10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2003

Commission file number 0-17254

NOVEN PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

STATE OF DELAWARE	59-2767632
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 October 31, 2003
Common stock $.0001 par value	22,521,813

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		Condensed Statements of Operations
		Condensed Balance Sheets
		Condensed Statements of Cash Flows
		Notes to Unaudited Condensed Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
	PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
Signatures
EX-10.1 Agreement dated November 5, 2003
EX-10.2 Employment Agreement - Robert C. Strauss
EX-31.1 CEO Certification Pursuant to Section 302
EX-31.2 CFO Certification Pursuant to Section 302
EX-32.1 CEO Certification Pursuant to Section 906
EX-32.2 CFO Certification Pursuant to Section 906

NOVEN PHARMACEUTICALS, INC.

INDEX

			Page No.
PART I - FINANCIAL INFORMATION
	Item 1 -	Unaudited Condensed Financial Statements
		Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002		3
		Condensed Balance Sheets as of September 30, 2003 and December 31, 2002		4
		Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002		5
		Notes to Unaudited Condensed Financial Statements		6
	Item 2 -	Management's Discussion and Analysis of Financial Condition and Results of Operations		16
	Item 3 -	Quantitative and Qualitative Disclosures About Market Risk		31
	Item 4 -	Controls and Procedures		31
PART II - OTHER INFORMATION
	Item 1 -	Legal Proceedings		32
	Item 6 -	Exhibits and Reports on Form 8-K		33
SIGNATURES				34

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NOVEN PHARMACEUTICALS, INC.
Condensed Statements of Operations
Three and Nine Months Ended September 30,
(in thousands, except per share amounts)
(unaudited)

		Three Months					Nine Months
		2003			2002		2003			2002
Revenues:
	Product revenues — Novogyne	$	3,938		$	7,604	$	15,153		$	23,683
	Product revenues — third parties		4,045			4,610		12,788			14,445
	Total product revenues		7,983			12,214		27,941			38,128
	License and contract revenues		1,113			984		3,441			3,961
	Total revenues		9,096			13,198		31,382			42,089
Expenses:
	Cost of products sold		3,936			5,111		14,261			17,032
	Research and development		1,916			2,585		6,563			9,267
	Marketing, general and administrative		4,791			3,492		12,265			10,104
	Total expenses		10,643			11,188		33,089			36,403
Income (loss) from operations			(1,547	)		2,010		(1,707	)		5,686
Equity in earnings of Novogyne			4,529			2,010		9,849			10,657
Interest income, net			159			223		505			625
Income before income taxes			3,141			4,243		8,647			16,968
Provision for income taxes			1,130			1,480		3,113			6,109
Net income		$	2,011		$	2,763	$	5,534		$	10,859
Basic earnings per share		$	0.09		$	0.12	$	0.25		$	0.48
Diluted earnings per share		$	0.09		$	0.12	$	0.24		$	0.46
Weighted average number of common shares outstanding:
	Basic		22,506			22,549		22,526			22,523
	Diluted		22,949			23,127		22,935			23,424

The accompanying notes are an integral part of these statements.

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NOVEN PHARMACEUTICALS, INC.
Condensed Balance Sheets
(in thousands, except share data)
(unaudited)

		September 30, 2003		December 31, 2002
Assets
Current Assets:
Cash and cash equivalents		$	86,913	$	58,684
	Accounts receivable — trade (less allowance for doubtful accounts of $84 in 2003 and $79 in 2002)		3,283		4,359
	Accounts receivable — Novogyne		4,243		2,581
	Inventories		5,194		5,613
	Net deferred income tax asset		5,400		2,600
	Prepaid income taxes and other current assets		5,716		541
			110,749		74,378
Property, plant and equipment, net			18,418		16,232
Other Assets:
	Investment in Novogyne		25,968		34,684
	Net deferred income tax asset		9,646		9,831
	Patent development costs, net		1,979		1,996
	Deposits and other assets		281		581
			37,874		47,092
		$	167,041	$	137,702
Liabilities and Stockholders’ Equity
Current Liabilities:
	Accounts payable		5,709		5,062
	Notes payable — current portion		7		8
	Accrued compensation and related liabilities		3,454		3,549
	Other accrued liabilities		1,953		1,578
	Allowance for returns		1,975		485
	Deferred contract revenues		1,301		829
	Deferred license revenues — current portion		20,526		3,525
			34,925		15,036
Long-Term Liabilities:
	Notes payable		—		5
	Deferred license revenues		30,774		25,920
			65,699		40,961
Commitments and Contingencies (Note 11)
Stockholders’ Equity:
	Preferred stock — authorized 100,000 shares of $.01 par value; no shares issued or outstanding		—		—
	Common stock — authorized 80,000,000 shares, par value $.0001 per share; issued and outstanding 22,517,430 shares at September 30, 2003 and 22,579,112 at December 31, 2002		2		2
	Additional paid-in capital		77,425		78,358
	Retained earnings		23,915		18,381
			101,342		96,741
		$	167,041	$	137,702

The accompanying notes are an integral part of these statements.

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NOVEN PHARMACEUTICALS, INC.
Condensed Statements of Cash Flows
Nine Months Ended September 30,
(in thousands)
(unaudited)

					2003			2002
Cash flows from operating activities:
	Net income				$	5,534		$	10,859
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				1,683			1,623
		Amortization of patent costs				252			231
		Amortization of non-competition agreement				300			300
		Deferred income tax (benefit) expense				(2,615	)		2,099
		Non-cash expense related to issuance of stock to charitable organization				31			—
		Recognition of deferred contract revenues				(296	)		(1,457	)
		Recognition of deferred license revenues				(3,145	)		(2,504	)
		Distributed earnings in excess of equity in earnings of Novogyne				7,045			1,070
		Changes in operating assets and liabilities:
			Decrease (increase) in accounts receivable — trade, net			1,076			(2,213	)
			(Increase) decrease in accounts receivable — Novogyne			(1,662	)		2,830
			Decrease (increase) in inventories			419			(2,856	)
			Increase in prepaid income taxes and other current assets			(3,504	)		(728	)
			Decrease in deposits and other assets			—			26
			Increase in accounts payable			647			4
			(Decrease) increase in accrued compensation and related liabilities			(95	)		2,567
			Increase (decrease) in other accrued liabilities			442			(304	)
			Increase in allowance for returns			1,490			—
			Increase in deferred contract revenues			768			132
			Increase in deferred license revenues			25,000			73
				Cash flows provided by operating activities		33,370			11,752
Cash flows from investing activities:
	Purchase of property, plant and equipment, net					(3,869	)		(1,642	)
	Payments for patent development costs					(235	)		(154	)
				Cash flows used in investing activities		(4,104	)		(1,796	)
Cash flows from financing activities:
	Issuance of common stock					258			665
	Purchase and retirement of common stock					(1,289	)		—
	Repayments of notes payable					(6	)		(250	)
				Cash flows (used in) provided by financing activities		(1,037	)		415
Net increase in cash and cash equivalents						28,229			10,371
Cash and cash equivalents, beginning of period						58,684			49,389
Cash and cash equivalents, end of period					$	86,913		$	59,760

The accompanying notes are an integral part of these statements.

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NOVEN PHARMACEUTICALS, INC.
Notes to Unaudited Condensed Financial Statements

1.     DESCRIPTION OF BUSINESS:

     Noven Pharmaceuticals, Inc. (“Noven”) was incorporated in Delaware in 1987 and is engaged in the research, development, manufacture and marketing of advanced transdermal drug delivery technologies and prescription transdermal products.

     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 prescription healthcare products in the United States and Canada. These products include Noven’s transdermal estrogen delivery systems marketed under the brand names Vivelle® and Vivelle-Dot® and Noven’s transdermal combination estrogen/progestin delivery system marketed under the brand name CombiPatch®. 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 defers the recognition of 49% of its profit on products sold to Novogyne until the products are sold by Novogyne.

2.     BASIS OF PRESENTATION:

     In management’s opinion, the accompanying unaudited condensed financial statements of Noven contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly, in all material respects, the financial position of Noven as of September 30, 2003, and the results of its operations for the three and nine months ended September 30, 2003 and 2002. Noven’s business is subject to numerous risks and uncertainties including, but not limited to, those set forth in Noven’s Annual Report on Form 10-K/A for the year ended December 31, 2002 (“Form 10-K”), and in Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this quarterly report on Form 10-Q. Accordingly, the results of operations and cash flows for the three and nine months ended September 30, 2003 and 2002 are not, and should not be construed as, necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 2003.

     The accompanying unaudited condensed 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 accounting principles generally accepted in the United States of America have been condensed or omitted. The unaudited condensed financial statements should be read in conjunction with the financial statements and the notes to the financial statements included in Noven’s Form 10-K.

