-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T1vlgAqcp30IBN4RED6kRjQcwfecOz8KYB15VI6v17S80NAa6kHRacXe5FfTL00o KtdujIDKTzjSDWvR2ylKKg== 0000950144-98-003680.txt : 19980331 0000950144-98-003680.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950144-98-003680 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVEN PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000815838 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 592767632 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-17254 FILM NUMBER: 98579705 BUSINESS ADDRESS: STREET 1: 11960 SW 144TH ST CITY: MIAMI STATE: FL ZIP: 33186 BUSINESS PHONE: 3052535099 MAIL ADDRESS: STREET 1: 11960 SW 144TH STREET CITY: MIAMI STATE: FL ZIP: 33185 10-K 1 NOVEN PHARMACEUTICALS, INC. FORM 10-K 12/31/97 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from _____________ to ____________ Commission file number 0-17254 --------------------------------------------------------- NOVEN PHARMACEUTICALS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 59-2767632 ------------------------------ ------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 11960 S.W. 144th Street, Miami, Florida 33186 - --------------------------------------- ---------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (305)253-5099 ---------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered Pursuant to Section 12(g) of the Act: Common Stock $.0001 Par Value ----------------------------- (Title of class) 2 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES [ ] NO [X] The aggregate market value of the voting stock held by non-affiliates of the registrant on February 23, 1998 was $112,497,000, (See definition of affiliate in Rule 405, 17 CFR 230.405). As of February 23, 1998, 20,475,531 shares of common stock, $.0001 par value, were outstanding. 3 DOCUMENTS INCORPORATED BY REFERENCE Incorporated documents (to the extent indicated herein) Part of Form 10-K - -------------------------------- ----------------- Portions of the Definitive Proxy Part III Statement for the 1998 Annual Meeting of Shareholders Items 10-13 4 NOVEN PHARMACEUTICALS, INC. FORM 10-K TABLE OF CONTENTS
PAGE PART I Item 1. Business...............................................................................1 Item 2. Properties ...........................................................................16 Item 3. Legal Proceedings ....................................................................17 Item 4. Submission of Matters to a Vote of Security Holders ..................................17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................................................17 Item 6. Selected Financial Data ..............................................................19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................................20 Item 8. Financial Statements and Supplementary Data ..........................................24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...............................................25 PART III (omitted) PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................25
5 Item 1. BUSINESS Noven Pharmaceuticals, Inc. ("Noven" or the "Company") is a leader in developing and manufacturing transdermal and transoral drug delivery systems. These systems utilize an adhesive patch containing medication which, when adhered to the skin or the mucosa of the oral cavity, allows the delivery of drugs across the tissues and into the bloodstream over an extended period of time. Noven has developed and patented thin, solid state, multi-laminate transdermal and transoral drug delivery systems that have a small surface area and are adaptable to deliver numerous drug entities. The Company's first product, an estrogen patch for the treatment of menopausal symptoms, was launched in the U.S. in March, 1996 by Ciba-Geigy Corporation ("Ciba- Geigy") under the brand name Vivelle(R). (In December, 1996, Ciba-Geigy's parent corporation was merged with Sandoz S.A. to form Novartis S.A. (hereinafter "Novartis"). All references to Novartis herein shall include Ciba-Geigy Corporation.) Novartis also launched the same product in Canada in June, 1996. Rhone-Poulenc Rorer, Inc. ("RPR") has received regulatory approval to market this product for the treatment of menopausal symptoms in 38 countries and has launched the product under the brand name MENOREST in 19 countries including Germany, France and the United Kingdom. MENOREST has also been approved in 36 countries as a preventative treatment for osteoporosis and Novartis is conducting clinical trials in the U.S. for this indication. The Company's other major development in hormonal replacement therapy ("HRT"), a combination patch of estrogen and progestogen, completed Phase III clinical trials in the U.S. and Europe. In August, 1997 RPR submitted a New Drug Application ("NDA") with the Food and Drug Administration ("FDA") for this product and has made similar regulatory filings for this product in Europe. This product has significant advantages over the estrogen replacement system, inasmuch as the combination of the two hormones reduces the incidences of endometrial hyperplasia and in low dosage forms, taken over several months, may eliminate bleeding for menopausal women. It also eliminates the need to take two single entity drugs (i.e. two pills). RPR has worldwide marketing rights to this product. Finally, Noven has also developed a second generation estrogen replacement system which has all of the beneficial features of its present patch but is approximately one-third its size. Novartis has marketing rights to this product in the U.S. and Canada and RPR has marketing rights in Japan. Noven has retained marketing rights in all other territories. DentiPatch(R), the Company's novel transoral anesthetic delivery system, was approved for marketing by the FDA in May, 1996. A regional launch of this product by the Company commenced in the second half of 1996. The Company launched this product on a national basis in 1997. DentiPatch(R), which contains lidocaine, the most widely used injectable dental anesthetic, is indicated for the prevention of pain from oral injection and for soft tissue dental procedures. The Company is also developing a range of new products based on its transdermal and transoral technologies. 1 6 The Company conducts its operations in Miami-Dade County, Florida. Commercial production was initiated in Noven's original facility in 1995. The Company's new manufacturing facility, located on approximately 15 acres, was approved by the FDA in April, 1996 and is also in commercial production. This new facility expands Noven's manufacturing capability from approximately 100 million patches to approximately 500 million patches per year. The further development of existing facilities at the new site will significantly increase Noven's manufacturing capacity to accommodate additional products under development. STRATEGY Noven's strategy for continued growth is based on certain key elements: a leadership position with its broad range of HRT products; an extensive pipeline of transdermal and transoral drug delivery products under various stages of development in a number of the larger therapeutic classes; the successful commercialization of the unique DentiPatch(R) system; and finally, the possible acquisition of technologies and products which are compatible with its long term plans to become a fully integrated pharmaceutical company capable of developing, manufacturing and marketing alternative drug delivery systems. TRANSDERMAL DRUG DELIVERY Transdermal drug delivery systems utilize an adhesive patch containing medication which is administered through the skin and into the bloodstream over an extended period of time. Transdermal drug delivery systems may offer significant advantages over conventional oral and parenteral dosage forms, including non-invasive administration, controlled delivery over an extended period of time, improved patient compliance and avoidance of the problems and adverse side-effects associated with oral and parenteral drug delivery. Transdermal drug delivery also provides benefits to the pharmaceutical industry by reducing costs and expanding the market for certain drugs. Noven's patented, proprietary transdermal drug delivery systems incorporate a thin, solid state, multi-laminate construction with a drug-bearing interpolymeric adhesive. This transdermal drug delivery system, or patch, has a finite area with a specific geometric shape. On one side the patch has a release liner that, when removed, exposes a pressure-sensitive adhesive. This adhesive functions as both the drug platform and as the means of affixing the system to the patient's skin. The outside of the patch is comprised of a specialized backing material that is specifically tailored to the drug being delivered and the length of time the system is intended to be worn. The patch can administer different amounts of drug needed by the patient, and its shape is designed so that it can be worn comfortably with excellent adhesion. The transdermal drug delivery system is packaged in a pouch designed to maintain the system's stability and protect against contamination. Noven's transdermal drug delivery systems are capable of being modified so that they may be used to deliver various drugs. The techniques utilized to modify the system include those which improve the solubility and diffusability of drugs within the transdermal system and those which improve a drug's percutaneous absorption by changing the skin's ability to retain moisture; by 2 7 softening the skin and improving the skin's permeability; by adding compounds which may act as penetration assistants or hair follicle openers; or by changing the skin's boundary layer. TRANSORAL DRUG DELIVERY Transoral drug delivery systems utilize a bio-adhesive patch containing medication which, when moistened, adheres to the buccal mucosa. These systems then administer the drug across the mucosa and into the bloodstream. The buccal mucosa can be utilized as a drug delivery site due to its thin structure and highly vascular property which may allow larger drug molecules, including peptides, proteins and carbohydrates, to be delivered into the bloodstream in therapeutic quantities. Transoral drug delivery systems also have many of the advantages associated with transdermal drug delivery, including non-invasive administration and controlled delivery. There has been only limited medical use of the buccal mucosal route for drug administration, the best known example being nitroglycerin tablets, which dissolve under the tongue and provide a rapid therapeutic response in angina sufferers. Although drugs may pass from these tablet systems across the mucosa into the bloodstream, certain potential disadvantages exist, such as having to position the tablet against the mucosal in a constant fashion; the drug dissolving into the saliva; or the drug being swallowed. A transoral patch presents the advantage of focused drug delivery at the site of the application of the patch in the mouth; saliva will not dilute the delivery of the drug in the same way that it will for a transoral tablet. Transoral patch technology might also provide an alternative to the parenteral administration of large molecules such as peptides, proteins and carbohydrates. Noven's first transoral delivery system is a patented, proprietary technology consisting of a thin, solid state multi-laminate construction with a drug-bearing bio-adhesive. The DentiPatch(R) system is 2 cm2 in area with a protective liner on one side that, when removed, exposes an adhesive that is then applied to the mucosa. The drug, which is contained in the adhesive, is absorbed through the buccal mucosa over time. The outside of the patch is comprised of a specialized backing material that is specifically tailored to the drug being delivered, which in the case of the DentiPatch(R), is lidocaine. The patch is contained in a pouch to maintain its stability and to protect against contamination. This basic system can be modified to deliver various drugs. The techniques used to modify the patch system might include those which improve the solubility and diffusability of drugs within the adhesive matrix and the release characteristics of the drug from the adhesive to the mucosa. 3 8 PRODUCTS The following table summarizes the status of products marketed, approved and under development by the Company and is qualified by reference to the more detailed descriptions elsewhere in this Annual Report.
