10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission file number 0-17254
NOVEN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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59-2767632 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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11960 S.W. 144
th Street, Miami, Florida
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33186 |
(Address of principal executive offices)
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(Zip Code) |
Registrants
telephone number, including area code 305-253-5099
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
Common Stock, Par Value $.0001
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NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 o No þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity of the registrant held by
non-affiliates of the registrant was approximately $266 million (computed by reference to the price
at which the common equity was last sold on June 30, 2008, the last business day of the
registrants most recently completed second fiscal quarter).
As of March 2, 2009, there were 24,913,418 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part
III: Portions of the registrants Proxy Statement for its 2009 Annual Meeting of Stockholders
NOVEN PHARMACEUTICALS, INC.
Annual Report on Form 10-K
for the year ended December 31, 2008
TABLE OF CONTENTS
Trademark Information: DOT Matrix® and DentiPatch® are registered
trademarks of Noven Pharmaceuticals, Inc.; Lithobid®, Pexeva® and
Stavzor® are registered trademarks, and Mesafem is a trademark of Noven
Therapeutics, LLC; Vivelle® is a registered trademark of Novartis Pharmaceuticals
Corporation; Estradot® (foreign) and Vivelle-Dot® are registered trademarks,
and Menorest is a trademark, of Novartis AG; CombiPatch® and Estalis® (United
States) are registered trademarks of Vivelle Ventures LLC; Menoaid® is a registered
trademark of Purapharm International; Femiest® is a registered trademark of
sanofi-aventis in Japan; Daytrana® is a registered trademark of Shire Pharmaceuticals
Ireland Limited; Intrinsa® is a trademark of P&G Pharmaceuticals; Duragesic®
is a registered trademark of Johnson & Johnson Corporation; Ortho Evra® is a registered
trademark of Ortho-McNeil Pharmaceutical, Inc.; Pristiq® is a registered trademark of
Wyeth Laboratories or affiliates; and Vyvanse® is a registered trademark of Shire LLC.
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FORWARD-LOOKING INFORMATION
Statements in this report that are not descriptions of historical facts are forward-looking
statements provided under the safe harbor protection of the Private Securities Litigation Reform
Act of 1995. These statements are made to enable a better understanding of our business, but
because these statements are subject to many risks, uncertainties, future developments and changes
over time, actual results may differ materially from those expressed or implied by such statements.
Examples of forward-looking statements are statements about anticipated financial or operating
results, financial projections, business prospects, future product performance, future research and
development results, anticipated regulatory filings and approvals and other matters that are not
historical facts. Such statements often include words such as anticipates, believes,
estimates, expects, intends, may, plans, could, should, seeks, will, would or
similar expressions.
These forward-looking statements are based on the information that was available to us, and
the expectations and assumptions that were deemed reasonable by us, at the time the statements were
made. We do not undertake any obligation to update any forward-looking statements in this report
or in any of our other communications, except as required by law, and all such forward-looking
statements should be read as of the time the statements were made, and with the recognition that
these forward-looking statements may not be complete or accurate at a later date.
Many factors may cause or contribute to actual results or events being materially different
from those expressed or implied by forward-looking statements. Although it is not possible to
predict or identify all such factors, they include those factors set forth under Risk Factors
beginning on page 21 of this report.
PART I
Item 1. Business.
General Business & Strategy
Noven Pharmaceuticals, Inc. (we or Noven) is a specialty pharmaceutical company engaged in
the research, development, manufacturing, licensing, marketing and sale of prescription
pharmaceutical products. Our business is focused in three principal areas: (i) Noven Transdermals,
our transdermal drug delivery segment; (ii) Novogyne Pharmaceuticals (Novogyne) our womens
health joint venture with Novartis Pharmaceuticals Corporation (Novartis); and (iii) Noven
Therapeutics, our specialty pharmaceutical segment. Each of these principal areas is more fully
discussed below.
Our primary commercialized products include prescription transdermal patches utilizing our
proprietary transdermal drug delivery technology for use in the treatment of Attention Deficit
Hyperactivity Disorder (ADHD) and in menopausal hormone therapy (HT), as well as oral
prescription products for use in the treatment of certain psychiatric conditions. Our
developmental pipeline includes products in the womens health and central nervous system (CNS)
categories.
Our long-term strategy for growth is focused on: (i) expanding and diversifying the
transdermal product offerings of Noven Transdermals through new transdermal product development
activities and new or expanded industry collaborations; (ii) maximizing the opportunities presented
at our Novogyne joint venture by continuing effective promotion of Vivelle-Dot® and
CombiPatch® and seeking to
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expand the range of products offered by the Novogyne sales force; and (iii) leveraging the
marketing and sales infrastructure and industry expertise of Noven Therapeutics with specialty
pharmaceutical products, and with complementary products that we will seek to develop or acquire,
and possible strategic collaborations all with the goal of establishing Noven as a leading, high
growth specialty pharmaceutical company. We regularly review our corporate strategies to evaluate
their suitability and effectiveness in light of evolving business, industry, market and other
conditions.
Noven operates in three segments distinguished along product categories and nature of the
business unit: (i) Noven Transdermals, which currently engages in the manufacturing, licensing and
sale to partners of prescription transdermal products; (ii) Novogyne, our womens health joint
venture with Novartis in which we own a 49% equity interest and (iii) Noven Therapeutics, which
currently engages in the marketing and sale of pharmaceutical products. Historically, Novogyne was
viewed as a component of the Noven Transdermals unit because the joint ventures primary activity
involves the marketing and sale in the United States and Canada of patches manufactured by Noven
Transdermals. In the fourth quarter of 2008, as a result of management and organizational changes
throughout 2008, Noven revised its presentation of reportable segments to reflect the joint venture
as a reportable unit distinct from the manufacturing and licensing activities of Noven
Transdermals. This view is consistent with the manner in which information is reported for
management decision making. See Note 17 Segment and Customer Data in our Notes to Consolidated
Financial Statements for Novens segment financial reporting.
We were incorporated in Delaware in 1987 as Noven Pharmaceuticals, Inc., and our principal
executive offices are located at 11960 S.W. 144th Street, Miami, Florida 33186. Our telephone
number is (305) 253-5099, and our website address is www.noven.com.
Noven Transdermals
Our Noven Transdermals segment is engaged in the manufacturing, licensing and sale of advanced
transdermal patches utilizing our proprietary drug delivery technologies. Our principal
commercialized transdermal products are prescription patches for use in the treatment of ADHD and
in HT. These products include:
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Daytrana®, the first and only transdermal patch approved by the United
States Food & Drug Administration (FDA) for the treatment of ADHD. |
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Vivelle-Dot®, the most prescribed transdermal estrogen therapy product in
the United States and the smallest estrogen patch approved by the FDA. This product is
marketed primarily under the brand name Estradot® outside the United States. |
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CombiPatch®, the first combination estrogen/progestin transdermal patch
approved by the FDA. This product is marketed primarily under the brand name
Estalis® outside the United States. |
Transdermal patches utilize an adhesive patch containing medication that is administered
through the skin and into the bloodstream over an extended period of time. Patches avoid first
pass liver metabolism and may offer significant advantages over conventional oral and parenteral
dosage forms, including non-invasive administration, controlled delivery, improved patient
compliance, flexible dose duration and avoidance of certain side effects.
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Patches incorporating our patented DOT Matrix® technology, such as
Daytrana®, Vivelle-Dot® and CombiPatch®, are diffusion-based
patches that use a patented blend of silicone adhesive, acrylic adhesive and drug. DOT
Matrix® is a highly efficient class of diffusion-based drug-in-adhesive patch
technology, patented through 2014, that can often deliver more drug through a smaller patch area
than competitive patches without using irritating skin permeation enhancers and without
compromising adhesion. This patented blend of silicone adhesive, acrylic adhesive and drug causes
microscopic pockets of concentrated drug to be formed and uniformly dispersed throughout the
patchs drug/adhesive layer. The resulting high concentration gradient between each drug pocket
and the skin works to enhance the diffusion of drug from the patch through the skin and into the
bloodstream. This inherent delivery efficiency reduces the need for skin permeation enhancers.
Precise ratios of silicone adhesive, acrylic adhesive and drug regulate the rate of drug delivery
and help assure therapeutic blood levels over the intended course of therapy. We believe that our
DOT Matrix® and other transdermal technologies enable us to develop patient-friendly
transdermal systems that can reduce skin irritation sometimes associated with patches, improve
adhesion, minimize patch size and improve patch appearance.
Novogyne Pharmaceuticals
Our HT products are marketed and sold in the United States through Vivelle Ventures LLC (d/b/a
Novogyne Pharmaceuticals) (Novogyne), a joint venture that we established with Novartis in 1998
to market and sell womens prescription healthcare products. These products include our
transdermal hormone therapy product delivery systems marketed under the brand names
Vivelle-Dot® and CombiPatch®. We hold a 49% equity interest in Novogyne, and
Novartis holds the remaining 51% equity interest.
Novogynes sales and marketing efforts have helped Vivelle-Dot® to become the most
prescribed product in the transdermal estrogen therapy (ET) patch category, with a 61% share of
monthly total prescriptions written in the United States as of December 31, 2008. In connection
with a transition to our advanced Vivelle-Dot® product, we ceased manufacturing our
first generation estrogen patch (which was marketed as Vivelle®, Menorest and
Femiest®) in late 2006.
Under the terms of the joint venture agreements, we manufacture and supply
Vivelle-Dot® and CombiPatch® to Novogyne, perform marketing, sales and
promotional activities, and receive royalties from Novogyne based on Novogynes sales of
Vivelle-Dot® and CombiPatch®. We are also reimbursed by Novogyne for costs
incurred by us on behalf of Novogyne, including costs associated with the Noven employees who
comprise the Novogyne sales force and other Noven personnel who provide services to Novogyne.
Novartis distributes Vivelle-Dot® and CombiPatch® and provides certain other
services to Novogyne, including contracting with the managed care sector and all regulatory,
accounting and legal services.
We account for our investment in Novogyne under the equity method of accounting and report our
share of Novogynes earnings as Equity in earnings of Novogyne on our Consolidated Statements of
Operations. We defer the recognition of 49% of our profit on products sold to Novogyne until the
products are sold by Novogyne to third party customers. Under the terms of the joint venture
agreements, Novartis is entitled to an annual $6.1 million preferred return from Novogyne, which
has the effect of reducing our share of Novogynes income in the first quarter of each year.
After the annual preferred return to Novartis, our share of Novogynes income increases as product
sales increase, subject to a maximum of 49%. In 2008, 2007 and 2006, our share of Novogynes
income was $45.6 million, $35.9 million and $28.6 million,
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respectively, representing
48.9%, 48.6% and 48.4%, respectively, of Novogynes income after Novartis preferred returns
for each of those years. The income we recognize from Novogyne is a non-cash item. Any cash we
receive from Novogyne is in the form of cash distributions which are based upon a contractual
formula. Accordingly, the amount of cash that we receive from Novogyne in any period is typically
not the same as the amount of income we recognize from Novogyne for that period. In 2008, 2007 and
2006, we received $42.0 million, $28.8 million and $26.4 million, respectively, in distributions
from Novogyne, which accounted for a substantial portion of our net operating cash flows for these
periods. We expect that for the next several years a substantial portion of our earnings and cash
flows will be generated through our interest in Novogyne.
Novogyne is managed by a committee (the Management Committee) comprised of five members,
three of whom are appointed by Novartis and two of whom are appointed by Noven. Novens Executive
Vice President is a Management Committee member and serves as President of Novogyne. Pursuant to
the joint venture agreements, certain significant actions require a supermajority vote of the
Management Committee members, including approving or amending the annual operating and capital
budgets of Novogyne, incurring debt or guaranties in excess of $1.0 million, entering into new
supply or licensing arrangements, marketing new products and acquiring or disposing of material
amounts of Novogynes assets. Novartis has the right to dissolve the joint venture in the event of
a change in control of Noven if the entity which acquires control is one of the ten largest
pharmaceutical companies (as measured by annual dollar sales). Upon dissolution, Novartis would
reacquire the rights to market Vivelle-Dot® under the terms of the original license agreement with Novartis for Novens
transdermal estrogen patches, and Novogynes other assets would be
liquidated and distributed to the parties in accordance with their capital account balances.
The joint venture will also dissolve upon the expiration of the original license agreement with Novartis
for Novens transdermal estrogen patches, as described below under Commercialized Products Hormone Therapy -Vivelle-Dot®/Estradot®.
The joint venture agreement includes a buy/sell provision that either Noven or Novartis may
trigger by notifying the other party of the price at which the triggering party would be willing to
acquire the other partys entire interest in the joint venture. Upon receipt of this notice, the
non-triggering party has the option to either purchase the triggering partys interest in Novogyne
or to sell its own interest in Novogyne to the triggering party at the price established by the
triggering party. If we are the purchaser, then we must also pay an additional amount equal to the
net present value of Novartis preferred return. This amount is calculated by applying a specified
discount rate and a period of 10 years to Novartis $6.1 million annual preferred return.
Noven Therapeutics
In August 2007, we acquired Noven Therapeutics, which now comprises our specialty pharmaceutical
operations. Noven Therapeutics currently markets and sells three branded prescription psychiatry
products:
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Stavzor®, a valproic acid delayed release product utilizing a proprietary
enteric-coated soft gelatin capsule delivery system. In July 2008, the FDA granted
final approval for the product, which is indicated for use in the
treatment of manic episodes associated with bipolar disorder, monotherapy and
adjunctive therapy in multiple seizure types (including epilepsy), and prophylaxis of
migraine headaches. Stavzor® was commercially launched in August 2008. |
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Pexeva®, a selective serotonin re-uptake inhibitor (SSRI)
antidepressant indicated for major depressive disorder, panic disorder, obsessive
compulsive disorder and generalized anxiety disorder. |
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Lithobid®, an extended release lithium product indicated for the
maintenance of bipolar disorder and the treatment of related manic episodes. |
In addition, we are advancing the development of Mesafem, a non-hormonal therapy
in Phase 2 clinical studies for the treatment of vasomotor symptoms associated with menopause. We
will seek to leverage Noven Therapeutics marketing and sales infrastructure with complementary
products that we will seek to develop or acquire.
Products
The following table sets forth certain information regarding our commercialized products and
products under development.
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Commercialized or |
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Indication |
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Developmental |
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Regulatory Status |
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Noven Transdermals
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Vivelle-Dot®/Estradot®
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Menopausal symptoms/
osteoporosis
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Commercialized
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FDA-approved;
Approved in multiple
foreign countries |
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CombiPatch®/Estalis®/
Menoaid®
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Menopausal symptoms/
osteoporosis
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Commercialized
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FDA-approved;
Approved in multiple
foreign countries |
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Daytrana®
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ADHD
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Commercialized
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FDA-approved;
Application filed in
European Union,
Canada |
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Amphetamine Patch
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ADHD
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Developmental
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Currently undergoing Phase 1 study |
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Testosterone Patch
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Hypoactive Sexual
Desire Disorder and
other indications
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Developmental
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Partners NDA
withdrawn in December
2004 |
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Noven Therapeutics
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Stavzor®
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Bipolar disorder,
migraine therapy and
epilepsy
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Commercialized
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FDA-approved |
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Pexeva®
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Major depressive
disorder, panic
disorder, obsessive
compulsive disorder
and generalized
anxiety disorder
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Commercialized
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FDA-approved |
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Lithobid®
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Bipolar disorder and
related manic
episodes
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Commercialized
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FDA-approved |
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Mesafem
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Vasomotor symptoms
(hot flashes)
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Developmental
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Currently undergoing
Phase 2 study |
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Transmucosal
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DentiPatch®
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Dental pain
associated with
certain dental
procedures
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Commercialized
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FDA-approved |
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Commercialized Products
Hormone Therapy
Overview
Our menopausal HT products consist of:
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Vivelle-Dot® /Estradot® our advanced
transdermal estrogen patch; and |
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CombiPatch® /Estalis® /Menoaid® our combination
transdermal estrogen/progestin patch. |
Our HT products are indicated for menopausal symptoms. The most common acute physical symptoms
of natural or surgical menopause are hot flashes and night sweats, which can occur in a substantial
percentage of menopausal women. Another common symptom associated with menopause is vaginal
dryness. Moderate-to-severe menopausal symptoms can be treated by replacing the estrogen that the
body can no longer produce. Estrogen therapy can effectively relieve hot flashes and night sweats
and can prevent drying and shrinking of the reproductive system. Our ET products are also
indicated for the prevention of osteoporosis, a progressive deterioration of the skeletal system
through the loss of bone mass. There are, however, other approved therapies for the prevention of
osteoporosis, and our labeling advises that ET should be used for this condition only by women who
have a significant risk of osteoporosis and for whom non-estrogen therapies are inappropriate.
Although benefits of ET include menopausal symptom control and osteoporosis prevention,
estrogen-only therapy has been associated with an increased risk of endometrial cancer for women
who have an intact uterus (non-hysterectomized). To address this situation, a combination therapy
of estrogen and progestin may be prescribed. Using both hormones together has been shown to reduce
the risk of endometrial cancer while continuing to produce the menopausal symptom control benefits
of ET.
Vivelle-Dot®/Estradot®
Utilizing our proprietary DOT Matrix® technology, our advanced transdermal estrogen
patch (marketed as Vivelle-Dot® and Estradot®) is one-third the surface area
of our previous Vivelle® estrogen patch at any given dosage level, yet provides the
same delivery of drug over the same timeframe. This system is more flexible and comfortable to
wear than the original product, with a lower potential for skin irritation.
Vivelle-Dot® is the most prescribed transdermal ET product in the United States. This
product is currently available in the United States in five dosage strengths, although the lowest
dosage strength is approved only for prevention of osteoporosis.
In the United States and Canada, Noven has granted exclusive
marketing rights for Vivelle-Dot® (and any follow-on transdermal estrogen patches) to Novogyne pursuant to a license agreement with Novartis that was subsequently assigned to
Novogyne. The license agreement provides for Novens receipt of royalty payments based upon sales. The license agreement is currently scheduled to expire in August 2014,
co-terminus with the expiration of the patents for Vivelle-Dot®. The term of the license agreement will be extended for any follow-on transdermal estrogen patches subject to
the agreement. Upon expiration, Novartis retains a perpetual, royalty-free, non-exclusive license to the product. Novogyne markets
Vivelle-Dot® in the United States. In Canada,
Vivelle-Dot® is marketed as Estradot® by an affiliate of Novartis Pharma AG
(Novartis Pharma). Sanofi-aventis (Aventis) has marketing rights for Vivelle-Dot®
in Japan. For all other countries, Novartis Pharma holds the rights to market this product under
the name Estradot®, as well as any product improvements and future generations of
estrogen patches developed by us. Under the terms of our license to Novartis Pharma, Novartis
Pharma is responsible for seeking approval to market Estradot® in its territories. The
product has been approved for marketing in over 30 foreign countries and Novartis Pharma has
launched the product in multiple international markets.
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Pursuant to license and supply agreements with Novartis Pharma and Novogyne, we manufacture
the product for these parties and receive fees based on their sales of the product. The supply
agreement for the Estradot® product is a long-term agreement. The supply agreement for
Vivelle-Dot® expired in January 2003. Since the expiration of this agreement, the
parties have continued to operate in accordance with certain of the supply agreements pricing
terms.
CombiPatch®/Estalis®/Menoaid®
We developed the first combination transdermal HT system approved for marketing by the FDA
(marketed as CombiPatch®, Estalis® and Menoaid®), a combination
patch containing estradiol and norethindrone acetate, a progestin.
Novogyne acquired marketing rights to the product in 2001 from Aventis (which was then our
exclusive worldwide licensee for the product) and markets the product under the brand name
CombiPatch® in two dosage strengths in the United States. Novartis Pharma holds the
right to market this product outside of the United States and is marketing this product under the
brand name Estalis® in a number of foreign countries. The product is marketed in Japan
under the brand name Menoaid® by a sublicensee of Aventis.
Pursuant to license and long-term supply agreements with Novartis Pharma, we manufacture the
combination product for Novartis Pharma and receive fees based on their sales of the product. We
sell the product to Novogyne at an agreed-upon price pursuant to a supply agreement.
The HT Product Market
We currently derive a significant portion of our revenues and substantially all of our net
income from our HT products. Our total HT-related net revenues were $52.3 million, $45.6 million
and $42.7 million for 2008, 2007 and 2006, respectively, which represented 48%, 55% and 70%,
respectively, of our net revenues in each of those years.
Since 2002, several studies, including the Womens Health Initiative (WHI) study performed
by the National Institutes of Health (NIH) and a study performed by the National Cancer Institute
(NCI), have identified increased risks from the use of HT, including increased risks of invasive
breast cancer, ovarian cancer, stroke, heart attacks and blood clots. As a result of the findings
from these and other studies, the FDA has required that black box labeling be included on all HT
products marketed in the United States to warn, among other things, that these products have been
associated with increased risks for heart disease, heart attacks, strokes and breast cancer and
that they are not approved for heart disease prevention. Since the July 2002 publication of the
WHI and NCI study data, total United States prescriptions have declined for substantially all HT
products, including our HT products in the aggregate. For a discussion of prescription trends for
our products, see Managements Discussion and Analysis of Financial Condition and Results of
Operations Executive Summary. Researchers continue to analyze data from the WHI study and
other studies. Other studies evaluating HT are currently underway or in the planning stage. In
particular, a private foundation has commenced a five-year study aimed at determining whether ET
use by women aged 42 to 58 reduces the risk of heart disease. The study also seeks to determine if
transdermal estrogen patches are more or less beneficial than an oral HT product. While our HT
products are not being used in the study, the market for our HT products could be adversely
affected if this study finds that a transdermal estrogen patch is less beneficial than other dosage
forms, and we could be subject to increased product liability risk if HT patch products are found
to increase the risk of adverse health consequences. Novens HT products have been named in lawsuits filed against
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Noven, Novogyne and Novartis. See Note 19 Commitments and Contingencies Litigation, Claims
and Assessments, in our Notes to Consolidated Financial Statements.
ADHD Therapy
Overview
ADHD is characterized by developmentally inappropriate levels of attention, concentration,
activity, distractibility, hyperactivity and impulsivity symptoms. The disorder typically causes
functional impairment that can limit success and create hardship in school and in social and
familial relationships. As children age, the symptoms can lead to serious conduct disorders,
criminal behavior, substance abuse and accidental injuries.
Daytrana®
We have developed a once-daily transdermal methylphenidate patch called Daytrana®
for the treatment of ADHD. Daytrana® is the first and only transdermal medication
approved to treat the symptoms of ADHD and is approved for children aged six to twelve years. The
FDA approved Daytrana® in April 2006. The product combines the active ingredient
methylphenidate with our DOT Matrix® technology and is designed to provide continuous
release of medication throughout the day.
Presently, all ADHD medications approved in the United States (other than
Daytrana®) are delivered orally. Stimulant therapies, including methylphenidate, which
is designated as a Schedule II controlled substance by the United States Drug Enforcement
Administration (DEA), are the most prescribed drug class for the treatment of ADHD. We believe
that, among other advantages Daytrana® possesses as compared to certain oral ADHD
medications, Daytrana® provides physicians and parents with broad dosing flexibility
because dosing can be controlled by removing the patch earlier than the end of the nine hour wear
time.
Shire, the market leader in the ADHD therapeutic category, is the exclusive, global licensee
of Daytrana® pursuant to a license agreement established between Noven and Shire in
2003. Under the license agreement, we granted Shire the exclusive global rights to market
Daytrana® in exchange for milestone payments to us of up to $150.0 million, all of which
have been received. We are currently deferring and recognizing these milestone payments as license
revenues on a straight-line basis, beginning on the date each was achieved through the first
quarter of 2013, which is our current best estimate of the end of the useful economic life of the
product.
Because we have received all milestone payments under the license agreement, Shires
obligations under the license agreement to promote Daytrana® and refrain from selling
any other methylphenidate product have expired. Noven and Shire are also parties to a supply
agreement under which we manufacture and supply Daytrana® to Shire at a fixed price. In
2008, our product sales of Daytrana® to Shire were $10.8 million. The supply agreement
gives Shire the right to qualify a second manufacturing source and purchase a portion of its
requirements from that source. If Shire were to exercise this right, our sales of
Daytrana® to Shire would be adversely affected.
Noven and Shire have received reports from some consumers concerning the difficulty of
removing the release liner from certain Daytrana® patches. In the first quarter of 2007
we, together with Shire, implemented enhancements to the Daytrana® release liner. In
July 2007 we received a list of observations on Form 483 from the FDA following an inspection of our manufacturing
facilities and the majority of these
10
observations related to the Daytrana® patch and
difficulties in removing the products release liner, including certain product lots that utilized
an enhanced release liner. In January 2008, we received a warning letter from the FDA citing
deficiencies in the peel force specifications for Daytrana®.
In January 2009, we received from the FDA a list of observations on Form 483 following an
on-site inspection of our manufacturing facilities. Like the warning letter and the prior Form
483, the majority of the observations in the Form 483 relate to the manufacture of
Daytrana® product that exhibits high peel force characteristics, an issue which Noven
and Shire continue to work to resolve.
During 2007 and 2008, Shire initiated voluntary market recalls (two in each year) of a portion
of the Daytrana® product on the market primarily in response to feedback from patients
and caregivers who continued to experience difficulty removing the release liner from some
Daytrana® patches. In February 2008, we paid Shire $3.3 million related to the 2007
recalls and in November 2008, we paid Shire $3.7 million related to the 2008 recalls.
In the fourth quarter of 2008, we implemented new product release testing intended to predict
which Daytrana® lots are at risk of developing peel force issues during the products
shelf life. Although the new release testing is designed to reduce the likelihood that
newly-manufactured product will be withdrawn or recalled in the future, we cannot assure that our
testing procedures will detect all production issues or that there will not be future
Daytrana® market withdrawals or recalls. A more detailed discussion of the
Daytrana® peel force issue and the associated financial impact can be found under the
heading Certain Items that May Affect Historical or Future Comparability Daytrana®
in Managements Discussion and Analysis of Financial Condition and Results of Operations.
We believe we have identified the root cause of the peel force issue. Noven is testing
manufacturing solutions designed to address the peel force issue. Implementation of the solutions
being tested will require prior agreement from the FDA. Subject to FDA review and agreement,
Novens current plan calls for shipments to Shire in the third
or fourth quarter of 2009. We cannot assure that the FDA will approve the solutions being tested on a timely basis or at all.
Novens warning letter remains under review by the FDA.
Psychiatry Products
Our commercialized prescription psychiatry products consist of Stavzor®, a valproic
acid delayed release product, Pexeva®, an SSRI antidepressant and Lithobid®,
an extended release lithium product, all of which are oral products. We market and sell
these products through the Psychiatry/CNS marketing and sales infrastructure of
Noven Therapeutics. These products are manufactured by third parties and supplied to us under
manufacturing and supply agreements.
Stavzor®
In July 2008, the FDA granted final approval for Stavzor®, which was commercially
launched in August 2008. Stavzor® is a valproic acid delayed release product that
utilizes a proprietary enteric-coated soft gelatin capsule delivery system. This product is
indicated for use in the treatment of manic episodes associated with bipolar disorder, monotherapy
and adjunctive therapy in multiple seizure types (including epilepsy), and prophylaxis of migraine headaches.
Stavzor® competes with Abbott Laboratories Depakote® product and its generic
equivalents.
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Noven Therapeutics is party to a development, license and supply agreement with Banner
Pharmacaps Inc. (Banner), the exclusive manufacturer and supplier of the product. In
consideration for certain license and development rights granted by Banner under the agreement, we
are obligated to make certain potential future payments, including escalating royalties on future
sales.
Pexeva®
Pexeva® is an SSRI antidepressant indicated for major depressive disorder, panic
disorder, obsessive compulsive disorder and generalized anxiety disorder. This product is one of
only two remaining patented brands without a generic equivalent in the United States SSRI market.
Pexeva® is subject to a composition of matter patent that extends to 2017, as well as
other patents that extend to 2022.
Noven Therapeutics acquired Pexeva® from Synthon Pharmaceuticals, Inc. (Synthon)
in November 2005. In this transaction, Noven Therapeutics purchased certain assets related to
Pexeva®, including the New Drug Application (NDA), intellectual property (including
patents and trademarks) and certain finished goods inventory. The purchase of Pexeva®
included a cash payment at the time of closing and an obligation to make certain future fixed
payments and possible future contingent milestone payments of up to $11.5 million in the event
sales of Pexeva® or any other products based on the same compound as is used in
Pexeva® achieve specified levels. We accrued for these contingent payments at the time
of closing of the Noven Therapeutics transaction. We became obligated
to pay $6.5 million of such
milestones based on sales of Pexeva® in 2007 and 2008. In 2008, we recognized $5.0
million in operating income as a result of the reversal of the remaining accrued liability upon our
determination that the achievement of the remainder of the contingent milestone was no longer
probable based on projected sales of Pexeva®. However, we remain contingently liable for
the $5.0 million payment if annual net sales of a future product utilizing the same compound as is
used in Pexeva® achieves $30.0 million or more through 2017.
Lithobid®
Lithobid®, an extended release lithium product, is the only branded lithium product
sold in the United States. This product is indicated for the maintenance of bipolar disorder and
the treatment of related manic episodes.
Noven Therapeutics acquired Lithobid® from Solvay Pharmaceuticals, Inc. (Solvay)
in August 2004. In this transaction, Noven Therapeutics purchased certain assets related to
Lithobid® including the NDA, intellectual property (including trademarks) and certain
finished goods inventory. ANI Pharmaceuticals, Inc. (ANI) manufactures Lithobid® under
a manufacturing and supply agreement with Noven Therapeutics.
Transmucosal Product
DentiPatch®, approved in 1996 and launched in 1997, was the first FDA-approved oral
transmucosal patch. Sales of DentiPatch® are not material to our consolidated results
of operations and we intend to discontinue the product once current inventory is exhausted, which
we expect to occur during 2009.
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Products Under Development
Research and Development
Transdermal Products
Our long-term prospects are dependent upon the successful development and commercialization of
new products. Novens research and development program investigates and seeks to identify
compounds that can be delivered transdermally which we believe may have substantial clinical
utility and market potential, as well as transdermal products that we believe can be improved by
using our patented technologies. We typically seek to develop transdermal products that use
approved drugs that currently are being delivered to patients through means other than transdermal
delivery, but we may also explore new formulations or proprietary products where we believe our
transdermal technology may be beneficially applied. As part of our transdermal development
strategy, we seek to supplement our research and development efforts by entering into research and
development agreements, joint ventures and other collaborative arrangements with other companies.
We have entered into several early stage feasibility and/or development agreements with other
pharmaceutical companies to determine the feasibility of transdermal delivery of various compounds.
Mesafem
As part of the Noven Therapeutics acquisition, we acquired a womens health product called
Mesafem that, if successfully developed and approved, would complement our expertise in
the womens health area. Mesafem is a low-dose paroxetine mesylate capsule under
development for the treatment of vasomotor symptoms associated with menopause, including hot
flashes and night sweats (VMS). Published clinical data has demonstrated the efficacy of
paroxetine for this indication. Mesafem is subject to the same patents as
Pexeva®, as well as other pending patent applications, and may benefit from three years
of market exclusivity under the Hatch-Waxman Act. As of the date of this report, Mesafem is
in Phase 2 clinical studies.
If successfully developed and approved, Mesafem would provide women with an
alternative to HT products for VMS. It would participate in a new market segment that is expected
to include Pristiq®, a product under development by Wyeth Pharmaceuticals for VMS. We
estimate that over 20 million women in the United States are affected by VMS and, of that number,
only about 5 million are under treatment for the condition.
Lithium QD and Stavzor® ER
Following an internal review and rationalization of projects in our drug development pipeline,
we discontinued development of our Lithium QD and Stavzor® ER projects in November 2008.
For the years ended December 31, 2008, 2007 and 2006, our research and development expense was
$15.5 million, $14.0 million (excluding acquired in-process
research and development) and $11.5 million, respectively. To bring Mesafem to market, we plan to increase our research and development expense significantly over the next
several years. See Managements Discussion and Analysis of Financial Condition and Results of
Operations Outlook.
Our research and development expense may vary significantly from quarter to quarter depending
on product development cycles, the
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timing of clinical studies and whether we are or a
third party is funding development. We intend to focus on long-term growth prospects and, therefore, may incur
higher than expected research and development expenses in a given period rather than delay clinical
activities. These fluctuations in research and development spending may not be accurately
anticipated and may have a material effect on our results of operations.
Transdermal Product Development Collaborations
Amphetamine Transdermal System
On November 5, 2008, we entered into a letter agreement (the Termination Agreement) with
Shire terminating our agreements with Shire for the development of an amphetamine patch for ADHD.
Under the Termination Agreement, rights to the developmental amphetamine patch were returned to us
and we intend to pursue the further development and commercialization of the product. Shire will
be entitled to a modest royalty if we elect to commercialize a product that incorporates
intellectual property arising from the development project with Shire. As a result of the
termination of this project with Shire, we recognized $7.2 million of
previously deferred license and contract revenues in the fourth quarter of 2008.
Transdermal System for HSDD
In April 2003, we established a collaboration with Procter & Gamble Pharmaceuticals, Inc.
(P&GP) relating to the development and commercialization of prescription transdermal patches for
the treatment of Hypoactive Sexual Desire Disorder (HSDD) in women. The products under
development explore follow-on product opportunities for Intrinsa®, P&GPs in-licensed
investigational transdermal testosterone patch designed to help restore sexual desire in menopausal
women diagnosed with HSDD.
In August 2008, we entered into global license and supply agreements with P&GP, which
supersede and replace the prior development letter agreement entered into between Noven and P&GP in
April 2003. Under the agreements, we granted P&GP an exclusive worldwide license to our low-dose testosterone
patch for use by women for HSDD and other indications, as well as potential next-generation patches, and P&GP granted us
exclusive supplier rights with respect to such licensed products. If the testosterone patch is
ultimately approved and commercially launched, we would receive royalties and manufacturing fees
under the agreements. We may also receive additional contingent development and sales milestone
payments related to the licensed products. The royalty payments are to be determined based on a
percentage of P&GPs quarterly sales of the licensed products. The milestone payments are
contingent upon the achievement of certain sales milestones. Pursuant to the agreements, P&GP will
fund any clinical development costs and will be responsible for any regulatory filings and
marketing applications associated with any licensed products developed under the agreements.
Competition
General
The markets for our products are highly competitive. Competition in the pharmaceutical
industry is generally based on a companys 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. The first product on the market in a particular pharmaceutical area typically is able to
obtain and maintain a significant market share for a period of time. In a highly
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competitive
marketplace and with evolving technology and medical science, there can be no assurance that
additional product introductions or medical developments by others will not render our products or
technologies noncompetitive or obsolete or cause them to fall out of favor with physicians. Most
of our competitors are substantially larger and have greater resources and larger sales forces than
we have, as well as greater experience in developing and commercializing pharmaceutical products.
Additionally, manufacturers of generic products typically do not bear significant research and
development or education and marketing development costs and, consequently, may be able to offer
their products at considerably lower prices than we are able to offer our products.
Competition Relating to Our Transdermal Products
All transdermal drug delivery products that we are developing may face competition from
conventional forms of drug delivery (i.e., oral and parenteral), from alternate forms of drug
delivery, such as controlled release oral delivery, gels and creams and
possibly from alternate non-drug therapies. Some or all of the transdermal products being marketed
or developed by us face, or will face, competition from other transdermal products that deliver the
same or alternative drugs to treat the same indications.
As a general matter, transdermal drug delivery systems are more expensive and difficult to
manufacture than oral formulations. We also compete with other drug delivery companies in the
establishment of business arrangements with large pharmaceutical companies to assist in the
development or marketing of products. It is also possible that Daytrana®,
Vivelle-Dot® or our other products could, prior to the expiration of the applicable
patent periods, face competition from a generic product if approved through the ANDA process or
from a functionally-equivalent product that avoids infringing our patents.
Daytrana® participates in a highly competitive market for the treatment of ADHD,
with a product mix that includes generic oral methylphenidate, long-acting formulations, other
stimulant medications, medications not containing Schedule II controlled substances and a variety
of other drug types. Shire currently markets products for the treatment of ADHD that compete with
Daytrana®. We cannot assure that Shire will continue to market Daytrana®
aggressively or effectively.
In the market for HT products, Novogyne competes against Wyeth Pharmaceuticals, Watson
Pharmaceuticals, Inc., Mylan Pharmaceuticals, Inc., Berlex Laboratories, Allergan, Inc., Ascend
Therapeutics, Inc., Barr Pharmaceuticals, Inc. and others, including Novartis, Novartis Pharma and
their affiliates. We expect increased competition in the HT market as new and innovative products
continue to be introduced in this field, including products using alternative delivery systems such
as gels, creams and sprays, lower-dosage products and products that may be used to treat
menopause-related symptoms that are not hormone-based or that may reduce the risks related to
hormone-based products.
Competition Facing Noven Therapeutics
Pexeva® participates in the highly competitive United States SSRI market. In this
market, we compete against, among others, Lilly, GlaxoSmithKline plc (GlaxoSmithKline) and Pfizer
Inc. (Pfizer). In addition, although there is no approved generic equivalent to
Pexeva®, it competes with generic versions of similar products with identical
therapeutic profiles. We also compete in the United States SSRI market against manufacturers of
emerging antidepressants, such as norepinephrine re-uptake inhibitors, substance P antagonists and
CRF receptor antagonists.
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In the market for the treatment of manic episodes associated with bipolar disorder,
Lithobid® competes against, among others, an AB-rated generic equivalent product,
products marketed by Lilly, GlaxoSmithKline and AstraZeneca PLC (AstraZeneca), as well as generic
versions of other lithium products and antiepileptic and antipsychotic agents.
Also in the market for the treatment of manic episodes associated with bipolar disorder, as
well as monotherapy and adjunctive therapy in multiple seizure types (including epilepsy), and
prophylaxis of migraine headaches, Stavzor® competes against, among others, Abbott
Laboratories Depakote® product and its generic equivalents.
Dependence on Licensees and the Novogyne Joint Venture
During 2008, 27%, 34%, and 13% of our revenues were attributable to Novogyne, Shire and
Novartis Pharma (and its affiliates), respectively, and our profitability has been significantly
dependent on our equity in Novogynes earnings, a non-cash item. Going forward, we expect to be
dependent on sales to Novogyne, Shire and Novartis Pharma and other collaboration partners, as well as
fees, amortization of previously received milestone payments, profit sharing and royalties
generated from their sales of our transdermal delivery systems, for a significant portion of our
expected revenues. No assurance can be given regarding the amount and timing of such revenues.
Failure of these parties to successfully market our transdermal products would cause the quantity
of such products purchased from us and the amount of manufacturing revenues, fees and royalties
ultimately paid to us to be reduced and would therefore have a material adverse effect on our
business and results of operations. We expect to be able to influence the marketing of
Vivelle-Dot® and CombiPatch® in the United States through our participation
in the management of Novogyne, but the Management Committee of Novogyne is comprised of a majority
of Novartis representatives, and we will not be able to control those matters. While our
agreements with our marketing partners may impose certain obligations on them, there can be no
assurance that such agreements will provide us with any meaningful level of protection or cause
these companies to perform at a level that we deem satisfactory. Further, these companies and
their affiliates sell competing products, both in the United States and abroad, and it is possible
that they will promote their competitive products to our detriment. Any reduction in the level of
support and promotion that these companies provide to our products, whether as a result of their
focus on other products or otherwise, could have a material adverse effect on our business, results
of operations, financial condition and prospects.
Manufacturing
We manufacture our transdermal products. Our headquarters and transdermal manufacturing
facility are located on a 15-acre site in Miami-Dade County, Florida. On this site, we conduct our
manufacturing operations in a single facility comprised of two approximately 40,000 square foot
buildings. We have supplemented our manufacturing facilities on our existing site with leased space
located in close proximity to our existing site for the storage and, if necessary, the manufacture
of new transdermal products.
Some raw materials essential to our transdermal business are readily available from multiple
sources. Certain raw materials and components used in manufacturing our transdermal products
(including essential polymer adhesives and other critical components) are, however, available from
limited sources, and in some cases, a single source. In addition, the DEA controls access to
controlled substances (including methylphenidate and amphetamine), and we must receive
authorization from the DEA to obtain these substances. Any curtailment in the availability of such
raw materials could result in production or other delays and, in the case of transdermal products
for which only one raw
16
material supplier exists, could result in a material loss of sales with
consequent adverse effects on our business and results of operations. In addition, because most
raw material sources for transdermal patches must generally be approved by regulatory authorities,
changes in raw material suppliers may result in production delays, higher raw material costs and
loss of sales, customers and market share. Some raw materials used in our transdermal products are
supplied by companies that restrict certain medical uses of their products. While our use is
presently acceptable, there can be no assurance that such companies will not expand their
restrictions to include our applications.
Pursuant to manufacturing and supply agreements, we rely upon third party manufacturers to
manufacture and supply us with Stavzor®, Pexeva® and Lithobid®. We
depend on these third party manufacturers to perform their obligations in a timely manner and in
accordance with applicable governmental regulations and their agreements with us. Additionally, we
have no control over whether third party manufacturers breach their agreements with us or whether
they determine to terminate or decline to renew agreements with us. Certain third party agreements
prevent us from qualifying a second source of supply. Even where we are permitted to qualify a
second source of supply, we expect it will be difficult and potentially costly and time-consuming
for us to qualify a second source of product supply if necessary. Any interruption in our ability
to obtain product supply and sell our products could adversely affect our present and future sales
margins, market share and product pipeline, as well as harm our overall business.
As discussed above under ADHD TherapyDaytrana®, we are working to address
certain manufacturing-related issues associated with the Daytrana® product.
Marketing and Sales
We maintain two sales forces a psychiatry/CNS sales force in support of Noven Therapeutics
products, and a womens health sales force that we manage on behalf of our Novogyne joint venture.
In general, we rely on industry partners to market and sell products developed by Noven
Transdermals, although we may retain rights to certain of those products for marketing and sale by
Noven.
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At Noven Therapeutics, we maintain a targeted specialty sales force comprised of
approximately 70 sales representatives and related marketing and sales infrastructure in
support of our Stavzor®, Pexeva® and Lithobid® products. |
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On behalf of our Novogyne joint venture, we maintain and manage an approximately
120-person womens health sales force and related sales and marketing infrastructure in
support of our Vivelle-Dot® and CombiPatch® products. In general,
Novens costs associated with these employees and substantially all of our sales and
marketing activities conducted on behalf of Novogyne are reimbursed by Novogyne. Under the
Novogyne joint venture agreements, Novartis has responsibility for Novogynes distribution
function (including
managing the relationships and agreements with wholesale drug distributors and other trade
customers) and its managed care strategy and relationships. We believe the expertise we
have established in womens health through Novogyne may benefit the commercialization of
Noven Therapeutics Mesafem product for menopausal vasomotor symptoms, if
Mesafem is ultimately approved and marketed. |
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At Noven Transdermals, our strategy has historically been to retain manufacturing rights
and to rely on collaborative partners with the marketing and sales resources necessary to
broadly commercialize the products under development. This reflects
the fact that our |
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transdermal products in development are generally not focused in a single therapeutic
category and therefore cannot be effectively addressed by a single sales force. Our growth
strategy includes the possibility that we may retain all rights to a new transdermal
product, and develop, market and sell it ourselves, particularly if it is aligned with the
therapeutic focus of Noven Therapeutics. |
Patents and Proprietary Rights
We seek to obtain patent protection on our delivery systems and manufacturing processes
whenever possible. We have obtained 35 United States patents and over 350 foreign patents relating
to our transdermal and transmucosal delivery systems and manufacturing processes, and have over 150
pending patent applications worldwide. As a result of changes in United States patent law under
the General Agreement on Tariffs and Trade and the accompanying agreement on Trade-Related Aspects
of Intellectual Property Law, the terms of some of our existing patents have been extended beyond
the original term of 17 years from the date of grant. Our patents filed after June 7, 1995 will
have a term of 20 years beginning on the effective filing date.
