-----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, WlObPEedltW/6UeqAFr1PUFBdjTHS6mR2WImignaeRu1nWd4SMNvbhJjUixkKk/O ZXYlSq66PCv7ktmh4It2fA== 0000950144-00-003629.txt : 20000327 0000950144-00-003629.hdr.sgml : 20000327 ACCESSION NUMBER: 0000950144-00-003629 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 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-K405 SEC ACT: SEC FILE NUMBER: 000-17254 FILM NUMBER: 578011 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-K405 1 NOVEN PHARMACEUTICALS 12/31/1999 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission File Number 1-09623 NOVEN PHARMACEUTICALS, INC. Incorporated under the laws of the I.R.S. Employer Identification Number State of Delaware 59-2767632 11960 S.W. 144th Street, Miami, Florida 33186 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, Par Value $.0001 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. [X] As of March 1, 2000, there were 21,760,750 shares of Common Stock outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant on March 1, 2000, was approximately $301 million. DOCUMENTS INCORPORATED BY REFERENCE: Part III: Portions of registrant's Proxy Statement for its 2000 Annual Meeting of Shareholders. 2 NOVEN PHARMACEUTICALS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 TABLE OF CONTENTS
PAGE PART I Item 1. Business................................................................................ 3 Item 2. Properties.............................................................................. 17 Item 3. Legal Proceedings....................................................................... 18 Item 4. Submission of Matters to a Vote of Security Holders..................................... 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 19 Item 6. Selected Financial Data................................................................. 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 21 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 27 Item 8. Financial Statements and Supplementary Data............................................. 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................. 27 PART III Item 10. Directors and Executive Officers of the Registrant...................................... 27 Item 11. Executive Compensation.................................................................. 27 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 27 Item 13. Certain Relationships and Related Transactions.......................................... 28 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 28
2 3 PART I ITEM 1. BUSINESS. GENERAL Noven Pharmaceuticals, Inc. ("Noven") is a leader in the development and manufacture of advanced transdermal and transmucosal drug delivery products and technologies. Noven was incorporated in Delaware in 1987, and its principal executive offices are located at 11960 S.W. 144th Street, Miami, Florida 33186; its telephone number is (305) 253-5099. Noven's principal commercialized products are transdermal drug delivery systems for use in hormone replacement therapy. Noven's first product was an estrogen patch for the treatment of menopausal symptoms marketed under the brand name Vivelle(R) in the United States and Canada and under the brand name Menorest(R) in Europe and certain other markets. In May 1999, Noven's second generation estrogen patch, the smallest transdermal estrogen patch ever approved by the United States Food and Drug Administration ("FDA"), was launched in the United States under the brand name Vivelle-Dot(TM). Noven also developed a combination estrogen/progestin transdermal patch for the treatment of menopausal symptoms, which is marketed under the brand name CombiPatch(TM) in the United States and under the brand name Estalis(R) in Europe. See "Transdermal Drug Delivery - Products" below for a more complete description of Noven's transdermal products and their marketing status. Noven has an active research and development program with over 20 products in development. Research efforts are focused primarily on four therapeutic categories: hormone replacement therapy ("HRT"), central nervous system conditions, cardiovascular disease and pain management. Four of its development projects are currently in the clinical trial stage, including MethyPatch(TM), a transdermal methylphenidate delivery system for the treatment of Attention Deficit Hyperactivity Disorder (ADHD). Noven believes that this product will address several serious issues associated with existing therapies and, if approved, will compete in the $500 million market for drugs that treat ADHD. No assurance can be given that this product will be approved by the FDA or that, if approved, it will be successfully marketed. See "Research and Development" below for a more complete description of Noven's product development program. Noven also developed a novel transmucosal anesthetic delivery system which was approved for marketing by the United States Food and Drug Administration ("FDA") in 1996 for the prevention of pain from oral injection and soft tissue dental procedures. Noven markets this product in the United States under the brand name DentiPatch(R). VIVELLE VENTURES LLC In May 1998, Noven and Novartis Pharmaceuticals Corporation ("Novartis") formed a joint venture company called Vivelle Ventures LLC to market and sell women's prescription healthcare products, with the initial focus on marketing Vivelle(R) in the United States and Canada. The joint venture does business under the name Novogyne Pharmaceuticals ("Novogyne"). Novogyne also markets Vivelle-Dot(TM) and co-promotes Novartis' Miacalcin(R) Nasal Spray, a product used to treat osteoporosis. Noven expects that Novogyne's product line will be expanded further in the future, although no assurance can be given that Novogyne will add additional products or that such 3 4 products will be successfully marketed. Novogyne is managed by a committee of five members, three of which are appointed by Novartis and two of which are appointed by Noven. Pursuant to the joint venture operating agreement, certain significant actions require a supermajority vote of the committee members. The President of Novogyne is Robert C. Strauss, who also serves as the President and Chief Executive Officer of Noven. The establishment of Novogyne modified a prior relationship in which Noven had licensed to Novartis the exclusive right to market Vivelle(R) in the United States and Canada and received royalties from Novartis based upon Novartis' sales. Noven initially invested $7.5 million in return for a 49% equity interest in Novogyne. Novartis contributed its rights to Vivelle(R) to Novogyne and also licensed to Novogyne the right to use the Vivelle(R) trademark in return for a 51% equity interest in Novogyne. Under the terms of the joint venture agreements, Noven manufactures Vivelle(R) and Vivelle-Dot(TM), performs marketing, sales and promotional activities, and receives royalties from Novogyne based on Novogyne's sales of the products. Novartis distributes Vivelle(R) and Vivelle-Dot(TM) and provides certain other services to Novogyne, including marketing to the managed care sector. Subject to approval by Novogyne's management committee, cash may be distributed quarterly to Novartis and Noven based upon a contractual formula. The joint venture agreements provide for an annual preferred return of $6.1 million to Novartis and then an allocation of income between Novartis and Noven depending upon sales levels attained. Noven's share of income increases as product sales increase, subject to a maximum of 49%. Either party may dissolve the joint venture following the second or third anniversary of the formation of the joint venture in the event that Novogyne does not achieve (i) sales of at least the lesser of $20 million or 90% of the annual budgeted sales or (ii) profits sufficient to pay Novartis the preferred return of $6.1 million in the preceding year (which Noven has the right to cure). Both of these thresholds were met in 1999. Dissolution can also result from a change in control of Noven prior to May 1, 2000, or at any time thereafter if the acquirer is a top ten pharmaceutical company (as measured by annual dollar sales), or if prior to May 1, 2000, Mr. Strauss is terminated by Noven "without cause" or leaves due to "good reason," as defined in Mr. Strauss' employment agreement with Noven. Upon dissolution, Novartis would reacquire the rights to market Vivelle(R) and Vivelle-Dot(TM) and Novogyne's other assets would be liquidated and distributed to the parties in accordance with their capital account balances as determined pursuant to the operating agreement. The joint venture operating agreement also has a buy/sell provision, effective May 1, 2000, which allows either party to compel either the purchase of the other party's interest in Novogyne or the sale of its own interest. STRATEGY Noven's strategy for continued growth and profitability is to utilize its proprietary transdermal and transmucosal drug delivery technology to establish a leadership position in these fields. In pursuing this strategy, Noven intends to focus on developing products for the following therapeutic areas: hormone replacement therapy, central nervous system conditions, cardiovascular disease and pain management. On a long-term basis, Noven will seek to (i) expand its technology base and seek to develop other drug delivery technologies, (ii) capitalize on the opportunity presented by its collaboration with Novartis through Novogyne by (a) licensing certain of Noven's women's health products to Novogyne and (b) expanding Novogyne's product range beyond transdermal 4 5 products, (iii) form new strategic alliances with other pharmaceutical companies and (iv) establish its own sales force to market certain of its independently developed products. No assurance can be given that Noven will successfully implement all or part of its long-term strategy. TRANSDERMAL DRUG DELIVERY DESCRIPTION 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, improved patient compliance and avoidance of certain problems and adverse side-effects. Noven believes that its technology enables it to develop patient-friendly transdermal systems that improve a patient's quality of life by reducing irritation and improving adhesion. Noven's patented, proprietary transdermal drug delivery systems incorporate a thin, solid state, multi-laminate construction with a drug-bearing interpolymeric adhesive. Noven's transdermal drug delivery systems are capable of being modified to deliver a wide variety of chemical entities. By utilizing a unique, patented blend of polymeric components which effectively modulate the solubility of the drug compound in the adhesive, Noven has achieved the delivery of lipophilic and hydrophilic drugs while minimizing the amount of drug needed in the adhesive. By reducing the dependence of these transdermal systems on chemical means of enhancement, the irritation potential of the finished product is significantly reduced. As a result of these developments, larger molecules, previously believed to be unsuitable for transdermal delivery, can be administered at efficacious doses without irritation. PRODUCTS FIRST GENERATION TRANSDERMAL ESTROGEN DELIVERY SYSTEM Noven's first generation transdermal estrogen delivery systems (marketed as Vivelle(R) and Menorest(R)) 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, through a patch that is applied twice weekly. Vivelle(R) and Menorest(R) offer four dosage strengths, thereby allowing physicians to maintain patients on the appropriate dose of estrogen. 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 for marketing in 36 foreign countries for the prevention of osteoporosis, and an application was filed with the FDA in October 1999 seeking marketing approval in the United States for this indication. Marketing rights to this product are held by Novogyne in the United States, Aventis S.A. (f/k/a Rhone-Poulenc Rorer, Inc.) ("Aventis") in Japan and by Novartis in all other territories. Marketing rights outside of the United States and Canada were held exclusively by Aventis until October 1999, when Novartis sublicensed Aventis' rights to market the product in all of Aventis' exclusive markets other than Japan. Novartis is selling this product under the brand name Menorest(R) in over 20 foreign countries, including France, Germany and the United Kingdom. 5 6 Novogyne markets this product in the United States under the brand name Vivelle(R), and Novartis' Canadian affiliate markets this product under the brand name Vivelle(R) in Canada. Pursuant to license and supply agreements with Aventis, Novartis and Novogyne, Noven manufactures Vivelle(R) and Menorest(R) for these parties and receives royalties based on their sales of the products. The supply agreement for Menorest(R) is a long-term agreement and the supply agreement for Vivelle(R) expires in January 2003. SECOND GENERATION TRANSDERMAL ESTROGEN DELIVERY SYSTEM Noven's continued efforts to improve its matrix patch technology have resulted in the successful development of a second generation transdermal estrogen replacement system called Vivelle-Dot(TM). This second generation system, utilizing Noven's proprietary Dot Matrix(TM) technology, is only one-third the area of a Vivelle(R) or Menorest(R) system at any given dosage level, yet provides the same delivery of drug over the same period. This system is even more flexible and comfortable to wear than the first generation product, with a lower potential for skin irritation. This product is bioequivalent to Noven's first generation product and, like that product, is available in four dosage strengths. In January 1999, Noven received FDA approval to market Vivelle-Dot(TM) for the treatment of the symptoms of menopause, and, in May 1999, Novogyne launched Vivelle-Dot(TM) in the United States. Novartis has marketing rights for Vivelle-Dot(TM) in Canada, and Aventis has marketing rights in Japan. Noven has retained marketing rights to Vivelle-Dot(TM) in all other markets and is currently seeking marketing partners. Pursuant to license and supply agreements with Novogyne, Noven manufactures the product for Novogyne and receives royalties based on Novogyne's sales of the product. TRANSDERMAL COMBINATION ESTROGEN/PROGESTIN DELIVERY SYSTEM Another of Noven's major developments in HRT was the first combination transdermal therapy system approved for marketing by the FDA, a combination patch containing 17-beta estradiol and a progestin, norethindrone acetate (NETA). Benefits of estrogen replacement therapy include 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 progestin is prescribed. Using both products together has been shown to reduce the risk of endometrial cancer while continuing to produce the benefits of estrogen replacement therapy. Further, studies have shown that continuous use of both estrogen and low dose progestin may be effective for many women in eliminating the monthly menstrual cycle or irregular bleeding. In 1998, Aventis, Noven's then exclusive worldwide licensee for this product, received approval from the FDA, as well as by regulatory authorities in 13 foreign countries, for the treatment of menopausal symptoms. Aventis is presently marketing the product under the brand name CombiPatch(TM) in the United States. Pursuant to the October 1999 sublicense by Aventis to Novartis described above, Novartis also acquired the right to market this product outside of the United States and Japan and is marketing this product under the brand name Estalis(R) in Sweden. Noven expects 6 7 that Novartis will launch Estalis(R) in more countries over the next several years, beginning in the year 2000, although no assurance can be given that Novartis will launch and successfully market Estalis(R) in any given country. Pursuant to license and supply agreements with Aventis, which has sublicensed its rights outside of the United States and Japan to Novartis, Noven manufactures the combination product for these parties and receives royalties based on their sales of the product. DEPENDENCE ON LICENSEES AND JOINT VENTURE During 1999, 6%, 35% and 57% of Noven's revenues were generated from sales to, and fees and royalties received from, Novartis, Novogyne and Aventis, respectively. Noven expects to be dependent on sales to Novartis, Novogyne and Aventis, as well as fees and royalties generated from such parties' sales of its transdermal delivery systems, for a significant portion of its expected revenues for the next several years, and no assurance can be given regarding the amount and timing of such revenues. Failure of any of these parties to successfully market these products would cause the quantity of products purchased from Noven and the amount of fees and royalties ultimately paid to Noven to be reduced and would therefore have a material adverse effect on Noven's business and results of operations. Noven expects to be able to exert influence on the marketing of Vivelle(R) and Vivelle-Dot(TM) through its participation in the management of Novogyne, but the management committee of Novogyne is comprised of a majority of Novartis representatives. With respect to Aventis' and Novartis' marketing efforts, Noven's agreements with these parties impose certain obligations on them, but there can be no assurance that such agreements will provide Noven with any meaningful level of protection or cause these parties to perform at a level that Noven deems satisfactory. Aventis recently completed a major merger transaction, creating an additional level of uncertainty regarding Aventis' future marketing efforts. In addition to Noven's dependence on sales by licensees, Noven expects that a significant amount of its earnings for the next several years will be generated through its interest in Novogyne, and no assurance can be given regarding Novogyne's future profitability. Novogyne's sales force is significantly smaller than the sales forces promoting several competitive products, including the market leading product, and there can be no assurance that Novogyne's sales force will be successful. Failure of Novogyne to successfully market Vivelle(R) and Vivelle-Dot(TM) would have a material adverse effect on Noven's business and results of operations. See "Competition" below for a more complete description of the competitive factors affecting Noven and its business. HRT MARKET OVERVIEW There are more than 40 million post-menopausal women in the United States, and this group is expected to grow by 50% by 2020. Noven 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, are expected to 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 7 8 natural or surgical menopause are hot flashes and night sweats, which can occur in up to 85% of menopausal women. Another common problem is vaginal dryness. This condition, which affects an estimated 25% 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. Osteoporosis currently affects over 20 million women and contributes to approximately 1.5 million fractures annually in the United States. 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, exercise and Vitamin D 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 United States. There have been numerous studies that suggest that estrogen replacement therapy may significantly reduce the risk of cardiovascular disease in post-menopausal women. Various reported studies have suggested that estrogen replacement therapy may reduce the risk of colon cancer and may prevent or treat osteoarthritis, Alzheimer's disease, strokes, and tooth loss in menopausal women, but the efficacy of estrogen replacement therapy for the prevention or treatment of these conditions has not been conclusively demonstrated. Other reported studies suggest that prolonged use of combination estrogen/progestin hormone replacement therapy may increase the risk of breast cancer in menopausal women. TRANSMUCOSAL DRUG DELIVERY DESCRIPTION Large, complex, bioengineered 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 also unsuitable for these molecules because they are often too large to pass through the skin intact. Transmucosal drug delivery, however, utilizing Noven's transmucosal patch technology, might offer a viable alternative. The lining of the mouth is thin and highly vascular, and drugs can pass rapidly across the mucosa and into the bloodstream without being subjected to breakdown in the gastrointestinal tract. Noven's oral patch technology provides the opportunity to focus and maintain a high concentration of drug against the mucosa to maximize absorption. Noven's transmucosal drug delivery systems utilize a bio-adhesive patch containing medication which adheres to the buccal mucosa. These systems then administer the drug across the mucosa and into the bloodstream. Transmucosal drug delivery systems also have many of the advantages associated with transdermal drug delivery, including non-invasive administration and controlled delivery. There are many other companies active in the development of transmucosal delivery systems. Challenges faced by Noven and these companies in developing marketable transmucosal systems 8 9 include designing a stable transmucosal platform that will deliver drug at a predictable rate, creating an adhesive system that will adhere in a wet environment, and designing a product that a patient will find comfortable to wear. PRODUCTS DENTIPATCH(R) - TRANSMUCOSAL LIDOCAINE DELIVERY SYSTEM Noven's first transmucosal delivery system, the DentiPatch(R) system, is a patented, proprietary technology consisting of a thin, solid state multi-laminate construction with a drug-bearing bio-adhesive that delivers lidocaine through the buccal mucosa over time. DentiPatch(R) was approved for marketing by the FDA in May 1996 and by the United Kingdom Medicines Control Agency in December 1998 and is the first FDA-approved, and still the only commercially available, oral transmucosal patch. Noven launched the product nationwide in April 1997. The product is the first topical anesthetic clinically proven to prevent 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. Noven is currently marketing the DentiPatch(R) system in the United States through its own marketing and sales department. RESEARCH AND DEVELOPMENT Noven's research and development efforts are focused primarily on developing products in the following fields: hormone replacement therapy, cardiovascular disease, central nervous system conditions and pain management. For the years ended December 31, 1999, 1998 and 1997, Noven spent $7.2 million, $6.8 million and $9.7 million, respectively, for company-sponsored research and development activities. From time to time, Noven may supplement its research and development efforts by entering into research and development agreements, joint ventures and other collaborative arrangements with other companies to defray the cost of product development. Noven's research and development philosophy is to identify drugs that can be delivered either transdermally or transmucosally, which can be developed rapidly and which have substantial market potential. Noven also seeks therapies that can be improved by using Noven's innovative technologies. The majority of drugs that Noven will work on are established agents currently being delivered to patients other than transdermally or transmucosally. Statements in this Form 10-K concerning the timing of regulatory filings and approvals are forward looking statements which are subject to risks and uncertainties. The length of time necessary to complete clinical trials, and from submission of an application for market approval to a final decision by a regulatory authority, varies significantly. No assurance can be given that Noven will have the financial resources necessary to complete products under development, that those projects to which Noven dedicates sufficient resources will be successfully completed, that Noven will be able to obtain regulatory approval for any such product, or that any approved product may be produced in commercial quantities, at reasonable costs, and be successfully marketed, either by Noven or by a licensing partner. Similarly, there can be no assurance that Noven's competitors, many of whom have greater resources than Noven, will not develop and introduce products that will adversely affect Noven's business and results of operations. 9 10 The following table summarizes the status of products marketed, approved and/or under development by Noven and is qualified by reference to the more detailed descriptions elsewhere in this Form 10-K. Noven has additional products in early development and continuously evaluates drugs that may be suitable for transdermal or transmucosal delivery.