MARKETING PRODUCT INDICATION STATUS MILESTONES - ------- ---------- ------ ---------- TRANSDERMAL/HRT Estrogen/Vivelle(R) and Menopausal -FDA approved -Novartis-- MENOREST Symptoms U.S. and Canada -RPR-- all other territories -Approved in 38 foreign countries -Commercial sales in the United States, Canada and 19 foreign countries Osteoporosis -Approved in 36 -Novartis--U.S. and foreign countries Canada -RPR--all other territories Combination Menopausal -NDA filed in U.S. -RPR -- Worldwide Estrogen/Progestogen Symptoms/ -Regulatory filings in Osteoporosis Europe Second Generation Menopausal -Clinical development -Novartis--U.S. and Estrogen Symptoms/ Canada Osteoporosis -RPR--Japan TRANSORAL Lidocaine/ Dental Pain Control -FDA approved -Marketing DentiPatch(R) -Filed in UK Commenced Ketoprofen Dental pain -Pre-clinical -- development (Undisclosed Osteoporosis -Pre-clinical -- molecules) development
4 9 OTHER TRANSDERMALS (Undisclosed Central nervous system -Phase I clinical trials -- Molecules) Nitroglycerin Angina Pectoris -FDA tentative -- approval Clonidine Hypertension -Phase I clinical trials -- Scopolamine Motion sickness -IND filed -- Ketoprofen Pain relief -Phase I clinical trials -- completed Testosterone/Estrogen Menopause/libido -Pre-clinical --
5 10 HORMONAL PRODUCTS - ----------------- MARKET OVERVIEW There are more than 40 million post-menopausal women in the U.S. and this group is expected to grow by 50% within the next decade. There are an additional 60 million post- menopausal women in Europe. The Company estimates that worldwide sales of all hormone replacement products, including those delivered transdermally, are approximately $2.5 billion to $3.0 billion annually. With the aging of the population worldwide, conditions and diseases such as menopause, osteoporosis and heart disease, which may benefit from hormone replacement therapy, will become significantly more prevalent. Menopause begins when the ovaries cease to produce estrogen, or when both ovaries are removed surgically prior to natural menopause. The most common acute physical symptoms of natural or surgical menopause are hot flashes and night sweats, which occur in up to 85% of menopausal women. One of the most common problems, after hot flashes, is vaginal dryness. This condition, which affects an estimated 25% percent of women, usually begins within five years after menopause. Moderate-to-severe menopausal symptoms can be treated by replacing the estrogen the body can no longer produce. Estrogen replacement therapy relieves hot flashes and night sweats effectively, and prevents drying and shrinking of the reproductive system. Another condition related to the inability to produce estrogen is osteoporosis, a progressive deterioration of the skeletal system through the loss of bone mass. The loss of estrogen in menopause causes increased skeletal resorption and decreased bone formation. According to the National Osteoporosis Foundation, osteoporosis currently affects 25 million people and contributes to approximately 1.5 million fractures annually in the U.S. Morbidity and suffering associated with these fractures are substantial. Estrogen replacement prevents the loss of bone mass and reduces the incidence of vertebral and hip fractures in older women. Numerous medical studies and the National Institutes of Health recommend estrogen replacement therapy as the most effective method of preventing osteoporosis in post-menopausal women. Heart disease is the number one killer of post-menopausal women in the U.S. There have been in excess of 30 studies that provide evidence that estrogen replacement therapy reduces cardiovascular disease by approximately 50% in post-menopausal women. Various reported studies have also shown that estrogen replacement therapy may significantly reduce the risk of colon cancer and have shown positive results in preventing or treating osteoarthritis, Alzheimer disease, strokes, and tooth loss in menopausal women, as well as post-pardum depression. 6 11 VIVELLE(R) AND MENOREST TRANSDERMAL ESTROGEN DELIVERY SYSTEM Noven's products are targeted to the expanding worldwide market for hormonal replacement therapy. Noven's transdermal estrogen delivery system, being sold by Novartis and RPR, is designed to offer a superior alternative to all dosage forms, including other transdermal systems, either currently in the market or under development. Marketing rights to the Company's transdermal estrogen delivery system have been licensed in the United States and Canada to Novartis and in all other territories to RPR. This product has been approved for marketing by the FDA, as well as by regulatory authorities in 38 foreign countries, for the treatment of menopausal symptoms. This product has also been approved in 36 foreign countries for the prevention of osteoporosis. RPR is selling Noven's transdermal estrogen delivery system under the trade name MENOREST in nineteen foreign countries, including France, Germany and the United Kingdom. In March and June, 1996, Ciba-Geigy launched the sale of this product under the brand name Vivelle(R), as an alternative to its older patch, Estraderm(R), in the United States and Canada, respectively. Vivelle(R) and MENOREST are available by prescription and utilize Noven's advanced transdermal matrix technology. These products deliver 17-beta estradiol, the primary estrogen produced by the ovaries, and are applied twice weekly. Vivelle(R) and MENOREST are the only transdermal estrogen systems currently in the market to offer up to four dosage strengths. This new treatment option allows physicians to maintain patients on the lowest possible dose of estrogen in a skin patch form. This product is also easy to wear due to its small size and is less irritating than other similar systems. TRANSDERMAL COMBINATION ESTROGEN / PROGESTOGEN DELIVERY SYSTEM Noven has developed a combination patch containing 17-beta estradiol and a progestogen, norethindrone acetate (NETA). This product is designed to make hormone replacement therapy available to a greater portion of the female population, including those who terminate HRT due to the adverse side effects of continuous or irregular bleeding. Estrogen produces the benefits of menopausal symptom control, osteoporosis prevention and cardiovascular protection. For women who have an intact uterus (non-hysterectomized), estrogen replacement therapy has been associated with an increased risk of uterine cancer. To address this situation, a combination therapy of estrogen and progestogen is prescribed. Using both products together has been shown to reduce the risk of cancer and continue to produce the benefits of estrogen replacement therapy. Further, continuous use of both estrogen and low dose progestogen may be the way to eliminate the monthly menstrual cycle or irregular bleeding. Combination therapy would provide long-term HRT treatment opportunities to women experiencing natural menopause and could, therefore, significantly expand the total HRT market. 7 12 This product has been licensed to RPR on a worldwide basis. An NDA was filed for this product in August, 1997 and European regulatory filings also commenced in 1997. This product is also in clinical development in Japan. SECOND GENERATION ESTROGEN The Vivelle(R) and MENOREST products are state-of-the-art matrix patch delivery systems for estrogen. However, Noven continues to make technological breakthroughs and improvements in matrix patch technology which has resulted in a second generation transdermal estrogen replacement system. This second generation system, utilizing Dot Matrix(TM) technology, is only one-third the area of a Vivelle(R) or MENOREST system at any given dosage level, yet provides the same delivery of drug over a four day period. This new system is even more flexible and comfortable to wear than the first generation product, with a lower potential for skin irritation. In addition to these clear-cut benefits in patient satisfaction and compliance, this product could provide Noven with increased profitability through greater gross margins. Novartis has the right to market the product in the U.S. and Canada and RPR has marketing rights in Japan. Other markets are available for licensing and negotiations between Noven and potential marketing partners are ongoing. TRANSORAL PRODUCTS - ------------------ DENTIPATCH(R) - TRANSORAL LIDOCAINE DELIVERY SYSTEM Injections are rated as the most fear provoking stimulus in all of dentistry; even the sight of the needle is a fear provoking event. These phobias appear to be a major contributor to the avoidance of routine dental care. According to the ADA national survey in 1990, there are approximately 1.2 billion dental procedures performed each year in the U.S. The Company believes that approximately 450 million dental procedures performed each year involving either injections or soft tissues might benefit from the DentiPatch(R) system. DentiPatch(R) was approved for marketing by the FDA in May, 1996 and is the world's first approved oral transmucosal patch. The product is the first topical anesthetic clinically proven to prevent injection pain when large needles are inserted to the bone. It is indicated for the prevention of pain from oral injections and soft tissue dental procedures. The DentiPatch(R) system is applied to the oral mucosa by the dentist or hygienist and quickly releases lidocaine which passes into the soft tissues producing an anesthetic effect. Benefits of this system include: (i) site-specific delivery providing numbing only where needed; (ii) rapid onset in a few minutes with a duration that lasts for 40 minutes throughout most procedures; (iii) increased patient comfort resulting from minimizing fears and anxieties; (iv) enhanced practice building as patients become more receptive to treatment recommendations; (v) no cross-contamination as systems are individually and conveniently packaged; and (vi) low risk of toxicity as drug levels in the bloodstream are only approximately one-twentieth that of an injection. 8 13 Noven launched the product nationwide in September, 1997. Additional products using the DentiPatch technology are currently being developed to enhance Noven's dental business. TRANSORAL DRUG DELIVERY PRODUCTS FOR OTHER INDICATIONS - ------------------------------------------------------ Large, complex, biotechnology molecules such as peptides, proteins and carbohydrates typically require an injectable route of delivery. When taken orally (as capsules or tablets) they are broken down and largely inactivated in the stomach and intestines. The transdermal route is usually unsuitable too, as the molecules are often too large to pass through the skin intact. However, transoral drug delivery, utilizing Noven's transoral patch technology, might offer a viable alternative in several cases. The lining of the mouth is thin and highly vascular and drugs can pass across into the bloodstream rapidly without being subjected to breakdown in the gastrointestinal tract. Noven's oral patch technology provides the opportunity of focusing and maintaining a high concentration of drug against the mucosa to maximize absorption. Noven is concentrating on new transoral delivery systems designed for dental anesthesia that offer increased efficacy and are easier for one dental professional to use in an expanded number of procedures. OTHER TRANSDERMAL PRODUCTS - -------------------------- Noven is in the process of combining its transdermal delivery system with a number of different drugs for various indications. Transdermal delivery systems have been and are being developed for nitroglycerin, scopolamine, clonidine and undisclosed molecules for the treatment of central nervous system disorders. Pre-clinical development is also ongoing involving testosterone and testoterone/estradiol. The Company intends to continue to develop and concentrate on the most attractive of these products. The ability of Noven to develop and commercialize these products depends, to a great extent, upon the financial resources it dedicates to them. RESEARCH AND DEVELOPMENT Noven's research and development philosophy is based on the identification of drugs that can be delivered either transdermally or transorally and which can be developed rapidly. The majority of drugs that Noven will work on are already established agents being delivered to patients by means other than transdermally or transorally. Noven seeks therapies that can be improved by using Noven's innovative technologies, and which have substantial market potential. Research and development currently involves twenty-four persons, consisting of formulation experts, analytical chemists and a medical and regulatory group. 9 14 MARKETING Noven has licensed its transdermal estrogen delivery system worldwide to two major pharmaceutical companies, Novartis and RPR, who are selling the product in the U.S., Canada and other foreign countries. In addition, Noven has licensed its transdermal combination estrogen/progestogen delivery system worldwide to RPR and its second generation estrogen delivery system to Novartis in the U.S. and Canada and to RPR in Japan.. In May, 1996, RPR formed a global strategic alliance with Novo Nordisk A/S to offer a comprehensive range of hormone replacement therapies. Noven is also in the process of negotiating the terms of a joint venture with Novartis in connection with the marketing of products for women's health care, including Vivelle(R). The Company has developed and implemented its own marketing and sales plan with respect to the DentiPatch(R) system. This product became available nationally in the second half of 1996. Initially, Noven marketed this product regionally, and commenced a national roll-out in September, 1997. This national roll-out of DentiPatch(R) combined the efforts of a nationwide distribution network and a specific periodontal sales force. The marketing plan will focus primarily on dental schools and periodontist in highly populated progressive areas and will emphasize "pain control" and soft tissue procedures. In order to fulfil its marketing plans for DentiPatch(R) and other products, Noven has established an in-house sales and marketing department that includes an Executive Director of Marketing & Sales, a national and six district sales managers, a product manager, a professional programs team and marketing and sales support staff. As Noven develops new products it will evaluate whether to license products to a larger company with an established sales force or to utilize its own marketing and sales capabilities. The Company's evaluation will be conducted on an individual product basis and will include consideration of the characteristics of the particular market, the estimated costs associated with sales, marketing and distribution. These combined costs and the Company's financial position will be factored into the decision of whether to license or directly market the product. MANUFACTURING Noven manufactures MENOREST for RPR and Vivelle(R) for Novartis pursuant to certain supply agreements. These supply agreements govern the specifications of the product, price, required quantities and other aspects of the manufacturing relationship. The Novartis agreement is for a term of three years terminating in March, 1999. The RPR agreement is for a term coextensive with the term of the last to expire foreign patent related to the MENOREST product, presently approximately eighteen years. Noven has the capacity of designing, developing, building and maintaining its production equipment, including fabrication of replacement parts where appropriate. Additionally, Noven's 10 15 engineering expertise provides valuable support to its research and development groups by rapidly fabricating or modifying equipment essential in the product development program. Noven's original manufacturing facility in Miami-Dade County, which consists of approximately 11,400 square feet, is fully equipped and has a manufacturing capacity of approximately 100 million transdermal patches per year. This facility has been approved to commercially manufacture Vivelle(R) and MENOREST for Novartis and RPR, respectively and the DentiPatch(R) system and has also received a pre-approval inspection for the manufacture of Noven's transdermal nitroglycerin product. Noven's newer 15 acre site in Miami-Dade County includes two adjacent buildings, each with approximately 40,000 square feet. One of the buildings has been fully renovated and equipped. This site was inspected and approved by the FDA and the Medicines Control Agency of the United Kingdom and is currently producing MENOREST and Vivelle(R) for commercial sale by its licensing partners. The facility will have a capacity of approximately 400 million transdermal patches per year. It is anticipated that full development of this site, including possible new construction on the property, can accommodate Noven's space requirements for its foreseeable long term growth. COMPETITION Noven's operations are conducted in highly competitive areas. All drug delivery products being developed by the Company will face competition from both conventional forms of drug delivery (i.e., oral and parenteral), and possibly alternate forms of drug delivery, such as controlled release oral delivery, liposomes and implants. Competition in drug delivery systems is generally based on a company's marketing strength, product performance characteristics (i.e., reliability, safety, patient convenience) and product price. Acceptance by physicians and other health care providers including managed care groups is also critical to the success of a product. In a highly competitive marketplace and with evolving technology, there can be no assurances that additional product introductions or developments by others will not render the Company's products or technologies noncompetitive or obsolete. Noven's transdermal delivery technology will face competition from other transdermal