---------- ------ ----------- ------------ -----------
Issuance of 157,394 shares of
stock pursuant to stock
option plan, net 157,394 16 30,524 30,540
Net loss (1,983,953) (1,983,953)
---------- ------ ----------- ------------ -----------
BALANCE, DECEMBER 31, 1996 19,831,538 $1,983 $60,122,275 $(24,047,315) $36,076,943
---------- ------ ----------- ------------ -----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 41
NOVEN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,983,953) $ (6,580,608) $ (4,944,225)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 899,263 1,327,254 861,312
Amortization of patent costs 120,480 120,480 90,490
Decrease (increase) in inventories 918,926 (3,805,393) (563,914)
(Increase) decrease in prepaid and other
current assets 9,863 566,939 (237,981)
Increase in accounts receivable (853,928) (1,800,106) (712,455)
(Decrease) increase in accounts payable and
accrued liabilities (2,237,405) 1,022,528 2,127,803
Decrease in deferred license revenue (225,996) (225,996) (1,475,996)
------------- ------------ ------------
Cash flows used in operating activities (3,352,750) (9,374,902) (4,854,966)
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) maturity of securities (5,835,613) 15,563,673 (11,426,090)
Purchase of fixed assets, net (1,067,940) (1,837,528) (2,772,381)
Payments for patent development costs (449,284) (359,909) (311,205)
Refund (payment) of deposits 610 4,656 (19,975)
------------- ------------ ------------
Cash flows (used in) provided in investing activities (7,352,227) 13,370,892 (14,529,651)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 30,540 65,001 28,334,202
============= ============ ============
Grant of stock purchase warrant 462,500
Cash flows provided by financing activities 30,540 65,001 28,796,702
------------- ------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (10,674,437) 4,060,991 9,412,085
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 16,131,263 12,070,272 2,658,187
------------- ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $5,456,826 $16,131,263 $ 12,070,272
------------- ------------ ------------
See accompanying notes to financial statements.
</TABLE>
F-5
<PAGE> 42
NOVEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Noven Pharmaceuticals, Inc. ("Noven") was incorporated in Delaware in
January 1987 to become a fully integrated pharmaceutical company capable of
developing, manufacturing and marketing pharmaceutical products which
incorporate alternate drug delivery technologies. The following is a summary
of significant accounting policies of Noven:
PERVASIVENESS OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash and
securities with a remaining maturity of three months or less.
SECURITIES HELD TO MATURITy - Securities held to maturity consist mainly of
U.S. Government obligations with maturities no longer than one year. The
securities are recorded at cost which approximates fair value.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out method) or net realizable value. The following are the major
classes of inventories as of December 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Finished goods $1,399,858 $2,226,603
Work in process 491,014 1,262,657
Raw materials 2,260,148 1,580,686
---------- ----------
TOTAL $4,151,020 $5,069,946
---------- ----------
</TABLE>
Inventories at December 31, 1996 and 1995 related primarily to the Company's
transdermal estrogen delivery system. To date Noven has not experienced and
does not anticipate in the future, any difficulty acquiring materials
necessary to manufacture its transdermal systems.
PROPERTY AND EQUIPMENT - Property and equipment is recorded at cost.
Depreciation is provided over the estimated useful lives of the assets
ranging up to 31 years. Leasehold improvements are amortized over the life
of the lease or the service life of the improvements, whichever is shorter.
The straight-line method of depreciation is principally followed for
financial purposes. Fully depreciated assets are removed from the cost and
accumulated depreciation accounts.
PATENT DEVELOPMENT COSTS - Costs, principally legal fees, related to the
development of patents are capitalized and amortized over the lesser of
their estimated economic useful lives or their remaining legal lives.
F-6
<PAGE> 43
INCOME TAXES - Noven accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". SFAS 109 provides that income taxes are
accounted for using an asset and liability method which requires the
recognition of deferred tax assets and liabilities for expected future tax
consequences of temporary differences between tax bases and financial
reporting bases of assets and liabilities. As there is no assurance that
the Company will generate sufficient earnings to utilize its available tax
assets for carryforwards, a valuation allowance has been established to
offset the existing net deferred tax asset. At December 31, 1996 and 1995,
Noven had net operating loss carryforwards of approximately $26,000,000 and
$24,000,000. Additionally, at December 31, 1996 and 1995, Noven had
research and development credit carryforwards of approximately $2,600,000
and $2,200,000 respectively. Carryforwards expire through 2011.
REVENUE RECOGNITION - Revenue from product sales is recognized at the time of
shipment. Royalty revenue is recognized when earned and is included in
product sales. License revenue is recognized into income when earned under
the terms of the agreements. Substantially all of Noven's product sales were
to its principal licensees (see Note 3).
COSTS OF PRODUCT SOLD - Direct and indirect costs associated with
manufacturing the transdermal estrogen delivery system are included in costs
of products sold. Pre-production expenses incurred during the start-up
phase are charged to research and development.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs consist of
self-funded research and development costs and the costs associated with
work performed under license agreements. Research and development costs
included direct and allocated expenses and are expensed as incurred.