     The accounting policies followed for interim financial reporting are the same as those disclosed in Note 2 of the notes to the financial statements included in Noven’s Form 10-K and in Note 5 –“Revenue Recognition”.

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3.     RECLASSIFICATIONS:

     Certain reclassifications have been made to prior period financial statements to conform to the current year’s presentation.

4.     INVENTORIES:

     The following are the major classes of inventories (in thousands):

	September 30,		December 31,
	2003		2002
Finished goods	$	824	$	830
Work in process		1,905		1,390
Raw materials		2,465		3,393
Total	$	5,194	$	5,613

5.     REVENUE RECOGNITION:

     Substantially all of Noven’s product revenues were to its licensees, Novogyne, Novartis Pharma AG and its affiliates (“Novartis AG”) and Aventis Pharma AG. Revenues from product sales are recognized at the time of shipment when both title and the risks and rewards of ownership have been transferred to the buyer. Certain of our license agreements provide that the ultimate supply price is based on a percentage of the licensee’s net selling price. Each of those agreements also establishes a fixed minimum supply price per unit that represents the lowest price Noven could receive on sales to the licensee. Noven receives the minimum price at the time of shipment with the possibility of an upward adjustment later when the licensee’s net selling price is known. Revenues under these agreements are recorded at the minimum price at the time of shipment. Noven records any upward adjustments to revenues at the time that the information necessary to make the determination is received from the licensee. If the upward adjustments are not determinable, Noven records the adjustments (which historically have not been significant) on a cash basis. These amounts are included in product revenues.

     Royalty revenues consist of royalties payable by Novogyne and Novartis AG from sales of Vivelle® and Vivelle-Dot®/Estradot® in the United States and Canada. Noven accrues royalties from Novogyne’s and Novartis AG’s product sales each quarter based on Novogyne’s and Novartis AG’s net sales for that quarter. Royalties are included in product revenues.

     License revenues consist of up-front, milestone and similar payments under license agreements and are recognized when earned under the terms of the applicable agreements. In most cases, license revenues are deferred and recognized over the estimated product life cycle or the length of relevant patents, whichever is shorter.

     Contract revenues consist of contract payments related to research and development projects performed for third parties. The work performed by Noven includes feasibility studies to determine if a specific drug is amenable to transdermal drug delivery, the actual formulation of a specific drug into a transdermal drug delivery system, studies to address the ongoing stability of

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the drug in a transdermal drug delivery system, and manufacturing of batches of product that can be used in human clinical trials. Noven receives contract payments for the work it performs in the following forms:

• nonrefundable up-front payments prior to commencing the work (or certain phases of the work);

• additional payments upon completion of additional phases; and

• in some cases, success milestone payments based on achievement of specified performance criteria.

     As prescribed by EITF 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables”, Noven analyzes each contract in order to separate each deliverable into separate units of accounting and then recognizes revenues for those separated units at their fair value, as delivered, based on the proportionate share of the work performed by Noven as it performs the specified acts under the contract. If each deliverable does not qualify as a separate unit of accounting, the deliverables are combined and the amounts under the contract are allocated to the combined deliverables. The appropriate recognition of revenue is then determined for the combined deliverables as a single unit of accounting. The difference between the amount of the payments received and the amount recognized is recorded as deferred revenues until that amount is earned in accordance with Staff Accounting Bulletin 101, “Revenue Recognition in Financial Statements” (“SAB 101”).

     Milestone payments are recorded when the specified performance criteria are achieved, as determined by the customer. Each contract may have different payment terms. Therefore, the timing of revenue recognition may vary from contract to contract.

     Revenues are net of an allowance for returns. Noven establishes allowances for returns for product that has been recalled or that it believes is probable of being recalled. The methodology used by Noven to estimate product recall returns is based on the distribution and expiration dates of the affected product and overall trade inventory levels. These estimates are based on currently available information, and the ultimate outcome may be significantly different than the amounts estimated given the subjective nature and complexities inherent in this area and in the pharmaceutical industry.

     Noven’s revenue recognition policy is in compliance with the requirements of SAB 101.

6.     EMPLOYEE STOCK PLANS:

     In accordance with the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation -Transition and Disclosure” (“SFAS 148”), Noven may elect to continue to apply the provisions of the Accounting Principles Board’s Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), 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 no stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

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     The following table illustrates the effect on net income and earnings per share for the three and nine months ended September 30, 2003 and 2002 if Noven had applied the fair value recognition provisions of SFAS 123, as amended by SFAS 148 (in thousands, except per share amounts):

		Three Months						Nine Months
		2003			2002			2003			2002
Net income:
	As reported	$	2,011		$	2,763		$	5,534		$	10,859
	Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,138	)		(1,270	)		(3,247	)		(3,499	)
	Pro forma	$	873		$	1,493		$	2,287		$	7,360
Basic earnings per share:
	As reported	$	0.09		$	0.12		$	0.25		$	0.48
	Pro forma	$	0.04		$	0.07		$	0.10		$	0.33
Diluted earnings per share:
	As reported	$	0.09		$	0.12		$	0.24		$	0.46
	Pro forma	$	0.04		$	0.06		$	0.10		$	0.31

     SFAS 123 requires the use of option valuation models that require the input of highly subjective assumptions, including expected stock price volatility. Because Noven’s stock options have characteristics significantly different from traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options.

     The effect of applying the fair value method of accounting for stock options on reported net income and earnings per share for the three and nine months ending September 30, 2003 and 2002, respectively, may not be representative of the effects for future years because outstanding options vest over a period of several years and additional awards are generally made during each year.

7.     CASH FLOW INFORMATION:

     Cash payments for income taxes were $8.5 million and $4.8 million for the nine months ended September 30, 2003 and 2002, respectively. Cash payments for interest were not material for the nine months ended September 30, 2003 and 2002.

       Non-cash Operating Activities

     In connection with the CombiPatch® transaction consummated in March 2001, the final $10.0 million quarterly installment of the purchase price was paid by Novogyne on Noven’s behalf directly to Aventis in March 2002.

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     In 2002, the State of New Jersey enacted legislation that requires Novogyne to remit estimated state tax payments on behalf of its owners, Noven and Novartis. In April 2003, Novogyne paid $1.7 million to the New Jersey Department of Revenue, representing Noven’s portion of Novogyne’s estimated state tax payment. This payment was deemed a distribution to Noven.

     Noven recorded $67,000 and $163,000 in income tax benefits to additional paid-in capital for the nine months ended September 30, 2003 and 2002, respectively, which were derived from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options.

8.     LICENSE AGREEMENTS:

     In the first quarter of 2003, Noven signed an agreement to license the exclusive global rights to market MethyPatch® to Shire Pharmaceuticals Group plc (“Shire”) for payments of up to $150 million and ongoing manufacturing revenues. Consideration for the transaction is as follows: (a) $25 million was paid upon closing of the transaction in April 2003; (b) $50 million is payable upon receipt of final marketing approval for MethyPatch® by the United States Food and Drug Administration (“FDA”); and (c) three installments of $25 million each are payable upon Shire’s achievement of $25 million, $50 million and $75 million in annual net sales of MethyPatch®, respectively. Shire’s annual net sales will be measured quarterly on a trailing 12-month basis, with each milestone payment due 45 days after the end of the first quarter during which trailing 12-month sales exceed the applicable threshold. Shire has agreed that it will not sell any other product containing methylphenidate as an active ingredient until the earlier of (a) five years from the closing date or (b) payment of all of the sales milestones. On the closing date, Noven entered into a long-term supply agreement under which Noven expects to manufacture and supply MethyPatch® to Shire at fair value for such services. The agreement gives Shire the right to qualify a second manufacturing source and purchase a portion of its requirements from the second source. Pursuant to the agreement, under certain circumstances Shire has the right to require Noven to repurchase the product rights for $5 million.

     In April 2003, Noven received a not approvable letter from the FDA relating to its MethyPatch® New Drug Application (“NDA”). A not approvable letter is issued if the FDA does not consider the application approvable because one or more deficiencies in the application preclude the FDA from approving it. The letter cited clinical and other issues as the basis for non-approval. In October 2003, Noven and Shire submitted a jointly prepared protocol for an additional clinical study for MethyPatch® to the FDA for review and comment, and Noven expects the FDA to respond to the protocol during the 2003 fourth quarter. Noven believes this study is necessary to amend the NDA. In November 2003, Noven and Shire signed a letter agreement relating to this additional study. Under the letter agreement, if the study protocol is acceptable to the FDA, Shire will manage the new clinical study and Noven will fund it, up to a maximum of $10.9 million. Noven will also incur certain additional expenses in pursuit of regulatory approval. At the conclusion of the trial, if Shire determines that submission of the study results to the FDA would not result in a commercially viable product, Shire will have the right to terminate the original transaction agreement. If Shire exercises its termination right under these circumstances, however, Shire will forfeit its right to require Noven to repurchase the product rights, and the product rights will revert to Noven without payment to Shire. If Shire elects to proceed after reviewing the study results, the parties are expected to cooperate in submitting the new study results to the FDA and pursuing regulatory approval of MethyPatch®.