products. Other companies, including Alza Corporation, Cygnus Therapeutic Systems, Elan Corporation, plc, TheraTech, Inc., Ethical Holdings, plc, Cilag, a division of Johnson & Johnson, Schering-Plough and 3M Corp. are developing and marketing competing transdermal drug delivery products. In January 1995, 3M Pharmaceuticals/Drug Delivery Systems and Berlex Laboratories, Inc. announced the receipt of FDA approval to market an estradiol transdermal system in the United States in two dosage strengths. Berlex Laboratories, Inc., along with Forest Laboratories, Inc., have U.S. marketing rights for this product. Commercial distribution of this transdermal delivery product commenced in the second quarter of 1995. It is estimated that this product has captured approximately thirty two percent (32%) of the transdermal estrogen market in the U.S., with the balance substantially held by Estraderm(R), a Novartis product. In addition, TheraTech, Inc. 11 16 announced in December, 1996 that it had received FDA approval to market its transdermal estrogen system under the name Alora(R). Proctor and Gamble commenced marketing this product in the spring of 1997. Finally, Cygnus Therapeutic Systems received FDA approval in 1997 of FemPatch(R) which is being marketed by Parke Davis. Noven has attempted to minimize certain competitive risks by its technological innovativeness and by developing strategic alliances. For example, Noven has aligned itself with two worldwide marketing organizations, Novartis and RPR, for marketing its estrogen delivery system as Vivelle(R) in the U.S. and Canada and as MENOREST elsewhere. Noven also believes that its estrogen replacement system has certain competitive advantages due to the product's characteristics, such as its small size, reduced irritation and availability in several different dosages. Further, Noven believes that its technological expertise in developing, manufacturing and commercializing other transdermal hormonal systems, such as its combination estrogen/progestogen delivery system and the second generation estrogen delivery system, will enable it to successfully compete in the global marketplace. Noven's transoral lidocaine delivery system, DentiPatch(R), faces competition from all other forms of topical anesthetics, such as gels, rinses and swabs. Septodont and Astra are the largest suppliers of these forms of anesthetics and it is unclear at this time how these competitors will respond to the introduction of the DentiPatch(R) system in the market. Noven's competitive position will also be substantially affected by the product's degree of acceptance in the dental community, and the time required to obtain such acceptance. PATENTS AND PROPRIETARY RIGHTS Noven has obtained 14 U.S. patents relating to its transdermal and transoral delivery systems and manufacturing processes and has over 100 pending patent applications worldwide. As a result of the changes in the United States patent law under the General Agreement on Tariffs and Trade and the accompanying Agreement on Trade-Related Aspects of Intellectual Property Law, which took effect in their entirety on January 1, 1996, the terms of some existing Noven patents have been extended beyond the term of seventeen years from the date of grant. Noven patents filed after June 7, 1995 will have a term of twenty years computed from the effective filing date. The Company is unaware of the existence of any challenges to the validity of its patents or of any third party claim of patent infringement with respect to any of its products that could have a material adverse affect on Noven's business or prospects. Although there is a statutory presumption as to a patent's validity, the issuance of a patent is not conclusive as to such validity, or as to the enforceable scope of the claims of the patent. There is no assurance that Noven's patents or any future patents will prevent other companies from developing similar or functionally equivalent products. Furthermore, there is no assurance that any 12 17 of the Company's future processes or products will be patentable, that any pending or additional patents will be issued in any or all appropriate jurisdictions or that Noven's processes or products will not infringe upon the patents of third parties. None of the drug chemical entities Noven uses for the products now in clinical trials are patented in the U.S. However, some of the drugs which may be incorporated in the Company's future products may be patented by others. Therefore, the ability of Noven to market such products prior to the expiration of such patents may depend, among other things, upon its ability to enter into arrangements with the holders of such patents. Noven also attempts to protect its proprietary information under trade secret laws. Generally, Noven's agreements with each employee, licensing partner, consultant, university, pharmaceutical company and agent contain provisions designed to protect the confidentiality of its proprietary information. There can be no assurance that these agreements will not be breached, that the Company will have adequate legal remedies as a result thereof, or that the Company's trade secrets will not otherwise become known or be independently developed by others. GOVERNMENT REGULATION UNITED STATES - ------------- The marketing of pharmaceutical products requires the approval of the FDA in the U.S. The FDA has established regulations, guidelines and safety standards which apply to the pre-clinical evaluation, clinical testing, manufacturing and marketing of pharmaceutical products. The process of obtaining FDA approval for a new product may take several years and is likely to involve the expenditure of substantial resources. The steps required before a product can be produced and marketed for human use include: (i) pre-clinical studies; (ii) submission to the FDA of an IND, which must become effective before human clinical trials may commence in the U.S.; (iii) adequate and well controlled human clinical trials; (iv) submission to the FDA of an NDA or, in some cases, an ANDA; and (v) review and approval of the NDA or an ANDA by the FDA. An ANDA may be submitted for products that have the same active ingredient(s), indication, route of administration, dosage form and dosage strength as an existing FDA-approved product, if clinical studies have demonstrated bio-equivalence of the new product to the FDA-approved product. Under FDA ANDA regulations, companies that seek to introduce a generic product must also certify that the product does not infringe on the approved product's patent. In such circumstances, legal action may ensue to determine the relative rights of the parties and the application of the patent. This patent certification process may involve Noven's transdermal nitroglycerin product, due to the FDA's full approval of another transdermal nitroglycerin product in April, 1995. Accordingly, it is possible that Noven's ability to obtain FDA approval for the marketing of its transdermal nitroglycerin product could involve litigation over the applicability of another patent to Noven's product. This type of litigation is already ongoing with respect to two other parties' efforts to 13 18 commercialize a transdermal nitroglycerin delivery system. The Company is assessing various alternatives in anticipation of these developments. An NDA generally is required for products with new active ingredients, new indications, new routes of administration, new dosage forms or new strengths. An NDA requires that complete clinical studies of a product's safety and efficacy be submitted to the FDA, the cost of which is substantial. These costs can be reduced, however, for delivery systems which utilize approved drugs. Limited testing may begin on humans after submission and approval of the IND. Pre-clinical studies are conducted to obtain preliminary information on a product's efficacy and safety. The results of these studies are submitted to the FDA as part of the IND and are reviewed by the FDA before human clinical trials begin. Human clinical trials may commence 30 days after receipt of the IND by the FDA, unless the FDA objects to the commencement of clinical trials. Human clinical trials are typically conducted in three sequential phases, but the phases may overlap. Phase I trials consist of testing the product primarily for safety in a small number of patients at one or more doses. In Phase II trials, the safety and efficacy of the product are evaluated in a patient population somewhat larger than the Phase I trials. Phase III trials typically involve additional testing for safety and clinical efficacy in an expanded population at different test sites. A clinical plan, or protocol, accompanied by the approval of the institution participating in the trials, must be reviewed by the FDA prior to commencement of each phase of the clinical trials. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time. The results of product development and pre-clinical and clinical studies are submitted to the FDA as an NDA or an ANDA for approval. If an application is submitted, there can be no assurance that the FDA will review and approve the NDA or an ANDA in a timely manner. The FDA may deny an NDA or an ANDA if applicable regulatory criteria are not satisfied or it may require additional clinical testing. Even if such data is submitted, the FDA may ultimately deny approval of the product. Further, if there are any modifications to the drug, including changes in indication, manufacturing process, labeling, or a change in a manufacturing facility, an NDA or an ANDA supplement may be required to be submitted to the FDA. Product approvals may be withdrawn after the product reaches the market if compliance with regulatory standards is not maintained or if problems occur regarding the safety or efficacy of the product. The FDA may require testing and surveillance programs to monitor the effect of products which have been commercialized, and has the power to prevent or limit further marketing of these products based on the results of these post-marketing programs. The Prescription Drug User Fee Act of 1992 (the "Fee Act") authorized the FDA to collect three types of fees from prescription drug manufacturers: (1) one-time application fees imposed upon submission to the FDA for approval, (2) establishment fees, and (3) product fees which are imposed annually. Payment of application fees are required for each human drug application including an NDA, certain ANDAs, certain initial certification/approval of certain antibiotic drugs, and licensure 14 19 under the Public Health Service Act of certain biological products. The Fee Act also mandates a fee on supplements (containing clinical data) to human drug applications. The amount of the fee is dependent on whether the application is accompanied by clinical data on safety and efficacy (other than bioavailability or bioequivalence studies). Through September 30, 1997 the application fee for human drug applications was $205,000, while applications without clinical data and supplements with clinical data were one-half of that fee. Payment of establishment fees are required for prescription drug establishments at which at least one prescription drug product is manufactured. Through September 30, 1997 the establishment fee was $115,700. Payment of product fees are required for each strength and dosage form of an approved prescription drug product at $13,200 through September 30, 1997. The corresponding fees for the period from October 1, 1997 through December 31, 1997 were $256,846, $141,966 and $18,591. The Fee Act provides for fee exceptions, waivers and reductions, including payment deferrals under certain circumstances, primarily for the benefit of small businesses. While Noven will endeavor to request such fee exceptions, waivers and reductions where it believes it can demonstrate eligibility, there is no assurance that the FDA will grant any such request. Foreign and domestic manufacturing facilities are subject to periodic inspections for compliance with the FDA's GMP regulations and each domestic drug manufacturing facility must be registered with the FDA. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money and effort in the area of quality assurance to insure full technical compliance. Facilities handling controlled substances, such as Noven, must be licensed by the U.S. Drug Enforcement Administration ("DEA"). The Company has produced transdermal drug delivery products in accordance with the FDA's GMP regulations for clinical trials, manufacturing process validation studies and commercial sale. Noven's activities are subject to various federal, state and local laws and regulations regarding occupational safety, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and possible future local, state, federal and foreign regulations. Under certain of these laws, Noven could be liable for substantial costs and penalties in the event that waste is disposed of improperly. Noven utilizes one waste management firm to provide for proper disposal of hazardous waste. The Company believes that its hazardous waste disposal procedure prevents improper disposal. FOREIGN - ------- Noven intends to have its products marketed in certain foreign countries. Therefore, approval by these countries' regulatory authorities must be obtained. The approval procedures vary from country to country, and the time required for approval may be longer or shorter than that required for FDA approval. Even after foreign approvals are obtained, further delays may be encountered before products may be marketed. For example, many countries require additional governmental approval for price reimbursement under national health insurance systems. Such approval can be critical to any extensive marketing of drug products in such countries. If practical and acceptable to the FDA, Noven intends to design its FDA protocols for the clinical studies of its products to 15 20 permit acceptance of the data by foreign regulatory authorities and to thereby reduce the risk of duplication of clinical studies. However, additional studies may be required to obtain foreign regulatory approval. Further, some foreign regulatory agencies may require additional studies involving patients located in their countries. As a result of the enactment of the FDA Export Reform & Enhancement Act of 1996, a drug not yet approved in the United States may be exported to certain foreign markets as long as the product: (i) is approved by the importing nation; (ii) is labeled for export and (iii) the product is not in conflict with the laws of the country to which it is intended for export. EMPLOYMENT The Company employs approximately one hundred and forty-six people; approximately fifty are engaged in manufacturing and process development, twenty-two in research and development, thirty-four in medical affairs, regulatory affairs, quality assurance and quality control and forty in marketing and administration. Most of the Company's scientific and engineering employees have had prior experience with pharmaceutical or medical product companies. No employee is represented by a union and Noven has never experienced a work stoppage. The Company believes its employee relations are excellent. INSURANCE The Company has procured general liability insurance, in an amount of $8 million per incident and $9 million in the aggregate per annum. This policy provides coverage on an occurrence basis and is subject to annual renewal. The Company has also procured product liability insurance in an amount of $12 million per incident and $12 million in the aggregate per annum. This policy provides coverage on a claims made basis and is subject to annual renewal. No assurance can be given that the coverage limits will be adequate. Item 2. PROPERTIES. The Company owns a 20,000+/- square foot building which is used for laboratory, engineering, office and administrative purposes on one and one-half acres. The Company also owns 9.5 acres of vacant land that could accommodate 160,000+/- square feet of new buildings for a variety of manufacturing, warehousing and developmental purposes. RPR owns, on a contiguous site, two existing buildings of approximately 80,000+/- square feet on four acres. One of the buildings is being used by Noven for manufacturing purposes. The other building is presently utilized for engineering, offices and warehousing. In 1998 this building will also be utilized for manufacturing. The RPR facility is leased to the Company for a term of 31.5 years on favorable terms. The lease grants Noven a purchase option. RPR may terminate the lease prior to the expiration of its term upon termination or expiration of the license agreement entered into in June 1992. These facilities, it is believed, will provide sufficient space for the Company's projected growth in the foreseeable future. 16 21 The Company leases real property at 13300 Southwest 128th Street, Miami, Florida, under standard leases that expire on December 31, 1998. The aggregate annual rental under these leases is approximately $94,000 per year, subject to certain adjustments. Substantially all of the approximately 11,400 square feet under lease at this location is used for manufacturing and packaging. The Company believes that its existing properties are well maintained and in good operating condition and that there is no excessive obsolescence. Item 3. LEGAL PROCEEDINGS. The Company is not a party to any material legal proceedings, and to the knowledge of the Company, none are threatened. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company did not submit any matters to a vote of stockholders during the fourth quarter of the fiscal year ended December 31, 1997. PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) Market Information The following table sets forth, for the periods indicated, the high and low sale prices for the Common Stock as reported on the Nasdaq National Market.