PRODUCT INDICATION REGULATORY STATUS MARKETING RIGHTS - ------- ---------- ----------------- ---------------- TRANSDERMAL HRT Estrogen/Vivelle(R) and Menopausal Symptoms FDA-approved; Novogyne--U.S. Menorest(R) Approved in 38 foreign Aventis--JapaN countries Novartis--all other territories Osteoporosis Approved in 36 foreign countries; Application filed and pending in U.S. Second Generation Menopausal Symptoms FDA-approved Novogyne--U.S. Estrogen/Vivelle-Dot(TM) Application filed and Novartis--Canada pending in Europe Aventis--Japan Noven--all other territories Osteoporosis Pending results of Vivelle(R) application in the U.S. and pending Vivelle-Dot(TM) approval in Europe Third Generation Estrogen Menopausal Symptoms/ Pre-clinical Novogyne-- U.S. and Canada Osteoporosis development Aventis--Japan Noven--all other territories Combination Estrogen/Progestin Menopausal Symptoms FDA-approved; Aventis--U.S. and Japan CombiPatch(TM)/Estalis(R) Approved in 13 foreign Novartis--all other countries territories
10 11
PRODUCT INDICATION REGULATORY STATUS MARKETING RIGHTS - ------- ---------- ----------------- ---------------- Second Generation Combination Menopausal Symptoms/ Pre-clinical development Aventis--Worldwide Estrogen/Progestin Osteoporosis Androgen Libido Phase I study complete Noven Androgen/Estrogen Menopausal Symptoms/Libido Pre-clinical development Noven TRANSMUCOSAL Lidocaine/DentiPatch(R) Dental pain control FDA-approved; Noven Approved in U.K. Ketoprofen Dental pain control Pre-clinical development Noven Undisclosed molecules Osteoporosis Pre-clinical development Noven OTHER TRANSDERMALS Methylphenidate/ Attention Deficit Phase II/III clinical Noven MethyPatch(TM) Hyperactivity Disorder trials Ketoprofen Pain relief Phase II clinical trials Noven Undisclosed molecules Central nervous system Pre-clinical development Noven Nitroglycerin Angina pectoris FDA tentative approval* Noven Clonidine Hypertension Pre-clinical development Noven Scopolomine Motion sickness IND filed Noven
*Subject to expiration or Noven's successful challenge of the relevant patent. 11 12 MANUFACTURING Noven conducts its manufacturing operations in a facility comprised of two approximately 40,000 square foot buildings located on approximately 5.5 acres in Miami-Dade County, Florida. This facility was most recently inspected by the FDA in February 1998 and by the Medicines Control Agency of the United Kingdom in July 1997 and found to be in compliance with applicable regulatory requirements. This facility has been certified by the Drug Enforcement Agency to manufacture products containing controlled substances in anticipation of the launch of MethyPatch(TM). This facility is currently producing Menorest(R), Vivelle(R), Vivelle-Dot(TM), CombiPatch(TM), Estalis(R) and DentiPatch(R) for commercial sale. With this facility, Noven's manufacturing capability is approximately 400 million patches per year. There is sufficient room for further development of facilities at this site that would significantly increase Noven's manufacturing capacity to accommodate additional products under development. Noven anticipates that full development of this site, including possible new construction on the property, can accommodate Noven's space requirements for the foreseeable future. No assurance can be given that Noven will have the financial resources necessary to adequately expand its manufacturing capacity if and when the need arises. Noven has the capacity to design, develop, build and maintain its production equipment, including fabrication of replacement parts where appropriate. Additionally, Noven's engineering expertise provides valuable support to its research and development groups by rapidly fabricating or modifying equipment essential in the product development program. Raw materials essential to Noven's business are generally readily available from multiple sources. Certain raw materials and components used in the manufacture of Noven's products are, however, available from limited sources, and in some cases, a single source. Any curtailment in the availability of such raw materials could be accompanied by production or other delays, and, in the case of products for which only one raw material supplier exists, could result in a material loss of sales, with consequent adverse effects on Noven's business and results of operations. In addition, because raw material sources for pharmaceutical products must generally be approved by regulatory authorities, changes in raw material suppliers may result in production delays, higher raw material costs and loss of sales and customers. MARKETING Except for the DentiPatch(R) product, Noven has historically granted marketing rights to its products to larger pharmaceutical companies. As Noven develops new products, it will evaluate whether to license such products to a larger company or to Novogyne or to utilize its own clinical, marketing and sales capabilities. Noven's evaluation will be conducted on a product-by-product basis and will include consideration of the characteristics of the particular market and the estimated costs associated with clinical studies, sales, marketing and distribution. These combined costs and Noven's financial position will be factored into the decision of whether to license or directly conduct clinical trials and market the product. Noven expects that it will seek to retain manufacturing rights in any future licensing transactions, partly in an effort to safeguard its proprietary technology. There can be no assurance that Noven will be able to reach a favorable agreement in any particular transaction or collaborative arrangement. 12 13 The establishment of Novogyne provided Noven with a sales force over which it has some management control. If Noven develops any products in the future for the women's healthcare market, it may seek to license the marketing rights for such products to Novogyne. COMPETITION Noven's operations are conducted in highly competitive areas. All drug delivery products being developed by Noven 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, implants, gels and creams. In addition, some or all of the products being developed by Noven will face competition from other transdermal or transmucosal products that deliver the same drugs to treat the same indications. 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. The first product on the market in a particular therapeutic area typically is able to obtain and maintain a significant market share. In a highly competitive marketplace and with evolving technology, there can be no assurance that additional product introductions or developments by others will not render Noven's products or technologies noncompetitive or obsolete. Noven faces competition from a number of companies in the development of transdermal and transmucosal drug delivery products, and competition is expected to intensify as more companies enter the field. Competitors include Alza Corporation, Elan Corporation, plc, Watson Pharmaceuticals, Inc., Mylan Pharmaceuticals, LTS Lohmann Therapy Systems, Ethical Holdings, plc, Johnson & Johnson, Schering-Plough, 3M Corp., Groupe Fournier and others. Some of these companies are substantially larger than Noven and have greater financial and research and development resources than Noven, as well as greater experience in developing and commercializing pharmaceutical products. Noven also competes with other drug delivery companies in the establishment of business arrangements with large pharmaceutical companies to assist in the development or marketing of products. Noven has attempted to minimize certain competitive risks by its technological innovation and by developing strategic alliances with Novartis and Aventis. Noven also believes that its estrogen replacement systems have certain competitive advantages, such as their small size, reduced irritation and availability in several different dosages. Unlike certain competitive products, however, Noven's estrogen replacement systems are not approved in the United States for the treatment or prevention of osteoporosis. Further, Noven believes that its technological expertise in developing and manufacturing other transdermal hormonal systems, such as its combination estrogen/progestin delivery system and the second generation estrogen delivery system, should enable it to successfully compete. Other competitive factors affecting Noven's business include the prevalence and influence of managed care organizations, government organizations, buying groups and similar institutions that are able to seek price discounts and rebates on pharmaceutical products. As the influence of these entities continues to grow, Noven and its marketing partners may face increased pricing pressure. Outside of 13 14 the United States, Noven's products may be affected by government price controls and reimbursement policies. PATENTS AND PROPRIETARY RIGHTS Noven seeks to obtain patent protection on its delivery systems and manufacturing processes where possible. Noven has obtained 19 United States patents relating to its transdermal and transmucosal delivery systems and manufacturing processes and has over 100 pending patent applications worldwide. As a result of the changes in United States patent law under the General Agreement on Tariffs and Trade and the accompanying Agreement on Trade-Related Aspects of Intellectual Property Law, 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. Noven is unaware of the existence of any challenge 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 effect 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 of Noven'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. 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 Noven will have adequate legal remedies as a result thereof, or that Noven's trade secrets will not otherwise become known or be independently developed by others. GOVERNMENT REGULATION Noven's operations are subject to extensive regulation by governmental authorities in the United States and other countries with respect to the testing, approval, manufacture, labeling, marketing and sale of pharmaceutical products. Noven devotes significant time, effort and expense to address the extensive government regulations applicable to its business. The marketing of pharmaceutical products requires the approval of the FDA in the United States. The FDA has established regulations, guidelines and safety standards 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 14 15 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 Investigational New Drug Exemption ("IND"), which must become effective before human clinical trials may commence in the United States; (iii) adequate and well controlled human clinical trials; (iv) submission to the FDA of a New Drug Application ("NDA") or, in some cases, an Abbreviated New Drug Application ("ANDA"); and (v) review and approval of the NDA or ANDA by the FDA. 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. An ANDA involves an abbreviated approval process that may be available 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 an ANDA product must also certify that the product does not infringe on the approved product's patent or that such patent has expired. If the applicant certifies that its product does not infringe on the approved product's patent, the patent holder may institute legal action to determine the relative rights of the parties and the application of the patent, and the FDA may not finally approve the ANDA until a court finally determines that the applicable patent is invalid or would not be infringed by the applicant's product. 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 15 16 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 approval procedures for the marketing of Noven's products in foreign countries vary from country to country, and the time required for approval may be longer or shorter than that required for FDA approval. Even after foreign approvals are obtained, further delays may be encountered before products may be marketed. For example, many countries require additional governmental approval for price reimbursement under national health insurance systems. If practical and acceptable to the FDA, Noven intends to design its FDA protocols for the clinical studies of its products to permit acceptance of the data by foreign regulatory authorities and to thereby reduce the risk of duplication of clinical studies. However, additional studies may be required to obtain foreign regulatory approval. Further, some foreign regulatory agencies may require additional studies involving patients located in their countries. Foreign and domestic manufacturing facilities are subject to periodic inspections for compliance with the FDA's good manufacturing practices ("GMP") regulations and each domestic drug manufacturing facility must be registered with the FDA. In complying with standards set forth in these regulations, Noven must expend significant time, money and effort in the area of quality assurance to insure full technical compliance. Facilities handling controlled substances, such as Noven, also must be licensed by the United States Drug Enforcement Administration. Noven has produced transdermal drug delivery products in accordance with the FDA's GMP regulations for clinical trials, manufacturing process validation studies and commercial sale. FDA approval to manufacture a drug is site specific. In the event an approved manufacturing facility for a particular drug becomes inoperable, obtaining the required FDA approval to manufacture such drug at a different manufacturing site could result in production delays, which could adversely affect Noven's business and results of operations. The federal and state governments in the United States, as well as many foreign governments, including the United Kingdom, from time to time explore ways to reduce medical care costs through health care reform. Due to uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation, Noven cannot predict what impact any reform proposal ultimately adopted may have on the pharmaceutical industry or on the business or operating results of Noven. 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. While it is impossible to accurately predict the future costs associated with environmental compliance and potential remediation activities, compliance with environmental laws is not expected to require significant capital expenditures and has not had, and is not presently expected to have, a material adverse effect on Noven's earnings or competitive position. 16 17 EMPLOYMENT Noven employs approximately 190 people; approximately 72 are engaged in manufacturing and process development, 15 in research and development, 46 in medical affairs, regulatory affairs, quality assurance and quality control and 57 in marketing and administration. No employee is represented by a union and Noven has never experienced a work stoppage. Noven believes its employee relations are good. In addition to the employees employed directly by Noven, Novogyne has a contract sales force of approximately 110 individuals that are managed by Noven under the terms of the joint venture agreements. RISK OF PRODUCT LIABILITY CLAIMS Testing, manufacturing and marketing pharmaceutical products subject Noven to the risk of product liability claims. Noven believes that it maintains an adequate amount of product liability insurance, but there can be no assurance that its insurance will cover all future claims or that Noven will be able to maintain existing coverage or obtain additional coverage at reasonable rates. There can be no assurance that claims arising under any product liability cases, whether or not covered by insurance, will not have a material adverse effect on Noven's business, financial condition or results of operations. SEASONALITY There are no significant seasonal aspects to Noven's business. ITEM 2. PROPERTIES. Noven's headquarters and manufacturing facilities are located on a 5.5 acre site in Miami, Florida. On this site, Noven owns an approximately 28,000 square foot building which is used for laboratory, engineering, office and administrative purposes. Noven also leases from Aventis, for nominal rent, two approximately 40,000 square foot buildings on this site, which are being used by Noven for manufacturing, engineering, administrative and warehousing purposes. One of these facilities has been certified by the Drug Enforcement Agency to manufacture products containing controlled substances in anticipation of the launch of MethyPatch(TM). The lease has a term of 31.5 years and Noven has an option to purchase the leased facilities at any time during the term. Aventis may terminate the lease prior to the expiration of its term upon termination or expiration of the 1992 license agreement between Noven and Aventis. Termination of the lease by Aventis could have a material adverse effect on the business and results of operations of Noven. Noven also owns 9.5 acres of vacant land on a contiguous site that could accommodate up to 160,000 square feet of new buildings for a variety of manufacturing, warehousing and developmental purposes. Noven believes that its facilities are in satisfactory condition, are suitable for their intended use and, in the aggregate, have capacities in excess of those necessary to meet Noven's present needs. Noven's sole manufacturing facility and its research and development activities, as well as its corporate headquarters and other critical business functions, are located in an area subject to hurricane casualty risk. Although Noven has certain limited protection afforded by insurance, Noven's business, 17 18 earnings and competitive position could be materially adversely affected in the event of a major windstorm or other casualty. ITEM 3. LEGAL PROCEEDINGS. Noven is a party to pending legal proceedings arising in the normal course of business, none of which Noven believes is material to its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Noven did not submit any matters to a vote of stockholders during the fourth quarter of the fiscal year ended December 31, 1999. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is a list of the names, ages, positions held and business experience of the persons serving as executive officers of Noven as of March 1, 2000. Officers serve at the discretion of the Board of Directors. There is no family relationship between any of the executive officers, and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected. JAMES B. MESSIRY. Mr. Messiry, age 57, has been Vice President and Chief Financial Officer of the Corporation since January 1999. From 1979 through 1985, and subsequently from 1991 until 1998, he served the Bacardi group of companies in a variety of senior executive positions in Europe and North America, most recently as Vice President of Bacardi-Martini, Inc. Between 1986 and 1991, Mr. Messiry held senior finance positions at Dole Fresh Fruit and Beatrice Latin America. From 1973 to 1979, Mr. Messiry served Pfizer, Inc. in various financial and strategic planning roles. STEVEN SABLOTSKY. Mr. Sablotsky, age 45, is a founder of Noven. He has served as Chairman of the Board of Directors since Noven's organization in 1987, and served as President and Chief Executive Officer from January 1987 until December 1997. He is a member of the American Institute of Chemical Engineers. ROBERT C. STRAUSS. Mr. Strauss, age 58, has been President and Chief Executive Officer and a Director of the Corporation since December 1997. From March 1997 to July 1997, he served as President and Chief Operating Officer and a Director of IVAX Corporation. From 1983 to 1997, he served in various executive positions with Cordis Corporation, most recently as its Chairman of the Board, President and Chief Executive Officer. Mr. Strauss serves on the Board of Directors of Eclipse Surgical Technologies, Inc. (medical devices), Columbia Laboratories, Inc. (pharmaceuticals) and Percardia Inc. (medical devices). 18 19 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) Market Information Noven's Common Stock is listed on the Nasdaq Stock Market and is traded under the symbol NOVN. The following table sets forth, for the periods indicated, the high and low sale prices for the Common Stock as reported on the Nasdaq Stock Market. High Price Low Price ---------- --------- First Quarter, 1998 9 1/4 6 1/8 Second Quarter, 1998 7 5/16 5 1/8 Third Quarter, 1998 7 3/4 2 11/16 Fourth Quarter, 1998 6 3/8 3 1/2 First Quarter, 1999 6 7/8 4 1/4 Second Quarter, 1999 7 1/8 4 1/4 Third Quarter, 1999 9 3/8 5 7/8 Fourth Quarter, 1999 18 3/8 8 1/4 (b) Holders. As of March 1, 2000 the number of stockholders of record was 497 and the approximate number of beneficial owners was 7,794. (c) Dividends. Noven has never paid a cash dividend on its Common Stock and intends to retain all earnings for the operation and expansion of its business and does not anticipate paying cash dividends in the foreseeable future. 19 20 ITEM 6. SELECTED FINANCIAL DATA. The selected financial data presented below is derived from the audited financial statements of Noven. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and related notes appearing elsewhere in this Form 10-K.