Research and development costs under license agreements partially funded by
the licensees are recorded as license revenue or other income.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and cash
equivalents, securities held to maturity, accounts receivable, accounts
payable and accrued expenses approximate fair value due to the relatively
short maturity of the respective instruments.
LOSS PER SHARE - Loss per share is based on the weighted average number of
shares outstanding.
RECLASSIFICATIONS - Certain amounts in the 1995 financial statements have
been reclassified to conform with the 1996 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 2,540,035 $ 2,540,035
Building 2,267,859 2,055,714
Leased property and leasehold improvements 8,053,841 7,978,592
Manufacturing and testing equipment 5,172,775 4,481,370
Furniture 540,365 451,224
----------- -----------
18,574,875 17,506,935
Less accumulated depreciation and amortization 2,873,401 1,974,138
----------- -----------
$15,701,474 $15,532,797
----------- -----------
</TABLE>
F-7
<PAGE> 44
On February 16, 1993, Noven purchased a 20,000 square foot building and 9.5
acres of vacant land in two separate transactions. The $1.1 million
purchase price for the building was paid with $300,000 in cash and 87,317
shares of restricted Noven common stock. The purchase price for the vacant
land, $2,204,000 was paid with 168,399 shares of Noven restricted stock.
The price protection provisions of the contract resulted in the issuance of
108,729 additional shares of Noven restricted stock on March 15, 1995. The
land and building are adjacent to two 40,000 square foot manufacturing
facilities which are leased by Noven from a licensee as part of a license
agreement.
3. LICENSE AGREEMENTS
In 1989 Noven entered into a license agreement which gave the licensee the
right to market Noven's transdermal estrogen delivery system worldwide
except for Japan. In 1990 Noven reacquired exclusive marketing rights to
the United States and Canada. Licensee fees and milestone payments received
in connection with this agreement were fully recognized into income by 1994.
In 1991 Noven entered into a license agreement which gave the licensee the
right to market Noven's transdermal estrogen delivery system in the United
States and Canada. License fees and milestone payments received in
connection with this agreement were fully recognized into income by 1994.
This agreement also provides for receipt of royalty payments based upon the
sales of the licensee. In addition, warrants to purchase 1,091,151 shares
of common stock were granted under this agreement. The exercise prices of
these warrants range from $2.5875 to $15.34. The term of the warrants range
from five to seven years. In addition, during a 30-day period subsequent to
any public or private sale of common stock by Noven, the licensee has the
right to purchase shares of common stock at the same price and in an amount
sufficient to maintain the same ownership percentage (inclusive of shares
subject to warrants held by the licensee) in outstanding common stock held
prior to any such sales. As of December 31, 1996, no warrants have been
exercised.
In 1992 Noven entered into an additional license agreement which granted the
licensee the right to market Noven's transdermal progestogen delivery system
and its transdermal combination estrogen/progestogen delivery system
worldwide. The agreement also expanded the licensee's marketing rights for
the transdermal estrogen delivery system to include Japan. The licensee
will fund all development and clinical costs for the licensed products and
will provide Noven certain milestone payments. In addition, Noven granted a
warrant to the licensee for the right to purchase up to 1,000,000 shares of
Noven common stock at a price of $8 per share for a period of 5 years. As
part of this license agreement, the licensee funded the construction of a
manufacturing facility for the production of transdermal drug delivery
systems. The facility is leased by Noven at a substantially below market
rate. Noven retains the right to purchase the facility at any time in the
future at the licensee's book value. Noven has recorded both the facility
and deferred revenue at amounts equal to the funds advanced by the licensee
which are depreciated/amortized to depreciation expense and license revenue
over the life of the underlying lease (see Note 2).
4. COMMITMENTS AND CONTINGENCIES
Noven has operating lease commitments, principally for research and
development facilities and office space. Future minimum annual rental
payments on existing noncancelable leases, at December 31, 1996, approximate
the following:
<TABLE>
<S> <C>
1997 $207,000
1998 155,000
1999 12,000
--------
Total $374,000
</TABLE>
F-8
<PAGE> 45
Rent expense for the years ended December 31, 1996, 1995 and 1994
amounted to approximately $186,000, $172,000 and $167,000 respectively.
Noven has employment agreements that provide for base salaries subject to
cost of living increases each year and other increases and bonuses as
determined by the Compensation Committee. These agreements provide for
annual commitments of approximately $700,000 in the aggregate.
5. RELATED PARTY TRANSACTIONS
Professional services have been rendered by an accounting firm of which a
director of Noven is a substantial shareholder. For the years ended December
31, 1996, 1995 and 1994, Noven paid approximately $76,000, $80,000 and
$46,000 for these services.