HIGH PRICE LOW PRICE ---------- --------- First Quarter, 1996 16 1/2 10 7/8 Second Quarter, 1996 18 3/4 10 1/2 Third Quarter, 1996 16 3/8 11 1/4 Fourth Quarter, 1996 16 1/4 8 3/4 First Quarter, 1997 16 1/8 7 7/8 Second Quarter, 1997 9 1/8 5 3/4 Third Quarter, 1997 11 1/8 7 Fourth Quarter, 1997 8 3/4 6
(b) Holders. 17 22 As of December 31, 1997, the number of stockholders of record was 653 and the approximate number of beneficial owners was 5,308. (c) Dividends. The Company has never paid a cash dividend on its Common Stock, intends to retain all earnings for the operation and expansion of its business and does not anticipate paying cash dividends in the future. Any future declaration and payment of dividends will be determined by the Board of Directors in light of conditions then existing, including the Company's earnings, financial condition, capital requirements, as well as such other factors as the Company's Board of Directors may consider. 18 23 Item 6. SELECTED FINANCIAL DATA. SELECTED FINANCIAL DATA The selected financial data presented below are derived from the financial statements of the Company. The financial statements for the years ended December 31, 1995, 1996 and 1997 and the reports thereon, are included elsewhere in this Form 10-K. The selected financial data as of December 31, 1993 and 1994 are derived from financial statements previously filed with the Commission and not included in this Form 10-K. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Financial Statements.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Product Sales $ -- $ 295 $ 8,747 $ 19,652 $ 12,395 License revenue 3,125 4,155 1,703 815 1,872 Interest income 624 1,214 1,682 1,177 893 Other income 345 381 52 -- 31 -------- -------- -------- -------- -------- Total 4,094 6,045 12,184 21,644 15,191 Expenses: Cost of products sold -- 148 4,814 10,020 5,180 Research and development 5,161 8,036 10,509 8,730 10,333 Marketing, general and administrative 2,244 2,805 3,442 4,878 9,235 -------- -------- -------- -------- -------- Total 7,405 10,989 18,765 23,628 24,748 Net loss $ (3,311) $ (4,944) $ (6,581) $ (1,984) $ (9,557) ======== ======== ======== ======== ======== Net loss per share $ (.21) $ (.28) $ (.34) $ (.10) $ (.47) ======== ======== ======== ======== ======== Weighted average shares of common stock and common stock equivalents 15,925 17,440 19,237 19,800 20,159
19 24
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Working capital $ 14,822 $ 35,047 $ 27,560 $ 24,859 $ 18,683 Total assets 29,860 54,365 48,646 44,229 38,224 Long-term obligations -- -- -- -- -- Accumulated deficit (10,539) (15,483) (22,063) (24,047) (33,604) Total stockholders' equity 20,693 44,546 38,030 36,077 29,881
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL From inception (1987) through 1994, the Company primarily engaged in the research and development of transdermal drug delivery systems. During this period, the Company's revenues were principally generated by license fees, milestone payments pursuant to various license agreements and interest earned on funds raised through the sale of its common stock. In 1995, due to the receipt of regulatory approvals for its transdermal estrogen delivery system, a significant portion of the Company' revenues were derived from the sale of this product to the Company's two licensing partners. In 1996, revenues from the sale of these products increased substantially as the Company's licensing partners purchased product to supply their distribution channels and build their own inventory positions. Although in-market sales on Noven's estrogen delivery systems continue to increase on a global basis, Noven experienced lower product sales during 1997 as compared to 1996 as the inventory levels of its licensee partners and the distribution channels diminished without resupply. Noven anticipates increased product sales in 1998; however losses are expected for 1998 due to the fact that product sales still will not be sufficient to offset operating costs, which will include significant research and development expenditures. Noven expects that revenues from product sales to its licensing partners will fluctuate from quarter to quarter and year to year depending upon various factors not in Noven's control, including, but not limited to, the inventory requirements of each licensing partner at different times throughout the year, possible special selling efforts undertaken by each licensing partner at different times 20 25 during the year, and, in the case of RPR the introduction of MENOREST and the estrogen/progestogen combination delivery system into new territories. Noven also expects to generate revenues in 1998 from licensing agreements with respect to products under development, although such revenues will fluctuate depending upon such factors as the number of new agreements finalized, timely achievements of milestones and strategic decisions affecting self-funding of products. Finally, during calendar year 1996, the Company commenced the marketing of its DentiPatch(R) system on a regional basis. The product was launched nationally in the second quarter of 1997, with the first national advertising program commencing at the beginning of the fourth quarter of 1997. Revenues from this product are anticipated to increase during 1998. INFORMATION SYSTEMS AND THE YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. As the year 2000 approaches, such systems may be unable to accurately process certain date-based information. As is the case with most other companies using computers in their operations, the Company is in the process of addressing the Year 2000 problem. The Company is currently engaged in a comprehensive review of all of its computer systems and obtaining assurances from key third parties that they are Year 2000 compliant. The Company anticipates completing the Year 2000 project by the end of 1998. The total cost to the Company of these Year 2000 Compliance activities is in the process of being determined. RESULTS OF OPERATIONS 1997 COMPARED TO 1996 - --------------------- Total revenues decreased approximately 30% from approximately $21,644,000 in 1996 to approximately $15,191,000 in 1997. The decrease in revenue was a result of the decrease in product sales of the Company's transdermal estrogen delivery system to its two licensing partners. License revenues increased approximately 130% from approximately $815,000 in 1996 to approximately $1,872,000 in 1997 as a result of milestone payments received in connection with the submission by RPR of a New Drug Application for the combination patch of estrogen and progestogen in the United States and similar filings in Europe. Interest income decreased approximately 24% from approximately $1,178,000 in 1996 to approximately $893,000 in 1997 due to lower average investment balances. Cost of product sold decreased approximately 48% from approximately $10,021,000 in 1996 to approximately $5,180,000 in 1997. The gross margin percentage was approximately 58% in 1997 and approximately 49% in 1996. The gross margins vary depending on the amount of product sold to each licensing partner and manufacturing efficiencies, including those relating to production volumes and in 1997 were favorably impacted by the sale of the DentiPatch(R) product. Research and development expenses increased approximately 18% from approximately $8,730,000 in 1996 to approximately $10,333,000 in 1997. The increase in research and development expenses was attributable to new product development, and manufacturing process development activity. New product development included work related to transoral delivery systems in the areas of dental therapeutics and larger molecular entities and transdermal delivery systems for hormone deficiency, nonsteroidal anti-inflammatory agents, central nervous system and cardiovascular drugs. Marketing, general and administrative expenses increased approximately 89% from approximately $4,878,000 in 1996 to approximately $9,235,000 in 1997. The increase in marketing, general and administrative expenses was primarily due to initial marketing expense to 21 26 support the launch of the DentiPatch(R) system and increases in staffing and associated office expenses. 1996 COMPARED TO 1995 - --------------------- Total revenues increased approximately 78% from approximately $12,184,000 in 1995 to approximately $21,644,000 in 1996. The increase in revenues from $8,748,000 in 1995 to $19,652,000 in 1996 was primarily a result of the increase in product sales of the Company's transdermal estrogen delivery system to its two licensing partners. Royalties from transdermal estrogen delivery systems are included in product sales. License revenues decreased approximately 52% from approximately $1,703,000 in 1995 to approximately $815,000 in 1996. Interest income decreased approximately 30% from approximately $1,682,000 in 1995 to approximately $1,178,000 in 1996 due to lower average security balances. Cost of product sold increased approximately 108% from approximately $4,814,000 in 1995 to approximately $10,021,000 in 1996. The gross margin percentage was approximately 49% in 1996 and approximately 45% in 1995. The gross margins vary depending on the amount of product sold to each licensing partner and manufacturing efficiencies, including those relating to production volumes. Research and development expenses decreased approximately 17% from approximately $10,509,000 in 1995 to approximately $8,730,000 in 1996. The decrease in research and development expenses was attributable to less process development activity and a reduced amount of costs associated with the validation of manufacturing equipment and facilities. In 1996 research and development expenses for new product development continued at the same rate as in 1995. New product development included work related to the transoral dental anesthetic system (DentiPatch(R)), an estrogen/progestogen combination delivery system, a second generation estrogen delivery system, a transdermal system delivering a nonsteroidal anti-inflammatory drug, an albuterol delivery system and a nicotine delivery system. Marketing, general and administrative expenses increased approximately 42% from approximately $3,442,000 in 1995 to approximately $4,878,000 in 1996. The increase in marketing, general and administrative expenses was primarily due to initial marketing expense to support the launch of the DentiPatch(R) system and increases in staffing and associated office expenses. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations through public offerings of common stock, including the exercise of warrants issued in connection with the first such offering, private placements of its equity securities, license and contract revenues, and interest income. However, since the launch of its first commercial product in 1995, the Company's operations have been principally financed increasingly by revenues from the sale of its transdermal estrogen delivery system to its licensing partners. The Company has neither utilized debt nor has it engaged in 22 27 significant commercial lease transactions to finance its operations. As of December 31, 1997 and 1996, the Company had approximately $17,148,000 and $19,149,000 respectively, in cash and securities held to maturity. Net cash used in operating activities for the year ended December 31, 1997 was approximately $4,241,000 compared to approximately $3,353,000 for the year ended December 31, 1996. Cash used in 1997 funded the net operating loss along with decreases in accounts payable and accrued liabilities partially offset by decreases in accounts receivables and inventories and an increase in customer advances. Cash used in 1996 was primarily due to decreases in accounts payable, along with the net operating loss and increases in accounts receivable, partially offset by a decrease in inventories. During the year ended December 31, 1997, the Company's investing activities provided approximately $6,691,000, compared to approximately $7,352,000 used in the prior year. Net cash provided during 1997 by investing activities was primarily from the sale of securities held to maturity offset by investments in property and equipment, and patents. Net cash used during 1996 in investing activities was primarily for the purchase of securities held to maturity and additionally for commercial manufacturing equipment, improvements at the new manufacturing site and investments in patents. As of December 31, 1997 the Company had no significant commitments for capital expenditures. During the year ended December 31, 1997, the Company's financing activities provided approximately $3,361,000 , compared to approximately $31,000 provided in the prior year. In 1997, net cash provided by financing activities was primarily from RPR's purchase of 500,000 shares of common stock for $4,000,000, offset by the Company's purchase of 97,100 shares of Treasury Stock for $663,235. The balance of the cash provided by financing activities in 1997 and 1996 was due to the exercise of options pursuant to the employee stock option plan. The Company expects to incur additional operating losses in 1998. Noven is presently negotiating the terms of a joint venture with Novartis in connection with women's health care products, including Vivelle(R). In the event this joint venture is consummated, Noven will be required to make a substantial capital contribution. These factors will adversely affect Noven's short-term liquidity. Under these circumstances therefore, it is highly likely that Noven will need to raise additional funds. Further, in the event the joint venture is not consummated, additional funds may still be required in the future for Noven's operations and in particular, product development. FORWARD LOOKING STATEMENTS From time to time, Noven may publish forward looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, usage and development activities and some other matters. The words "may", "will", "expect", "anticipate", "continue", "estimate", "project", "intend" and similar expressions are intended to identify such forward looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward looking statements. In order to comply with the terms of the safe 23 28 harbor, Noven notes that a variety of factors could cause its actual results and experience to differ materially from anticipated results and other expectations expressed by Noven's forward looking statements. The risks and uncertainties that may effect the operations, performance, development and results of Noven's business, include the following: 1. Dependence upon RPR and Novartis, its two licensing partners, with respect to (i) the commercialization and marketing of certain transdermal hormonal products and (ii) obtaining regulatory approval of certain other transdermal hormonal products. Noven's revenues in any period can be materially affected by the sales and marketing performance of either or both of its licensing partners. 2. Uncertainties regarding (i) the market share for Noven's transdermal hormonal products which can be captured by Noven's licensing partners, and (ii) the market for the DentiPatch(R) product and Noven's ability to successfully establish and effectuate a marketing program. 3. Competition from other entities engaged in transdermal and/or transoral research, development, manufacturing and marketing, as well as other entities engaged in alternative drug delivery technologies. 4. Difficulties associated with (i) identifying appropriate licensing partners capable of meeting the financial requirements of research and development and/or marketing new products, and (ii) consummating satisfactory licensing agreements. 5. The time required to obtain regulatory approval of products and its associated expenses. 6. Unanticipated difficulties associated with the manufacturing process of MENOREST and Vivelle(R) for its licensing partners as well as its DentiPatch(R) product, that could result in delays in delivery and shortages of product. 7. The possible exposure to product liability suits in excess of insurance policy limits or excluded from insurance coverage. Readers are cautioned not to place undue reliance on forward looking statements when made, which speak only as of the date made. Noven undertakes no obligation to publicly release the results of any revision of these forward looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. Also, unless expressly stated, Noven does not adopt projections, forecasts or other forward looking statements which may be disseminated from time to time by analysts and other third parties. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24 29 INDEX TO FINANCIAL STATEMENTS