Years Ended December 31, -------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (in thousands, except per share amounts) Statement of Operations Data: Revenues: Product sales $ 31,334 $ 20,114 $ 12,395 $ 19,652 $ 8,747 License revenue 316 1,728 1,872 815 1,703 -------- -------- -------- -------- -------- Total revenues 31,650 21,842 14,267 20,467 10,450 Expenses: Cost of products sold 12,721 9,447 5,180 10,021 4,814 Research and development 7,171 6,808 9,723 8,730 10,509 Marketing, general and administrative 7,860 10,105 9,845 4,878 3,442 -------- -------- -------- -------- -------- Total operating costs and expenses 27,752 26,360 24,748 23,629 18,765 Equity in earnings of Vivelle Ventures LLC 1,487 -- -- -- -- Interest income, net 343 439 924 1,178 1,734 -------- -------- -------- -------- -------- Income (loss) before taxes 5,728 (4,079) (9,557) (1,984) (6,581) Income tax benefit 4,732 -- -- -- -- -------- -------- -------- -------- -------- Net income (loss) $ 10,460 $ (4,079) $ (9,557) $ (1,984) $ (6,581) ======== ======== ======== ======== ======== Basic earnings (loss) per share $ 0.49 $ (.19) $ (.47) $ (.10) $ (.34) ======== ======== ======== ======== ======== Diluted earnings (loss) per share $ 0.48 $ (.19) $ (.47) $ (.10) $ (.34) ======== ======== ======== ======== ======== Balance Sheet Data: Working capital $ 16,581 $ 8,847 $ 18,683 $ 24,859 $ 27,560 Investment in Vivelle Ventures LLC 8,365 7,500 -- -- -- Total assets 56,888 40,156 38,224 44,229 48,646 Long-term notes payable 604 -- -- -- -- Accumulated deficit (27,223) (37,683) (33,604) (24,047) (22,063) Stockholders' equity 39,393 28,325 29,881 36,077 38,030
20 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with the 1999 financial statements and the related notes included in this Form 10-K. GENERAL From its inception in 1987 through 1994, Noven engaged primarily in the development of advanced transdermal and transmucosal drug delivery systems. During this period, Noven's revenues consisted primarily of amounts paid to Noven under license agreements with Novartis Pharmaceuticals Corporation (f/k/a Ciba Geigy Corporation) ("Novartis") and Aventis S.A. (f/k/a Rhone Poulenc Rorer Inc. ("Aventis"). In 1995, after receipt of regulatory approvals for its first generation transdermal estrogen delivery system, a significant portion of Noven's revenues was derived from the sale of this product to Novartis and Aventis. In 1996, revenues from the sale of this product increased substantially as Novartis and Aventis purchased product to supply their distribution channels and build their own inventory positions. In 1997, although retail sales of the products increased over 1996, Noven experienced lower sales as Novartis, Aventis and their distributors reduced inventories. In May 1998, Noven and Novartis formed a joint venture company called Vivelle Ventures LLC to market and sell women's healthcare products in the United States and Canada, with the initial focus on marketing Noven's first generation estrogen delivery system, Vivelle(R). The joint venture does business under the name Novogyne Pharmaceuticals ("Novogyne"). The establishment of Novogyne modified a prior relationship in which Noven had licensed Novartis the exclusive right to market Vivelle(R) in the United States and Canada and received royalties from Novartis based upon Novartis' sales. Novogyne is managed by a committee consisting of 5 members, 3 of which are appointed by Novartis and 2 of which are appointed by Noven. Novartis contributed its rights to Vivelle(R) to Novogyne and also licensed the right to use the Vivelle(R) trademark in return for a 51% equity interest in Novogyne. Noven invested $7.5 million in return for a 49% equity interest in Novogyne. In January 1999, Noven received FDA approval for its second generation estrogen delivery system, Vivelle-Dot(TM), which was launched by Novogyne in May 1999. Under the terms of the joint venture agreements, Noven manufactures Vivelle(R) and Vivelle-Dot(TM), performs marketing, sales and promotional activities, and receives royalties from Novogyne based on Novogyne's sales of the products. Novartis distributes Vivelle(R) and Vivelle-Dot(TM) and provides certain other services to Novogyne, including marketing to the managed care sector. The joint venture agreements provide for an annual preferred return of $6.1 million to Novartis and then an allocation of income between Novartis and Noven according to a contractual formula depending upon sales levels attained. Noven's share of income increases as product sales increase, subject to a cap of 49%. In 1999, Novogyne generated sufficient income to meet Novartis' preferred return and Novogyne's income resulted in the recognition of $1.5 million in income by Noven. Subject to approval by Novogyne's management committee, cash may be distributed quarterly to Novartis and Noven based upon a contractual formula. In 1999, Noven received $0.6 million in distributions from Novogyne based upon Novogyne's results of operations for the year ended December 31, 1998 and, based on 1999 results, expects to receive $2.2 million in distributions from Novogyne in 2000. Noven expects that a significant portion of its earnings for the next several 21 22 years will be generated through its interest in Novogyne, but no assurance can be given regarding Novogyne's future profitability. In 1998, Aventis received regulatory approval from the FDA and from certain European regulatory authorities to market Noven's transdermal combination estrogen/progestin delivery system. Aventis is presently marketing the product in the United States under the name CombiPatch(TM). In October 1999, Novartis Pharma AG sublicensed Aventis' rights to market (1) Noven's combination estrogen/progestin transdermal system under the name Estalis(R) in all countries other than the United States and Japan, and (2) Noven's first generation estrogen transdermal system under the name Menorest(R) in all countries other than the United States, Canada and Japan. In connection with the sublicense transaction, and pursuant to Noven's license agreement with Aventis, Noven received $2.7 million in cash from Aventis as Noven's share of the sublicense fees paid to Aventis. This amount was recorded as deferred license revenue and will be recognized as license revenue over seven and one half years. As of March 1, 2000, Estalis(R) was being marketed only in Sweden, but Noven expects that Novartis Pharma AG will launch Estalis(R) in more countries beginning in 2000. Noven expects that revenues from product sales to its licensees 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 marketing efforts of each licensee, the inventory requirements of each licensee, and the timing and scope of Estalis(R) launches by Novartis Pharma AG. RESULTS OF OPERATIONS 1999 COMPARED TO 1998 Total revenues for the year ended December 31, 1999 were $31.7 million, an increase of $9.8 million, or 45%, over the prior year. The increase in revenues was attributable to product sales, which increased $11.2 million, or 56%, for the year ended December 31, 1999, compared to 1998. Product sales in 1999 included $1.2 million in minimum fee payments related to sales of Menorest(R) in certain European countries through 1998. The remaining $10.0 million of the increase in product sales was primarily attributable to sales of CombiPatch(TM), which was launched in the United States by Aventis in September 1998, and to a lesser extent, sales of Vivelle-Dot(TM), which was launched in the United States by Novogyne in May 1999. License revenue declined by $1.4 million, or 82%, for the year ended December 31, 1999 compared to the prior year, due to $1.5 million in milestone payments received in 1998. Gross profit (product sales less cost of products sold) for the year ended December 31, 1999 was $18.6 million (59% of product sales), compared to $10.7 million (53% of product sales) for the prior year. The increase in gross margin resulted primarily from a 20% increase in production volume, manufacturing efficiencies and the recognition of higher royalty and minimum fee payments. Research and development expenses increased approximately $0.4 million, or 5%, for the year ended December 31, 1999, compared to the prior year. Noven expects a significant increase in research and development expenses in 2000, primarily related to clinical studies for Noven's methylphenidate transdermal delivery system. The future level of research and development expenditures will depend on, among other things, the status of products under development and the 22 23 outcome of clinical trials, strategic decisions by management, the consummation of new license agreements and Noven's liquidity. Marketing, general and administrative expenses decreased approximately $2.2 million, or 22%, for the year ended December 31, 1999, compared to the prior year. This decrease was primarily due to lower sales and marketing expenses associated with DentiPatch(R) as a result of Noven's decision to reduce promotion of that product and, to a lesser extent, a redeployment of most of Noven's marketing personnel to Novogyne, which reimburses Noven for its marketing expenses incurred on behalf of Novogyne. Interest income, net decreased approximately $0.1 million, or 22%, for the year ended December 31, 1999 compared to 1998, primarily due to lower average balances in cash and cash equivalents and an increase in debt mainly associated with a Master Lease facility entered into in May 1999. Income tax benefit for the year ended December 31, 1999 resulted from the recognition of a deferred income tax asset of $5.0 million. Realization of this deferred income tax asset depends upon generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that this portion of the deferred income tax asset will be realized based upon estimated future taxable income. See Note 6, Income Taxes, in the Notes to Financial Statements for further information. 1998 COMPARED TO 1997 Total revenues increased 53% from $14.3 million in 1997 to $21.8 million in 1998. The increase in revenues was primarily a result of the increase in sales of Vivelle(R) and the launch of CombiPatch(TM). License revenues decreased 8% from $1.9 million in 1997 to $1.7 million in 1998. License revenues were primarily attributable to milestone payments received from licensees. Cost of products sold increased 82% from $5.2 million in 1997 to $9.4 million in 1998. The gross margin percentage on product sales was 53% in 1998 and 58% in 1997. The decrease in gross margins resulted primarily from a decrease in manufacturing efficiency caused by initial manufacturing costs associated with CombiPatch(TM), and to a lesser extent from a shift in product mix. Research and development expenses decreased 30% from $9.7 million in 1997 to $6.8 million in 1998. The decrease was attributable to a reduction in process development activity and reduced costs for validation of manufacturing equipment and facilities. Research and development expenses for new products were flat. Marketing, general and administrative expenses increased 3% from $9.8 million in 1997 to $10.1 million in 1998 due to increases in staffing and associated office expenses. Interest income, net decreased 52% from $0.9 million in 1997 to $0.4 million in 1998 due to lower average cash and cash equivalents balances. 23 24 YEAR 2000 COMPLIANCE The total cost of Noven's Year 2000 project, which addressed potential problems identified by Noven with respect to Year 2000 issues, was $200,000. Noven's Year 2000 issues have not had a material adverse effect on Noven's results of operations, liquidity or financial condition, and Noven does not expect any such effect in the future. Noven is not aware of any material Year 2000 issues experienced by any material customer, supplier or business partner. Nonetheless, Noven will continue to monitor its Year 2000 compliance and that of other third parties, and there can be no assurance that no material adverse effects will occur in the future. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1999 and December 31, 1998, Noven had $15.3 million and $5.6 million, respectively, in cash and cash equivalents. Net cash of approximately $9.5 million was provided by operating activities during 1999, compared to approximately $5.0 million used in operating activities during the prior year. This increase primarily resulted from growth in income from operations due to higher product sales and royalties, as well as receipt of $2.7 million in October 1999 from Aventis in connection with a sublicense by Novartis Pharma AG of Aventis' rights to market certain of Noven's products. See Note 3, License Agreements, in the Notes to Financial Statements for more information. Accrued compensation and related liabilities increased by $1.7 million over 1998, primarily due to an increase in bonuses payable under a formula bonus plan that provides for the payment of bonuses if Noven's actual performance exceeds established performance goals. In 2000, if Noven exceeds the established company performance goals, bonus awards may exceed initial target awards. Cash used in 1998 funded Noven's net operating loss and increases in accounts receivable and inventories, partially offset by increases in accounts payable, accrued compensation and related liabilities and other accrued liabilities. Net cash of approximately $0.8 million was used in investing activities during 1999, compared to approximately $3.4 million used in investing activities during the prior year. Net cash used in investing activities during 1999 was for the purchase of fixed assets and payment of patent development costs, partially offset by a cash distribution from Novogyne. In 1998, the investment in Novogyne was partially offset by the net cash received by the maturity of securities. Net cash of approximately $1.0 million was provided by financing activities during 1999, compared to approximately $2.7 million provided by financing activities during 1998. In 1998, $2.5 million was provided by sales of common stock in connection with the exercise of warrants. In May 1999, Noven entered into a Master Lease for a maximum principal amount of $1.0 million with a base lease term of three or four years depending upon the equipment type. The Master Lease contains certain financial covenants. Under the Master Lease, Noven has entered into one lease in the amount of $0.6 million with an interest rate at 8% and an expiration date of May 2003. See Note 5, Notes Payable, in the Notes to Financial Statements for further information. Noven's principal sources of short term liquidity are existing cash and cash generated from product sales, fees and royalties under license agreements and distributions from Novogyne, which Noven believes will be sufficient to meet its operating needs and anticipated capital requirements 24 25 over the short term. For the long term, Noven intends to utilize funds derived from these sources, as well as funds generated through sales of products under development. Noven expects that such funds will be comprised of payments received pursuant to future licensing arrangements, as well as Noven's direct sales of its own products. Noven expects that its cash requirements will continue to increase, primarily as a result of expected increases in expenditures associated with clinical studies for products under development. There can be no assurance that Noven will successfully complete the development of such products, that Noven will obtain regulatory approval for any such products, that any approved product may be produced in commercial quantities, at reasonable costs, and be successfully marketed, or that Noven will successfully negotiate future licensing arrangements. To the extent that capital requirements exceed available capital, Noven will seek alternative sources of financing to fund its operations. Other than the Master Lease, Noven has no credit facility. Noven is pursuing financing alternatives, which include a revolving credit facility, and expects to complete a financing arrangement in the near future. No assurance can be given that alternative financing will be available, if at all, in a timely manner, on favorable terms. If Noven is unable to obtain satisfactory alternative financing, Noven may be required to delay or reduce its proposed expenditures, including expenditures for research and development, in order to meet its future obligations. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for historical information contained herein, the matters discussed herein are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting Noven's operations, markets, products and prices, and other factors discussed elsewhere in this report and the other documents filed by Noven with the Securities and Exchange Commission ("SEC"). These factors may cause Noven's results to differ materially from the statements made in this report or otherwise made by or on behalf of Noven. The following is a brief summary of some of the risk factors, which are not listed in order of priority, that could adversely affect Noven's results. Most of these factors are described elsewhere in this report, but the risks described below are not the only risks Noven faces. o Noven faces competition from a number of companies in the development of transdermal and transmucosal drug delivery products, and competition is expected to intensify as more companies enter the field. Some of these companies are substantially larger than Noven and have greater financial and research and development resources than Noven, as well as greater experience in developing and commercializing pharmaceutical products. Noven's products compete with other transdermal products as well as alternative dosage forms of the same or comparable chemical entities. There can be no assurance that Noven's products will successfully compete against competitive products or that developments by others will not render our products obsolete or uncompetitive. o Novogyne contributed a significant portion of Noven's earnings in 1999, and Novogyne's results may continue to be material to Noven in the future. Because, among other things, Noven and Novartis are vastly different in size, the interests of Noven and Novartis may not always be aligned. Novogyne's management committee is comprised of a majority of representatives from Novartis. 25 26 o Over the short term, Noven expects that its cash requirement will continue to increase as a result of expected increases in expenses related to clinical studies for products in development. o Noven expects to be dependent on sales to Novartis, Novogyne and Aventis, as well as fees and royalties generated from such parties' sales of its transdermal delivery systems, for a significant portion of its expected revenues for the next several years, and no assurance can be given regarding the amount and timing of such revenues. Failure of any of these parties to market successfully these products would cause the quantity of products purchased from Noven and the amount of fees and royalties ultimately paid to Noven to be reduced and would therefore have a material adverse effect on Noven's business and operations. In the short term, Noven's growth depends in part on Novartis' launch plans and marketing efforts with respect to Estalis(R), and the scope and success of those efforts are outside the control of Noven. o Almost all of Noven's revenues are currently generated through sales of its hormone replacement therapy transdermal delivery systems. While these products have been found to be safe and effective by the FDA and the regulatory authorities of those countries where Noven's products are approved, published studies have concluded that there may be some health risks associated with hormone replacement therapy. o Noven's long-term strategy is dependent, in part, upon the successful development and commercialization of some or all of Noven's pipeline products. The length of time necessary to complete clinical trials and obtain marketing approval from regulatory authorities may be considerable. No assurance can be given that Noven will have the financial resources necessary to complete products under development, that those projects to which Noven dedicates sufficient resources will be successfully completed, that Noven will be able to obtain regulatory approval for any such product, or that any approved product can be produced in commercial quantities, at reasonable costs, and be successfully marketed, either by Noven or by a licensing partner. o Noven's operations are subject to extensive regulation by governmental authorities in the United States and other countries with respect to the testing, approval, manufacture, labeling, marketing and sale of pharmaceutical products. Noven devotes significant time, effort and expense addressing the extensive government regulations applicable to its business. Even if a product is approved by a regulatory authority, product approvals may be withdrawn after the product reaches the market if compliance with regulatory standards is not maintained or if problems occur regarding the safety or efficacy of the product. Failure to comply with governmental regulations may result in fines, unanticipated compliance expenditures, interruptions of production and resulting loss of sales and criminal prosecution. o Noven's success will depend, in part, on its ability to obtain or license patents and operate without infringing the proprietary rights of others. There is no assurance that Noven's patents or any future patents will prevent other companies from developing similar or functionally equivalent products. Furthermore, there is no assurance that any of Noven'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. 26 27 o Like all pharmaceutical companies, Noven faces the risk of loss and associated adverse publicity from product liability lawsuits. Noven believes that it maintains an adequate amount of product liability insurance, but there can be no assurance that its insurance will cover all future claims or that Noven will be able to maintain existing coverage or obtain additional coverage at reasonable rates. o Certain raw materials and components used in the manufacture of Noven's products are available from limited sources, and, in some cases, a single source. Any curtailment in the availability of such raw materials could be accompanied by production or other delays, and, in the case of products for which only one raw material supplier exists, could result in a material loss of sales, with consequent adverse effects on Noven's business and results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Noven does not believe that it has material exposure to market rate risk. Noven has no material debt obligations. Noven may, however, require additional financing to fund future obligations and no assurance can be given that the terms of future sources of financing will not expose Noven to material market rate risk. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Index to Financial Statements at page 34 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information concerning directors required by item 10 is incorporated by reference to Noven's Proxy Statement for its 2000 Annual Meeting of Shareholders. The information concerning executive officers required by item 10 is contained in the discussion entitled "Executive Officers of the Registrant" in Part I hereof. ITEM 11. EXECUTIVE COMPENSATION. The information required by item 11 is incorporated by reference to Noven's Proxy Statement for its 2000 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by item 12 is incorporated by reference to Noven's Proxy Statement for its 2000 Annual Meeting of Shareholders. 27 28 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by item 13 is incorporated by reference to Noven's Proxy Statement for its 2000 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) FINANCIAL STATEMENTS See Index to Financial Statements at page 34 of this report. (a)(2) FINANCIAL STATEMENT SCHEDULES All schedules have been omitted because the required information is not applicable or the information is included in the consolidated financial statements or the notes thereto. (a)(3) EXHIBITS
Exhibit Number Description Method of Filing ------- ----------- ---------------- 3.1 Noven's Restated Certificate of Incorporation. Incorporated by reference to Exhibit 3.1 of Noven's Form 10-K for the year ended December 31, 1998 (File No. 1-09623). 3.2 Noven's By-laws, as amended and restated Incorporated by reference to Exhibit 3.5 as of April 28, 1992. of Noven's Form 10-K for the year ended December 31, 1993 (File No. 1-09623). 10.1 Noven Pharmaceuticals, Inc. Amended and Incorporated by reference to Noven's Restated Stock Option Plan.* Form 10-K for the year ended December 31, 1990 (File No. 1-09623), as further amended on June 23, 1992 and incorporated by reference to the definitive Proxy Statement dated May 11, 1992, for the Annual Meeting of Shareholders held on June 23, 1992.
28 29 10.2 Amendment to Noven Pharmaceuticals, Inc. Incorporated by reference to Noven's Form 10-Q Amended and Restated Stock Option Plan.* for the quarter ended June 30, 1999 (File No. 0-17254). 10.3 Noven Pharmaceuticals, Inc. 1997 Incorporated by reference to Noven's definitive Stock Option Plan.* Proxy Statement dated May 1, 1997, for the Annual Meeting of Shareholders held on June 3, 1997. 10.4 Amendment to Noven Pharmaceuticals, Inc. Incorporated by reference to Noven's Form 10-Q 1997 Stock Option Plan.* for the quarter ended June 30, 1999 (File No. 0-17254). 10.5 Noven Pharmaceuticals, Inc. 1999 Incorporated by reference to Noven's Long-Term Incentive Plan.* definitive Proxy Statement dated April 19, 1999, for the Annual Meeting of Shareholders held on June 8, 1999. 10.6 Employment Agreement between Noven Incorporated by reference to Exhibit 10.31 and Robert C. Strauss dated of Noven's Form 10-K for the year ended December 12, 1997.* December 31, 1997 (File No. 1-09623). 10.7 Form of Employment Agreement (Change Filed herewith. in Control) between Noven and certain of its executive officers.* 10.8 Form of Indemnification Agreement for Incorporated by reference to Exhibit 10.4 Directors and Officers. of Noven's Form 10-K for the year ended December 31, 1998 (File No. 1-09623). 10.9 License Agreement between Noven and Incorporated by reference to Exhibit 10.9 Ciba-Geigy Corporation dated November 15, 1991 of Amendment No. 1 to Noven's Registration (with certain provisions omitted pursuant Statement on Form S-2 (File No. 33-45784). to Rule 406).
29 30 10.10 Agreement between Noven and Turnpike-McNeil Incorporated by reference to Exhibit 10.17 Development Limited dated January 29, 1993 of Noven's Form 10-K for the year ended (re: real property). December 31, 1992 (File No. 1-09623). 10.11 Agreement between Noven and Turnpike-McNeil Incorporated by reference to Exhibit 10.18 Development Limited dated January 29, 1993 of Noven's Form 10-K for the year ended (re: real property and building). December 31, 1992 (File No. 1-09623). 10.12 Industrial Lease between Rhone-Poulenc Rorer Incorporated by reference to Exhibit 10.20 Pharmaceuticals Inc. and Noven dated of Noven's Form 10-K for the year March 23, 1993 and effective February 16, 1993 ended December 31, 1993 (File No. 1-09623). (with certain provisions omitted pursuant to Rule 24b-2). 10.13 Formation Agreement by and between Novartis Incorporated by reference to Exhibit 10.32 Pharmaceuticals Corporation and Noven to Noven's Form 10-Q for the quarter ended dated as of May 1, 1998. March 31, 1998 (File No. 0-17254). 10.14 Operating Agreement of Vivelle Ventures LLC Incorporated by reference to Exhibit 10.33 (a Delaware limited liability company) to Noven's Form 10-Q for the quarter ended dated as of May 1, 1998. March 31, 1998 (File No. 0-17254). 10.15 Marketing and Promotional Agreement by and Incorporated by reference to Exhibit 10.4 between Noven and Vivelle Ventures LLC to Noven's Form 10-Q for the quarter ended dated as of May 1, 1998. March 31, 1998 (File No. 0-17254). 10.16 Sublicense Agreement by and among Novartis Incorporated by reference to Exhibit 10.35 Pharmaceuticals Corporation, Noven and to Noven's Form 10-Q for the quarter ended Vivelle Ventures LLC dated as of May 1, 1998. March 31, 1998 (File No. 0-17254). 10.17 Amended and Restated Limited Assignment Filed herewith. Agreement by and among Novartis Pharmaceuticals Corporation, Noven and Vivelle Ventures LLC dated as of April 1, 1999.
30 31 10.18 Amended and Restated License Agreement between Incorporated by reference to Exhibit 10.1 Noven and Rhone-Poulenc Rorer, Inc. dated of Noven's Form 10-Q for the September 30, 1999 (with certain provisions quarter ended September 30, 1999 omitted pursuant to Rule 24b-2). (File No. 0-17254). 10.19 Amended and Restated License Agreement between Incorporated by reference to Exhibit 10.2 Noven and Rhone-Poulenc Rorer, Inc. dated of Noven's Form 10-Q for the quarter September 30, 1999 (with certain provisions ended September 30, 1999 (File No. 0-17254). omitted pursuant to Rule 24b-2). 10.20 Amended and Restated Supply Agreement between Filed herewith. Noven and Novartis Pharmaceuticals Corporation dated as of April 1, 1999 (with certain provisions omitted pursuant to Rule 24b-2). 11 Computation of Earnings per Share. Filed herewith. 23 Consent of Deloitte & Touche LLP. Filed herewith. 27 Financial Data Schedule. Filed herewith.