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Noven cannot assure that the submitted protocol or any further revised study design will be acceptable to the FDA. If the parties are unable to reach agreement with the FDA on a study design, the parties may not continue to pursue regulatory approval of MethyPatch®.

     Of the $25 million received from Shire at closing, $5 million has been deferred and is expected to be recognized as license revenues over time beginning at the time Shire’s right to require Noven to repurchase MethyPatch® rights expires. A portion of the remaining $20 million was recognized as revenues in the 2003 second quarter using a 10-year amortization period. Beginning in the 2003 third quarter, Noven ceased amortization of the balance of the $20 million due to the planned initiation of an additional clinical trial and the significant costs expected to be incurred in pursuing MethyPatch® approval.

     Beginning in the 2003 third quarter Noven determined it cannot yet estimate the total cost of pursuing MethyPatch® approval, but Noven expects that the total cost will not exceed the deferred revenue balance. Noven expects to offset expenses incurred in pursuit of MethyPatch® regulatory approval (including the cost of any clinical studies) against the deferred revenue balance. License revenue recognized under this arrangement will be recorded net of the expenses incurred in pursuing regulatory approval. Once Noven can estimate the expected total cost or how much Noven is willing to commit in pursuit of approval, Noven expects to recognize any unused portion of the deferred revenue balance over the remainder of the initial 10-year period. The accounting treatment of amounts received from Shire would be expected to change if Shire were to exercise its right to require Noven to repurchase the product rights or if MethyPatch® development were abandoned.

9.     INVESTMENT IN NOVOGYNE:

     Noven shares in the earnings of Novogyne, after satisfaction of an annual preferred return of $6.1 million to Novartis, according to an established formula. Noven’s share of Novogyne’s earnings increases as Novogyne’s product sales increase, subject to a cap of 49%. Novogyne produced sufficient income in the first quarter of 2003 and 2002 to meet Novartis’ annual preferred return for those years and for Noven to recognize earnings from Novogyne under the formula.

     During the three and nine months ended September 30, 2003 and 2002, Noven had the following transactions with Novogyne (in thousands):

	Three Months				Nine Months
	2003		2002		2003		2002
Revenues:
Product sales	$	2,756	$	6,796	$	11,772	$	20,093
Royalties		1,182		808		3,381		3,590
	$	3,938	$	7,604	$	15,153	$	23,683
Reimbursed expenses	$	6,350	$	6,720	$	18,891	$	20,348

     As of September 30, 2003 and December 31, 2002, Noven had amounts due from Novogyne of $4.2 million and $2.6 million, respectively, for products sold to, and marketing expenses reimbursable by, Novogyne.

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     The unaudited condensed Statements of Operations of Novogyne for the three and nine months ended September 30, 2003 and 2002 are as follows (in thousands):

	Three Months				Nine Months
	2003		2002		2003		2002
Net revenues	$	24,284	$	21,507	$	70,997	$	81,936
Cost of sales		4,568		7,079		14,793		21,324
Selling, general and administrative expenses		8,368		8,709		24,312		26,866
Amortization of intangible assets		1,545		1,545		4,635		4,635
Income from operations		9,803		4,174		27,257		29,111
Interest income		33		73		135		237
Net income	$	9,836	$	4,247	$	27,392	$	29,348
Noven’s equity in earnings of Novogyne	$	4,529	$	2,010	$	9,849	$	10,657

     Royalties due to Noven on sales of Vivelle® and Vivelle-Dot® for 2002 have been reclassified from selling, general and administrative expenses to cost of sales to conform to the current year’s presentation.

     Subject to the approval of Novogyne’s management committee, cash may be distributed to Novartis and Noven based upon a contractual formula. For the three and nine months ended September 30, 2003, Noven received distributions of $4.9 million and $16.9 million from Novogyne, respectively. For the nine months ended September 30, 2002, Noven received a distribution of $11.7 million from Novogyne. There were no distributions from Novogyne for the three months ended September 30, 2002. In addition, as discussed in Note 7, a $1.7 million tax payment to the New Jersey Department of Revenue made by Novogyne on Noven’s behalf in April 2003 was deemed a distribution from Novogyne to Noven. These amounts were recorded as reductions in the investment in Novogyne when deemed received.

10.   SHARE REPURCHASE PROGRAM:

     In the first quarter of 2003, Noven’s Board of Directors authorized a share repurchase program under which Noven may acquire up to $25 million of its common stock. As of September 30, 2003, Noven had repurchased 105,000 shares of its common stock at an aggregate price of approximately $1.3 million. These shares were retired on March 31, 2003.

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11.   COMMITMENTS AND CONTINGENCIES:

       HT Studies

     In July 2002, the National Institutes of Health (“NIH”) released data from its Women’s Health Initiative (“WHI”) study on the risks and benefits associated with use of oral combination hormone therapy (“HT”). The study revealed an increase in the risk of developing breast cancer and increased risks of stroke, heart attack and blood clots. Also in July 2002, results of an observational study sponsored by the National Cancer Institute (“NCI”) on the effects of estrogen therapy (“ET”) were announced. The main finding of the study was that postmenopausal women who used ET for 10 or more years had a higher risk of developing ovarian cancer than women who never used HT. In June 2003, a new analysis of study data indicated that use of combination HT may increase the frequency of abnormal mammograms beginning in the first year of therapy and/or may cause tumors at the time of diagnosis to be more advanced. In August 2003, further WHI data analysis suggested that the use of combination therapy increased the risk of heart disease beginning in the first year of therapy, and a large study in the United Kingdom suggested that the use of both estrogen-only and combination therapy increased the risk of breast cancer, and the risk of death from breast cancer, whether administered orally, transdermally or via implant.

     These studies and others have caused the HT market, and the market for Noven’s products, to significantly decline. Prescriptions for CombiPatch®, our combination estrogen/progestin patch, continue to decline in the post-WHI environment. Novogyne recorded the acquisition of CombiPatch® marketing rights at cost and tests this asset for impairment on a periodic basis. Further adverse change in the market for HT products could have a material adverse impact on the ability of Novogyne to recover its investment in these rights, which could require Novogyne to record an impairment loss on the CombiPatch® intangible asset. Impairment of the CombiPatch® intangible asset would adversely affect Novogyne’s and Noven’s financial results. Management can not predict whether these or other studies will have additional adverse effects on Noven’s liquidity and results of operations, or Novogyne’s ability to recover the carrying value of the CombiPatch® intangible asset.

       Production Issues

     In October 2003, Noven’s product stability testing program revealed that certain CombiPatch® and Vivelle-Dot® product did not maintain required specifications throughout the products’ shelf lives, resulting in product recalls. Third quarter revenues are net of approximately $900,000 and $5.0 million in allowances for returns at Noven and Novogyne, respectively, related to the announced and expected recalls. In addition, Noven’s third quarter marketing, selling and administrative expenses include $850,000 in estimated costs associated with these recalls.

     The CombiPatch® recalls resulted from a previously disclosed production issue related to a raw material supplied by one vendor. This issue caused Noven to temporarily suspend shipments of CombiPatch® to Novogyne in the 2003 first quarter, and caused Novartis to recall one lot of CombiPatch® in July 2003. Since identifying the issue, Noven has been monitoring all lots of CombiPatch® product manufactured with the material. Even

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though interim testing indicated that these additional lots were expected to maintain specifications throughout their shelf lives, one additional lot unexpectedly tested out of specifications. In light of this event, Novartis initiated a recall of all lots of CombiPatch® product remaining in distribution that are potentially affected by this problematic raw material. Noven continues to manufacture and ship CombiPatch® to Novogyne and expects no interruption of trade supplies.