PAGE ---- REPORT OF INDEPENDENT AUDITORS' Deloitte & Touche LLP F-1 FINANCIAL STATEMENTS Balance Sheets as of December 31, 1997 and 1996 F-2 Statements of Operations for the years ended December 31, 1997, 1996 and 1995 F-3 Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 F-4 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-5 Notes to Financial Statements F-6
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable PART III -------- Omitted pursuant to General Instruction G(3) to Form 10-K PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements included in Part II of this Report. 2. Exhibits 25 30 EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 3.1 --Certificate of Incorporation of the Registrant dated April 10, 1987 and January 28, 1987, incorporated by reference to Exhibit 3(a) of Registration Statement on Form S-18 (Commission File No. 33-20331-A). 3.2 --Amendments to Certificate of Incorporation of the Registrant dated April 10, 1987 and January 28, 1988, incorporated by reference to Exhibit 3(b) of Registration Statement on Form S-18 (Commission File No. 33-20331-A). 3.3 --Amendment to Certificate of Incorporation of the Registrant dated June 21, 1991, incorporated by reference to Exhibit 3.3 of Registration Statement on Form S-2 (Commission File No. 33-45784). 3.4 --Amendment to Certificate of Incorporation of the Registrant dated August 17, 1992, incorporated by reference to Exhibit 3.4 of Form 10-K filed with the Securities and Exchange Commission on March 31, 1994. 3.5 --By-laws of the Registrant, as amended and restated as of April 28, 1992, incorporated by reference to Exhibit 3.5 of Form 10-K filed with the Securities and Exchange Commission on March 31, 1994. 3.6 --Amendment to Certificate of Incorporation of the Registrant dated August 2, 1994 incorporated by reference to Exhibit 3.6 of Form 10-K filed with the Securities and Exchange Commission on March 31, 1995. 10.2 --Agreement between the Registrant and Rorer Group, Inc. (now known as Rhone- Poulenc Rorer, Inc.) dated April 27, 1989 (with certain provisions omitted pursuant to Rule 24b-2), as amended on June 22, 1990 (with certain provisions omitted pursuant to Rule 24b-2), incorporated by reference to Exhibit 10-2 of Form 10-K filed with the Securities and Exchange Commission on March 31, 1996. 10.3 --Amended and Restated Stock Option Plan of the Registrant, incorporated by reference to Exhibit 10.10 of Form 10-K for the year ended December 31, 1990 filed with the Securities and Exchange Commission on March 28, 1991, as further amended on June 23, 1992 and incorporated by reference to the 1992 Proxy Statement filed with the Securities and Exchange Commission on April 30, 1992. 10.7 --Parkside Plaza Office Lease between Mark Rubino and the Registrant dated November 28, 1990, incorporated by reference to Exhibit 10-7 of Form 10-K filed with the Securities and Exchange Commission on March 31, 1996. 26 31 10.8 --Parkside Plaza Office Lease between Bud Eiskant and the Registrant dated June 1, 1990, incorporated by reference to Exhibit 10-8 of Form 10-K filed with the Securities and Exchange Commission on March 31, 1996. 10.9 --License Agreement between the Registrant and Ciba-Geigy Corporation dated November 15, 1991 (with certain provisions omitted pursuant to Rule 406) incorporated by reference to Exhibit 10.9 of Amendment No. 1 to Registration Statement on Form S-2 (Commission File No. 33-45784). 10.12 --Warrant and Warrant Agreement between the Registrant and Ciba-Geigy Corporation dated November 15, 1991, incorporated by reference to Exhibit 10.12 of Registration Statement on Form S-2 (Commission File No. 33-45784). 10.13 --License Agreement and Supply Agreement between the Registrant and Rhone- Poulenc Rorer Pharmaceuticals Inc. dated June 26, 1992 (with certain provisions omitted pursuant to Rule 24b-2), incorporated by reference to Exhibit 10.13 of Form 10-K for the year ended December 31, 1992, filed with the Securities and Exchange Commission on March 31, 1993. 10.14 --Warrant and Warrant Agreement between the Registrant and Rhone-Poulenc Rorer Pharmaceuticals Inc. dated June 26, 1992, incorporated by reference to Exhibit 10.14 of Form 10-K for the year ended December 31, 1992, filed with the Securities and Exchange Commission on March 31, 1993. 10.15 --Parkside Plaza Office Lease between Scott E. Stuckey and Annamarie Stuckey and Registrant dated July 27, 1992, incorporated by reference to Exhibit 10.15 of Form 10-K for the year ended December 31, 1992, filed with the Securities and Exchange Commission on March 31, 1993. 10.16 --Parkside Plaza Office Lease between Lawrence T. Deddy, Trustee and the Registrant dated July 29, 1992, incorporated by reference to Exhibit 10.16 of Form 10-K for the year ended December 31, 1992, filed with the Securities and Exchange Commission on March 31, 1993. 10.17 --Agreement between the Registrant and Turnpike-McNeil Development Limited dated January 29, 1993 (re: real property), incorporated by reference to Exhibit 10.17 of Form 10-K for the year ended December 31, 1992, filed with the Securities and Exchange Commission on March 31, 1993. 10.18 --Agreement between the Registrant and Turnpike-McNeil Development Limited dated January 29, 1993 (re: real property and building), incorporated by reference to Exhibit 10.18 of Form 10-K for the year ended December 31, 1992, filed with the Securities and Exchange Commission on March 31, 1993. 27 32 10.19 --Warrant issued to Ciba-Geigy Corporation dated April 1, 1993, incorporated by reference to Exhibit 10.19 of Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission on March 31, 1994. 10.20 --Industrial Lease between Rhone-Poulenc Rorer Pharmaceuticals Inc. and the Registrant dated March 23, 1993 and effective February 16, 1993 (with certain provisions omitted pursuant to Rule 24b-2), incorporated by reference to Exhibit 10.20 of Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission on March 31, 1994. 10.21 --Second Amendment dated May 13, 1993 to Agreement between the Registrant and Rhone-Poulenc Rorer, Inc. (successor to Rorer Group, Inc.) dated April 27, 1989 (with certain provisions omitted pursuant to Rule 24b-2), incorporated by reference to Exhibit 10.21 of Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission on March 31, 1994. 10.22 --Amendment dated May 17, 1994 to Warrant dated November 15, 1991 issued to Ciba-Geigy Corporation incorporated by reference to Exhibit 10.22 of Form 10-K for the year ended December 31, 1994, filed with the Securities and Exchange Commission on March 31, 1995. 10.23 --Warrant issued to Ciba-Geigy Corporation dated November 28, 1994 incorporated by reference to Exhibit 10.23 of Form 10-K for the year ended December 31, 1994, filed with the Securities and Exchange Commission on March 31, 1995. 10.24 --Employment Agreement between Steven Sablotsky and the Registrant dated December 31, 1994 incorporated by reference to Exhibit 10.24 of Form 10-K for the year ended December 31, 1994, filed with the Securities and Exchange Commission on March 31, 1995. 10.25 --Employment Agreement between Mitchell Goldberg and the Registrant dated December 31, 1994 incorporated by reference to Exhibit 10.25 of Form 10-K for the year ended December 31, 1994, filed with the Securities and Exchange Commission on March 31, 1995. 10.27 --Supply Agreement between the Registrant and Ciba-Geigy Corporation, Pharmaceuticals Division, dated August 31, 1995 and effective March, 1996 (certain portions have been omitted pursuant to Rule 24b-2), incorporated by reference to Exhibit 10.27 of Form 10-Q(A-2) for the quarter ended March 31, 1996, filed with the Securities and Exchange Commission on November 1, 1996. 28 33 10.28 --Amendment dated May 6, 1996 to the June 9, 1994 Amendment to the License Agreement and the Supply Agreement, each dated April 27, 1989 by and between the Company and Rhone-Poulenc Rorer, Inc. (with certain portions omitted pursuant to Rule 24b- 2), incorporated by reference to Exhibit 10.28 of Form 10-Q(A) for the quarter ended June 30, 1996, filed with the Securities and Exchange Commission on December 3, 1996. 10.29 --Amendment to Certificate of Incorporation 10.30 --1997 Stock Option Plan incorporated by reference to the 1997 Proxy Statement filed with the Securities and Exchange Commission on April 29, 1997. 10.31 --Employment Agreement between Robert C. Strauss and the Registrant dated December 12, 1997. 27 Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K-None. 29 34 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 27, 1998 NOVEN PHARMACEUTICALS, INC. By: /s/ Steven Sablotsky --------------------------------- STEVEN SABLOTSKY, Chairman of the Board 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/ Steven Sablotsky Chairman of the Board March 27, 1998 --------------------------------- Steven Sablotsky By: /s/ Robert C. Strauss Principal Executive March 27, 1998 --------------------------------- Officer and Director Robert C. Strauss (President) By: /s/ William A. Pecora Principal Financial March 27, 1998 --------------------------------- and Accounting Officer William A. Pecora (Chief Financial Officer) By: /s/ Mitchell Goldberg Director March 27, 1998 --------------------------------- Mitchell Goldberg (Executive Vice President) By: /s/ Sheldon H. Becher Director March 27, 1998 --------------------------------- Sheldon H. Becher
30 35 By: /s/ Sidney Braginsky Director March 27, 1998 --------------------------------- Sidney Braginsky By: /s/ Lawrence J. DuBow Director March 27, 1998 --------------------------------- Lawrence J. DuBow By: /s/ Fred G. Weiss Director March 27, 1998 --------------------------------- Fred G. Weiss
31 36 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Noven Pharmaceuticals, Inc.: We have audited the accompanying balance sheets of Noven Pharmaceuticals, Inc. ("Noven") as of December 31, 1997 and 1996, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of Noven's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Noven Pharmaceuticals, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Miami, Florida February 13, 1998 F-1 37 NOVEN PHARMACEUTICALS, INC. BALANCE SHEETS DECEMBER 31, 1997 AND 1996 - --------------------------------------------------------------------------------
ASSETS 1997 1996 ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 11,267,555 $ 5,456,826 Securities held to maturity 5,880,430 13,692,010 Accounts receivable 1,224,492 3,366,489 Inventories 2,500,660 4,151,020 Prepaid and other current assets 282,472 248,357 ------------ ------------ Total current assets 21,155,609 26,914,702 ------------ ------------ PROPERTY AND EQUIPMENT: Property and equipment, at cost 18,990,113 18,574,875 Less: accumulated depreciation and amortization 3,746,846 2,873,401 ------------ ------------ Total net property and equipment 15,243,267 15,701,474 ------------ ------------ OTHER ASSETS: Patent development costs, net 1,761,122 1,547,434 Deposits and other assets 64,053 65,128 ------------ ------------ Total other assets 1,825,175 1,612,562 ------------ ------------ TOTAL $ 38,224,051 $ 44,228,738 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,163,177 $ 1,525,192 Accrued liabilities 309,798 530,588 ------------ ------------ Total current liabilities 2,472,975 2,055,780 ------------ ------------ DEFERRED LICENSE REVENUE 5,870,019 6,096,015 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 4) STOCKHOLDERS' EQUITY: Preferred stock - authorized 100,000 shares of $.01 par value; no shares issued or outstanding Common stock - authorized 40,000,000 shares of $.0001 par value; issued and outstanding 20,475,531 in 1997 and 19,831,538 shares in 1996 2,048 1,983 Additional paid-in capital 64,146,061 60,122,275 Accumulated deficit (33,603,817) (24,047,315) Treasury stock, 97,100 shares in 1997, at cost (663,235) -- ------------ ------------ Total stockholders' equity 29,881,057 36,076,943 ------------ ------------ TOTAL $ 38,224,051 $ 44,228,738 ============ ============
See accompanying notes to financial statements. F-2 38 NOVEN PHARMACEUTICALS, INC. STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- REVENUES: Product sales $ 12,394,610 $ 19,651,872 $ 8,747,965 License revenue 1,871,996 814,996 1,702,780 Interest income 893,091 1,177,535 1,681,688 Other income 31,325 -- 51,908 ------------ ------------ ------------ Total revenues 15,191,022 21,644,403 12,184,341 ------------ ------------ ------------ EXPENSES: Cost of products sold 5,179,598 10,020,614 4,814,349 Research and development 10,333,152 8,729,709 10,508,763 Marketing, general and administrative 9,234,774 4,878,033 3,441,837 ------------ ------------ ------------ Total expenses 24,747,524 23,628,356 18,764,949 ------------ ------------ ------------ NET LOSS $ (9,556,502) $ (1,983,953) $ (6,580,608) ============ ============ ============ BASIC AND DILUTED LOSS PER SHARE $ (0.47) $ (0.10) $ (0.34) ============ ============ ============ WEIGHTED AVERAGE SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS 20,158,946 19,800,115 19,236,807 ============ ============ ============
See accompanying notes to financial statements. F-3 39 NOVEN PHARMACEUTICALS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
COMMON SHARES ADDITIONAL -------------------- PAID-IN ACCUMULATED TREASURY STOCK AMOUNT CAPITAL DEFICIT STOCK TOTAL ----- ------ ------- ------- ----- ----- BALANCE, DECEMBER 31, 1994 18,839,068 $ 1,884 $ 60,026,833 $(15,482,754) $ $ 44,545,963 ------------ ------------ ------------ ------------ ------------ ------------ Issuance of 726, 347 shares of stock pursuant to stock option plan, net 726,347 72 64,929 65,001 Issuance of 108,729 shares of stock for acquisition of property and equipment 108,729 11 (11) Net loss (6,580,608) (6,580,608) ------------ ------------ ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 1995 19,674,144 1,967 60,091,751 (22,063,362) 38,030,356 ------------ ------------ ------------ ------------ ------------ ------------ Issuance of 157,394 shares of stock pursuant to stock option plan, net 157,394 16 30,524 30,540 Net loss (1,983,953) (1,983,953) ------------ ------------ ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 1996 19,831,538 1,983 60,122,275 (24,047,315) 36,076,943 ------------ ------------ ------------ ------------ ------------ ------------ Issuance of 140,793 shares of stock pursuant to stock option plan, net 140,793 14 3,837 3,851 Issuance of 3,200 shares of stock pursuant to a license agreement 3,200 1 19,999 20,000 Issuance of 500,000 shares of stock pursuant to partial exercise of warrant 500,000 50 3,999,950 4,000,000 Purchase of 97,100 shares of treasury stock, at cost (663,235) (663,235) Net loss (9,556,502) (9,556,502) ------------ ------------ ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 1997 20,475,531 $ 2,048 $ 64,146,061 $(33,603,817) $ (663,235) $ 29,881,057 ============ ============ ============ ============ ============ ============
See accompanying notes to financial statements. F-4 40 NOVEN PHARMACEUTICALS, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (9,556,502) $ (1,983,953) $ (6,580,608) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,008,466 899,263 1,327,254 Amortization of patent costs 358,093 120,480 120,480 Decrease (increase) in inventories 1,650,360 918,926 (3,805,393) (Increase) decrease in prepaid and other current assets (34,115) 9,863 566,939 Decrease (increase) in accounts receivable 2,141,997 (853,928) (1,800,106) Increasee (decrease) in accounts payable 637,985 (2,286,862) 602,859 (Decrease) increase in accrued liabilities (220,790) 49,457 419,669 Decrease in deferred license revenue (225,996) (225,996) (225,996) ------------- ------------ -------------- Cash flows used in operating activities (4,240,502) (3,352,750) (9,374,902) ------------- ---------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Maturity (purchase) of securities 7,811,580 (5,835,613) 15,563,673 Purchase of fixed assets, net (550,260) (1,067,940) (1,837,528) Payments for patent development costs (571,780) (449,284) (359,909) Refund of deposits and other assets 1,075 610 4,656 ------------ ------------ ------------- Cash flows provided by (used in) investing activities 6,690,615 (7,352,227) 13,370,892 ------------ ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Sale of common stock 4,023,851 30,540 65,001 Treasury stock purchased (663,235) -- - -------------- ------------ ------------ Cash flows provided by financing activities 3,360,616 30,540 65,001 ------------- ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,810,729 (10,674,437) 4,060,991 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,456,826 16,131,263 12,070,272 ------------- ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 11,267,555 $ 5,456,826 $ 16,131,263 ============= ============ ============