We are unaware of any challenge to the validity of our patents that could have a material
adverse effect on our business or prospects. Other than the allegations made by Johnson-Matthey in
the matter discussed in Note 19 Commitments and Contingencies Litigation, Claims and
Assessments in the Notes to our Consolidated Financial Statements, we are unaware of any third
party claim of patent infringement with respect to any of our products that could have a material
adverse effect on our business and prospects.
Government Regulation
Our operations are subject to extensive regulation by governmental authorities in the United
States and other countries with respect to the development, testing, approval, manufacturing,
labeling, marketing and sale of pharmaceutical products, and the possession and use of controlled
substances. We devote significant time, effort and expense to address the extensive government
regulations applicable to our business.
The marketing of pharmaceutical products requires the approval of the FDA in the United
States. The FDA has established regulations, guidelines and safety standards that 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 or more and is
likely to involve the expenditure of substantial resources. The steps required before a product
can be produced and marketed for human use typically include: (i) pre-clinical studies; (ii)
submission to the FDA of an Investigational New Drug Application (IND), which must become
effective before human clinical trials may commence in the United States; (iii) adequate and well
controlled human clinical trials that demonstrate reasonable assurance of the safety and efficacy of the
product; (iv) submission to the FDA of an NDA; and (v) review and approval of the NDA by the FDA.
Approval of a product by the FDA does not guarantee the products safety or efficacy.
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 products safety and efficacy be submitted to the FDA, the cost of which is
substantial. These costs can be reduced, however, for delivery systems that utilize already
approved drugs. In these cases, the company seeking approval may refer to safety and toxicity data
reviewed by the FDA in its approval process for the innovator product. In addition, a supplemental
NDA may be filed to add an indication or make product improvements to
an already approved product.
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An abbreviated approval process may be available for products that have, among other
requirements, the same active ingredient(s), indication, route of administration, dosage form and
dosage strength as an existing FDA-approved product covered by an NDA, if clinical studies have
demonstrated bio-equivalence of the new product to the FDA-approved product covered by an NDA. For
this abbreviated process, an ANDA is submitted to the FDA instead of an NDA. Under the FDAs ANDA
regulations, companies that seek to introduce an ANDA product must also certify that the product
does not infringe on any approved products patent listed with the FDA or that such patent has
expired. If the applicant certifies that its product does not infringe on the approved products
patent or that such patent is invalid, the patent holder may institute legal action to determine
the relative rights of the parties and the application of the patent. Under the Hatch-Waxman Act,
the FDA may not finally approve the ANDA until the earlier of 30 months after the date of the legal
action or a final determination by a court that the applicable patent is invalid or would not be
infringed by the applicants product. We are developing products for which we or a licensee may
file an ANDA.
Pre-clinical studies are conducted to obtain preliminary information on a products 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 can 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 prior to FDA
approval, but the phases may overlap. Phase 1 trials consist of testing the product primarily for
safety and dosage strength in healthy volunteers or a small number of patients at one or more
doses. In Phase 2 trials, the safety and efficacy of the product are evaluated in a patient
population somewhat larger than the Phase 1 trials, generally at differing dosages. Phase 3 trials
typically involve additional testing for safety and clinical efficacy in an expanded population at
a number of separate clinical test sites. Phase 4 trials may be required after a product is
already approved and on the market to learn more about the products long-term risks, benefits and
optimal use, or to test the product in different populations of people, such as children or adults.
A clinical plan, or protocol, accompanied by information on the investigator(s) conducting the
trials, must be submitted to the FDA prior to commencement of each phase of the clinical trials.
The results of product development and pre-clinical and clinical studies are submitted to the
FDA as an NDA or ANDA for approval. If an application is submitted, there can be no assurance that
the FDA will complete its review and approve the NDA or ANDA in a timely manner. The FDA may deny
an NDA or 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 modifications to the drug, including changes in
indication, dosage, manufacturing process, labeling, or a change in manufacturing facility, an NDA
or ANDA notification may be required to be submitted to the FDA and FDA approval required prior to
implementation of the change.
The FDA may require testing and surveillance programs to monitor the effect of products that
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. Product approvals may be contingent on an
agreement to conduct specified post-marketing programs, and 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. As the FDAs approval process
comes under greater scrutiny by the government and the public, especially with regard to safety
issues, we expect that
19
the scope and frequency of post-marketing programs required as a condition
of approval will increase. For example, the approval letter for Daytrana® requires
post-marketing surveillance and post-marketing studies relating to the possibility of skin
sensitization.
The approval procedures for the marketing of our products in foreign countries 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 or additional studies
involving patients located in their countries.
Manufacturing facilities are subject to periodic inspections for compliance with the FDAs
good manufacturing practices regulations and each domestic drug manufacturing facility must be
registered with the FDA. Most foreign regulatory authorities have similar regulations. In
complying with standards set forth in these regulations, we must expend significant time, money and
effort in the area of quality assurance to ensure full technical compliance. Facilities handling
controlled substances, such as ours, also must be licensed by the DEA, and are subject to more
extensive regulatory requirements than those facilities not licensed to handle controlled
substances. We also require approval of the DEA to obtain and possess controlled substances,
including methylphenidate and amphetamine. We produce transdermal drug delivery products, and our
third party manufacturers produce Stavzor®, Pexeva® and Lithobid®,
in accordance with United States and international regulations for clinical trials, manufacturing
process validation studies and commercial sale. FDA approval to manufacture a drug product is site
specific. In the event our or any of our third party manufacturers approved manufacturing
facilities becomes inoperable, obtaining the required FDA approval to manufacture the applicable
product at a different manufacturing site could result in production delays, which could adversely
affect our business and results of operations.
Our activities are subject to various federal, state and local laws and regulations regarding
occupational safety, sales practices, laboratory and manufacturing 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, we could be liable for
substantial costs and penalties in the event that waste is disposed of improperly. While it is
impossible to accurately predict the future costs associated with environmental compliance and
potential remediation activities, compliance with environmental laws is not expected to require
significant future capital expenditures and has not had, and is not presently expected to have, a
material adverse effect on our earnings or competitive position.
In addition, in recent years, several states and localities have enacted legislation requiring
pharmaceutical companies to establish marketing compliance programs, and file periodic reports with
the state or make periodic public disclosures on sales, marketing, pricing, clinical trials, and
other activities. Many of these requirements are new and uncertain, and the penalties for failing
to comply with these regulations are unclear. Furthermore, individual states, acting through their
attorneys general, have become active, seeking to regulate the marketing of prescription drugs
under state consumer protection and false advertising laws. We have a compliance program designed
to monitor and assist us in our compliance with these rules and regulations.
Failure to comply with governmental regulations may result in fines, warning letters,
unanticipated compliance expenditures, interruptions or suspension of production and resulting loss
of sales, product seizures or recalls, injunctions prohibiting further sales,
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withdrawal of
previously approved marketing applications and criminal prosecution. As discussed above under
ADHD TherapyDaytrana®, we received a warning letter from the FDA in January 2008 and
two Form 483s primarily related to Daytrana®.
Backlog
Our backlog for Noven Transdermals totaled $0.4 million as of March 2, 2009, substantially all
of which is expected to be filled during 2009. Our backlog for Noven Transdermals totaled $2.9
million as of March 7, 2008, all of which was filled during 2008. We did not have a backlog for
Noven Therapeutics in 2008 or 2007.
Employees
As of March 2, 2009, we had approximately 610 employees, approximately 261 of which were
engaged in manufacturing, process development, quality assurance and quality control, 223 in
marketing and sales, 81 in general administration, 31 in research and development and 14 in
clinical research and regulatory affairs. Included in these numbers are 85 individuals who became
employees of Noven as a result of the Noven Therapeutics acquisition in August 2007. Also included
are approximately 148 employees whose salaries are reimbursed, in whole or in part, by our Novogyne
joint venture. No employee is represented by a union and we have never experienced a labor-related
work stoppage. We believe our employee relations are good.
Seasonality
Although our business is affected by the purchasing patterns of our partners and wholesale
drug distributors, there are no significant seasonal aspects to our existing business.
Available Information
Our website address is www.noven.com. Our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of
charge through our website, as soon as reasonably practicable after such material is electronically
filed with, or furnished to, the Securities and Exchange Commission (SEC). We also make
available on our website the beneficial ownership reports (Forms 3, 4 and 5) filed by our officers,
directors and other reporting persons under Section 16 of the Securities Exchange Act of 1934. Our
website and the information contained therein or connected thereto are not incorporated into this
annual report on Form 10-K.
Item 1A. Risk Factors.
This section summarizes certain risk factors that could adversely affect us or that may cause
our results to differ materially from the forward-looking statements contained in this report or
otherwise made by or on our behalf. The risks and uncertainties described below are not
necessarily listed in order of probability or priority and are not the only ones we face. If any
of the following risks actually occurs, our business, financial condition and results of operations
could suffer. Additional risks not presently known to us or other factors not perceived by us to
present significant risks to our business at this time also may impair our business, financial
condition and results of operations.
21
Our business may be significantly harmed if we are unable to adequately resolve the issues raised
by the FDA in the warning letter we received in January 2008.
In January 2008, we received a warning letter from the FDA in connection with the FDAs July
2007 inspection of our manufacturing facilities. In the warning letter, which is posted on the
FDAs website, the FDA cited Current Good Manufacturing Practice deficiencies related to: (i) peel
force specifications for removal of Daytranas® release liner; and (ii) data supporting
the peel force characteristics of Daytranas® enhanced release liner throughout the
products shelf life. We submitted our response to the warning letter on January 30, 2008.
In January 2009, we received from the FDA a list of observations on Form 483 following an
on-site inspection of our manufacturing facilities. Like the warning letter and the prior Form
483, the majority of the observations in the Form 483 relate to the manufacture of
Daytrana® product that exhibits high peel force characteristics, an issue which Noven
and Shire continue to work to resolve.
Unless the violations identified in the warning letter are corrected, the FDA may withhold
approval of marketing applications relating to products manufactured at our Miami, Florida
facility. Failure to adequately address the issues raised by the FDA in the warning letter as well
as the production and other issues involving Daytrana® could result in additional
regulatory action, including fines, recalls of products, injunctions, seizures, suspension of
production or withdrawal of the approval of products. Any enforcement action would be expected to
have a material adverse effect on us, including the potential for litigation related to this
matter, harm to our reputation and various costs associated with the foregoing.
Recalls or withdrawals of our products could have a material adverse effect on our results of
operations and financial condition.
Product recalls or withdrawals may be initiated at the discretion of Noven (if we have
regulatory authority for the product), our partners (if they have regulatory authority for the
product, as is the case for our Vivelle-Dot®, CombiPatch® and
Daytrana® products), the FDA, other government agencies, or a combination of these
parties. Our products may be recalled or we or our partners may withdraw products from the market
for various reasons including the failure of our products to maintain their stability through their
expiration dates, manufacturing issues, quality claims, safety issues or disputed labeling claims.
As a general matter, manufacturing transdermal delivery systems is more complex than for oral
products, which may increase the risk of a recall or market withdrawal of one or more of our
transdermal products.
We have experienced a number of production issues, some of which have led to recalls and
market withdrawals. In the third quarter of 2007, Shire initiated two voluntary recalls of a
portion of the Daytrana® product on the market primarily in response to feedback from
patients and caregivers who experienced difficulty removing the release liner from certain
Daytrana® patches. We paid Shire $3.3 million in February 2008 related to the 2007
recalls. These costs were charged to operations in 2007. In 2008, we recorded additional expenses
of
22
approximately $3.7 million related to two additional voluntary recalls by Shire in 2008 of four
lots of Daytrana® and certain previously-manufactured lots that would not have met the
newly implemented release testing standard and are probable of being voluntarily withdrawn or
recalled from the market prior to the expiration of their shelf life. In addition, during 2008, we
established a reserve of $3.8 million related to these affected
lots. We do expect that there will be an additional voluntary withdrawal/recall of some
Daytrana® lots due to the peel force issue. While we believe the $3.8 million reserve
is adequate for the costs of such withdrawal/recall, we cannot assure that our costs related to
this issue will not exceed the amount reserved.
We do not carry insurance to cover the risk of a potential product recall or market
withdrawal. A significant product recall or market withdrawal could materially affect our sales,
the prescription trends for the products and our reputation and the reputation of the product. In
these cases, our business, results of operations and financial condition could be materially and
adversely affected.
Our approved products may not achieve the expected level of market acceptance.
Our success depends on the market acceptance of our products. Substantially all of our
revenues have historically been generated through sales of transdermal delivery systems, which
generally are more expensive than oral formulations. Our transdermal products are marketed
primarily to physicians, some of whom are reluctant to prescribe a transdermal delivery system when
an alternative delivery system is available. We and our licensees must demonstrate to prescribing
physicians the benefits of transdermal delivery. The commercial success of our products is also
based in part on patient preference, and difficulties in obtaining patient acceptance of our
transdermal delivery systems may similarly impact our ability to market our transdermal products.
The market for Daytrana® has been and may continue to be negatively affected by the
peel force issues, the FDA warning letter, Shires 2007 and 2008 voluntary market recalls and other
factors, although we have taken steps to implement enhancements to the Daytrana® release
liner intended to improve ease of use of the patch. Our results of operations and financial
condition could be adversely affected if the enhancements do not result in improved ease of use of
the Daytrana® product throughout its shelf life.
If we cannot develop, license or acquire new products and commercialize them on a timely basis,
including Mesafem, our financial condition and results of operations could
be adversely affected.
Our long-term strategy is dependent upon the successful development and commercialization of
new products. We cannot assure that we will be able to identify commercially promising products or
technologies or additional indications to which our products and technologies may be beneficially
applied. The length of time necessary to complete clinical trials and obtain marketing approval
from regulatory authorities is considerable. We cannot assure that we will have the financial
resources necessary to complete products under development, that those projects to which we
dedicate resources will be successfully completed, that we will be able to obtain regulatory
approval for any such product, or that any approved product can be produced in commercial
quantities, at reasonable costs, and be successfully marketed, either by us or by a licensing
partner. A project can fail or be delayed at any stage of development, even if each prior stage
was completed successfully, which could jeopardize our ability to recover our investment in the
product. Some of our development projects will not be completed successfully or on schedule. Many
of the factors that may cause a product in development to fail or be delayed are beyond our
control. Mesafem, our
23
womens health product under development for the treatment of
vasomotor symptoms associated with menopause, is in Phase 2 clinical trials. We cannot assure that
Phase 2 clinical trials for Mesafem will be successful, and even if they are
successful, whether Phase 3 clinical trials will ultimately be successful.
Furthermore, the potential success of a new pharmaceutical product is subject to many risks
which could have a material adverse effect on our business, financial condition and results of
operations, including, but not limited to: (i) the failure of ongoing and planned clinical trials
and the risk that results from early-stage clinical trials may not be indicative of results in
later-stage trials; (ii) the unproven safety and efficacy of products under development; (iii) the
difficulty of predicting FDA approval, including the timing of approval and that approval may not
be granted at all; (iv) while FDA approval may be granted, the possibility that any expected period
of exclusivity may not be realized and that we may not be able to produce commercially viable
quantities; (v) the impact of competitive products, pricing and managed care and formulary status;
(vi) the possibility that any product launch may be delayed or that product acceptance and demand
may be less than anticipated; (vii) the possibility that patent applications may not result in
issued patents and that issued patents may not be enforceable or could be invalidated; (viii) the
commercial markets that we intend to enter with new products may not develop in the manner or to
the extent that we anticipate; and (ix) the potential negative impact of competitive responses to
our sales, marketing and strategic efforts.
From time to time, we may need to acquire licenses to patents and other intellectual property
of third parties to develop, manufacture and commercialize our products. We cannot assure that we
will be able to acquire such licenses on commercially reasonable terms or at all. The failure to
obtain such a license could negatively affect our ability to develop, manufacture and commercialize
certain products. In some cases, we have begun and, in the future, may begin developing a product
with the expectation that a licensee will be identified to assist in completing development and/or
marketing. We cannot assure that we will attract a business partner for any particular product or
will be able to negotiate an agreement on commercially reasonable terms. If an agreement is not
reached, our initial development investment in any such product may not be recovered.
In order to diversify and complement our current product offerings, we may pursue new product and
technology acquisitions, which may be costly and may not provide the expected benefits.
One of our current growth strategies is to diversify our transdermal product offerings (beyond
ADHD and HT) and complement our therapeutic product offerings through, among other things, new
product acquisitions or the license or purchase of rights to new technologies. If we undertake
any such product or technology acquisition, the process of integrating the new product or
technology may result in unforeseen operating difficulties and expenditures and may divert
significant management attention from our ongoing business operations. We may fail to realize the
anticipated benefits of any such acquisition for a variety of reasons, including as a result of an
acquired technology proving to not be safe or effective in later clinical trials, the technology
being found to infringe upon the intellectual property rights of a third party or the acquired
product or technology achieving less market acceptance or commercial success than anticipated. We
may fund any future acquisition through debt financing or the issuance of equity or debt
securities, which could dilute the ownership percentage of current stockholders or limit our
financial or operating flexibility as a result of restrictive covenants related to new debt. Such
funds may not be available on terms that are favorable to us, or at all due to current economic
conditions and extremely tight credit markets. Acquisition efforts, whether consummated or not,
can consume significant management attention and require substantial expenditures, which could
detract from our other programs.
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We may be unable to obtain marketing approval for our new products on a timely basis or at all.
We are not able to market our products in the United States or other jurisdictions without
first obtaining marketing approval from the FDA or an equivalent foreign agency. The process of
obtaining FDA approval for a new product is risky, expensive and may take several years. The
process is subject to the broad authority and discretion of the FDA.
We cannot assure that we will obtain the necessary regulatory approval for our products under
development when expected, or at all, or that any such approval will be free from unduly burdensome
conditions or limitations. In light of the WHI and other HT studies, as well as publicity
surrounding COX-2 inhibitors and certain antidepressants, it is possible that healthcare
regulators, including the FDA and the Drug Safety Oversight Board, could delay the approval of
certain products or require that any such new products be subject to more extensive or more
rigorous study and testing prior to being approved or be subject to more extensive conditions,
limitations or monitoring after approval. We cannot predict what effect future changes in
regulations or legal interpretations, if, when and as ultimately promulgated, may have on our
business.
We may not realize the expected benefits of the Noven Therapeutics acquisition.
We may be unable to take advantage of the opportunities that we expect to obtain from the
Noven Therapeutics acquisition. We cannot assure the future commercial success of the currently
marketed products or that Mesafem, an important developmental product acquired in the
acquisition, will receive marketing approval or achieve commercial success. The potential success
of any new pharmaceutical product is subject to a number of risks and uncertainties, including,
among others, the risks and uncertainties described in the preceding risk factors.
The Noven Therapeutics acquisition is expected to dilute our earnings for an undetermined period of
time.
Our financial results reflect significant amortization and other ongoing integration-related
expenses associated with our acquisition of Noven Therapeutics. In addition, we plan to increase
our research and development expenses significantly over the next several years as we advance the
development of Mesafem. We cannot assure the future success of this product or whether
we will be able to recover our initial and ongoing investment in Noven Therapeutics and its
products.
Publication of negative results of studies or clinical trials may adversely impact our products.
From time to time, studies or clinical trials on various aspects of pharmaceutical products
are conducted by academics or others, including government agencies, the results of which, when
published, may have dramatic effects on the markets for the pharmaceutical products that are the
subject of the study and on other similar or related pharmaceutical products. The publication of
negative results of studies or clinical trials related to our products or the areas in which our
products compete could adversely affect our sales, the prescription trends for our products and the
reputation of our products and could also cause us to be a target for product liability or other
lawsuits.
Currently, our liquidity, results of operations and business prospects are significantly
dependent on sales, license royalties and fees associated with transdermal HT products and to a
lesser extent, Daytrana®. The market for HT products has been negatively affected by
the WHI study and other studies that have found that the overall health risks from the use of certain HT products exceed the benefits from the use
25
of those products among healthy postmenopausal
women. For example, total prescriptions dispensed in the HT market in the United States declined by 56% from 2002 (the
year of publication of the results of the WHI study) to 2008. In addition, a private foundation
has commenced a five-year study aimed at determining whether ET use by women aged 42 to 58 reduces
the risks of heart disease. The study also seeks to determine if transdermal estrogen patches are
more or less beneficial than an oral HT product. The market for HT products, including ours, both
in the United States and abroad, could be further adversely impacted if this or other HT studies
find unacceptable risks from the use of HT products. Any further adverse change in the market for
HT products could have a material adverse impact on our business, financial condition and results
of operations.
The FDAs analysis of potential safety issues associated with certain transdermal products,
including Duragesic® and Ortho Evra®, and the resulting media
coverage of these issues, may adversely affect the publics and the medical communitys perceptions
of other transdermal products, including our transdermal products, and could ultimately impair the
commercial acceptance of our current and future transdermal products.
We do not control Novogyne, and we may face additional risks because Novartis, our joint venture
partner, has significantly greater resources than we have.
Our profitability has been dependent on our equity in Novogynes earnings, and Novogynes
results will likely continue to be material to us in the future. Because, among other things, we
are much smaller than Novartis, and because Novartis and its affiliates sell competing products
outside of Novogyne, our interests may not always be aligned. This may result in potential
conflicts between Novartis and us on matters relating to Novogyne that we may not be able to
resolve on favorable terms or at all. Under the Novogyne joint venture agreement, Novartis has the
right to dissolve Novogyne under certain circumstances. Novogynes Management Committee is
comprised of a majority of representatives from Novartis. While certain significant corporate
actions require the supermajority vote of the Management Committee members, we do not control
Novogyne. In addition, the joint venture operating agreement has a buy/sell provision that either
Noven or Novartis may trigger by notifying the other party of the price at which the triggering
party would be willing to acquire the other partys entire interest in the joint venture. Novartis
is a larger company with greater financial resources than we have and, therefore, may be in a
better position to be the purchaser if the provision is triggered. If the buy/sell provision is
triggered and Novartis is the purchaser, we cannot assure that we would be able to reinvest the
proceeds of the sale in a manner that would result in sufficient earnings to offset the loss of
earnings from Novogyne. If the provision is triggered and we are the purchaser, we cannot assure
that we would be able to adequately perform the services currently being provided by Novartis or
that we would not be adversely affected by the changes in capital and/or debt structure that would
likely be required to finance the purchase.
We depend on Novartis to perform financial, accounting, regulatory, compliance, inventory, sales
deductions and other functions for Novogyne.
Under the Novogyne joint venture agreements, Novartis is responsible for providing Novogyne
with all financial, accounting, legal and regulatory services, including monitoring inventory
levels and estimating and recording sales allowances and returns for Novogyne (which include
reserves and allowances related to product returns), and is primarily responsible for ensuring
compliance with applicable regulations relating to sales and marketing activities. Novartis is
also responsible for the establishment and maintenance of internal controls for Novogyne. As a
result, our ability to assess their effectiveness at maintaining those internal controls is
necessarily limited. Failure by Novartis to perform its obligations under the joint venture agreements could negatively
affect the financial condition and results of operations of Novogyne and
26
Noven. Further, any
material errors in Novogynes financial statements could lead to a restatement of Novogynes financial statements, which would likely require us to restate our financial statements.
We depend on partners to obtain regulatory approval for, and to market and sell, certain of our
transdermal products. Our marketing partners sell products that compete with our transdermal
products.
We depend upon collaborative agreements with other pharmaceutical companies to obtain
regulatory approval for and to market and sell certain of our transdermal products. To help
alleviate the up-front financial burden of seeking product approval and commercializing products,
we often seek out strategic partners to whom we can license our transdermal products. Under the
terms of the Novogyne joint venture, Novartis is responsible for the distribution of Novogynes
products, including Vivelle-Dot®, and for selling Novogynes products to its trade
customers. For Daytrana®, we have granted the exclusive marketing rights to Shire.
Failure of Novartis, Shire or our other partners to adequately support our transdermal products
would cause the quantity of products purchased from us and the amount of fees and royalties
ultimately paid to us to be reduced and would therefore have a material adverse effect on our
business and operations. Our partners may have different and, sometimes, competing priorities from
ours. Some of our partners, including Novartis and Shire, market and sell transdermal products
competitive with our transdermal products. Shire has a portfolio of ADHD products and, in February
2007, received marketing approval for Vyvanse®, an amphetamine pro drug for the
treatment of ADHD which competes with our Daytrana® product. Shire dedicated
substantial resources to the promotion of this product. The marketing organizations of our partners
may be unsuccessful, or those partners may assign a lower level of priority to the marketing of our
transdermal products. Our agreements with Shire required Shire to use commercial efforts to market
Daytrana® until payment of all milestone payments, but Shire has no obligation to
continue marketing Daytrana® thereafter. We have already received all such milestone
payments. If one or more partners fails to pursue the marketing of our transdermal products as
planned, or if marketing of any of those products is otherwise delayed, our business, financial
condition and results of operations may be negatively affected. Absent these marketing partners,
we do not presently have a significant direct marketing channel to health care providers for our
transdermal products.
Failure to comply with our supply agreements or otherwise adequately supply our transdermal
products to our licensees could negatively affect our financial condition and results of
operations.
Our supply agreements with our licensees for our transdermal products impose strict
obligations on us with respect to the manufacturing and supply of our transdermal products.
Failure to comply with the terms of these supply agreements may result in our being unable to
supply our transdermal products to our licensees, resulting in lost revenues by us and potential
responsibility for damages and losses suffered by our licensees. Our supply agreement with
Novogyne for Vivelle-Dot® has expired. Since the expiration of that supply agreement,
the parties have continued to operate in accordance with certain of the supply agreements pricing
terms. We cannot assure that we and Novogyne will continue to operate under the supply agreement
in accordance with certain of its pricing terms or that we will enter into a new supply agreement
on satisfactory terms or at all. Due to our dependence on Novogyne, we may be unable to negotiate
favorable business terms with them or resolve any dispute that we may be involved in with them in a
favorable manner. Failure to continue operating in accordance with certain of the supply
agreements pricing terms could have a material adverse effect on our business, results of operations and financial condition.
Designation of a new supplier and approval of a new supply agreement would require the affirmative
vote of four of the five members of Novogynes Management Committee. Accordingly, both Novartis
and Noven must agree on Novogynes supplier.
27
We face scale-up risks in manufacturing new transdermal products in commercial quantities.
Inefficiencies and other scale-up problems can occur in the process of manufacturing new
products in commercial quantities. If we do not adequately and timely scale-up our manufacturing
processes for new transdermal products or otherwise meet supply requirements for these transdermal
products, the success of our new transdermal product launches, revenues and product gross margins
could be adversely affected. Significant scale-up or other manufacturing problems could also cause
our collaboration partners, if permitted under our agreements, to rely more heavily on second
manufacturing sources, thus reducing the manufacturing revenues that we would otherwise realize.
It could also jeopardize our ability to obtain milestone payments. If we experience manufacturing
difficulties such as quality problems, yield deficiencies or similar issues, our overall
manufacturing costs may be higher than anticipated.
We rely on third party manufacturers to supply us with our oral products. Failure of these third
parties to comply with governmental regulations or our manufacturing and supply agreements or
otherwise supply our oral products could negatively affect our financial condition and results of
operations.
We rely upon third party manufacturers to manufacture and supply us with Stavzor®,
Pexeva®, and Lithobid®, which are marketed and sold by Noven Therapeutics.
We depend on these third party manufacturers to perform their obligations in a timely manner and in
accordance with applicable governmental regulations and their agreements with us, and any
production issues experienced by these third party manufacturers or delays in shipping products to
us may affect our product supply and ultimately have a negative impact on our sales and
profitability.
All manufacturers of pharmaceutical products sold in the United States must comply with the
FDAs good manufacturing practices, and manufacturing operations and processes are subject to FDA
inspection. Failure to comply with FDA or other governmental regulations can lead to the shutdown
of a manufacturing facility, the seizure of a product distributed by that facility and other
sanctions. Furthermore, changes in the manufacturing process or procedure, including a change in
the location where the product is manufactured or a change of a third party manufacturer, may
require prior review and approval in accordance with the FDAs good manufacturing practices. This
review may be costly and time-consuming and could delay or prevent the launch of a product. The
FDA at any time may also implement new standards, or change their interpretation and enforcement of
existing standards for manufacture of products, and if the third party manufacturers are unable to
comply, they may be subject to regulatory action, civil actions or other sanctions.
In addition, our third party manufacturers may encounter difficulties, including, but not
limited to the following: (i) inconsistent production yields and difficulties in scaling production
to commercial and validation sizes; (ii) difficulties obtaining raw materials; (iii) equipment
failures, potential facility catastrophes and plant time scheduling issues; (iv) quality control
and assurance issues; and (v) lack of regulatory compliance with the FDAs, or other agencies,
regulations and specifications.
Furthermore, we have no control over whether the third party manufacturers breach their
agreements with us or whether they terminate or decline to renew agreements with us. Defective
products or other problems caused by our third party manufacturers could expose us to liability to
others for which we may not have adequate recourse against our third party manufacturers. If there
is poor manufacturing performance on the part of our third party manufacturers or we are
contractually prohibited or unable to enter into agreements with additional
28
manufacturers,
if necessary, on commercially reasonable terms, we may not be able to meet commercial demand for Noven
Therapeutics products or complete the development of, or successfully market, our products under
development. Any of the above factors could interrupt our ability to sell our products and
adversely affect our present and future sales margins, market share and product pipeline, as well
as harm our overall business.
We rely on a single supplier or a limited number of suppliers for certain raw materials and
compounds used in our transdermal products.
Certain raw materials and components used in manufacturing our transdermal products, including
essential polymer adhesives, are available from limited sources, and, in some cases, a single
source. Without adequate approved supplies of raw materials or packaging supplies, our
manufacturing operations relating to our transdermal products could be interrupted until another
supplier is identified, our transdermal products approved and trading terms with this new supplier
negotiated. We may not be able to identify an alternative supplier and any supplier that we do
identify may not be able to obtain the requisite regulatory approvals in a timely manner or at all.
Furthermore, we may not be able to negotiate favorable terms with an alternative supplier. Any
disruptions in our manufacturing operations from the loss of an approved supplier may cause us to
incur increased costs and lose revenues and may have an adverse effect on our relationships with
our partners and customers, any of which could have adverse effects on our business and results of
operations. Some raw materials used in our transdermal products are supplied by companies that
restrict certain medical uses of their products. While our use is presently acceptable, we cannot
assure that such companies will not expand their restrictions to include our applications. Our
business also faces the risk that third party suppliers may supply us with raw materials that do
not meet required specifications, which, if undetected by us, could cause our transdermal products
to test out of specification and require us to recall the affected product.
Our supply of methylphenidate and other controlled substances must be approved by the DEA.
Regulatory authorities must generally approve raw material sources for transdermal products
and, in the case of controlled substances, the DEA sets quotas for controlled substances, including
methylphenidate and amphetamine, and we must receive authorization from the DEA to handle these
substances. Similarly, the manufacturers who supply the controlled substances to us must also
receive authorization from the DEA to manufacture the substances. We cannot assure that we or our
suppliers will be granted sufficient DEA quota to meet our production requirements for controlled
substances. Previous grants of methylphenidate quota for Daytrana® have been less than
originally requested, and we have had to re-apply for additional quota. We expect that this
application and re-application process will continue with respect to future grants. We cannot
guarantee that the timing or quantity of future DEA awards of methylphenidate quota will be
sufficient for us to meet our production requirements for Daytrana®, and the timing and
quantity of any future award may impact our production costs and market penetration of
Daytrana®.
Compliance with governmental regulation is critical to our business.
Our operations are subject to extensive regulation by governmental authorities in the United
States and other countries with respect to the development, testing, approval, manufacturing,
labeling, marketing and sale of pharmaceutical products. These regulations are wide-ranging and
govern, among other things: adverse drug experience reporting; product promotion; product pricing
and discounting; drug sample accountability; drug product stability; product manufacturing,
including good manufacturing practices; and product changes or modifications.
29
In
addition, our Miami manufacturing facilities handle controlled substances, resulting in additional extensive
regulatory requirements and oversight. Compliance with the extensive government regulations
applicable to our business requires the allocation of significant time, effort and expense. Even
if a product is approved by a regulatory authority, 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. Failure to comply with governmental
regulations may result in fines, warning letters or other negative written observations,
unanticipated compliance expenditures, interruptions or suspension of production and resulting loss
of sales, product seizures or recalls, injunctions prohibiting further sales, withdrawal of
previously approved marketing applications and criminal prosecution. Under the terms of the
Novogyne joint venture, Novartis is responsible for providing regulatory services. We cannot
assure that Novartis will comply with these regulations or that any violation by Novartis will not
have an adverse effect on us.
In addition, in recent years, several states and localities have either enacted, or are
considering enacting, legislation requiring pharmaceutical companies to establish marketing
compliance programs, and file periodic reports with the state or make periodic public disclosures
on sales, marketing, pricing, clinical trials, and other activities. Many of these requirements are
new and uncertain, and the penalties for failing to comply with these regulations are unclear.
Furthermore, individual states, acting through their attorneys general, have become active, seeking
to regulate the marketing of prescription drugs under state consumer protection and false
advertising laws. As a result of the Noven Therapeutics acquisition, we market and sell our
therapeutic products through our own sales force. We have recently implemented a compliance
program designed to monitor and assist us in our compliance with these rules and regulations. If
we are not in full compliance with these laws, we could face enforcement action and fines and other
penalties, and could receive adverse publicity.
If we market products in a manner that violates health care fraud and abuse laws, we may be subject
to civil or criminal penalties.
Federal health care program anti-kickback statutes prohibit, among other things, knowingly and
willfully soliciting or receiving any remuneration in return for purchasing, leasing, ordering, or
arranging for or recommending purchasing, leasing, or ordering, any good, facility or service that
is reimbursable under Medicare, Medicaid or other federally financed health care programs. These
statutes have been interpreted to apply to arrangements between pharmaceutical manufacturers, on
the one hand, and prescribers, patients, purchasers and formulary managers, on the other. Although
there are a number of statutory exemptions and regulatory safe harbors protecting certain common
activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that
involve remuneration intended to induce prescribing, purchasing or recommending any good, facility,
or service which is reimbursable under Medicare, Medicaid or other federally financed
health care program may be subject to scrutiny if such practices do not qualify for an
exemption or safe harbor.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be
presented, a false claim for payment to the federal government, or knowingly making, or causing to
be made, a false statement to get a false claim paid. Pharmaceutical companies have been prosecuted
under these laws for a variety of alleged promotional and marketing activities, such as allegedly
providing free products to customers with the expectation that the customers would bill federal
programs for such products, reporting to pricing services inflated average wholesale prices that
were then used by federal programs to set reimbursement rates, engaging in promotion for uses that
the FDA has not
30
approved, or off-label uses, that caused claims to be submitted to Medicaid for
non-covered off-label uses and submitting inflated best price information to the Medicaid Rebate
Program.
The majority of states also have statutes or regulations similar to the federal anti-kickback
statutes and false claims laws, which apply to items and services reimbursed under Medicaid and
other state programs, or, in several states, apply regardless of the payor. Sanctions under these
federal and state laws may include civil monetary penalties, exclusion of a manufacturers products
from reimbursement under government programs, criminal fines and imprisonment. Even if we are not
determined to have violated these laws, government investigations into these issues typically
require the expenditure of significant resources and generate negative publicity, which would have
an adverse impact on our financial condition. Because of the breadth of these laws and the
narrowness of the safe harbors, it is possible that some of our business activities could be
subject to challenge under one or more of these laws.
Decreased margins on sales of Daytrana® may adversely impact our results of operations.
The price at which we sell Daytrana® to Shire is generally fixed and is determined
in accordance with the terms of our supply agreement with Shire. Consequently, our margin on sales
of Daytrana® is determined by our production costs and yields. If our production yields
decrease or our costs of production for Daytrana® increase, our profitability will be
adversely impacted. In particular, we have incurred and expect to incur in 2009 increased quality
assurance costs related to the Daytrana® peel force issue and our efforts to address the
concerns raised by the FDA in the two Form 483s and the warning letter. Our ability to produce
Daytrana® and continue to improve the gross sales margin is contingent on, among other
things, resolving the peel force issue and receiving a sufficient supply of the active
methylphenidate ingredient from Shire, as well as sufficient quota of the controlled substance from
the DEA. At any given time, we expect to have applications pending with the DEA for annual or
additional procurement quota that may be critical to continued production. Any delay or stoppage in
the supply of the active methylphenidate ingredient could cause us to lose revenues or incur
additional costs (including those related to expedited production), which could have an adverse
effect on our results of operations.
We face significant competition, which may result in others discovering, developing or
commercializing products before, or more successfully than, we do.
We face competition from a number of companies in the development of our products, and
competition is expected to intensify as more companies enter the markets in which we operate. Some
of these companies are substantially larger than we are and have greater resources and greater
experience in developing and commercializing pharmaceutical products than we have. As a
result, they may succeed before us in developing competing technologies or obtaining regulatory
approvals for products.
Our transdermal products compete with other transdermal products, alternative dosage forms of
the same or comparable chemical entities and non-drug therapies. We face competition in the HT
market as new and innovative products continue to be introduced in this field, including products
using alternative delivery systems such as sprays, lower-dosage products and products that may be
used to treat menopause-related symptoms that are not hormone-based or that may reduce the risks
related to hormone-based products. We may also face competition for our Vivelle-Dot®
product from generic equivalents, which could erode market demand for the product, exerting pricing
pressure on our product and consequently adversely impact our results of operations and financial
condition. The ADHD market is highly competitive, and our
31
competitors include our partner Shire,
which markets other ADHD products, including Vyvanse®, an amphetamine pro drug for the
treatment of ADHD. Other competitors marketing or developing ADHD products include Johnson &
Johnson, Novartis, GlaxoSmithKline, Bristol-Myers Squibb, Abbott Laboratories, Celltech, and Lilly.
We cannot assure that our transdermal products and technologies will remain competitive. If
we cannot maintain competitive transdermal products and technologies, our current and potential
strategic partners may choose to adopt the drug delivery technologies of our competitors or their
own internally developed technologies, which could adversely impact our results of operations and
financial condition.
Our oral products also participate in highly competitive markets. In the SSRI market and the
market for the treatment of bipolar disorder, we compete against, among others, Lilly,
GlaxoSmithKline, AstraZeneca and Pfizer, each of which is substantially larger and has greater
financial resources than we have. Stavzor® competes against, among others, Abbott
Laboratories Depakote® product and its generic equivalents. In addition,
Pexeva® faces competition in the SSRI market from generic versions of similar products
and Lithobid® competes against generic versions of lithium products, including an
AB-rated generic to Lithobid®. Manufacturers of generic products typically do not bear
significant research and development or education and marketing development costs and consequently
may be able to offer their products at considerably lower prices than we can offer our products.
We cannot assure that our products will compete successfully against competitive products or
that developments by others will not render our products obsolete or uncompetitive. If we cannot
maintain competitive products, our results of operations and financial condition would be adversely
impacted.
Competitors may use legal, regulatory and legislative strategies to prevent or delay the launch of
our products.
Competitors may pursue legislative and other regulatory or litigation strategies to prevent or
delay the launch of our products. These strategies include, but are not limited to: seeking to
obtain new patents on drugs for which patent protection is near expiration; changing the labeling
for the branded product; filing a citizens petition with the FDA; pursuing state legislative
efforts to limit the substitution of generic versions of branded pharmaceuticals; filing patent
infringement lawsuits that automatically delay FDA approval of many generic products; introducing a
second generation product prior to the expiration of market exclusivity for the first generation
product, which may reduce demand for a generic first generation product; and obtaining market exclusivity
extensions by conducting pediatric trials of brand drugs.
The Hatch-Waxman Act provides for a generic marketing exclusivity period of 180 days for each
ANDA applicant that is first to file an ANDA containing a certification of invalidity,
non-infringement or unenforceability related to a patent listed in the FDA Orange Book with
respect to a reference listed drug product, commonly referred to as a Paragraph IV certification.
During this exclusivity period, the FDA cannot grant final approval to any other Paragraph IV
filer. If an ANDA containing a Paragraph IV certification is successful, it generally results in
higher market share, net revenues and gross margin for that applicant for a period of time. Even
if we obtain FDA approval for generic drug products, we may have a significant disadvantage against
a competitor who was first to file an ANDA containing a Paragraph IV certification.
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The European market for our transdermal products may be limited due to pricing pressures and other
matters.
Pharmaceutical prices, including prices for our transdermal products, in Europe and certain
other regions are significantly lower than in the United States. Because our agreements with
Novartis Pharma provide for us to receive a percentage of Novartis Pharmas net selling price
(subject to a minimum price), our gross margins are generally much lower for transdermal products
sold to Novartis Pharma for resale outside of the United States than for the same products sold to
Novogyne for sale in the United States. In addition, the lower prices restrict Novartis Pharmas
gross margin realized from selling our transdermal products. Because our transdermal products
compete for sales and marketing resources with other Novartis Pharma products, including
competitive HT products, we cannot assure that the relatively low gross margins generated from
selling our transdermal products will not cause Novartis Pharma to focus its resources on other
products or even not launch our transdermal products in certain countries. Novartis Pharma has
launched Estradot® in the United Kingdom, France, Germany and Spain (without the benefit
of government reimbursement) and in a number of smaller European countries.
Our quarterly operating results are subject to significant fluctuations.
In 2008, we experienced significant fluctuations in our quarterly operating results and we
expect that revenues from product sales and our research and development expenditures will continue
to fluctuate from quarter-to-quarter and year-to-year depending upon various factors not in our
control. These factors include, without limitation: the timing of FDA approval and subsequent
timing and success of any new transdermal or therapeutic product launch; the purchasing patterns of
wholesale drug distributors; marketing efforts of our licensees relating to our transdermal
products; fluctuations in sales and returns allowances, including those related to allowances for
expiring products as well as product recalls; the inventory requirements of each licensee for our
transdermal products; the impact of competitive products; the impact of the HT studies on
prescriptions for our HT products; the transdermal product pricing of each licensee; the timing of
certain royalty reconciliations and payments under our license agreements for our transdermal
products; and the success of Shires sales and marketing efforts for Daytrana®. Our
earnings may also fluctuate because of, among other things, fluctuations in research and
development expenses resulting from the timing of clinical trials and our efforts to bring
Mesafem to market. In addition, Novartis is entitled to an annual $6.1 million
preferred return over our interest in Novogyne, which has had the effect of reducing our share of
Novogynes income in the first quarter of each year.
Our results of operations will be adversely affected if we or Novogyne fail to realize the full
value of our intangible assets, which significantly increased as a result of the Noven Therapeutics
acquisition.
Accounting principles generally accepted in the United States require us and Novogyne to test
the recoverability of our respective long-lived assets and certain identifiable intangible assets
whenever events or changes in circumstances indicate that those assets carrying amounts may not be
recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized
for the difference. Novogyne recorded the acquisition of the CombiPatch® product
marketing rights at cost and tests this asset for impairment when factors indicate there may be a
possible impairment. In addition, intangible assets in the form of patent development costs and
goodwill from the acquisition of Noven Therapeutics comprise a significant portion of our total
assets. Goodwill is tested for impairment annually in the fourth quarter or more frequently, when
events or other changes in circumstances indicate that the carrying value of goodwill may not be
recoverable. If after testing
33
the intangible assets and goodwill, we (or Novogyne) determine that
these assets are impaired, then we (or Novogyne) would be required to write-down the impaired asset
to fair value in the period when the determination is made. Such a write-down could have a
material adverse effect on our results of operations.
