10-Q 1 e10-q.txt NOVEN 10-Q FOR 06/30/00 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2000 Commission file number 0-17254 NOVEN PHARMACEUTICALS, INC. STATE OF DELAWARE 59-2767632 ------------------------------ ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 11960 S.W. 144th Street Miami, FL 33186 --------------------------------------------------- (Address of principal executive offices) (Zip Code) (305) 253-5099 --------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Class Outstanding at July 31, 2000 ----- ---------------------------- Common stock $.0001 par value 22,027,668 2 NOVEN PHARMACEUTICALS, INC. INDEX
Page No. -------- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Statements of Operations for the Three and Six Months Ended June 30, 2000 and 1999 3 Balance Sheets as of June 30, 2000 and December 31, 1999 4 Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 5 Notes to Financial Statements 6-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 10 PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders 11 Item 6 - Exhibits and Reports on Form 8-K 11 SIGNATURES 12
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NOVEN PHARMACEUTICALS, INC. Statements of Operations Three and Six Months Ended June 30, (in thousands, except per share amounts) (unaudited)
Three Months Six Months -------------------- -------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Revenues: Product sales $10,335 $ 7,437 $19,791 $14,857 License revenue 146 56 293 113 ------- ------- ------- ------- Total revenues 10,481 7,493 20,084 14,970 Expenses: Cost of products sold 4,512 3,361 9,023 6,605 Research and development 3,555 1,485 5,380 3,142 Marketing, general and administrative 2,307 1,743 4,389 3,647 ------- ------- ------- ------- Total operating costs and expenses 10,374 6,589 18,792 13,394 ------- ------- ------- ------- Income from operations 107 904 1,292 1,576 Equity in earnings of Novogyne 3,253 -- 3,730 -- Interest income, net 267 64 467 116 ------- ------- ------- ------- Income before income taxes 3,627 968 5,489 1,692 Provision for income taxes 153 9 188 18 ------- ------- ------- ------- Net income $ 3,474 $ 959 $ 5,301 $ 1,674 ======= ======= ======= ======= Basic earnings per share $ 0.16 $ 0.05 $ 0.24 $ 0.08 ======= ======= ======= ======= Diluted earnings per share $ 0.15 $ 0.05 $ 0.23 $ 0.08 ======= ======= ======= ======= Weighted average number of common shares outstanding: Basic 21,797 21,460 21,740 21,496 ======= ======= ======= ======= Diluted 22,895 21,638 22,862 21,673 ======= ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 3 4 NOVEN PHARMACEUTICALS, INC. Balance Sheets (in thousands, except share data)
June 30, 2000 December 31, 1999 (unaudited) (audited) ------------- ----------------- ASSETS Current Assets: Cash and cash equivalents $ 18,798 $ 15,338 Accounts receivable (less allowance for doubtful accounts of $156 in 2000 and $167 in 1999) 4,324 3,048 Due from Novogyne 3,304 3,651 Inventories 5,315 3,578 Prepaid and other current assets 382 415 -------- -------- 32,123 26,030 Property, Plant and Equipment - net 15,186 15,329 Other Assets: Investment in Novogyne 9,868 8,365 Net deferred income tax asset 5,000 5,000 Patent development costs, net 1,789 1,805 Deposits and other assets 199 359 -------- -------- 16,856 15,529 -------- -------- $ 64,165 $ 56,888 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 5,533 $ 5,085 Notes payable - current portion 348 348 Accrued compensation and related liabilities 1,816 2,237 Other accrued liabilities 1,058 1,193 Deferred license revenue - current portion 586 586 -------- -------- 9,341 9,449 Long Term Liabilities: Notes payable 433 604 Deferred license revenue 7,149 7,442 -------- -------- 16,923 17,495 Shareholders' 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 21,916,932 shares at June 30, 2000 and 21,546,271 at December 31, 1999 2 2 Additional paid-in capital 69,162 66,614 Accumulated deficit (21,922) (27,223) -------- -------- 47,242 39,393 -------- -------- $ 64,165 $ 56,888 ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 4 5 NOVEN PHARMACEUTICALS, INC. Statements of Cash Flows Six Months Ended June 30, (in thousands) (unaudited)