See accompanying notes to financial statements. F-5 41 NOVEN PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Noven Pharmaceuticals, Inc. ("Noven" or the "Company") was incorporated in Delaware in January 1987 and is an industry leader in the development and commercialization of advanced drug delivery systems. The following is a summary of significant accounting policies of Noven: PERVASIVENESS OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash and securities with a remaining maturity of three months or less. SECURITIES HELD TO MATURITY - Securities held to maturity consist mainly of U.S. Government obligations with maturities no longer than one year. The securities are recorded at cost which approximates fair value. INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The following are the major classes of inventories as of December 31: 1997 1996 ---- ---- Finished goods $ 857,219 $1,399,858 Work in process 335,650 491,014 Raw materials 1,307,791 2,260,148 ---------------- --------------- Total $2,500,660 $4,151,020 ================ =============== Inventories at December 31, 1997 and 1996 related primarily to the Company's transdermal and transoral delivery systems. To date, Noven has not experienced and does not anticipate any difficulty acquiring materials necessary to manufacture its transdermal and transoral delivery systems. PROPERTY AND EQUIPMENT - Property and equipment is recorded at cost. Depreciation is provided over the estimated useful lives of the assets ranging up to 31 years. Leasehold improvements are amortized over the life of the lease or the service life of the improvements, whichever is shorter. The straight-line method of depreciation is principally followed for financial purposes. Fully depreciated assets are removed from the cost and accumulated depreciation accounts. PATENT DEVELOPMENT COSTS - Costs, principally legal fees, related to the development of patents are capitalized and amortized over the lesser of their estimated economic useful lives or their remaining legal lives. F-6 42 INCOME TAXES - Noven accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS 109 provides that income taxes are accounted for using an asset and liability method which requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities. As there is no assurance that the Company will generate sufficient earnings to utilize its available tax assets for carryforwards, a valuation allowance has been established to offset the existing net deferred tax asset. At December 31, 1997 and 1996, Noven had net operating loss carryforwards of approximately $35,000,000 and $26,000,000. Additionally, at December 31, 1997 and 1996, Noven had research and development credit carryforwards of approximately $3,600,000 and $2,600,000 respectively. Carryforwards expire through 2011. REVENUE RECOGNITION - Revenue from product sales is recognized at the time of shipment. Royalty revenue is recognized when earned and is included in product sales. License revenue is recognized into income when earned under the terms of the agreements. Substantially all of Noven's product sales were to its principal licensees (see Note 3). COSTS OF PRODUCT SOLD - Direct and indirect costs associated with manufacturing the transdermal and transoral delivery systems are included in costs of products sold. RESEARCH AND DEVELOPMENT COSTS - Research and development costs consist of self-funded research and development costs and the costs associated with work performed under license agreements. Research and development costs included direct and allocated expenses and are expensed as incurred. Research and development costs under license agreements partially funded by the licensees are recorded as license revenue or other income. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and cash equivalents, securities held to maturity, accounts receivable, accounts payable and accrued expenses approximate fair value due to the relatively short maturity of the respective instruments. LOSS PER SHARE - The Company adopted SFAS No. 128, EARNINGS PER SHARE, for fiscal year 1997. Under SFAS No. 128, basic loss per share excludes dilution and is computed based on the average number of common shares outstanding and diluted loss per share is computed based on the average number of common and common equivalent shares outstanding. Under the treasury stock method, common equivalent shares are not included in the per share calculations where the effect of their inclusion would be antidilutive. SFAS No. 128 required the restatement of all prior-period earnings per share data. For purposes of the financial statements herein net loss per share represents basic and diluted loss per share. NEW ACCOUNTING STANDARDS - In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", ("SFAS No. 131"). SFAS No. 131, establishes standards for the way that public companies report selected information about operating segments in annual financial statements and requires that those companies report selected information about segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for the periods beginning after December 15, 1997. The Company has not determined the effects, if any, SFAS No. 131 will have on the disclosures in its financial statements. F-7 43 2. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 1997 and 1996:
1997 1996 ---- ---- Land $ 2,540,035 $ 2,540,035 Building 2,365,190 2,267,859 Leased property and leasehold improvements 8,118,046 8,053,841 Manufacturing and testing equipment 5,368,329 5,172,775 Furniture 598,513 540,365 --------------- --------------- 18,990,113 18,574,875 Less accumulated depreciation and amortization 3,746,846 2,873,401 --------------- --------------- $ 15,243,267 $ 15,701,474 =============== ===============
On February 16, 1993, Noven purchased a 20,000 square foot building and 9.5 acres of vacant land in two separate transactions. The $1.1 million purchase price for the building was paid with $300,000 in cash and 87,317 shares of restricted Noven common stock. The purchase price for the vacant land, $2,204,000 was paid with 168,399 shares of Noven restricted stock. The price protection provisions of the contract resulted in the issuance of 108,729 additional shares of Noven restricted stock on March 15, 1995. The land and building are adjacent to two 40,000 square foot manufacturing facilities which are leased by Noven from a licensee as part of a license agreement. 3. LICENSE AGREEMENTS The Company has license agreements with two licensees Rhone Poulenc Rorer ("RPR") and Novartis Pharmaceuticals Corporation ("Novartis"). Noven's license agreement with Novartis grants Novartis the right to market Noven's transdermal estrogen delivery system in the United States and Canada. The agreement provides for receipt of royalty payments based on the sales by Novartis. In addition, warrants to purchase 1,091,151 shares of common stock were granted under this agreement. The exercise prices of these warrants range from $2.5875 to $15.34. The term of the warrants range from five to seven years. In addition, during a 30-day period subsequent to any public or private sale of common stock by Noven, Novartis has the right to purchase shares of common stock at the same price and in an amount sufficient to maintain the same ownership percentage (inclusive of shares subject to warrants held by the licensee) in outstanding common stock held prior to any such sales. As of December 31, 1997, none of these warrants have been exercised. Noven has entered into two license agreements with RPR. These agreements grant RPR the right to market Noven's transdermal estrogen delivery system worldwide except for the United States and Canada and Noven's transdermal combination estrogen/progestogen delivery system worldwide. The agreements will provide Noven certain milestone payments. In addition, Noven granted a warrant to RPR for the right to purchase up to 1,000,000 shares of Noven common stock at a price of $8 per share for a period of five years. On July 1, 1997, 500,000 shares were purchased for $4,000,000 pursuant to this warrant, and the warrant for the remaining 500,000 shares was extended for a period of eighteen months. Further, RPR funded the construction of a manufacturing facility for the production of transdermal drug F-8 44 delivery systems. The facility is leased by Noven at a substantially below market rate. Noven retains the right to purchase the facility at any time in the future at RPR's book value. Noven has recorded both the facility and deferred revenue at amounts equal to the funds advanced by RPR which are depreciated/amortized to depreciation expense and license revenue over the life of the underlying lease (see Note 2). 4. COMMITMENTS AND CONTINGENCIES Noven has employment agreements that provide for base salaries subject to cost of living increases each year and other increases and bonuses as determined by the Compensation Committee. These agreements provide for annual commitments of approximately $1,130,000 in the aggregate and with terms up to 2002. 5. STOCK OPTIONS Noven established a stock option plan (the "Plan") effective January 1, 1997 that provides for the granting of up to 4,000,000 incentive and non-qualified stock options to selected individuals or entities. The terms and conditions of these options (including price, exercise date and number of shares) are determined by the Stock Option Committee, which administers the Plan. The per share exercise price of (i) non-qualified stock options granted to directors and all other persons, can not be less than the fair market value of the common stock on the date of grant and (ii) incentive stock options granted to employees and employees owning in excess of 10% of the issued and outstanding common stock, can not be less than the fair market value and 110% of the fair market value, respectively, of the common stock on the date of grant. Each option issued under the Plan is exercisable after the period(s) specified in the option agreement, but no option can be exercised after 10 years from the date of grant (or five years from the date of grant in the case of a grantee holding more than 10% of the issued and outstanding common stock). Generally the options vest over a period of five years, beginning one year after date of grant. The predecessor stock option plan, which had 3,750,000 options authorized to be granted, had provisions similar to those of the Plan. This plan terminated on December 31, 1996, and no additional options may be granted under this plan. At the end of December 31, 1997, there were approximately 983,000 stock options outstanding under this plan. The Company applies Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for its option plan. Accordingly, no compensation expense has been recognized. Had compensation cost for the Company's plan been determined based upon the fair value at the grant date consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 ---- ---- ---- Net Loss: As Reported $ (9,556,502) $ (1,983,953) $(6,580,608) Pro forma (9,863,653) (2,698,116) (6,961,488) Loss per Share: As Reported $(0.47) $(0.10) $(0.34) Pro forma (0.49) (0.14) (0.36)
F-9 45 The fair value of the options granted during 1997, 1996 and 1995, is estimated as $2.91, $6.44 and $4.24, respectively, on the date of the grant using the Black Scholes option-pricing model with the assumptions listed below. The discount rate reflects the reduction in value due to transfer restrictions on the stock. 1997 1996 1995 ---- ---- ---- Volatility 65.3% 65.9% 62.4% Risk free interest rate 5.83% 6.21% 6.09% Expected life (years) 7 7 7 Discount rate 33.3% 33.3% 33.3% Stock option transactions related to the plans are summarized as follows:
1997 1996 1995 ----------------------------- ----------------------------- ------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Shares Price Shares Price Shares Price - ------- ----------------------------- --------------- ------------- -------------- --------------- Outstanding at beginning of year 1,565,005 $ 8.95 1,509,363 $ 6.79 2,042,149 $ 4.23 Granted 611,523 $ 6.62 362,675 $ 14.38 628,700 $ 9.08 Exercised (155,649) $ 2.64 (189,158) $ 2.17 (961,636) $ 2.13 Canceled (426,896) $ 2.45 (117,875) $ 8.86 (199,850) $ 10.31 ----------- --------- --------- Outstanding at year end 1,593,983 $ 8.27 1,565,005 $ 8.95 1,509,363 $ 6.79 =========== ========= ========= Shares of common stock reserved 4,983,483 1,565,005 1,746,432 Options exercisable at year end 350,317 489,048 663,031
The following tables summarize information concerning outstanding and exercisable options at December 31, 1997, 1996 and 1995:
YEAR ENDED DECEMBER 31, 1997 ---------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable -------------------------------------------------------------- --------------------------------------- Number Weighted Average Number Range of Outstanding Remaining Weighted Average Exercisable Weighted Average Exercise Price at Year End Contractual Life Exercise Price at Year End Exercise Price -------------------------------------------------------------- --------------------------------------- $0 - $4 280,835 4.38 $ 2.31 86,376 $ 2.98 $4 - $8 604,500 6.50 $ 6.53 68,750 $ 6.70 $8 - $12 352,773 3.18 $ 9.73 106,998 $ 10.09 $12 - $18 355,875 5.11 $ 14.49 88,193 $ 14.69 --------- ------- 1,593,983 5.08 $ 8.27 350,317 $ 8.83 ========= =======
F-10 46
YEAR ENDED DECEMBER 31, 1996 ---------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable -------------------------------------------------------------- --------------------------------------- Number Weighted Average Number Range of Outstanding Remaining Weighted Average Exercisable Weighted Average Exercise Price at Year End Contractual Life Exercise Price at Year End Exercise Price -------------------------------------------------------------- --------------------------------------- $0 - $4 413,834 2.17 $ 2.37 179,384 $ 2.44 $4 - $8 97,500 5.42 $ 7.63 6,750 $ 7.57 $8 - $12 614,546 4.07 $ 9.62 232,140 $ 9.59 $12 - $18 439,125 6.03 $ 14.49 70,774 $ 14.78 --------- ------- 1,565,005 4.20 $ 8.95 489,048 $ 7.69 ========= =======
YEAR ENDED DECEMBER 31, 1995 ---------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable -------------------------------------------------------------- --------------------------------------- Number Weighted Average Number Range of Outstanding Remaining Weighted Average Exercisable Weighted Average Exercise Price at Year End Contractual Life Exercise Price at Year End Exercise Price -------------------------------------------------------------- ---------------- ---------------------- $0 - $4 602,667 2.21 $ 2.30 355,169 $ 2.31 $4 - $8 167,500 6.30 $ 7.68 -- -- $8 - $12 650,596 5.12 $ 9.61 255,231 $ 9.78 $12 - $18 88,600 3.03 $ 14.83 52,631 $ 14.78 --------- -------- 1,509,363 3.97 $ 6.79 663,031 $ 6.17 ========= ========