     Noven is working to identify the root cause of the Vivelle-Dot® issue, and in the interim has initiated more rigorous testing of Vivelle-Dot® and Estradot® product. In October 2003, a quantity of Vivelle-Dot® tested out of specification. In November 2003, an additional quantity tested out of specification, and Noven notified Novartis of the failure. Novartis has announced a recall of the Vivelle-Dot® product that tested out of specification in October 2003 and is expected to initiate a recall shortly of the product that tested out of specification in November 2003. Noven has identified additional Vivelle-Dot® product that demonstrates adverse stability trends but remains within required specifications. Based on Noven’s testing and analysis to date, Noven does not believe that any additional Vivelle-Dot® product that is currently in distribution or in its inventory is probable of being recalled. Noven has established allowances for estimated sales returns for product that has been recalled or will be recalled as a result of testing out of specification. Novogyne has increased its allowance for sales returns in light of the same issue. Noven has suspended shipments of Vivelle-Dot® to Novogyne and Estradot® to Novartis AG until Noven identifies a root cause and/or confirms that the issue does not impact product to be shipped. Noven hopes that it will complete testing and resume shipping within a timeframe that avoids interruption of trade supplies. Based on Noven’s current information, Noven believes that Novogyne has approximately one to two months of Vivelle-Dot® inventory on hand. If a root cause determination or additional testing indicates that the production issue affects more product than Noven’s current testing and analysis suggests, additional recalls may be required, Noven’s allowances may prove insufficient and/or Noven may be unable to resume shipping. If Noven is unable to resume shipments of Vivelle-Dot® and/or Estradot®, Novogyne and/or Novartis AG would be unable to supply its customers, which would result in lost sales and potentially lost market share, and Noven’s results of operations and prospects would be materially adversely affected.

     The FDA inspected Noven’s facilities earlier this year, and recently initiated a follow-up inspection. The recent and expected product recalls may result in additional FDA inspections of Noven’s facilities and procedures. Noven cannot assure that the FDA will be satisfied with Noven’s operations and procedures, which could result in more frequent and stringent inspections and monitoring. If the FDA were to conclude that Noven’s manufacturing controls and procedures are not sufficient, Noven could be required to suspend production until it demonstrates to the FDA that Noven’s controls and procedures are sufficient.

       Supply Agreement

     Noven’s supply agreement with Novogyne for Vivelle® and Vivelle-Dot® expired in January 2003. The parties are negotiating an extension to the agreement. Since expiration, the parties have continued to operate in accordance with the supply agreement’s commercial terms. Failure to extend the agreement could have a material adverse effect on Noven’s financial statements.

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       Litigation, Claims and Assessments

     On August 7, 2003, an individual filed a lawsuit on behalf of a purported class of purchasers of Noven’s common stock during the period from October 29, 2001 through April 28, 2003. The complaint alleges that, during the subject period, Noven and its officers named as defendants violated the Securities Exchange Act of 1934 by making false and misleading statements regarding Noven’s rationale for approval of its MethyPatch® product and marketing strategies. The press release states that Plaintiff is seeking to recover damages on behalf of all purchasers of Noven common stock during the subject period. Following the filing of Plaintiff’s complaint, five other substantially similar complaints were filed against Noven and its officers named as defendants in the above referenced action. A joint motion was filed with the Court in October 2003 seeking to consolidate all of the six actions into a single consolidated action. This development did not have a material effect on the action or on Noven’s financial position or results of operations.

     Noven believes the lawsuit is without merit, and intends to vigorously defend the lawsuit, but its outcome cannot be predicted. The lawsuit, if determined adversely to Noven, could have a material adverse effect on Noven’s financial position and results of operations. Noven’s ultimate liability, if any, with respect to the lawsuit is presently not determinable.

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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 our Form 10-K for the year ended December 31, 2002 and the condensed 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 in this report are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our and our licensees’ respective plans, objectives, expectations, estimates, strategies, prospects, product approvals and development plans, and anticipated financial results. These statements are typically identified by the use of terms such as “anticipates,” “believes,” “estimates,” “hopes,” “expects,” “intends,” “may,” “plans,” “could,” “should,” “will,” “would” and similar words. These statements are based on our current expectations and beliefs concerning future events and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed herein. We do not undertake to update any of these forward-looking statements or to announce the results of any revisions to these forward-looking statements except as required by law.

     In addition to the important factors described in our Form 10-K, the following important factors, among others, could cause our actual results to differ materially from those expressed in any forward-looking statements: uncertainties associated with the impact on the HT market of published studies regarding the adverse health effects of certain forms of HT; uncertainties associated with future prescription trends for CombiPatch®, Vivelle® family products, Estalis® and Estradot®, including risks relating to declining physician or patient preference for HT as a result of the published studies and label changes mandated by the FDA; uncertainties related to the FDA’s willingness to permit us, Novogyne and trade participants to deplete HT product inventory bearing the old labels; risks associated with the commercialization of Noven’s products; risks and uncertainties associated with the potential impact on our business of the effectiveness as of April 2003 of the privacy regulations issued by the Department of Health and Human Services under the Health Insurance Portability and Accountability Act of 1996, risks and uncertainties associated with the impact of a Novogyne competitor’s strategy of increasing market share by heavily discounting product sales to managed care organizations; risks associated with increased competition in the estrogen market as a result of the 2003 launch of a vaginal estrogen delivery system and the expected launches in 2003 and 2004 of estrogen cream and gel products, each of which is a new dosage form in this category, as well as the recent filing by a competitor of an NDA for an ultra-low dose estrogen patch; risks associated with increased competition in the estrogen/progestin market as a result of the expected approval in 2003 of a combination estrogen/progestin patch; risks associated with higher than desired Vivelle® returns to Novogyne; risks and uncertainties relating to our dependence on Novartis to monitor trade inventory levels for Novogyne (including levels of Vivelle-Dot®) and to perform Novogyne’s financial, accounting, inventory and sales deductions functions; the risk that Novogyne’s revenues could fluctuate based on trade customer buying patterns, which may not correlate with prescription trends; uncertainties concerning the timing and extent of Estradot® regulatory approvals (including any delays that may arise if any Estradot® product should be required to be recalled) and launch orders and Estalis® orders and commercialization efforts by Novartis AG, particularly in light of the significant pricing, reimbursement and regulatory issues faced by Novartis AG in Europe; our limited ability to accurately forecast international product orders from Novartis AG; the risk that MethyPatch® may not be approved by the FDA, particularly in light of the FDA’s issuance of a not approvable letter; the risk that the FDA may not approve the proposed study protocol for MethyPatch®; uncertainties associated with the

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timing, cost and outcomes of clinical trials, product development and product launch, including the regulatory review process for MethyPatch® (together with expected clinical trials in connection with that review process), our generic fentanyl patch, and any future generations of our combination estrogen/progestin patch; risks and uncertainties associated with product liability claims that may be brought against us as a result of published studies regarding the adverse health effects of HT, especially in light of claims that have been brought against Wyeth Pharmaceuticals; our dependence on strategic alliances and our relationships with our licensees, and our vulnerability to the risks and uncertainties of our licensees’ businesses, inventory requirements and marketing strategies; the risk that our licensees may favor their own competitive products over the products licensed from us; the risk that Shire may elect to terminate our agreement after completion of our additional clinical study, and that therefore we would lose the opportunity to receive our milestone payments and manufacturing revenue from Shire; the risk that Shire may seek to exercise its right to require us to repurchase the rights to MethyPatch® for $5 million, and the risk that such an exercise would change our method of accounting for the initial amount received from Shire; risks associated with the availability of a non-stimulant therapy to treat children with Attention Deficit Hyperactivity Disorder (“ADHD”) and the market penetration of that product; expected fluctuations in quarterly revenues and research and development expenses, including fluctuations in revenues resulting from factors not within our control and the timing of royalty reconciliations and payments under our license agreements; risks and uncertainties relating to the fact that a majority of our cash flow is dependent upon Novogyne’s ability to pay distributions to us; our reliance on Shire’s marketing efforts and success to achieve the MethyPatch® sales levels necessary to trigger our milestone payments; the risk that we may be unable to resume shipments of Vivelle-Dot® and Estradot® in time to avoid inventory depletion in the trade or at all and the risk that our products may lose market share in that event; the risk that the product recall allowances we have established may not be adequate; the impact of detected or undetected product stability failures or other product defects on our ability to estimate our reserves for sales returns and other accounting consequences associated therewith; the risk that recalls may result in more frequent or stringent inspections of our facilities and processes by the FDA; the effect of changes in taxation or accounting principles generally accepted in the United States (including changes in accounting principles relating to the accounting treatment for employee stock options); and economic, competitive, governmental and technological factors affecting our operations, markets, products, prices and prospects.

Supply Agreement

     Our supply agreement with Novogyne for Vivelle® and Vivelle-Dot® expired in January 2003. The parties are negotiating an extension to the agreement. Since the expiration of the Vivelle® and Vivelle-Dot® supply agreement, the parties have continued to operate in accordance with the supply agreement’s commercial terms. We cannot assure that the agreement will be extended on satisfactory terms or at all. Failure to extend the supply agreement could have a material adverse effect on our business, results of operations, financial conditions and prospects. Designation of a new supplier and approval of a new supply agreement would require the affirmative vote of four of the five members of Novogyne’s Management Committee. Accordingly, both Novartis and Noven must agree on Novogyne’s supplier.