- --------------- * Compensation Plan or Agreement. (b) REPORTS ON FORM 8-K. No Current Reports on Form 8-K were filed by Noven during the quarter ended December 31, 1999. 31 32 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 21, 2000 NOVEN PHARMACEUTICALS, INC. By: /s/ Robert C. Strauss By: /s/ Steven Sablotsky ------------------------- ------------------------ ROBERT C. STRAUSS STEVEN SABLOTSKY President and Chief Executive Officer 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 21, 2000 ------------------------------- Steven Sablotsky By: /s/ Robert C. Strauss Principal Executive March 21, 2000 ------------------------------- Officer and Director Robert C. Strauss (President and CEO) By: /s/ James B. Messiry Principal Financial March 21, 2000 ------------------------------- Officer James B. Messiry (Chief Financial Officer) By: /s/ Leonard E. Maniscalco Principal Accounting March 21, 2000 ------------------------------- Officer Leonard E. Maniscalco (Executive Director - Finance) By: /s/ Sheldon H. Becher Director March 21, 2000 ------------------------------- Sheldon H. Becher By: /s/ Sidney Braginsky Director March 21, 2000 ------------------------------- Sidney Braginsky
32 33 By: /s/ Rodolfo C. Bryce Director March 21, 2000 ------------------------------- Rodolfo C. Bryce By: /s/ Lawrence J. DuBow Director March 21, 2000 ------------------------------- Lawrence J. DuBow
33 34 INDEX TO FINANCIAL STATEMENTS
Page ---- INDEPENDENT AUDITORS' REPORTS 35 FINANCIAL STATEMENTS Balance Sheets as of December 31, 1999 and 1998 37 Statements of Operations for the years ended 38 December 31, 1999, 1998 and 1997 Statements of Stockholders' Equity for the years ended 39 December 31, 1999, 1998 and 1997 Statements of Cash Flows for the years ended 40 December 31, 1999, 1998 and 1997 Notes to Financial Statements 41
34 35 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, 1999 and 1998, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 did not audit the financial statements of Vivelle Ventures LLC (d/b/a Novogyne Pharmaceuticals) for the year ended December 31, 1999, Noven's investment in which is accounted for by use of the equity method. Noven's equity of $8,365,000 in Vivelle Ventures LLC at December 31, 1999 and $1,487,000 of that joint venture's income for the year then ended are included in the accompanying financial statements. Such 1999 financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for such joint venture for 1999, is based solely on the report of such other auditors. 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, and for 1999 the report of other auditors, provide a reasonable basis for our opinion. In our opinion, based on our audits, and for 1999 the report of other auditors, such financial statements present fairly, in all material respects, the financial position of Noven Pharmaceuticals, Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Certified Public Accountants Miami, Florida February 25, 2000 35 36 PricewaterhouseCoopers [LOGO] PricewaterhouseCoopers LLP 400 Campus Drive P.O. Box 988 Florham Park, NJ 07932 Telephone (973) 236-4000 Facsimile (973) 236-5000 REPORT OF INDEPENDENT ACCOUNTANTS To the Management Committee of Vivelle Ventures LLC d/b/a Novogyne Pharmaceuticals In our opinion, the accompanying balance sheets and the related statements of operations and members' capital and cash flows present fairly, in all material respects, the financial position of Vivelle Ventures LLC d/b/a Novogyne Pharmaceuticals (the "Company") as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the year ended December 31, 1999 and the period May 1, 1998 (date of inception) through December 31, 1998 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP February 8, 2000 36 37 NOVEN PHARMACEUTICALS, INC. Balance Sheets At December 31, 1999 and 1998 (in thousands except share amounts)
1999 1998 -------- -------- ASSETS Current Assets: Cash and cash equivalents $ 15,338 $ 5,573 Accounts receivable (less allowance for doubtful accounts of $167 in 1999 and $268 in 1998) 3,048 3,044 Due from Vivelle Ventures LLC 3,651 3,489 Inventories 3,578 2,733 Prepaid and other current assets 415 421 -------- -------- 26,030 15,260 Property, plant and equipment - net 15,329 15,517 Other Assets: Investment in Vivelle Ventures LLC 8,365 7,500 Net deferred income tax asset 5,000 -- Patent development costs, net 1,805 1,765 Deposits and other assets 359 114 -------- -------- 15,529 9,379 -------- -------- $ 56,888 $ 40,156 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 5,085 $ 4,954 Notes payable - current portion 348 179 Accrued compensation and related liabilities 2,237 913 Other accrued liabilities 1,193 141 Deferred license revenue - current portion 586 226 -------- -------- 9,449 6,413 Long-Term Liabilities: Notes payable 604 -- Deferred license revenue 7,442 5,418 -------- -------- 17,495 11,831 Commitments and Contingencies (Note 7) -- -- Stockholders' Equity: Preferred stock - authorized 100,000 shares of $.01 par value; no shares issued or outstanding -- -- Common stock - authorized 40,000,000 shares, par value $.0001 per share; issued and outstanding 21,546,271 in 1999 and 21,482,423 in 1998 2 2 Additional paid-in capital 66,614 66,669 Accumulated deficit (27,223) (37,683) Treasury stock, 97,100 shares, at cost -- (663) -------- -------- 39,393 28,325 -------- -------- $ 56,888 $ 40,156 ======== ========
See accompanying notes to financial statements. 37 38 NOVEN PHARMACEUTICALS, INC. Statements of Operations Years Ended December 31, 1999, 1998 and 1997 (in thousands except per share amounts)
1999 1998 1997 -------- -------- -------- Revenues: Product sales $ 31,334 $ 20,114 $ 12,395 License revenue 316 1,728 1,872 -------- -------- -------- Total revenues 31,650 21,842 14,267 Expenses: Cost of products sold 12,721 9,447 5,180 Research and development 7,171 6,808 9,723 Marketing, general and administrative 7,860 10,105 9,845 -------- -------- -------- Total operating costs and expenses 27,752 26,360 24,748 -------- -------- -------- Income (loss) from operations 3,898 (4,518) (10,481) Equity in earnings of Vivelle Ventures LLC 1,487 -- -- Interest income, net 343 439 924 -------- -------- -------- Income (loss) before income taxes 5,728 (4,079) (9,557) Income tax benefit 4,732 -- -- -------- -------- -------- Net income (loss) $ 10,460 $ (4,079) $ (9,557) ======== ======== ======== Basic earnings (loss) per share $ 0.49 $ (0.19) $ (0.47) ======== ======== ======== Diluted earnings (loss) per share $ 0.48 $ (0.19) $ (0.47) ======== ======== ======== Weighted average number of common shares outstanding: Basic 21,508 21,013 20,159 ======== ======== ======== Diluted 21,897 21,013 20,159 ======== ======== ========
See accompanying notes to financial statements. 38 39 NOVEN PHARMACEUTICALS, INC. Statements of Stockholders' Equity Years Ended December 31, 1999, 1998 and 1997 (in thousands)
Common Stock Additional ---------------------- Paid-in Accumulated Treasury Shares Amount Capital Deficit Stock Total -------- -------- --------- ----------- --------- -------- Balance at December 31, 1996 19,831 $ 2 $ 60,122 $(24,047) $ -- $ 36,077 Issuance of shares pursuant to stock option plan, net 141 -- 4 -- -- 4 Issuance of shares pursuant to license agreement 3 -- 20 -- -- 20 Issuance of shares pursuant to exercise of warrants 500 -- 4,000 -- -- 4,000 Purchase of shares of treasury stock, at cost -- -- -- -- (663) (663) Net loss -- -- -- (9,557) -- (9,557) -------- -------- -------- -------- -------- -------- Balance at December 31, 1997 20,475 2 64,146 (33,604) (663) 29,881 Issuance of shares pursuant to stock option plan, net 41 -- 23 -- -- 23 Issuance of shares pursuant to exercise of warrants 966 -- 2,500 -- -- 2,500 Net loss -- -- -- (4,079) -- (4,079) -------- -------- -------- -------- -------- -------- Balance at December 31, 1998 21,482 2 66,669 (37,683) (663) 28,325 Issuance of shares pursuant to stock option plan, net 96 -- 247 -- -- 247 Retirement of shares of treasury stock, at cost (97) -- (663) -- 663 -- Issuance of shares for bonus compensation 65 -- 361 -- -- 361 Net income -- -- -- 10,460 -- 10,460 -------- -------- -------- -------- -------- -------- 21,546 $ 2 $ 66,614 $(27,223) $ -- $ 39,393 ======== ======== ======== ======== ======== ========
See accompanying notes to financial statements. 39 40 NOVEN PHARMACEUTICALS, INC. Statements of Cash Flows Years Ended December 31, 1999, 1998 and 1997 (in thousands except per share amounts)
1999 1998 1997 -------- -------- -------- Cash flows from operating activities: Net income (loss) $ 10,460 $ (4,079) $ (9,557) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,363 1,206 1,008 Amortization of patent costs 208 255 358 Recognition of deferred license revenue (316) (226) (226) Equity in earnings of Vivelle Ventures LLC (1,487) -- -- Recognition of deferred income tax asset (5,000) -- -- (Increase) decrease in accounts receivable (4) (1,819) 2,142 (Increase) in due from Vivelle Ventures LLC (162) (3,489) -- (Increase) decrease in inventories (845) (232) 1,650 Decrease (increase) in prepaid and other current assets 6 (139) (34) (Increase) decrease in deposits and other assets (245) (50) 1 Increase in accounts payable 131 2,791 638 Increase in accrued compensation and related liabilities 1,683 693 18 Increase (decrease) in other accrued liabilities 1,052 51 (238) Increase in deferred license revenue 2,700 -- -- -------- -------- -------- Cash flows provided by (used in) operating activities 9,544 (5,038) (4,241) Cash flows from investing activities: Maturity of securities, net -- 5,880 7,812 Purchase of fixed assets, net (1,173) (1,480) (550) Investment in Vivelle Ventures LLC -- (7,500) -- Distribution from Vivelle Ventures LLC 622 -- -- Payments for patent development costs (248) (259) (572) -------- -------- -------- Cash flows (used in) provided by investing activities (799) (3,359) 6,691 Cash flows from financing activities: Issuance of common stock 247 2,523 4,024 Note payable 773 179 -- Purchase of treasury stock -- -- (663) -------- -------- -------- Cash flows provided by financing activities 1,020 2,702 3,361 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 9,765 (5,695) 5,811 Cash and cash equivalents, beginning of year 5,573 11,268 5,457 -------- -------- -------- Cash and cash equivalents, end of year $ 15,338 $ 5,573 $ 11,268 ======== ======== ========
Cash payments for interest were $49.3 in 1999 and $1.0 in 1998; no interest payments were made in 1997. Accrued compensation for the years ended 1999 and 1998 includes bonuses for certain employees and officers. Bonuses for 1998 were partially settled by issuance of 65,000 shares of common stock with a value of $361. During 1999, Noven retired 97,100 shares of treasury stock valued at $663. See accompanying notes to financial statements. 40 41 NOVEN PHARMACEUTICALS, INC. Notes to Financial Statements Years Ended December 31, 1999, 1998 and 1997 1. Summary of significant accounting policies: Noven Pharmaceuticals, Inc. ("Noven") was incorporated in Delaware in 1987 and is engaged principally in one line of business, the manufacture and development of advanced transdermal and transmucosal drug delivery technologies and products. Vivelle Ventures LLC: Noven and Novartis Pharmaceuticals Corporation ("Novartis") entered into a joint venture, Vivelle Ventures LLC (d/b/a Novogyne Pharmaceuticals) ("Novogyne"), effective May 1, 1998, to market and sell women's healthcare products in the United States and Canada, including Noven's transdermal estrogen delivery systems marketed under the brand names Vivelle(R) and Vivelle-Dot(TM). Noven accounts for its 49% investment in Novogyne under the equity method. Noven has eliminated 49% of its profit on products sold to Novogyne that remain in Novogyne's inventory. Use 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 includes cash and securities with an original maturity of three months or less. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. The following are the major classes of inventories as of December 31 (in thousands): 1999 1998 ------ ------ Finished goods $ 125 $ 685 Work in process 973 337 Raw materials 2,480 1,711 ------ ------ Total $3,578 $2,733 ====== ====== Inventories at December 31, 1999 and 1998 related to Noven's transdermal and transmucosal delivery systems. To date, Noven has not experienced and does not anticipate any difficulty acquiring materials necessary to manufacture its transdermal and transmucosal delivery systems. No assurance can be given that Noven will not experience any such difficulty in the future. 41 42 Property, Plant and Equipment: Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method 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. Retired assets are removed from the cost and accumulated depreciation accounts. Noven, using its best estimates based on reasonable and supportable assumptions and projections, reviews for impairment long-lived assets and certain identifiable intangibles to be held and used whenever events or changes in circumstances indicate that the carrying amount of its assets might not be recoverable. Patent Development Costs: Costs related to the development of patents, principally legal fees, are capitalized and amortized over the lesser of their estimated economic useful lives or their remaining legal lives. Income Taxes: Noven's share of Novogyne's earnings is included in income before 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 income tax assets and liabilities for expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities (see Note 6). Revenue Recognition: Revenues from product sales, which include sales to Novogyne of $11 million and $7.2 million in 1999 and 1998, respectively, are recognized at the time of shipment. Certain minimum fees under license agreements, which are included in product sales, are recognized when determinable. Royalty revenue consists only of royalties payable by Novogyne and Novartis from sales of Vivelle(R) and Vivelle-Dot(TM) in the United States and Vivelle(R) in Canada. To the extent determinable, royalty revenue is recognized when earned and is included in product sales in the amount of $2.9 million, $2.6 million and $1.8 million for 1999, 1998 and 1997, respectively. License revenue consists of up-front, milestone and similar payments under license agreements and is recognized when earned under the terms of the applicable agreements. In some cases, license revenue will be deferred and recognized as license revenue over time. Substantially all of Noven's product sales were to its principal licensees (see Note 3). Cost of Products Sold: Direct and indirect costs of manufacturing are included in cost of products sold. Research and Development Costs: Research and development costs include costs of internally generated research and development activities and costs associated with work performed under agreements with third parties. Research and development costs include direct and allocated expenses and are expensed as incurred. 42 43 Fair Value of Financial Instruments: The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to the relatively short maturity of the respective instruments. Earnings (Loss) Per Share: Basic earnings (loss) per share is computed based on the average number of common shares outstanding. Diluted earnings per share is computed under the treasury stock method, whereby dilutive stock options are assumed to be exercised. Common equivalent shares are not included in the per share calculations when the effect of their inclusion would be antidilutive. Employee Stock Plans: In accordance with the provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," Noven may elect to continue to apply the provisions of the Accounting Principles Board's Opinion No. 25 (APB 25, "Accounting for Stock Issued to Employees") and related interpretations in accounting for its employee stock option plans, or adopt the fair value method of accounting prescribed by SFAS 123. Noven has elected to continue to account for its stock plans using APB 25, and therefore is generally not required to recognize compensation expense in connection with these plans. Companies that continue to use APB 25 are required to present, in the notes to the financial statements, the pro forma effects on reported net income and earnings per share as if compensation expense had been recognized based on the fair value of options granted (see Note 8). Concentrations of Credit Risk: Noven's customers consist of Novogyne and a limited number of pharmaceutical companies with operations throughout the world. Noven performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral to secure accounts receivable. Noven maintains an allowance for doubtful accounts based on an assessment of the collectibility of such accounts. Reclassification: Certain amounts presented in the accompanying financial statements for prior years have been reclassified to conform to the current year's presentation. Recent Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes standards for the accounting and reporting of derivative instruments embedded in other contracts (collectively referred to as derivatives) and of hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure these instruments at fair value. In July 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133," which changes the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. Noven does not expect the adoption of SFAS No. 133 to have any effect on its financial statements or disclosures. 43 44 2. Property, Plant and Equipment - net: Property, plant and equipment consist of the following at December 31, 1999 and 1998 (in thousands):
1999 1998 ------- ------- Land $ 2,540 $ 2,540 Building and improvements 2,393 2,392 Leased property and leasehold improvements 8,646 8,137 Manufacturing and testing equipment 6,908 6,601 Furniture 830 706 ------- ------- 21,317 20,376 Less accumulated depreciation and amortization 5,988 4,859 ------- ------- $15,329 $15,517 ======= =======
3. License Agreements: Noven has license agreements with Aventis S.A. (f/k/a Rhone-Poulenc Rorer Inc.) ("Aventis") and Novartis. At the time of the formation of Novogyne, Novartis sublicensed its rights under its license agreement to Novogyne. Noven's agreement with Novogyne grants Novogyne the right to market Noven's transdermal estrogen delivery systems in the United States and Canada. Novartis' Canadian affiliate continues to market Noven's first generation transdermal estrogen delivery system in Canada and has been granted the right to market Noven's second generation transdermal estrogen delivery system in Canada. The agreement provides for royalty payments based on sales by Novogyne and Novartis' Canadian affiliate. Warrants to purchase a total of 1,091,151 shares of Noven common stock were granted during the period 1991 through 1994 to Novartis under this agreement. Novartis exercised a warrant for 966,184 shares in the second quarter of 1998. The remaining warrants have expired. Noven has two license agreements with Aventis. These agreements grant Aventis the right to market Noven's first generation transdermal estrogen delivery system worldwide except for the United States and Canada and Noven's transdermal combination estrogen/progestin delivery system worldwide. The agreements also grant Aventis the right to market Noven's second generation transdermal estrogen delivery system in Japan. The agreements provide Noven certain milestone payments and fees based on Aventis' sales. Noven received milestone payments totaling $1.5 million in each of 1998 and 1997, resulting from Aventis' filing of regulatory applications in 1997 and from Aventis' receipt of regulatory approval for the combination product in the United States and certain European countries in 1998. Noven does not expect to receive significant milestone payments under the existing agreements in 2000. Aventis funded the construction of a manufacturing facility for the production by Noven of transdermal drug delivery systems. Noven leases the facility at a nominal rate for a term of 31.5 years expiring in 2024 and has the right to purchase the facility at any time during the term of the lease at Aventis' book value. Noven has recorded both the facility and deferred revenue at amounts equal to the funds advanced by Aventis which are deferred and recognized as depreciation expense and license revenue over the life of the underlying lease. In October 1999, Novartis Pharma AG sublicensed Aventis' rights to market (1) Noven's combination estrogen/progestin transdermal delivery system in all countries other than the United States and Japan, and (2) Noven's first generation estrogen transdermal delivery system in all countries other than the United States, Canada and Japan. 44 45 In connection with the sublicense transaction, and pursuant to Noven's license agreement with Aventis, Noven received $2.7 million in cash from Aventis as Noven's share of the sublicense fees paid by Novartis to Aventis, which was recorded as deferred license revenue and will be recognized as license revenue over seven and one half years. 4. Investment in Vivelle Ventures LLC: In 1998, Noven invested $7.5 million in return for a 49% equity interest in Novogyne. In return for a 51% equity interest, Novartis granted an exclusive sublicense to Novogyne of a license agreement with Noven (see Note 3). This sublicense assigned certain of Novartis' rights and obligations under a supply agreement with Noven, and granted an exclusive license to Novogyne of the Vivelle(R) trademark. Noven shares in the income of Novogyne according to an established formula after an annual preferred return of $6.1 million to Novartis. During 1999, Novogyne produced $10.7 million of net income, and Noven recorded $1.5 million as equity in earnings of Vivelle Ventures LLC. In 2000, Noven expects to receive a cash distribution of $2.2 million from Novogyne based on Novogyne's results of operations for the year ended December 31, 1999. For the fiscal year ended December 31, 1998, Novogyne did not produce sufficient income under the established formula for Noven to recognize income from the operations of Novogyne. Under the terms of the agreement, however, Novogyne did generate sufficient income in 1998 to meet Novartis' preferred return. During the periods ended December 31, 1999 and 1998, Noven sold $11.0 million and $7.2 million of products to Novogyne, recognized $2.5 million and $1.7 million in royalties from Novogyne and was reimbursed for $13.9 million and $6.8 million of sales and marketing expenses incurred on behalf of Novogyne, respectively. As of December 31, 1999 and 1998, Noven has receivables from Novogyne of $3.7 million and $3.2 million, respectively, representing products sold to and marketing expenses reimbursable from Novogyne. Under the terms of the joint venture agreements, Noven is responsible for the manufacture of the product, retention of samples and regulatory documentation, design and implementation of an overall marketing and sales program in the hospital and retail sales sectors of the market, including the preparation of annual and quarterly marketing plans and sales force staffing, and the procurement of advertising services in connection with the marketing and promotion of the products. All other matters, including inventory control and distribution, management of marketing and sales programs for the managed care sector of the market, customer service support, regulatory affairs support and other administrative services are provided by Novartis. 45 46 The condensed financial statements of Novogyne are as follows: Condensed Statements of Operations For the year ended December 31, 1999 and for the period from May 1, 1998 (date of inception) through December 31, 1998 (in thousands):
1999 1998 ------- ------- Revenues $34,274 $16,739 Cost of sales 6,530 3,793 Selling, general and administrative expenses 17,720 9,900 ------- ------- Income from operations 10,024 3,046 Interest income 661 333 ------- ------- Net income $10,685 $ 3,379 ======= =======
Condensed Balance Sheets At December 31, 1999 and 1998 (in thousands): 1999 1998 ------- ------- Total assets (all of which are current) $24,433 $17,125 Total liabilities (all of which are current) $ 9,036 $ 6,246 Members' capital $15,398 $10,879