We previously invested a portion of our cash in auction rate securities, which subjects us to
liquidity and investment risk. We could be required to record additional impairment charges if the
fair value of these investments continues to decline.
At December 31, 2008, we held investments in auction rate securities (classified as
available-for-sale) with a par value and fair value of $16.0 million and $15.5 million,
respectively. Auction rate securities are floating rate debt securities with long-term nominal
maturities, the interest rates of which are reset periodically (typically every seven to
thirty-five days) through a Dutch auction process. Beginning in February 2008, as part of the
ongoing credit market crisis, several auction rate securities from various issuers have failed to
receive sufficient order interest from potential investors to clear successfully, resulting in
auction failures. As a result of failed auctions, these investments now pay interest at a rate
defined by the governing documents or indenture.
In 2008, we liquidated a substantial portion of our auction rate securities at par and
recorded unrealized losses of $0.5 million to reduce the remaining investments to fair value, which
impairments were determined to be other-than-temporary and recognized in our 2008 Consolidated Statement of
Operations.
Our auction rate security investments are collateralized primarily by tax-exempt municipal
bonds and, to a much lesser extent, guaranteed student loans. We do not hold any auction rate
securities collateralized by mortgages or collateralized debt obligations. We believe our
investments are of high credit quality, as all are investment grade and the majority are rated AA
or higher. In assessing whether declines in fair value are temporary in nature or
other-than-temporary, management considers a variety of factors, including our recent history of
liquidating similar instruments at par value, the length of time and extent to which the fair value
has been less than par, the financial condition of the issuer of the investment and managements
intent and ability to retain the investments for a sufficient period to allow for any anticipated
recovery in fair value. In the fourth quarter of 2008, management determined that the $0.5 million
unrealized decline in fair value of our auction rate securities was other-than-temporary. We will
continue to monitor the market for our auction rate security investments. If management determines
in a future period that existing temporary declines or further declines in fair value are other-than-temporary, we will be
required to record a charge to operations in the period when such determination is made. As
illiquid conditions persist in the auction market for these securities, it may become increasingly
more likely that we will need to recognize additional other-than-temporary impairment charges in
future periods. Such non-cash impairment charges could materially and adversely affect our
consolidated financial condition and results of operations. See Note 5 Investments
Available-for-Sale, in the Notes to our Consolidated Financial Statements for further information.
There are inherent uncertainties involved in the estimates, judgments and assumptions used in the
preparation of our consolidated financial statements, and any changes in those estimates, judgments
and assumptions could have a material adverse effect on our financial condition and results of
operations.
The consolidated and condensed consolidated financial statements that we file with the SEC are
prepared in accordance with United States generally accepted accounting principles (GAAP). The
preparation of financial statements in accordance with GAAP involves making
34
estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities. The most significant estimates we are required to
make under GAAP include, but are not limited to, those related to revenue recognition, sales
allowances, inventories and cost of goods sold, determining the useful life or impairment of
goodwill and other long-lived assets, litigation settlements and related liabilities, and income
taxes. We periodically evaluate estimates used in the preparation of the consolidated financial
statements for reasonableness, including estimates provided by third parties. Appropriate
adjustments to the estimates will be made prospectively, as necessary, based on these periodic
evaluations. We base our estimates on, among other things, currently available information, market
conditions, historical experience and various assumptions, which together form the basis of
judgments underlying the carrying values of assets and liabilities that are not readily apparent
from other sources. Although we believe that our assumptions are reasonable under the
circumstances, estimates would differ if different assumptions were utilized and these estimates
may prove in the future to have been inaccurate.
If our estimates for returned products are incorrect, there could be a materially adverse impact on
our net revenues and results of operations.
In the pharmaceutical industry, our customers are normally granted the right to return a
product for a refund if the product has not been used by its expiration date or for a period of one
year thereafter. Management is required to estimate the amount of product that will ultimately be
returned pursuant to our return policy and to record a related reserve at the time of sale. These
amounts are deducted from our gross revenues to determine our net revenues. We believe that we
have sufficient data to estimate future returns at the time of sale of our products, except for
Stavzor®, for which we do not yet have sufficient sales history to reasonably estimate
returns. Management periodically reviews the allowances for returns and adjusts them based on
actual experience. In order to reasonably estimate future returns, we analyze both quantitative
and qualitative information including, but not limited to, actual return rates by product, the
level of product in the distribution channel, expected shelf life of the product, product demand,
the introduction of competitive or generic products that may erode current demand, our new product
launches and general economic and industry wide indicators. There are inherent limitations in
estimating future product returns due to the time lapse between sale and actual return of the
product. If we over- or under-estimate the amount of product that will ultimately be returned, there could be a material impact to our
results of operations.
We cannot be certain of the protection or confidentiality of our patents and proprietary rights.
Our success will depend, in part, on our ability to obtain or license patents for our
products, processes and technologies. If we do not do so, our competitors may exploit our
innovations and deprive us of the ability to realize revenues from those innovations. We cannot
assure that we will be issued patents for any of our patent applications, that any existing or
future patents that we receive or license will provide competitive advantages for our products, or
that we will be able to enforce successfully our patent rights. Specifically, Pexeva®
and Mesafem are subject to a composition of matter patent that extends to 2017.
However, recent Supreme Court case law (unrelated to our patent) may make it easier to challenge
the validity of this patent on grounds of obviousness. If we are unable to successfully enforce
our patent rights, including our patent rights relating to Pexeva® and
Mesafem, our results of operations and financial condition may be adversely impacted.
35
Additionally, we cannot assure that our patents or any future patents will prevent third
parties from developing similar or functionally equivalent products, or challenging, invalidating
or avoiding our patent applications or any existing or future patents that we receive or license.
The patents related to Vivelle-Dot® and other of our transdermal products are
formulation patents and do not preclude others from developing and marketing products that deliver
drugs transdermally or otherwise through non-infringing formulations. Furthermore, we cannot
assure that any of our future processes or products will be patentable, that any pending or
additional patents will be issued in any or all appropriate jurisdictions or that our processes or
products will not infringe upon the patents of third parties.
We also rely on trade secrets, unpatented proprietary know-how and continuing technological
innovation. We use confidentiality agreements with licensees, manufacturers, suppliers, employees
and consultants to protect our trade secrets, unpatented proprietary know-how and continuing
technological innovation, but we cannot assure that these parties will not breach their agreements
with us or that we will be able to effectively enforce our rights under those agreements. We also
cannot be certain that we will have adequate remedies for any breach. Disputes may arise
concerning the ownership of intellectual property or the applicability of confidentiality
agreements. Furthermore, we cannot be sure that our trade secrets and proprietary technology will
not otherwise become known or that our competitors will not independently develop our trade secrets
and proprietary technology.
Third parties may claim that we infringe their proprietary rights, forcing us to expend substantial
resources in resulting litigation, the outcome of which is uncertain. Any unfavorable outcome could
negatively affect our financial condition and results of operations.
Our success depends, in part, on our ability to operate without infringing the proprietary
rights of others, and we cannot assure that our products and processes will not infringe upon the
patents of others. Third parties may also institute patent litigation against us for competitive
reasons unrelated to any infringement by us. If a third party asserts a claim of infringement, we
may have to seek licenses, defend infringement actions or challenge the validity of those
third-party patents in court. If we cannot obtain the required licenses, or are found liable for
infringement or are not able to have these patents declared invalid, we may be liable for
significant monetary damages, encounter significant delays in bringing products to market or be precluded from participating in the
manufacture, use or sale of products or methods of drug delivery covered by the patents of others.
We cannot assure that we have identified, or that in the future we will be able to identify, all
United States and foreign patents that may pose a risk of potential infringement claims.
In June 2007, Johnson-Matthey Inc. filed a complaint in the United States District Court,
Eastern District of Texas, against us alleging that we were infringing one of its patents through
our manufacturing and sale of Daytrana®. The plaintiff is seeking injunctions from
further infringement and claiming compensatory and other damages in an unspecified amount. In July
2007, Johnson-Matthey added Shire as a defendant in this lawsuit. The parties have commenced formal
discovery and the case has been scheduled for trial in late 2009. We intend to vigorously defend
this lawsuit, but the outcome cannot ultimately be predicted. See Note 19 Commitments and
Contingencies Litigation, Claims and Assessments, in the Notes to our Consolidated Financial
Statements.
We may experience reductions in the levels of reimbursement for our products by governmental
authorities, private health insurers and managed care organizations.
Our ability and our marketing partners ability to successfully commercialize our products is
dependent in part on obtaining reimbursement from government health authorities, private health
insurers and managed care organizations. The trend toward managed
36
healthcare
in the United States and the prominence of health maintenance organizations (HMOs) and similar entities could
significantly influence the purchase of our products, resulting in lower prices and lower demand.
This is particularly true in a market that includes generic alternatives, such as the ADHD and SSRI
markets, as well as the market for the treatment of bipolar disorder. In addition, managed care
agreements established by Novartis could adversely affect Novogynes financial results.
We are subject to chargebacks and rebates when our products are resold to, or reimbursed by,
governmental agencies and managed care buying groups, which may reduce our net revenues and impact
our results of operations.
Chargebacks and rebates are the difference between the prices at which we sell our products to
wholesalers and the price that third party payors, such as governmental agencies and managed care
buying groups, ultimately pay pursuant to pre-determined contract prices and discounts. Medicare,
Medicaid and reimbursement legislation or programs regulate drug coverage and reimbursement levels
for most of the population in the United States. Federal law requires all pharmaceutical
manufacturers who participate in the Medicaid program to rebate a percentage of their revenue
arising from Medicaid-reimbursed drug sales to individual states. We record an estimate of the
amount either to be charged back to us or rebated to the end-users at the time of sale to the
wholesaler. Managed care organizations use these chargebacks and rebates as a method to reduce
overall costs in drug procurement. We record an accrual for chargebacks and rebates based upon
factors including current contract prices, historical chargeback and rebate rates and actual
chargebacks and rebates claimed. The amount of actual chargebacks claimed and rebates paid could,
however, be higher than the amounts we accrue, and could reduce our net revenues during the period
in which claims are made. If we over- or under-estimate the level of chargebacks and rebates,
there may be a material impact to our results of operations.
Health care reform or other changes in government regulation could harm our business.
The federal and state governments in the United States, as well as many foreign governments,
from time to time explore ways to reduce medical care costs through health care reform. In the
United States, the new presidential administration has indicated that it will advocate and seek
reforms to the current health care system. Additionally, some parties have advocated for the
re-importation of prescription drugs from Canada and other countries for resale in the United
States at a discount to United States prices, as well as requiring the government to negotiate
directly with drug companies for lower prices in the Medicare prescription drug plan. Due to the
diverse range of proposals put forth from country to country and the uncertainty of any proposals
adoption, we cannot predict what impact any reform proposal ultimately adopted may have on the
pharmaceutical industry or on our business, financial condition or results of operations.
We may be exposed to product liability claims and we cannot assure that our insurance will be
adequate.
Like all pharmaceutical companies, the testing, manufacturing and marketing of our products
may expose us to potential product liability and other claims resulting from their use. We,
Novogyne and Novartis have been named as defendants in cases in which a plaintiff alleges personal
injury from the use of HT products which we manufacture and Novogyne distributes. If any such
claims against us or Novogyne are successful, we may be required to make significant payments and
suffer the associated adverse publicity. Even unsuccessful claims could result in the expenditure
of funds in litigation and the diversion of management time and resources. Novartis has indicated
that it will seek
37
indemnification from us and Novogyne to the extent permitted by the agreements
between and among Novartis, Novogyne and us. We and Novogyne maintain product liability insurance,
but we cannot assure that such insurance will cover all future claims or that we and/or Novogyne
will be able to maintain existing coverage or obtain additional coverage at reasonable rates. In
recent years, the cost of product liability insurance has increased while providing significantly
less coverage and higher deductibles than in the past. If a claim is not covered or if coverage is
insufficient, we and/or Novogyne may incur significant liability payments that would negatively
affect our business, financial condition and results of operations. As of December 31, 2008,
Novogynes aggregate limit under its claims-made insurance policy was $10.0 million. Novogyne has
established reserves in the amount of $9.0 million with an offsetting insurance receivable of $6.7
million for expected defense and settlement expenses as well as for estimated future cases alleging
use of Novens HT products. This accrual represents Novogyne managements best estimate as of
December 31, 2008.
All of our transdermal products are manufactured at one location. An interruption of production at
this facility could negatively affect our business, financial condition and results of operations.
All of our transdermal products are manufactured at a single facility in Miami, Florida. An
interruption of manufacturing resulting from regulatory issues (including in connection with the
FDA warning letter described above), technical problems, casualty loss (including due to a
hurricane) or other factors could result in our inability to meet production requirements, which
may cause us to lose revenues and which could have an adverse effect on our relationships with our
partners and customers, any of which could have a material adverse effect on our business,
financial condition or results of operations. Without our existing production facility, we would
have no other means of manufacturing our transdermal products until we were able to restore the
manufacturing capability at our facility or develop an alternative manufacturing facility. Although we carry business
interruption insurance to cover lost revenues and profits resulting from casualty losses, this
insurance does not cover all possible situations and all potential exposure and we cannot assure
that any event of casualty to our facility would be covered by such insurance. The amount of our
coverage may not be sufficient to cover the full amount of a covered loss. In addition, our
business interruption insurance would not compensate us for the loss of opportunity and potential
adverse impact on relations with our existing partners and customers resulting from our inability
to produce transdermal products for them.
We use hazardous chemicals at our Miami manufacturing facility. Potential claims relating to
improper handling, storage or disposal of these chemicals could be time consuming and costly.
Our research and development processes involve the controlled use of hazardous chemicals.
These hazardous chemicals are reagents and solvents typically found in a chemistry laboratory. Our
operations also produce hazardous waste products. Federal, state and local laws and regulations
govern the use, manufacture, storage, handling and disposal of hazardous materials. We cannot
eliminate all risk of accidental contamination from or discharge of hazardous materials and any
resultant injury. Compliance with environmental laws and regulations may be expensive. We might
have to pay civil damages in the event of an improper or unauthorized release of, or exposure of
individuals to, hazardous materials. We are not insured against these environmental risks.
Our insurance coverage may not be adequate and rising insurance premium costs could negatively
affect our profitability.
We rely on insurance to protect us from many business risks, including product liability,
business interruption, property and casualty loss, employment practices liability and directors
and officers liability. The cost of insurance has risen
significantly in the last few years,
38
especially for property, business interruption and product liability coverage. These and other
types of coverage also have become less widely available and more difficult to obtain. In
response, we increased deductibles and decreased certain coverages to mitigate these costs while
still paying higher premiums. We cannot assure that the insurance that we maintain and intend to
maintain will be adequate, or that the cost of insurance and limitations in coverage will not
adversely affect our business, financial condition or results of operations. Furthermore, it is
possible that, in some cases, coverage may not be available at any price.
Our financial condition and results of operations could be harmed if we are required to perform
under existing or future contractual indemnification provisions.
In the normal course of business, we enter into development, license, supply, employment and
other agreements that include indemnification provisions. The Novogyne joint venture operating
agreement contains an indemnification provision as do certain supply and license agreements between
and among us, Novartis and Novogyne. The various indemnification provisions in these agreements are
not uniform and, depending on the circumstances, may be subject to differing legal interpretations.
As a consequence, it may be difficult in certain circumstances for us to determine or predict in
advance what amounts we might be obligated to pay Novogyne or Novartis under these indemnification
provisions or, alternatively, what obligations may be owed to us by these parties, including as
they relate to potential damages, settlement amounts and defense costs associated with the product
liability lawsuits that relate to the use of products we manufacture and Novogyne
distributes. While insurance coverage may mitigate the costs of some of our obligations under our
indemnification provisions, our business, financial condition and results of operations could be
harmed if we are required to perform under these indemnification provisions and there is no, or
insufficient, insurance coverage.
Our success depends on attracting and retaining our key employees.
Our success depends on our ability to attract and retain qualified, experienced personnel. We
face significant competition in recruiting talented personnel. In the past, our Miami, Florida
location, which is an area with relatively few pharmaceutical companies, made recruitment more
difficult, as many candidates prefer to work in places with a broad pharmaceutical industry
presence. The loss of key personnel, or the inability to attract and retain additional, competent
employees, could adversely affect our business, financial condition or results of operations.
Our stockholders rights plan, our corporate charter documents, Delaware law and our joint venture
operating agreement with Novartis may have an anti-takeover effect.
Our stockholders rights plan, our corporate charter documents, Delaware law and our joint
venture operating agreement with Novartis each include provisions that may discourage or prevent
parties from attempting to acquire us. These provisions may have the effect of depriving our
stockholders of the opportunity to sell their stock at a price in excess of prevailing market
prices in an acquisition of us. We have a stockholders rights plan, commonly referred to as a
poison pill, which is intended to cause substantial dilution to a person or group who attempts to
acquire us on terms that our Board of Directors has not approved. The existence of the
stockholders rights plan could make it more difficult for a third party to acquire a majority of
our common stock without the consent of our Board of Directors. Certain provisions of our
certificate of incorporation and bylaws could have the effect of making it more difficult for a
third party to acquire a majority of our
39
outstanding voting common stock. These include provisions
that limit the ability of stockholders to bring matters before an annual meeting of stockholders,
call special meetings or nominate candidates to serve on our Board of Directors.
We are also subject to the provisions of Section 203 of the Delaware General Corporation Law,
which prohibits a publicly-held Delaware corporation from engaging in a business combination with
an interested stockholder for a period of three years after the date of the transaction in which
the person became an interested stockholder, unless the business combination is approved in a
prescribed manner. For purposes of Section 203, a business combination includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested stockholder, and an
interested stockholder is a person who, either alone or together with affiliates and associates,
owns (or within the past three years, did own) 15% or more of the corporations voting stock.
The Novogyne operating agreement has a buy/sell provision that either we or Novartis may
trigger by notifying the other party of the price at which the triggering party would be willing to
acquire the other partys interest in the joint venture. As a result of the buy/sell provision, any
potential acquirer of us faces the possibility that Novartis could trigger this provision at any
time and thereby require the acquirer to either purchase for cash Novartis interest in Novogyne
(which would include the net present value of Novartis $6.1 million annual preferred return) or to
sell its interest in Novogyne to Novartis. The existence of the buy/sell provision and the
uncertainty it may create could discourage an acquisition of us by a third party, which could have an adverse effect on
the market price for our common stock. In addition, the joint venture operating agreement gives
Novartis the right to dissolve the joint venture in the event of a change in control of Noven if
the acquirer is one of the ten largest pharmaceutical companies (as measured by annual dollar
sales). Upon dissolution, Novartis would reacquire the rights to market Vivelle-Dot®
subject to the terms of Novartis prior arrangement with us, and Novogynes other assets would be
liquidated and distributed between us and Novartis in accordance with our and Novartis respective
capital account balances as determined pursuant to the joint venture operating agreement. This
dissolution provision could discourage one of the ten largest pharmaceutical companies from
attempting to acquire us, which could have an adverse effect on the market price for our common
stock.
The market price for our common stock is volatile.
The market price for our common stock is volatile. During 2008, our common stock traded as
low as $8.57 per share and as high as $14.28 per share. Any number of factors, including some that
we do not control and some unrelated to our business or financial results, may have a significant
impact on the market price for our common stock, including: announcements by us or our competitors
of technological innovations or new commercial products; changes in governmental regulation;
receipt by us or one of our competitors of regulatory approvals or adverse regulatory
determinations; developments relating to patents or proprietary rights of us or one of our
competitors; publicity regarding actual or potential medical results or risks for products that we
or one of our competitors market or has under development; and period-to-period changes in
financial results and the economy generally. We, like any other company with a volatile stock
price, may be subject to securities litigation arising from significant downward movement in our
stock price, which could have a material adverse effect on our business and financial results.
40
The recent volatility in the financial markets and deteriorating economic conditions could
adversely affect us or our partners, customers or suppliers.
As widely reported, financial markets in the United States, Europe and Asia have been
experiencing extreme disruption in recent months, including, among other things, extreme volatility
in securities prices, severely diminished liquidity and credit availability, rating downgrades of
certain investments and declining valuations of others. Among other risks we face, the current
tightening of credit in financial markets may adversely affect our ability to access our credit
facility or obtain financing in the future, including, if necessary, to fund a product, technology
or business acquisition. In addition, current economic conditions could harm the liquidity or
financial position of our partners, customers or suppliers, which could in turn cause such parties
to fail to meet their contractual or other obligations to us. Novogyne has currently recorded a
product liability insurance receivable in the amount of $6.7 million due from a subsidiary of
American International Group (AIG). Although AIG has advised that its commercial insurance
subsidiaries remain well-capitalized despite the parent companys recent liquidity issues and
diminished financial position, we cannot assure that the insurance carrier will pay the amounts
that Novogyne believes are owed under the policy, either due to a change in the carriers financial
condition, a coverage dispute or otherwise.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
Our headquarters and our manufacturing facility for our transdermal products are located on a
15-acre site in Miami-Dade County, Florida. On this site, we own an approximately 20,000 square
foot building used for laboratory, office and administrative purposes. We also lease from Aventis,
for $1.00 per year, seven acres of the site and two approximately 40,000 square foot buildings
located on this portion of the site, which we use for manufacturing, engineering, administrative
and warehousing purposes. The lease expires upon the earlier of 2024 or the termination or
expiration of our 1992 license agreement with Aventis. This lease includes an option to purchase
the leased facilities and property for its depreciated value and subsequent to year-end, we began
the process of exercising this option and purchasing the facilities and properties for $1.00, its
depreciated value as of December 31, 2008. The facility has been certified by the DEA to
manufacture products containing controlled substances.
We lease approximately 17,600 square feet of office space in a neighboring facility for
certain marketing and administrative functions and an additional 73,000 square feet of industrial
space for warehousing which, depending on need, may also be used for
manufacturing. The lease for the office space can be renewed by us
until 2013. The initial
lease term for the industrial space expires in 2015 and the term may be extended for up to an additional 21 years pursuant
to four renewal options for five years each and a one-time option to renew for one year. Our site
includes five acres of undeveloped land that we own, which we believe could accommodate new
buildings for a variety of manufacturing, warehousing and developmental purposes. We believe that
our facilities are in satisfactory condition, and are suitable for their intended use and have
adequate capacity for the manufacture of our transdermal products.
In addition, as part of the Noven Therapeutics acquisition in August 2007, we assumed the
operating lease of 8,700 square feet of office space that Noven Therapeutics used for their
operations in New York, New York. This lease expires in September 2010.
41
Our manufacturing facility for our transdermal products, as well as the site of our research
and development activities and our corporate headquarters and other critical business functions,
are located in an area subject to hurricane casualty risk. Although we have certain limited
protection afforded by insurance, our business, earnings and competitive position could be
materially adversely affected in the event of a major windstorm or other casualty.
Item 3. Legal Proceedings.
See Note 19 Commitments and Contingencies Litigation, Claims and Assessments, in the
Notes to our Consolidated Financial Statements for information regarding legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
We did not submit any matters to a vote of stockholders during the quarter ended December 31,
2008.
Executive Officers of the Registrant
Set forth below is a list of the names, ages, positions held and business experience of the
persons serving as our executive officers as of March 12, 2009. Officers serve at the discretion
of the Board of Directors. There is no family relationship between any of our executive officers
or between any of our executive officers and any of our directors, and there is no arrangement or
understanding between any executive officer and any other person pursuant to which the executive
officer was selected.
Peter Brandt. Mr. Brandt, age 51, was appointed to Novens Board and to the offices
of President and Chief Executive Officer in April 2008. From 1981 until 2007, Mr. Brandt served in
a number of executive positions at Pfizer, Inc. (pharmaceuticals). He served as Pfizers President
U.S. Pharmaceuticals Operations from August 2006 until January 2007 and as its Senior Vice
President U.S. Pharmaceuticals Operations from January 2006 to August 2006. From 2004 to 2006,
Mr. Brandt served as President Latin America Operations and as Senior Vice President Worldwide
Pharmaceuticals Finance, IT, Planning and Business Development, Pfizer Health Solutions. From
1998 to 2004, he served as Senior Vice President Worldwide Pharmaceuticals Finance, Planning and
Business Development and Pfizer Health Solutions.
Jeffrey F. Eisenberg. Mr. Eisenberg, age 43, has been with Noven since November 1998
and, since January 2008, has served as Executive Vice President. From January 2008 to April 2008,
he served as Novens Interim Chief Executive Officer. From May 2005 to January 2008, he served as
Novens Senior Vice President Strategic Alliances. From January 2001 to September 2001, he
served as Novens Vice President, General Counsel and Corporate Secretary, and, from September 2001
to May 2005, he served as Novens Vice President Strategic Alliances, General Counsel and
Corporate Secretary. From 1995 through 1998, Mr. Eisenberg served as Associate General Counsel and
then as Acting General Counsel of IVAX Corporation. Prior to joining IVAX, he was a lawyer in the
corporate securities department of the law firm of Steel Hector & Davis.
Michael D. Price. Mr. Price, age 51, was appointed Vice President and Chief Financial
Officer of Noven in November 2007. Mr. Price retired from Bentley Pharmaceuticals, Inc. in
September 2006 and was retired since that time through joining Noven in November 2007. Prior to his
retirement, Mr. Price served as Chief Financial Officer, Vice President/Treasurer and Secretary of
Bentley, where he was employed from
42
March 1992 until September 2006. Mr. Price also served on Bentleys Board of Directors from 1995 until 2004. Mr. Price is a Certified Public Accountant
licensed by the State of Florida.
Steven M. Dinh. Mr. Dinh, age 53, was appointed Vice President and Chief Scientific
Officer of Noven in June 2008. From 1997 to 2007, Mr. Dinh served in the dual role of Vice
President of Research and Technology Development and Co-Chair Office of the President for
Emisphere Technologies. Previously, he served as Chief Scientific Officer and Vice President of
Research and Development for Lavipharm Laboratories, where he led research and development efforts
in drug delivery and transdermal and cosmetic products. Prior to Lavipharm, he held several
senior-level research and development positions focused in transdermal and pharmaceutical research
and development for Novartis Pharmaceuticals Corporation and Ciba-Geigy.
Richard P. Gilbert. Mr. Gilbert, age 58, has served Noven as Vice President
Operations since December 2004. From January 2000 to November 2004, he served as Vice President,
Manufacturing Operations, at ConvaTec (a Bristol-Myers Squibb Company). Prior to ConvaTec, Mr. Gilbert held various senior roles at London International Group, LLC, The Tensar Corporation,
and Richmond Technology.
Joel S. Lippman, M.D. Dr. Lippman, age 54, was appointed Vice President Clinical
Development and Chief Medical Officer of Noven in July 2008. From 2006 to 2008, he served as an
independent consultant to companies in the healthcare industry. From 2000 to 2006, Dr. Lippman
served Ethicon, Inc., a Johnson & Johnson company, as Worldwide Vice President Medical Affairs
and Chief Medical Officer and as a member of that companys Global Management Board. From 1990 to
2000, he served Ortho-McNeil Pharmaceutical, Inc., also a Johnson & Johnson company, as Vice
President Clinical Trials. From 1988 to 1990, he served Wyeth-Ayerst Laboratories in a number of
clinical development, medical affairs and related roles.
Anthony Venditti. Mr. Venditti, age 50, was appointed Vice President Marketing &
Sales of Noven in June 2008. From 2005 to 2007, he served Novartis Pharmaceuticals Corporation as
Vice President and head of Novartis United States Neuroscience division, where he was responsible
for marketing, sales and new product operations for the central nervous system (CNS) portfolio in
the United States. From 1996 to 2005, he served Novartis in a number of senior executive positions,
with responsibility for marketing, sales, business analysis, strategic planning and new product
commercialization, including key roles in the launch of several new products.
43
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Our Common Stock is listed on the Nasdaq Global Select Market and is traded under the symbol
NOVN. As of March 2, 2009, we had 214 stockholders of record of our Common Stock. We have never
declared a cash dividend on our Common Stock and do not anticipate declaring cash dividends in the
foreseeable future. The following table sets forth, for the periods indicated, the high and low
sale prices for our Common Stock as reported on the Nasdaq Global Select Market.
|
|
|
|
|
|
|
|
|
|
|
High Price |
|
Low Price |
|
|
|
|
|
|
|
|
|
Fourth Quarter, 2008 |
|
$ |
12.24 |
|
|
$ |
9.45 |
|
Third Quarter, 2008 |
|
|
13.31 |
|
|
|
9.65 |
|
Second Quarter, 2008 |
|
|
12.97 |
|
|
|
8.57 |
|
First Quarter, 2008 |
|
|
14.28 |
|
|
|
8.98 |
|
|
|
|
|
|
|
|
|
|
Fourth Quarter, 2007 |
|
$ |
16.88 |
|
|
$ |
12.65 |
|
Third Quarter, 2007 |
|
|
24.06 |
|
|
|
14.99 |
|
Second Quarter, 2007 |
|
|
26.15 |
|
|
|
22.23 |
|
First Quarter, 2007 |
|
|
27.80 |
|
|
|
21.68 |
|
Stock Repurchase Program
The following table provides information with respect to our stock repurchases during the
fourth quarter of 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
Approximate |
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
Dollar Value |
|
|
|
|
|
|
|
|
|
|
Part of |
|
That May Yet |
|
|
Total Number of |
|
Average Price |
|
Publicly |
|
be Purchased |
|
|
Shares |
|
Paid |
|
Announced |
|
under the |
|
|
Purchased |
|
Per Share |
|
Program |
|
Program1 |
October 1, 2008 to
October 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,876,238 |
|
November 1, 2008 to
November 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,876,238 |
|
December 1, 2008 to
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,876,238 |
|
|
|
|
|
|
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,876,238 |
|
|
|
|
1 |
|
In September 2007, we established a stock repurchase program authorizing the repurchase
of up to $25.0 million of our common stock. During the third quarter of 2007, Noven
repurchased 322,345 shares of its common stock at an aggregate price of approximately $5.1
million. There is no expiration date specified for this program. |
44
Comparison of Five-Year Cumulative Total Return
The following graph and table show the cumulative total return, assuming the investment of
$100 on December 31, 2003, on an investment in each of Novens common stock, the Russell 2000 Index
and the Value Line Drugs Index (in either case, assuming reinvestment of dividends). The
comparisons in the graph and table are required by the SEC and are not intended to forecast or be
indicative of possible future performance of our common stock. We have not declared dividends to
our stockholders since our inception and do not plan to declare dividends in the foreseeable
future. The following graph and chart are being furnished solely to accompany this Form 10-K
pursuant to Item 201(e) of Regulation S-K and shall not be deemed soliciting materials or to be
filed with the SEC (other than as provided in Item 201), nor shall such information be
incorporated by reference into any of our filings under the Securities Act of 1933 or the
Securities Exchange Act of 1934, whether made before or after the date hereof, and irrespective of
any general incorporation language in any such filing.
Noven
Pharmaceuticals, Russell 2000 Index and Value Line Value Line Drugs Index*
(Performance Results Through 12/31/08)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
Noven
Pharmaceuticals |
|
$ |
100.00 |
|
|
$ |
112.16 |
|
|
$ |
99.47 |
|
|
$ |
167.32 |
|
|
$ |
91.26 |
|
|
$ |
72.32 |
|
Russell 2000 Index |
|
$ |
100.00 |
|
|
$ |
117.00 |
|
|
$ |
120.88 |
|
|
$ |
141.43 |
|
|
$ |
137.55 |
|
|
$ |
89.68 |
|
Value Line Drugs
Index |
|
$ |
100.00 |
|
|
$ |
99.10 |
|
|
$ |
108.99 |
|
|
$ |
125.53 |
|
|
$ |
136.16 |
|
|
$ |
123.67 |
|
Source: Value Line, Inc.
45
Item 6. Selected Financial Data.
The selected financial data presented below is derived from our audited Consolidated Financial
Statements. The data set forth below should be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of Operations and the Consolidated Financial
Statements and related notes appearing elsewhere in this Form 10-K (amounts in thousands, except
per share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
20081,3 |
|
|
20072,3 |
|
|
20063 |
|
|
20054 |
|
|
2004 |
|
Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues, net |
|
$ |
77,627 |
|
|
$ |
65,436 |
|
|
$ |
48,326 |
|
|
$ |
40,451 |
|
|
$ |
36,871 |
|
License and contract revenues |
|
|
30,548 |
|
|
|
17,725 |
|
|
|
12,363 |
|
|
|
12,081 |
|
|
|
9,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
108,175 |
|
|
|
83,161 |
|
|
|
60,689 |
|
|
|
52,532 |
|
|
|
45,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
|
51,861 |
|
|
|
41,017 |
|
|
|
36,508 |
|
|
|
34,047 |
|
|
|
20,514 |
|
Acquired in-process research
and development |
|
|
|
|
|
|
100,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
15,527 |
|
|
|
13,978 |
|
|
|
11,454 |
|
|
|
13,215 |
|
|
|
9,498 |
|
Selling and marketing |
|
|
23,299 |
|
|
|
9,160 |
|
|
|
967 |
|
|
|
563 |
|
|
|
624 |
|
General and administrative |
|
|
36,796 |
|
|
|
30,411 |
|
|
|
20,734 |
|
|
|
16,352 |
|
|
|
16,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
127,483 |
|
|
|
194,716 |
|
|
|
69,663 |
|
|
|
64,177 |
|
|
|
47,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of contingent milestone liability |
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(14,308 |
) |
|
|
(111,555 |
) |
|
|
(8,974 |
) |
|
|
(11,645 |
) |
|
|
(1,392 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of Novogyne |
|
|
45,642 |
|
|
|
35,850 |
|
|
|
28,632 |
|
|
|
24,655 |
|
|
|
17,641 |
|
Interest and other income, net |
|
|
2,022 |
|
|
|
5,454 |
|
|
|
4,272 |
|
|
|
2,242 |
|
|
|
999 |
|
Loss on auction rate securities |
|
|
(515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
32,841 |
|
|
|
(70,251 |
) |
|
|
23,930 |
|
|
|
15,252 |
|
|
|
17,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
11,429 |
|
|
|
(24,875 |
) |
|
|
7,942 |
|
|
|
5,280 |
|
|
|
6,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
21,412 |
|
|
$ |
(45,376 |
) |
|
$ |
15,988 |
|
|
$ |
9,972 |
|
|
$ |
11,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
0.87 |
|
|
$ |
(1.84 |
) |
|
$ |
0.67 |
|
|
$ |
0.42 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
$ |
0.87 |
|
|
$ |
(1.84 |
) |
|
$ |
0.66 |
|
|
$ |
0.42 |
|
|
$ |
0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
24,617 |
|
|
|
24,728 |
|
|
|
23,807 |
|
|
|
23,566 |
|
|
|
23,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
24,729 |
|
|
|
24,728 |
|
|
|
24,252 |
|
|
|
23,981 |
|
|
|
24,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to footnotes on the following page.
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
20081,3 |
|
|
20072,3 |
|
|
20063 |
|
|
20054 |
|
|
2004 |
|
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
62,875 |
|
|
$ |
13,973 |
|
|
$ |
9,144 |
|
|
$ |
66,964 |
|
|
$ |
93,958 |
|
Short-term investments available-for-sale, at fair value |
|
|
3,650 |
|
|
|
21,565 |
|
|
|
144,455 |
|
|
|
17,900 |
|
|
|
|
|
Other current assets |
|
|
47,113 |
|
|
|
45,565 |
|
|
|
56,608 |
|
|
|
34,746 |
|
|
|
48,763 |
|
Non-current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
34,886 |
|
|
|
36,213 |
|
|
|
37,010 |
|
|
|
34,455 |
|
|
|
22,587 |
|
Investments in auction rate securities |
|
|
11,810 |
|
|
|
32,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Novogyne |
|
|
24,319 |
|
|
|
24,310 |
|
|
|
23,296 |
|
|
|
23,243 |
|
|
|
26,233 |
|
Net deferred income tax asset, non-current portion |
|
|
65,159 |
|
|
|
58,053 |
|
|
|
8,308 |
|
|
|
6,373 |
|
|
|
8,239 |
|
Intangible assets, net5 |
|
|
36,508 |
|
|
|
38,773 |
|
|
|
2,317 |
|
|
|
2,211 |
|
|
|
2,174 |
|
Goodwill5 |
|
|
14,407 |
|
|
|
14,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits and other non-current assets |
|
|
839 |
|
|
|
677 |
|
|
|
227 |
|
|
|
18 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
301,566 |
|
|
$ |
286,698 |
|
|
$ |
281,365 |
|
|
$ |
185,910 |
|
|
$ |
201,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
62,994 |
|
|
$ |
57,079 |
|
|
$ |
29,386 |
|
|
$ |
28,488 |
|
|
$ |
45,372 |
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations, less current portion |
|
|
27 |
|
|
|
8,438 |
|
|
|
279 |
|
|
|
|
|
|
|
121 |
|
Deferred license and contract revenues, non-current
portion |
|
|
77,112 |
|
|
|
85,056 |
|
|
|
74,188 |
|
|
|
16,053 |
|
|
|
27,443 |
|
Other non-current liabilities |
|
|
997 |
|
|
|
1,831 |
|
|
|
837 |
|
|
|
748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
141,130 |
|
|
$ |
152,404 |
|
|
$ |
104,690 |
|
|
$ |
45,289 |
|
|
$ |
72,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
$ |
160,436 |
|
|
$ |
134,294 |
|
|
$ |
176,675 |
|
|
$ |
140,621 |
|
|
$ |
129,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Financial results for 2008 included: (i) the recognition of $7.2 million
of previously deferred license and contract revenues as a result of the termination of our
agreements with Shire for the development of an amphetamine patch, (ii) the recognition of
$5.0 million in operating income from the reversal of an accrued liability related to a
future Pexeva® contingent sales milestone, (iii) $3.7 million of charges
associated with the voluntary market withdrawal of a portion of the
Daytrana®
product by Shire,
(iv) a $3.8 million charge related to previously manufactured Daytrana® product at
risk of exceeding the
products peel force specification during its shelf life, and (v) a $1.8 million charge
related to a patent infringement case. |
|
2 |
|
Financial results for 2007 included: (i) a $100.2 million charge recorded in the 2007
third quarter for the portion of the Noven Therapeutics acquisition purchase price allocated
to in-process research and development; (ii) a $3.3 million
charge associated with the voluntary withdrawal of a portion of
Daytrana®
product by Shire; (iii) a $3.3 million fourth quarter
charge related to separation arrangements with certain executive officers; and (iv)
results of operations of Noven Therapeutics from the date of acquisition (August 14, 2007)
through December 31, 2007. |
|
3 |
|
Financial results for 2008, 2007 and 2006 included $4.8 million, $5.4 million and
$3.3 million, respectively, in stock-based compensation expenses resulting from the adoption
of SFAS No. 123 (R), Share-Based Payment effective January 1, 2006. |
|
4 |
|
Financial results for 2005 included $9.9 million in charges associated with the
write-off of fentanyl inventories and associated destruction charges, and the recognition of
$5.7 million in fentanyl deferred license revenues, resulting from the FDAs decision not to
approve our application for a generic fentanyl patch. |
|
5 |
|
Intangible assets, net and goodwill increased in 2007 as a result of the Noven
Therapeutics acquisition on August 14, 2007. |
47
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
This section addresses material aspects of Novens consolidated financial condition and
results of operations. The contents of this section include:
|
|
|
An executive summary of our 2008 consolidated results of operations; |
|
|
|
|
A review of certain items that may affect the historical or future comparability of
our consolidated results of operations; |
|
|
|
|
An analysis of our consolidated results of operations and our liquidity and capital
resources; |
|
|
|
|
An outlook that includes our current financial guidance for 2009; |
|
|
|
|
A discussion of how we apply our critical accounting estimates; and |
|
|
|
|
A discussion of recently-issued accounting standards. |
This discussion should be read in conjunction with Noven and Novogynes 2008 financial
statements and the related notes thereto included in this Form 10-K.
Executive Summary
The following Executive Summary is qualified in its entirety by the more detailed discussion
and analysis of our financial condition and results of operations appearing in this Item 7 as well
as in our consolidated financial statements and related notes included in this Form 10-K.
Our financial results for 2008 included a full year of the results of operations of Noven
Therapeutics (previously known as JDS Pharmaceuticals), a specialty pharmaceutical company that we
acquired on August 14, 2007. Our financial results included the results of operations of Noven
Therapeutics beginning on the acquisition date (August 14, 2007). Noven
Therapeutics is a specialty pharmaceutical company focused in CNS and
womens health indications, with a
targeted sales force, three marketed psychiatry products, and a non-hormonal product
for vasomotor symptoms in clinical development. The Noven Therapeutics acquisition was an important
part of Novens transition from primarily a transdermal drug delivery company to an integrated
specialty pharmaceutical company.
Our financial results for 2008 also included: (i) the
recognition of $7.2 million
of previously deferred license revenues as a result of the termination of our
agreements with Shire for the development of an amphetamine patch; (ii) the recognition of $5.0
million in operating income due to the reversal of an accrued liability related to a future
Pexeva® contingent sales milestone; (iii) $3.7 million in charges for reimbursements
to Shire for voluntary recalls of certain Daytrana® product initiated by Shire in 2008,
as well as the establishment of a $3.8 million reserve related to previously-manufactured
Daytrana® product at risk of exceeding the products peel force specification during its
shelf life (this aggregate $7.5 million amount is referred to as the 2008 Daytrana®
Charges); and (iv) a $1.8 million charge related to
a patent infringement case.
Our financial results for 2007 included: (i) a $100.2 million charge for the portion of the
Noven Therapeutics purchase price allocated to in-process research and development (the IPR&D
Charge); (ii) a $3.3 million charge for reimbursements to Shire for voluntary recalls of certain Daytrana® product (the 2007 Daytrana® Charges); and (iii) an aggregate
$3.3 million charge related to separation arrangements associated with the retirement of certain
former executive officers.
48
Including the impact of these items, we reported net income of $21.4 million ($0.87 diluted
earnings per share) for 2008 compared to a net loss of $45.4 million ($1.84 loss per share) for
2007. Our net revenues in 2008 were $108.2 million, an increase of 30% compared to $83.2 million
reported in 2007. This increase reflects the recognition of $24.5 million in net revenues
associated with Noven Therapeutics, primarily due to our sales of Pexeva® and
Lithobid® products as well as increased license and contract revenues, primarily due to
the $7.2 million recognized as a result of the termination of certain of our agreements with Shire,
as discussed above, in addition to increased amortization of deferred revenue from
Daytrana® sales milestone payments. The increase in net revenues was partially offset
by a $1.6 million reduction in revenues for 2008, representing a portion of the 2008
Daytrana® Charges.
Gross margin, as a percentage of net product revenues, was 33% in 2008 compared to 37% in
2007. Cost of products sold in 2008 included $1.1 million of the 2008 Daytrana®
Charges, $2.8 million of inventory write-offs primarily related to an equipment failure in
transdermal manufacturing, as well as increased quality assurance activities and expenses,
primarily related to Daytrana® production. Although we implemented new
manufacturing processes that helped improve efficiencies associated with existing
Daytrana® production in the fourth quarter of 2008, we expect the peel force issue to
continue to negatively affect margins as a result of increased Daytrana® manufacturing
costs, including reimbursements to Shire for the active
methylphenidate ingredient (AMI) included in destroyed product, unless and
until the peel force issue is resolved.