6. STOCK OPTIONS
Noven had a stock option plan (the "Plan") that provided for the granting of
10,000,000 incentive and non-qualified stock options to selected individuals
or entities. This plan terminated on December 31, 1996. The terms and
conditions (including price, exercise date and number of shares) were
determined by the Stock Option Committee, which administered the Plan. The
per share exercise price of (i) non-qualified stock options granted to
directors and all other persons, could not be less than the fair market
value and 50% of the fair market value, respectively, of the common stock
on the date of grant and (ii) incentive stock options granted to employees
and employees owning in excess of 10% of the issued and outstanding common
stock, could not be less than the fair market value and 110% of the fair
market value, respectively, of the common stock on the date of grant.
Noven has not granted any options at less than fair market value.
Each option issued under the Plan is exercisable after the period(s)
specified in the option agreement, but no option can be exercised after 10
years from the date of grant (or five years from the date of grant in the
case of a grantee holding more than 10% of the issued and outstanding common
stock). Options may be exercised only if the grantee has been in the
continuous employment of, or affiliation with, or has continuously acted as
a consultant for Noven from the date of grant to the date of exercise,
except in the event of death or permanent disability.
At December 31, 1996 and 1995, Noven had reserved 3,750,000 shares of
common stock for issuance under the Plan.
Noven has adopted a new stock option plan effective January 1, 1997 that
provides for the granting of up to 4,000,000 incentive and non-qualified
stock options. This plan is subject to approval at the 1997 Annual
Stockholders Meeting. No options have been granted under the new plan. The
provisions thereunder are substantially the same as the Plan.
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting
for its Plan. Accordingly, no compensation expense has been recognized.
Had compensation cost for the Company's Plan been determined based upon the
fair value at the grant date for awards under this Plan consistent with the
methodology prescribed under Statement of Financial Accounting Standards No.
123, Accounting for Stock Based
F-9
<PAGE> 46
Compensation, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net Income:
As Reported $(1,983,953) $(6,580,608)
Pro forma (2,698,116) (6,961,488)
Earnings per Share:
As Reported $(0.10) $(0.34)
Pro forma (0.14) (0.36)
</TABLE>
The fair value of the options granted during 1996 and 1995, is estimated as
$6.44 and $4.24, respectively, on the date of the grant using the Black
Scholes option-pricing model with the assumptions listed below. The
discount rate reflects the reduction in value due to transfer restrictions
on the stock.
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Volatility 65.9% 62.4%
Risk free interest rate 6.21% 6.09%
Expected Life (years) 7 7
Discount rate 33.3% 33.3%
</TABLE>
Stock option transactions related to the Plan are summarized as follows :
<TABLE>
<CAPTION>
--------------------- ------------------- -----------------------
1996 1995 1994
--------------------- ------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
- ------- ----------- -------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,509,363 $ 6.79 2,042,149 $ 4.23 2,536,771 $ 3.62
Granted 362,675 14.38 628,700 9.08 36,750 14.16
Exercised (189,158) 2.17 (961,636) 2.13 (513,433) 1.75
Canceled (117,875) 8.86 (199,850) 10.31 (17,939) 9.41
--------- ------ --------- ------ --------- ------
Outstanding at
year end 1,565,005 $ 8.95 1,509,363 $ 6.79 2,042,149 $ 4.23
--------- ------ --------- ------ --------- ------
Options exercisable
at year end 489,048 663,031 1,458,377
--------- ------ --------- ------ --------- ------
</TABLE>
F-10
<PAGE> 47
The following tables summarize information concerning outstanding and
exercisable options at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Price 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price
----------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
$0 - $4 413,834 2.17 $ 2.37 179,384 $ 2.44
$4 - $8 97,500 5.42 7.63 6,750 7.57
$8 - $12 614,546 4.07 9.62 232,140 9.59
$12 - $18 439,125 6.03 14.49 70,774 14.78
--------- ---- ------ ------- ------
1,565,005 4.20 $ 8.95 489,048 $ 7.69
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Price 12/31/95 Contractual Life Exercise Price 12/31/95 Exercise Price
----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0 - $4 602,667 2.21 $ 2.30 355,169 $ 2.31
$4 - $8 167,500 6.30 7.68 0 0
$8 - $12 650,596 5.12 9.61 255,231 9.78
$12 - $18 88,600 3.03 14.83 52,631 14.78
--------- ---- ------ ------- ------
1,509,363 3.97 $ 6.79 663,031 $ 6.17
</TABLE>
F-11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NOVEN PHARMACEUTICALS, INC. FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,456,826
<SECURITIES> 13,692,010
<RECEIVABLES> 3,366,489
<ALLOWANCES> 0
<INVENTORY> 4,151,020
<CURRENT-ASSETS> 26,914,702
<PP&E> 18,574,875
<DEPRECIATION> 2,873,401
<TOTAL-ASSETS> 44,228,738
<CURRENT-LIABILITIES> 2,055,780
<BONDS> 0
0
0
<COMMON> 1,983
<OTHER-SE> 36,074,960
<TOTAL-LIABILITY-AND-EQUITY> 44,228,738
<SALES> 19,651,872
<TOTAL-REVENUES> 21,644,403
<CGS> 10,020,614
<TOTAL-COSTS> 10,020,614
<OTHER-EXPENSES> 8,729,709
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,983,953)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,983,953)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,983,953)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