The joint venture operating agreement also has a buy/sell provision, effective May 1, 2000, which allows each party to compel either the purchase of the other party's interest in Novogyne or the sale of its own interest in Novogyne. Either party may dissolve Novogyne following the second or third anniversary of the formation of Novogyne in the event that Novogyne does not achieve (i) sales of at least the lesser of $20 million or 90% of the annual budgeted sales or (ii) profits sufficient to pay Novartis the preferred return of $6.1 million in each such year (which Noven has the right to cure). Both of these thresholds were met in 1999. Dissolution can also result from a change in control of Noven prior to May 1, 2000 or at any time thereafter if the acquirer is a top ten pharmaceutical company (as measured by annual dollar sales), or if prior to May 1, 2000, the president of Novogyne (who is also the President and CEO of Noven) is terminated by Noven "without cause" or leaves due to "good reason," as defined in his employment agreement with Noven. Upon dissolution, Novartis would reacquire the rights to market Vivelle(R) and Vivelle-Dot(TM) and Novogyne's other assets would be liquidated and distributed to the parties in accordance with their capital account balances as determined pursuant to the operating agreement. 46 47 5. Notes Payable: In May 1999, Noven entered into a Master Finance Lease Agreement (the "Master Lease") for $1 million with a base lease term of three or four years depending upon the equipment type. The terms of the Master Lease include, among other provisions, minimum net worth, revenue and operating results requirements, as well as certain financial ratios, measured on a quarterly basis. Transactions under the Master Lease have been accounted for as financing arrangements. Long-term obligations, less installments due within one year, are summarized below (in thousands):
1999 1998 --------- --------- Borrowings under Master Lease, 8%, maturing in 2003 $ 545 $ -- Capitalized equipment lease, 11%, maturing in 2004 31 -- Insurance installment note, 6%, maturing in 2001 376 179 --------- --------- 952 179 Less: installments due within one year 348 179 --------- --------- $ 604 $ -- ========= =========
6. Income Taxes: The components of the benefit from income taxes in 1999 are as follows (in thousands): Current Income Taxes Federal $ 193 State 75 ------- 268 Deferred Income Taxes (Benefit) Federal (4,655) State (345) ------- (5,000) ------- Income Tax Benefit $(4,732) =======
47 48 Deferred income taxes arise due to timing differences in reporting of certain income and expense items for book purposes and income tax purposes. The following table summarizes the tax effects comprising Noven's net deferred income tax asset as of December 31, 1999 (in thousands):
1999 1998 -------- -------- Deferred Income Tax Assets: Joint Venture interest $ 501 $ 227 Net operating losses 9,999 13,863 General business credit 4,922 4,261 Sublicense revenue 957 -- Other 574 245 -------- -------- Total deferred income tax assets 16,953 18,596 Deferred Income Tax Liabilities: Basis difference in fixed assets 423 321 -------- -------- Net deferred income tax asset 16,530 18,275 -------- -------- Valuation allowance (11,530) (18,275) -------- -------- Net Deferred Income Tax Asset $ 5,000 $ -- ======== ========
At December 31, 1998, Noven established $18.3 million in valuation allowances against its deferred income tax assets, which consisted primarily of net operating loss and research and development credit carryforwards. A portion of the carryforwards was utilized against 1999 income, and Noven recognized a deferred income tax asset of $5.0 million. Realization of the net deferred income tax asset of $5.0 million is dependent upon generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that this portion of the net deferred income tax asset will be realized based upon estimated future taxable income of Noven and, accordingly, no valuation allowances for this portion of the net deferred income tax asset were deemed necessary at December 31, 1999. At December 31, 1999, Noven had net operating loss carryforwards of approximately $27.0 million. Additionally, at December 31, 1999, Noven had research and development credit carryforwards of $4.9 million. The net operating loss carryforwards will expire in 2009 through 2018, and the research and development credit carryforwards will expire in 2002 through 2019. 48 49 The difference between the total income tax provision and the statutory federal income tax rate applied to pretax income is reconciled as follows (dollars in thousands):
1999 1998 1997 ------------------- ------------------- ------------------- AMOUNT % AMOUNT % AMOUNT % ------- ------ ------- ----- ------- ----- Income taxes at statutory rate $ 1,947 34.0 $(1,387) (34.0) $(3,249) (34.0) Increase (decrease) in taxes: State income tax, net of federal benefits (178) (3.1) -- -- -- -- Research and development expenditures 225 3.9 211 5.2 355 3.7 Other 19 -- -- -- -- -- Establishment (reduction) of valuation allowance on deferred income tax assets (6,745) (117.4) 1,176 28.8 2,894 30.3 ------- ------ ------- ----- ------- ----- Income tax benefit $(4,732) (82.6) $ -- -- $ -- -- ======= ====== ======= ===== ======= =====
7. 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. These agreements provide for annual commitments of approximately $744,500 in the aggregate and with terms extending through 2002. Noven has a formula bonus plan that includes company and individual performance goals and incurred $2.1 million and $0.9 million of bonus expenses in 1999 and 1998, respectively. Under the plan, a fixed percentage of each employee's base salary is set as a target incentive bonus award for such employee. To the extent that actual company performance is equal to, exceeds or is less than the company performance targets, an employee's bonus award may be equal to, greater than or less than his target award. An employee's non-financial goals are then considered in determining his final bonus award. In 1999, Noven met or exceeded each of the company performance goals, and in accordance with the plan formula the bonus awards to most employees were greater than their initial target awards. 8. Stock Option Plans Noven established its 1999 Long-Term Incentive Plan (the "1999 Plan") on June 8, 1999. The 1999 Plan replaced Noven's 1997 Stock Option Plan (the "1997 Plan") and no future stock option awards may be granted under the 1997 Plan. The 1999 Plan provides for the granting of up to 3,768,848 incentive and non-qualified stock options to selected individuals, including 2,878,848 shares that remained available under the 1997 Plan at the time of its termination. The terms and conditions of these options (including price, vesting schedule, term and number of shares) are determined by the Stock Option Committee, which administers the 1999 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, (ii) incentive stock options granted to employees can not be less than the fair market value of the common stock on the date of grant and (iii) incentive stock options granted to employees owning in excess of 10% of Noven's issued and outstanding common stock can not be less than 110% of the fair market value of the common stock on the date of grant. Each option granted under the 1999 Plan is exercisable after the period(s) specified in the relevant option agreement, and no option can be exercised after ten years from the date of grant (or five years from the date of grant in the case of a grantee of an incentive stock option holding more than 10% of the issued and outstanding Noven common stock). At December 31, 1999, there were approximately 547,000 stock options outstanding under the 1999 Plan. Generally, the options vest over a period of five years, beginning one year after date of grant. 49 50 The 1997 Plan, originally effective January 1, 1997, provided for the granting of up to 4,000,000 incentive and non-qualified stock options. At December 31, 1999, there were approximately 1,384,000 stock options outstanding under the 1997 Plan. The 1997 Plan is also administered by the Stock Option Committee, and the terms and conditions of the 1997 Plan are similar to those of the 1999 Plan. Noven also has an earlier stock option plan, which had provisions similar to those of the 1997 and 1999 Plans. This plan terminated on December 31, 1996, and no additional options may be granted under this plan. At December 31, 1999, there were approximately 623,000 stock options outstanding under this plan. Noven applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its option plans. Accordingly, no compensation expense has been recognized. Had compensation cost for Noven'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", Noven's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share amounts):
1999 1998 1997 ---------- ---------- ---------- Net income (loss): As reported $ 10,460 $ (4,079) $ (9,557) Pro forma $ 8,412 $ (6,160) $ (10,777) Basic earnings (loss) per share: As reported $ 0.49 $ (0.19) $ (0.47) Pro forma $ 0.39 $ (0.29) $ (0.54) Diluted earnings (loss) per share: As reported $ 0.48 $ (0.19) $ (0.47) Pro forma $ 0.38 $ (0.29) $ (0.54)
50 51 The fair value of each option granted during 1999, 1998 and 1997, is estimated as $5.40, $2.57 and $2.91, respectively, on the date of the grant using the Black Scholes option-pricing model with the assumptions listed below.
1999 1998 1997 ----- ----- ----- Volatility 61.3% 64.5% 65.3% Risk free interest rate 5.72% 5.16% 5.83% Expected life (years) 7 7 7
Stock option transactions related to the plans are summarized as follows (options and shares in thousands):
1999 1998 1997 ------------------------- ------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price --------- --------- --------- --------- --------- --------- Outstanding at beginning of year 2,026 $ 7.61 1,594 $ 8.27 1,565 $ 8.95 Granted 755 $ 9.54 675 $ 6.84 612 $ 6.62 Exercised (105) $ 2.91 (56) $ 2.31 (156) $ 2.64 Canceled and expired (122) $ 8.63 (187) $ 11.89 (427) $ 2.45 --------- --------- --------- Outstanding at end of year 2,554 $ 8.32 2,026 $ 7.57 1,594 $ 8.27 ========= ========= ========= Shares of common stock reserved 5,834 4,928 4,983 Options exercisable at end of year 851 656 350
The following table summarizes information concerning outstanding and exercisable options at December 31, 1999 (options in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------------------- ------------------------------- Range of Number Weighted Average Number Exercise Outstanding Remaining Weighted Average Exercisable Weighted Average Prices At Year End Contractual Life Exercise Price At Year End Exercise Price ---------- ----------- --------------- ---------------- ----------- ---------------- $ 0 - $ 4 123 0.8 $ 2.31 100 $ 2.31 $ 4 - $ 6 1,037 5.6 $ 5.64 277 $ 5.94 $ 6 - $ 9 480 3.7 $ 8.44 211 $ 8.50 $ 9 - $14 845 5.2 $ 11.80 225 $ 12.25 $ 14 - $18 69 3.7 $ 16.02 38 $ 16.17 --------- ---------- 2,554 4.8 $ 8.32 851 $ 8.28 ========= ==========
51 52 9. 401(k) Savings Plan On January 1, 1997, Noven established a savings plan under section 401(k) of the Internal Revenue Code (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 contribute from one to fifteen percent of their current compensation to the 401(k) Plan. Noven determines, on a year-to-year basis, the amount, if any, that it will provide as a matching contribution. For the years ended December 31, 1999, 1998 and 1997, Noven made no matching contributions. 10. Segment, Geographic and Customer Data Noven is engaged principally in one line of business, the development and commercialization of advanced transdermal drug delivery systems, which represents more than 90% of total revenue. Products that are sold to Aventis for resale in Europe are shipped to Ireland. There were no sales or transactions between geographic areas. The following table presents information about Noven's revenues by geographic area (in thousands):
1999 1998 1997 --------- --------- --------- United States $ 24,571 $ 16,256 $ 6,417 Ireland 7,079 5,586 7,850 --------- --------- --------- Total Revenue $ 31,650 $ 21,842 $ 14,267 ========= ========= =========
Total revenue by customer of Noven, including royalty payments and license revenue (in thousands):
1999 1998 1997 --------- --------- --------- Novartis $ 1,749 $ 1,607 $ 5,017 Aventis 18,059 11,677 7,850 Novogyne 11,021 7,172 -- Other 821 1,386 1,400 --------- --------- --------- Total Revenue $ 31,650 $ 21,842 $ 14,267 ========= ========= =========
52 53 11. Unaudited Quarterly Condensed Financial Data (in thousands, except per share amounts)
1999 FIRST SECOND THIRD FOURTH FULL YEAR ---- -------- -------- -------- -------- --------- Revenue $ 7,477 $ 7,493 $ 8,060 $ 8,620 $ 31,650 Total operating expenses 6,804 6,589 6,849 7,510 27,752 -------- -------- -------- -------- -------- Income from operations 673 904 1,211 1,110 3,898 Equity in interest of Vivelle Ventures LLC -- -- -- 1,487 1,487 Interest income - net 52 64 77 150 343 Income tax provision (benefit) 9 9 50 (4,800) (4,732) -------- -------- -------- -------- -------- Net income $ 716 $ 959 $ 1,238 $ 7,547 $ 10,460 ======== ======== ======== ======== ======== Basic earnings per share $ 0.03 $ 0.05 $ 0.06 $ 0.35 $ 0.49 ======== ======== ======== ======== ======== Diluted earnings per share $ 0.03 $ 0.05 $ 0.06 $ 0.34 $ 0.48 ======== ======== ======== ======== ========
1998 FIRST SECOND THIRD FOURTH FULL YEAR ---- -------- -------- -------- -------- --------- Revenue $ 2,548 $ 6,395 $ 5,018 $ 7,881 $ 21,842 Total operating expenses 6,014 8,038 4,965 7,343 26,360 -------- -------- -------- -------- -------- Income (loss) from operations (3,466) (1,643) 53 538 (4,518) Interest income - net 190 86 86 77 439 -------- -------- -------- -------- -------- Net income (loss) $ (3,276) $ (1,557) $ 139 $ 615 $ (4,079) ======== ======== ======== ======== ======== Basic earnings (loss) per share $ (0.16) $ (0.08) $ 0.01 $ 0.03 $ (0.19) ======== ======== ======== ======== ======== Diluted earnings (loss) per share $ (0.16) $ (0.08) $ 0.01 $ 0.03 $ (0.19) ======== ======== ======== ======== ========
53 EX-10.7 2 EMPLOYMENT AGREEMENT(CHANGE IN CONTROL) 1 EXHIBIT 10.7 EMPLOYMENT AGREEMENT (CHANGE IN CONTROL) This Employment Agreement, dated as of _____, 1999, is entered into between Noven Pharmaceuticals, Inc., a Delaware corporation (the "COMPANY"), and ________ (the "EXECUTIVE"). The Board of Directors of the Company (the "BOARD"), has determined that it is in the best interests of the Company and its shareholders to assure that the company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined in Section 2) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. In consideration of the foregoing and the mutual promises contained below, the parties agree as set forth below. 1. CERTAIN DEFINITIONS. (a) "EFFECTIVE DATE" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or in anticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) "CHANGE OF CONTROL PERIOD" shall mean the period commencing on the date hereof and ending on the third anniversary of such date; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "RENEWAL DATE") the Change of Control Period may be extended by the Company 2 so as to terminate three years from such Renewal Date by the Company giving notice to the Executive that the Change of Control Period shall be so extended. 2. CHANGE OF CONTROL. For the purpose of this Agreement, a "CHANGE OF CONTROL" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) (a "PERSON") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 40% or more of either (i) the then outstanding shares of common stock of the Company (the "OUTSTANDING COMPANY COMMON STOCK") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "OUTSTANDING COMPANY VOTING SECURITIES"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this Section 2 are satisfied; or (b) Individuals who, as of the date hereof, constitute the Board (the "INCUMBENT BOARD") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual 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 shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-1l of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 70% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, -2- 3 immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 40% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 70% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 40% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 3. EMPLOYMENT PERIOD. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the period commencing on the Effective Date and ending on the second anniversary of such date (the "EMPLOYMENT PERIOD"). -3- 4 4. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("ANNUAL BASE SALARY"), which shall be paid in equal installments on a monthly or more frequent basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual -4- 5 Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "AFFILIATED COMPANIES" shall include any company controlled by, controlling or under common control with the Company. (ii) ANNUAL BONUS. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "ANNUAL BONUS") in cash at least equal to the average annualized (for any fiscal year consisting of less than twelve full months or with respect to which the Executive has been employed by the Company for less than twelve full months) bonus paid or payable, including by reason of any deferral, to the Executive by the Company and its affiliated companies in respect of the three fiscal years immediately preceding the fiscal year in which the Effective Date occurs (the "RECENT AVERAGE BONUS"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practice, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, 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 affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. -5- 6 (v) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable employment expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (ix) "PEER EXECUTIVES." For purposes of this Agreement, references to "peer executives of the Company and its affiliated companies" shall refer only to Executives based in the United States. 5. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "DISABILITY EFFECTIVE DATE"), provided that, within the 30 days after -6- 7 such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "DISABILITY" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean (i) a material breach by the Executive of the Executive's obligations under Section 4(a) (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) GOOD REASON. The Executive's employment may be terminated during the Employment Period by the Executive for Good Reason. For purposes of this Agreement, "GOOD REASON" shall mean: (i) 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 4(a) or any other action by the Company which results in a diminution in such position (including any action which results in a dimunition of status, offices, titles and reporting levels or requirements), 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 promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b), 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; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B); (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c), provided that such successor has received at least ten days prior written notice from the Company or the Executive of the requirements of Section 11(c). -7- 8 For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b). For purposes of this Agreement, a "NOTICE OF TERMINATION" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) DATE OF TERMINATION. "DATE OF TERMINATION" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON: OTHER THAN FOR CAUSE. DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the greater of (i) the Annual Bonus paid or payable, including by reason of any deferral, to the Executive (and annualized for any fiscal year consisting of less than twelve full months or for which the Executive has been employed for less than twelve full months) for the most recently completed fiscal year during the Employment Period, if any, and -8- 9 (ii) the Recent Average Bonus (such greater amount shall be hereinafter referred to as the "HIGHEST ANNUAL BONUS") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "ACCRUED OBLIGATIONS"); and B. the amount (such amount shall be hereinafter referred to as the "SEVERANCE AMOUNT") equal to the product of (1) two and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; and, provided further, that such amount shall be reduced by the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended (the "CODE")) of any other amount of severance relating to salary or bonus continuation to be received by the Executive upon termination of employment of the Executive under any agreement, severance plan, policy or arrangement of the Company; and (ii) for the remainder of the Employment Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b) if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes re-employed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "WELFARE BENEFIT CONTINUATION"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period; and (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the -9- 10 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally thereafter with respect to other peer executives of the Company and its affiliated companies and their families (such other amounts and benefits shall be hereinafter referred to as the "OTHER BENEFITS"). (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of Accrued Obligations (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Death Benefits (as defined below)) and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the greater of (A) the sum of the Severance Amount, and (B) the present value (determined as provided in Section 260G(d)(4) of the Code) of any cash amount to be received by the Executive or the Executive's family as a death benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of life insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (B) shall be hereinafter referred to as the "DEATH BENEFITS"). (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for (i) payment of Accrued Obligations (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the greater of (A) the sum of the Severance Amount, and (B) the present value (determined as provided in Section 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (B) shall be hereinafter referred to as the "DISABILITY BENEFITS"). (d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Employment -10- 11 Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. NON-EXCLUSIVITY OF RIGHTS. Except as provided in Sections 6(a)(ii), 6(b) and 6(c), nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. FULL SETTLEMENT: RESOLUTION OF DISPUTES. (a) The payment by the Company to the Executive of the amounts required by this Agreement shall serve as a full settlement of any and all claims which the Executive may have against the Company arising out of or in connection with the termination of the Executive's employment by the Company. (b) 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. 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 and, except as provided in Section 6(a)(ii), such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any dispute or contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. (c) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, -11- 12 nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause or that the determination by the Executive of the existence of Good Reason was not made in good faith, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 9. CERTAIN ADDITIONAL 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, but determined without regard to any additional payments required under this Section 9) (a "PAYMENT") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "EXCISE TAX"), then the Executive shall be entitled to receive an additional payment (a "GROSS-UP PAYMENT") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte & Touche LLP (the "ACCOUNTING FIRM") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a -12- 13 negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("UNDERPAYMENT"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such -13- 14 advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. 