2000 1999 -------- -------- Cash flows from operating activities: Net income $ 5,301 $ 1,674 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 707 685 Amortization of patent costs 104 104 Recognition of deferred license revenue (293) (113) Equity in earnings of Novogyne (3,730) -- (Increase) in accounts receivable (1,276) (1,157) Decrease in due from Novogyne 347 205 (Increase) in inventories (1,737) (201) Decrease in prepaid and other current assets 33 71 Decrease (Increase) in deposits and other assets 160 (307) Increase (Decrease) in accounts payable 448 (1,169) Increase in accrued compensation and related liabilities 360 488 (Decrease) increase in other accrued liabilities (135) 343 -------- -------- Cash flows provided by operating activities 289 623 Cash flows from investing activities: Purchase of fixed assets, net (564) (511) Distribution from Novogyne 2,228 622 Payments for patent development costs (88) (155) -------- -------- Cash flows provided by (used in) investing activities 1,576 (44) Cash flows from financing activities: Issuance of common stock 1,766 81 Notes payable (171) 1,060 -------- -------- Cash flows provided by financing activities 1,595 1,141 -------- -------- Net increase in cash and cash equivalents 3,460 1,720 Cash and cash equivalents - beginning of period 15,338 5,573 -------- -------- Cash and cash equivalents - end of period $ 18,798 $ 7,293 ======== ======== Cash payments for interest were $35 in 2000 and $9 in 1999 Accrued compensation and related liabilities for the years ended December 31, 1999 and 1998 includes bonuses for employees and officers of $782 and $329 that were settled by issuance of 55,000 and 62,000 shares of common stock during the quarters ended March 31, 2000 and 1999, respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 5 6 NOVEN PHARMACEUTICALS, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS 1. Basis of Presentation: In management's opinion, the accompanying unaudited financial statements of Noven Pharmaceuticals, Inc. ("Noven") contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of Noven as of June 30, 2000, and the results of its operations for the three and six months ended June 30, 2000 and 1999. The results of operations and cash flows for the six months ended June 30, 2000 are not necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 2000. The accompanying financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The financial statements should be read in conjunction with the financial statements and the notes to the financial statements included in Noven's Annual Report on Form 10-K for the year ended December 31, 1999. The accounting policies followed for interim financial reporting are the same as those disclosed in Note 1 of the notes to the financial statements included in Noven's Annual Report on Form 10-K for the year ended December 31, 1999. 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 and reports its share of Novogyne's earnings as "Equity in Earnings of Novogyne" on its Statements of Operations. Noven has eliminated 49% of its profit on products sold to Novogyne that remain in Novogyne's inventory. Certain amounts presented in the financial statements for prior periods have been reclassified to the current period's presentation. 2. Inventories: The following are the major classes of inventories (in thousands): June 30, December 31, 2000 1999 -------- ------------ Finished goods $ 130 $ 125 Work in process 1,078 973 Raw Materials 4,107 2,480 ------ ------ Total $5,315 $3,578 ====== ====== 6 7 3. Income Taxes: Provisions for income taxes for the six months ended June 30, 2000 and 1999 reflect provisions for the alternative minimum tax. 4. Investment in Novogyne: Noven shares in the earnings of Novogyne according to an established formula after satisfaction of an annual preferred return of $6.1 million to Novartis. Noven's share of earnings increases as product sales increase, subject to a cap of 49%. Novogyne produced sufficient income in the first quarter of 2000 to meet Novartis' preferred return and for Noven to recognize earnings from Novogyne under the formula. During the six months ended June 30, 2000 and 1999, Noven recognized $10.9 million and $5.0 million, respectively, of product sales to Novogyne, which included $1.8 million and $1.0 million in royalties, and was reimbursed for $7.3 million and $6.5 million, respectively, of sales and marketing expenses incurred on behalf of Novogyne. As of June 30, 2000 and 1999, Noven had amounts due from Novogyne of $3.3 million and $3.3 million, respectively, representing products sold to and marketing expenses reimbursable by Novogyne. During the three months ended June 30, 2000 and 1999, Noven recognized $4.8 million and $3.0 million, respectively, of product sales to Novogyne, which included $0.9 million and $0.7 million in royalties, and was reimbursed for $4.1 million and $3.8 million, respectively, of sales and marketing expenses incurred on behalf of Novogyne. Subject to the approval of Novogyne's management committee, cash may be distributed quarterly to Novartis and Noven based upon a contractual formula. In April 2000, Noven received a cash distribution of $2.2 million from Novogyne based upon the results of operations for the year ended December 31, 1999, which was recorded as a reduction in the investment in Novogyne in the second quarter of 2000. 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. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the financial statements, the related notes and management's discussion and analysis of financial condition and results of operations included in Noven's Annual Report on Form 10-K for the year ended December 31, 1999 and the financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q. Except for historical information contained herein, the matters discussed below 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. These factors, which are discussed elsewhere in this report and in the documents filed by Noven with the Securities and Exchange Commission ("SEC"), may cause Noven's results to differ materially from the forward looking statements made in this report or otherwise made by or on behalf of Noven. Noven recognizes revenues from product sales at the time of shipment. Noven accrues royalty revenue, which is included in product sales, based on its best estimates of its licensee's product sales. When no reasonable basis for estimating exists because the information is not in Noven's control, Noven will recognize royalty revenue when actual results are available. Because substantially all of Noven's product sales are to its licensees, Noven's product sales may fluctuate from quarter to quarter depending on various factors not in Noven's control, including but not limited to the marketing efforts of each licensee, inventory requirements of each licensee, the product pricing of each licensee and the timing of certain royalty reconciliations and payments under Noven's license agreements. Royalty reconciliations and payments under the license agreements are generally made once or twice per year for product sales made in the prior period. Noven shares in the earnings of Novogyne according to an established formula after satisfaction of an annual preferred return of $6.1 million to Novartis. In the first quarter of 2000, Novartis' preferred return was satisfied for all of 2000. Noven reports its share of Novogyne's earnings as "Equity in Earnings of Novogyne" on its Statements of Operations. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 Total revenues for the six months ended June 30, 2000 were $20.1 million, an increase of $5.1 million, or 34%, over the same period in the prior year. The increase was attributable to increased sales of Estalis(R), Vivelle-Dot(TM) and Vivelle(R), partially offset by lower sales of CombiPatch(TM) in the United States. Gross profit (product sales less cost of products sold) for the six months ended June 30, 2000 was $10.8 million (54% of product sales), compared to $8.3 million (56% of product sales) for the same period in the prior year. The decrease in gross margins resulted primarily from the elimination of 49% of Noven's profit on product sold to Novogyne that remained in Novogyne's inventory at June 30, 2000. This profit will be recognized by Noven at the time such inventory is sold by Novogyne. The inventory increase at Novogyne was the result of an inventory build up in anticipation of an increase in product demand. 8 9 Research and development expenses increased approximately $2.2 million, or 71%, for the six months ended June 30, 2000 compared to the same period in the prior year, primarily resulting from increased clinical study expenses. Noven expects a significant increase in research and development expenses in the remainder of 2000, primarily related to clinical studies associated with Noven's methylphenidate transdermal delivery system. The future level of research and development expenditure will depend on, among other things, the status of products under development and the outcome of clinical trials, strategic decisions by management, the consummation of new license agreements and Noven's liquidity. Marketing, general and administrative expenses increased approximately $0.7 million, or 20%, for the six months ended June 30, 2000 compared to the same period in the prior year. This increase primarily resulted from an increase in staffing and associated office expenses. For the six months ended June 30, 2000, Noven reported Equity in Earnings of Novogyne of $3.7 million; Noven reported no such equity in earnings for the same period in the prior year. In the first half of 2000, Novogyne had revenues of $29.0 million, an increase of 75% over the same period in the prior year. A significant portion of this increase came from increased sales of Vivelle-Dot(TM), which was launched in the second quarter of 1999. In the first half of 2000, Novogyne had net income of $15.5 million, a 200% increase over the same period in the prior year. Provision for income taxes for the six months ended June 30, 2000 reflects a provision for the alternative minimum tax. Noven will continue to evaluate the appropriateness of recording an additional tax benefit which would result in an increase in the Net Deferred Income Tax Asset. THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 Total revenues for the three months ended June 30, 2000 were $10.5 million, an increase of $3.0 million, or 40%, over the same period in the prior year. The increase was primarily attributable to increased