Excluding the $100.2 million IPR&D Charge in 2007, research and development expenses in 2008
increased $1.5 million to $15.5 million compared to 2007. Selling and marketing expenses
increased to $23.3 million from $9.2 million in 2007, reflecting a full year of selling and
marketing expenses at Noven Therapeutics, including $4.8 million
related to
Stavzor®,
which was commercially launched in August 2008. In 2008, general and administrative expenses increased
$6.4 million, or 21%, reflecting $4.8 million of the 2008
Daytrana®
Charges (compared to $2.2 million in 2007), a full year
of expenses at Noven Therapeutics, and a $1.8 million charge
related to a patent
infringement case.
We recognized $45.6 million in earnings from Novogyne in 2008, an increase of 27% compared to
2007. Net revenues at Novogyne increased 15% to $169.6 million in 2008, primarily due to increased
sales of Vivelle-Dot®. Novogynes gross margin percentage for 2008 increased slightly
to 80%. Novogynes selling, general and administrative expenses were $37.5 million in 2008, a 2%
decrease from 2007. Novogynes net income for 2008 increased 25% to $99.5 million compared to $79.8
million in the prior year.
At December 31, 2008, we had $62.9 million in cash and cash equivalents and $15.5 million in
investments in auction rate securities. This compares with $14.0 million in cash and cash
equivalents and $54.4 million in investments in auction rate
securities at December 31, 2007. In
the third quarter of 2008, we received the third and final $25.0 million milestone payment related
to Shires sales of
Daytrana®.
As of December 31, 2008, no amounts were outstanding under
our $15.0 million revolving credit facility.
49
Our investments in auction rate securities at December 31, 2008 had a fair value of $15.5
million. We liquidated $39.0 million of these investments at par
value in 2008. The auction rate securities that we hold are collateralized primarily by tax-exempt
municipal bonds and, to a much lesser extent, guaranteed student loans. During 2008, we recorded
an other-than-temporary change in fair value of $0.5 million relating to our investments in auction
rate securities, which was consequently recognized in our 2008 Consolidated Statement of Operations.
Total prescriptions for Vivelle-Dot® increased 6% in 2008 compared to 2007, and
total prescriptions for Novogynes HT products, taken as a whole, increased 3%. By comparison, the
United States HT market declined 5% for the same period. Total prescriptions for
Daytrana® decreased 11% in 2008 compared to 2007, while prescriptions for ADHD stimulant
therapies as a class increased 8% over the same period. Total prescriptions for Pexeva®
decreased 6% in 2008 compared to 2007, while for the same period prescriptions for the selective
serotonin re-uptake inhibitor (SSRI) class increased 1%. Reflecting ongoing generic substitution,
total prescriptions for Lithobid® decreased 31% in 2008 compared to 2007.
In July 2008, the FDA granted final approval of the New Drug Application for
Stavzor® (valproic acid delayed release capsules) in the treatment of manic episodes
associated with bipolar disorder, adjunctive therapy in multiple seizure types (including
epilepsy), and prophylaxis of migraine headaches. Noven Therapeutics commercially launched
Stavzor® in August 2008.
In August 2008, we entered into global license and supply agreements with Procter & Gamble
Pharmaceuticals, Inc. relating to the development and commercialization of
a low-dose testosterone patch for the treatment of HSDD and
other indications.
In the fourth quarter of 2008, we began patient enrollment for a Phase 2 study of
Mesafem, our developmental non-hormonal product for vasomotor symptoms (hot flashes),
and that study is continuing, with completion expected during 2009.
Also in the fourth quarter of 2008, we terminated our agreements with Shire for the
development of an amphetamine patch, and the rights to this product were returned to us. We intend
to pursue the further development and commercialization of the product. As a result of the
termination, we recognized $7.2 million of
previously deferred payments from Shire as license revenues in the fourth quarter of
2008.
Certain Items that May Affect Historical or Future Comparability
Set forth below are certain items that may affect the historical or future comparability of
our consolidated results of operations and financial condition. Such disclosure is not intended to
address every item that may affect the historical or future comparability of our consolidated
results of operations or financial condition and such disclosure should be read in conjunction with
the discussion and analysis of our consolidated results of operations, liquidity and capital
resources and outlook appearing elsewhere in this Item 7.
Acquisition of Noven Therapeutics, LLC in 2007
As more fully described in Note 4 Acquisition of Noven Therapeutics, LLC to the
Consolidated Financial Statements, we acquired Noven Therapeutics, LLC (f/k/a JDS Pharmaceuticals,
LLC) on August 14, 2007 (the Closing Date). The results of operations of Noven Therapeutics have
been included in our consolidated results beginning on the Closing Date. The
total purchase price for the Noven Therapeutics acquisition consisted of $125.0 million cash paid
at closing, approximately $5.4 million of transaction costs consisting
50
primarily of fees paid for
financial advisory, legal, valuation and accounting due diligence services, approximately $0.5
million in connection with non-competition agreements entered into with two executives of Noven
Therapeutics in connection with the acquisition and $1.0 million of net working capital
adjustments. We funded the acquisition from the sale of short-term investments. We accounted for
the acquisition of Noven Therapeutics using the purchase method of accounting. The final purchase
price exceeded the amounts allocated to the tangible and intangible assets acquired and liabilities
assumed by approximately $14.4 million, which has been recorded as goodwill, all of which is
deductible for tax purposes.
The final allocation of total purchase price for the acquisition to tangible and intangible
assets acquired and liabilities assumed was based on their estimated fair values at the Closing
Date, which increased our assets and liabilities on the Closing Date as follows (amounts in
thousands):
|
|
|
|
|
Property, equipment and other assets |
|
$ |
525 |
|
Intangible assets: |
|
|
|
|
Acquired in-process research and development |
|
|
100,150 |
|
Identifiable intangible assets |
|
|
39,110 |
|
Goodwill |
|
|
14,407 |
|
Net working capital, including cash of $0.6 million |
|
|
(7,062 |
) |
Long-term obligation assumed |
|
|
(3,711 |
) |
Contingent milestones assumed |
|
|
(11,500 |
) |
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
131,919 |
|
|
|
|
|
The $100.2 million of the purchase price allocated to IPR&D was charged to operations
immediately following the completion of the acquisition in 2007. The IPR&D expense resulted in a
significant loss in 2007.
The assumed long-term obligation of $3.7 million was paid in 2007 based on an analysis of
favorable early payment discount. The $11.5 million contingent
milestones assumed were for
contingent sales milestones payable upon the achievement of specified future sales levels of
Pexeva®.
We became obligated to pay $6.5 million of these milestones based on 2007 and
2008 sales of Pexeva®. In the third quarter of 2008, we recognized $5.0 million in
operating income as a result of the reversal of the remaining accrued liability upon our determination that
the achievement of the applicable milestone was no longer probable based on projected sales of
Pexeva®.
Daytrana®
Daytrana® is our transdermal methylphenidate system for the treatment of ADHD,
which we have licensed globally to Shire. We and Shire have received reports from some consumers
concerning the difficulty of removing the release liner from certain Daytrana® patches.
In the first quarter of 2007, we, together with Shire, implemented enhancements to the
Daytrana® release liner. While the enhanced release liner has reduced the level of
consumer reports, some patients and caregivers continue to have difficulty in removing the release
liner from some Daytrana® patches.
51
In July 2007, we received from the FDA a list of observations on Form 483 following an on-site
inspection of our manufacturing facilities. The majority of the observations in the Form 483
related to the Daytrana® patch and difficulties experienced by some patients in removing
the release liner, including certain product lots that utilize the enhanced release liner. In July
2007, we submitted to the FDA our response to the Form 483.
In the third quarter of 2007, Shire initiated two voluntary recalls of a portion of the
Daytrana® product on the market primarily in response to feedback from patients and
caregivers who experienced difficulty removing the release liner from some Daytrana®
patches. We paid Shire $3.3 million in February 2008 related to those recalls. This payment was
charged to operations in 2007.
In January 2008, we received a warning letter from the FDA in connection with the FDAs July
2007 inspection of our manufacturing facilities. In the warning letter, which is posted at the
FDAs website, the FDA cited Current Good Manufacturing Practice deficiencies related to: (i) peel
force specifications for removal of Daytranas® release liner; and (ii) data supporting
the peel force characteristics of Daytranas® enhanced release liner throughout the
products shelf life. We submitted our response to the warning letter on January 30, 2008, which
remains under review by the FDA.
In April 2008, a Noven stability protocol identified certain Daytrana® lots
exhibiting high peel force characteristics. In June 2008, Shire initiated the voluntary recall of
two lots of Daytrana® that did not meet the products release liner removal
specification. In August 2008, Shire initiated the voluntary recall of two additional lots of
Daytrana® that did not meet the products release liner removal specification. During
2008, we paid Shire $3.7 million related to its June and August 2008 recalls, of which
approximately $3.1 million has been charged to general and administrative expenses, $0.4 million
was recorded as a reduction in revenues and $0.2 million was charged to cost of products sold in
2008. For each of the recalls described above, the amount charged to general and administrative
expenses represents amounts we are obligated to reimburse Shire for direct costs of the recalls,
the amounts reflected as reductions of revenue represent the amounts recognized for product which is
expected to be returned and the charge to cost of product sold represents the value of AMI included
in such product for which we are required to reimburse Shire.
In the fourth quarter of 2008, we implemented new product release testing intended to predict
which Daytrana® lots are at risk of developing peel force issues during the products
shelf life. Product that fails to meet this test will be destroyed, which will result in increased
Daytrana® manufacturing costs, including reimbursements to Shire for the AMI included in
the destroyed product. In 2008, Daytrana® cost of products sold exceeded our
Daytrana® net revenues by $7.0 million, including $2.7 million of the
2008 Daytrana® Charges, of which $1.6 million was recorded as a reduction in revenues and $1.1 million was charged to cost of products sold. Although we have
implemented new manufacturing processes that helped improve efficiencies associated
with existing Daytrana® production in the fourth quarter of 2008, we expect the peel
force issue to continue to negatively affect margins as a result of increased Daytrana®
manufacturing costs, including reimbursements to Shire for the AMI included in destroyed
product, unless and until the peel force issue is resolved.
In accordance with SFAS No. 5, we have determined that certain previously-manufactured lots
that would not have met the new release testing standard are probable of being voluntarily
withdrawn or recalled from the market prior to the expiration of their shelf life.
52
Consequently,
during 2008, we established a reserve of $3.8 million related to these affected lots, which
includes $1.7 million of estimated recall costs that we will be required to reimburse Shire if
there are withdrawals or recalls. Of the $3.8 million reserve,
approximately $1.7 million has been
charged to general and administrative expenses, $1.2 million was recorded as a reduction in
revenues and $0.9 million was charged to cost of products sold. We do expect that there will be an additional voluntary withdrawal/recall of some
Daytrana® lots due to the peel force issue. While we believe the $3.8 million reserve
is adequate for the costs of such withdrawal/recall, we cannot assure that our costs related to
this issue will not exceed the amount reserved.
Although the new release
testing is designed to reduce the likelihood that newly-manufactured product will be withdrawn or
recalled in the future, we cannot assure that our testing procedures will detect all production
issues or that there will not be future Daytrana® market withdrawals or recalls.
In January 2009, we received from the FDA a list of observations on Form 483 following an
on-site inspection of our manufacturing facilities. Like the warning letter and the prior Form
483, the majority of the observations in the Form 483 relate to the manufacture of
Daytrana® product that exhibits high peel force characteristics, an issue which Noven
and Shire continue to work to resolve.
We
believe we have identified the root cause of the peel force issue. We
are testing
manufacturing solutions designed to address the peel force issue. Implementation of the solutions
being tested will require prior agreement from the FDA. Subject to FDA review and agreement,
Novens current plan calls for shipments to Shire in the third
or fourth quarter of 2009. We cannot assure that the FDA will approve the solutions being tested on a timely basis or at all.
Novens warning letter remains under review by the FDA.
For a detailed discussion of the risks and uncertainties facing Daytrana®, please
see the risk factor discussion beginning on page 21 of this Form 10-K.
Results of Operations
As discussed in Note 17 Segment and Customer Data to our Consolidated Financial
Statements, we operate in three segments distinguished along product categories and nature of the
business unit: (i) Noven Transdermals, which currently engages in the manufacturing, licensing and
sale to partners of prescription transdermal products; (ii) Novogyne, our womens health joint
venture with Novartis in which we own a 49% equity interest; and (iii) Noven Therapeutics, which
currently engages in the marketing and sale of pharmaceutical products.
53
Revenues:
The following table summarizes our net revenues by segment and type for our operating segments
which generate revenues (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
% Change |
|
|
2007 |
|
|
% Change |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noven Transdermals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Novogyne: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
21,308 |
|
|
|
-5 |
% |
|
$ |
22,425 |
|
|
|
14 |
% |
|
$ |
19,714 |
|
Royalties |
|
|
8,411 |
|
|
|
13 |
% |
|
|
7,458 |
|
|
|
9 |
% |
|
|
6,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues Novogyne |
|
|
29,719 |
|
|
|
-1 |
% |
|
|
29,883 |
|
|
|
13 |
% |
|
|
26,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
|
23,100 |
|
|
|
-11 |
% |
|
|
26,000 |
|
|
|
21 |
% |
|
|
21,422 |
|
Royalties |
|
|
334 |
|
|
|
-2 |
% |
|
|
340 |
|
|
|
-1 |
% |
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues third parties |
|
|
23,434 |
|
|
|
-11 |
% |
|
|
26,340 |
|
|
|
21 |
% |
|
|
21,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenues |
|
|
53,153 |
|
|
|
-5 |
% |
|
|
56,223 |
|
|
|
16 |
% |
|
|
48,326 |
|
License and contract revenues |
|
|
30,548 |
|
|
|
72 |
% |
|
|
17,725 |
|
|
|
43 |
% |
|
|
12,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Transdermals |
|
|
83,701 |
|
|
|
13 |
% |
|
|
73,948 |
|
|
|
22 |
% |
|
|
60,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noven Therapeutics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
|
24,474 |
|
|
|
166 |
% |
|
|
9,213 |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
108,175 |
|
|
|
30 |
% |
|
$ |
83,161 |
|
|
|
37 |
% |
|
$ |
60,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M Not Meaningful
Net Revenues
As described in more detail below, the 30% increase in net revenues for 2008 as compared to
2007 was primarily attributable to the addition of $24.5 million in net revenues reflecting a full
year of sales of Noven Therapeutics products, as compared to 4.5 months of sales in 2007. We also
realized a $12.8 million, or 72%, increase in license and contract revenues compared to 2007, which
was primarily attributable to an increase in amortization of Daytrana® milestones and $7.2 million of
revenue recognized upon termination of an amphetamine development agreement in the fourth quarter
of 2008. These increases were partially offset by a $3.1 million decrease in product revenues from
our Noven Transdermals segment comprised primarily of a $2.6 million decrease in sales of
Daytrana® in 2008.
As described in more detail below, the 37% increase in net revenues for 2007 as compared to
2006 was primarily attributable to full year sales of Daytrana® and an increase in
license revenue associated with that product. Aggregate sales to Novogyne increased primarily due
to increased sales of Vivelle-Dot®. In addition, revenues in 2007 benefited from the
inclusion of $9.2 million in Pexeva® and Lithobid® sales since August 14,
2007, the date of our acquisition of Noven Therapeutics.
54
Product Revenues Novogyne
Product revenues Novogyne consists of our sales of
Vivelle-Dot®/Estradot® and CombiPatch® to Novogyne at a fixed
price for resale and product sampling by Novogyne primarily in the United States as well as the
royalties we receive as a result of Novogynes sales of Vivelle-Dot®. For additional
information on the components of product revenues Novogyne as well as our other sources of
revenues, see Critical Accounting Estimates Revenue Recognition.
The $0.2 million decrease in product revenues from Novogyne for 2008 compared to 2007
primarily resulted from a $1.5 million decline of Vivelle-Dot® product revenues,
partially offset by an increase of $1.0 million in royalties due to increased sales by Novogyne to
its customers for 2008, as well as a $0.5 million increase in unit sales of CombiPatch®
due to the timing of orders from Novogyne. The decline in Vivelle-Dot® product revenues
is attributable to the timing of orders as prescriptions have increased period to period. The
previously disclosed backlog of orders due to the first quarter 2008 production issues was
completely filled as of December 31, 2008.
The $3.3 million increase in product revenues from Novogyne for 2007 compared to 2006
primarily related to a $3.9 million increase in sales of Vivelle-Dot®, of which $1.9
million related to trade product sales due to increased prescription trends, $0.9 million related
to the timing of orders from Novogyne for samples of Vivelle-Dot® and $1.1 million
related to a price increase. Royalties increased $0.6 million due to increased sales by Novogyne
for 2007.
As noted below under Novogyne Net Revenues, Novogyne sells its products to trade customers,
including wholesalers, distributors and chain pharmacies and the timing of orders by these
customers is difficult to predict and can lead to significant variability in trade customers
ordering patterns. As a result, there may be significant period-to-period variability in
Novogynes ordering patterns from Noven.
Product Revenues Third Parties
Product revenues third parties consist of: (i) sales of Estradot®,
Estalis® and Menorest hormone therapy patches to Novartis Pharma at a price based on a
percentage of Novartis Pharmas net selling price (subject to certain minima) for resale primarily outside the United States
and Japan, together with royalties generated from Novartis Pharmas sales of Estradot®
in Canada; (ii) sales of Daytrana® to Shire for commercial resale in the United States;
(iii) beginning on August 14, 2007, Novens commercial sales of Pexeva® and
Lithobid® to trade customers, including wholesalers, distributors and chain pharmacies;
and (iv) beginning in August 2008, sales of Stavzor® to trade customers, including
wholesalers, distributors and chain pharmacies.
As discussed above, the increase in net revenues for 2008 compared to 2007 for our Noven
Therapeutics segment was primarily attributable to $24.5 in net revenues in 2008 reflecting a full
year of sales compared to $9.2 million in net revenues in 2007, reflecting only 4.5 months of sales
following the Noven Therapeutics acquisition.
The $2.9 million decrease in product revenues third parties in our Noven Transdermals
segment for 2008 compared to 2007 primarily consisted of a $2.6 million decline in sales of
Daytrana® and a $0.6 million decline in third-party revenues from our HT products due to
a decrease in pricing. The decrease in Daytrana® product revenues was largely
attributable to delays in the release of product in 2008, an aggregate $1.6 million reduction in
revenues related to expected Daytrana® product returns due to peel force issues on sold
product, the timing of orders and, to a lesser extent, decreased demand. In addition, Noven
realized a lower benefit from price increases for our third party HT product through periodic price
reconciliation payments received from Novartis as further described below. We recognized $2.4
million and $3.1 million of such payments in 2008 and 2007, respectively.
55
The $4.6 million increase in product revenues third parties in our Noven Transdermals
segment for 2007 compared to 2006 primarily related to $4.7 million increase in volume sales of
Daytrana® and a $1.3 million increase related to HT product pricing with Novartis
Pharma. Daytrana® product sales in 2007 were $13.4 million compared to $8.6 million in
2006. Sales of Daytrana® commenced in the second quarter of 2006. The increase related
to HT product pricing was primarily due to the recognition of a higher price reconciliation payment
received from Novartis Pharma in 2007 compared to 2006. Noven records such payments from time to
time upon Novartis Pharmas determination that its actual sales price of our product entitles us to
receive amounts in excess of the minimum transfer price at which we initially sold the product to
Novartis Pharma. These increases were partially offset by declines of $0.7 million and $0.5 million
in sales volume of Menorest and Femiest®, respectively. The decline in Menorest is
attributable to the continued transition from Menorest to Estradot®, while we believe
the decline in Femiest® was due to the timing of orders.
We sell Stavzor® to pharmaceutical wholesalers and chain drug stores. These
companies have the right to return Stavzor® for up to one year after product expiration.
As a result of the commercial launch of Stavzor® in the third quarter of 2008, we do not
have sufficient sales history to reasonably estimate product returns. Under SFAS No. 48, we cannot
recognize revenue on product shipments until we can reasonably estimate returns relating to these
shipments. In accordance with SFAS No. 48, we defer recognition of revenue on product shipments of
Stavzor® to our customers until such time as Stavzor® units are dispensed
through patient prescriptions, since our customers are no longer permitted to return the product
once it has been dispensed. We estimate the volume of prescription units dispensed at pharmacies
based on data provided by external, independent sources. These sources poll pharmacies, hospitals,
mail order and other retail outlets for Stavzor® prescriptions and project this sample
on a national level. We will recognize revenue based on prescription units dispensed until we have
sufficient sales history to reasonably estimate product returns. We recognized $0.4 million of net revenues for Stavzor® in 2008, and $1.5 million
remained in deferred product revenue on our Consolidated Balance Sheet as of December 31, 2008.
License and Contract Revenues
License revenues consist of the recognition of non-refundable up-front, milestone and similar
payments under license agreements. Contract revenues consist of the recognition of payments
received as work is performed on research and development projects. The payments received may take
the form of non-refundable up-front payments, payments received upon the completion of certain
phases of development work and success milestone payments.
License and contract revenues increased $12.8 million for 2008 compared to 2007, primarily due
to (i) a $4.8 million increase in amortization of milestone payments received from Shire related to
the license of Daytrana®; (ii) $7.2 million related to the termination of the
amphetamine patch project with Shire as described below; and (iii) an $0.8 million increase in
contract revenues due to additional work performed on developmental products. The $4.8 million
increase in amortization of milestone payments reflects a full year of amortization of the second
$25.0 million Daytrana® sales milestone payment received during the third quarter of
2007 and additional amortization of the third $25.0 million Daytrana® sales milestone
payment received in the third quarter of 2008.
In connection with our collaboration with Shire for the development of an amphetamine patch,
Shire paid us an aggregate $7.2 million, including payments for development and for the exclusive
developmental rights to the product. These $7.2 million of
payments received were included in deferred license
and contract revenues on our Consolidated Balance Sheet as of December 31, 2007.
56
On November 5, 2008, we entered into a letter agreement (the Termination Agreement) with Shire terminating our
agreements with Shire relating to an amphetamine patch. The Termination Agreement terminates the
amphetamine collaborative agreements with Shire dated as of (i) June 15, 2004, (ii) May 4, 2007,
and (iii) June 4, 2007. Under the Termination Agreement, rights to the developmental amphetamine
patch were returned to us. We currently intend to pursue the further development and
commercialization of the product. Shire will be entitled to a modest royalty if we elect to
commercialize a product that incorporates intellectual property arising from the development
project with Shire. As a result of the termination of this project with Shire, we
recognized the $7.2 million as license and contract revenues in the fourth quarter of 2008.
License revenues increased $6.9 million for 2007 compared to 2006, which is primarily
attributable to an increase of $8.1 million in amortization of milestone payments received from
Shire related to the license of Daytrana®. The $8.1 million increase reflects full-year
amortization of the $50.0 million approval milestone compared to two quarters in 2006, full-year
amortization of the $25.0 million sales milestone received in the first quarter of 2007 as well as
six-months amortization of the $25.0 million sales milestone received in the third quarter of 2007.
In 2006, we benefited from the recognition of $1.0 million in deferred license revenues related to
a one-time non-refundable payment from a third party. Contract revenues declined $1.5 million for
2007 compared to 2006, primarily reflecting a decline in contract work performed.
Gross to Net Revenues
We record revenues net of sales allowances for rebates, chargebacks, cash and other discounts,
as well as sales returns allowances. Sales returns allowances represent managements best estimate of the amount of product shipped to
customers that will be returned in the future. Such estimates consider a variety of factors which
can differ depending on the nature of the product, customer sales terms and historical return
rates. Our Transdermal products are generally sold to partners and are typically not subject to
return based on expiration dating. However, the products are subject to return based on
manufacturing and quality specifications and, therefore, may be subject to product recall. We
establish return allowances on product sold through our Transdermals segment when it is probable
that such product will be recalled or withdrawn. Sales returns allowances in our Noven Therapeutics
segment represent allowances for estimated product returns based on expiration dating and are
estimated based on historical return rates, current sales levels and other factors on a
product-by-product basis. During each of 2008 and 2007, sales returns
allowances for Noven Transdermals increased $0.7 million primarily due to Shires voluntary recalls
of certain Daytrana® product. For the Noven Therapeutics segment, during 2008,
allowances for Medicaid, Medicare & State program rebates and credits including redemption offers
decreased 4% as a percentage of revenue due to the non-renewal of certain unprofitable state
Medicaid contracts. Sales returns allowances for the Noven Therapeutics segment increased 4% due
to an increase in actual returns of Pexeva® and Lithobid® product. All other
sales allowances for the Noven Therapeutics segment were consistent in 2008 and 2007, as a
percentage of revenue.
57
The following table sets forth the reconciliation of our gross revenues to net revenues
(dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
gross |
|
|
|
|
|
|
gross |
|
|
|
|
|
|
gross |
|
|
|
2008 |
|
|
revenues |
|
|
2007 |
|
|
revenues |
|
|
2006 |
|
|
revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noven Transdermals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenues |
|
$ |
85,317 |
|
|
|
100 |
% |
|
$ |
74,903 |
|
|
|
100 |
% |
|
$ |
60,982 |
|
|
|
100 |
% |
Sales returns allowances |
|
|
(1,616 |
) |
|
|
-2 |
% |
|
|
(955 |
) |
|
|
-1 |
% |
|
|
(293 |
) |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
83,701 |
|
|
|
98 |
% |
|
$ |
73,948 |
|
|
|
99 |
% |
|
$ |
60,689 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noven Therapeutics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenues |
|
$ |
39,196 |
|
|
|
100 |
% |
|
$ |
14,579 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
Cash discounts |
|
|
(835 |
) |
|
|
-2 |
% |
|
|
(285 |
) |
|
|
-2 |
% |
|
|
|
|
|
|
|
|
Medicaid, Medicare & State
program rebates and
credits including
redemption offers |
|
|
(7,285 |
) |
|
|
-19 |
% |
|
|
(3,289 |
) |
|
|
-23 |
% |
|
|
|
|
|
|
|
|
Chargebacks |
|
|
(1,315 |
) |
|
|
-3 |
% |
|
|
(351 |
) |
|
|
-2 |
% |
|
|
|
|
|
|
|
|
Wholesaler fees |
|
|
(1,877 |
) |
|
|
-5 |
% |
|
|
(775 |
) |
|
|
-5 |
% |
|
|
|
|
|
|
|
|
Sales returns allowances |
|
|
(3,410 |
) |
|
|
-9 |
% |
|
|
(666 |
) |
|
|
-5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and returns allowances |
|
|
(14,722 |
) |
|
|
-38 |
% |
|
|
(5,366 |
) |
|
|
-37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
24,474 |
|
|
|
62 |
% |
|
$ |
9,213 |
|
|
|
63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
This section discusses gross margins relating to our product revenues: (i) across all of our
products (Overall Gross Margin); (ii) on our transdermal product revenues from Novogyne (Gross
Margin Novogyne), which for accounting purposes is considered a related party; (iii) on our
transdermal product revenues from third parties (Gross Margin Third Parties); and (iv) on our
Noven Therapeutics products. Product revenues from third parties include HT product sales to
Novartis Pharma for resale primarily outside the United States and Japan, as well as
Daytrana® product sales to Shire. Noven Therapeutics product revenues include sales of
Stavzor®, Pexeva® and Lithobid® to trade customers.
For our Noven Transdermals segment, the allocation of manufacturing expenses impacts our
determination of inventory costs and, consequently, gross margins for each of our products.
Manufacturing expenses, which totaled $31.0 million, $25.9 million and $26.2 million in 2008, 2007
and 2006, respectively, include compensation and benefits, supplies and tools, equipment costs,
depreciation and amortization, and insurance costs and represent a substantial portion of our
inventory production costs. The allocation of manufacturing expenses among manufactured products
requires us to make significant estimates that involve subjective and often complex judgments.
Using different estimates would likely result in materially different results for Gross Margin
Novogyne and Gross Margin Third Parties than are presented in the gross margin table below.
58
Our gross margins are summarized as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noven Transdermals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Novogyne: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
$ |
29,719 |
|
|
|
|
|
|
$ |
29,883 |
|
|
|
|
|
|
$ |
26,559 |
|
|
|
|
|
Cost of products sold |
|
|
15,134 |
|
|
|
|
|
|
|
13,683 |
|
|
|
|
|
|
|
14,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
14,585 |
|
|
|
49 |
% |
|
|
16,200 |
|
|
|
54 |
% |
|
|
12,457 |
|
|
|
47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
|
23,434 |
|
|
|
|
|
|
|
26,340 |
|
|
|
|
|
|
|
21,767 |
|
|
|
|
|
Cost of products sold |
|
|
28,689 |
|
|
|
|
|
|
|
24,188 |
|
|
|
|
|
|
|
22,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(5,255 |
) |
|
|
-22 |
% |
|
|
2,152 |
|
|
|
8 |
% |
|
|
(639 |
) |
|
|
-3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noven Transdermals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
|
53,153 |
|
|
|
|
|
|
|
56,223 |
|
|
|
|
|
|
|
48,326 |
|
|
|
|
|
Cost of products sold |
|
|
43,823 |
|
|
|
|
|
|
|
37,871 |
|
|
|
|
|
|
|
36,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
9,330 |
|
|
|
18 |
% |
|
|
18,352 |
|
|
|
33 |
% |
|
|
11,818 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noven Therapeutics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
|
24,474 |
|
|
|
|
|
|
|
9,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
|
8,038 |
|
|
|
|
|
|
|
3,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
16,436 |
|
|
|
67 |
% |
|
|
6,067 |
|
|
|
66 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
|
77,627 |
|
|
|
|
|
|
|
65,436 |
|
|
|
|
|
|
|
48,326 |
|
|
|
|
|
Cost of products sold |
|
|
51,861 |
|
|
|
|
|
|
|
41,017 |
|
|
|
|
|
|
|
36,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
25,766 |
|
|
|
33 |
% |
|
$ |
24,419 |
|
|
|
37 |
% |
|
$ |
11,818 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In general, Noven Therapeutics products have higher gross margins than our transdermal
products because we sell Noven Therapeutics products directly to trade customers at wholesale and
commercial prices. Our sales of HT products to Novogyne for resale in the United States have a
higher gross margin than our other transdermal products, reflecting favorable pricing, larger
production orders and other factors. Our sales of HT products to Novartis Pharma for resale in
international markets generally have lower gross margins than sales of HT products sold to Novogyne
due to, among other things, unfavorable pricing environments in foreign markets, and smaller
production orders. Our gross margin on product sales of Daytrana® to Shire has been
negatively affected by the factors described below.
As noted in the tables above, Overall Gross Margin declined in 2008 compared to 2007. Overall
Gross Margin in 2008 was negatively affected by: (i) inventory write-offs of $2.8 million,
primarily related to an equipment failure in transdermal manufacturing (comprised of $1.8 million
of write-offs of products manufactured for Novogyne and $1.0 million of third party HT product
write-offs), as well as additional manufacturing costs incurred in 2008 to address this issue; (ii)
cost of products sold in 2008, which included $1.1 million of
the 2008 Daytrana® Charges;
(iii) inventory write-offs of approximately $1.5 million related to Daytrana® product;
(iv) the addition of approximately
59
$5.1 million in manufacturing costs in our Noven Transdermals
segment over 2007, primarily in the quality assurance area, of which approximately $1.4 million
related to costs associated with the Daytrana® peel force issue; and (v) significantly
lower product revenues in our Noven Transdermals segment, primarily related to the timing of
shipments and delays in the release of Daytrana® product in 2008. Overall Gross Margin
in 2008 benefited from the addition of our Stavzor®, Pexeva® and
Lithobid® products, which collectively had net sales of $24.5 million and related cost
of products sold of $8.0 million, resulting in a gross margin of 67% for those products and a
decrease in product inventory at Novogyne which resulted in approximately $0.4 million of recognized deferred
profit on product sold to Novogyne.
As noted in the tables above, Overall Gross Margin improved significantly in 2007 compared to
2006. Overall Gross Margin in 2007 benefited from: (i) the addition of our Pexeva® and
Lithobid® products, which had net sales of $9.2 million and related cost of products
sold of $3.1 million, resulting in a gross margin of 66% for those products; (ii) significantly
higher product revenues due to full-year sales of Daytrana®; higher facility utilization
for our transdermal products, which contributed to improved overhead absorption; cost savings
associated with our cost reduction program initiated in the third quarter of 2006; and (iii) a $1.3
million increase in price reconciliation payments relating to international sales of our HT
products for 2007 as compared to 2006, which payments increase product revenues without increasing
costs.
We sell Daytrana® finished product to Shire at a fixed cost, and consequently, our
profit on product sales of Daytrana® depends on our ability to manufacture the product
efficiently and to fully utilize our facilities. For 2008, Daytrana® net product
revenues were $10.8 million and cost of products sold related to Daytrana® was $17.8
million, resulting in negative gross margin for the product. This compares with Daytrana®
product revenues of $13.4 million and cost of products sold related to Daytrana®
of $14.8 million for 2007. Daytrana® gross margin was negatively affected in 2008 by the
2008 Daytrana® Charges as well as increased manufacturing and quality assurance related
expenditures, including, as discussed above, approximately $1.4 million related to costs associated
with the Daytrana® peel force issue. Although we have implemented new
manufacturing
processes that helped improve efficiencies associated with existing
Daytrana® production in the fourth quarter of 2008, we expect the peel force issue to
continue to negatively affect margins as a result of increased Daytrana® manufacturing
costs, including reimbursements to Shire for the AMI included in destroyed product, unless and
until the peel force issue is resolved.
We expect to continue to incur increased quality assurance costs related to our continued
efforts to improve our quality assurance systems and to address the issues raised by the FDA and a
significant portion of these continuing costs will be allocated to Daytrana®, which we
expect to negatively affect the gross margin on sales of this product in 2009 and beyond.
Our expectations for gross margins in future periods are addressed under Outlook below.
60
Operating Expenses:
Operating expenses are summarized as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2008 |
|
% Change |
|
2007 |
|
% Change |
|
2006 |
Research and development |
|
$ |
15,527 |
|
|
|
11 |
% |
|
$ |
13,978 |
|
|
|
22 |
% |
|
$ |
11,454 |
|
Acquired in-process research and
development |
|
|
|
|
|
|
N/M |
|
|
|
100,150 |
|
|
|
N/M |
|
|
|
|
|
Selling and marketing |
|
|
23,299 |
|
|
|
154 |
% |
|
|
9,160 |
|
|
|
847 |
% |
|
|
967 |
|
General and administrative |
|
|
36,796 |
|
|
|
21 |
% |
|
|
30,411 |
|
|
|
47 |
% |
|
|
20,734 |
|
N/M Not Meaningful
Research and Development
Research and development expenses include costs associated with, among other things, product
formulation, pre-clinical testing, clinical studies, regulatory and medical affairs, production for
clinical and regulatory purposes, production related development engineering for developmental
products, and the personnel associated with each of these functions.
The $1.5 million increase in research and development expenses for 2008 compared to 2007 was attributable to a $2.0 million increase in clinical research and development, primarily for Mesafem, partially offset by a $0.5 million decrease
in clinical research costs for other developmental products.
The $2.5 million increase in research and development expenses for 2007 compared to 2006 was
primarily due to a $1.9 million increase in clinical research costs on transdermal developmental
products and $1.5 million in expenses as a result of the acquisition of Noven Therapeutics. These
increases in 2007 were partially offset by a $1.0 million decline in development engineering
expenses primarily related to Daytrana® prior to the products launch in the second
quarter of 2006.
Acquired In-Process Research and Development
Immediately following the closing of the Noven Therapeutics acquisition, we expensed $100.2
million in 2007 representing the portion of the purchase price allocated to in-process research and
development in our acquisition of Noven Therapeutics. This amount represents the value assigned to
projects that have been initiated and achieved material progress but (i) have not yet reached
technological feasibility or have not yet reached the appropriate regulatory approval; (ii) have no
alternative future use; and (iii) the fair value is estimable with reasonable certainty.
Selling and Marketing
The $14.1 million increase in selling and marketing costs for 2008 compared to 2007 were
attributable to the addition of Noven Therapeutics in August 2007, which added $14.5 million of
selling and marketing costs in 2008, including $4.8 million related to
Stavzor®,
which was launched in August 2008.
61
The $8.2 million increase in selling and marketing costs for 2007 compared to 2006 were
primarily attributable to the addition of Noven Therapeutics in August 2007, related to the sales
and marketing of Pexeva® and Lithobid®.
General and Administrative
General and administrative expenses increased $6.4 million, or 21%, for 2008 compared to 2007,
reflecting $4.8 million of the 2008 Daytrana® Charges (compared to $2.2 million in
2007), a $1.8 million charge related to a patent infringement case, a $1.5 million increase in
salary and related benefits primarily as a result of filling key executive positions, a $1.4
million increase in professional fees, primarily attributable audit and accounting fees and
executive recruiting, a $0.6 million loss on the disposal of assets, and a $1.8 million increase
across other general and administrative expense categories. These increases were partially offset
by the absence of a $3.3 million charge recorded in 2007 related to certain executive separations.
General and administrative expenses increased $9.7 million, or 47%, for 2007 compared to 2006.
The increase was attributable to a $3.9 million increase in compensation expenses, of which $3.3
million related to separation arrangements with certain executive officers. Also contributing to
the increase was $2.2 million in costs associated with Shires 2007 voluntary recalls of
Daytrana®, a $2.1 million increase as a result of the addition of Noven Therapeutics and
a $1.6 million increase in professional fees.
Reversal of Contingent Milestone Liability
In 2008, we recognized $5.0 million in operating income as a result of the reversal of an
accrued liability for the final contingent milestone payment to Synthon upon a determination that
the achievement of the final sales milestone for annual net sales of Pexeva® was no
longer probable.
Other Income and Expenses
Interest and Other Income
Interest and other income decreased $3.4 million, or 63%, in 2008 compared to 2007. This
decrease was primarily attributable to a decrease in cash available for investment as a result of
the payment of $130.4 million in connection with the Noven Therapeutics acquisition in August 2007,
as well as additional sales of auction rate securities at par during 2008 and lower interest rates
on our remaining investments.
Interest and other income increased $1.2 million, or 28%, in 2007 compared to 2006. This
increase was primarily attributable to an increase in cash available for investment due to our
receipt from Shire of sales milestone payments of $25.0 million in March 2007 and $25.0 million in
August 2007. These cash increases were offset by the $130.4 million in cash consideration related
to the Noven Therapeutics acquisition, which decreased our cash available for investment in the
third and fourth quarter of 2007.
62
Income Taxes
Our effective tax rate was approximately 35% for 2008 and 2007 and 33% for 2006. The
provision for income taxes is based on the Federal statutory and state income tax rates. Net
deferred income tax assets are measured using the average graduated tax rate for the estimated
amount of annual taxable income in the years that the liability is expected to be settled or the
asset recovered. The effect of adjusting the expected tax rate related to the net deferred income
tax assets is included in the provision for income taxes. The acquisition of Noven Therapeutics
resulted in a significant increase in our deferred income tax assets, primarily due to the $100.2
million of acquired in-process research and development which was expensed immediately under GAAP,
but is being deducted over 15 years for tax purposes. As of December 31, 2008 we had a net deferred tax asset of
$72.2 million compared to $65.7 million at December 31, 2007. Realization of this deferred tax
asset depends upon the generation of sufficient future taxable income. A valuation allowance is
established if it is more likely than not that all or a portion of the deferred tax asset will not
be realized. Noven Therapeutics files separate state income tax returns in states where it has
determined that it is required to file state income taxes. As a result, state deferred tax assets
relating to Noven Therapeutics are evaluated separately in determining whether the state deferred
tax assets are realizable. Noven Therapeutics has historically reported taxable losses in these
states and we expect that Noven Therapeutics will continue to incur state taxable losses in the
next few years. These circumstances create negative evidence indicating the need for a valuation
allowance at December 31, 2008. Our valuation allowance for state deferred tax assets was $3.5
million and $3.2 million as of December 31, 2008 and 2007, respectively, due to uncertainty about
our ability to realize these state deferred tax assets based on our projection of future state
taxable income. If we determine, based on future profitability of Noven Therapeutics that these
state deferred tax assets will more likely than not be realized, a release of all, or part, of the
related valuation allowance could result in an immediate income tax benefit in the period the
valuation allowance is released.
The increase in our effective tax rate for 2007 as compared to 2006 related primarily to a
higher percentage of our income that was subject to state income taxes and lower tax-exempt
interest income as a percentage of our total loss due to the sale of investments to fund the Noven
Therapeutics acquisition.
Equity in Earnings of Novogyne
We share in the earnings of Novogyne according to an established formula after satisfaction of
an annual preferred return of $6.1 million to Novartis. Our share of Novogynes earnings (a
non-cash item) increases as Novogynes earnings increase, subject to a cap of 49%. Novogyne
earned sufficient income in each of 2008, 2007 and 2006 to meet Novartis annual preferred return
for those periods and for us to recognize earnings from Novogyne under the formula. We report our
share of Novogynes earnings as Equity in earnings of Novogyne in our Consolidated Statements of
Operations.
63
Novogyne records revenues net of sales allowances for rebates, chargebacks, cash and other
discounts and sales returns allowances. The financial results of Novogyne are summarized as follows
(dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
% Change |
|
|
2007 |
|
|
% Change |
|
|
2006 |
|
Gross revenues |
|
$ |
197,994 |
|
|
|
16 |
% |
|
$ |
171,347 |
|
|
|
11 |
% |
|
$ |
154,901 |
|
Sales allowances |
|
|
23,731 |
|
|
|
8 |
% |
|
|
21,912 |
|
|
|
27 |
% |
|
|
17,226 |
|
Sales returns allowances |
|
|
4,645 |
|
|
|
221 |
% |
|
|
1,447 |
|
|
|
-75 |
% |
|
|
5,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and returns allowances |
|
|
28,376 |
|
|
|
21 |
% |
|
|
23,359 |
|
|
|
2 |
% |
|
|
22,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
169,618 |
|
|
|
15 |
% |
|
|
147,988 |
|
|
|
12 |
% |
|
|
131,943 |
|
Cost of sales |
|
|
33,795 |
|
|
|
8 |
% |
|
|
31,203 |
|
|
|
3 |
% |
|
|
30,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
135,823 |
|
|
|
16 |
% |
|
|
116,785 |
|
|
|
15 |
% |
|
|
101,794 |
|
Gross margin percentage |
|
|
80% |
|
|
|
|
|
|
|
79% |
|
|
|
|
|
|
|
77% |
|
Selling, general and
administrative expenses |
|
|
37,471 |
|
|
|
-2 |
% |
|
|
38,084 |
|
|
|
2 |
% |
|
|
37,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
98,352 |
|
|
|
25 |
% |
|
|
78,701 |
|
|
|
22 |
% |
|
|
64,475 |
|
Interest income and other |
|
|
1,129 |
|
|
|
-1 |
% |
|
|
1,145 |
|
|
|
36 |
% |
|
|
842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
99,481 |
|
|
|
25 |
% |
|
$ |
79,846 |
|
|
|
22 |
% |
|
$ |
65,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Novens equity in earnings
of Novogyne |
|
$ |
45,642 |
|
|
|
27 |
% |
|
$ |
35,850 |
|
|
|
25 |
% |
|
$ |
28,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Novogyne Net Revenues
Novogyne sells its products to trade customers, including wholesalers, distributors and chain
pharmacies. As has historically been the case, the timing of purchases by trade customers is
driven
by the inventory needs of each customer and other factors, and does not necessarily track
underlying prescription trends in any given period or coincide with Novogynes quarterly financial
reporting periods. As a result, the timing of orders by trade customers is difficult to predict
and can lead to significant variability in Novogynes quarterly results.