6. 401(k) PLAN On January 1, 1997, the Company adopted a 401(k) profit sharing plan (the "401(k) Plan") covering substantially all employees who have completed three months of service and have reached the age of twenty-one. This plan allows eligible participants to defer from one to fifteen percent of their current compensation and have these amounts contributed to the 401(k) Plan on their behalf. The Company determines, on a year to year basis, the amount, if any, that it will provide as a matching contribution. For the year ended December 31, 1997, no matching contributions were made by the Company. F-11 EX-10.29 2 AMENDMENT TO CERTIFICATE OF INCORPORATION 1 Exhibit 10.29 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF NOVEN PHARMACEUTICALS, INC. NOVEN PHARMACEUTICALS, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That by unanimous consent of the Board of Directors of Noven Pharmaceuticals, Inc. resolutions were duly adopted setting forth a proposed amendment to the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and submitting it to the stockholders entitled to vote thereto for adoption at a meeting of stockholders. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the Article thereof numbered "Fourth" so that, as amended, said Article shall be and read as follows: The total number of shares of capital stock which the corporation shall have authority to issue is 40,100,000, of which 40,000,000 shall be common stock of $.0001 par value per share and of which 100,000 shall be preferred stock of $.01 par value per share. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is expressly authorized, in the resolution or any resolutions providing for the issue of any wholly unissued series of Preferred Stock, to fix, state and express the powers, rights, designations, preferences, qualifications, limitations and restrictions thereof, including, without limitation: the rate of dividends upon which and the times at which dividends on shares of such series shall be payable and the preferences, if any, 2 which such dividends shall have relative to dividends on shares of any other class or classes or any other series of stock of this corporation, whether such dividends shall be cumulative or non-cumulative, and if cumulative, the date or dates from which dividends on shares of such series shall be cumulative; the voting rights, if any, to be provided for shares of such series; the rights, if any, which the holders of shares of such series shall have in the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation; the rights, if any, which the holders of shares of such series shall have to convert such shares into or exchange such shares for shares of Common Stock of this Company and the terms and conditions, including price and rate of exchange of such conversion or exchange; the redemption (including sinking fund provisions), if any, of shares of such series; and such other powers, rights, designations, preferences, qualifications, limitations and restrictions as the Board of Directors may desire to so fix. The Board of Directors is also expressly authorized to fix the number of shares constituting such series and to increase or decrease the number of shares of any series prior to the issue of shares of that series and to decrease, but not increase, the number of shares of any series subsequent to the issue of shares of that series, but not below, the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. SECOND: That thereafter, pursuant to resolution of its Board of Directors, the amendment was submitted to the stockholders entitled to vote thereon for adoption at the annual meeting of stockholders with the required notice in accordance with Section 242 of the General Corporation Law of the State of Delaware and at which the necessary number of shares as required by statute were voted in favor of the amendment. 3 THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said Noven Pharmaceuticals, Inc. caused this certificate to be signed by Steven Sablotsky, its President and Noreen Sablotsky, its Secretary, this 9th day of June, 1997. /s/ Steven Sablotsky ------------------------------------ STEVEN SABLOTSKY, President /s/ Noreen Sablotsky ------------------------------------ NOREEN SABLOTSKY, Secretary The foregoing instrument was acknowledged before me this 9th day of June, 1997 by STEVEN SABLOTSKY and NOREEN SABLOTSKY, President and Secretary, respectively, of Noven Pharmaceuticals, Inc., a Delaware corporation, who are personally known to me, and did not take an oath. Monica A. Holliday /s/ Monica Holliday - ----------------------------- ---------------------------------- Typed, Printed or Stamped Notary Public -- State of Name of Notary Public Florida at large My Commission expires: August 11, 2000 [seal] EX-10.31 3 EMPLOYMENT AGREEMENT 1 Exhibit 10.31 EMPLOYMENT AGREEMENT --------------------- THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 12th day of December, 1997 by and between NOVEN PHARMACEUTICALS, INC., a Delaware corporation (hereinafter called the "Company"), and ROBERT C. STRAUSS (hereinafter called the "Executive"). Recitals -------- A. The Board of Directors of the Company (the "Board") recognizes and desires to assure the Company of the Executive's continued employment in an executive capacity and to compensate him therefor. B. The Executive is willing to make his services available to the Company on the terms and conditions hereinafter set forth. Agreement --------- NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties agree as follows: 1. EMPLOYMENT. 1.1 EMPLOYMENT AND TERM. The Company hereby agrees to employ the Executive and the Executive hereby agrees to serve the Company, on the terms and conditions set forth herein, for the period commencing on the date hereof and expiring on December 31, 2002 (the "Initial Term") unless sooner terminated as hereinafter set forth; provided, however, that commencing on January 1, 2003 and each January 1, thereafter, the Initial Term of this Agreement shall automatically be extended for one additional year unless at least ninety (90) days prior to such January 1 date, the Company shall have delivered to the Executive or the Executive shall have delivered to the Company written notice that the term of the Executive's employment hereunder will not be extended. 1.2 DUTIES OF EXECUTIVE. The Executive shall serve as the President and Chief Executive Officer of the Company and shall have powers and authority superior to any other officer or employee of the Company or of any subsidiary of the Company except the Chairman of the Board. Subject to the preceding sentence, during the term of Employment, the Executive shall diligently perform all services as may be reasonably assigned to him by the Board, and shall exercise such power and authority as may from time to time be delegated to him by the Board. The Executive shall be required to report solely to, and shall be subject solely to the supervision and direction of the Board at duly called meetings thereof, and no other person or group shall be given authority to supervise or direct Executive in the performance of his duties. In addition, the Executive shall regularly consult with and provide information to the Chairman of the Board with respect to the Company's business and affairs. The Executive shall devote substantially all his working time and attention to the business and affairs of the Company (excluding any vacation and sick leave to which the Executive is entitled), render such services to the best of his ability, and use his reasonable best efforts to promote the interests of the Company. It shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees (it being agreed that in no event shall Executive serve on the board of directors of more than four other corporations and the acceptance of any new directorship after the date hereof shall be subject to the consent of the Board, which shall not be unreasonably withheld), (B) deliver lectures, fulfill speaking engagements or teach at educational institutions, and (C) manage personal investments, 2 so long as such activities do not interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. 1.3 PLACE OF PERFORMANCE. In connection with his employment by the Company, the Executive shall be based at the Company's principal executive offices except for travel reasonably necessary in connection with the Company's business. The Company shall not, without the written consent of the Executive, relocate or transfer its principal executive offices outside Dade or Broward County, Florida. 2. COMPENSATION. 2.1 BASE SALARY. Commencing on the effective date of this Agreement, the Executive shall receive a base salary at the annual rate of not less than $400,000 (the "Base Salary") during the term of this Agreement, with such Base Salary payable in installments consistent with the Company's normal payroll schedule, subject to applicable withholding and other taxes. On January 1 of each calendar year (the "Salary Adjustment Date") commencing on January 1, 1999, the Executive's then Base Salary shall be increased by an amount equal to the previous year's Base Salary multiplied by the percentage increase, if any, in the "Consumer Price Index: Dade County, All Items--Urban Wage Earners and Clerical Workers", published by the Bureau of Labor Statistics of the United States Department of Labor (the "CPI"), between the CPI as of December 31 for the year then ended, and the CPI as of December 31 for the year prior to the year then ended. In the event that there is a change in the basis of calculating the CPI, or if a change is made in the terms or number of items contained in the CPI, or if the CPI is discontinued, the Company shall, in good faith, designate a substitute index or formula, and such substitute index or formula shall have the same effect as if it had been originally designated herein. The Base Salary shall also be reviewed, at least annually, for merit increases (if any) and may, by action and in the discretion of the Board, be increased at any time or from time to time. The Base Salary, if increased, shall not thereafter be decreased for any reason. 2.2 INCENTIVE COMPENSATION. The Executive shall be entitled to receive such bonus payments or incentive compensation as may be determined at any time or from time to time by the Board (or any authorized committee hereof) in its discretion. Such potential bonus payments and/or incentive compensation shall be considered at least annually by the Board (it being agreed that such consideration shall not create any implication that the Board shall award any such bonus or incentive compensation). 2.3 STOCK OPTION. (a) The Company hereby grants to the Executive a seven-year incentive stock option (the "Option") to purchase 525,000 shares of the Company's common stock, par value $.0001 per share ("Common Stock"), at a per share exercise price $6 3/16. The Option shall be treated as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code to the greatest extent permitted by law. The Option shall be evidenced by an agreement in substantially the form attached hereto as EXHIBIT A. (b) The Option shall be subject to the terms and conditions of the Company's Stock Option Plan (the "Plan") and contain the following provisions: (i) The Option shall be immediately exercisable with respect to 50,000 shares of Common Stock. The Option shall "vest" (i.e., become exercisable) with respect to the remaining 475,000 shares of Common Stock in whole or in part and cumulatively according to the following schedule (subject, however, to the accelerated vesting contemplated by the following clause (ii) of this Section 2.3(b)): 2 3 10% on or after December 12, 1998 20% on or after December 12, 1999 20% on or after December 12, 2000 25% on or after December 12, 2001 25% on or after December 12, 2002 (ii) Notwithstanding the preceding clause (i), the Option shall become immediately exercisable as to 50% of the shares of Common Stock not otherwise vested upon any termination of Executive's employment pursuant to Section 4.4 hereof; (iii) The Company shall take all action reasonably requested by the Executive to permit any "cashless" exercise of the Option that is permitted under the Plan; (iv) If the Company's Stock Option Committee requests within six months of the date hereof, paragraph 11 of the attached Option agreement form shall be reinstated and be applicable. The Company's Chairman shall use his best efforts to persuade such Committee to not reinstate such provision. Executive shall not exercise the Option prior to the six month anniversary of this Agreement unless his employment is terminated; (v) The Company agrees that, no later than June 30, 1998, it will file a Registration Statement on Form S-8 or take any other action necessary to ensure that the issuance of Common Stock pursuant to the Option is registered under the Securities Act of 1933, as amended; and (vi) The provisions of the Plan shall not be adversely modified as to the Option granted to Executive pursuant to this Agreement without the Executive's prior written consent. 3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS. 3.1 EXPENSE REIMBURSEMENT. During the term of Executive's employment hereunder, the Company, upon the submission of reasonable supporting documentation by the Executive, shall reimburse the Executive for all reasonable expenses actually paid or incurred by the Executive in the course of and pursuant to the business of the Company, including expenses for travel and entertainment. 3.2 INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Initial Term, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable to other key executives of the Company and its subsidiaries, in each case comparable to those currently in effect or as subsequently amended. Such plans, practices, policies and programs, in the aggregate, shall provide the Executive with compensation, benefits and reward opportunities at least as favorable as the most favorable of such compensation, benefits and reward opportunities provided at any time hereafter with respect to other key executives. 3.3 WELFARE BENEFIT PLANS. During the Initial Term, the Executive and/or the Executive's family (which shall be deemed to include Ms. Camilla M. Cochrane assuming Ms. Cochrane is insurable and the cost of such coverage is comparable to the cost of coverage had Ms. Cochrane been Executive's spouse), as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its subsidiaries (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs), at least as favorable as the most favorable of such plans, practices, policies and programs in effect at any time hereafter with respect to other key executives; provided, however, that Ms. Cochrane may be covered 3 4 under alternative plans or policies so long as the coverage is comparable in all material respects to the coverage provided to Executive. 3.4 WORKING FACILITIES. During the term of Executive's employment hereunder, the Company shall furnish the Executive with an office, a secretary and such other facilities and services suitable to his position and adequate for the performance of his duties hereunder. 3.5 AUTOMOBILE ALLOWANCE. During the Initial Term, the Company shall provide Executive with a non-accountable automobile allowance of Seven Hundred Fifty Dollars ($750.00) per month, which amount is intended to compensate Executive for wear and tear and, in addition, reimburse the Executive for all costs of gasoline, oil, repairs, maintenance, insurance and other expenses incurred by Executive by reason of the use of Executive's automobile for Company business from time to time. 3.6 VACATION. During the Initial Term, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its subsidiaries as in effect at any time hereafter with respect to other key executives of the Company and its subsidiaries; PROVIDED, HOWEVER, that in no event shall Executive be entitled to less than five weeks paid vacation per year. 4. TERMINATION. 4.1 TERMINATION FOR CAUSE. Notwithstanding anything contained to the contrary in this Agreement, this Agrement may be terminated by the Company for Cause. As used in this Agreement, "Cause" shall only mean (i) any material act or acts of personal dishonesty taken by the Executive which is either (x) at the expense of the Company, or (y) reasonable likely to bring significant disrepute to the Company, (ii) subject to the following sentences, any violation by the Executive of the Executive's material obligations under this Agreement which is demonstrably willful and deliberate on the Executive's part and which is not remedied within ten business days after receipt of written notice from the Company, (iii) the conviction of the Executive for any criminal act which is a felony or a misdemeanor involving moral turpitude, or (iv) a material breach of Executive's representation in the last sentence of Section 17 hereof or a material breach of the Confidentiality and Invention Agreement contemplated by Section 6.1 hereof. Upon any determination by the Company's Board of Directors that Cause exists under clause (ii) of the preceding sentence, the Company shall cause a special meeting of the Board to be called and held at a time mutually convenient to the Board and Executive, but in no event later than ten (10) business days after Executive's receipt of the notice contemplated by clause (ii). Executive shall have the right to appear before such special meeting of the Board with legal counsel of his choosing to refute any determination of Cause specified in such notice, and any termination of Executive's employment by reason of such Cause determination shall not be effective until Executive is afforded such opportunity to appear. Any termination for Cause pursuant to clause (i), (iii) or (iv) of the first sentence of this Section 4.1 shall be made in writing to Executive, which notice shall set forth in detail all acts or omissions upon which the Company is relying for such termination. Upon any termination pursuant to this Section 4.1, the Executive shall be entitled to be paid his Base Salary to the date of termination and the Company shall have no further liability hereunder (other than for reimbursement for reasonable expenses incurred prior to the date of termination). 4.2 DISABILITY. Notwithstanding anything contained in this Agreement to the contrary, the Company, by written notice to the Executive, shall at all times have the right to terminate this Agreement, and the Executive's employment hereunder, if the Executive shall, as the result of mental or physical incapacity, illness or disability, fail to perform his duties and responsibilities provided for herein for a period of more than one hundred twenty (120) days in any 12-month period. Upon any termination pursuant to this Section 4.2, the Executive shall be entitled to be paid his Base Salary to the date of 4 5 termination and the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination). 