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 and be binding upon the Company and its successors and assigns. -14- 15 (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 assume expressly 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 as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Florida, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: If to the Company: Noven Pharmaceuticals, Inc. 11960 S.W. 144th Street Miami, Florida 33186 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert -15- 16 any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v), shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Moreover, if prior to the Effective Date, the Executive's employment with the Company terminates, then the Executive shall have no further rights under this Agreement. From and after the Effective Date, this Agreement shall supersede any prior agreement between the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. Noven Pharmaceuticals, Inc. --------------------------- By: Title: --------------------------- Executive -16- 17 SCHEDULE 10.7 The Company has entered into identical employment agreements (change in control), a form of which is attached as Exhibit 10.7, with the following executive officers: Steven Sablotsky (Chairman of the Board) James B. Messiry (Vice President and Chief Financial Officer) EX-10.17 3 AMENDED AND RESTATED LIMITED ASSGMNT AGREEMENT 1 Exhibit 10.17 ================================================================================ AMENDED AND RESTATED LIMITED ASSIGNMENT AGREEMENT By and Among NOVARTIS PHARMACEUTICALS CORPORATION, NOVEN PHARMACEUTICALS, INC. and VIVELLE VENTURES LLC Dated as of April 1, 1999 ================================================================================ 2 AMENDED AND RESTATED LIMITED ASSIGNMENT AGREEMENT AMENDED AND RESTATED LIMITED ASSIGNMENT AGREEMENT dated as of April 1, 1999 (this "Agreement") by and among Novartis Pharmaceuticals Corporation, a Delaware corporation ("Novartis"), as the successor-in-interest to the Pharmaceuticals Division of Ciba-Geigy Corporation, a New York corporation ("CIBA"), Vivelle Ventures, LLC, a Delaware limited liability company ("LLC") and Noven Pharmaceuticals, Inc. a Delaware corporation ("Noven"). Capitalized terms used but not otherwise defined herein shall have the respective meanings assigned to such terms in that certain Amended and Restated Supply Agreement dated as of April 1, 1999 by and between Noven and Novartis (the "Amended and Restated Supply Agreement"), attached hereto as EXHIBIT A. W I T N E S S E T H: WHEREAS, Novartis, as successor-in-interest to CIBA, and Noven are parties to the Amended and Restated Supply Agreement, pursuant to which Noven has agreed to supply Novartis with Finished Product and Novartis has agreed to purchase annually certain minimum quantities of such Finished Product; WHEREAS, Novartis and Noven have formed LLC for the purpose of creating a platform to maintain and grow a franchise in women's health, focusing initially on the manufacture and sale of the 17(beta)-estradiol single active ingredient in a matrix currently being marketed by Novartis under the trademark "Vivelle" pursuant to the Restated License Agreement; WHEREAS, Novartis and Noven agreed in connection with the formation of the LLC that Novartis would, as its contribution to LLC, among other things, make a limited assignment to LLC of its rights and obligations under the Supply Agreement as may be amended from time to time; and WHEREAS, LLC desires to obtain the rights under the Amended and Restated Supply Agreement and is willing to assume the obligation to purchase the quantities of Finished Product specified in the Amended and Restated Supply Agreement; NOW THEREFORE, in consideration of the agreements and covenants set forth above and herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend and restate the Limited Assignment Agreement to more particularly set forth the parties' rights and obligations hereunder as follows: 1. ASSIGNMENT AND ASSUMPTION. (a) For the term of this Agreement, Novartis hereby assigns to LLC its rights under Sections 2.9, 2.10, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 6.1, 6.2, 6.3, 3 7.1, 7.2, 7.3 and Article 8 of the Amended and Restated Supply Agreement (the "Assigned Sections"). (b) For the term of this Agreement, LLC hereby accepts such assignment and assumes and agrees to perform and discharge the duties and obligations of Novartis arising under the Assigned Sections. 2. CONSENT TO ASSIGNMENT AND ASSUMPTION; RELEASE. For the term of this Agreement, Noven hereby consents to the assignment by Novartis of the rights under the Assigned Sections and the assumption by LLC of the performance, discharge of duties and obligations arising under the Assigned Sections. For the term of this Agreement, Noven hereby releases Novartis of all its duties and obligations (including, without limitation, its obligation to purchase the Annual Purchase Minimum or pay for any Finished Product purchased by LLC) arising under the Assigned Sections. 3. RETENTION OF REMAINING RIGHTS AND OBLIGATIONS. Notwithstanding the foregoing, Novartis retains all rights and obligations not assigned to LLC hereby. 4. CANADA. Subject to Section 2 of that certain Sublicense Agreement dated as of May 1, 1998 by and among Novartis, Noven and LLC (the "Sublicense Agreement"), the parties agree that for purpose of sale to Novartis' Canadian Affiliate, Novartis may purchase Vivelle (as that term is defined in that certain Operating Agreement of Vivelle Ventures LLC dated as of May 1, 1998 by and between Novartis and Noven (the "Operating Agreement")) from LLC at the price at which LLC purchases Vivelle from Noven. 5. ABSOLUTE ASSIGNMENT OF ALL RIGHTS AND OBLIGATIONS. In the event that Noven purchases all of Novartis' Interest (as that term is defined in the Operating Agreement) in LLC pursuant to Section 9.5 of the Operating Agreement, Novartis, Noven and LLC shall execute an assignment agreement assigning all of Novartis' rights and obligations under the Amended and Restated Supply Agreement to LLC and releasing Novartis from its obligations under the Amended and Restated Supply Agreement. 6. INDEMNIFICATION. LLC agrees and warrants to indemnify, defend and hold harmless Noven and Novartis from and against any and all claims, damages, expenses, attorneys' fees, settlements, and judgments arising out of any injury or damage to a third party alleged to be caused by the Finished Product supplied by Noven to LLC or manufactured for or by LLC; provided, however that Noven and/or Novartis notifies LLC within twenty (20) days of receipt of a claim or action, fully cooperates with LLC in the defense of such claim or action, and permits LLC to control the defense and settlement of such claim or action. Notwithstanding the above, LLC does not warrant and shall not be liable to indemnify Noven from and against any claims, damages, expenses, attorneys' fees, settlements and judgments arising out of any injury or damage to a third party caused by latent defects in the 2 4 Finished Product caused by the negligence or willful misconduct on the part of Noven, for which Noven shall have the right to control the defense and settle such claim or action. Noven agrees and warrants to indemnify and hold harmless LLC from and against any and all claims, damages, expenses, attorneys' fees, settlements and judgments for personal injury to a third party caused by latent defects in the Finished Product caused by the negligence or willful misconduct of Noven. This provision shall survive the expiration or termination of this Agreement. 7. RECALLS. If an authorized government agency of the United States or any country or territory based on requirements specifically notified to Noven by LLC shall seize any Finished Product or if LLC deems it necessary to initiate a voluntary recall for any commercially reasonable reason, LLC shall immediately notify Noven of such seizure or recall and shall consult with Noven regarding the timely compliance with all pertinent state or federal regulations pertaining thereto. Furthermore, each party shall make a permanent and complete record of all costs incurred thereby, a copy of which shall be delivered to the other party as soon after the completion of such recall or seizure as practically may be done. When the cause or reason of said recall or seizure resides in the negligent failure of Noven to manufacture in accordance with the Specifications or applicable, notified government rules and regulations, or in the failure of said product to maintain stability for the period described in the product labeling, Noven shall reimburse LLC for all reasonable costs incurred by LLC in effecting such recall or seizure, including all reasonable credits extended to LLC's customers as a result thereof. When the cause or reason for said recall or seizure is anything other than that set forth in the preceding sentence, including, but not limited to, failure by other than Noven to store, transport or care for the Finished Product, LLC shall bear all costs of such recall or seizure and indemnify Noven therefrom including reimbursement for all reasonable costs incurred by Noven in effecting such recall or seizure. 8. TERM; TERMINATION. The term of this Agreement and the Parties' obligations hereunder shall be deemed to have commenced on the earlier of the termination of the Supply Agreement or the Effective Date (as defined in the Amended and Restated Supply Agreement) and shall continue in effect until the earlier to occur of the following events: (a) the dissolution of LLC as provided in Article X of the Operating Agreement dated as of May 1, 1998 between Novartis and Noven; (b) the termination of the Amended and Restated Supply Agreement; or (c) the termination of the Restated License Agreement. 9. OBLIGATIONS UPON TERMINATION. Except as otherwise agreed by the parties, within thirty (30) days of the effective date of the expiration or any termination of this Agreement, LLC and any Supplier in possession of Know-How shall cease to use and deliver to Noven, upon written request, all Know-How, to the extent that such use is not permitted by the License Agreement except for any documents or records which either LLC or the Supplier is required to retain by law, and Noven shall do the same with respect to any LLC Know-How in its possession. Noven shall deliver to LLC, at LLC's request and expense, all Finished Product and preprinted packaging, labeling and stock materials which are in the possession of Noven, for which LLC shall be obligated to make payment upon delivery. 10. NOTICES. Any notice or communication required or permitted to be given or made under this Agreement by one of the parties hereto shall be in writing and shall be 3 5 deemed to have been sufficiently given or made for all purposes if mailed by certified mail, postage prepaid, addressed to such other party at its respective address as follows: (a) If to Noven, to: Noven Pharmaceuticals, Inc. 11960 S.W. 144th Street Miami, FL 33186 Attention: Mr. Robert C. Strauss, President and Chief Executive Officer Telephone: (305) 253-5099 Facsimile: (305) 232-1836 with a copy to: Noven Pharmaceuticals, Inc. 11960 S.W. 144th Street Miami, FL 33186 Attention: General Counsel Telephone: (305) 253-5099 Facsimile: (305) 232-1836 or to such other person or address as Noven shall furnish to the other parties hereto in writing. (b) If to Novartis, to: Novartis Pharmaceuticals Corporation 59 Route 10 East Hanover, NJ 07936 Attention: Office of the CEO Telephone: (973) 781-8005 Facsimile: (973) 781-7036 with copies to: Novartis Pharmaceuticals Corporation 59 Route 10 East Hanover, NJ 07936 Attention: General Counsel, Legal Department Telephone: (973) 781-5230 Facsimile: (973) 781-5260 and White & Case LLP 1155 Avenue of the Americas New York, NY 10036 Attention: William F. Wynne, Jr., Esq. Telephone: (212) 819-8200 Facsimile: (212) 354-8113 4 6 or to such other person or address as Novartis shall furnish to the other parties hereto in writing. (c) If to LLC, to: Vivelle Ventures LLC c/o Noven Pharmaceuticals, Inc. 11960 S.W. 144th Street Miami, FL 33186 Attention: Mr. Robert C. Strauss, President Telephone: (305) 253-5099 Facsimile: (305) 232-1836 with copies to: Novartis Pharmaceuticals Corporation 59 Route 10 East Hanover, NJ 07936 Attention: General Counsel Telephone: (973) 781-5230 Facsimile: (973) 781-5260 and White & Case LLP 1155 Avenue of the Americas New York, NY 10036 Attention: William F. Wynne, Jr., Esq. Telephone: (212) 819-8200 Facsimile: (212) 354-8113 or to such other person or address as LLC shall furnish to the other parties hereto in writing. 11. FORCE MAJEURE. Neither party shall be responsible or liable to the other hereunder for failure or delay in performance of this Agreement due to any war, fire, accident or other casualty, or any labor disturbance or act of God or the public enemy, or any other unforeseeable contingency beyond such party's control. In addition, in the event of the applicability of this Paragraph 11, the party affected by such force majeure shall immediately use 5 7 its best efforts to eliminate, cure and overcome any of such causes and resume performance of its obligations. 12. ASSIGNMENT. This Agreement and all rights and obligations hereunder are personal to the parties hereto and may not be assigned, other than to Affiliates of Novartis, without the express prior written consent of the other. Any assignment or attempt at same in the absence of such prior written consent shall be void and without effect. 13. APPLICABLE LAW. This Agreement shall be construed, and the rights of the parties determined, in accordance with the laws of the State of New York without regard to choice of law principles of the State of New York. 14. SEVERABILITY. If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. In the event any provisions shall be held invalid, illegal or unenforceable the parties shall use best efforts to substitute a valid, legal and enforceable provision, which insofar as possible, implements the purposes hereof. The same principle shall apply in respect of the filling of any contractual gap. 15. AMENDED AND RESTATED SUPPLY AGREEMENT. Unless otherwise specified herein, nothing contained in this Agreement shall affect the rights and obligations of the parties under the Amended and Restated Supply Agreement or the Restated License Agreement, and the terms and conditions of the Amended and Restated Supply Agreement and the Restated License Agreement shall remain in full force and effect. 16. NO WAIVER. The failure of any party hereto at any time or times to require performance of any provisions hereof shall in no manner affect its right to enforce such provision at a later time. No waiver by any party hereto of any condition nor the breach of any term, covenant or representation contained in this Agreement whether by conduct or otherwise in any one or more instances shall be deemed to be or construed as a further or continuing waiver of such condition or breach or a waiver of any other condition or deemed to be or construed as the breach of any other term, covenant or representation in this Agreement. 17. DRAFTSMANSHIP. The parties acknowledge and agree that this Agreement is the product of extensive negotiation and neither party will be deemed to have drafted this Agreement. 18. ENTIRE AGREEMENT. This Agreement among the parties made on the date of execution hereof and Section 2 of the Sublicense Agreement, constitute the entire understanding among the parties relating to the subject matter hereof, and no amendment or modification to this Agreement shall be valid or binding upon the parties unless made in writing and signed by the representatives of such parties. 19. COUNTERPARTS. This Agreement and any amendments hereto may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. Delivery of an executed counterpart of a 6 8 signature page to this Agreement by telecopier shall be as effective as delivery of a manually executed counterpart of this Agreement. 7 9 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the day and year first written above. NOVARTIS PHARMACEUTICALS CORPORATION By: /s/ Paulo Costa --------------------------------- Name: Paulo Costa Title: President and Chief Executive Officer Date: January 11, 2000 NOVEN PHARMACEUTICALS, INC. By: /s/ Steven Sablotsky --------------------------------- Name: Steven Sablotsky Title: Chairman Date: January 19, 2000 VIVELLE VENTURES LLC By: /s/ Robert C. Strauss --------------------------------- Name: Robert C. Strauss Title: President Date: January 19, 2000 8 EX-10.20 4 AMENDED AND RESTATED SUPPLY AGREEMENT 1 EXHIBIT 10.20 ================================================================================ AMENDED AND RESTATED SUPPLY AGREEMENT By and Among NOVARTIS PHARMACEUTICALS CORPORATION, and NOVEN PHARMACEUTICALS, INC. Dated as of April 1, 1999 ================================================================================ 2 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. AMENDED AND RESTATED SUPPLY AGREEMENT This AMENDED AND RESTATED SUPPLY AGREEMENT (the "Agreement") is entered into as of April 1, 1999 (the "Effective Date"), by and between Novartis Pharmaceuticals Corporation, a Delaware corporation ("Novartis") and Noven Pharmaceuticals, Inc., a Delaware corporation ("Noven") (with each of Noven and Novartis referred to individually as a "Party" or collectively as the "Parties"). W I T N E S S E T H : WHEREAS, Noven and Novartis, as the successor-in-interest to the Pharmaceuticals Division of Ciba-Geigy Corporation, a New York corporation ("Ciba"), are parties to a certain Restated License Agreement (as defined herein) covering the development, manufacture, and sale of the Finished Products and a certain Supply Agreement (as defined herein) pursuant to which Noven manufactured and supplied the Finished Products to Novartis; and WHEREAS, Novartis and Noven have formed Vivelle Ventures LLC pursuant to that certain Formation Agreement (the "Formation Agreement") dated as of May 1, 1998 (the "LLC") for the purpose of creating a platform to maintain and grow a franchise in women's health, focusing initially on the manufacture and sale of the Finished Products; and WHEREAS, Novartis as its contribution to LLC, among other things, granted an exclusive sublicense to LLC of Novartis' rights under the Restated License Agreement and made a limited assignment to LLC of Novartis' rights and obligations under the Supply Agreement; and -1- 3 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. WHEREAS, Novartis desires Noven to supply it or the LLC, as the case may be, with the Finished Products and Noven has the capability and is desirous of supplying Finished Products to Novartis or the LLC pursuant to the terms and conditions specified herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions contained herein, the Parties agree to amend and restate the Supply Agreement as follows, to more particularly set forth each Party's rights and obligations thereunder: ARTICLE 1. DEFINITIONS The following terms, as used in the Agreement, shall have the meanings set forth in this Article 1: 1.1 Except as otherwise provided herein, all capitalized terms not defined herein shall have the same meaning ascribed to them in the Restated License Agreement. 1.2 "GMP" shall mean the Current Good Manufacturing Practices as that term is defined by the FDA which are in force or hereafter adopted by the FDA in (a) its applicable regulations promulgated or issued thereunder, (b) guidelines or directives that Noven and Novartis may mutually agree are applicable, as amended from time to time and (c) good manufacturing practice as required by GRB regulations. 1.3 "GRB" means the U.S. Food and Drug Administration or any other government regulatory body of a country where the Finished Products are to be sold or distributed which has authority over clinical testing, manufacturing, marketing or sale of pharmaceutical products. 1.4 "Finished Products" shall mean the 17(beta)-estradiol single active ingredient in a matrix currently being marketed by LLC under the trademark "Vivelle" ("Vivelle") and the -2- 4 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 17(beta)-estradiol single active ingredient in a dot matrix currently being marketed by Novartis (or the LLC as the case may be) under the trademark "Vivelle-Dot" ("Vivelle-Dot") pursuant to the Restated License Agreement, manufactured by Noven in accordance with the Specifications (as defined herein) and supplied to Novartis by Noven in finished packaged form ready for retail sale and distribution. 1.5 "Materials" shall mean all active ingredients and excipients used in the manufacture of the Finished Products, as well as the primary and printed packaging materials, collectively. 1.6 "Plant" shall mean (a) the Noven facility located at 11960 S.W. 144th Street, Miami, Florida 33186, and (b) any other Noven facility agreed to by Novartis pursuant to paragraph 2.7 which has been qualified by a GRB for manufacture of the Finished Products. 1.7 "Product Application" means a formal application seeking approval to manufacture, market and sell the Finished Products within a particular country or jurisdiction submitted by a Party to the appropriate GRB under applicable laws, or such application owned by a Party including any Abbreviated New Drug Application (ANDA) or New Drug Application (NDA), as defined in the U.S. Federal Food, Drug and Cosmetic Act and applicable regulations promulgated thereunder, as such are from time to time amended. 1.8 "Project Facilities" shall mean the Plant and all facilities and equipment used by Noven to carry out the manufacture, storage, disposal and transportation of the Finished Products, or any component thereof, including those of any Noven contractor or subcontractor of any rank (including, without limitation, environmental or health and safety consultant or waste management firm). -3- 5 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 1.9 "Restated License Agreement" shall mean the Restated License Agreement entered into between Noven and Novartis, dated November 15, 1991, pursuant to which Noven has granted Novartis an exclusive license under the Patent Rights and Know-How (as defined therein), to manufacture, have manufactured, use and sell the Finished Products and which has been exclusively sublicensed to LLC pursuant to that certain Sublicense Agreement dated May 1, 1998. 1.10 "Specifications" shall mean, collectively, the Noven manufacturing, packaging and standard testing procedures for the Finished Products, including all applicable control procedures and analytical test methods contained therein, as described in Exhibit A attached hereto, as may be amended from time to time. 1.11 "Supply Agreement" shall mean that certain Supply Agreement dated as of August 31, 1995 by and between Noven and Novartis assigned in part to LLC pursuant to a Limited Assignment Agreement dated May 1, 1998 and which has been amended and restated pursuant to this Agreement. 1.12 "Waste" shall mean all materials, except any Finished Products or component thereof, present at the Plant and produced or generated in connection with the manufacture of the Finished Products. Waste shall include Finished Products or any component thereof which does not meet the Specifications; waste water, recovered solvents, and other remainders and materials; and components of the Finished Products, that are not used in the manufacture by Noven of the Finished Products, or non-compliant Finished Products which are returned to Noven pursuant to this Agreement. -4- 6 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. ARTICLE 2. MANUFACTURING 2.1 Noven shall manufacture the Finished Products in accordance with the Specifications and all applicable laws and regulations relating to the manufacture and packaging thereof, including but not limited to, Sections 501, 502 and 505 of Federal Food, Drug and Cosmetic Act, as amended from time to time. Upon Novartis' written request, Noven, at Novartis' expense, shall provide Novartis with copies of any permits required by state and local governing authorities having jurisdiction over any Plant for the operation of any Plant or for the manufacture of the Finished Products. 2.2 The Specifications may be amended by mutual agreement of Noven and Novartis. In the event that such changes result in increased production costs to Noven, Noven and Novartis shall mutually agree as to the allocation of such costs between the Parties. Additionally, Novartis shall reimburse Noven for the costs of implementing any changes requested by Novartis in labeling, packaging and preprinting of backing or pouch materials, and of discontinuing stock of same due to such changes, provided, however, that Novartis' obligation to reimburse Noven under this Section 2.2 shall be limited to such quantities of stock as would be necessary for Noven to fill Novartis' next Order (as defined in Section 4.3 herein) and for active drug substance, such quantities sufficient to fill Novartis' requirements for a four-month period. Notwithstanding the foregoing, Novartis, upon prior written notice to Noven, shall have the right to change unilaterally the Specifications if required by a GRB. In the event that change(s) required by a GRB result in increased costs to Noven, all cost increases due to such change(s) shall be shared equally between Noven and Novartis. -5- 7 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 2.3 Without the prior written approval of Novartis, which approval shall not be unreasonably withheld, Noven shall not rework or reprocess any Waste. 