Novogynes gross revenues increased $26.6 million for 2008 compared to 2007. By product,
Vivelle-Dot® and CombiPatch® increased $30.9 million and $1.0 million,
respectively, while Vivelle® (a discontinued product) decreased $5.4 million. The $30.9
million Vivelle-Dot® increase consisted of a $19.0 million increase related to pricing
and an $11.9 million increase in unit sales, which is consistent with increases in prescription
trends. The $1.0 million CombiPatch® increase was attributable to a $1.5 million
increase related to pricing, partially offset by a $0.5 million decline in unit sales which
resulted from a continued decline in the market for combination therapies, and the impact of a
competitive product.
Novogynes gross revenues increased $16.4 million for 2007 compared to 2006. By product,
Vivelle-Dot® increased $17.9 million while Estradot®, Vivelle® and
CombiPatch®
declined $0.8 million, $0.6 million and $0.1 million, respectively. The
$17.9 million Vivelle-Dot® increase consisted of an $11.3 million increase related to
pricing and a $6.6 million increase from higher unit sales due to increased product demand and to
the timing of orders. The decline in Estradot® was attributable to the timing of
orders. The decline in Vivelle®, the first
64
generation
estrogen patch, is attributable to a $1.0 million decline due to lower unit sales resulting from product maturity and the
continuing market transition to Vivelle-Dot®, partially offset by a $0.4 million
increase related to pricing. The decline in CombiPatch® results from a $1.4 million
decrease due to lower unit sales as the market for combination therapies continues to decline, and
the impact of a competitive product. The CombiPatch® decline was partially offset by a
$1.3 million increase related to an increase in the pricing of the product.
Sales allowances consist of chargebacks, Medicaid rebates, managed healthcare rebates, cash
discounts and other allowances, which tend to fluctuate based on changes in gross revenues. For
2008, 2007 and 2006, these sales allowances were 12%, 13% and 11%, respectively, of gross revenues.
The following table describes Novogynes sales and returns allowances (dollar amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
%
of gross revenues |
|
|
2007 |
|
|
%
of gross revenues |
|
|
2006 |
|
|
%
of gross revenues |
|
Gross revenues |
|
$ |
197,994 |
|
|
|
100 |
% |
|
$ |
171,347 |
|
|
|
100 |
% |
|
$ |
154,901 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed health care rebates |
|
|
14,578 |
|
|
|
7 |
% |
|
|
13,226 |
|
|
|
8 |
% |
|
|
10,117 |
|
|
|
7 |
% |
Cash discounts |
|
|
3,920 |
|
|
|
2 |
% |
|
|
3,387 |
|
|
|
2 |
% |
|
|
3,042 |
|
|
|
2 |
% |
Medicaid, Medicare & State
program rebates and credits
including prescription
drug saving cards |
|
|
1,340 |
|
|
|
1 |
% |
|
|
1,637 |
|
|
|
1 |
% |
|
|
981 |
|
|
|
1 |
% |
Chargebacks, including
hospital chargebacks |
|
|
1,423 |
|
|
|
1 |
% |
|
|
1,298 |
|
|
|
1 |
% |
|
|
1,032 |
|
|
|
1 |
% |
Other discounts |
|
|
2,470 |
|
|
|
1 |
% |
|
|
2,364 |
|
|
|
1 |
% |
|
|
2,054 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales allowances |
|
|
23,731 |
|
|
|
12 |
% |
|
|
21,912 |
|
|
|
13 |
% |
|
|
17,226 |
|
|
|
11 |
% |
Sales returns allowances |
|
|
4,645 |
|
|
|
2 |
% |
|
|
1,447 |
|
|
|
1 |
% |
|
|
5,732 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and returns allowances |
|
|
28,376 |
|
|
|
14 |
% |
|
|
23,359 |
|
|
|
14 |
% |
|
|
22,958 |
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
169,618 |
|
|
|
86 |
% |
|
$ |
147,988 |
|
|
|
86 |
% |
|
$ |
131,943 |
|
|
|
85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
Sales returns allowances consist of allowances for returns of expiring product. The activity
in the sales returns allowances was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Sales returns allowances included in net revenues |
|
$ |
4,645 |
|
|
$ |
1,447 |
|
|
$ |
5,732 |
|
Actual returns primarily for expiring product |
|
|
(3,466 |
) |
|
|
(3,349 |
) |
|
|
(3,962 |
) |
|
|
|
|
|
|
|
|
|
|
Change in allowances for returns primarily for
expiring product |
|
$ |
1,179 |
|
|
$ |
(1,902 |
) |
|
$ |
1,770 |
|
|
|
|
|
|
|
|
|
|
|
The increase in sales returns allowances for 2008 compared to 2007 is primarily attributable
to an increase in sales of Vivelle-Dot® as well as a revision to the return rate for
Vivelle-Dot® in the current period due to an increase in the rate of actual returns for
the product. In addition, 2007 benefited from a reduction in allowances for expiring product due to
lower than expected returns as a result of a decline in actual returns of CombiPatch® at
the time.
The decrease in sales returns allowances as a percentage of gross revenues for 2007 compared
to 2006 was primarily related to lower actual returns of CombiPatch® in 2007. The higher
returns of CombiPatch® in 2006 compared to 2007 primarily related to returns of a
superseded packaging configuration.
Novogyne Gross Margin
The increase in gross margin percentage for 2008 as compared to 2007 was primarily related to
higher sales of Vivelle-Dot®, which has a higher gross margin than the other products
sold by Novogyne, as well as price increases for all products, partially offset by higher sales
returns allowances due to the increase in such allowances for Vivelle-Dot®.
The two percentage point gross margin increase for 2007 as compared to 2006 was primarily
related to higher pricing, especially for Vivelle-Dot®, and to an aggregate decrease in
sales returns allowances due to lower returns of CombiPatch®.
Novogyne Selling, General and Administrative
Novogynes selling, general and administrative expenses decreased $0.6 million for 2008
compared to 2007 primarily due to a $0.8 million decrease in sample expenses due to the timing of
shipments by Noven to Novogyne and an aggregate $0.2 million decrease in marketing, advertising
and promotional expenses attributable to product marketing efficiency efforts. These
decreases were partially offset by a $0.4 million increase in HT litigation expenses.
Novogynes selling, general and administrative expenses increased $0.8 million for 2007
compared to 2006 due to a $1.2 million increase in sample expenses and a $0.5 million increase in
sales, marketing and advertising expenses. These increases were partially offset by a $0.9 million
decline in HT litigation expenses.
66
Liquidity and Capital Resources
As of December 31, 2008 and December 31, 2007, Noven had the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
62,875 |
|
|
$ |
13,973 |
|
Short-term investments |
|
|
3,650 |
|
|
|
21,565 |
|
Working capital |
|
|
50,644 |
|
|
|
24,024 |
|
In addition to our cash and working capital, as of December 31, 2008, we owned investments in
auction rate securities with a fair value of $15.5 million, of which $3.7 million has been called
by the issuer and is included in current assets.
Due to the current illiquid market conditions and failed auctions, we have classified the remaining
$11.8 million of these investments as non-current assets; however, these investments have been a
source of liquidity during 2008, including proceeds of
$39.0 million from sales and redemptions of
these auction rate securities at par during 2008. On a combined basis, our cash and
cash equivalents and investments in auction rate securities were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Cash and cash equivalents |
|
$ |
62,875 |
|
|
$ |
13,973 |
|
Investments in auction rate securities: |
|
|
|
|
|
|
|
|
Current |
|
|
3,650 |
|
|
|
21,565 |
|
Non-current |
|
|
11,810 |
|
|
|
32,835 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents and investments |
|
$ |
78,335 |
|
|
$ |
68,373 |
|
|
|
|
|
|
|
|
Cash provided by (used in) operating, investing and financing activities is summarized as
follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash flows: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
19,597 |
|
|
$ |
54,369 |
|
|
$ |
60,027 |
|
Investing activities |
|
|
32,273 |
|
|
|
(43,499 |
) |
|
|
(133,511 |
) |
Financing activities |
|
|
(2,968 |
) |
|
|
(6,041 |
) |
|
|
15,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows |
|
$ |
48,902 |
|
|
$ |
4,829 |
|
|
$ |
(57,820 |
) |
|
|
|
|
|
|
|
|
|
|
Operating Activities
Net cash provided by operating activities for 2008 primarily resulted from the receipt of
$42.0 million in distributions from Novogyne and a $25.0 million milestone payment from Shire.
Significant operating cash outflows during 2008 included income tax payments of $20.8 million, $5.4
million of employee severance, bonus and retention payments, payments to Shire of $3.7 million and
$3.3 million related
67
to its 2008 and 2007 voluntary recalls of certain Daytrana®
product, respectively, and $3.5 million in payments related to insurance premiums. In addition,
changes in working capital, including a $6.8 million increase in inventories and a $1.8 million
decrease in accrued compensation and related liabilities, also partially offset the net cash
provided by operating activities.
Net cash provided by operating activities for 2007 primarily resulted from the receipt of
$50.0 million in milestone payments from Shire, our receipt of $28.8 million in cash distributions
from Novogyne, and our receipt of $5.9 million in connection with the amphetamine transdermal
system collaborative agreement with Shire. These amounts were partially offset by changes in
working capital due to the timing of certain payments, including $23.7 million in tax payments,
$3.0 million in insurance payments and an increase of $3.1 million in compensation and related
liabilities.
Net cash provided by operating activities in 2006 primarily resulted from the receipt of $50.0
million from Shire related to the final marketing approval of Daytrana® by the FDA and
$26.4 million in cash distributions from Novogyne. These receipts were offset by changes in
working capital due to the timing of certain payments, including reimbursement payments of $5.1
million to Shire for clinical trial costs incurred in connection with obtaining
Daytrana® regulatory approval, $3.9 million for compensation and related liabilities and
$2.6 million related to insurance.
Investing Activities
Noven has invested a portion of its cash in investments, which primarily consist of investment
grade, auction rate securities, which are categorized as available-for-sale under the provisions of
SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities.
Net
cash provided by investing activities for 2008 was primarily
attributable to $39.0 million
in sales of investments at par, partially offset by $3.8 million in equipment purchases to support
operations and a $1.5 million milestone payment to Banner upon approval of Stavzor® in
the third quarter of 2008.
Net cash used in investing activities for 2007 was primarily attributable to $130.4 million in
acquisition costs related to the acquisition of Noven Therapeutics, net of cash acquired, and $2.8
million in equipment purchases to support operations and expansion of facilities, partially offset
by $90.1 million of proceeds from the sale of short-term investments primarily used to fund the
Noven Therapeutics acquisition.
Net cash used in investing activities in 2006 was primarily attributable to $126.4 million in
net purchases of short-term investments, as well as the purchase of $6.3 million in fixed assets to
expand production capacity for future products. Beginning in the first quarter of 2005, Noven
invested a portion of its cash in short-term investments, which primarily consist of investment
grade, asset backed, variable rate debt obligations and municipal auction rate securities, which are
categorized as available-for-sale under the provisions of SFAS No. 115.
Financing Activities
Net cash used in financing activities for 2008 was primarily attributable to a $3.3 million
sales milestone payment to Synthon, an obligation assumed as part of the Noven Therapeutics
acquisition.
68
Net cash used in financing activities for 2007 was primarily attributable to the open-market
purchase of $5.1 million of our common stock under the stock repurchase program established in the
third quarter of 2007 and the payment of a $3.7 million long-term obligation assumed as part of the
acquisition of Noven Therapeutics. These payments were offset by $2.5 million received as the
exercise price paid by option holders in connection with the exercise of stock options. In
addition, 2007 benefited from $0.4 million in excess tax benefit from the exercise of stock
options.
Net cash provided by financing activities in 2006 was attributable to $13.2 million received
as the exercise price paid by the option holders in connection with the exercise of stock options.
In addition, 2006 benefited from $2.6 million in excess tax benefit from the exercise of stock
options, which prior to the adoption of SFAS No. 123(R) was reported in operating activities.
Short-Term and Long-Term Liquidity
Our principal sources of short-term liquidity are existing cash and distributions from
Novogyne. Additional sources of short-term liquidity include cash generated from product sales,
license fees and royalties under development and license agreements.
Our short-term cash flow is significantly dependent on distributions from Novogyne and sales,
royalties and license fees associated with our products. Any material decrease in sales of those
products by us or our licensees, a material decline in the HT market, the introduction of a generic
version of Vivelle-Dot®, material increases in operating expenses, or the inability or
failure of Novogyne to pay distributions, would have a material adverse effect on our short-term
cash flow and require us to rely on our existing cash balances, investments, equity or debt
offerings or on borrowings to support our operations and business.
During 2008, our cash and cash equivalents and investments in auction rate securities
increased from $68.4 million to $78.3 million. The increase primarily resulted from the receipt of
the third and final $25.0 million sales milestone payment from Shire and $42.0 million of
distributions from Novogyne. The cash increases were partially offset
by certain cash outlays in 2008, including (i) $20.8 million of income tax payments in 2008; (ii) $3.8
million for equipment purchases; (iii) $3.7 million of payments to Shire for Shires voluntary
withdrawals of Daytrana® product in 2008; (iv) $3.5 million for insurance premiums; (v)
a $1.5 million milestone payment in connection with market approval for Stavzor®; and
(vi) cash used to fund increases in inventory and other working capital items. In addition, we
also paid certain obligations previously charged to operations in 2007 and/or accrued as of
December 31, 2007, including (i) $5.4 million of employee severance, bonus and retention payments;
(ii) $3.3 million of costs associated with Shires 2007 voluntary withdrawals of Daytrana®
product; and (iii) a $3.3 million milestone payment related
to Noven Therapeutics products. We believe that our existing cash balances and expected collections of
receivables, together with the available capacity under our credit facility (described below), will
be sufficient to meet our operating needs and short-term capital requirements.
We received the first $25.0 million sales milestone payment from Shire relating to its sales
of Daytrana® in the first quarter of 2007, the second $25.0 million Daytrana®
sales milestone payment in the third quarter of 2007 and the third $25.0 million
Daytrana® sales milestone payment in the third quarter of 2008. We paid an aggregate
$20.8 million and $23.7 million in taxes during 2008 and 2007, respectively, of which approximately
$8.8 million and $18.0 million relates to Daytrana® milestones received to date. We
expect to pay income taxes related to the final Daytrana® milestone payment of
approximately $8.5 million during 2009.
As discussed elsewhere herein, we paid Shire $3.7 million related to Shires voluntary recalls
of Daytrana® product in 2008. In addition, we reserved $3.8 million in 2008 for certain
previously-manufactured Daytrana® lots that would not meet the new release testing
standard and
69
are
probable of being voluntarily withdrawn or recalled from the market prior to
expiration of their shelf life, and which therefore would require additional reimbursements to Shire.
In April 2008, we made a $3.3 million milestone payment to Synthon based on achieving
specified net sales of Pexeva® during 2007. We expect to pay an additional $3.3 million
milestone to Synthon in 2009 based on 2008 net sales of Pexeva®.
We have invested a significant portion of our cash in auction rate securities, which subjects
us to the liquidity risk described in Part II Item 7A Quantitative and Qualitative Disclosures
About Market Risk. During 2008, we recorded $0.5 million of other-than-temporary impairments on
our investments in auction rate securities which are classified as available-for-sale under SFAS
No. 115. As of December 31, 2008, the total par value and fair value of our investments in auction
rate securities was $16.0 million and $15.5 million, respectively. We liquidated $39.0 million of
our investments in auction rate securities at par value during 2008. An additional $3.7 million
has been called by the issuer and is expected to be redeemed in March 2009. Due to continuing
auction failures beginning in February 2008, we utilized valuation models to determine the fair
values of our investments in auction rate securities. The fair values of our investments were
calculated based on the following: (i) the underlying structure of each security; (ii) the present
value of future principal and interest payments discounted at rates considered to reflect current
market conditions; (iii) consideration of the probabilities of default, auction failure, or
repurchase at par for each period; and (iv) consideration of third party credit enhancement. These
estimated fair values could change significantly based on future market conditions.
Changes to investments measured at fair value on a recurring basis using unobservable inputs
(Level 3) during 2008 were as follows (amounts in thousands):
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
54,400 |
|
Purchases of investments |
|
|
550 |
|
Sales of investments at par |
|
|
(38,975 |
) |
Unrealized losses, other-than-temporary |
|
|
(515 |
) |
|
|
|
|
Balance at December 31, 2008 |
|
$ |
15,460 |
|
|
|
|
|
As a result of failed auctions, our auction rate securities pay interest at rates as defined
by the governing documents or indenture. Due to uncertainty regarding the timing of our future
investment liquidations, we have classified our auction rate securities as non-current assets as of December 31,
2008, except for the called security, which is included in current assets. As illiquid
conditions persist in the auction market for these securities, it may become increasingly more
likely that we will need to recognize additional other-than-temporary impairment charges in future
periods. Such non-cash impairment charges could materially and adversely affect our consolidated
financial condition and results of operations.
We paid approximately $125.0 million in cash to acquire Noven Therapeutics in August 2007 and
incurred approximately $5.4 million in transaction-related costs. We funded the purchase price and
related transaction expenses from our sale of short-term investments. In addition, we assumed
approximately $16.1 million of accrued expenses and other current liabilities and assumed certain
contractual arrangements under which we may be required to pay to third parties up to $8.3 million
in product development and sales milestones as of December 31, 2008. See Note 19 Commitments
and Contingencies Noven Therapeutics Commitments in the Notes to our Consolidated Financial
Statements for further information.
70
During 2008, proceeds from stock option exercises were not significant. We expect the amount
of proceeds from stock option exercises to fluctuate from period to period depending on the price
of our common stock and equity award exercises. Beginning in 2006, we began granting SSARs to
employees and restricted stock to non-employee directors in lieu of stock options. These types of
awards do not provide us with cash upon their exercise. Accordingly, we expect that funds received
from option exercises will become less of a source of funds over time.
In July 2008, we entered into an agreement for a $15.0 million credit facility. In connection
with the credit facility and in lieu of granting a security interest in our assets, we agreed not
to pledge, grant any security interest in, or allow any lien or encumbrance in or on, certain of
our financial assets. The facility expires in July 2009. As of the date of this report, no
borrowings were outstanding under this facility and we have no long-term debt. To the extent the
sources of liquidity described above are insufficient to fund our operations, we would expect to
seek to obtain funds through debt and/or equity financing. We cannot provide any assurance that
such financing will be available, if at all, in a timely manner, or on favorable terms. If we are
unable to obtain satisfactory financing, we may be required to delay or reduce our proposed
expenditures, plant and equipment and strategic acquisitions. Furthermore, debt financing would
likely require us to devote funds to service and ultimately repay such debt and could subject us to
financial or operational covenants that could limit or hinder our ability to conduct our business.
Our strategic plan includes the acquisition of one or more products, technologies or
businesses that we believe may be complementary to our business. We expect that we will be
required to seek debt and/or equity financing to complete such an acquisition. Current conditions
in the credit markets and equity markets could make it particularly difficult to raise funds on
attractive terms, if at all. We cannot provide any assurance that such financing will be available,
if at all, in a timely manner, or on favorable terms.
Capital expenditures totaled $3.8 million for 2008. We expect to fund our foreseeable capital
expenditures from our operating cash flows, existing cash, short-term investments and debt.
If our transdermal products under development are successful, we may need to fund plant and
equipment purchases to expand production capacity. For our long-term operating needs, we intend to
utilize funds derived from the sources described above. To the extent available, we may use funds
generated through sales of products under development and payments received pursuant to
development and licensing arrangements. If such funds are insufficient, we may rely on debt
and/or equity financing to fund such expansion. We cannot assure that we will successfully
complete the development of such products, that we will obtain regulatory approval for any such
products, that any approved product will be produced in commercial quantities, at reasonable costs,
and be successfully marketed, or that we will successfully negotiate future licensing or product
acquisition arrangements. Because much of the cost associated with product development and
expansion of manufacturing facilities is incurred prior to product launch, if we are unsuccessful
in out-licensing, or if we are unable to launch additional commercially-viable products that we
develop or that we license or acquire from others, we will have incurred the up-front costs
associated with product development or acquisition without the benefit of the cash generated by
sales of those products, which could adversely affect our long-term liquidity needs. Factors that
could impact our ability to develop or acquire and launch additional commercially-viable products
are discussed in Part I Item 1A Risk Factors of this Form 10-K.
71
For the years ended December 31, 2008, 2007 and 2006, our equity in earnings of Novogyne and
the recognition of deferred license and contract revenues (both of
which are non-cash items) contributed significantly to our income before income taxes. Accordingly, our net income may not
be reflective of our cash flow in any given period.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Aggregate Contractual Obligations
The table below lists our significant contractual obligations as of December 31, 2008 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than |
|
|
1 - 3 |
|
|
3 - 5 |
|
|
More than |
|
|
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|
Operating Lease Obligations1 |
|
$ |
6,560 |
|
|
$ |
1,407 |
|
|
$ |
2,294 |
|
|
$ |
1,968 |
|
|
$ |
891 |
|
Capital Lease Obligation2 |
|
|
188 |
|
|
|
155 |
|
|
|
16 |
|
|
|
16 |
|
|
|
1 |
|
Deferred Compensation Obligation |
|
|
515 |
|
|
|
139 |
|
|
|
195 |
|
|
|
67 |
|
|
|
114 |
|
Long-Term Obligations3 |
|
|
3,250 |
|
|
|
3,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Obligations4 |
|
|
26,293 |
|
|
|
26,289 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
Unrecognized Tax Benefits |
|
|
1,343 |
|
|
|
302 |
|
|
|
236 |
|
|
|
565 |
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
38,149 |
|
|
$ |
31,542 |
|
|
$ |
2,745 |
|
|
$ |
2,616 |
|
|
$ |
1,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
In the ordinary course of business, we enter into operating leases for machinery,
equipment, warehouse and office space. Total lease expense for operating leases was $2.1 million,
$1.5 million and $1.2 million for the years ended December 31, 2008, 2007 and 2006, respectively. |
|
2 |
|
Noven did not enter into capital lease obligations in 2008. During 2007 and 2006,
Noven entered into capital lease obligations for new equipment totaling $0.1 million and $0.4
million, respectively, of which $0.2 million (including interest) remains outstanding as of
December 31, 2008. |
|
3 |
|
Represents $3.3 million sales milestone payable in 2009 based on 2008 sales of
Pexeva®. |
|
4 |
|
In the ordinary course of business, we enter into non-cancelable purchase
obligations to vendors to which we have submitted purchase orders, but have not yet received the
goods or services. |
Outlook
A summary of our current financial guidance is provided below. This financial guidance
supersedes all financial guidance that we may have previously provided. Any financial guidance
previously provided in areas not addressed below, whether in prior filings with the Securities and
Exchange Commission, press releases, public conference calls or otherwise, is no longer current and
is hereby withdrawn. The forward-looking information contained in this section is based on our
current assumptions and expectations, many of which are based upon matters beyond our control. In
particular, for purposes of this guidance we have assumed that, during 2009, there will not be any
material:
|
|
|
acquisitions of products, companies, or technologies or other transactions; |
72
|
|
|
changes in Novens or Novogynes accounting or accounting principles or any of the
estimates or judgments underlying our critical accounting policies; |
|
|
|
|
regulatory or technological developments; |
|
|
|
|
changes in the supply of, demand for, or distribution of our products (including any
changes resulting from competitive products, unexpected product recalls/withdrawals, or new
study results); |
|
|
|
|
negative actions with respect to our applications for methylphenidate quota or other
disruptions in supplies of raw materials; |
|
|
|
|
adverse actions by the FDA in connection with the January 2008 warning letter or
otherwise; |
|
|
|
|
changes in our business relationships/collaborations; or |
|
|
|
|
changes in the economy, health care reimbursement policies or the health care sector
generally. |
Financial guidance is inherently uncertain. Accordingly, we cannot assure that we will
achieve results consistent with this guidance, and our actual financial results could differ
materially from the expected results discussed below. For a discussion of certain factors that may
impact our actual financial results for the periods referenced, including additional risks and
uncertainties related to Noven Therapeutics, readers should carefully consider the risks,
uncertainties and cautionary factors discussed in Part I Item 1A Risk Factors of this Form
10-K, as well as other information contained in this Form 10-K and in other reports filed from time
to time with the Securities and Exchange Commission.
Net revenues, gross margin, expenses, net income and other aspects of our financial results
can vary substantially from quarter-to-quarter based upon a number of factors, including the timing
of product orders by our licensees, the timing of release of manufactured product following quality
control and quality assurance measures undertaken by Noven and/or its customers, the availability
of raw materials, the timing of commencement of clinical studies, and other factors.
Net Revenues. We expect total net revenues for full year 2009 to be in the range of $110
million to $115 million, including license and contract revenues of approximately $26 million.
Gross Margin. We expect our overall gross margin, as a percentage of total net product
revenues, to be in the range of 38% to 42% for full year 2009, with a higher gross margin expected
in the second half of 2009 than in the first half, reflecting our belief that our gross margin on
Daytrana® should improve following commercial production of Daytrana® product
incorporating a solution to the peel force issue. If, however, we are unsuccessful in addressing
the peel force issue on our expected timeline, our overall gross margin for 2009 would be lower than our forecast range.
Research and Development Expense. We expect our consolidated research and development expense
for full year 2009 to be in the low-to-mid $20 million range, reflecting (among other clinical projects)
the cost of our ongoing Phase 2 study for Mesafem. Estimates of research and development expenses
for future periods are subject to substantial adjustment as each product advances through various
stages of development.
Selling, General and Administrative Expense. We expect our consolidated selling, general and
administrative expense for full year 2009 to be in the mid $50 million range.
73
Noven
Therapeutics. We expect to improve the pre-tax contribution from
our Noven Therapeutics segment by approximately $5.0 million in
full year 2009 compared to 2008 levels.
Equity in Earnings of Novogyne. We expect our equity in earnings of Novogyne to be in the
low-to-mid $50 million range for full year 2009.
Earnings Per Share. For full year 2009, we expect to report diluted earnings per share
in the range of $0.85 to $0.95 per share.
Cash.
We expect to use approximately $5 million to
$10 million of cash in 2009 as we continue to invest in
MesafemTM
and other programs intended to drive longer-term growth.
Critical Accounting Estimates
Our discussion and analysis of our consolidated financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these
consolidated financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including
those related to revenue recognition as well as estimates related to product returns and sales
allowances, the fair value of stock-based compensation granted to employees and outside directors,
as well as the net realizable value of our inventories and our deferred tax asset and our effective
tax rate and the recoverability and fair value of our intangible assets and goodwill. We base our
estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Many of our critical accounting estimates are those which we believe require the most subjective or
complex judgments, often as a result of the need to make estimates about the effect of matters that
are inherently uncertain or which involve factors that may be beyond our control. Using different
assumptions could result in materially different results. A discussion of our critical accounting
estimates, the underlying judgments and uncertainties affecting their application and the
likelihood that materially different amounts would be reported under different conditions or using
different assumptions, is as follows:
License Revenues, Multiple Element Arrangements and Contract Revenues
License revenues consist of the recognition of non-refundable up-front, milestone and similar
payments under license agreements. These agreements may contain multiple deliverables, such as
product development, technology licenses, contract research and development, and the manufacturing
and supply of products.
We recognize license revenue in accordance with the SECs Staff Accounting Bulletin Topic 13,
Revenue Recognition, and Emerging Issues Task Force (EITF) Issue 00-21, Revenue Arrangements
with Multiple Deliverables (EITF Issue 00-21), as applicable. Revenue arrangements with multiple
deliverables are divided into separate units of accounting if certain criteria are met, including
whether the delivered item has standalone value to the customer, and whether there is objective,
reliable evidence of the fair value of the undelivered items. Consideration received is allocated
among the separate units of accounting based on their relative fair values or using the residual
method, as appropriate, and the applicable revenue recognition criteria are identified and applied
to each of the units. If multiple deliverables do not meet the separation criteria of EITF Issue
00-21, they are accounted for as a single unit of accounting and management applies a revenue
recognition method that best reflects the economic substance of the transaction. In selecting the
appropriate method to apply, management considers the specific facts and circumstances of each
transaction, giving particular emphasis to the manner in which the customer receives the benefit of
the transaction.
74
In general, revenues from non-refundable, up-front license fees received prior to or upon
product approval are deferred until the revenue recognition criteria have been satisfied and the
customer begins to derive the value and benefits from the use of, or access to, the license. Our
obligations generally are completed upon achieving regulatory approval of the licensed products,
upon delivery of our development work, or when we have delivered a commercially viable license to
our technology. In multiple element arrangements where research and development work does not meet
the separation criteria of EITF Issue 00-21 (as has typically been the case for our agreements),
our policy is to recognize such revenues over the products estimated life cycle. Our arrangements
generally culminate in the delivery to the licensee of technology licenses to market and sell
products we have developed in a licensed territory. Historically, we have applied the guidance of
EITF Issue 00-21, and have typically determined that the multiple deliverables should be accounted
for as a single unit of accounting. Furthermore, we have concluded that the most appropriate
revenue attribution method is to defer license revenues and recognize them over the products
estimated life cycles, as the customer derives the value from the use of, or access to, the
license. When we are unable to estimate the pattern of the expected economic benefits, the
deferred revenues are amortized on a systematic and rational (straight-line) basis over the
products estimated life cycle.
We evaluate the facts and circumstances surrounding achievement of non-refundable sales
milestones to ensure that revenue recognition represents the substance of the transaction.
Substantive sales milestones are recognized as revenue when achieved based on the substance of the
underlying transactions, when we have fulfilled all of our obligations relating to the milestone
payments. Non-substantive sales milestones are not recognized immediately as revenue when
achieved, but are deferred and recognized as revenues over time in a manner that is consistent with
the underlying facts and circumstances.
In determining the estimated life cycles over which to recognize license revenues, we consider
the remaining life of proprietary protection and the economic lives of competing products in the
specific or similar therapeutic categories. We believe the estimated product life cycle (the
estimated economic life) generally ends when prescription trends decline to less than 20% of the
products peak prescriptions, which can be impacted by introductions of competing branded products,
generic competition, and/or changes/improvements in forms of treatment therapy.
In the event that we receive a non-refundable payment for a product that does not ultimately
receive regulatory approval, the payment is recognized as revenue when all efforts cease, the
project has been discontinued and we have no further obligation relating to the product.
Shire Collaboration Daytrana®
In 2003, we entered into a collaboration wherein we entered into a license agreement with
Shire to market and sell Daytrana® and entered into a manufacturing and supply agreement
under which we agreed to supply product to Shire. We determined that the arrangement included three
deliverables: (1) a license; (2) a research and development arrangement; and (3) a manufacturing
and supply agreement.
The license and research and development deliverables did not meet the criteria for separation
under EITF 00-21; therefore, they were combined and accounted for as a single unit of accounting.
We concluded that the manufacturing and supply agreement was at fair value based on our experience
with similar arrangements; as a result, we accounted for it separate from the single unit of
accounting (license and research and development deliverable). Accordingly, all milestone payments
(including the up-front payment, FDA approval payment and subsequent
75
sales
milestones) were allocated to the single unit of accounting. In accordance with our policy, we began to recognize
revenue for the single unit of accounting when the revenue recognition criteria related to all
deliverables had been satisfied. Specifically, this occurred upon FDA approval of
Daytrana® in April 2006, at which time all of our obligations were satisfied, Shire had
a commercially viable license and Shire began realizing the value of the deliverable.
In our collaboration with Shire, we receive multiple payment streams. We recognize revenue as
a single unit of accounting using a single attribution model for the license and research and
development deliverables, whereby all milestone payments are recognized using the straight-line
method over the estimated life cycle of Daytrana® (estimated to be seven years), as
Shire derives the value from the use of, or access to, the license.
Contract Revenues
Contract revenues consist of the recognition of contract payments related to research and
development projects performed for third parties where we have determined that such projects are
separate units of accounting. The work we perform may include feasibility studies to determine if
a specific drug can be delivered transdermally, the actual formulation of a specific drug into a
transdermal drug delivery system, studies to address the ongoing stability of the drug in a
transdermal drug delivery system, and manufacturing of batches of product that can be used in human
clinical trials. We receive contract payments for the work we perform in the following forms:
|
|
|
non-refundable up-front payments prior to commencing the work (or certain phases
of the work); |
|
|
|
|
additional payments upon completion of additional phases; and |
|
|
|
|
in some cases, success milestone payments based on achievement of specified
performance criteria. |
We recognize revenue from non-refundable, up-front payments based on the proportional
performance method as we perform research and development work. We recognize additional payments
received upon completion of additional phases and milestone payments when the specified performance
criteria are achieved under the milestone method as long as such milestones are substantive. We
record any difference between the amount of the payments received and the amount recognized as
deferred license and contract revenues on our Consolidated Balance Sheets until such amount is
earned.
Revenue Recognition Novogyne
Revenues at Novogyne are recognized when all the risks and rewards of ownership have
transferred to the customer, which occurs at the time of shipment of products. Revenues are
reduced at the time of sale to reflect expected returns that are estimated based on historical
experience. Additionally, provisions are made at the time of sale for all discounts, rebates and
estimated sales allowances based on historical experience updated for changes in facts and
circumstances, as appropriate. Such provisions are recorded as a reduction of revenues.
76
The following table describes the activity for the revenue deduction accruals by major
category for Novogyne (in which we hold a 49% investment and account for using the equity method)
for the year ended December 31, 2008 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Charge (Reversal) |
|
|
|
|
|
|
January 1, |
|
|
|
|
|
|
Adjustments of |
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
Payments |
|
|
prior years |
|
|
Current Year |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid, Medicare and
State program rebates &
credits including
prescription drug
savings cards |
|
$ |
896 |
|
|
$ |
(1,503 |
) |
|
$ |
(251 |
) |
|
$ |
1,591 |
|
|
$ |
733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed health care
rebates |
|
|
6,149 |
|
|
|
(13,088 |
) |
|
|
(11 |
) |
|
|
14,589 |
|
|
|
7,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks, including
hospital chargebacks |
|
|
111 |
|
|
|
(1,426 |
) |
|
|
|
|
|
|
1,423 |
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash discounts, direct
customer discounts &
other discounts |
|
|
1,054 |
|
|
|
(6,579 |
) |
|
|
|
|
|
|
6,390 |
|
|
|
865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales returns allowances |
|
|
6,036 |
|
|
|
(3,466 |
) |
|
|
663 |
|
|
|
3,982 |
|
|
|
7,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,246 |
|
|
$ |
(26,062 |
) |
|
$ |
401 |
|
|
$ |
27,975 |
|
|
$ |
16,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These deductions represent estimates of the related obligations, requiring the use of judgment
when estimating the impact of these sales deductions on gross sales for a reporting period. These
estimates for revenue deductions are derived utilizing a combination of information received from
third parties, including market data, inventory reports from its major wholesale customers,
historical information and other analysis.
The following briefly describes the nature of each revenue deduction and how the related
accruals are estimated by Novogyne:
The United States Medicaid program is a state-government-administered program that uses state
and federal funds to provide assistance to certain vulnerable and needy individuals and families.
In 1990, the Medicaid Drug Rebate Program was established to reduce state and federal expenditures
for prescription drugs. Under the rebate program, rebates are paid to states based on drugs paid
for by those states. Provisions for estimating Medicaid rebates are calculated using a combination
of historical experience, product and population growth, price increases, the impact of contracting
strategies and specific terms in the individual state agreements. These provisions are then
adjusted based upon the established re-filing process with individual states. For Medicaid, the
calculation of rebates involves interpretation of relevant regulations, which are subject to
challenge or change in interpretative guidance by government authorities. Since Medicaid rebates
are typically billed up to six months after the product is dispensed, any rebate adjustments may
involve revisions of accruals for several quarters.
77
Prior to 2006, the products also participated in prescription drug savings programs that offer
savings to patients that are eligible participants under United
States Medicare programs. These
savings vary based on a patients current drug coverage and personal income levels. Provisions for
the obligations under these programs are based on historical experience, trend analysis and current
program terms.
On January 1, 2006, an additional prescription drug benefit was added to the United States
Medicare program which funds healthcare benefits to individuals over the age of 65. Individuals
that previously had dual Medicaid/Medicare drug benefit eligibility had their Medicaid prescription
drug coverage replaced on January 1, 2006, by the new Medicare Part D coverage provided through
private prescription drug plans. The change led to a significant shift of plan participants
between programs in which products participate. Provisions for Medicare Part D rebates are
estimated using a combination of specific terms of individual plan agreements, product and
population growth, price increases and the impact of contracting strategies.
Wholesaler chargebacks relate to contractual arrangements with certain indirect customers to
sell products at prices that are lower than the list price charged to wholesalers. A wholesaler
chargeback represents the difference between the invoice price charged to the wholesaler and the indirect customers contract discount price. Provisions for estimating chargebacks are
calculated using a combination of historical experience, product growth rates and the specific
terms in each agreement. Wholesaler chargebacks are generally settled within a few weeks of
incurring the liability.
Managed health care rebates are offered to key managed health care, group purchasing
organizations and other direct and indirect customers to sustain and increase product market share.
These rebate programs provide that the customer receive a rebate after attaining certain
performance parameters relating to product purchases, formulary status and/or pre-established
market share milestones relative to competitors. Since rebates are contractually agreed upon,
rebates are estimated based on the specific terms in each agreement, historical experience and
product growth rates. The sales performance of products subject to managed health care rebates and
other contract discounts and levels of inventory in the distribution channel are tracked, and
adjustments to the accrual are made periodically to reflect actual experience.
In order to evaluate adequacy of ending accrual balances, Novogyne uses both internal and
external estimates of the level of inventory in the distribution channel and the rebate claims
processing lag time. External data sources include periodic reports of wholesalers and purchased
third party market data. Management internally estimates the inventory level in the retail channel
and in transit.
Novogynes policy is that no product will be shipped to customers with less than nine months
of remaining shelf-life and Novogyne generally will accept returns
due to expiration within 12
months after the product has expired. An allowance for estimated sales returns is recorded based
on: (i) the historical experience of actual product returns; and (ii) the estimated lag time
between when an actual sale takes place in relation to when the products are physically returned by
a customer. The historical actual returns rate is then applied to product sales during the
estimated lag period to develop the returns estimate. Novogyne also considers trends and
expectations for future demand and trade inventory levels. These policies cause a significant lag
time between when a product is sold and the latest date on which a return could occur. Novogyne
believes this is a reasonable basis on which to estimate returns exposure and incorporates the key
factors that contribute to returns. In addition, Novogyne establishes sales returns allowances for
product that has been recalled or that it believes is probable of being recalled. The methodology
used to estimate product returns associated with recalls is based on the distribution and
expiration dates of the affected
78
product
and overall trade inventory levels. These estimates are
based on currently available information, and the ultimate outcome may be different than the
amounts estimated given the subjective nature and complexities inherent in this area and in the
pharmaceutical industry.
Novogynes product supply policy is to maintain inventories on a consistent level from year to
year based on the pattern of consumption. Wholesaler inventory levels are monitored monthly based
on gross sales volume, prescription volumes based on third party data and information received from
the key wholesalers. Novogyne believes the third party data sources of information are sufficiently
reliable; however its accuracy cannot be independently verified.
Cash discounts are offered to customers to encourage prompt payment. Cash discounts, which are
typically 2% of gross sales, are accrued at the time of sale.
Other sales discounts, such as consumer coupons and discount cards, are also offered. These
discounts are recorded at the time of sale and estimated utilizing historical experience and the
specific terms for each program.
Novartis controls and maintains the reserves associated with such sales allowances and returns
on behalf of Novogyne and pays all monies owed and issues credits to individual customers as deemed
necessary. The contracts that underlie these transactions are maintained by Novartis for its
business as a whole and those transactions relating to Novogyne are estimated by Novartis. Based
on an analysis of the underlying activity, the amounts recorded by Novogyne represent Novartis
best estimate of charges that apply to sales by Novogyne. However, we cannot control Novartis
analysis of the underlying activity or its application of that analysis to Novogyne. If Novartis
materially changes the assumptions it uses in determining the reserve, Novogyne may be required to
record an additional reserve allowance on its financial statements, which would adversely affect
Novogynes operating results during the period in which the determination or reserve were made, and
would consequently also reduce the earnings attributable to our investment in Novogyne for that
period.
Revenue Recognition Noven Therapeutics
Revenues at Noven Therapeutics are recognized when all the risks and rewards of ownership have
transferred to the customer, which occurs at the time of delivery of the product to the customer.
Revenues are reduced at the time of sale to reflect expected returns that are estimated based on
historical experience. Additionally, provisions are made at the time of sale for all discounts,
rebates and estimated sales allowances based on historical experience updated for changes in facts
and circumstances, as appropriate. Such provisions are recorded as a reduction of revenue.
79
The following table describes the activity for the revenue deduction accruals by major
category for the year ended December 31, 2008 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Charges |
|
|
|
January 1, |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
December 31, |
|
|
|
2008 |
|
|
Payments |
|
|
Current Year |
|
|
Adjustments |
|
|
2008 |
|
Medicaid, Medicare and
State program rebates &
credits including
prescription drug
savings cards |
|
$ |
4,065 |
|
|
$ |
(8,624 |
) |
|
$ |
7,285 |
|
|
$ |
|
|
|
$ |
2,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks, including
hospital chargebacks |
|
|
139 |
|
|
|
(1,294 |
) |
|
|
1,315 |
|
|
|
|
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash discounts |
|
|
59 |
|
|
|
(817 |
) |
|
|
835 |
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other discounts |
|
|
770 |
|
|
|
(2,053 |
) |
|
|
1,877 |
|
|
|
|
|
|
|
594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales returns allowances |
|
|
1,875 |
|
|
|
(2,015 |
) |
|
|
3,410 |
|
|
|
(200 |
) 1 |
|
|
3,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,908 |
|
|
$ |
(14,803 |
) |
|
$ |
14,722 |
|
|
$ |
(200 |
) |
|
$ |
6,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Represents credits expected to be issued against customer
receivable balances related to product returns. |
These deductions represent estimates of the related obligations, requiring the use of judgment
when estimating the impact of these sales deductions on gross sales for a reporting period. These
estimates for revenue deductions are derived utilizing a combination of information received from
third parties, including market data, inventory reports from major wholesale customers, historical
information and other analysis. Our management believes that it is able to reasonably estimate
these sales deductions, except for Stavzor®, for which we do not yet have sufficient
sales history to reasonably estimate returns.
The revenue deductions for Noven Therapeutics and how we estimate the related accruals are
substantially similar to the revenue deductions at Novogyne, with the following exceptions:
Noven Therapeutics policy is that generally no product will be shipped to customers with less
than 12 months of remaining shelf-life and generally returns due to expiration will be accepted
within 12 months after the product has expired.
Noven Therapeutics supply policy is to maintain inventories on a consistent level from year
to year based on the pattern of consumption. Wholesaler inventory levels are monitored monthly
based on gross sales volume, prescription volumes based on third party data and information
received from key wholesalers.
Intangible Assets and Goodwill
We account for acquired businesses using the purchase method of accounting which requires that
the assets acquired and liabilities assumed be recorded at the date of acquisition at their
respective estimated fair values. The cost to acquire a business, including transaction
80
costs, is
allocated to the underlying net assets of the acquired business based on estimates of their
respective fair values. Amounts allocated to acquired in-process research and development are
expensed at the date of acquisition. Intangible assets are amortized over the expected life of the asset. Any
excess of the purchase price over the estimated fair values of the net assets acquired is recorded
as goodwill.