sales of Estalis(R), Vivelle-Dot(TM) and Vivelle(R), partially offset by lower sales of CombiPatch(TM) in the United States. Gross profit (product sales less cost of products sold) for the three months ended June 30, 2000 was $5.8 million (56% of product sales) compared to $4.1 million (55% of product sales) for the same period in the prior year. The increase in gross margin resulted primarily from an increase in manufacturing volume, partially offset by the elimination of 49% of Noven's profit on product sold to Novogyne that remains in Novogyne's inventory at June 30, 2000. Research and development expenses increased approximately $2.1 million, or 139%, for the three months ended June 30, 2000 compared to the same period in the prior year, primarily resulting from clinical study expenses associated with Noven's methylphenidate transdermal delivery system. Marketing, general and administrative expenses increased approximately $0.6 million, or 32%, for the three months ended June 30, 2000 compared to the same period in the prior year. This increase primarily resulted from an increase in staffing and associated office expenses. For the three months ended June 30, 2000, Noven reported Equity in Earnings of Novogyne of $3.3 million; Noven reported no such equity in earnings for the same period in the prior year. For the three months ended June 30, 2000, Novogyne had revenues of $15.8 million, an increase of 162% over the same period in the prior year. A significant portion of this increase came from increased sales of Vivelle-Dot(TM), which was launched in the second quarter of 1999. For the three months 9 10 ended June 30, 2000, Novogyne had net income of $8.2 million, a 277% greater than the same period in the prior year. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2000 and December 31, 1999, Noven had $18.8 million and $15.3 million, respectively, in cash and cash equivalents. Net cash of approximately $0.3 million was provided by operating activities during the first six months of 2000, compared to approximately $0.6 million provided by operating activities during the same period in the prior year. Equity in Earnings of Novogyne, a non-cash item, constituted $3.7 million of Noven's $5.3 million net income in the 2000 period. The remaining net income was mostly offset by increases in raw material inventory and accounts receivable. Net cash of approximately $1.6 million was provided by investing activities during the first six months of 2000, compared to approximately $44,000 used in investing activities during the same period of the prior year. Net cash provided by investing activities during 2000 and 1999 resulted from distributions from Novogyne, partially offset by the purchase of fixed assets and payment of patent development costs. Net cash of approximately $1.6 million was provided by financing activities during the first six months of 2000, compared to approximately $1.1 million provided by financing activities during the same period of the prior year. The increase in the 2000 period resulted from the issuance of common stock in connection with the exercise of stock options. 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 over the short term. In April 2000, Noven received a cash distribution of $2.2 million from Novogyne based upon the results of operations for the year ended December 31, 1999. 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 cash requirements. 10 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Noven does not believe that it has material exposure to market risk. Noven has no material debt obligations. Noven may, however, obtain financing in the future and no assurance can be given that the terms of future sources of financing will not expose Noven to material market risk. PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Annual Meeting of Shareholders held on June 6, 2000. (i) Election of Directors FOR AGAINST ---------- ------- Sheldon H. Becher 17,294,876 153,615 Sidney Braginsky 17,294,876 153,615 Rodolfo C. Bryce 17,294,876 153,615 John G. Clarkson, M.D. 17,294,876 153,615 Lawrence J. DuBow 17,294,876 153,615 Steven Sablotsky 17,294,876 153,615 Robert C. Strauss 17,294,876 153,615 (ii) The ratification of the appointment of Deloitte & Touche LLP as Noven's independent certified public accountants for 2000 was approved by an affirmative vote of 17,329,621 shares to a negative vote of 107,590 shares, with 11,280 shares abstaining. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 27 Financial Data Schedule (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Registrant during the three months ended June 30, 2000. 11 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NOVEN PHARMACEUTICALS, INC. Date: August 11, 2000 By: /s/ James B. Messiry ---------------- ----------------------------- James B. Messiry Vice President and Chief Financial Officer 12 13 EXHIBITS -------- 27 Financial Data Schedule 13