International HT

     In November 2000, we entered into an exclusive license agreement with Novartis AG pursuant to which we granted Novartis AG the right to market Vivelle-Dot® under the name Estradot® in all countries other than the United States, Canada and Japan. Under the terms of the agreement, Novartis AG is responsible for seeking approval to market Estradot® in its territories. Novartis AG has launched the product in Germany and a number of smaller countries. However, Novartis AG has informed us that pricing, reimbursement and post-WHI regulatory issues are adversely impacting its launch plans in many countries, including the United Kingdom, France, and Italy. Accordingly, we cannot assure that Novartis AG, will launch Estradot® in any particular country within its territory.

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Novartis AG markets several other transdermal HT products in addition to our products, which may limit the efforts Novartis AG devotes to our products. In some countries, including the United Kingdom and France, Novartis AG has informed us that it is seeking a marketing partner to launch the product, but to date has been unsuccessful. We cannot assure that Novartis AG will be successful in securing a marketing partner or in launching Estradot® in those countries, and we do not expect additional major market launches of Estradot® in the near term.

Production Issues

     In October 2003, our product stability testing program revealed that certain lots of CombiPatch® and Vivelle-Dot® did not maintain required specifications throughout the products’ shelf lives, resulting in product recalls. Third quarter revenues are net of approximately $900,000 and $5.0 million in allowances for returns at Noven and Novogyne, respectively, related to the announced and expected recalls. In addition, our third quarter marketing, selling and administrative expenses include $850,000 in estimated costs associated with these recalls.

     The CombiPatch® issue resulted from a previously disclosed production issue related to a problematic raw material supplied by one vendor. This issue caused us to temporarily suspend shipments of CombiPatch® to Novogyne in the 2003 first quarter, and caused Novartis to recall one lot of CombiPatch® in July 2003. Since identifying the issue, we have been monitoring all lots of CombiPatch® product manufactured with the problematic material. Even though interim testing indicated that these additional lots were expected to maintain specifications throughout their shelf lives, we experienced an unexpected stability failure in one additional lot. In light of this event, Novartis initiated a recall of all lots of CombiPatch® product remaining in distribution that are potentially affected by this problematic raw material. We continue to manufacture and ship CombiPatch® to Novogyne and expect no interruption of trade supplies.

     We are working to identify the root cause of the Vivelle-Dot® issue, and in the interim have initiated more rigorous testing of Vivelle-Dot® and Estradot® product. In October 2003, a quantity of Vivelle-Dot® tested out of specification. In November 2003, an additional quantity tested out of specification, and we notified Novartis of the failure. Novartis has announced a recall of the Vivelle-Dot® product that tested out of specification in October 2003 and is expected to initiate a recall shortly of the product that tested out of specification in November 2003. We have identified additional Vivelle-Dot® product that demonstrates adverse stability trends but remains within required specifications. Based on results of our testing and analysis to date, we do not believe that any additional Vivelle-Dot® product that is currently in distribution or in our inventory is probable of being recalled. We have established allowances for estimated sales returns for product that has been recalled or will be recalled as a result of testing out of specification. Novogyne has increased its allowance for sales returns in light of the same issue. We have suspended shipments of Vivelle-Dot® to Novogyne and Estradot® to Novartis until our testing identifies a root cause and/or confirms that the issue does not impact product to be shipped. We hope that we will complete testing and resume shipping within a timeframe that avoids interruption of trade supplies. Based on our current information, we believe that Novogyne has approximately one to two months of inventory on hand. If a root cause determination or additional testing indicates that the production issue affects more product than our current testing and analysis suggests, additional recalls may be required, our allowances may prove insufficient and/or we may be unable to resume shipping. If we are unable to resume shipments of Vivelle-Dot® and/or Estradot®, Novogyne and/or Novartis would be unable to supply its customers, which would result in lost sales and potentially lost market share, and our results of operations and prospects would be materially adversely affected.

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     The FDA inspected our facilities earlier this year, and recently initiated a follow-up inspection. The recent and expected product recalls may result in additional FDA inspections of our facilities and procedures. We cannot assure that the FDA will be satisfied with our operations and procedures, which could result in more frequent and stringent inspections and monitoring. If the FDA were to conclude that our manufacturing controls and procedures are not sufficient, we could be required to suspend production until we demonstrate to the FDA that our controls and procedures are sufficient.

HT Studies

     In July 2002, the NIH released data from its WHI study on the risks and benefits associated with use of oral combination HT by healthy women. The NIH announced that it was discontinuing the arm of the study investigating the use of oral estrogen/progestin combination HT products after an average follow-up period of 5.2 years because the oral HT product used in the study was shown to cause an increase in the risk of invasive breast cancer. The study also found an increased risk of stroke, heart attacks and blood clots and concluded that overall health risks exceeded benefits from use of the orally delivered combined estrogen plus progestin product among healthy postmenopausal women. Also in July 2002, results of an observational study sponsored by the NCI on the effects of ET were announced. The main finding of the NCI study was that postmenopausal women who used ET for 10 or more years had a higher risk of developing ovarian cancer than women who never used HT. In June 2003, a further analysis of data from the discontinued combination therapy arm of the WHI study indicated that use of combination HT may also increase the frequency of abnormal mammograms beginning in the first year of therapy and/or may cause tumors to be more advanced at the time of diagnosis. In August 2003, further WHI data analysis suggested that the use of combination therapy increased the risk of heart disease beginning in the first year of therapy, and a large U.K. study suggested that the use of both estrogen-only and combination therapy increased the risk of breast cancer, and the risk of death from breast cancer, whether administered orally, transdermally or via implant. The data from the WHI and other studies continue to be analyzed and we cannot predict what further findings, if any, those analyses may yield.

     Although the range of consequences of these studies cannot be predicted, they have to date significantly and adversely impacted our results of operations. It is possible that these studies could result in a significant permanent decrease in the market for our HT products, either as physicians withdraw their patients from HT or as women elect to discontinue HT on their own. In addition, the market growth that would have been expected if HT had been found safe and effective for additional indications, such as heart disease, is now unlikely to materialize. In January 2003, the FDA announced that marketers of HT products, including Novogyne, are required to modify their HT product labels to include additional safety information and warnings. Among other things, the labels must indicate that HT should be used for short-term therapy only and that, in the absence of clinical studies demonstrating that HT products other than the oral product studied in the WHI study are safe, physicians should assume that all HT products carry the same risks. Novartis has informed us that it has submitted proposed revised labeling to the FDA and will begin using the revised label after reaching agreement with the FDA on label language. Based on industry practice, we expect that Noven, Novogyne and trade participants will be permitted to deplete product inventory bearing the old label concurrently with the introduction of product with revised labeling. If depletion of inventory with old labeling is not permitted or does not otherwise occur, revised labeling could cause an increase in sales returns to Novogyne, and could have a material adverse impact on the financial results of Noven and Novogyne. Healthcare regulators also could delay the approval of new HT

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products, such as those presently under development by Novartis AG and us, including Estradot®, or require that any new HT products be subject to more extensive or more rigorous study and testing prior to being approved. Further, because these studies show that certain uses of certain HT products may result in a higher likelihood of certain adverse health effects, it is possible that we could be named as a defendant in product liability lawsuits relating to our HT products, especially in light of pending claims against Wyeth Pharmaceuticals.

     Other studies evaluating HT are currently underway or in the planning stages. In particular, the estrogen-only arm of the WHI study is ongoing. We are unable to predict the effect of new study results, once available, on the short and long-term prospects for the HT market or on the market for our transdermal HT products. Since publication of the WHI and NCI study data, United States prescriptions have declined for substantially all HT products, including our products in the aggregate. Demand for our products in Europe has declined as well. Any increase in returns of products to Novogyne (including any such changes resulting from the results of the recent or ongoing HT studies or the pending product label changes) would have a material adverse effect on our results of operations and financial condition.

     The WHI safety board re-evaluates the risk/benefit profile of the estrogen-only arm as frequently as twice per year. In addition, researchers continue to analyze data from the discontinued arm of the WHI study and other studies. If the estrogen-only study or any other currently ongoing HT study is halted, or if ongoing analyses yield additional safety concerns, the market for HT products, including ours, both in the United States and abroad, could be further adversely impacted. The HT label changes mandated by the FDA may also negatively impact our products, particularly with physicians and patients who may believe that transdermal HT products are safer than orally delivered HT products. Currently, our results of operations and business prospects are dependent on sales, license royalties and fees associated with transdermal HT products. Accordingly, any further adverse change in the market for HT products (including any adverse changes resulting from the foregoing studies) could have a material adverse impact on our liquidity, results of operations and business prospects.

MethyPatch®

     We have developed a once-daily transdermal methylphenidate delivery system for the treatment of ADHD, which is intended to be marketed under the trade name MethyPatch®. We filed an NDA with the FDA in June 2002.