2.4 Noven acknowledges that it is familiar with and shall abide by GMPs. 2.5 Noven shall keep accessible all books (including laboratory books) and records maintained in connection with the testing of the Finished Products, including those books and records relating to cross-over cleaning, for a period of seven (7) years for purposes of United States requirements and eleven (11) years in order to comply with Canadian requirements from the date of generation of such documents. 2.6 Noven shall not change the manufacturing site for the Finished Products from the Plant without the prior written approval of Novartis, which approval shall not be unreasonably withheld. 2.7 Noven shall inform Novartis of any change in production equipment used to manufacture the Finished Products prior to implementation, and Novartis shall review each change in equipment within thirty (30) days after notification in writing by Noven. All changes must be reviewed and approved in writing by Novartis prior to being implemented, such approval not to be unreasonably withheld, and Noven shall validate the production equipment where required before production is initiated. 2.8 Noven shall package the Finished Products in accordance with the Specifications and GMP, including identifying and labeling each shipping unit as appropriate. 2.9 Notwithstanding anything contained herein to the contrary, any Finished Products supplied by Noven for resale in Canada shall conform with the standards, specifications, and all laws and regulations applicable with respect to Canada, including but not -6- 8 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. limited to preprinting and labeling requirements, and shall be manufactured in a facility approved for that purpose by the proper authorities of Canada, to the extent that Novartis (a) assists Noven in determining of the applicable standards, specifications, laws, and regulations of Canada and (b) agrees to an appropriate increase in the per unit price for Finished Products in an amount representing any increase in Noven's per unit cost for compliance therewith or as a result of any Specification changes required by such standards, specifications, laws and regulations. 2.10 ***. ARTICLE 3. TERM 3.1 The term of this Agreement and the Parties' obligations hereunder shall be deemed to have commenced on the earlier of the termination of the Supply Agreement or the Effective Date and shall continue for three (3) periods of twelve (12) months (each an "Agreement Year") with the first Agreement Year commencing on the date this Agreement is executed by all Parties (the "Term"). 3.2 Six (6) months prior to the expiration of the Term the Parties may negotiate to extend this Agreement for an additional twelve (12) months (the "Extension Period"). ARTICLE 4. SUPPLY/PURCHASES 4.1 In each Agreement Year, Novartis agrees that it will purchase from Noven and make payment for a minimum of *** ("Annual Purchase Minimum"). For the time period representing the earlier of the termination of the Supply Agreement or the Effective Date through the execution of this Agreement by both parties (with such period herein referred to as the "Partial Year"), Novartis agrees that it will purchase from Noven and make payment for a -7- 9 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. minimum amount of Finished Product equal to the pro rata share of the Annual Purchase Minimum. For purposes of clarification, the Annual Purchase Minimum may be comprised of any number of Vivelle and Vivelle-Dot individually prepackaged dosage forms (each a "Unit") totaling, in the aggregate, *** of Finished Products based upon the prices set forth on Exhibit B (as the same may be adjusted in accordance with this Agreement). In the event that the actual purchases of Finished Products are less than the Annual Purchase Minimum in any Agreement Year, Noven may bill Novartis for the difference within thirty (30) days following each Agreement Year. All amounts paid by Novartis (or by the LLC as the case may be) to Noven for samples of Vivelle and Vivelle-Dot will be credited in full against the Annual Purchase Minimum for the relevant Agreement Year, Partial Year or portion thereof. 4.2 Noven represents and warrants that it possesses, and covenants that during the Term and any Extension Period it will possess, the capability of supplying Novartis, and that it shall supply Novartis pursuant to Novartis' purchase orders, with *** Units of Finished Products ("Annual Supply Minimum") during an Agreement Year. Noven further represents and warrants that it possesses, and covenants that for the Partial Year it will possess, the capability of supplying Novartis, and that it shall supply Novartis pursuant to Novartis' purchase orders, with a minimum amount of Finished Product equal to the pro rata share of the Annual Supply Minimum for said Partial Year. Noven's failure to meet the Annual Supply Minimum shall be deemed a material breach of the Agreement. 4.3 Within sixty (60) days after the execution of this Agreement by both Parties, Novartis shall provide Noven with written forecasts broken down monthly indicating each of the quantities of Vivelle and Vivelle-Dot that Novartis estimates it will purchase during -8- 10 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. *** shall constitute a firm order ("Order"). Thereafter, at quarterly intervals, Novartis shall provide Noven with an Order for one quarter plus an additional one quarter's forecast, ***. 4.4 Orders will be placed within *** of each of the quantities of Vivelle and Vivelle-Dot previously forecasted by Novartis ***; provided, however, that Noven will use commercially reasonable efforts to produce quantities in excess of *** of such Orders if requested by Novartis. Orders shall indicate the quantities to be delivered and specific delivery dates which shall be no sooner than ninety (90) days after receipt of an Order by Noven. 4.5 All Finished Products supplied by Noven pursuant to an Order shall have been manufactured (a) no earlier than ninety (90) days prior to the agreed upon delivery date of the Order, and (b) from a full lot of either the Vivelle or Vivelle-Dot Unit dedicated to be delivered only to Novartis, so that no portion of the lot from which either the Vivelle or Vivelle-Dot Unit were manufactured shall have been delivered or planned to be delivered to a third party. Noven shall complete the manufacturing process, including packaging the Finished Product for retail sale, no later than six (6) months after the manufacture of pouched system by Noven at the Plant. 4.6 Delivery of Finished Products shall be ***, title to shipments of the Finished Products *** to ensure that the viability of the Finished Product is maintained in accordance with the Specifications, ***. 4.7 The Parties agree that the provisions of this Agreement, together with any amendments hereto, shall prevail over any inconsistent or additional statements or provisions contained in any other documents passing between the parties, including but not limited to, any Order, acknowledgment, confirmation or notice. -9- 11 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 4.8 The license granted in Article 2 of the Restated License Agreement shall not limit Noven's right to manufacture in the Territory transdermal patch products containing estrogen and to export the same outside of the Territory for resale by third parties outside the Territory, provided that: (a) Noven shall not manufacture transdermal patch products containing estrogen as the single active ingredient for any third party for sale within the Territory without the prior written consent of Novartis; (b) All transdermal patch products containing estrogen as the single active ingredient manufactured in the United States for export by Noven or exported by Noven shall comply with all applicable laws and regulations in the United States relating thereto, including without limitation, GMPs; (c) Noven will provide Novartis with (i) adverse drug experience data required to be disclosed by Novartis under 21 C.F.R. ss. 314.80 and/or 21 C.F.R. ss. 314.81 within five (5) business days of receipt by Noven of the same as well as (ii) any additional information required to be submitted by Novartis under 21 C.F.R. ss. 314.81, to the extent that such additional information relates to transdermal patch products containing estrogen as a single active ingredient, provided that Noven now or hereafter has the right to disclose the same under the terms of existing agreements with third parties, in a timely manner; (d) Except as required by law for export, Novartis labels or labeling identifying Novartis shall not accompany or be placed on transdermal patch products -10- 12 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. containing estrogen manufactured by Noven other than those manufactured for Novartis; and (e) Except for the right to manufacture for export granted above, nothing in this Agreement confers any other rights upon Noven under the NDA's or ANDA's transferred or required to be transferred to Novartis pursuant to Article 7.2 of the Restated License Agreement. The Restated License Agreement fully sets forth the rights of the parties with respect to the NDA's and ANDA's transferred or required to be transferred to Novartis. ARTICLE 5. QUALITY CONTROL AND QUALITY ASSURANCE 5.1 Each lot of Finished Products manufactured by Noven in accordance with Article 2 herein shall meet the applicable release standards as set forth in the Specifications to assure the Finished Products meet regulatory specifications at all times through the expiration date of that lot as defined in the applicable Product Application. Noven shall employ appropriate change control procedures to ensure that the applicable release standards remain congruent with the applicable Product Application. Control procedures and analytical test methods referenced in a given Product Application may not be modified or superseded without the express written or verbal consent of Novartis and only, if necessary, after approval by the appropriate GRB. 5.2 Noven shall be responsible for procuring all Materials and shall ensure, through applicable GMP testing, that at all times all Materials used in the manufacture of the Finished Products are in compliance with their specifications and, as appropriate, are within the expiration dates printed on their labels or packaging. Noven shall ensure that all Materials are stored according to the precise storage conditions provided by their manufacturer or supplier. -11- 13 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Noven shall carry out all Materials testing in accordance with GMP and all laboratory testing failures shall be promptly investigated and documented in reasonable detail. Noven may release Materials for processing only upon receipt of satisfactory test results. Noven shall employ appropriate change control procedures to ensure the control procedures remain congruent with the applicable Product Application and shall notify Novartis promptly of any changes to control procedures. 5.3 Noven shall ensure that all Materials released for processing are tested in accordance with agreed specifications and the filed Product Application. Noven will confirm that all batches of Materials correspond to the applicable specifications and GMP and are approved by Noven for incorporation into the Finished Product. Noven shall retain samples of all Materials used to prepare a lot of a Finished Product (except for water and volatile solvents) for a period of at least one year beyond the expiration date of the last lot of Finished Product containing said component. Packaging components are represented by Noven's retention of samples of finished dosage forms. The amount of retained sample shall be sufficient for at least three complete and full testing analyses in accordance with the control procedures for that component. 5.4 Noven shall investigate, in accordance with GMP, and promptly notify Novartis in writing of any extraordinary event occurring during the manufacture or packaging of a lot of Finished Product that is shipped to Novartis. An "extraordinary event" is defined as any deviation from the manufacturing and/or packaging procedures contained in the Specifications or from GMP which may have the potential to result in a Finished Product outside the established -12- 14 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. test specifications. Novartis reserves the right to review and evaluate all such investigations prior to acceptance of a given lot of the Finished Product. 5.5 In-process testing shall be performed by Noven as required by Noven's standard operating procedures but at all times consistent with the applicable Product Application. Representative samples from each lot of a Finished Product shall be tested by Noven for conformance with the requirements of the applicable Product Application prior to shipment of the full lot unless shipment prior to testing is agreed to in writing by Novartis. Any lot which fails to conform to release standards shall be rejected. All laboratory testing failures must be investigated and documented by the testing laboratory. Product Specification failures resulting in batch rejections, in-process production and environmental control specification failures, and critical equipment operating parameter failures, must be fully investigated by Noven in a timely manner, to determine the possible root cause, and necessary follow-up actions must be conducted promptly. Noven shall notify Novartis in writing of each such failure in the annual product review referred to in Section 5.8. 5.6 Noven shall complete a batch manufacturing record for each lot of each Finished Product manufactured, retain it for at least seven (7) years, and upon request shall provide a copy to Novartis. Records for all Materials used in the manufacture of a particular lot of Finished Products as well as supporting documentation for the validation of equipment and processes, shall be retained for a period of one year beyond the expiration date of that lot. 5.7 Noven shall store retained samples of each lot of Finished Product as required by the applicable GRB. The amount retained shall be sufficient for at least three complete and full testing analyses in accordance with the control procedure. -13- 15 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 5.8 Noven shall perform follow-up stability testing and annual product review in accordance with its standard operating procedures and consistent with all applicable GRB regulations for each lot of Finished Product. 5.9 Noven shall be responsible for validating all manufacturing and control procedures, including all applicable cleaning procedures. Noven will allow Novartis to audit all relevant documents, as well as the documentation concerning the qualification and calibration of equipment, upon reasonable request. 5.10 Noven shall reject any lot which fails to meet the applicable release standards as set forth in the Specifications or which does not comply with the specifications set forth in the applicable Product Application. 5.11 Noven shall provide test data and other information as requested by Novartis to enable Novartis to evaluate and respond to customer service and complaint handling operations relating to the Finished Products. In the case of customer complaints or reports of adverse incidents relating to the Finished Products, Noven shall provide Novartis, as promptly as possible, but in all cases within fifteen (15) days from Noven becoming aware of said complaint or incident, a written evaluation setting forth all relevant details applicable to the complaint and, to the extent applicable, a copy of each customer or regulatory complaint it receives concerning a Finished Product. 5.12 Each Party shall inform the other immediately upon becoming aware of an upcoming or underway inspections by regulatory authorities relating in any way to a Finished Product manufactured by Noven. Noven also shall inform Novartis promptly upon becoming -14- 16 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. aware of any serious violation uncovered as a result of an inspection of its facilities or its procedures which may impact the Finished Products or Novartis' rights under this Agreement. 5.13 Re-use or issue by Noven of any returned Finished Product bearing the Novartis tradename or any trademark owned by or licensed to Novartis requires the express written approval of Novartis. Mis-shipments are not classified as returned goods and can be placed back in distribution. 5.14 Upon reasonable notice and during normal business hours, Novartis may inspect, on a confidential basis, Noven's facilities, batch records and testing records to assure that the manufacturing and control processes were carried out in accordance with GMP, the Specifications and all applicable GRB regulations. 5.15 Any changes which may have a quality or regulatory impact must be submitted to Novartis for approval prior to implementation. These changes include but are not limited to changes or modifications to the existing: manufacturing process, equipment, formulation, batch size, Material, suppliers, processing of Materials, analytical methods, Specifications, storage conditions, or transport conditions. 5.16 No later than two (2) months prior to the due date of the annual report required to be filed with any GRB, for each of Vivelle and Vivelle-Dot, Noven will furnish to Novartis information in reasonable detail relating to stability data and any changes to the Specifications made in accordance with this Agreement and any chemistry-related data. The Parties acknowledge that the due date for the annual report required to be filed with the U.S. Food and Drug Administration for each calendar year is October for Vivelle and July for Vivelle-Dot. -15- 17 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 5.17 That certain Quality Assurance Agreement (the "QA Agreement") by and between the Parties entered into on February 5, 1999, attached as Exhibit C hereto, as amended from time to time, shall further define the Parties obligations under this Article 5. ARTICLE 6. PRICE 6.1 The price of each Unit of Vivelle and Vivelle-Dot manufactured during the Term of the Agreement is set forth in Exhibit B attached hereto. 6.2 The price of Finished Product, to be manufactured during the Extension Period shall be negotiated by the Parties in good faith at least six (6) months prior to the expiration of the Term of the Agreement. 6.3 The prices described in Section 6.1 shall be adjusted thirty (30) days prior to each Agreement Year (except for the first Agreement Year for which there is no adjustment) in accordance with any increases during the previous Agreement Year in Noven's aggregate costs for materials and labor used in manufacturing the Finished Products; provided, however, that no adjustment shall exceed, on a percentage basis, the percentage increase in the "Producer Price Index" published by the U.S. Department of Labor, Bureau of Labor Statistics (the "Index") with 1998 as the base year or ***, whichever is greater. If the cost of (a) either Estradiol, backing material or release liner increases by *** or (b) any other raw material or combination of raw materials increases by more than ***, Noven may, upon prior written notice to Novartis, increase the prices for Finished Products by an amount which does not exceed such increase in cost. Price increases under the preceding sentence shall be effective solely during the period the cost increase is in effect and the materials causing the increase are actually used in Finished Products. Notwithstanding the prior two sentences, upon receipt of notice from Noven of a price increase -16- 18 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. described in the prior two sentences, if Novartis is able to purchase the raw material or materials subject to the cost increase at a lower cost than that available to Noven, Novartis shall have the option of purchasing such raw material or materials and providing them to Noven, in which case the price increase described in the prior two sentences shall not take effect ***. Should the publication of said Index be discontinued by said Bureau of Labor Statistics, then such other indexes as may be published by said Bureau most nearly approaching said discontinued Index shall be used in determining the adjustment hereunder. Should said Bureau discontinue the publication of any such index, then such indexes as may be published by another United States governmental agency, as most nearly approximating the Index, shall govern and be substituted as the Index hereunder. 6.4 During the Term of the Agreement or the Extension Period, Novartis may propose making process improvements to manufacturing in order to maximize the efficiency of the manufacturing processes. Noven shall act in good faith to review any such proposal and, if implemented by Noven, the Parties shall negotiate a reduction in the pricing of the Finished Products based upon the improvement, taking into account each Party's costs incurred in realizing such benefits, to ensure that the Parties share such benefits equally. ARTICLE 7. RESPONSIBILITY 7.1 Noven shall use best efforts to manufacture and deliver Finished Products to Novartis which meet the Specifications. Novartis shall use best efforts to properly store, handle and care for the Finished Products while in Novartis' possession or control. Novartis shall, within sixty (60) days after Novartis receives delivery of each shipment of Finished Products, notify Noven in the event of the non-compliance of the Specifications of all or any part -17- 19 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. of said shipment to the extent such non-compliance is not due to the fault of Novartis, and shall immediately provide Noven with samples of the Finished Products upon Noven's request. Failure to provide such notification to Noven shall constitute acceptance by Novartis of the shipment, except for latent defects caused by the gross negligence or willful misconduct of Noven. 7.2 In the event of notification by Novartis of any non-compliance with the Specifications of the shipment to the extent such non-compliance is not due to the fault of Novartis, the particular shipment shall be set aside and held intact by Novartis until all questions relating to the non-compliance of the shipment have been resolved, corrected, or remedied to Novartis' satisfaction. 7.3 With respect to the purchase price and cost of transportation and disposal of Finished Products that are not in compliance with the Specifications, to the extent such non-compliance is not due to the fault of Novartis, Noven's liability to Novartis shall be (a) at Novartis' option, (i) replacement of the Finished Products, (ii) reimbursement of the purchase price of the Finished Products, or (iii) credit to Novartis for future orders of Finished Products; and (b) payment for the reasonable cost of transportation and disposal of any non-compliant Finished Products. 7.4 Noven agrees and warrants to indemnify, defend, and hold harmless Novartis from and against any and all claims, damages, expenses, attorneys' fees, settlements, and judgments arising out of any injury or damage to a third party alleged to be caused by the Finished Products supplied by Noven to Novartis whether manufactured for or by Noven; provided, however, that Novartis notifies Noven within twenty (20) days of receipt of a claim or -18- 20 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. action, fully cooperates with Noven in the defense of such claim or action, and permits Noven to control the defense and settlement of such claim or action. Notwithstanding the above, Noven does not warrant and shall not be liable to indemnify Novartis from and against any claims, damages, expenses, attorneys' fees, settlements and judgments to the extent arising out of any injury or damage to a third party caused by the negligence or willful misconduct on the part of Novartis or breach by Novartis of this Agreement, for which Novartis shall have the right to control the defense and settle such claim or action. Novartis agrees and warrants to indemnify and hold harmless Noven from and against any and all claims, damages, expenses, attorneys' fees, settlements and judgments for personal injury to a third party to the extent caused by the negligence or willful misconduct of Novartis or breach by Novartis of this Agreement. This provision shall survive expiration or termination of this Agreement. 