During 2008, we finalized the purchase price allocation for our Noven Therapeutics
acquisition, resulting in a $0.3 million net reduction in goodwill.
The judgments made in determining the estimated fair value assigned to each class of assets
acquired and liabilities assumed, as well as asset lives and methods used for amortization, can
materially impact our results of operations. Fair values and useful lives are determined based on,
among other factors, the expected future period of benefit of the asset, the various
characteristics of the asset and projected cash flows. This process requires us to make estimates
with respect to future sales volumes, pricing, new product launches, anticipated product costs and
overall market conditions. Because these estimates influence the values assigned the various
assets acquired, these estimates are considered to be critical accounting estimates. In connection
with our acquisition of Noven Therapeutics, in addition to the value of acquired tangible assets
and assumed liabilities, we ultimately recorded on our balance sheet $39.1 million of identifiable
intangible assets, $14.4 million of goodwill, and $11.5 million of liabilities for contingent
payments we expected to make related to the achievement of sales milestones for acquired products.
Additionally, our cash flow estimates resulted in allocating $100.2 million of the purchase price
to IPR&D. In accordance with SFAS No. 141, Business Combinations (SFAS No. 141), which applied
to acquisitions prior to January 1, 2009, the value allocated to IPR&D was immediately charged to
operations. Our forecast of future cash flows associated with IPR&D required various assumptions
to be made including:
|
|
|
revenues that are likely to result from the approved products or IPR&D
projects, including estimated number of units to be sold, estimated selling
prices, estimated market penetration, estimated market share, year-over-year
growth rates over the product life cycles and estimated sales allowances; |
|
|
|
|
contract and license revenues generated by approved products or IPR&D
projects; |
|
|
|
|
cost of sales for the potential products using historical data, industry
data or other sources of market data; |
|
|
|
|
sales and marketing expenses using historical data, industry data or other
sources of market data; |
|
|
|
|
general and administrative expenses; |
|
|
|
|
research and development expenses; and |
|
|
|
|
future equity in earnings of Novogyne. |
Additional information about assumptions and other considerations related to the valuation of IPR&D
can be found in the notes to our Consolidated Financial Statements.
Our goodwill is assigned to our Noven Therapeutics reporting segment. Goodwill is tested for
impairment annually in the fourth quarter or more frequently, when events or other changes in
circumstances indicate that the carrying value of goodwill may not be recoverable. If we determine
at the date of the evaluation that the fair value of the reporting segment is less than its
carrying value, then we would allocate the fair value of the segment to all of the assets and
liabilities of the reporting segment in a manner similar to the allocation of purchase price in a
business combination. A goodwill impairment would be recognized to the extent that the carrying
value of goodwill exceeds the fair value not allocated to identifiable assets. In accordance with
SFAS No. 141, our finite-lived intangible assets are evaluated for impairment whenever
81
events or circumstances indicate that
the carrying amounts may not be recoverable. We would recognize an impairment to the extent that
the carrying value of a finite-lived intangible asset exceeds its fair value.
As of December 31, 2008, we determined that no impairment of goodwill or intangible assets
existed. We will continue to assess the carrying value of goodwill and intangible assets in
accordance with applicable accounting guidance.
Income Taxes
Our future effective tax rate is based on estimates of expected income and enacted statutory
tax rates, as applied to our operations. Significant judgment is required in making these
determinations and the ultimate resolution of our tax return positions could differ from current
expectations. Despite our belief that our tax return positions are correct, our policy is to
establish accruals for tax contingencies that may result from examinations by tax authorities. Our
tax accruals are analyzed periodically and adjustments are made as events occur to warrant such
adjustment. It is reasonably possible that our effective tax rate and/or cash flows may be
materially impacted by the ultimate resolution of our tax positions. If we are assessed interest
and/or penalties by governing jurisdictions, we include those amounts in our tax provision. Our
effective tax rate was 35% in 2008 and 2007and 33% in 2006. If our effective tax rate differed
from our estimate, our results would vary.
Accounting principles generally accepted in the United States require that we record a
valuation allowance against our net deferred tax asset if we cannot
conclude that we will more likely than not
be able to generate sufficient future taxable income to utilize our net deferred tax asset. At
December 31, 2008 and December 31, 2007, net deferred tax assets were $72.2 million and $65.7
million, respectively.
Realization of these deferred tax assets depends upon the generation of sufficient future
taxable income. Estimates of future taxable income require us to make significant estimates that
involve subjective and often complex judgments, the most significant of which relate to future cash
flows of approved products and products in IPR&D. A valuation allowance is established if it is
more likely than not that all or a portion of the deferred tax asset will not be realized. Noven
Therapeutics files separate state income tax returns in states where Noven Therapeutics has
determined that it is required to file state income taxes. As a result, state deferred tax assets
relating to Noven Therapeutics are evaluated separately in determining whether the state deferred
tax assets are realizable. Noven Therapeutics has historically reported taxable losses in these
states and we expect that Noven Therapeutics will continue to incur state taxable losses in the
next few years. These expected taxable losses create negative evidence indicating the need for a
valuation allowance at December 31, 2008 and December 31, 2007. Our valuation allowance for state
deferred tax assets was $3.5 million and $3.2 million as of December 31, 2008 and December 31,
2007, respectively, due to uncertainty about our ability to realize these state deferred tax assets
based on our projection of future state taxable income relating to Noven Therapeutics. If we
determine, based on future Noven Therapeutics profitability that these state deferred tax assets
will more likely than not be realized, a release of all, or part, of the related valuation
allowance could result in an immediate income tax benefit in the period the valuation allowance is
released.
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Stock-Based Compensation
On January 1, 2006, we adopted SFAS No. 123(R), which requires the measurement and recognition
of compensation expense for all share-based payment awards made to employees and directors based on
estimated fair values. Pre-tax stock-based compensation expense recognized under SFAS No. 123(R)
was $4.8 million, $5.4 million and $3.3 million in 2008, 2007 and 2006, respectively.
We use the Black-Scholes option pricing model to determine the fair value of stock
options and SSARs. The determination of the fair value of stock-based payment awards on the date
of grant using an option-pricing model is affected by our stock price as well as assumptions
regarding a number of complex and subjective variables. These variables include our expected stock
price volatility over the term of the awards, actual and projected employee equity award exercise
behaviors, risk-free interest rate, expected forfeiture rates and expected dividends.
The
expected term of stock options/SSARs is defined as the expected time
that options will remain outstanding assuming they are not forfeited
prior to the vest date. We estimate the expected term using a
statistical predictive model that incorporates Novens
historical exercise activity in conjunction with Novens
post-vest termination information. We estimate
the volatility of common stock by using a combination of both historical and implied volatility
based on an equal weighting of each as management believes that marketplace participants would
likely use the expected volatility in determining an exchange price for an option or SSAR. We are
required to estimate forfeitures at the time of grant and revise those estimates in subsequent
periods if actual forfeitures differ from those estimates. We use historical data to estimate
pre-vesting forfeitures and record stock-based compensation expense accordingly. If factors change
and we employ different assumptions for estimating stock-based compensation expense in future
periods or if we decide to use a different valuation model, the future periods may differ
significantly from what we have recorded in the current period and could materially affect our
operating income, net income and net income per share. The Black-Scholes option-pricing model was
developed for use in estimating the fair value of traded options that have no vesting restrictions
and are fully transferable, characteristics not present in our stock option and SSAR grants.
Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide
reliable measures of the fair values of our stock-based compensation. Consequently, there is a
risk that our estimates of the fair values of our stock-based compensation awards on the grant
dates may bear little resemblance to the actual values realized upon the exercise, expiration,
early termination or forfeiture of those stock-based payments in the future. Stock options or
SSARs may expire worthless or otherwise result in zero intrinsic value as compared to the fair
values originally estimated on the grant date and reported in our financial statements.
Alternatively, values may be realized from these instruments that are significantly higher than the
fair values originally estimated on the grant dates, and reported in our financial statements.
There currently is no market-based mechanism or other practical application to verify the
reliability and accuracy of the estimates stemming from these valuation models, nor is there a
means to compare and adjust the estimates to actual values.
Inventories
Inventories consist primarily of raw materials, work in process and finished goods for our
commercial branded products and under certain circumstances may include pre-launch branded and
generic products. Inventory costs include material, labor and manufacturing overhead. Inventories
are stated at the lower of cost (first-in, first-out method, or FIFO) or market and as appropriate,
we reflect provisions necessary to reduce the carrying value of our inventories to net realizable
value.
We use a standard costing system to estimate our actual FIFO cost of inventory at the end of
each reporting period. Historically, standard costs have been substantially consistent with actual
costs. In addition, the allocation of overhead costs impacts our estimate of the cost of
inventory. Total overhead costs, which were in excess of $30.0 million in 2008, include salaries
and benefits, supplies and tools, equipment
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costs, depreciation and insurance costs and represent a
substantial portion of our inventory costs. The allocation of overhead to inventory production
costs and between and among our various products requires us to make significant estimates that
involve subjective and often complex judgments, including, among other things, normal production
capacity, the relationship between labor costs and overhead costs, the extent of labor that goes
into producing products and the amount of overhead costs absorbed in manufacturing inventory. Any
change in these assumptions could materially impact our recorded cost of products sold and stated
inventory balances.
Our net inventory balances were $13.9 million and $12.1 million as of December 31, 2008 and
2007, respectively. We determine the market value of our raw materials, finished product and
packaging inventories based upon references to current market prices for such items as of the end
of each reporting period and record a write-down of inventory standard cost to market, when
applicable. We periodically review our inventory for excess items, and we establish a valuation
write-down based upon the age of specific items in inventory and the expected recovery from the
disposition of the items. A provision is established for the estimated aged surplus, spoiled or
damaged products, and discontinued inventory items and components. The amount of the provision is
determined by analyzing inventory composition, expected usage, historical and projected sales
information, and other factors. Changes in sales volume due to unexpected economic or competitive
conditions are among the factors that could result in materially different amounts for provisions
we establish. If our provisions prove to be inadequate, our inventories could be overstated or
understated in any given period.
Novogyne Intangible Asset
As of December 31, 2008, Novogyne had a long-term intangible asset of $13.9 million related to
the acquisition of the marketing rights to CombiPatch®. The amortization of this asset
is included in cost of sales in Novogynes financial statements. In accordance with SFAS No. 144,
Accounting for the Impairment of Disposal of Long-Lived Assets, the CombiPatch®
marketing rights are assessed for impairments whenever events or changes in circumstances
indicate the carrying amount of the asset may not be recoverable. The impairment testing involves
comparing the carrying amount of the asset to the forecasted undiscounted future net cash flows of
the product. This analysis requires Novogyne to make a number of significant assumptions and
judgments involving prescription trends, sales price, unit cost and product life cycle among many
other factors. In the event the carrying value of the asset exceeds the undiscounted future net
cash flows of the product and the carrying value is not considered recoverable, an impairment
exists. An impairment loss is measured as the excess of the assets carrying value over its fair
value, calculated using a discounted future cash flow method. An impairment loss would reduce net
income in the period that the impairment occurs. Events which could give rise to impairments
include a number of inherent risks in the pharmaceutical industry and cannot be predicted. Further
declines in CombiPatch® sales (whether as a result of the HT studies, competition in the
category or otherwise) could require Novogyne to record an impairment loss related to these
marketing rights. As a result of the significance of the CombiPatch® marketing rights,
any such impairment loss could have a material adverse impact on Novogynes and Novens financial
condition and/or results of operations.
Novogyne Loss Contingencies
Novogyne is required to establish accruals for certain loss contingencies related to
litigation, including product liability claims. Novogyne accrues estimated legal fees and
settlement costs in accordance with SFAS No. 5, Accounting for Contingencies. Accruals for
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product liability claims are recorded by Novogyne, on an undiscounted basis, when it is probable
that a liability has been
incurred and the amount of the liability can be reasonably estimated based on existing information. Novogyne includes estimated legal fees in accruals for product
liability claims and makes adjustments as new information becomes available. Receivables for
insurance recoveries related to product liability claims under Novogynes third party insurance
policy are recorded, on an undiscounted basis, when it is probable that a recovery will be
realized. Novogynes accruals and related receivables for product liability claims and other
litigation accruals involve significant estimates, including estimates of incurred but not reported
claims, estimates of cost per claim for both reported and unreported claims, allocation of cost
between Noven, Novartis and Novogyne based on ownership dates and applicable indemnification and
other agreements between them, estimates of insurance recoveries and judgments as to the
recoverability of insurance receivables recorded. Since July 2004, Novartis, along with various
other pharmaceutical companies, has been named in a number of lawsuits involving Novogynes hormone
replacement therapy products. Novogyne has established reserves in the amount of $9.0 million as
of December 31, 2008 for expected defense and settlement expenses related to pending lawsuits as
well as for estimated future cases alleging use of Novogynes products. In addition, Novogyne has
recorded an insurance receivable of $6.7 million, which is Novogynes best estimate of the
insurance coverage for recovery of claims.
Novartis controls and maintains the accruals associated with such litigation on behalf of
Novogyne. The litigation accruals and estimated insurance recoveries are maintained by Novartis
for its business as a whole and those accruals and recoveries relating to Novogyne are estimated by
Novartis (based on claims specifically attributable to Novogynes products and Novogynes insurance
policies). Based on an analysis of the underlying data, the amounts recorded by Novogyne represent
Novartis best estimate of litigation accruals and estimated insurance recoveries relating to
Novogyne. However, we cannot control Novartis analysis of the underlying data or its application
of that analysis to Novogyne. Litigation and its outcome are inherently difficult to predict. Any
change in the estimates of number of cases, cost per case, allocation of cost between Noven,
Novartis and Novogyne, insurance recoveries and other assumptions could cause Novogynes and
Novens financial results to significantly vary. Furthermore, if actual liability and insurance
recoveries ultimately differ from that which has been recorded, Novogynes and Novens financial
results in the period where the liability becomes payable and the insurance is recoverable could be
materially affected by the adjustment of the liability and insurance recoveries.
New Accounting Standards
In May 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles (SFAS No. 162). SFAS No. 162 identifies
the sources of accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are presented in conformity
with GAAP. This statement will be effective 60 days following the Securities and Exchange
Commissions approval of the Public Company Accounting Oversight Board amendments to AU Section
411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. We do not expect adoption of SFAS No. 162 to have a material impact on our
consolidated financial condition, results of operations or cash flows.
In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, Determination of the
Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent
of FSP 142-3 is to improve the
85
consistency
between the useful life of a recognized intangible asset
under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the
asset under GAAP and SFAS No. 141(R), Business Combinations. For a recognized intangible asset,
an entity shall disclose information that enables users of financial statements to assess the
extent to which the expected future cash flows associated with the asset are affected by the
entitys intent and/or ability to renew or extend the arrangement. FSP 142-3 is effective for
financial statements issued for fiscal years and interim periods beginning after December 15, 2008,
with early adoption prohibited. FSP 142-3 requires the guidance for determining the useful life of
a recognized intangible asset to be applied prospectively to intangible assets acquired after the
effective date. The disclosure requirements shall be applied prospectively to all intangible assets
recognized as of, and subsequent to, the effective date. We do not expect adoption of FSP 142-3 to
have a material impact on our consolidated financial condition, results of operations or cash
flows.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an Amendment of Accounting Research Bulletin (ARB) No. 51 (SFAS No.
160). SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest
(minority interest) in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160
amends certain of ARB 51s consolidation procedures to conform them to the requirements of SFAS No.
141(R), Business Combinations, which was issued at the same time as SFAS No. 160. This new
statement is effective for fiscal years, and interim periods within those fiscal years, beginning
on or after December 15, 2008 (that is, January 1, 2009, for entities with calendar year-ends).
Earlier adoption is prohibited. SFAS No. 160 will be applied prospectively as of the beginning of
the fiscal year in which this statement is initially applied, except for the presentation and
disclosure requirements, which will be applied retrospectively for all periods presented. We do not
expect adoption of SFAS No. 160 to have a material impact on our consolidated financial condition,
results of operations or cash flows.
In December 2007, the FASB revised SFAS No. 141, Business Combinations (SFAS No. 141(R)).
SFAS No. 141(R) establishes principles and requirements for how an acquirer: (i) recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase; and (iii) determines what information
to disclose to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS No. 141(R) applies to all transactions or other events in
which an entity (the acquirer) obtains control of one or more businesses (the acquiree), including
those sometimes referred to as true mergers or mergers of equals and combinations achieved
without the transfer of consideration, for example, by contract alone or through the lapse of
minority veto rights. SFAS No. 141(R) does not apply to: (i) the formation of a joint venture; (ii)
the acquisition of an asset or a group of assets that does not constitute a business; (iii) a
combination between entities or businesses under common control; or (iv) a combination between
not-for-profit organizations or the acquisition of a for-profit business by a not-for-profit
organization. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008.
An entity may not apply SFAS No. 141 (R) before that date. We do not expect adoption of SFAS No.
141(R) to have a material impact on our consolidated financial condition, results of operations or
cash flows.
In December 2007, the FASBs Emerging Issue Task Force (EITF) reached a consensus on EITF
Issue No. 07-01, Accounting for Collaborative Arrangements Related to the Development and
Commercialization of Intellectual Property (EITF 07-01). EITF 07-01 discusses the appropriate
income statement presentation and classification for the activities and payments between the
participants in
86
arrangements
related to the development and commercialization of intellectual
property. It requires certain transactions between collaborators to be recorded in the income
statement on either a gross or net basis within expenses when certain characteristics exist in the
collaboration relationship. The sufficiency of disclosure related to these arrangements is also
specified. EITF 07-01 is effective for fiscal years beginning after December 15, 2008. We do not
expect adoption of EITF 07-01 to have a material impact on our consolidated financial condition,
results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As of March 2, 2009, we held investments in auction rate securities (classified as
available-for-sale) with a par value and fair value of $16.0 million and $15.5 million,
respectively. Auction rate securities are floating rate debt securities with long-term nominal
maturities, the interest rates of which are reset periodically (typically every seven to
thirty-five days) through a Dutch auction process. These periodic auctions have historically
provided a liquid market for auction rate securities, as this mechanism generally allowed existing
investors to rollover their holdings and continue to own their respective securities at
then-existing market rates or to liquidate their holdings by selling their securities at par value.
Beginning in February 2008, as part of the ongoing credit market crisis, several auction rate
securities from various issuers have failed to receive sufficient order interest from potential
investors to clear successfully, resulting in auction failures. Historically, when investor demand
was insufficient, the banks running the auctions would step in and purchase the remaining
securities in order to prevent an auction failure. However, since early 2008, the banks have been
allowing these auctions to fail. As a result of failed auctions, these investments now pay
interest at a rate defined by the governing documents or indenture.
Our auction rate security investments are collateralized primarily by tax-exempt municipal
bonds and, to a much lesser extent, guaranteed student loans. We do not hold any auction rate
securities collateralized by mortgages or collateralized debt obligations. We believe our
investments are of high credit quality, as all are investment grade and the majority are rated AA
or higher. In assessing whether declines in fair value are temporary in nature or
other-than-temporary, management considers a variety of factors, including our recent history of
liquidating similar instruments at par value, the length of time and extent to which the fair value
has been less than par, the financial condition of the issuer and managements intent and ability
to retain the investments for a sufficient period to allow for any anticipated recovery in fair
value. In the fourth quarter of 2008, management determined that the $0.5 million unrealized
decline in fair value of our auction rate securities was other-than-temporary. As a result, we
recognized the unrealized loss in our 2008 Consolidated
Statement of Operations. The determination that the loss was other-than-temporary was primarily
based on the length of time that the securities have been impaired and the fact that the continuing
auction failures do not enable Noven to reliably estimate when the value of the securities may
recover. We will continue to monitor the market for
our auction rate security investments. To the extent that future
declines in fair value are determined to be other-than-temporary,
additional impairment charges will result. Such non-cash impairment charges could
materially and adversely affect our consolidated financial condition and results of operations.
Item 8. Financial Statements and Supplementary Data.
See
Index to Consolidated Financial Statements at page 102 of this report.
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Item 9. |
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Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure. |
Not applicable.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
As of the end of the period covered by this report, our management evaluated, with the
participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the
effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under
the Securities Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, our CEO and
CFO concluded that, as of December 31, 2008, our disclosure controls and procedures were effective
in ensuring that information relating to Noven, including its consolidated subsidiaries, required
to be disclosed in reports that it files or submits under the Exchange Act was: (1) recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms;
and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate
to allow timely decisions regarding required disclosure. However, that conclusion should be
considered in light of the various limitations described below on the effectiveness of those
controls and procedures, some of which pertain to most if not all business enterprises, and some of
which arise as a result of the nature of our business. Our management, including our CEO and CFO,
does not expect that our disclosure controls and procedures will prevent all errors and all
improper conduct. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of improper conduct, if any, have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or by management
override of the control. Further, the design of any system of controls also is based in part upon
assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be detected. Furthermore, our level of historical and current equity
participation in Novogyne may substantially impact the effectiveness of our disclosure controls and
procedures. Because we do not control Novogyne, and Novogynes financial, accounting, inventory,
sales and sales deductions functions are performed by Novartis, our disclosure controls and
procedures with respect to our equity investment in Novogyne are necessarily more limited than
those we maintain with respect to Noven.
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Changes in Internal Control over Financial Reporting
No changes were made in our internal control over financial reporting during our last fiscal
quarter that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Scope of Managements Report on Internal Control over Financial Reporting
Managements evaluation of Novens internal control over financial reporting at December 31,
2008 does not include an evaluation of internal control over financial reporting for Novogyne.
Under the Novogyne joint venture agreements, Novartis is responsible
for the financial and accounting functions at Novogyne, as well as
for the establishment and maintenance of internal controls for
Novogyne.
Noven does not consolidate Novogyne for financial reporting purposes and is not required to assess
Novogynes internal control over financial reporting. (Noven does maintain certain controls over
recording accounts related to its investment in Novogyne and its equity interest in Novogynes
earnings in Novens consolidated financial statements, including reviewing Novogynes audited
financial statements and related notes, included elsewhere in this Form 10-K.) Failure by Novartis
to properly maintain internal controls for Novogyne could negatively affect
the financial condition and results of operations of Novogyne and Noven. Equity in earnings of
Novogyne totaled $45.6 million for the year ended December 31, 2008. Our investment in Novogyne
totaled $24.3 million at December 31, 2008, which represented approximately 8% of Novens
consolidated assets.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or
15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under
the supervision of, a companys principal executive and principal financial officers and effected
by a companys board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles and includes those
policies and procedures that:
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Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the company; |
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Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles generally
accepted in the United States, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and |
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Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the companys assets that could have a
material effect on the financial statements. |
Because of its inherent limitations, and because it is required to provide only reasonable,
not absolute, assurance that its objectives are met, internal control over financial reporting may
not prevent or detect misstatements whether arising from fraud or simple error. Projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate over time because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Novens management assessed the effectiveness of the companys internal control over financial
reporting as of December 31, 2008. In making this assessment, Novens management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal ControlIntegrated Framework.
Based on our assessment, Novens management believes that, as of December 31, 2008, Novens
internal control over financial reporting is effective based on those criteria.
Deloitte & Touche LLP, Novens independent registered public accounting firm, has issued an
audit report on Novens internal control over financial
reporting. This report appears on page 90.
89
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Noven Pharmaceuticals, Inc.
We have audited the internal control over financial reporting of Noven Pharmaceuticals, Inc. and
subsidiaries (the Company) as of December 31, 2008, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Managements Report on Internal Controls Over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
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In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements as of and for the year ended December
31, 2008, of the Company and our report dated March 12, 2009, expressed an unqualified opinion on
those consolidated financial statements.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, FL
March 12, 2009
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Item 9B. Other Information.
Sidney Braginsky, a current member of Novens Board of Directors, advised the Board on
February 4, 2009 that he has decided to retire from the Board and that therefore he will not stand
for reelection as a director at the annual meeting of stockholders to be held on May 22, 2009.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information concerning executive officers required by Item 10 is contained in the
discussion entitled Executive Officers of the Registrant in Part I, Item 4 hereof. All other
information required by Item 10 is incorporated by reference to our Proxy Statement for our 2009
Annual Meeting of Stockholders.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to our Proxy Statement for
our 2009 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The information required by Item 12 is incorporated by reference to our Proxy Statement
for our 2009 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions, and Director
Independence.
The information required by Item 13 is incorporated by reference to our Proxy Statement for
our 2009 Annual Meeting of Stockholders.
Item 14. Principal Accounting Fees and Services.
The information required by Item 14 is incorporated by reference to our Proxy Statement for
our 2009 Annual Meeting of Stockholders.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements |
|
See
Index to Consolidated Financial Statements at page 102 of this report. |
(a)(2)
Financial Statement Schedule
The
following financial statement schedule is filed as a part of this
report on page 176.
|
|
|
Schedule II |
|
Valuation and Qualifying Accounts for the years ended
December 31, 2008, 2007 and 2006. |
All other schedules have been omitted because the required information is not applicable or the information is
included in the Consolidated Financial Statements or the notes thereto.
92
(a)(3) Exhibits
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Method of Filing |
|
|
|
|
|
3.1
|
|
Novens Restated Certificate of Incorporation.
|
|
Incorporated by
reference to
Exhibit 3.1 of
Novens Form 10-K
for the year ended
December 31, 1998
(File No. 0-17254). |
|
|
|
|
|
3.2
|
|
Novens Certificate of Amendment of
Certificate of Incorporation dated June 5,
2001.
|
|
Incorporated by
reference to
Exhibit 3.1 of
Novens Form 10-Q
for the quarter
ended June 30, 2001
(File No. 0-17254). |
|
|
|
|
|
3.3
|
|
Certificate of Designations of Series A
Junior Participating Preferred Stock of Noven
Pharmaceuticals, Inc.
|
|
Incorporated by
reference to
Exhibit 3.3 of
Novens Form 8-K
dated November 15,
2007 (File No.
0-17254). |
|
|
|
|
|
3.4
|
|
Novens By-Laws, as amended and restated as
of November 18, 2008.
|
|
Incorporated by
reference to
Exhibit 3.1 of
Novens Form 8-K
dated November 24,
2008 (File No.
0-17254). |
|
|
|
|
|
4.1
|
|
Rights Agreement between Noven and American
Stock Transfer & Trust Company dated November
6, 2001.
|
|
Incorporated by
reference to
Exhibit 4.1 of
Novens Form 8-K
dated November 6,
2001 (File No.
0-17254). |
|
|
|
|
|
4.2
|
|
Amendment to Rights Agreement between Noven
and American Stock Transfer & Trust Company
dated March 18, 2008.
|
|
Incorporated by
reference to
Exhibit 4.1 of
Novens Form 8-K
dated March 21,
2008 (File No.
0-17254). |
|
|
|
|
|
10.1
|
|
Noven Pharmaceuticals, Inc. 1999 Long-Term
Incentive Plan.*
|
|
Incorporated by
reference to
Novens definitive
Proxy Statement
dated April 9,
2007, for the
Annual Meeting of
Shareholders held
on May 18, 2007. |
|
|
|
|
|
10.2
|
|
Amended and Restated Form of Employment
Agreement (Change of Control), between Noven
and each of Jeffrey F. Eisenberg, Michael D.
Price, Steven M. Dinh, Richard P. Gilbert,
Joel S. Lippman and Anthony Venditti.*
|
|
Filed herewith. |
93
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Method of Filing |
|
|
|
|
|
10.3
|
|
Form of Indemnification Agreement for
Directors and Officers.
|
|
Incorporated by
reference to
Exhibit 10.4 of
Novens Form 10-K
for the year ended
December 31, 1998
(File No. 0-17254). |
|
|
|
|
|
10.4
|
|
License Agreement between Noven 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
Novens
Registration
Statement on Form
S-2 (File No.
33-45784). |
|
|
|
|
|
10.5
|
|
Industrial Lease between Rhône-Poulenc Rorer
Pharmaceuticals Inc. and Noven 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
Novens Form 10-K
for the year ended
December 31, 1993
(File No. 0-17254). |
|
|
|
|
|
10.6
|
|
Operating Agreement of Vivelle Ventures LLC (a
Delaware limited liability company) dated
May 1, 1998.
|
|
Incorporated by
reference to
Exhibit 10.33 to
Novens Form 10-Q
for the quarter
ended March 31,
1998 (File No.
0-17254). |
|
|
|
|
|
10.7
|
|
Amendment to Operating Agreement between
Novartis Pharmaceuticals Corporation and Noven
dated March 29, 2001.
|
|
Incorporated by
reference to
Exhibit 10.7 to
Novens Form 10-Q
for the quarter
ended March 31,
2001 (File No.
0-17254). |
|
|
|
|
|
10.8
|
|
Marketing and Promotional Services Agreement
by and between Noven and Vivelle Ventures LLC
dated May 1, 1998.
|
|
Incorporated by
reference to
Exhibit 10.4 to
Novens Form 10-Q
for the quarter
ended March 31,
1998 (File No.
0-17254). |
|
|
|
|
|
10.9
|
|
First Amendment to Marketing and Promotional
Services Agreement between Vivelle Ventures
LLC and Noven dated March 29, 2001.
|
|
Incorporated by
reference to
Exhibit 10.6 to
Novens Form 10-Q
for the quarter
ended March 31,
2001 (File No.
0-17254). |
|
|
|
|
|
10.10
|
|
Sublicense Agreement by and among Novartis
Pharmaceuticals Corporation, Noven and
Vivelle Ventures LLC dated May 1, 1998.
|
|
Incorporated by
reference to
Exhibit 10.35 to
Novens Form 10-Q
for the quarter
ended March 31,
1998 (File No.
0-17254). |
|
|
|
|
|
10.11
|
|
Amended and Restated License Agreement between
Noven and Rhône-Poulenc Rorer Pharmaceuticals,
Inc. dated September 30, 1999 (with certain
provisions omitted pursuant to Rule 24b-2).
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 10-Q
for the quarter
ended September 30,
1999 (File No.
0-17254). |
94
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Method of Filing |
|
|
|
|
|
10.12
|
|
Amended and Restated License Agreement between
Noven and Rhône-Poulenc Rorer, Inc. dated
September 30, 1999 (with certain provisions
omitted pursuant to Rule 24b-2).
|
|
Incorporated by
reference to
Exhibit 10.2 of
Novens Form 10-Q
for the quarter
ended September 30,
1999 (File No. 0-17254). |
|
|
|
|
|
10.13
|
|
Amendment No. 2 to Amended and Restated
License Agreement between Rorer Pharmaceutical
Products, Inc. and Noven Pharmaceuticals, Inc.
dated March 29, 2001 (with certain provisions
omitted pursuant to Rule 24b-2).
|
|
Incorporated by
reference to
Exhibit 10.2 of
Novens Form 10-Q
for the quarter
ended March 31,
2001 (File No.
0-17254). |
|
|
|
|
|
10.14
|
|
License Agreement between Noven and Novartis
Pharma AG dated November 3, 2000 (with
certain provisions omitted pursuant to Rule
24b-2).
|
|
Incorporated by
reference to
Exhibit 10.2 of
Novens Form 10-Q
for the quarter
ended September 30,
2000 (File No.
0-17254). |
|
|
|
|
|
10.15
|
|
License Agreement between Noven and Vivelle
Ventures LLC dated March 29, 2001 (with
certain provisions omitted pursuant to Rule
24b-2).
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 10-Q
for the quarter
ended March 31,
2001 (File No.
0-17254). |
|
|
|
|
|
10.16
|
|
Sublicense Agreement among Rorer
Pharmaceutical Products, Inc., Rhône-Poulenc
Rorer Inc., Aventis Pharmaceuticals Products
Inc., Rhône-Poulenc Rorer International
Holdings Inc., Novartis Pharma AG and Noven
dated March 29, 2001 (with certain provisions
omitted pursuant to Rule 24b-2).
|
|
Incorporated by
reference to
Exhibit 10.3 of
Novens Form 10-Q
for the quarter
ended March 31,
2001 (File No.
0-17254). |
|
|
|
|
|
10.17
|
|
Purchase Agreement among Rorer Pharmaceutical
Products, Inc., Aventis Pharmaceuticals
Products Inc. and Vivelle Ventures LLC dated
March 29, 2001 (with certain provisions
omitted pursuant to Rule 24b-2).
|
|
Incorporated by
reference to
Exhibit 10.4 of
Novens Form 10-Q
for the quarter
ended March 31,
2001 (File No.
0-17254). |
|
|
|
|
|
10.18
|
|
Supply Agreement between Vivelle Ventures LLC
and Noven dated March 29, 2001 (with certain
provisions omitted pursuant to Rule 24b-2).
|
|
Incorporated by
reference to
Exhibit 10.5 of
Novens Form 10-Q
for the quarter
ended March 31,
2001 (File No.
0-17254). |
|
|
|
|
|
10.19
|
|
Development Agreement between Novartis Pharma
AG and Noven dated June 1, 2001.
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 10-Q
for the quarter
ended June 30, 2001
(File No. 0-17254). |
95
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Method of Filing |
|
|
|
|
|
10.20
|
|
Transaction Agreement among Shire US
Inc., Shire Pharmaceuticals Group PLC and
Noven, dated February 26, 2003 (with
certain provisions omitted pursuant to
Rule 24b-2).**
|
|
Incorporated by
reference to
Exhibit 10.25 of
Novens Form 10-K
for the year ended
December 31, 2002
(File No. 0-17254). |
|
|
|
|
|
10.21
|
|
License Agreement among Shire US Inc.,
Shire Pharmaceuticals Group PLC and
Noven, dated April 7, 2003 (with
certain provisions omitted pursuant to
Rule 24b-2).**
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 10-Q
for the quarter
ended March 31,
2003 (File No.
0-17254). |
|
|
|
|
|
10.22
|
|
Toll Conversion and Supply Agreement
among Shire US Inc., Shire
Pharmaceuticals Group PLC and Noven,
dated April 7, 2003 (with certain
provisions omitted pursuant to Rule
24b-2).**
|
|
Incorporated by
reference to
Exhibit 10.2 of
Novens Form 10-Q
for the quarter ended
March 31, 2003
(File No. 0-17254). |
|
|
|
|
|
10.23
|
|
Agreement between Shire US Inc. and
Noven, dated June 15, 2004 (with certain
provisions omitted pursuant to Rule
24b-2).**
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 10-Q
for the quarter
ended June 30, 2004
(File No. 0-17254). |
|
|
|
|
|
10.24
|
|
Agreement between Shire Pharmaceuticals
Ireland Limited and Noven dated March 6,
2006.**
|
|
Incorporated by
reference to
Exhibit 10.27 of
Novens Form 10-K
for the year ended
December 31, 2005
(File No. 0-17254). |
|
|
|
|
|
10.25
|
|
Form of Incentive Stock Option Agreement.*
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 10-Q
for the quarter
ended September 30,
2004 (File No.
0-17254). |
|
|
|
|
|
10.26
|
|
Form of Non-Qualified Stock Option
Agreement.*
|
|
Incorporated by
reference to
Exhibit 10.2 of
Novens Form 10-Q
for the quarter
ended September 30,
2004 (File No.
0-17254). |
|
|
|
|
|
10.27
|
|
Form of Non-Qualified Stock Option
Agreement (Non-Employee Director).*
|
|
Incorporated by
reference to
Exhibit 10.3 of
Novens Form 10-Q
for the quarter
ended September 30,
2004 (File No.
0-17254). |
|
|
|
|
|
10.28
|
|
Industrial Long-Term Lease, dated
February 22, 2005, between Noven and
Deerwood Commerce Center LLC.**
|
|
Incorporated by
reference to
Exhibit 10.37 of
Novens Form 10-K
for the year ended
December 31, 2004
(File No. 0-17254). |
96
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Method of Filing |
|
|
|
|
|
10.29
|
|
Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation
Plan, as amended and restated on
November 18, 2008.*
|
|
Filed herewith. |
|
|
|
|
|
10.30
|
|
Form of Stock Appreciation Rights
Agreement (Employee).*
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 10-Q
for the quarter
ended March 31,
2006 (File No.
0-17254). |
|
|
|
|
|
10.31
|
|
Form of Restricted Stock Agreement.*
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 8-K
dated May 22, 2006
(File No. 0-17254). |
|
|
|
|
|
10.32
|
|
Agreement and Plan of Merger, dated
July 9, 2007, by and among
Noven Pharmaceuticals, Inc., Noven
Acquisition, LLC, JDS
Pharmaceuticals, LLC, and Satow
Associates, LLC.**
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 8-K
dated July 10, 2007
(File No. 0-17254). |
|
|
|
|
|
10.33
|
|
Letter Agreement by and between
Shire Pharmaceuticals Ireland
Limited and Noven
dated November 5, 2008.
|
|
Filed herewith. |
|
|
|
|
|
10.34
|
|
Non-Competition Agreement between
Noven and Phillip Satow, dated
August 14, 2007.*
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 8-K
dated August 20,
2007 (File No.
0-17254). |
|
|
|
|
|
10.35
|
|
Asset Purchase Agreement by and
between Synthon Pharmaceuticals,
Inc. and JDS Pharmaceuticals, LLC
dated October 17, 2005 (with
certain provisions omitted pursuant
to Rule 24b-2).**
|
|
Incorporated by
reference to
Exhibit 10.3 of
Novens Form 10-Q
for the quarter
ended September 30,
2007 (File No.
0-17254). |
|
|
|
|
|
10.36
|
|
Development, License and Supply
Agreement by and between Banner
Pharmacaps Inc. and JDS
Pharmaceuticals, LLC dated April
26, 2007 (with certain provisions
omitted pursuant to Rule 24b-2).**
|
|
Incorporated by
reference to
Exhibit 10.4 of
Novens Form 10-Q
for the quarter
ended September 30,
2007 (File No.
0-17254). |
97
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Method of Filing |
|
|
|
|
|
10.37
|
|
Amendment to Development, License and
Supply Agreement by and between Banner
Pharmacaps Inc. and Noven Therapeutics,
LLC dated December 23, 2008.
|
|
Filed herewith. |
|
|
|
|
|
10.38
|
|
Contract Manufacturing Agreement
between OSG Norwich Pharmaceuticals,
Inc. and JDS Pharmaceuticals, LLC dated
November 1, 2005 (with certain
provisions omitted pursuant to Rule
24b-2).**
|
|
Incorporated by
reference to
Exhibit 10.5 of
Novens Form 10-Q
for the quarter
ended September 30,
2007 (File No.
0-17254). |
|
|
|
|
|
10.39
|
|
Separation Agreement between Robert C.
Strauss and Noven, dated January 2,
2008.*
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 8-K
dated January 3,
2008 (File No.
0-17254). |
|
|
|
|
|
10.40
|
|
Form of Restricted Stock Unit
Agreement.*
|
|
Incorporated by
reference to
Exhibit 10.2 of
Novens Form 8-K
dated January 3,
2008 (File No.
0-17254). |
|
|
|
|
|
10.41
|
|
Letter Agreement between Jeffrey F.
Eisenberg and Noven, dated January 2,
2008.*
|
|
Incorporated by
reference to
Exhibit 10.3 of
Novens Form 8-K
dated January 3,
2008 (File No.
0-17254). |
|
|
|
|
|
10.42
|
|
Restricted Stock Agreement between
Jeffrey F. Eisenberg and Noven, dated
January 2, 2008.*
|
|
Incorporated by
reference to
Exhibit 10.4 of
Novens Form 8-K
dated January 3,
2008 (File No.
0-17254). |
|
|
|
|
|
10.43
|
|
Manufacturing and Supply Agreement
between ANI Pharmaceuticals, Inc. and
Noven Therapeutics, LLC (f/k/a, JDS
Pharmaceuticals, LLC) dated January 2,
2008 (with certain provisions omitted
pursuant to Rule 24b-2).**
|
|
Incorporated by
reference to
Exhibit 10.48 of
Novens Form 10-K
for the year ended
December 31, 2007
(File No. 0-17254). |
|
|
|
|
|
10.44
|
|
Employment Agreement between Peter
Brandt and Noven, dated April 29,
2008.*
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 8-K
dated May 5, 2008
(File No. 0-17254). |
98
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Method of Filing |
|
|
|
|
|
10.45
|
|
Restricted Stock Agreement between Peter
Brandt and Noven, dated April 29, 2008.*
|
|
Incorporated by
reference to
Exhibit 10.2 of
Novens Form 8-K
dated May 5, 2008
(File No. 0-17254). |
|
|
|
|
|
10.46
|
|
Stock Appreciation Rights Agreement
between Peter Brandt and Noven, dated
April 29, 2008.*
|
|
Incorporated by
reference to
Exhibit 10.3 of
Novens Form 8-K
dated May 5, 2008
(File No. 0-17254). |
|
|
|
|
|
10.47
|
|
Amended and Restated Restricted Stock
Agreement between Peter Brandt and
Noven, dated May 28, 2008.*
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 8-K
dated June 2, 2008
(File No. 0-17254). |
|
|
|
|
|
10.48
|
|
Development and License Agreement
between Noven and Procter & Gamble
Pharmaceuticals, Inc., dated June 30,
2008 (with certain provisions omitted
pursuant to Rule 24b-2).**
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 10-Q
for the quarter
ended September 30,
2008 (File No.
0-17254). |
|
|
|
|
|
10.49
|
|
Supply Agreement among Noven, Procter &
Gamble Pharmaceuticals, Inc. and P&G
Pharmaceuticals S.A.R.L., dated August
14, 2008 (with certain provisions
omitted pursuant to Rule 24b-2).**
|
|
Incorporated by
reference to
Exhibit 10.2 of
Novens Form 10-Q
for the quarter
ended September 30,
2008 (File No.
0-17254). |
|
|
|
|
|
10.50
|
|
Credit Agreement between Noven and
SunTrust Bank, dated July 31, 2008.
|
|
Incorporated by
reference to
Exhibit 10.1 of
Novens Form 8-K
dated August 6,
2008 (File No.
0-17254). |
|
|
|
|
|
11
|
|
Computation of Earnings (Loss) per Share.
|
|
Filed herewith. |
|
|
|
|
|
21
|
|
Subsidiaries of the Registrant.
|
|
Filed herewith. |
|
|
|
|
|
23.1
|
|
Consent of Deloitte & Touche LLP.
|
|
Filed herewith. |
|
|
|
|
|
23.2
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
Filed herewith. |
99
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Method of Filing |
|
|
|
|
|
31.1
|
|
Certification of Peter Brandt,
President and Chief Executive
Officer, pursuant to Securities
Exchange Act Rules 13a-15(c) and
15d-15(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
Filed herewith. |
|
|
|
|
|
31.2
|
|
Certification of Michael D. Price,
Vice President and Chief Financial
Officer, pursuant to Securities
Exchange Act Rules 13a-15(c) and
15d-15(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
Filed herewith. |
|
|
|
|
|
32.1
|
|
Certification of Peter Brandt,
President and Chief Executive
Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant
to Section 906 of the
Sarbanes-Oxley Act of 2002.***
|
|
Furnished herewith. |
|
|
|
|
|
32.2
|
|
Certification of Michael D. Price,
Vice President and Chief Financial
Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant
to Section 906 of the
Sarbanes-Oxley Act of 2002.***
|
|
Furnished herewith. |
|
|
|
* |
|
Compensation Plan or Agreement. |
|
** |
|
Certain exhibits and schedules to this document have not been filed. The Registrant agrees
to furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission
upon request. |
|
*** |
|
Pursuant to Item 601(b)(32) of Regulation S-K, this exhibit is furnished rather than filed
with this Annual Report on Form 10-K. |
100
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 12, 2009 |
NOVEN PHARMACEUTICALS, INC.
|
|
|
By: |
/s/ Peter Brandt
|
|
|
|
Peter Brandt |
|
|
|
President and Chief Executive Officer |
|
|
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.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
By:
|
|
/s/ Peter Brandt
Peter Brandt
President and Chief
Executive Officer
|
|
Principal Executive
Officer
|
|
March 12, 2009 |
|
|
|
|
|
|
|
By:
|
|
/s/ Michael D. Price
Michael D. Price
Vice President and
Chief Financial Officer
|
|
Principal Financial
and Accounting Officer
|
|
March 12, 2009 |
|
|
|
|
|
|
|
By:
|
|
/s/ Wayne P. Yetter
Wayne P. Yetter
|
|
Chairman of the Board
and Director
|
|
March 12, 2009 |
|
|
|
|
|
|
|
By:
|
|
/s/ Sidney Braginsky
Sidney Braginsky
|
|
Director
|
|
March 12, 2009 |
|
|
|
|
|
|
|
By:
|
|
/s/ John G. Clarkson, M.D.