     In the first quarter of 2003, we signed an agreement to license the exclusive global rights to market MethyPatch® to Shire for payments of up to $150 million and ongoing manufacturing revenues. Consideration for the transaction is as follows: (a) $25 million was paid upon closing of the transaction in April 2003; (b) $50 million is payable upon receipt of final marketing approval for MethyPatch® by the FDA; and (c) three installments of $25 million each are payable upon Shire’s achievement of $25 million, $50 million and $75 million in annual net sales of MethyPatch®, respectively. Shire’s annual net sales will be measured quarterly on a trailing 12-month basis, with each milestone payment due 45 days after the end of the first quarter during which trailing 12-month sales exceed the applicable threshold. Shire has agreed that it will not sell any other product containing methylphenidate as an active ingredient until the earlier of (a) five years from the closing date or (b) payment of all of the sales milestones. On the closing date, we entered into a long-term supply agreement under which we expect to manufacture and supply MethyPatch® to Shire at fair value for such services. The agreement gives Shire the right to qualify a second manufacturing

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source and purchase a portion of its requirements from the second source. Pursuant to the agreement, under certain circumstances Shire has the right to require us to repurchase the product rights for $5 million.

     In April 2003, we received a not approvable letter from the FDA relating to our MethyPatch® NDA. A not approvable letter is issued if the FDA does not consider the application approvable because one or more deficiencies in the application preclude the FDA from approving it. The letter cited clinical and other issues as the basis for non-approval. In October 2003, we submitted with Shire a jointly prepared study protocol for an additional clinical study for MethyPatch® to the FDA for review and comment, and Noven expects the FDA to respond to the protocol during the 2003 fourth quarter. We believe this study is necessary to amend the NDA. In November 2003, we signed a letter agreement with Shire relating to this additional study. Under the letter agreement, if the study protocol is acceptable to the FDA, Shire will manage the new clinical study and we will fund it, up to a maximum of $10.9 million. We may also incur certain additional expenses in pursuit of regulatory approval. At the conclusion of the trial, if Shire determines that submission of the study results to the FDA would not result in a commercially viable product, Shire will have the right to terminate the original transaction agreement. If Shire exercises its termination right under these circumstances, however, Shire will forfeit its right to require us to repurchase the product rights, and the product rights will revert to us without payment to Shire. If Shire elects to proceed after reviewing the study results, the parties are expected to cooperate in submitting the new study results to the FDA and pursuing regulatory approval of MethyPatch®. We cannot assure that the submitted protocol or any further revised study design will be acceptable to the FDA. If the parties are unable to reach agreement with the FDA on a study design, the parties may not continue to pursue regulatory approval of MethyPatch®.

     Of the $25 million received from Shire at closing, $5 million has been deferred and is expected to be recognized as license revenues over time beginning at the time Shire’s right to require us to repurchase MethyPatch® rights expires. A portion of the remaining $20 million was recognized as revenues in the 2003 second quarter using a 10-year amortization period. Beginning in the 2003 third quarter, we ceased amortization of the balance of the $20 million due to the planned initiation of an additional clinical trial and the significant costs expected to be incurred in pursuing MethyPatch® approval.

     Beginning in the 2003 third quarter we determined we cannot yet estimate the total cost of pursuing MethyPatch® approval, but we expect that the total cost will not exceed the deferred revenue balance. We expect to offset expenses incurred in pursuit of MethyPatch® regulatory approval (including the cost of any clinical studies) against the deferred revenue balance. License revenue recognized under this arrangement will be recorded net of expenses incurred in pursuing regulatory approval. Once we can estimate the expected total cost or how much we are willing to commit in pursuit of approval, we expect to recognize any unused portion of the deferred revenue balance over the remainder of the initial 10-year period. The accounting treatment of amounts received from Shire would be expected to change if Shire were to exercise its right to require Noven to repurchase the product rights or if MethyPatch® development were abandoned.

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Results of Operations

Three and nine months ended September 30, 2003 compared to three and nine months ended September 30, 2002

Revenues:

     Total revenues for the three and nine months ended September 30, 2003 and 2002 are summarized as follows (dollar amounts in thousands):

		Three Months							Nine Months
		2003		2002		% Change			2003		2002		% Change
Product revenues — Novogyne:
	Product sales	$	2,756	$	6,796		(59	%)	$	11,772	$	20,093		(41	%)
	Royalties		1,182		808		46	%		3,381		3,590		(6	%)
			3,938		7,604		(48	%)		15,153		23,683		(36	%)
Product revenues — third parties:
	Product sales		4,035		4,467		(10	%)		12,748		14,273		(11	%)
	Royalties		10		143		(93	%)		40		172		(77	%)
			4,045		4,610		(12	%)		12,788		14,445		(11	%)
Total product revenues			7,983		12,214		(35	%)		27,941		38,128		(27	%)
License and contract revenues:
	Contract		231		103		124	%		296		1,457		(80	%)
	License		882		881		—			3,145		2,504		26	%
			1,113		984		13	%		3,441		3,961		(13	%)
Total revenues		$	9,096	$	13,198		(31	%)	$	31,382	$	42,089		(25	%)

Total Revenues

     The decline in total revenues for the three and nine months ended September 30, 2003 as compared to the same periods in 2002 was primarily attributable to lower unit sales for both our U.S. and international products, as well as approximately $900,000 in an allowance for returns established in the third quarter related to announced and expected product recalls.

Product Revenues — Novogyne

     The decline in revenues from Novogyne for the three months ended September 30, 2003 as compared to the same period in the prior year primarily relates to a volume decline for the Vivelle® family products, as well as an allowance for returns established in the 2003 third quarter related to announced and expected product recalls. The decline in Vivelle® reflects lower prescription trends due to product maturity. Since the 1999 launch of Vivelle-Dot®, which is a newer, improved version of Vivelle®, Vivelle® prescriptions and sales have been steadily declining. The decline in Vivelle-Dot® reflects the timing of shipments to Novogyne based on Novogyne’s inventory requirements and the effect of the announced and expected product recalls. These declines were partially offset by an increase in royalties, primarily related to increased sales revenue of Vivelle-Dot® by Novogyne.

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     The decline in revenues from Novogyne for the nine months ended September 30, 2003 as compared to the same period in the prior year primarily relates to volume declines of product sold to Novogyne, which reflect lower prescription trends following the publication of the HT studies and the impact of inventory reduction initiatives intended to align inventories with post-WHI demand. An allowance for returns related to announced and expected product recalls established in the third quarter also contributed to the decline.

Product Revenues – Third Parties

     The decline in revenues from third parties for the three months ended September 30, 2003 as compared to the same period in the prior year primarily relates to lower unit sales of Estalis®, partially offset by higher unit sales of Estradot®. The declines in Estalis® reflect lower prescription trends following the publication of the HT studies.

     The decline in revenues from third parties for the nine months ended September 30, 2003 as compared to the same period in the prior year primarily relates to volume declines of Menorest®. Novartis AG has indicated that it has reduced orders for Menorest® in certain countries in anticipation of planned transitions to Estradot® and as a result of declines in the estrogen patch market in Europe following the publication of the HT studies.

License and Contract Revenues

     The decrease in contract revenues for the nine months ended September 30, 2003 as compared to the same period in the prior year is primarily attributable to the attainment of certain product development milestones and the completion of certain product development contracts in the prior year. The increase in license revenues for the nine months ended September 30, 2003 as compared to the prior year is due to the recognition of license revenue in connection with the Shire transaction. Beginning in the third quarter, we ceased amortization of the unamortized balance of license revenue received in the Shire transaction due to the planned initiation of an additional clinical trial and the significant costs expected to be incurred in pursuing MethyPatch® approval.

Gross Margin:

     Gross margin for the three and nine months ended September 30, 2003 and 2002 are summarized as follows (dollar amounts in thousands):

	Three Months							Nine Months
	2003		2002		% Change			2003		2002		% Change
Total product revenues	$	7,983	$	12,214		(35	%)	$	27,941	$	38,128		(27	%)
Gross profit (product revenues less cost of products sold)		4,047		7,103		(43	%)		13,680		21,096		(35	%)
Gross margin (as a percentage of product revenues)		51%		58%					49%		55%

     The declines in gross margin for the three and nine months ended September 30, 2003 were primarily due to lower overhead absorption due to lower production volumes, as well as an allowance for returns

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established in the third quarter related to announced and expected product recalls, which decrease product revenues without affecting cost of goods sold.