4.3 DEATH. In the event of the death of the Executive during the term of his employment hereunder, the Company shall pay to the estate of the deceased Executive an amount equal to the sum of (x) any unpaid amounts of his Base Salary to the date of his death, plus (y) six months of Base Salary, and the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of the Executive's death). 4.4 TERMINATION WITHOUT CAUSE. At any time the Company shall have the right to terminate Executive's employment hereunder by written notice to Executive; provided, however, that the Company shall (i) pay to Executive any unpaid Base Salary accrued through the effective date of termination specified in such notice, (ii) pay to the Executive in a lump sum, in cash within 30 days after the date of employment termination, an amount equal to the Executive's then annual Base Salary, and (iii) pay to the Executive, in accordance with the Company's normal payroll periods and for a period of two years from the date of termination, 50% of the Executive's then Base Salary (I.E., one year's Base Salary will be paid over two years), provided the Executive is not in breach of Section 6.3 hereof. The Company shall be deemed to have terminated the Executive's employment pursuant to this Section 4.4 if such employment is terminated (i) by the Company without Cause, or (ii) by the Executive voluntarily for "Good Reason." For purposes of this Agreement, "Good Reason" means (a) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 1.2 of this Agreement, or any other action by the Company, which results in a significant diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company within ten (10) business days after receipt of notice thereof given by the Executive; (b) any failure by the Company to comply with any of the provisions of Section 2, Section 3, Section 7 or Section 17 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (c) the Company's requiring the Executive to be based at any office or location other than Dade or Broward County, Florida, except for travel reasonably required in the performance of the Executive's responsibilities; (d) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; (e) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement; or (f) any termination by the Executive during the three-month period following the effective date of any "Change in Control" other than a termination for Cause. 5. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in Control" shall mean: (a) The acquisition (other than by or from the Company), at any time after the date hereof, by any person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act"), of beneficial ownership (within the meaning of Rule 5 6 13d-3 promulgated under the Exchange Act) of 30% or more of either the then outstanding shares of common stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors; or (b) The seven (7) individuals who, after the appointment of Executive as a director pursuant to Section 7 hereof, constitute the Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or (c) Approval by the shareholders of the Company (A) a reorganization, merger or consolidation with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 51% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, (B) a liquidation or dissolution of the Company, or (C) the sale of all or substantially all of the assets of the Company, unless the approved reorganization, merger, consolidation, liquidation, dissolution or sale is subsequently abandoned. (d) The approval by the Board of a distribution (or series of distributions) of assets representing more than 50% of the Company's current assets. 6. RESTRICTIVE COVENANTS. 6.1 CONFIDENTIALITY. The Executive agrees to promptly execute and deliver to the Company a Confidentiality and Invention Agreement in substantially the same form as set forth on EXHIBIT B. 6.2 NONSOLICITATION OF EMPLOYEES. While employed by the Company and for a period of twenty-four (24) months thereafter, Executive shall not directly or indirectly, for himself or for any other person, firm, corporation, partnership, association or other entity, attempt to employ or enter into any contractual arrangement with any employee or former employee of the Company, unless such employee or former employee has not been employed by the Company for a period in excess of six months. 6.3 NON-COMPETITION. While employed by the Company and for a period of twenty-four (24) months thereafter, Executive shall not, directly or indirectly, whether as principal, agent, shareholder (except as set forth below) or in any other capacity, whether or not compensation is received, engage or participate in any activity for, be employed by, assist or have an equity interest in (other than as a passive investor of no more than ten percent (10%) with no involvement in the management or conduct of the affairs of business of such entity) any business or other entity which is or plans to develop, manufacture, market or sell any pharmaceutical product designed to compete directly with the transdermal/transoral topical or other products of the Company and its subsidiaries which are under active development or are manufactured, marketed or sold or other business in which the Company is engaged during the term of Executive's employment hereunder. Executive acknowledges that the provisions of this Section 6.3 are reasonably necessary for the purposes of protecting the Company legitimate business interests and goodwill. It is accordingly the intention of the parties that this Section 6.3 6 7 be enforceable to the fullest extent permissible under applicable law. Executive agrees, however, that in the event any restriction or limitation of this Section 6.3, or any portion thereof, shall be declared or held to be invalid or unenforceable by a court of competent jurisdiction, then such restriction or limitation shall be deemed amended to substitute or modify it, as either or both may be necessary, to render it valid and enforceable. 6.4 INJUNCTION. It is recognized and hereby acknowledged by the parties hereto that a breach by the Executive of any of the covenants contained in Section 6.2 or 6.3 of this Agreement will cause irreparable injury to the Company's legitimate business interests and goodwill. As a result, the Executive recognizes and hereby acknowledges that the Company shall be entitled (without the posting of bond or security or the proving of actual damages) to an injunction from any court of competent jurisdiction enjoining and restraining any violation of any or all of the covenants contained in Section 6 of this Agreement by the Executive or any of his affiliates, associates, partners or agents, either directly or indirectly, and that such right to injunction shall be cumulative and in addition to whatever other remedies the Company may possess. 7. ELECTION OF EXECUTIVE AS DIRECTOR. Contemporaneously herewith, the Board is appointing Executive to fill the vacancy on the Board created by the increase of its size to seven (7) members. For so long as the Executive continues to serve as the Company's President and Chief Executive Officer, the Company shall cause the nomination of the Executive as a director of the Company at each shareholder meeting at which election of directors is considered. 8. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. 9. NOTICES: Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered by hand or when deposited in the United States mail, by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: Noven Pharmaceuticals, Inc. 11960 S.W. 144th Street Miami, Florida 33186 Attention: Steven Sablotsky, Chairman WITH A COPY TO: Leonard H. Bloom Shapo, Freedman & Bloom, P.A. 200 S. Biscayne Boulevard, Suite 4750 Miami, Florida 33131 If to the Executive: Robert C. Strauss 760 San Bruno Coral Gables, Florida 33146 WITH A COPY TO: Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. 1221 Brickell Avenue Miami, Florida 33131 Attention: Cesar L. Alvarez, Esq. 7 8 or to such other addresses as either party hereto may from time to time give notice of to the other in the aforesaid manner. 10. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of, be enforceable by and be binding upon the Company's successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise. 11. SEVERABILITY. The invalidity of any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall not affect the enforceability of the remaining portions of this Agreement or any part thereof, all of which are inserted conditionally on their being valid in law, and, in the event that any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall be declared invalid, this Agreement shall be construed as if such invalid word or words, phrase or phrases, sentence or sentences, clause or clauses, or section or sections had not been inserted. If such invalidity is caused by length of time or size of area, or both, the otherwise invalid provision will be considered to be reduced to a period or area which would cure such invalidity. 12. WAIVERS. The waiver by either party hereto of a breach or violation of any term or provision of this Agreement shall not operate nor be construed as a waiver of any subsequent breach or violation. 13. DAMAGES. Nothing contained herein shall be construed to prevent the Company or the Executive from seeking and recovering from the other damages sustained by either or both of them as a result of its or his breach of any term or provision of this Agreement. 14. NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this Agreement is intended or shall be construed, to confer upon or give any person (other than the parties hereto and, in the case of Executive, his heirs, personal representative(s) and/or legal representative) any rights or remedies under or by reason of this Agreement. 8 9 15. FULL SETTLEMENT. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others (it being agreed that nothing herein shall require any severance or other payment following a proper termination of Executive's employment for Cause). In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. 16. CERTAIN REDUCTION OF PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be nondeductible by the Company for Federal income tax purposes because of Section 162(m) or 280G of the Code, then the aggregate present value of amounts payable or distributable to or for the benefit of the Executive pursuant to this Agreement (such payments or distributions pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Company because of Section 162(m) or 280G of the Code. Anything to the contrary notwithstanding, if the Reduced Amount is zero and it is determined further that any Payment which is not an Agreement Payment would nevertheless be nondeductible by the Company for Federal income tax purposes because of Section 162(m) or 280G of the Code, then the aggregate present value of Payments which are not Agreement Payments shall also be reduced (but not below zero) to an amount expressed in present value which maximizes the aggregate present value of Payments without causing any Payment to be nondeductible by the Company because of Section 162(m) or 280G of the Code. For purposes of this Section 16, present value shall be determined in accordance with Section 280G(d)(4) of the Code. Any amount which is not paid in the taxable year in which it was originally scheduled to be paid as a result of the postponement thereof pursuant hereto shall be payable in the next succeeding taxable year in which such payment will not result in the disallowance of a deduction pursuant to either Section 162(m) or 280G of the Code; provided, however, that all postponed payments shall be placed in a Rabbi trust or similar vehicle for the benefit of the Executive in such a way that the amounts so transferred are not taxable to such person or deductible by the Company until payment from such vehicle to the Executive is made. In the event a payment has been made to the Executive, but then disallowed as a deduction by the Internal Revenue Service and return of the payment is required into the trust, said payment to the Executive shall be treated as a loan and said payment to the trust shall be treated as repayment of said loan. The Company shall not pledge, hypothecate or othwerise encumber any amounts held in the trust or other similar vehicle for the benefit of the Executive hereunder. (b) All determinations required to be made under this Section 16 shall be made by the Company's independent public accountants (the "Accounting Firm"), which shall provide (i) detailed supporting calculations both to the Company and the Executive within twenty (20) business days of the termination of Executive's employment or such earlier time as is requested by the Company, and (ii) an opinion to the Executive that he has substantial authority not to report any excise tax on his Federal income tax return with respect to any Payments. Any such determination by the Accounting Firm shall be binding upon the Company and the Executive. The Executive shall determine which and how much of the Payments shall be eliminated or reduced consistent with the requirements of this Section 16, provided that, if the Executive does not make such determination within ten business days of the receipt of the calculations made by the Accounting Firm, the Company shall elect which and how much of the Payments shall be eliminated or reduced consistent with the requirements of this Section 16 and shall notify the Executive promptly of such election. Within five business days thereafter, the Company shall pay to or 9 10 distribute to or for the benefit of the Executive such amounts as are then due to the Executive under this Agreement. All fees and expenses of the Accounting Firm incurred in connection with the determinations contemplated by this Section 16 shall be borne by the Company. (c) As a result of the uncertainty in the application of Section 162(m) or 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments will have been made by the Company which should not have been made ("Overpayment") or that additional Payments which will not have been made by the Company could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against the Executive which the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of the Executive shall be treated for all purposes as a loan ab initio to the Executive which the Executive shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which the Executive is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. 17. CONFLICTS WITH CERTAIN EXISTING ARRANGEMENTS. The Company acknowledges that it has received and reviewed Executive's non-competition covenants with a prior employer, a copy of which is attached hereto as EXHIBIT C. The Company agrees that (x) it shall not hereafter acquire a "Conflicting Organization" or otherwise expand its present business activities such that Executive could reasonably be expected to be deemed in breach or violation of such non-competition covenants, and (y) it shall indemnify and hold harmless the Executive from any and all damages that Executive may hereafter suffer or incur by reason of any such Company acquisition or expansion of business after the date hereof. The Executive represents to the Company that his execution and performance of the Agreement does not violate the provisions of any employment, non-competition or other material agreement to which he is a party or by which he is bound. 18. REIMBURSEMENT OF LEGAL EXPENSES. The Company shall promptly reimburse Executive for up to $3,000 of all reasonable legal fees incurred by Executive in connection with the preparation, negotiation and execution of this Agreement and ancillary documents. 19. INDEMNIFICATION. The Company agrees to promptly execute and deliver to Executive an Indemnification Agreement in substantially the same form as utilized for the Chairman of the Board, it being agreed that the Company will use its best efforts to ensure that such agreement will provide for mandatory indemnification and advancement of expenses to the fullest extent permitted by law. 10 11 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. COMPANY: NOVEN PHARMACEUTICALS, INC. By: ------------------------------- Steven Sablotsky Chairman of the Board EXECUTIVE: ---------------------------------- ROBERT C. STRAUSS 11 EX-27 4 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 11,267,555 5,880,430 1,224,492 0 2,500,660 21,155,609 18,990,113 3,746,846 38,224,051 2,472,975 0 0 0 2,048 29,879,009 38,224,051 12,394,610 15,191,022 5,179,598 5,179,598 10,333,152 0 0 (9,556,502) 0 (9,556,502) 0 0 0 (9,556,502) (0.47) (0.47)
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