John G. Clarkson, M.D.
|
|
Director
|
|
March 12, 2009 |
|
|
|
|
|
|
|
By:
|
|
/s/ Donald A. Denkhaus
Donald A. Denkhaus
|
|
Director
|
|
March 12, 2009 |
|
|
|
|
|
|
|
By:
|
|
/s/ Pedro P. Granadillo
Pedro P. Granadillo
|
|
Director
|
|
March 12, 2009 |
|
|
|
|
|
|
|
By:
|
|
/s/ Phillip M. Satow
Phillip M. Satow
|
|
Director
|
|
March 12, 2009 |
|
|
|
|
|
|
|
By:
|
|
/s/ Robert G. Savage
Robert G. Savage
|
|
Director
|
|
March 12, 2009 |
101
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS: |
|
|
|
|
|
|
|
|
|
|
|
|
104 |
|
|
|
|
|
|
|
|
|
105 |
|
|
|
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
|
|
108 |
|
|
|
|
|
|
VIVELLE VENTURES, LLC |
|
|
|
|
(d/b/a NOVOGYNE PHARMACEUTICALS) |
|
|
|
|
(a significant unconsolidated joint venture) |
|
|
|
|
|
|
|
|
|
|
|
|
158 |
|
|
|
|
|
|
FINANCIAL STATEMENTS: |
|
|
|
|
|
|
|
|
|
|
|
|
159 |
|
|
|
|
|
|
|
|
|
160 |
|
|
|
|
|
|
|
|
|
161 |
|
|
|
|
|
|
|
|
|
162 |
|
|
|
|
|
|
|
|
|
163 |
|
102
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Noven Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Noven Pharmaceuticals, Inc. and
subsidiaries (Noven) as of December 31, 2008 and 2007, and the related consolidated statements of
operations, change in stockholders equity, and cash flows for each of the three years in the
period ended December 31, 2008. Our audits also included the financial statement schedule listed
in the Index at Item 15. These financial statements and financial statement schedule are the
responsibility of Novens management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits. We did not audit the financial
statements of Vivelle Ventures LLC (d/b/a Novogyne Pharmaceuticals), Novens investment in which is
accounted for by use of the equity method, for the years ended December 31, 2008, 2007, and 2006.
Novens investment in Vivelle Ventures LLC of $24,319,000 and $24,310,000 at December 31, 2008 and
2007, respectively, and Novens share of that joint ventures income of $45,642,000, $35,850,000,
and $28,632,000 for the years ended December 31, 2008, 2007, and 2006, respectively, are included
in the accompanying consolidated financial statements. Such financial statements of Vivelle
Ventures LLC were audited by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for such joint venture, is based solely on the report
of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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 and the report of the other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such consolidated
financial statements present fairly, in all material respects, the financial position of Noven
Pharmaceuticals, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2008,
in conformity with accounting principles generally accepted in the United States of America. Also,
in our opinion,
such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Novens internal control over financial reporting as of December 31, 2008,
based on the criteria established in Internal ControlIntegrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report
dated March 12, 2009,
expressed an unqualified opinion on Novens internal control over financial reporting based on our
audit.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, FL
March 12, 2009
103
NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
62,875 |
|
|
$ |
13,973 |
|
Short-term investments available-for-sale, at fair value |
|
|
3,650 |
|
|
|
21,565 |
|
Accounts receivable (less allowances of $509
at 2008 and $252 at 2007) |
|
|
8,577 |
|
|
|
6,956 |
|
Accounts receivable Novogyne, net |
|
|
6,510 |
|
|
|
8,683 |
|
Inventories |
|
|
13,924 |
|
|
|
12,136 |
|
Net deferred income tax asset, current portion |
|
|
7,026 |
|
|
|
7,614 |
|
Prepaid income taxes |
|
|
8,178 |
|
|
|
4,925 |
|
Prepaid and other current assets |
|
|
2,898 |
|
|
|
5,251 |
|
|
|
|
|
|
|
|
|
|
|
113,638 |
|
|
|
81,103 |
|
|
|
|
|
|
|
|
Non-current Assets: |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
34,886 |
|
|
|
36,213 |
|
Investments in auction rate securities |
|
|
11,810 |
|
|
|
32,835 |
|
Investment in Novogyne |
|
|
24,319 |
|
|
|
24,310 |
|
Net deferred income tax asset, non-current portion |
|
|
65,159 |
|
|
|
58,053 |
|
Intangible assets, net |
|
|
36,508 |
|
|
|
38,773 |
|
Goodwill |
|
|
14,407 |
|
|
|
14,734 |
|
Deposits and other non-current assets |
|
|
839 |
|
|
|
677 |
|
|
|
|
|
|
|
|
|
|
|
187,928 |
|
|
|
205,595 |
|
|
|
|
|
|
|
|
|
|
$ |
301,566 |
|
|
$ |
286,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
7,384 |
|
|
$ |
8,399 |
|
Accrued compensation and related liabilities |
|
|
7,958 |
|
|
|
9,801 |
|
Other accrued liabilities |
|
|
17,260 |
|
|
|
15,270 |
|
Current portion of long-term obligations |
|
|
3,396 |
|
|
|
3,421 |
|
Deferred product revenue Stavzor® |
|
|
1,537 |
|
|
|
|
|
Deferred license and contract revenues, current portion |
|
|
25,459 |
|
|
|
20,188 |
|
|
|
|
|
|
|
|
|
|
|
62,994 |
|
|
|
57,079 |
|
|
|
|
|
|
|
|
Non-current Liabilities: |
|
|
|
|
|
|
|
|
Long-term obligations, less current portion |
|
|
27 |
|
|
|
8,438 |
|
Deferred license and contract revenues, non-current portion |
|
|
77,112 |
|
|
|
85,056 |
|
Other non-current liabilities |
|
|
997 |
|
|
|
1,831 |
|
|
|
|
|
|
|
|
|
|
|
78,136 |
|
|
|
95,325 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
141,130 |
|
|
|
152,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Notes 7, 16 and 19) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Preferred stock authorized 100,000 shares par
value $.01 per share; no shares issued or outstanding |
|
|
|
|
|
|
|
|
Common stock authorized 80,000,000 shares,
par value $.0001 per share; 25,235,763 and 24,881,867 issued and outstanding at
December 31, 2008 and 2007 |
|
|
3 |
|
|
|
2 |
|
Additional paid-in capital |
|
|
123,290 |
|
|
|
118,561 |
|
Retained earnings |
|
|
42,267 |
|
|
|
20,855 |
|
Treasury
stock, at cost 322,345 shares at December 31, 2008
and 2007 |
|
|
(5,124 |
) |
|
|
(5,124 |
) |
Common stock held in trust |
|
|
(1,569 |
) |
|
|
(950 |
) |
Deferred compensation obligation |
|
|
1,569 |
|
|
|
950 |
|
|
|
|
|
|
|
|
|
|
|
160,436 |
|
|
|
134,294 |
|
|
|
|
|
|
|
|
|
|
$ |
301,566 |
|
|
$ |
286,698 |
|
|
|
|
|
|
|
|
The
accompanying notes to consolidated financial statements are an
integral part of these financial statements.
104
NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues Novogyne: |
|
|
|
|
|
|
|
|
|
|
|
|
Product sales, net |
|
$ |
21,308 |
|
|
$ |
22,425 |
|
|
$ |
19,714 |
|
Royalties |
|
|
8,411 |
|
|
|
7,458 |
|
|
|
6,845 |
|
|
|
|
|
|
|
|
|
|
|
Total net product revenues Novogyne |
|
|
29,719 |
|
|
|
29,883 |
|
|
|
26,559 |
|
Product revenues, net third parties |
|
|
47,908 |
|
|
|
35,553 |
|
|
|
21,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net product revenues |
|
|
77,627 |
|
|
|
65,436 |
|
|
|
48,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and contract revenues |
|
|
30,548 |
|
|
|
17,725 |
|
|
|
12,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
108,175 |
|
|
|
83,161 |
|
|
|
60,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold Novogyne |
|
|
15,134 |
|
|
|
13,683 |
|
|
|
14,102 |
|
Cost of products sold third parties |
|
|
36,727 |
|
|
|
27,334 |
|
|
|
22,406 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of products sold |
|
|
51,861 |
|
|
|
41,017 |
|
|
|
36,508 |
|
Acquired in-process research and
development |
|
|
|
|
|
|
100,150 |
|
|
|
|
|
Research and development |
|
|
15,527 |
|
|
|
13,978 |
|
|
|
11,454 |
|
Selling and marketing |
|
|
23,299 |
|
|
|
9,160 |
|
|
|
967 |
|
General and administrative |
|
|
36,796 |
|
|
|
30,411 |
|
|
|
20,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
127,483 |
|
|
|
194,716 |
|
|
|
69,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of contingent milestone liability |
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(14,308 |
) |
|
|
(111,555 |
) |
|
|
(8,974 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of Novogyne |
|
|
45,642 |
|
|
|
35,850 |
|
|
|
28,632 |
|
Interest and other income, net |
|
|
2,022 |
|
|
|
5,454 |
|
|
|
4,272 |
|
Loss on auction rate securities |
|
|
(515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
32,841 |
|
|
|
(70,251 |
) |
|
|
23,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
11,429 |
|
|
|
(24,875 |
) |
|
|
7,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
21,412 |
|
|
$ |
(45,376 |
) |
|
$ |
15,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
0.87 |
|
|
$ |
(1.84 |
) |
|
$ |
0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
$ |
0.87 |
|
|
$ |
(1.84 |
) |
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
24,617 |
|
|
|
24,728 |
|
|
|
23,807 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
24,729 |
|
|
|
24,728 |
|
|
|
24,252 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
105
NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Treasury |
|
|
|
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Stock |
|
|
Other |
|
|
Total |
|
Balance at December 31, 2005 |
|
|
23,617 |
|
|
$ |
2 |
|
|
$ |
89,846 |
|
|
$ |
50,773 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
140,621 |
|
Exercises of stock options/ SSARs |
|
|
1,040 |
|
|
|
|
|
|
|
13,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,224 |
|
Stock-based compensation expense and
issuance of shares to outside directors |
|
|
4 |
|
|
|
|
|
|
|
3,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,286 |
|
Common stock held in trust |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(375 |
) |
|
|
(375 |
) |
Deferred compensation obligation |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375 |
|
|
|
375 |
|
Tax benefit
from exercises of stock options/SSARs |
|
|
|
|
|
|
|
|
|
|
3,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,556 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,988 |
|
|
|
|
|
|
|
|
|
|
|
15,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
24,661 |
|
|
|
2 |
|
|
|
109,912 |
|
|
|
66,761 |
|
|
|
|
|
|
|
|
|
|
|
176,675 |
|
Cumulative effect, adoption of FIN 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(530 |
) |
|
|
|
|
|
|
|
|
|
|
(530 |
) |
Exercises of stock options/ SSARs |
|
|
162 |
|
|
|
|
|
|
|
2,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,545 |
|
SSARs issued for non-compete agreement |
|
|
|
|
|
|
|
|
|
|
265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265 |
|
Stock-based compensation expense and
issuance of shares to outside directors |
|
|
59 |
|
|
|
|
|
|
|
5,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,381 |
|
Repurchases of shares |
|
|
(322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,124 |
) |
|
|
|
|
|
|
(5,124 |
) |
Common stock held in trust |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(575 |
) |
|
|
(575 |
) |
Deferred compensation obligation |
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
575 |
|
|
|
575 |
|
Tax benefit
from exercises of stock options/SSARs |
|
|
|
|
|
|
|
|
|
|
458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,376 |
) |
|
|
|
|
|
|
|
|
|
|
(45,376 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
24,560 |
|
|
|
2 |
|
|
|
118,561 |
|
|
|
20,855 |
|
|
|
(5,124 |
) |
|
|
|
|
|
|
134,294 |
|
Exercises of stock options/ SSARs |
|
|
19 |
|
|
|
1 |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201 |
|
Stock-based compensation expense and
issuance of shares to outside directors |
|
|
334 |
|
|
|
|
|
|
|
4,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,836 |
|
Tax benefit adjustments |
|
|
|
|
|
|
|
|
|
|
(307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(307 |
) |
Common stock held in trust |
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(619 |
) |
|
|
(619 |
) |
Deferred compensation obligation |
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
619 |
|
|
|
619 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,412 |
|
|
|
|
|
|
|
|
|
|
|
21,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
24,913 |
|
|
$ |
3 |
|
|
$ |
123,290 |
|
|
$ |
42,267 |
|
|
$ |
(5,124 |
) |
|
$ |
|
|
|
$ |
160,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
106
NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
21,412 |
|
|
$ |
(45,376 |
) |
|
$ |
15,988 |
|
Adjustments to reconcile net income (loss) to net cash flows
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and certain other noncash items |
|
|
8,994 |
|
|
|
6,762 |
|
|
|
4,340 |
|
Disposal of property, plant and equipment |
|
|
656 |
|
|
|
98 |
|
|
|
89 |
|
Inventory write-offs |
|
|
5,040 |
|
|
|
1,186 |
|
|
|
1,538 |
|
Reversal of contingent milestone liability |
|
|
(5,000 |
) |
|
|
|
|
|
|
|
|
Loss on auction rate securities |
|
|
515 |
|
|
|
|
|
|
|
|
|
Stock based compensation expense |
|
|
4,836 |
|
|
|
5,381 |
|
|
|
3,286 |
|
Acquired in-process research and development expense |
|
|
|
|
|
|
100,150 |
|
|
|
|
|
Income tax
benefits on stock-based awards/SSARs |
|
|
311 |
|
|
|
458 |
|
|
|
3,556 |
|
Excess tax benefit from exercise of stock options |
|
|
|
|
|
|
(370 |
) |
|
|
(2,590 |
) |
Deferred income tax benefit |
|
|
(6,518 |
) |
|
|
(52,601 |
) |
|
|
(335 |
) |
Recognition of deferred license and contract revenues |
|
|
(30,548 |
) |
|
|
(17,725 |
) |
|
|
(12,363 |
) |
Equity in earnings of Novogyne |
|
|
(45,642 |
) |
|
|
(35,850 |
) |
|
|
(28,632 |
) |
Distributions from Novogyne |
|
|
42,033 |
|
|
|
28,844 |
|
|
|
26,368 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable trade, net |
|
|
(1,621 |
) |
|
|
2,928 |
|
|
|
(27,119 |
) |
Decrease in milestone payment receivable Shire |
|
|
|
|
|
|
25,000 |
|
|
|
|
|
Decrease (increase) in accounts receivable Novogyne, net |
|
|
2,173 |
|
|
|
(990 |
) |
|
|
1,219 |
|
Increase in inventories |
|
|
(6,828 |
) |
|
|
(2,416 |
) |
|
|
(2,328 |
) |
Decrease in prepaid income taxes |
|
|
347 |
|
|
|
4,483 |
|
|
|
6,492 |
|
Decrease (increase) in prepaid and other current assets |
|
|
1,573 |
|
|
|
(2,731 |
) |
|
|
(1,053 |
) |
Increase in deposits and other assets |
|
|
(255 |
) |
|
|
|
|
|
|
(15 |
) |
Decrease in accounts payable and accrued expenses |
|
|
(776 |
) |
|
|
(3,743 |
) |
|
|
(6,116 |
) |
(Decrease) increase in accrued compensation and related liabilities |
|
|
(1,806 |
) |
|
|
3,121 |
|
|
|
(463 |
) |
Increase (decrease) in other accrued liabilities |
|
|
1,106 |
|
|
|
4,716 |
|
|
|
(39 |
) |
Increase in deferred license and contract revenues |
|
|
27,875 |
|
|
|
32,125 |
|
|
|
78,012 |
|
Increase in deferred product revenue Stavzor® |
|
|
1,537 |
|
|
|
|
|
|
|
|
|
Increase in other liabilities |
|
|
183 |
|
|
|
919 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities |
|
|
19,597 |
|
|
|
54,369 |
|
|
|
60,027 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(3,820 |
) |
|
|
(2,753 |
) |
|
|
(6,261 |
) |
Payments for intangible assets |
|
|
(1,997 |
) |
|
|
(181 |
) |
|
|
(616 |
) |
Acquisition of JDS, net of cash acquired |
|
|
|
|
|
|
(130,360 |
) |
|
|
|
|
Purchase of company-owned life insurance |
|
|
(335 |
) |
|
|
(260 |
) |
|
|
(185 |
) |
Purchases of investments |
|
|
(62,800 |
) |
|
|
(1,568,598 |
) |
|
|
(1,298,424 |
) |
Proceeds from sale of investments |
|
|
101,225 |
|
|
|
1,658,653 |
|
|
|
1,171,975 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities |
|
|
32,273 |
|
|
|
(43,499 |
) |
|
|
(133,511 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock from exercise of stock options/SSARs |
|
|
201 |
|
|
|
2,545 |
|
|
|
13,224 |
|
Purchase of treasury stock |
|
|
|
|
|
|
(5,124 |
) |
|
|
|
|
Excess tax benefit from exercise of stock options |
|
|
|
|
|
|
370 |
|
|
|
2,590 |
|
Payments of long-term obligations |
|
|
(3,169 |
) |
|
|
(3,832 |
) |
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by financing activities |
|
|
(2,968 |
) |
|
|
(6,041 |
) |
|
|
15,664 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
48,902 |
|
|
|
4,829 |
|
|
|
(57,820 |
) |
Cash and cash equivalents, beginning of year |
|
|
13,973 |
|
|
|
9,144 |
|
|
|
66,964 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
62,875 |
|
|
$ |
13,973 |
|
|
$ |
9,144 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
107
NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. |
|
DESCRIPTION OF BUSINESS: |
Since its incorporation in Delaware in 1987, Noven Pharmaceuticals, Inc. (Noven) has been
primarily engaged in the research, development, manufacturing, licensing, marketing and sale of
prescription pharmaceutical products.
Noven and Novartis Pharmaceuticals Corporation (Novartis) established a joint venture,
Vivelle Ventures LLC (d/b/a Novogyne Pharmaceuticals) (Novogyne), effective May 1, 1998, to
market and sell womens prescription healthcare products in the United States and Canada.
These products include Novens transdermal hormone therapy product delivery systems marketed
under the brand names Vivelle-Dot® and CombiPatch®.
On August 14, 2007 (the Closing Date), Noven acquired Noven Therapeutics, LLC (f/k/a JDS
Pharmaceuticals, LLC (JDS)), a privately-held specialty pharmaceutical company that
currently markets and sells three branded prescription psychiatry products through a targeted
sales force. In connection with the acquisition, Noven also acquired a product pipeline which
included Mesafem, a developmental non-hormonal product for vasomotor symptoms (hot flashes),
and Noven is advancing the clinical development of Mesafem.
Noven accounted for the acquisition
of Noven Therapeutics using the purchase method of accounting and the results of operations of
Noven Therapeutics have been included in Novens consolidated
results beginning on the Closing Date (see Note 4 Acquisition of Noven Therapeutics, LLC).
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: |
|
|
|
BASIS OF CONSOLIDATION: |
The consolidated financial statements include the accounts of Noven Pharmaceuticals, Inc.
and its wholly-owned subsidiaries. All intercompany accounts and transactions have been
eliminated. Noven accounts for its 49% investment in Novogyne under the equity method of
accounting and reports its share of Novogynes earnings as Equity in earnings of Novogyne on
its Consolidated Statements of Operations. Noven defers the recognition of 49% of its profit on
products sold to Novogyne until the products are sold by Novogyne to third party customers.
SEGMENT INFORMATION:
Noven operates in three segments distinguished along product categories and nature of the
business unit: (i) Noven Transdermals, which currently engages in the manufacturing, licensing
and sale to partners of prescription transdermal products; (ii) Novogyne, the womens health
joint venture between Noven and Novartis in which Noven owns a 49%
equity interest; and (iii)
Noven Therapeutics, which currently engages in the marketing and sale of pharmaceutical
products. Historically, Novogyne was viewed as a component of the Noven Transdermals unit
because the joint ventures primary activity involves the marketing and sale in the United
States and Canada of patches manufactured by Noven Transdermals. In the fourth quarter of 2008,
as a result of management and organizational changes throughout
108
2008, Noven revised its
presentation of reportable segments to reflect the joint venture as a reportable unit distinct
from the manufacturing and licensing activities of Noven Transdermals. This view is consistent
with the manner in which information is reported for management decision making. See Note 17
Segment and Customer Data for Novens segment financial reporting.
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates made by management include: (i) revenue recognition,
including specific estimates related to: (a) separating deliverables related to collaborative
agreements into separate units of accounting and then recognizing revenues for those separated
units at their fair values as earned; (b) estimating when the license period begins and
determining the period of recognition over which revenues will be earned; (c) contract
revenues, consisting of development fees and milestone payments that require estimates of
proportional performance of work completed; and (d) estimating sales allowances and returns;
(ii) determining the useful lives and method used for amortizing intangible assets; (iii)
determining the fair value of employee equity awards in order to determine compensation
expense; (iv) the valuation of inventories and the allocation of overhead expenses; (v) the
allocation of purchase price to acquired assets including identifiable intangibles and
goodwill; (vi) determination of the economic lives of intangible assets; (vii) estimates of
cash flows used to assess the recoverability and fair values of intangible assets and goodwill;
(viii) determination of the net realizable value of the net deferred tax asset, estimation of
the effective tax rate and income and other tax accruals; and (ix) valuation of auction rate
securities.
The most significant estimates made by the management of Novogyne impacting Novens
consolidated financial statements include: (i) Novogynes testing for impairment of the
long-term intangible asset related to the acquisition of the marketing rights to
CombiPatch®; (ii) Novogynes estimates related to sales allowances and returns at
Novogyne (which impacts estimates in Novens financial statements); and (iii) Novogynes
provisions for product liability claims and anticipated recovery of insurance related
receivables.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include all highly liquid investments with an original maturity
of three months or less at the date of purchase. Cash and cash equivalents as of December 31,
2008 and 2007, consisted primarily of overnight money market accounts, time deposits,
commercial paper and money market funds with original maturities of three months or less at the
date of purchase.
INVESTMENTS AVAILABLE-FOR-SALE:
Beginning in 2005, Noven invested a portion of its cash in investments, consisting
primarily of investment grade, asset backed, variable rate debt obligations and auction rate securities, which are classified as available-for-sale under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 115 Accounting for Certain Investments in Debt
and Equity Securities (SFAS No. 115). In
109
accordance with SFAS No. 115, these investments
are reported in the Consolidated Balance Sheets at fair value. Any unrealized gains and losses
deemed to be of a temporary nature are included in comprehensive income (loss) as a separate
component of stockholders equity, net of applicable taxes. Unrealized losses determined to
represent other-than-temporary declines in fair value are charged to operations in the period
such determination is made.
As of December 31, 2008 and 2007, Novens investments in securities, which are classified
as available-for-sale, consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Tax-exempt variable rate demand bonds |
|
$ |
|
|
|
$ |
4,000 |
|
Tax-exempt auction rate securities |
|
|
3,650 |
|
|
|
17,565 |
|
|
|
|
|
|
|
|
Investments, current |
|
|
3,650 |
|
|
|
21,565 |
|
|
|
|
|
|
|
|
|
|
Tax-exempt auction rate securities, non-current |
|
|
11,810 |
|
|
|
32,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities |
|
$ |
15,460 |
|
|
$ |
54,400 |
|
|
|
|
|
|
|
|
As further discussed in Note 19, Commitments and Contingencies Credit Facility, in
connection with the $15.0 million credit facility obtained in July 2008, Noven agreed not to
pledge, grant any security interest in, or allow any lien or encumbrance in or on, certain of
Novens financial assets, including its investments in auction rate securities.
INVENTORIES:
Inventories consist primarily of raw materials, work in process and finished goods for
Novens commercial branded products and under certain circumstances may include pre-launch
branded and generic products. Inventory costs include material, labor and manufacturing
overhead. As appropriate, Noven reflects provisions necessary to reduce the carrying value of
its inventories to net realizable value. Certain raw materials and components used in the
manufacture of its products (including essential polymer adhesives and other critical
components) are available from limited sources, and in some cases, a single source. In
addition, the Drug Enforcement Agency (DEA) controls access to controlled substances,
including methylphenidate, the active ingredient in Daytrana®. Manufacturers of
products containing controlled substances must annually apply to the DEA for procurement quota
in order to obtain these substances for manufacturing.
Other than products produced for commercial sale or to meet the requirements for
production of pre-launch inventories, Novens policy is to immediately expense all inventory
purchased for research and development purposes.
During 2008, Noven recorded a $5.0 million charge to cost of products sold related to the
write-off of inventories. These write-offs were primarily related to an equipment failure in
transdermal manufacturing during the three months ended March 31, 2008 which resulted in
110
$1.8
million of write-offs of products manufactured for Novogyne and $1.0 million of third party HT
product write-offs, as well as inventory write-offs during 2008 of approximately $1.5 million
due to Daytrana® product and $0.7 million related to scrap and expired material in
the ordinary course of business.
Shire plc (Shire) retains title to the active methylphenidate ingredient (AMI) in
Daytrana®. The value of the AMI is neither included in Daytrana® product
revenues nor in Novens cost of products sold. Noven bears certain manufacturing risks of loss
related to the AMI. These risks include the contractual obligation of Noven to reimburse Shire
for the cost of AMI if Noven does not meet certain minimum yields of the finished product.
Shire has a reciprocal obligation to pay Noven if the yield requirements are exceeded. Amounts
paid by Shire to Noven for exceeding such yield requirements for 2008 and 2007 were not
material. During 2008 and 2007, Noven used $5.7 million and $5.9 million of Shires AMI in the
finished product, respectively, and had $2.6 million of Shires consignment AMI inventory on
hand at December 31, 2008 and 2007, which is not reflected in the table below.
Inventories are stated at the lower of cost (first-in, first-out method, or FIFO) or
market. Noven evaluates lower of cost or market separately for commercial and pre-launch
inventories. In evaluating whether inventory is stated at the lower of cost or market,
management considers such factors as the amount of inventory on hand, remaining shelf life and
current and expected orders from Novens collaboration partners and customers based on market
conditions, including levels of competition.
The following are the major classes of inventories as of December 31, 2008 and 2007
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Finished goods |
|
$ |
3,200 |
|
|
$ |
3,171 |
|
Work in process |
|
|
2,510 |
|
|
|
1,532 |
|
Raw materials |
|
|
8,214 |
|
|
|
7,433 |
|
|
|
|
|
|
|
|
|
|
$ |
13,924 |
|
|
$ |
12,136 |
|
|
|
|
|
|
|
|
COST OF PRODUCTS SOLD:
Direct and indirect costs of manufacturing are included in cost of products sold.
Indirect costs include overhead costs, which consist of salaries and benefits, supplies and
tools, equipment costs, depreciation and insurance costs and represent a substantial portion of
Novens inventory production costs. Noven uses a standard costing system to estimate its
actual FIFO cost of inventory at the end of each reporting period. Abnormal amounts of idle
facility expense, freight, handling costs and spoilage are charged to operations as incurred in
accordance with SFAS No. 151 Inventory Costs, an amendment of ARB No. 43, Chapter 4.
111
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following at December 31, 2008 and 2007 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
|
Useful Lives |
|
|
|
2008 |
|
|
2007 |
|
|
(in years) |
|
Land |
|
$ |
2,540 |
|
|
$ |
2,540 |
|
|
|
|
|
Building and improvements |
|
|
3,279 |
|
|
|
3,416 |
|
|
|
40 |
|
Leased property and leasehold improvements |
|
|
22,111 |
|
|
|
22,400 |
|
|
|
10-31 |
|
Manufacturing and other equipment |
|
|
22,992 |
|
|
|
26,181 |
|
|
|
3-10 |
|
Furniture |
|
|
2,017 |
|
|
|
2,628 |
|
|
|
10 |
|
Software and software development costs |
|
|
6,657 |
|
|
|
5,141 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,596 |
|
|
|
62,306 |
|
|
|
|
|
Less accumulated depreciation and
amortization |
|
|
(24,710 |
) |
|
|
(26,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34,886 |
|
|
$ |
36,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment are recorded at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets ranging up to 40 years.
Leasehold improvements are amortized over the shorter of the lease term or the estimated useful
life of the improvements. Major renewals and betterments are capitalized, while maintenance
repairs and minor renewals are expensed as incurred. During 2008, 2007 and 2006, depreciation
expense totaled $4.3 million, $4.4 million and $4.0 million, respectively. During 2008,
property, plant and equipment were retired, which had an original cost of $6.3 million and a
net book value of $0.7 million.
IMPAIRMENT OF LONG-LIVED ASSETS:
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable.
When factors indicate that an asset should be evaluated for possible impairment, Noven reviews
such long-lived asset to assess recoverability from future operations using undiscounted cash
flows. If it is determined that an assets carrying value will not be recovered through
operations, then an impairment would be recognized in earnings to the extent that carrying value
exceeds fair value. Fair value is determined based on market quotes, if available, or is based
on valuation techniques.
GOODWILL AND INTANGIBLE ASSETS:
Intangible assets are stated at cost less accumulated amortization. Amortization is
generally recorded by either the pattern in which the economic benefit is expected to be
realized or the straight-line method as appropriate. Noven reviews the original estimated useful
lives of assets as well as the pattern in which the economic benefit is expected to be realized
at least annually and makes adjustments when events indicate that the period and the pattern of
economic benefit should be adjusted.
112
Noven accounts for acquired businesses using the purchase method of accounting, which
requires that the assets acquired and liabilities assumed be recorded at the date of acquisition
at their respective estimated fair values. In accordance with SFAS No. 141, Business
Combinations, which applied to acquisitions prior to January 1, 2009, the cost to acquire a
business, including transaction costs, was allocated to the underlying net assets of the
acquired business based on estimates of their respective fair values. Amounts allocated to
acquired in-process research and development were charged to operations at the date of
acquisition (see Note 4 Acquisition of Noven Therapeutics, LLC).
Acquisitions completed after December 31, 2008 will be accounted for accordance with SFAS No.
141 (R), Business Combinations. Under SFAS No. 141 (R), assets used in research and
development activities will be initially recognized and measured at fair value and transaction
costs will be charged to operations rather than being included as a component of the purchase
price. Under either approach, finite-lived intangible assets are amortized over the expected
lives of the assets. Any excess of the purchase price over the estimated fair values of the net
assets acquired is recorded as goodwill.
The judgments made in determining the estimated fair values assigned to each class of
assets acquired and liabilities assumed, as well as asset lives, can materially impact Novens
results of operations. Fair values and useful lives are determined based on, among other
factors, the expected future period of benefit of the asset, the various characteristics of the
asset and projected cash flows. This process requires Noven to make estimates with respect to
future sales volumes, pricing, new product launches, anticipated product costs and overall
market conditions. Because these estimates influence the values assigned to the various assets
acquired, these estimates are considered to be critical accounting estimates. As a result of
Novens acquisition of Noven Therapeutics, in addition to the value of acquired tangible assets
and assumed liabilities, Noven ultimately recorded on its balance sheet $39.1 million of
identifiable intangible assets and $14.4 million of goodwill.
All of Novens goodwill arose from the Noven Therapeutics acquisition in August 2007 and,
thus, relates to the Noven Therapeutics segment. Goodwill is tested for impairment annually in
the fourth quarter or more frequently, when events or other changes in circumstances indicate
that the carrying value of goodwill may not be recoverable. If Noven determines at the date of
the evaluation that the fair value of the reporting segment is less than its carrying value,
then Noven would allocate the fair value of the segment to all of the assets and liabilities of
the reporting segment in a manner similar to the allocation of purchase price in a business
combination. A goodwill impairment would be recognized to the extent that the carrying value of
goodwill exceeds the fair value not allocated to identifiable assets. Novens finite-lived
intangible assets are evaluated for impairment whenever events or circumstances indicate that
the carrying amounts may not be recoverable. Noven would recognize an impairment to the extent
that the carrying value of a finite-lived intangible exceeds its fair value. As of December 31,
2008, Noven determined that no impairment of goodwill or intangible assets existed.
PATENT DEVELOPMENT COSTS:
Costs related to the development of patents, principally legal fees, are capitalized and
amortized through cost of products sold over the shorter of the period over which the economic
benefit is expected to be realized or their remaining legal lives.
113
INCOME TAXES:
Income taxes have been accounted for using an asset and liability approach in which
deferred tax assets and liabilities are recognized for the differences between the financial
statement and tax basis of assets and liabilities using enacted tax rates in effect for the
years in which the differences are expected to reverse. A valuation allowance is provided when,
based on available evidence, it is more likely than not that a portion of the deferred tax
assets will not be realized. Deferred tax assets and liabilities are adjusted for changes in
enacted tax rates and laws.
On January 1, 2007, Noven adopted the provisions of, and began accounting for uncertainty
in income taxes in accordance with FASB Interpretation No. (FIN) 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48). This
interpretation requires companies to determine whether it is more likely than not that a tax
position will be sustained upon examination by the appropriate taxing authorities before any
part of the benefit can be recorded in the financial statements. FIN 48 clarifies the accounting
for income taxes by prescribing a minimum recognition threshold a tax position is required to
meet before recognition in the financial statements. FIN 48 requires a two-step approach when
evaluating a tax position based on recognition (Step 1) and measurement (Step 2).
In the ordinary course of business there is inherent uncertainty in quantifying income tax
positions. In accordance with FIN 48, Noven assesses income tax positions and records tax
benefits for all years subject to examination based upon managements evaluation of the facts,
circumstances and information available at the reporting dates. For those income tax positions
with a greater than 50% likelihood of being realized, Noven records the benefit. For those
income tax positions where it is more likely than not that a tax benefit will not be sustained,
no tax benefit is recognized in the consolidated financial statements. When applicable,
associated interest and penalties are recognized as a component of interest expense. The impact
of the adoption of FIN 48 is described in Note 16 Income Taxes.
COMMITMENTS AND CONTINGENCIES:
Noven accounts for commitments and contingencies in accordance with the provisions of SFAS
No. 5, Accounting for Contingencies (SFAS No. 5). SFAS No. 5 provides that accruals are to
be established for contingencies that are probable and estimable. However, estimating the
amount to accrue usually requires significant judgment. See Note 7 Contract and License
Agreements, Note 16 Income Taxes and Note 19 Commitments and Contingencies for
further information.
REVENUE RECOGNITION:
Product Revenues
Product revenues include: (i) revenues on product sales, net of allowances for product
returns and other sales allowances, including allowances for discounts, rebates, and
chargebacks; and (ii) royalties from the sale of certain Noven products by licensees.
Substantially all of Noven Transdermals product revenues relate to the sale of
transdermal product to its licensees, Novogyne, Novartis Pharma AG and its affiliates
(Novartis Pharma), and Shire. All of Noven Therapeutics product revenues relate to the
commercial sale
114
of its three FDA-approved products, Stavzor®, Pexeva® and
Lithobid®. Revenues from product sales are recognized when both title and the risks
and rewards of ownership have been transferred to the buyer. Certain of Noven Transdermals
license agreements provide that the ultimate supply price is based on a percentage of the
licensees net selling price. Each of those agreements sets forth a minimum supply price per
unit that Noven is entitled to receive from the licensee. Revenues under these agreements are
recorded at the minimum price at the time of shipment. Noven records any upward adjustments to
revenues at the time that the information necessary to make the determination is received from
the licensee. If the upward adjustments are not determinable, Noven records the adjustments
when payments from licensees are received. These amounts are included in product revenues.
Product revenues include royalty revenues consisting of royalties payable by Novogyne and
Novartis Pharma on sales of Vivelle-Dot®/Estradot® in the United States
and Canada. Noven accrues royalty revenues and the related receivables each quarter based on
Novogynes and Novartis Pharmas net sales for that quarter.
Product revenues are recorded net of allowances for returns, if any. The methodology used
by Noven to estimate product returns is based on the distribution and expiration dates of the
affected product and overall trade inventory levels. These estimates are based on currently
available information, and the ultimate outcome may be significantly different than the amounts
estimated given the subjective nature and complexities inherent in this area and in the
pharmaceutical industry.
In July 2008, the United States Food and Drug Administration (FDA) granted final
approval for Stavzor® (valproic acid delayed release capsules) for the treatment of
manic episodes associated with bipolar disorder, adjunctive therapy in multiple seizure types
(including epilepsy), and prophylaxis of migraine headaches. In the third quarter of 2008,
Noven made a $1.5 million milestone payment to Banner Pharmacaps Inc. (Banner) upon receiving
FDA approval for Stavzor®. Upfront and milestone payments made to third parties in
connection with research and development collaborations prior to regulatory approval are
expensed as incurred. Payments made to third parties subsequent to regulatory approval are
capitalized and amortized through cost of products sold over the shorter of the period over
which the economic benefit is expected to be realized or their remaining legal lives. Noven
Therapeutics commercially launched Stavzor® in August 2008. Noven sells
Stavzor® to pharmaceutical wholesalers and chain drug stores. These companies have
the right to return Stavzor® for up to one year after product expiration. As a
result of the commercial launch of Stavzor® in the third quarter of 2008, Noven does
not have sufficient sales history to reasonably estimate product returns. Under SFAS No. 48,
Revenue Recognition When Right of Return Exists (SFAS No. 48), Noven cannot recognize
revenue on product shipments until it can reasonably estimate returns relating to these
shipments. In accordance with SFAS No. 48, Noven defers recognition of revenue and the
associated costs on product shipments of Stavzor® to Novens customers until such
time as Stavzor® units are dispensed through patient prescriptions, because Novens
customers are no longer permitted to return the product after it has been dispensed. Noven
estimates the volume of prescription units dispensed at pharmacies based on data provided by
external sources. These sources poll pharmacies, hospitals, mail order and other retail outlets
for Stavzor® prescriptions and project this sample on a national level. Noven will
recognize revenue based on prescription units dispensed until Noven has sufficient
sales history to reasonably estimate its product returns. Noven recognized $0.4 million
of net revenues for Stavzor® in 2008 and $1.5 million remained in deferred product
revenue on Novens Consolidated Balance Sheet as of December 31, 2008.
115
Sales allowances for estimated discounts, rebates, returns, chargebacks and other sales
allowances are established by Noven concurrently with the recognition of revenue. Sales
allowances are established based upon consideration of a variety of factors, including
prescription data, customers inventory reports and other information received from customers
and other third parties related to product in the distribution channel, customers right of
return, historical information by product, the number and timing of competitive products
approved for sale, both historically and as projected, the estimated size of the market for
Novens products, current and projected economic and market conditions, anticipated future
product pricing, future levels of prescriptions for the products and analyses that are
performed. The estimates of prescription data, inventory at customers and in the distribution
channel are subject to the inherent limitations of estimates that rely on third party data, as
certain third party information may itself rely on estimates, and reflect other limitations.
Management believes that the sales allowances are reasonably determinable and are based on the
information available at that time to arrive at its best estimate.
Estimated rebates and returns involve more subjective judgments and are more complex in
nature. Actual product returns, rebates and other sales allowances incurred are dependent upon
future events. Management periodically monitors the factors that influence sales allowances
and makes adjustments to these provisions when it believes that actual results may differ from
established allowances. If conditions in future periods change, revisions to previous
estimates may be required, potentially by significant amounts. Changes in the level of
provisions for estimated product returns, rebates and other sales allowances will affect
revenues.
Sales allowances for estimated discounts, chargebacks and doubtful accounts are recorded
as reductions to accounts receivable. Allowances for product returns, estimated Medicaid,
managed care and certain other rebates are recorded as other accrued liabilities.
Sales allowances included in the Consolidated Balance Sheets as of December 31, 2008 and
December 31, 2007, were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Accounts receivable: |
|
|
|
|
|
|
|
|
Gross receivable |
|
$ |
9,086 |
|
|
$ |
7,208 |
|
Sales allowances and
allowances for doubtful accounts |
|
|
(509 |
) |
|
|
(252 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
8,577 |
|
|
$ |
6,956 |
|
|
|
|
|
|
|
|
Sales allowances: |
|
|
|
|
|
|
|
|
Accrued
Medicaid, Medicare, State programs and other rebates |
|
$ |
2,726 |
|
|
$ |
4,065 |
|
Allowance for product returns |
|
|
3,070 |
|
|
|
1,875 |
|
Other sales allowances |
|
|
594 |
|
|
|
770 |
|
|
|
|
|
|
|
|
Total sales allowances |
|
$ |
6,390 |
|
|
$ |
6,710 |
|
|
|
|
|
|
|
|
116
License Revenues and Multiple Element Arrangements
License revenues consist of the recognition of non-refundable up-front, milestone and
similar payments under license agreements. These agreements may
contain multiple deliverables,
such as product development, technology licenses, contract research and development, and the
manufacturing and supply of products.
Noven recognizes license revenue in accordance with the Securities and Exchange
Commissions Staff Accounting Bulletin (SAB) Topic 13, Revenue Recognition, and Emerging
Issues Task Force (EITF) Issue 00-21, Revenue Arrangements with Multiple Deliverables (EITF
Issue 00-21), as applicable. Revenue arrangements with multiple deliverables are divided into
separate units of accounting if certain criteria are met, including whether the delivered item
has standalone value to the customer, and whether there is objective, reliable evidence of the
fair value of the undelivered items. Consideration received is allocated among the separate
units of accounting based on their relative fair values or using the residual method, as
appropriate, and the applicable revenue recognition criteria are identified and applied to each
of the units. If multiple deliverables do not meet the separation criteria of EITF Issue 00-21,
they are accounted for as a single unit of accounting and management applies a revenue
recognition method that best reflects the economic substance of the transaction, giving
particular consideration to the manner in which the customer receives the benefit of the
transaction.
In general, revenues from non-refundable, up-front license fees received prior to or upon
product approval are deferred until the revenue recognition criteria have been satisfied and
the customer begins to derive the value and benefits from the use of, or access to, the
license. Novens obligations generally are completed upon achieving regulatory approval of the
licensed products, upon delivery of Novens development work, or when Noven has delivered a
commercially viable license to its technology. In multiple element arrangements where research
and development work does not meet the separation criteria of EITF Issue 00-21 (as has
typically been the case for Novens agreements), Novens policy is to recognize such revenues
over the products estimated life cycle. Novens arrangements generally culminate in the
delivery to the licensee of technology licenses to market and sell Noven-developed products in
a licensed territory. Historically, we have applied the guidance of EITF Issue 00-21, and have
typically determined that these deliverables should be accounted for as a single unit of
accounting. Furthermore, management has concluded that the most appropriate revenue
attribution method is to defer license revenues and recognize them over the products estimated
life cycles, as the customer derives the value from the use of, or access to, the license.