Operating Expenses:

     Operating expenses for the three and nine months ended September 30, 2003 and 2002 are summarized as follows (dollar amounts in thousands):

	Three Months							Nine Months
	2003		2002		% Change			2003		2002		% Change
Research and development	$	1,916	$	2,585		(26	%)	$	6,563	$	9,267		(29	%)
Marketing, general and administrative		4,791		3,492		37	%		12,265		10,104		21	%

Research and Development

     The decline in research and development expenses for the three months ended September 30, 2003, as compared to the same period in 2002 was primarily attributable to the purchase of fentanyl active ingredient for development purposes in the prior year. The decline for the nine months ended September 30, 2003, as compared to the same period in 2002, was primarily attributable to lower research and development expenses for MethyPatch® due to the completion of a Phase III clinical trial in the prior year, partially offset by increases in research and development expenses associated with our fentanyl transdermal delivery system.

Marketing, General and Administrative

     The increase in marketing, general and administrative expenses for the three and nine months ended September 30, 2003 as compared to the same period in 2002 was primarily attributable to the $850,000 in costs associated with product recalls, increased consulting and professional fees and increased insurance costs. For the three months ended September 30, 2003, the increase was partially offset by the elimination of pre-launch marketing expenses for MethyPatch®, which ceased as a result of the Shire transaction.

Interest Income:

     Interest income, net, decreased $64,000, or 29%, and $120,000 or 19%, for the three and nine months ended September 30, 2003 as compared to the same period in 2002, primarily due to lower interest rates in 2003, partially offset by an increase in our overall cash balance due to the $25 million received in April 2003 in connection with the Shire transaction.

Income Taxes:

     Our effective tax rate increased to 36.0% for the three months ended September 30, 2003 from 34.9% for the three months ended September 30, 2002, and was 36.0% for the nine months ended September 30, 2003 and 2002. The provision for income taxes is based on the Federal statutory and state income tax rates. Net deferred income tax assets are measured using the average graduated tax rate for the estimated amount of annual taxable income in the years that the liability is expected to be settled or the asset recovered. The effect of adjusting the expected tax rate related to

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the net deferred income tax assets is included in the provision for income taxes. As of September 30, 2003, we had a net deferred tax asset of $15.0 million. Realization of this deferred tax asset depends upon the generation of sufficient future taxable income. Although realization is not assured, we believe it is more likely than not that the deferred income tax asset will be realized based upon estimated future taxable income.

Equity in Earnings of Novogyne:

     We share in the earnings of Novogyne, after satisfaction of an annual preferred return of $6.1 million to Novartis, according to an established formula. Novogyne produced sufficient income in the first quarters of 2003 and 2002 to meet Novartis’ annual preferred return for those years and for us to recognize earnings from Novogyne under the formula. We report our share of Novogyne’s earnings as “Equity in earnings of Novogyne” on our unaudited Condensed Statements of Operations.

     The financial results of Novogyne for the three and nine months ended September 30, 2003 and 2002 are summarized as follows (dollar amounts in thousands):

			Three Months									Nine Months
			2003			2002			% Change			2003			2002			% Change
Novogyne’s Summary Results:
	Gross revenues		$	31,839		$	30,936			3	%	$	85,016		$	102,332			(17	%)
	Sales allowances and returns			7,555			9,429			(20	%)		14,019			20,396			(31	%)
	Net revenues			24,284			21,507			13	%		70,997			81,936			(13	%)
	Cost of sales			4,568			7,079			(35	%)		14,793			21,324			(31	%)
	Gross profit			19,716			14,428			37	%		56,204			60,612			(7	%)
	Gross margin percentage			81	%		67	%					79	%		74	%
	Selling, general and administrative expenses			8,368			8,709			(4	%)		24,312			26,866			(10	%)
	Amortization of intangible assets			1,545			1,545			—			4,635			4,635			—
	Income from operations			9,803			4,174			135	%		27,257			29,111			(6	%)
	Interest income			33			73			(55	%)		135			237			(43	%)
		Net income	$	9,836		$	4,247			132	%	$	27,392		$	29,348			(7	%)
Noven’s equity in earnings of Novogyne			$	4,529		$	2,010			125	%	$	9,849		$	10,657			(8	%)

     Royalties due to us on sales of Vivelle® and Vivelle-Dot® for 2002 have been reclassified from selling, general and administrative expenses to cost of sales to conform to the current year’s presentation.

Revenues

     Gross revenues increased for the three months ended September 30, 2003 compared to the prior year, primarily due to increased unit sales of Vivelle-Dot®, which we believe related to the timing of orders from trade customers. The increase was partially offset by declines in unit sales of Vivelle® in the U.S. and Vivelle® family products to Canada. Vivelle® is in a declining trend due to

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product maturity. The decline in volume of sales to Canada resulted from launch quantities of Estradot® sold in the prior year.

     Gross revenues declined for the nine months ended September 30, 2003 compared to the prior year, primarily due to lower unit sales of Vivelle® and CombiPatch® in the U.S. The lower volume sales of Vivelle® were attributable to the same factors described above. The lower sales of CombiPatch® were due to the continuing effect of the HT studies described above. These declines were partially offset by increased sales of Vivelle-Dot®, primarily attributable to price increases.

     The declines in sales allowances and returns for each of the three and nine months ended September 30, 2003 were attributable to declines in the reserves for expiration dating related returns, primarily attributable to lower unit sales of Vivelle®, lower returns for the Vivelle® family, and lower overall trade inventory levels. These factors caused Novogyne to reduce its estimate of future returns and correspondingly reduce its reserve for sales allowances and returns by $6.9 million and $11.0 million, respectively, for the three and nine months ended September 30, 2003. In each period, these declines were partially offset by $5 million in allowances for sales returns established in the third quarter related to announced and expected product recalls.

Gross Margin

     The increases in gross margin for the three and nine months ended September 30, 2003 as compared to the prior periods were primarily due to lower sales allowances and returns, which increased net sales without affecting cost of goods sold, and lower inventory obsolescence reserves.

Selling, General and Administrative

     Novogyne’s selling, general and administrative expenses declined for the three and nine months ended September 30, 2003 as compared to the same periods in the prior year, primarily due to lower CombiPatch® promotion expenses and lower sample expenses in 2003.

Amortization of Intangible Asset

     Novogyne amortized $1.5 million related to the CombiPatch® acquisition cost for each of the three month periods ended September 30, 2003 and 2002 and $4.6 million for each of the nine month periods ended September 30, 2003 and 2002. CombiPatch® was licensed by Novogyne in March 2001.

Liquidity and Capital Resources

     As of September 30, 2003 and December 31, 2002, we had $86.9 million and $58.7 million in cash and cash equivalents, and working capital of $75.8 million and $59.3 million, respectively.

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     Cash provided by (used in) operating, investing and financing activities for the nine months ended September 30, 2003 and 2002 is summarized as follows (amounts in thousands):

		2003			2002
Cash flows:
	Operating activities	$	33,370		$	11,752
	Investing activities		(4,104	)		(1,796	)
	Financing activities		(1,037	)		415

Operating Activities:

     Net cash provided by operating activities for the nine months ended September 30, 2003 primarily resulted from the receipt of a $25.0 million license payment upon the closing of the Shire transaction in April 2003 and $16.9 million in distributions from Novogyne. The increase was partially offset by changes in working capital due to the timing and amount of product shipments, payment of Director’s and Officer’s insurance premiums and payment of income taxes.

     Net cash provided by operating activities for the nine months ended September 30, 2002 primarily resulted from an $11.7 million distribution from Novogyne. This was partially offset by changes in working capital due to the timing and amount of product shipments and payments for inventory and income taxes.

Investing Activities:

     Net cash used in investing activities for the nine months ended September 30, 2003 and 2002 was primarily attributable to the purchase of fixed assets to expand production capacity for future products and payment of patent development costs.

Financing Activities:

     Net cash used in financing activities for the nine months ended September 30, 2003 was primarily attributable to the repurchase of 105,000 shares of our common stock, partially offset by cash received in connection with the issuance of common stock from the exercise of stock options.

     Net cash provided by financing activities for the nine months ended September 30, 2002 was primarily attributable to cash received in connection with the issuance of common stock from the exercise of stock options, partially offset by the payoff of all borrowings under a master lease facility in March 2002.

Short-Term and Long-Term Liquidity:

     Our principal sources of short-term liquidity are existing cash, cash generated from product sales, fees and royalties under development and license agreements and distributions from Novogyne. In April 2003, Shire paid us $25 million upon closing of the MethyPatch® transaction. For the nine months ended September 30, 2003, all of our income before income taxes was comprised of equity in earnings of Novogyne, a non-cash item. Our short-term cash flow is dependent on sales, royalties and license fees associated with transdermal HT products. Any decrease in sales of those products by us or our licensees or any increase in returns of products to Novogyne (including any such changes resulting from the results of the recent or ongoing HT studies

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or the pending product label changes), the failure of the transdermal HT market to resume its prior growth trends, or the inability or failure of Novogyne to pay distributions would have a material adverse effect on our short-term cash flow and require us to rely more heavily on our existing cash reserves or on borrowings to support our operations and business. Although we expect to receive distributions from Novogyne, there can be no assurance that Novogyne will have sufficient profits or cash flow to pay distributions or that Novogyne’s Management Committee will authorize such distributions. We also expect our funding of an additional MethyPatch® clinical study to have a negative impact on our short-term liquidity. We cannot assure that MethyPatch® will be approved by the FDA, particularly in light of the not approvable letter we received from the FDA in April 2003, or that Shire will generate MethyPatch® sales at levels that would trigger our milestone payments; therefore, we cannot assure that we will receive any further payments from Shire. If, as a result of our product stability issues we are unable to manufacture and ship Vivelle-Dot® and Estradot® or the FDA requires us to suspend production, our liquidity would be materially and adversely affected.