7.5 If an authorized government agency of the United States or any country or territory shall seize any Finished Products or if Novartis in its sole judgment deems it necessary to initiate a voluntary recall for any commercially reasonable reason, Novartis shall immediately notify Noven of such seizure or recall and shall consult with Noven regarding the timely compliance with all pertinent state or federal regulations pertaining thereto. Notification of the applicable GRB authorities shall be coordinated. Furthermore, each Party shall make a permanent and complete record of all costs incurred thereby, a copy of which shall be delivered to the other Party as soon after the completion of such recall or seizure as practically may be done. When the cause or reason of said recall or seizure resides in the negligent failure of Noven to manufacture in accordance with the Specifications or applicable government rules and regulations, or in the failure of said product to maintain stability for the period described in the -19- 21 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. product labeling, Noven shall reimburse Novartis for all reasonable costs incurred by Novartis in effecting such recall or seizure, including all reasonable credits extended to Novartis' customers as a result thereof. When the cause or reason for said recall or seizure is anything other than that set forth in the preceding sentence, including, but not limited to, failure by others than Noven or its agents to properly store or transport the Finished Products, Novartis shall bear all costs of such recall or seizure and indemnify Noven therefrom including reimbursement for all reasonable costs incurred by Noven at Novartis' request in effecting such recall or seizure. ARTICLE 8. PAYMENT Payment for the Finished Products furnished to Novartis shall be made by Novartis no later than thirty (30) days after Novartis' receipt of the invoice from Noven or delivery of the Finished Products to Novartis, whichever is later. In the event Novartis shall, with respect to any delivery of the Finished Products complying with Specifications, fail to make payment of undisputed amounts when due and payable, and shall fail to remedy such failure within thirty (30) days after Novartis' receipt of written notice of such failure from Noven, Noven may suspend its obligation (a) to meet the Annual Supply Minimum and (b) deliver Finished Products pursuant to an Order, until such undisputed amount has been paid in full. In addition to the foregoing, upon written notice to Novartis, interest shall accrue on any undisputed amount due and payable to Noven at the prime rate plus *** until such amount is paid. The prime rate shall be the rate specified as the prime rate in the Wall Street Journal on the date such undisputed amount was due and payable. -20- 22 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. ARTICLE 9. AUDIT AND INSPECTION RIGHTS 9.1 During the term of this Agreement and the Extension Period, Novartis and its authorized representatives shall have the right, at Novartis' expense, to audit, inspect and observe the manufacture, storage, disposal and transportation of the Finished Products or Waste during normal business hours upon five (5) days prior notice. All employees and representatives of Novartis (a) shall comply with and observe all applicable rules and regulations governing their conduct while performing their audit, inspection, or observation, and (b) shall have no authority to manage, supervise, or control, any of Noven's employees. Noven agrees to respond to Novartis' audit findings within thirty (30) days of receipt of the audit report and to be responsive to the recommendations contained therein. 9.2 Noven shall make available all records and reports relating to the manufacture, storage, disposal and transportation of Finished Products and/or Waste to Novartis, as well as those documents relating to analytical and stability data, for Novartis' review during normal business hours and upon reasonable prior notice to Noven, and Novartis shall have the right to copy these documents as required. In the event that Novartis supplies materials to be used by Noven, Novartis shall have the right to conduct inventory reconciliation audits and other audits as reasonably required for its internal control. 9.3 Noven agrees to fully respond within forty-five (45) days of receipt, to an annual questionnaire provided by Novartis concerning Noven's safety, health and environmental practices and any changes thereto. 9.4 Noven shall promptly give Novartis advance notice, to the extent that advance notice is given to Noven, of any site visit to the Plant regarding the manufacture, -21- 23 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. storage, disposal or transportation of the Finished Products or Waste by any governmental or regulatory agency; provided, however, that Noven shall notify Novartis within eight (8) hours of notification to Noven of any site visits by the FDA or other GRB. Novartis shall have the option of attending any such site visit by any governmental or regulatory agency, if the site visit relates directly or indirectly to the manufacturing, storage, disposal and transportation of the Finished Products. Should Novartis not participate in the site visit, Noven shall fully report in writing the substance and results of the visit to Novartis within seven (7) days of the occurrence thereof. In the event that any such governmental or regulatory agency finds that a Plant is deficient or unsatisfactory in any respect, Novartis shall have the option to (a) assist Noven, at Noven's expense in correcting the deficiency, or (b) terminate this Agreement provided the violations materially impair Noven's capability to continue to produce Finished Products in accordance with this Agreement. ARTICLE 10. WASTE DISPOSAL Noven shall assume responsibility for disposing of all Waste in accordance with all applicable laws and regulations, and in accordance with all Novartis requirements, standards and procedures provided in writing to Noven. Novartis shall provide to Noven a list of disposal sites previously approved by Novartis. If Novartis and Noven cannot mutually agree upon a disposal method or site, Novartis shall have the option of assuming the responsibility to dispose of such Waste itself at Noven's expense, such expense not to exceed that which would otherwise be incurred or expended by Noven if lawfully disposed of by Noven. Copies of all documentation evidencing disposal by Noven shall be made available to Novartis upon Novartis' request and expense. -22- 24 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. ARTICLE 11. SAFETY Noven shall comply with all applicable health and safety regulations policies and procedures relating to the manufacture and packaging of the Finished Products including the transmission by Noven to its employees of health and safety information relating to the Finished Products, and their manufacture, storage, disposal and transportation. ARTICLE 12. ENVIRONMENTAL, HEALTH AND SAFETY WARRANTY INDEMNIFICATION Noven represents and warrants that all Project Facilities shall be in full compliance with all applicable health, safety and environmental, laws, statutes, ordinances, regulations, rules and pronouncements. Noven agrees and warrants to indemnify, defend and hold harmless Novartis, its officers and employees, from any and all liability (including strict and joint and several liability) or loss arising from or related to (including liability for threatened harm) Project Facilities and Waste disposal. Novartis agrees and warrants to indemnify, defend and hold harmless Noven, its officers and employees, from any and all liability (including strict and joint and several liability) or loss arising from or related to Waste disposal for which Novartis has assumed responsibility. ARTICLE 13. CONFIDENTIALITY (a) Each Party acknowledges that the information disclosed in connection with the activities contemplated hereunder may contain confidential information of the disclosing Party ("CONFIDENTIAL INFORMATION"), and that any such Confidential Information shall remain the property of the disclosing Party (such Party hereinafter referred to as the "DISCLOSING PARTY"). Each Party agrees, covenants and acknowledges that, except to the extent expressly permitted by -23- 25 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. this Agreement or as otherwise agreed to by the Parties in writing, from and after the Effective Date of this Agreement, it will not disclose, give, sell, use or otherwise divulge any Confidential Information received from the Disclosing Party (whether written or oral) which is marked as CONFIDENTIAL or orally indicated to be confidential and subsequently confirmed in writing as confidential within thirty (30) days after its disclosure. (b) Each Party agrees, covenants and acknowledges that from and after the Effective Date of this Agreement, it will exercise the same degree of care with respect to protecting the Confidential Information of the Disclosing Party as the care it exercises with respect to its own Confidential Information. (c) In the event a Party or its respective employees, officers, directors or advisors, who have received Confidential Information (hereafter the "RECIPIENT"), become legally compelled to disclose any Confidential Information, such Recipient shall provide the Disclosing Party with prompt written notice of such requirement so that such Disclosing Party may seek a protective order or other remedy or waive compliance with this Article 13. In the event that such protective order or other remedy is not obtained, or such Disclosing Party waives compliance with this Article 13, then the Recipient shall furnish only that portion of Confidential Information which is legally required to be provided and exercise its best efforts to obtain assurances that appropriate confidential treatment will be accorded the Confidential Information. (d) The confidentiality and restrictive use obligations under this Article 13 shall not apply to (i) any information that, at the time of disclosure, is or subsequently becomes available publicly; PROVIDED, HOWEVER, that such information was not disclosed in breach of this Agreement by the Recipient or any of its Affiliates or their respective employees, officers, -24- 26 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. directors or advisors, or (ii) is hereafter made available to the Recipient from a source other than the Disclosing Party, which source did not obtain same from the Disclosing Party and did not impose an obligation of confidentiality on the Recipient. (e) The Parties recognize that the performance of the obligations under this Article 13 are special, unique and extraordinary in character, and that in the event of the breach by either Party or their Affiliates or their respective employees, officers, directors or advisors of the terms and conditions of this Article 13, the Disclosing Party shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either at law or in equity, to enforce the specific performance thereof by such Party or to enjoin such Party or their Affiliates or their respective employees, officers, directors or advisors from violating the provisions of this Article 13. ARTICLE 14. INTELLECTUAL PROPERTY All inventions, whether patentable or not, conceived and reduced to practice by Novartis alone shall be owned by Novartis. All inventions, whether patentable or not, conceived and reduced to practice by Noven alone shall be owned by Noven. All inventions, whether patentable or not, conceived and reduced to practice jointly by Novartis and Noven shall be owned jointly by Novartis and Noven. ARTICLE 15. TERMINATION AND DEFAULT 15.1 TERMINATION 15.1.1 Novartis may terminate this Agreement during the Term without cause upon ninety (90) days' written notice; provided, however, that Novartis shall be obligated to pay -25- 27 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. the Annual Purchase Minimum in accordance with the provisions of Section 4.1 herein for the remainder of the Term, but excluding the Extension Period. 15.1.2 Noven may not terminate this Agreement except as otherwise provided herein. 15.1.3 The right of, either Party to terminate this Agreement, as herein provided, shall not be affected in any way by its waiver of or failure to take action with respect to any previous defaults. 15.1.4 This Agreement and the obligations of the parties hereunder shall immediately terminate upon termination of the Restated License Agreement. 15.2 DEFAULT 15.2.1 If Noven shall be in default with respect to any material obligation hereunder and fail to cure such default within thirty (30) days after notice thereof, then Novartis may terminate this Agreement during the Term or the Extension Period by giving thirty (30) days' prior written notice to that effect. 15.2.2 Notwithstanding Section 15.2.1 above, any intentional violation by Noven of Article 10, 11 or 12 shall be grounds for immediate termination by Novartis of this Agreement during the Term or the Extension Period. 15.2.3 Notwithstanding Section 15.2.1 above, Novartis shall have the right to immediately terminate this Agreement during the Term or the Extension Period in the event of (a) a Change of Control event with respect to Noven as defined in that certain Limited Liability Company Operating Agreement (the "Operating Agreement") dated as of May 1, 1998 by and between the Parties that, at such time, would permit Novartis to dissolve the LLC pursuant to the -26- 28 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. terms of such Operating Agreement or (b) an assignment or delegation of this Agreement by Noven without the prior written consent of Novartis. 15.2.4 In the event that Noven is not able to supply any portion of the Finished Products pursuant to an Order, then Novartis shall have the right to manufacture, or have a third party manufacture on its behalf, that portion of Novartis' requirements of the Finished Products which Noven is not able to supply. If Noven is not able to supply any portion of the Finished Products pursuant to an Order for more than one hundred and twenty (120) days, then Novartis shall have the right (a) to source from another manufacturer, (b) void the terms of Articles 4 in whole or in part, and (c) terminate this Agreement. 15.2.5 Either party shall have the right to terminate this Agreement in the event that any proceeding under a Bankruptcy Act or an insolvency, receivership or dissolution proceeding is filed by or against the other party and such proceeding is not dismissed within sixty (60) days after the filing thereof. 15.2.6 Noven shall also have the right to terminate this Agreement if Novartis fails to make payment(s) (i) upon undisputed amounts exceeding *** or (ii) upon any amounts exceeding *** due hereunder within the time provided therefor and continues in default for more than ninety (90) days after receiving notice from Noven, such termination to be effective upon further notice to Novartis after failure by Novartis to cure such default. ARTICLE 16. OBLIGATIONS UPON TERMINATION Except as otherwise agreed by the parties, within thirty (30) days of the effective date of the expiration or any termination of this Agreement, Novartis and any Supplier in possession of Know-How shall cease to use and deliver to Noven, upon written request all -27- 29 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Know-How, to the extent that such use is not permitted by the Restated License Agreement except for any documents or records which either Novartis or the Supplier is required to retain by law, and Noven shall do the same with respect to any Novartis Know-How in its possession. Noven shall deliver to Novartis, at Novartis' request and expense, all Finished Products and preprinted packaging, labeling and stock materials which are in the possession of Noven, for which Novartis shall be obligated to make payment upon delivery. ARTICLE 17. INSURANCE Noven shall maintain the types and amounts of insurance set forth in Exhibit D, attached hereto. ARTICLE 18. PUBLICITY Without the prior written consent of Novartis as to the text, intended date and time (EST time) of publication, Noven agrees not to issue any press release or other public statement disclosing the existence of or relating to this Agreement; provided, however, that Noven shall not be prevented from complying with any duty of disclosure it may have pursuant to law or applicable stock exchange rules. ARTICLE 19. ASSIGNMENT Neither Party shall assign its rights or obligations hereunder to a third party without the prior written consent of the other Party, such consent not to be unreasonably withheld, and any attempt to make such assignment without such consent shall render this Agreement null and void. -28- 30 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. ARTICLE 20. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to choice-of-law principles of the State of New York. ARTICLE 21. SEVERABILITY If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. In the event any provisions shall be held invalid, illegal or unenforceable, the parties shall use best efforts to substitute a valid, legal and enforceable provision, which, insofar as practical, implements the purposes hereof. ARTICLE 22. NOTICES 22.1 All notices, requests, demands and other communications hereunder shall be given in writing and shall be: (a) personally delivered; (b) sent by telecopier, facsimile transmission or other electronic means of transmitting written documents; or (c) sent to the Parties at their respective addresses indicated herein by registered or certified U.S. mail, return receipt requested and postage prepaid, or by private overnight mail courier service. The respective addresses to be used for all such notices, demands or requests are as follows: (a) If to Noven, to: Noven Pharmaceuticals, Inc. 11960 S.W. 144th Street Miami, FL 33186 Attention: Mr. Robert C. Strauss, President and Chief Executive Officer Telephone: (305) 253-5099 Facsimile: (305) 232-1836 -29- 31 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. with a copy to: Noven Pharmaceuticals, Inc. 11960 S.W. 144th Street Miami, FL 33186 Attention: General Counsel Telephone: (305) 253-5099 Facsimile: (305) 232-1836 or to such other person or address as Noven shall furnish to Novartis in writing. (b) If to Novartis, to: Novartis Pharmaceuticals Corporation 59 Route 10 East Hanover, NJ 07936 Attention: Office of the CEO Telephone: (973) 781-8005 Facsimile: (973) 781-7036 with copies to: Novartis Pharmaceuticals Corporation 59 Route 10 East Hanover, NJ 07936 Attention: General Counsel Telephone: (973) 781-5230 Facsimile: (973) 781-5260 and White & Case LLP 1155 Avenue of the Americas New York, NY 10036 Attention: William F. Wynne, Jr., Esq. Telephone: (212) 819-8200 Facsimile: (212) 354-8113 or to such other person or address as Novartis shall furnish to Noven in writing. If personally delivered, such communication shall be deemed delivered upon actual receipt; if electronically transmitted pursuant to this paragraph, such communication shall be deemed delivered on the day transmitted unless it is received after 5:00 p.m., New York time, -30- 32 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. or on a day which is not a business day, in which case it shall be deemed delivered on the next business day after transmission (and sender shall bear the burden of proof of delivery); if sent by overnight courier pursuant to this paragraph, such communication shall be deemed delivered upon receipt; and if sent by U.S. mail pursuant to this paragraph, such communication shall be deemed delivered as of the date of delivery indicated on the receipt issued by the relevant postal service, or, if the addressee fails or refuses to accept delivery, as of the date of such failure or refusal. Either Member may change its address for the purposes of this Agreement by giving notice thereof in accordance with this Section. ARTICLE 23. FORCE MAJEURE Neither Party shall be responsible or liable to the other hereunder for failure or delay in performance of this Agreement due to any war, fire, accident or other casualty, any governmental action, any labor disturbance, any act of God or the public enemy, or any other cause beyond such Party's reasonable control. In the event of the application of this Article, the party affected by such force majeure shall use its best efforts to eliminate, cure and overcome any of such causes and resume performance of its obligations; provided, however, that either Party shall have the right to terminate this Agreement if performance of this Agreement is prevented for a continuous period of one hundred twenty (120) days. ARTICLE 24. COST Unless otherwise specified, each Party shall bear the full cost of its compliance with the terms of this Agreement and its respective obligations hereunder. For purposes of this Agreement, the term "costs" when used herein shall mean the fully allocated costs including but not limited to the fully allocated cost of goods and services and manufacturing overhead directly -31- 33 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. related to Finished Products, and allocation of all administrative and general expenses directly related to Finished Products. Costs shall be determined by generally accepted accounting principles, applied on a consistent basis. ARTICLE 25. LICENSE AGREEMENT AND OTHER AGREEMENTS Unless otherwise specified herein and the Exhibits attached hereto, nothing contained in this Agreement shall affect the rights and obligations of the Parties under the Restated License Agreement, the Formation Agreement or any other agreement by and between the Parties and the terms and conditions of all such agreements shall remain in full force and effect. ARTICLE 26. ENTIRE AGREEMENT This Agreement and the Exhibits attached hereto constitute the entire understanding between the Parties relating to the subject matter hereof, and no amendment or modification to this Agreement shall be valid or binding upon the Parties unless designated as such, made in writing and signed by the representatives of such Parties. -32- 34 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. IN WITNESS WHEREOF, this Agreement has been duly executed by the Parties to be effective as of the day and year first written above. NOVEN PHARMACEUTICALS, INC. By /s/ Robert C. Strauss -------------------------------------- Name: Robert C. Strauss Title: President and Chief Executive Officer Date: January 18, 2000 NOVARTIS PHARMACEUTICALS CORPORATION By /s/ Paulo Costa -------------------------------------- Name: Paulo Costa Title: President and Chief Executive Officer Date: January 11, 2000 -33- 35 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT A FINISHED PRODUCT SPECIFICATION -34- 36 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT B FINISHED PRODUCT PRICE SCHEDULE -35- 37 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT C QUALITY ASSURANCE AGREEMENT -36- 38 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT D INSURANCE -37- EX-11 5 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11 Noven Pharmaceuticals, Inc. Computation of Earnings per Share (in thousands except per share amounts)
1999 1998 1997 -------- -------- -------- BASIC EARNINGS (LOSS): Net income (loss) $ 10,460 $ (4,079) $ (9,557) Weighted average number of common shares outstanding 21,508 21,013 20,159 ======== ======== ======== Basic earnings (loss) per share $ 0.49 $ (0.19) $ (0.47) ======== ======== ======== DILUTED EARNINGS (LOSS): Net income (loss) $ 10,460 $ (4,079) $ (9,557) Weighted average number of common shares outstanding 21,508 21,013 20,159 Potential dilution on exercise of stock options 389 -- -- -------- -------- -------- Weighted average number of common shares outstanding, as adjusted 21,897 21,013 20,159 ======== ======== ======== Diluted earnings (loss) per share $ 0.48 $ (0.19) $ (0.47) ======== ======== ========
EX-23 6 CONSENT OF DELOITTE AND TOUCHE LLP 1 Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in Registration Statement No. 333-64081 of Noven Pharmaceuticals, Inc. on Form S-8, in Registration Statement No. 333-56293 of Noven Pharmaceuticals, Inc. on Form S-3 and in Registration Statement No. 333-90835 of Noven Pharmaceuticals, Inc. on Form S-8 of our report dated February 25, 2000, appearing in this Annual Report on Form 10-K of Noven Pharmaceuticals, Inc. for the year ended December 31, 1999. Miami, Florida March 20, 2000 EX-27 7 NOVEN PHARMACEUTICALS FDS 12/31/1999
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NOVEN PHARMACEUTICALS, INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 15,338 0 3,215 167 3,578 26,030 21,317 5,988 56,888 9,449 0 0 0 2 39,393 56,888 31,334 31,650 12,721 27,752 0 0 0 5,728 (4,732) 0 0 0 0 10,460 .49 .48
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