When management is unable to estimate the pattern of the expected economic benefits, the
deferred revenues are amortized on a systematic and rational (straight-line) basis over the
products estimated life cycle.
Noven evaluates the facts and circumstances surrounding achievement of non-refundable sales
milestones to ensure that revenue recognition represents the substance of the transaction.
Substantive sales milestones are recognized as revenue when achieved based on the substance of
the underlying transactions, when Noven has fulfilled all of its obligations relating to the
milestone payments. Non-substantive sales milestones are not recognized immediately as revenue
when achieved, but are deferred and recognized as revenues over time in a manner that is
consistent with the underlying facts and circumstances.
In determining the period over which to recognize license revenues, Noven considers the
remaining life of proprietary protection and the economic lives of competing products in the
specific or similar therapeutic categories as a basis for estimating the product life cycles.
Noven believes the estimated product life cycle (the estimated economic life) is generally
determined to come to a conclusion when prescription
117
trends decline to less than 20% of the
products peak prescriptions, which can be impacted by introductions of competing branded
products, generic competition, and/or changes/improvements in forms of treatment therapy.
In the event that Noven receives a non-refundable payment for a product that does not
ultimately receive regulatory approval, the payment is recognized as revenue when all efforts
cease, the project has been discontinued and Noven has no further obligation relating to the
product.
Shire Collaboration Daytrana®
In 2003, Noven entered into a collaborative agreement with Shire consisting primarily of
the transfer to Shire of a license to market and sell Daytrana® and a manufacturing
and supply agreement under which the Company agreed to supply product to Shire. Noven
determined that the arrangement included three deliverables:
(i) a license; (ii) a research and
development arrangement; and (iii) a manufacturing and supply agreement.
The license and research and development deliverables did not meet the criteria for
separation under EITF Issue 00-21; therefore, they were combined and accounted for as a single
unit of accounting. Noven concluded that the manufacturing and supply agreement was at fair
value based on Novens experience with similar arrangements; as a result, it was accounted for
separately from the single unit of accounting (license and research and development
deliverable). Accordingly, all milestone payments (including the up-front payment, FDA approval
payment and subsequent sales milestones) were allocated to the single unit of accounting. In
accordance with Novens policy, Noven began to recognize revenue for the single unit of
accounting upon FDA approval of Daytrana® in April 2006, at which time all of
Novens obligations were satisfied, Shire had a commercially viable license and Shire began
realizing the value of the deliverable. In Novens collaboration with Shire, Noven receives
multiple payment streams, Noven recognizes revenue as a single unit of accounting using a
single attribution model for the license and research and development deliverable, whereby all
milestone payments are recognized using the straight-line method over the estimated life cycle
of Daytrana® (estimated to be seven years), as Shire derives the value from the use
of, or access to, the license.
Shire Collaboration Amphetamine
As described in Note 7 Contract and License Agreements, in November 2008, Noven and
Shire terminated a 2004 agreement for the development of an amphetamine patch to treat ADHD. As
a result of the termination, Noven recognized $7.2 million as license and
contract revenues in 2008 for non-refundable amounts which had previously been received and
deferred.
Contract Revenues
Contract revenues consist of the recognition of contract payments related to research and
development projects performed for third parties where Noven has determined that such projects
are separate units of accounting. The work performed by Noven may include feasibility studies
to determine if a specific drug can be delivered transdermally, the actual formulation of
a specific drug into a transdermal drug delivery system, studies to address the ongoing
stability of the drug in a transdermal drug delivery system, and manufacturing of batches of
product that can be used in human clinical trials. Noven receives contract payments in the
following forms for the research and development work performed:
118
|
|
|
non-refundable up-front payments prior to commencing the work (or certain phases
of the work); |
|
|
|
|
additional payments upon completion of additional phases; and |
|
|
|
|
in some cases, success milestone payments based on achievement of specified
performance criteria. |
Noven recognizes revenue from non-refundable up-front payments based on the proportional
performance method as Noven performs the agreed research and development work. Contractual
amounts received upon completion of specified phases and milestone payments are recognized when
the specified performance criteria are achieved under the milestone method as long as such
milestones are substantive. The difference between the amount of the payments received and the
amount recognized is recorded as deferred license and contract revenues on Novens Consolidated
Balance Sheet until such amount is earned.
RESEARCH AND DEVELOPMENT COSTS:
Research and development expenses include costs of internally generated research and
development activities and costs associated with work performed under agreements with third
parties. Research and development expenses are charged to operations as incurred and include
direct and allocated expenses, which include costs associated with, among other things, product
formulation, pre-clinical testing, clinical studies, regulatory and medical affairs, production
for clinical and regulatory purposes, production related development engineering for
developmental products, and the personnel costs associated with each of these functions.
ADVERTISING COSTS:
Advertising costs are charged to operations as incurred. In addition, Noven Therapeutics
regularly carries inventory of sample product for distribution in the marketplace; however,
Novens policy is to immediately expense samples when the title and risk of loss for the
samples transfers to Noven. Samples expense is included in selling and marketing expenses.
EARNINGS (LOSS) PER SHARE:
Noven computes its earnings (loss) per share in accordance with SFAS No. 128, Earnings
Per Share. Basic earnings (loss) per share is based on income attributable to common
stockholders and the weighted average number of common shares outstanding during the period.
Diluted earnings per share reflects an estimate of the potential dilution that would occur if
securities or other contracts to issue common stock that Noven issues were exercised or
converted into common stock. Common stock equivalents are not included in the diluted earnings
(loss) per share calculation if the effect of their inclusion would be antidilutive. The
total number of common stock equivalents not included in the diluted earnings (loss) per share
calculation for the years ended December 31, 2008, 2007 and 2006
were 3.3 million, 1.7 million
and 0.4 million shares, respectively, which amounts represent out-of-the-money equity awards.
Noven incurred a net loss for the year ended December 31, 2007. As a result, 0.4 million
in-the-money options and/or stock settled appreciation rights were excluded from the diluted loss
per share calculation for 2007 as their effect would have been antidilutive.
119
COMPREHENSIVE INCOME (LOSS):
For the years ended December 31, 2008, 2007 and 2006, comprehensive income (loss) was
equal to net income (loss).
In the first quarter of 2008, Noven recognized a $0.5 million temporary unrealized loss on its
investments in auction rate securities through other comprehensive loss. As discussed in Note
5 Investments Available-for-Sale, in the fourth quarter of 2008, management determined
that the loss was other-than-temporary and, accordingly, recognized
the loss in the 2008 Consolidated Statement of Operations.
EQUITY PLANS:
On January 1, 2006, Noven adopted the provisions of, and began accounting for stock-based
compensation in accordance with, SFAS No. 123 Revised, Share Based Payment (SFAS No.
123(R)). Under the fair value recognition provisions of this statement, stock-based
compensation cost is measured at the grant date based on the fair value of the award and is
recognized as expense on a straight-line basis over the requisite service period, which is
generally the vesting period. Noven elected the modified prospective method, under which prior
periods are not revised for comparative purposes. The valuation provisions of SFAS No. 123(R)
apply to new grants and to grants that were outstanding as of the effective date and are
subsequently modified. Estimated compensation for grants that were outstanding as of the
effective date will be recognized over the remaining service period using the grant date fair
value previously calculated in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123).
Noven uses the Black-Scholes option pricing model to determine the fair value of stock
options and stock-settled stock appreciation rights (SSARs). The grant date fair value of
stock-based payment awards is determined using an option-pricing model which considers Novens
stock price, as well as a number of complex and subjective variables, including Novens expected
stock price volatility over the expected term of the awards, expected exercise behavior,
risk-free interest rate, estimated forfeitures and expected dividends.
The
expected term of stock options/SSARs is defined as the expected time
that options will remain outstanding assuming they are not forfeited
prior to the vest date. Noven estimates the expected term using a
statistical predictive model that incorporates Novens historical
exercise activity in conjunction with Novens post-vest termination
information. Noven estimates the volatility of common stock by using a combination
of both historical and implied volatility based on an equal weighting of each, as management
believes it is the expected volatility that marketplace participants would likely use in
determining an exchange price for an option/SSAR. The risk-free interest rate is based on
United States Treasury zero-coupon issues with remaining terms similar to the expected term on
the options/SSARs. Noven does not anticipate paying any cash dividends in the foreseeable
future and therefore uses an expected dividend yield of zero in the option valuation model.
Noven estimates forfeitures based on historical data at the time of grant and revises those
estimates in subsequent periods if actual forfeitures differ from those estimates. The
weighted average grant date fair values of options/SSARs granted during 2008, 2007 and 2006
were $4.94, $6.67 and $10.94, respectively, using the Black-Scholes option-pricing model with
the assumptions below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2008 |
|
2007 |
|
2006 |
Volatility |
|
|
52.3 |
% |
|
|
48.5 |
% |
|
|
49.2 |
% |
Risk free interest rate |
|
|
2.67 |
% |
|
|
3.90 |
% |
|
|
4.67 |
% |
Expected life (years) |
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
120
Total stock-based compensation recognized in Novens Consolidated Statements of Operations
for the years ended December 31, 2008, 2007 and 2006 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Selling and marketing |
|
$ |
552 |
|
|
$ |
357 |
|
|
$ |
415 |
|
General and administrative |
|
|
3,346 |
|
|
|
4,165 |
|
|
|
2,043 |
|
Research and development |
|
|
473 |
|
|
|
543 |
|
|
|
412 |
|
Total cost of products sold |
|
|
465 |
|
|
|
316 |
|
|
|
416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,836 |
|
|
$ |
5,381 |
|
|
$ |
3,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit recognized related to
compensation expense |
|
$ |
1,688 |
|
|
$ |
1,861 |
|
|
$ |
941 |
|
|
|
|
|
|
|
|
|
|
|
In accordance with SFAS No. 123(R), tax benefits at the time of exercise in excess of those
recognized in conjunction with compensation expense are reported as cash flow from financing
activities. Cash received from options exercised under all share-based payment arrangements for
the years ended December 31, 2008, 2007 and 2006 was $0.2 million, $2.5 million and $13.2
million, respectively. The tax benefit realized on the tax deductions from option exercises
under stock-based compensation arrangements for 2008 was $0.3 million. In addition, Noven
recognized $0.3 million of tax benefit adjustments resulting from exercises and terminations of
vested awards in 2008. The tax benefit realized on the tax deductions from option exercises
under stock-based compensation arrangements totaled $0.5 million and $3.6 million for the years
ended December 31, 2007 and 2006, respectively, of which $0.4 million and $2.6 million was
reported as a cash inflow from financing activities for the years ended December 31, 2007 and 2006, respectively. The total
intrinsic values of all option exercises for the year ended December 31, 2008 were not material.
The total intrinsic values of all option exercises for the years ended December 31, 2007 and
2006 were $1.6 million and $10.5 million, respectively.
During 2007, Noven recorded expenses of approximately $3.3 million associated with the
separation of three executive officers, including the former chief executive officer and former
chief financial officer. Approximately $1.9 million represented cash separation payments, which
were paid in 2008. The remainder of the charge consisted of $0.7 million related to extending
the term of their vested equity awards and $0.7 million representing the fair value of
restricted stock units awarded to the former chief executive officer.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of financial instruments such as cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses reasonably approximate fair values because of
the short term nature of these items. Investments are carried at fair value.
CONCENTRATIONS OF CREDIT RISK:
Novens customers currently consist of Novogyne, Novartis Pharma, Shire and a limited
number of other pharmaceutical companies with worldwide operations. In addition, Noven
Therapeutics customers currently consist of wholesalers and large-chain pharmacy stores.
Noven performs ongoing credit evaluations of its customers financial condition and generally
requires no collateral to secure accounts receivable.
121
Noven maintains an allowance for
doubtful accounts based on an assessment of the collectability of such accounts. See Note 17
Segment and Customer Data for information on revenues by customer.
RECENT ACCOUNTING PRONOUNCEMENTS:
In May 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles (SFAS No. 162). SFAS No. 162
identifies the sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that are presented
in conformity with GAAP. This statement will be effective 60 days following the Securities
Exchange and Commissions approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. Noven does not expect adoption of SFAS No. 162 to have a material impact
on its consolidated financial condition, results of operations or cash flows.
In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, Determination of the
Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The
intent of FSP 142-3 is to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the
fair value of the asset under GAAP and SFAS No. 141(R), Business Combinations. For a
recognized intangible asset, an entity shall disclose information that enables users of
financial statements to assess the extent to which the expected future cash flows associated
with the asset are affected by the entitys intent and/or ability to renew or extend the
arrangement. FSP 142-3 is effective for financial statements issued for fiscal years and interim
periods beginning after December 15, 2008, with early adoption prohibited. FSP 142-3 requires
the guidance for determining the useful life of a recognized intangible asset to be applied
prospectively to intangible assets acquired after the effective date. The disclosure
requirements shall be applied prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. Noven does not expect adoption of FSP 142-3 to have a
material impact on its consolidated financial condition, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an Amendment of Accounting Research Bulletin (ARB) No. 51 (SFAS No.
160). SFAS No. 160 establishes accounting and reporting standards for the
noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of
a subsidiary. SFAS No. 160 amends certain of ARB 51s consolidation procedures to conform them
to the requirements of SFAS No. 141(R), Business Combinations, which was issued at the same
time as SFAS No. 160. This new statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009,
for entities with calendar year-ends). Earlier adoption is prohibited. SFAS No. 160 will be
applied prospectively as of the beginning of the fiscal year in which this statement is
initially applied, except for the presentation and disclosure requirements, which will be
applied retrospectively for all periods presented. Noven does not expect adoption of SFAS No.
160 to have a material impact on its consolidated financial condition, results of operations or
cash flows.
122
In December 2007, the FASB revised SFAS No. 141, Business Combinations (SFAS No.
141(R)). SFAS No. 141(R) establishes principles and requirements for how an acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree; (ii) recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase;
and (iii) determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies
to all transactions or other events in which an entity (the acquirer) obtains control of one or
more businesses (the acquiree), including those sometimes referred to as true mergers or
mergers of equals and combinations achieved without the transfer of consideration, for
example, by contract alone or through the lapse of minority veto rights. SFAS No. 141(R) does
not apply to: (i) the formation of a joint venture; (ii) the acquisition of an asset or a group
of assets that does not constitute a business; (iii) a combination between entities or
businesses under common control; or (iv) a combination between not-for-profit organizations or
the acquisition of a for-profit business by a not-for-profit organization. SFAS No. 141(R)
applies prospectively to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. An
entity may not apply SFAS No. 141 (R) before that date. Noven does not expect adoption of SFAS
No. 141 (R) to have a material impact on its consolidated financial condition, results of
operations or cash flows.
In December 2007, the FASBs Emerging Issue Task Force (EITF) reached a consensus on EITF
Issue No. 07-01, Accounting for Collaborative Arrangements Related to the Development and
Commercialization of Intellectual Property (EITF 07-01). EITF 07-01 discusses the
appropriate income statement presentation and classification for the activities and payments
between the participants in arrangements related to the development and commercialization of
intellectual property. It requires certain transactions between collaborators to be recorded in
the income statement on either a gross or net basis within expenses when certain characteristics
exist in the collaboration relationship. The sufficiency of disclosure related to these
arrangements is also specified. EITF 07-01 is effective for fiscal years beginning after
December 15, 2008. Noven does not expect adoption of EITF 07-01 to have a material impact on its
consolidated financial condition, results of operations or cash flows.
RECLASSIFICATIONS:
Certain
reclassifications have been made to the prior periods Consolidated Statements
of Operations and Consolidated Statements of Cash Flows to conform to the current periods
presentation.
3. |
|
CASH FLOW INFORMATION: |
Cash payments for income taxes were $20.8 million, $23.7 million and $0.8 million in 2008,
2007 and 2006, respectively. In 2002, the State of New Jersey enacted legislation that
requires Novogyne to remit estimated state income tax payments on behalf of its owners, Noven
and Novartis. In 2008, 2007 and 2006, Novogyne paid $3.6 million, $6.0 million and $2.2
million, respectively, to the New Jersey Department of Revenue, representing Novens portion of
Novogynes estimated state income tax payment. These payments were deemed distributions to
Noven from Novogyne. Noven received tax refunds directly from the State of New Jersey of $2.7
million, $2.4 million and $1.9 million in 2008, 2007 and 2006, respectively, related to these
state income tax payments made on Novens behalf. Cash payments for interest were not material
in 2008, 2007 and 2006.
123
Non-cash Operating Activities
The income tax benefit from the exercise of non-qualified stock options and disqualifying
dispositions of incentive stock options was $0.3 million for 2008. Noven recorded a $0.5
million and $3.6 million income tax benefit as additional paid-in capital derived from the
exercise of non-qualified stock options and disqualifying dispositions of incentive stock
options in 2007 and 2006, respectively.
Non-cash Investing Activities
On the Closing Date, Noven entered into a non-competition agreement with an executive of
JDS who agreed to serve on Novens board of directors following the acquisition. This
obligation, valued at $0.3 million, was settled by granting 44,297 SSARs. This non-competition
agreement has been recorded as an intangible asset on Novens Consolidated Balance Sheet as of
December 31, 2007.
Noven did not enter into capital lease obligations in 2008. In 2007 and 2006, Noven
entered into capital lease obligations for new equipment totaling $0.1 million and $0.4
million, respectively.
4. |
|
ACQUISITION OF NOVEN THERAPEUTICS, LLC: |
Noven acquired Noven Therapeutics, LLC (f/k/a JDS Pharmaceuticals, LLC) on August 14, 2007
pursuant to the terms of the Agreement and Plan of Merger, dated July 9, 2007. The purchase
price for the acquisition was $125.0 million cash paid at closing, subject to certain working
capital adjustments (the Merger Consideration). Noven funded the cash purchase price from
the sale of short-term investments. On the Closing Date, a portion of the Merger Consideration
in an amount equal to $10.0 million was placed in an escrow account to be held until December
31, 2008 to satisfy any post-closing indemnity claims by Noven in connection with the Merger
Agreement as well as certain expenses. The working capital adjustments were finalized in June
2008, resulting in a $1.1 million payment to Noven from the escrow
account. The balance of
the escrowed funds was disbursed to the sellers in January 2009.
The total purchase price for the Noven Therapeutics acquisition consisted of $125.0
million cash paid at closing, approximately $5.4 million of transaction costs, consisting
primarily of fees paid for financial advisory, legal, valuation and accounting due diligence
services, approximately $0.5 million in connection with non-competition agreements entered into
with two executives of JDS and $1.0 million of net working capital adjustments. The executives
were the former Chief Executive Officer (the JDS CEO) and former President (the JDS
President) of JDS who are father and son, respectively. The former JDS CEO became a member of
Novens Board of Directors after the Merger.
In addition to the non-competition agreements which were included in the purchase price,
the Company also entered into a one-year agreement with the JDS CEO to provide consulting
services with respect to Noven Therapeutics business as may reasonably be requested
124
by Noven
in exchange for a service fee of $250 per hour. Noven paid the former
JDS CEO $50,500 and $37,500 under the consulting agreement which was charged to operations in 2008 and 2007,
respectively. In addition, Noven entered into a six month employment agreement with the former
JDS President. Salary and bonus payments totaling $162,400 under the employment agreement were
charged to operations during 2007. The balance of $33,100 due under the employment agreement
was charged to operations during 2008.
The acquisition of Noven Therapeutics was accounted for using the purchase method of
accounting. The purchase price was allocated to tangible and intangible assets acquired and
liabilities assumed based on their estimated fair values at the Closing Date. The purchase
price exceeded the amounts allocated to the tangible and intangible assets acquired and
liabilities assumed by approximately $14.7 million, which has been recorded as goodwill, all of
which is deductible for tax purposes. In 2008, the purchase price allocation was completed,
resulting in a final goodwill value of $14.4 million (see Note 9 Goodwill and Intangible
Assets). The primary factors that contributed to the recognition of goodwill are the
intellectual capital of the skilled sales, marketing and distribution personnel and an
organized experienced pharmaceutical sales force that is leveragable, neither of which meet the
criteria for recognition as an asset separately from goodwill.
The following table presents the final allocation of the total purchase price for the
acquisition of Noven Therapeutics (amounts in thousands):
|
|
|
|
|
Current assets, including cash of $0.6 million |
|
$ |
8,268 |
|
Property and equipment |
|
|
362 |
|
Intangible assets: |
|
|
|
|
Acquired in-process research and development |
|
|
100,150 |
|
Identifiable intangible assets |
|
|
39,110 |
|
Goodwill |
|
|
14,407 |
|
Other assets |
|
|
163 |
|
Accrued expenses and other current liabilities |
|
|
(15,330 |
) |
Long-term obligation assumed |
|
|
(3,711 |
) |
Contingent milestones assumed |
|
|
(11,500 |
) |
|
|
|
|
Total purchase price |
|
$ |
131,919 |
|
|
|
|
|
Acquired In-Process Research and Development (IPR&D) Intellectual Property
IPR&D is defined by FIN No. 4, Applicability of SFAS Statement No. 2 to Business
Combinations Accounted for by the Purchase Method (FIN 4), as being a development project
that has been initiated and achieved material progress but: (i) has not yet reached
technological feasibility or has not yet reached the appropriate regulatory approval; (ii) has
no alternative future use; and (iii) the fair value is estimable with reasonable certainty. As
required by FIN 4, the portion of the purchase price allocated to in-process research and
development expenses (IPR&D) of $100.2 million was immediately charged to operations
following the completion of the acquisition and is reflected in Novens Consolidated Statement
of Operations for the year ended December 31, 2007.
125
The fair value of IPR&D has been determined by the income approach using the multi-period
excess earnings method on a project-by-project basis. The projects were valued based on the
present value of probability adjusted incremental cash flows, after deducting contributory
asset charges for other assets employed (including fixed assets, the assembled workforce and
working capital). The probability weightings used to determine IPR&D cash flows ranged from
80% to 90%. The discount rate used to determine the present value of IPR&D cash flows was
approximately 23%.
The forecast of future IPR&D cash flows required various assumptions to be made including:
|
|
|
revenue that is likely to result from IPR&D projects, including estimated
number of units to be sold, estimated selling prices, estimated market
penetration, estimated market share, estimated year-over-year growth rates over
the product life cycles and estimated sales allowances; |
|
|
|
|
cost of sales for the potential product using historical data, industry data
or other sources of market data; |
|
|
|
|
sales and marketing expenses using historical data, industry data or other
sources of market data; |
|
|
|
|
general and administrative expenses; and |
|
|
|
|
research and development expenses. |
In addition, Noven considered the following in determining the fair value of IPR&D:
|
|
|
the projects stage of completion; |
|
|
|
|
the costs incurred to date; |
|
|
|
|
the projected costs to complete the IPR&D projects; |
|
|
|
|
the contribution, if any, of the acquired identifiable intangible assets; |
|
|
|
|
the projected launch date of the products under development; |
|
|
|
|
the estimated life of the products under development; and |
|
|
|
|
the probability of success of launching a commercially viable product. |
To the extent that an IPR&D project is expected to utilize the acquired identified
intangible assets, the value of the IPR&D project has been reduced to reflect this utilization.
Identifiable Intangible Assets
The identifiable intangible assets acquired are attributable to the following categories
based on the final purchase price allocation (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset life |
|
|
|
Fair Value |
|
|
(years) |
|
Acquired product intangibles |
|
$ |
37,790 |
|
|
|
6 - 10 |
|
Non-competition agreements |
|
|
530 |
|
|
|
2 - 3 |
|
Favorable lease |
|
|
790 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets |
|
$ |
39,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual Property approved products
The fair value of the intellectual property rights (including technical processes and
institutional understanding) associated with Noven Therapeutics products approved by the FDA
has been determined by the income approach using the multi-period excess earnings method.
126
This method calculates fair value based on the present value of the incremental after-tax cash flows
attributable to the assets, after the deduction of contributory asset charges for other assets
employed (including fixed assets, the assembled workforce and working capital) in generating
the cash flows. The forecast of future cash flows for approved products requires various
assumptions as discussed in Acquired In-Process Research and Development (IPR&D)
Intellectual Property above.
The valuations of IPR&D intellectual property and identifiable intangible assets are based
on information available at the time of the acquisition and the expectations and assumptions
that: (i) have been deemed reasonable by Novens management; and (ii) would be available to,
and made by, a market participant. No assurance can be given that the underlying assumptions or
events incorporated into the valuations of such assets will occur as projected. For these
reasons, among others, the actual cash flows may vary materially from forecasted future cash
flows.
Non-competition agreements and favorable lease
In accordance with SFAS No. 141, which applied to acquisitions prior to January 1, 2009,
the fair values of non-competition agreements and a favorable lease entered into in connection
with the acquisition were recorded as intangible assets and are being amortized on a
straight-line basis over their expected periods of benefit.
Long-term liabilities
Noven assumed a long-term obligation with a fair value of $3.7 million on the Closing
Date. The long-term obligation was paid in full by Noven in 2007. Noven also assumed $11.5
million of future contingent sales milestones related to Noven Therapeutics acquisition of
Pexeva® from Synthon Pharmaceuticals, Inc. As of the acquisition date, Noven
determined that it was probable that these contingent sales milestones would be paid.
Therefore, in accordance with SFAS No. 141, which applied to acquisitions prior to January 1,
2009, the contingent sales milestones were recorded as liabilities in the amount of $11.5
million. In the third quarter of 2008, management determined that the likelihood of paying $5.0
million of such milestones was no longer probable. As a result, Noven reversed the liability.
Because the purchase allocation with regard to this item had been finalized, Noven recognized
$5.0 million in operating income as a result of the reversal. See Note 7 Contract and
License Agreements Synthon Pharmaceuticals Collaboration for further information about the
contingent sales milestones.
Supplemental disclosure of pro forma information
The following represents Novens pro forma results of operations as though the acquisition
of Noven Therapeutics had occurred on January 1, 2006. As described above, the fair value of
IPR&D projects acquired which had not yet reached approval totaling $100.2
million was immediately charged to operations following the acquisition. This amount has
been excluded from the pro forma results because it results directly from the transaction and
is non-recurring in nature. The pro forma information is not necessarily indicative of the
results that would have resulted had the acquisition occurred at the beginning of the periods
presented, nor is it necessarily indicative of future results.
127
The pro forma information for the years ended December 31, 2007 and 2006 is as follows
(amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
97,891 |
|
|
$ |
80,395 |
|
Net income |
|
|
8,246 |
|
|
|
5,168 |
|
|
|
|
|
|
|
|
|
|
Net earnings per share (Basic) |
|
|
0.33 |
|
|
|
0.22 |
|
Net earnings per share (Diluted) |
|
|
0.33 |
|
|
|
0.21 |
|
5. |
|
INVESTMENTS AVAILABLE-FOR-SALE: |
At December 31, 2008, Noven held investments in auction rate securities (classified as
available-for-sale) with a par value and fair value of $16.0 million and $15.5 million,
respectively. Noven liquidated $39.0 million of its investments in auction rate securities at
par value during 2008. An additional $3.7 million has been called by the issuer and is expected
to be redeemed in March 2009. Auction rate securities are floating rate debt securities
with long-term nominal maturities, the interest rates of which are reset periodically (typically
every seven to thirty-five days) through a Dutch auction process. Beginning in February 2008,
as part of the ongoing credit market crisis, several auction rate securities from various
issuers have failed to receive sufficient order interest from potential investors to clear
successfully, resulting in auction failures. As a result of failed auctions, these investments
now pay interest at a rate defined by the governing documents or indenture. Due to uncertainty
regarding the timing of Novens future investment liquidations, Noven classified its auction
rate securities as non-current assets as of December 31, 2008, except for the called security,
which is included in current assets.
Novens auction rate security investments are collateralized primarily by tax-exempt
municipal bonds and, to a much lesser extent, guaranteed student loans. Noven does not hold any
auction rate securities collateralized by mortgages or collateralized debt obligations. Noven
believes its investments are of high credit quality, as all are investment grade and the
majority are rated AA or higher. In assessing whether declines in fair value are temporary in
nature or other- than-temporary, management considers a variety of factors, including Novens
recent history of liquidating similar instruments at par value, the length of time and extent to
which the fair value has been less than par, the financial condition of the issuer and managements intent and ability to retain the investments for a sufficient period
to allow for any anticipated recovery in fair value. In the fourth quarter of 2008, Noven
determined that the $0.5 million unrealized decline in fair value of its auction rate portfolio
was other-than-temporary. As a result, Noven recognized the
impairments in its 2008 Consolidated
Statement of Operations. The determination that the unrealized losses
were other-than-temporary was primarily based on the length of time that the securities have been
impaired and the fact that the continuing auction failures do not enable Noven to reliably
estimate when the value of the securities may recover. To the extent future declines in
fair value are determined to be other-than-temporary, additional impairment charges will result.
Such non-cash impairment charges could materially and adversely affect Novens consolidated
financial condition and results of operations.
128
6. |
|
FAIR VALUE MEASUREMENTS: |
Noven adopted SFAS No. 157, Fair Value Measurements in 2008. SFAS No. 157, among other
things, defines fair value, establishes a consistent framework for measuring fair value and
expands disclosure for each major asset and liability category measured at fair value on either
a recurring or nonrecurring basis. SFAS No. 157 clarifies that fair value is an exit price,
representing the amount expected to be received to sell an asset, or paid to transfer a
liability, in an orderly transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that market participants
would use in pricing an asset or liability. To increase consistency and comparability in fair
value measurements and related disclosures, SFAS No. 157 sets forth a three-tier hierarchy for
the inputs used to measure fair value based on the degree to which such inputs are observable in
the marketplace, as follows:
|
(i) |
|
Level 1 observable inputs such as quoted prices in active markets; |
|
|
(ii) |
|
Level 2 inputs, other than the quoted prices in active markets, that
are observable either directly or indirectly; and |
|
|
(iii) |
|
Level 3 unobservable inputs for which there is little or no market
data, which require the reporting entity to develop its own assumptions. |
As
described in Note 5 Investments Available-for-Sale, during 2008, Noven recorded $0.5 million of other-than-temporary
impairments on its investments in auction rate securities which are classified as
available-for-sale under SFAS No. 115. Due to continuing auction failures beginning in
February 2008, Noven utilized valuation models to determine the fair values of its investments
in auction rate securities. The fair values of the investments were calculated based on the
following: (i) the underlying structure of each security; (ii) the present value of future
principal and interest payments discounted at rates considered to reflect current market
conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase
at par for each period; and (iv) consideration of third party credit enhancement. These
estimated fair values could change significantly based on future market conditions.
Changes to investments measured at fair value on a recurring basis using unobservable
inputs (Level 3) during 2008 were as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
54,400 |
|
Purchases of investments |
|
|
550 |
|
Sales of investments at par |
|
|
(38,975 |
) |
Unrealized losses, other-than-temporary |
|
|
(515 |
) |
|
|
|
|
Balance at December 31, 2008 |
|
$ |
15,460 |
|
|
|
|
|
7. |
|
CONTRACT AND LICENSE AGREEMENTS: |
|
|
|
HORMONE THERAPY COLLABORATIONS |
Noven has license agreements relating to its hormone therapy products with Aventis,
Novartis, Novartis Pharma and Novogyne. At the time of the formation of Novogyne, Novartis
sublicensed its rights under its license agreement to Novogyne. Novens agreement with
129
Novogyne
grants Novogyne the right to market Novens transdermal estrogen delivery systems
in the United
States and Canada. Novartis Canadian affiliate markets Novens advanced estrogen delivery
system
in Canada. The agreement provides for royalty payments based on sales by Novogyne and
Novartis Canadian affiliate.
Aventis Licenses
Noven has two license agreements with sanofi-aventis as successor in interest of Aventis.
These agreements grant Aventis the right to market Novens original transdermal estrogen
delivery system worldwide except for the United States and Canada and to market Novens
transdermal combination estrogen/progestin delivery system worldwide. The agreements also
grant Aventis the right to market Novens advanced transdermal estrogen delivery system in
Japan. In June 1992, as part of the license agreements, Aventis funded $7.0 million for the
construction of a manufacturing facility for the production by Noven of transdermal drug
delivery systems. Noven leases the facilities from Aventis for $1.00 per year for a term that
expires upon the earlier of 2024 or the termination or expiration of Novens license agreement
with Aventis. This lease includes an option to purchase the leased facilities and property for
its depreciated value and subsequent to year-end, Noven began the process of exercising this
option and purchasing the facilities and properties for $1.00, its depreciated value as of
December 31, 2008. For accounting purposes, Noven treated the exchange of the funding of the
facility for the license as a non-monetary exchange at fair value. Noven has determined that
the fair market value of the license was $7.0 million, based on the amount Aventis paid for the
construction of the manufacturing facility. Noven recorded both the facility and deferred
license revenues at amounts equal to the funds advanced by Aventis, which are deferred and
recognized as depreciation expense and license revenues over the life of the underlying lease,
which expires in 2024. At December 31, 2008 and 2007, the carrying amounts of the leased
property and deferred revenues were $3.4 million and $3.6 million, respectively.
Novartis Pharma Sublicenses from Aventis
In October 1999, Novartis Pharma sublicensed Aventis rights to market: (i) Novens
combination estrogen/progestin transdermal delivery system in all countries other than the
United States and Japan; and (ii) Novens original estrogen transdermal delivery system in all
countries other than the United States, Canada and Japan.
Novartis Pharma License of Estradot®
In November 2000, Noven entered into an exclusive license agreement with Novartis Pharma
pursuant to which Noven granted Novartis Pharma the right to market Novens advanced
transdermal estrogen delivery system under the name Estradot® in all countries other
than the United States, Canada and Japan. The agreement also grants Novartis Pharma marketing
rights
in the same territories to any product improvements and future generations of estrogen
patches developed by Noven. Noven received an up-front license payment of $20.0 million upon
execution of the agreement. The up-front payment was deferred and is being recognized as
license revenues over 10 years beginning in the fourth quarter of 2000, which is the estimated
life of the product. Noven subsequently received a $5.0 million milestone payment in the
fourth quarter of 2001 that is being recognized as license revenues beginning in the first
quarter of 2002 through the fourth quarter of 2010.
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Novogyne Marketing Rights of CombiPatch®
Novogyne acquired the exclusive United States marketing rights to CombiPatch®
in March 2001 in a series of transactions involving Novogyne, Noven, Novartis and Aventis.
Prior to the transaction, Aventis had been Novens exclusive licensee for
CombiPatch® in the United States. The transaction was structured as: (i) a direct
purchase by Novogyne from Aventis of certain assets for $25.0 million, which was paid at
closing; (ii) a grant-back by Aventis to Noven of certain intellectual property rights relating
to CombiPatch®; and (iii) a simultaneous license by Noven to Novogyne of these
intellectual property rights. The consideration that was paid by Noven to Aventis, and by
Novogyne to Noven, was $40.0 million. Novogyne agreed to indemnify Noven against Novens
obligation to Aventis. As a consequence of the transaction and under the terms of Novens
existing license agreement with Aventis, Noven received $3.5 million from Aventis, which amount
was deferred and is being recognized as license revenues over 10 years beginning in the first
quarter of 2001, which is the estimated life of the product. In a related transaction,
Novartis Pharma acquired from Aventis the development and marketing rights to future
generations of Novens combination estrogen/progestin patch in all markets other than Japan.
Due to current regulatory requirements in Europe, Novartis Pharma has elected not to complete
development of a next generation combination estrogen/progestin patch.
SHIRE COLLABORATION
Noven has developed a once-daily transdermal methylphenidate patch for Attention Deficit
Hyperactivity Disorder (ADHD) called Daytrana®. In the first quarter of 2003,
Noven licensed to Shire the exclusive global rights to market Daytrana® for payments
by Shire of up to $150.0 million. In consideration for this licensing transaction, Shire
agreed to pay Noven as follows: (i) $25.0 million was paid upon closing of the transaction in
April 2003; (ii) $50.0 million was paid in April 2006 upon receipt of final marketing approval
by the FDA; and (iii) three installments of $25.0 million each payable upon Shires achievement
of $25.0 million, $50.0 million and $75.0 million in annual Daytrana® net sales,
respectively. Noven received the first $25.0 million sales milestone in the first quarter of
2007, the second $25.0 million sales milestone in the third quarter of 2007 and the third $25.0
million sales milestone in the third quarter of 2008. Noven is currently deferring and
recognizing approval and sales milestones as license revenues on a straight-line basis,
beginning on the date the milestone is achieved through the first quarter of 2013, which is
Novens current best estimate of the end of the useful economic life of the product. During
2008, 2007 and 2006 Noven recognized $18.8 million, $14.0 million and $5.9 million,
respectively, in license revenues related to the Shire collaboration. Noven also manufactures
and supplies finished product to Shire. During 2008, 2007 and 2006 Novens product sales of
Daytrana® to Shire were $10.8 million, $13.4 million and $8.6 million, respectively.
Beginning in the fourth quarter of 2003, Noven recorded reimbursements to Shire for
Shires direct costs and certain direct incremental costs incurred by Noven as requested by
Shire in pursuit of Daytrana® regulatory approval. These reimbursements were
recorded as a reduction of a portion of the first $25.0 million sales milestone received from
Shire. The reimbursements to Shire reduced the amount of deferred revenues that Noven is
currently recognizing related to the original $25.0 million up-front payment.
In addition to Novens agreements with Shire related to Daytrana®, in June 2004
Noven entered into an agreement with Shire for the development of a transdermal amphetamine
patch for ADHD, and in July 2006, Noven and Shire amended this agreement. Under the
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amended agreement, Shire paid Noven $6.9 million for the exclusive developmental rights to the product.
A total of $7.2 million received under the amphetamine arrangement was included in deferred
license and contract revenues on Novens Consolidated Balance Sheet as of December 31, 2007.
Noven entered into a letter agreement (the Termination Agreement) with Shire terminating
Novens agreements with Shire for the development of an amphetamine patch. Under the Termination
Agreement, rights to the developmental amphetamine patch were returned to Noven. Noven
currently intends to pursue the further development and commercialization of the product. Shire
will be entitled to a modest royalty if Noven elects to commercialize a product that
incorporates intellectual property arising from the development project with Shire. As a result
of the termination of this project with Shire, Noven recognized $7.2 million
as license and contract revenues in the fourth quarter of 2008.
P&G PHARMACEUTICALS COLLABORATION
In April 2003, Noven established a collaboration with Procter & Gamble Pharmaceuticals,
Inc. (P&GP) relating to the development and commercialization of prescription transdermal
patches for the treatment of Hypoactive Sexual Desire Disorder (HSDD) in women. The products
under development explore follow-on product opportunities for Intrinsa®, P&GPs
in-licensed investigational transdermal testosterone patch designed to help restore sexual
desire in menopausal women diagnosed with HSDD. Until recently, P&GP had indicated that the
project was on hold.
In August 2008, Noven entered into global license and supply agreements with P&GP relating
to the development and commercialization of prescription transdermal patches for the treatment
of HSDD and other indications in women. The global license agreement supersedes and
replaces the prior development letter agreement entered into between Noven and P&GP on April
28, 2003. Under the agreements, Noven granted P&GP an exclusive
worldwide license to our low-dose testosterone patch for use by women
for HSDD and other indications, as well as
potential next-generation patches, and P&GP granted Noven exclusive supplier rights with
respect to such licensed products. Noven received a $1.0 million payment from P&GP upon
entering into the agreement, and has included the amount in deferred license and contract
revenues on its Consolidated Balance Sheet as of December 31, 2008. If the testosterone patch
is ultimately approved and commercially launched, Noven would receive royalties and
manufacturing fees under the agreements. Noven may also receive additional contingent
development and sales milestone payments related to the licensed products. The royalty
payments are to be determined based on a percentage of P&GPs quarterly sales of the licensed
products. The milestone payments are contingent upon the achievement of certain sales
milestones. Pursuant to the agreements, P&GP will fund any clinical development costs and will
be responsible for any regulatory filings and marketing applications associated with any
licensed products developed under the agreements.
SYNTHON PHARMACEUTICALS COLLABORATION
In November 2005, JDS, now known as Noven Therapeutics, entered into an asset purchase
agreement with Synthon Pharmaceuticals, Inc. (Synthon) for the purchase of
Pexeva®. In this transaction, Noven Therapeutics purchased certain assets related
to Pexeva® including the New Drug Application (NDA), intellectual property
(including patents and trademarks) and certain finished goods inventory. The purchase of
Pexeva® included a cash payment at the time of closing and an obligation to make
certain future fixed payments and certain contingent payments.
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As a result of Novens acquisition of Noven Therapeutics, Noven became responsible for
possible future contingent milestone payments of up to $11.5 million in the event sales of
Pexeva® achieve certain levels under the asset purchase agreement with Synthon. Based
on net sales of Pexeva® in 2007 and 2008, Noven Therapeutics was required to make
milestone payments to Synthon of $3.3 million for each of those years. The 2007 milestone was
paid in April 2008 and the 2008 milestone is expected to be paid in April 2009.
Noven accrued for these contingent milestone payments at the time of closing of the Noven
Therapeutics acquisition based on projected future sales of Pexeva® which indicated
that the achievement of each of the specified sales levels was probable. In the third quarter of
2008, Noven determined that the achievement of $30.0 million in annual net sales for
Pexeva®, the next specified sales level, was no longer probable, resulting
in a change in accounting estimate. The change results from lower forecasted long-term
prescription growth than originally expected, as well as a redistribution of selling effort to
support Stavzor®, which was commercially launched in August 2008. In the third
quarter of 2008, Noven recognized $5.0 million in operating income as a result of the reversal
of the accrued liability for the final contingent milestone payment upon a determination that
the achievement of the milestone was no longer probable. The change in accounting estimate
resulted in a positive net income impact of $3.1 million after taxes for 2008. Although Noven
reversed the $5.0 million accrued liability, Noven remains contingently liable for the $5.0
million payment if annual net sales of a future product utilizing the same compound as is used
in Pexeva® achieves sales of $30.0 million or more through 2017.
SOLVAY PHARMACEUTICALS COLLABORATION
In August 2004, Noven Therapeutics entered into an asset purchase agreement with Solvay
Pharmaceuticals, Inc. (Solvay) for the purchase of Lithobid®. In this
transaction, Noven Therapeutics purchased certain assets related to Lithobid®
including the NDA, intellectual property (including trademarks) and certain finished goods
inventory, which was paid in full prior to the closing of the Merger. In connection with the
acquisition of the product rights for Lithobid®, Noven Therapeutics entered into an
agreement requiring Solvay to manufacture and supply Lithobid® for up to five years,
subject to certain limitations. Prior to Novens acquisition of Noven Therapeutics, Solvay
assigned the manufacturing and supply agreement to ANI Pharmaceuticals, Inc. (ANI). In
December 2007, Noven Therapeutics and ANI agreed to terminate the Solvay manufacturing and
supply agreement and enter into a new manufacturing and supply agreement containing
substantially similar terms and conditions as the prior agreement.
BANNER PHARMACAPS COLLABORATION
In April 2007, Noven Therapeutics entered into a development, license and supply agreement
with Banner Pharmacaps Inc. (Banner) in which Banner licensed rights to a delayed release
valproic acid product (Stavzor®), as well as rights to future development of an
extended release valproic acid product, in return for a payment at closing, royalties on future
sales, and up to $6.0 million in potential development milestone payments. The agreement also
provides that Banner will be the exclusive supplier of the products licensed under the
agreement.
In September 2008, Noven made a $1.5 million milestone payment to Banner upon FDA approval
for Stavzor®. The remaining potential development milestone payments of up to $4.5
million were contingent upon the satisfaction of certain conditions related to the development
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