     In the first quarter of 2003, our Board of Directors authorized a share repurchase program under which we may acquire up to $25 million of our common stock. As of September 30, 2003, we had repurchased 105,000 shares of our common stock at an aggregate price of approximately $1.3 million. Any repurchases of common stock under our share repurchase program could adversely affect our short-term liquidity.

     We believe that we will have sufficient cash available to meet our operating needs and anticipated short-term capital requirements. For our long-term operating needs, we intend to utilize funds derived from the above sources, as well as funds generated through sales of products under development or products that we may license or acquire from others. We expect that such funds will be comprised of payments received pursuant to future development and licensing arrangements, as well as direct sales of our own products. We expect that our cash requirements will continue to increase, primarily to fund clinical studies for products under development and for plant and equipment to expand production capacity. We cannot assure that we will successfully complete the development of such products, that we will obtain regulatory approval for any such products, that any approved product may be produced in commercial quantities, at reasonable costs, and be successfully marketed, or that we will successfully negotiate future licensing or product acquisition arrangements. Because much of the cost associated with product development is incurred prior to product launch, if we are unsuccessful in out-licensing, or if we are unable to launch additional commercially viable products that we develop or that we license or acquire from others, we will have incurred the up-front costs associated with product development or acquisition without the benefit of the liquidity generated by sales of those products, which could adversely affect our long-term liquidity needs.

     We are unable to predict the effects of the discontinued and ongoing HT studies discussed above on the short and long-term prospects for the HT market or for the market for our transdermal HT products. Accordingly, we are not able to predict the effect that those studies may have on our short-term or long-term liquidity, results of operations and business prospects.

     To the extent that capital requirements exceed available capital, we will seek alternative sources of financing to fund our operations. We did not extend our credit facility, which expired in April 2003. No assurance can be given that alternative financing will be available, if at all, in a timely manner, or on favorable terms. If we are unable to obtain satisfactory alternative financing, we may be required to delay or reduce our proposed expenditures, including expenditures for research and development and plant and equipment, in order to meet our future cash requirements.

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Critical Accounting Policies

     For a discussion of our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies”, which is included in our Form 10-K and in our Form 10-Q as of June 30, 2003. In addition to the matters discussed in the Form 10-K and Form 10-Q, the following items should be added to the “Revenue Recognition” and “Investment in Novogyne” policies: Noven and Novogyne establish sales returns allowances for product that has been recalled or that they believe is probable of being recalled. The methodology used to estimate product returns is based on the distribution and expiration dates of the affected product and overall trade inventory levels. These estimates are based on currently available information, and the ultimate outcome may be significantly different than the amounts estimated given the subjective nature and complexities inherent in this area and in the pharmaceutical industry.

Outlook

     A discussion of some of the factors that could impact our financial results in the remainder of 2003 is provided below, elsewhere in this Form 10-Q, and under the caption “Cautionary Factors that May Have an Impact on Future Results” included in Item 7 of our Form 10-K. Other factors, trends, risks and uncertainties unknown to us could also influence our financial results.

U.S. HT:

     During the fourth quarter of 2002 and first half of 2003, we undertook inventory reduction initiatives intended to align inventories for our U.S. HT products with the reduced demand that followed the publication of the WHI and other HT studies. Based on information received from Novartis, we now believe that inventories at Novogyne and in the trade channel have reached desired levels, subject to normal fluctuations.

     In October 2003, we announced recalls of CombiPatch® and Vivelle-Dot® product that had tested out of specification, and indicated that other Vivelle-Dot® product was expected to be recalled following additional testing and analysis. We have undertaken additional testing of Estradot® to determine whether it is affected. Noven’s and Novogyne’s 2003 third quarter revenues are net of allowances for returns of approximately $900,000 and $5.0 million, respectively, related to these recalls. In addition, Noven’s expenses include approximately $850,000 in costs associated with such recalls. Our results would be materially adversely affected if further analysis indicates that additional recalls are required or that additional allowances are necessary, if trade supplies are interrupted, or if Estradot® is affected to any material degree.

International HT:

     We do not expect international sales of our HT products to increase in future periods unless Estradot® is launched in additional major markets. Estradot® has been launched in Germany and in several other countries, but, according to Novartis AG, significant pricing, reimbursement and post-WHI regulatory issues are adversely impacting further launch plans in many countries, including the United Kingdom, France, and Italy. Due to these issues and Novartis’ failure to date in securing a marketing partner in the United Kingdom and France for Estradot®, we do not expect additional major market launches of Estradot® in the near term.

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MethyPatch®:

     In the second quarter of 2003, we received notification from the FDA that our pending NDA for MethyPatch® (methylphenidate transdermal system) was not approvable. In light of this development, we cannot assure either product approval or launch, nor can we predict when, if ever, we will receive additional milestone payments or manufacturing revenues from Shire.

     Since receipt of the FDA notice, Noven and Shire have met with the FDA and have worked together on strategies to advance MethyPatch® toward approval. Noven and Shire have developed a draft protocol for an additional clinical study that Noven believes is necessary to amend the NDA, and we submitted the protocol to the FDA in October 2003 for review and comment. We expect the FDA to respond to our protocol in the fourth quarter of 2003. If the FDA agrees with our protocol and clinical strategy, we expect to proceed with the additional study. If they do not, development of MethyPatch® could be discontinued.

     In November 2003, Noven and Shire signed a letter agreement defining certain rights and obligations of the parties. Under the letter agreement, Shire has agreed to supervise and manage the additional study, and we have agreed to fund it, up to a maximum of $10.9 million, and to provide clinical supplies of the product. We may also incur additional expenses in pursuit of approval. Our costs incurred in pursuit of approval are expected to be offset against a portion of the $25 million previously received from Shire and previously deferred.

Fentanyl Transdermal System:

     In the 2003 third quarter, we submitted an Abbreviated New Drug Application (“ANDA”) to the FDA seeking approval to market a generic version of Duragesic® (fentanyl transdermal system). Duragesic®, distributed by Janssen Pharmaceutica L.P. (a division of Johnson & Johnson), is a Schedule II transdermal patch containing fentanyl, an opioid analgesic. Duragesic® is indicated for the management of chronic pain.

     Duragesic® is expected to come off patent in mid-2004, but Janssen has been granted a six-month extension to the patent term due to completion of pediatric studies. We are in the process of negotiating with a potential industry partner to assist with commercialization. We believe that another company has “first-to-file” status with respect to a generic Duragesic® product, and that other companies are also developing generic versions of Duragesic®.

     The FDA has communicated to us that, based on its preliminary review of our ANDA, our fentanyl patch formulation appears to contain three inactive ingredients that have not been previously approved in a drug product by the same route of administration. As a condition to further review, they requested examples of approved drug products that use these ingredients or other information demonstrating that they do not affect safety. We have provided, and the FDA is reviewing, our response to this request. Our response references listings in the FDA’s Inactive Ingredient Guide, Drug Master File authorizations, usage of these ingredients in approved products and other information supporting the safety of the ingredients. If the FDA determines, however, that our response is insufficient, approval of our fentanyl patch could be delayed or prevented.

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Procter & Gamble Pharmaceuticals Development Program:

     In the second quarter of 2003, we signed an agreement to develop new prescription transdermal delivery systems for P&G Pharmaceuticals, Inc. (P&GP), a subsidiary of The Procter & Gamble Company. Under the agreement, we are entitled to receive up to $7.8 million, payable in installments if certain development milestones are achieved. At P&GP’s request, we have not disclosed the compounds incorporated in the new patches or the therapeutic category at which they are directed.

Financial Guidance:

     Noven’s revenues for 2003 are expected to decline from 2002. This decline reflects: (i) the continuing impact of WHI and other HT studies; (ii) inventory reduction efforts in the first half of 2003; (iii) strong U.S. HT sales in the first half of 2002; (iv) lower international HT sales in 2003 due to launch delays for Estradot® and declines in volume of our other products; and (v) the establishment of an allowance for returns for announced and expected product recalls. Due to uncertainties presented by the product recalls relating to production issues with CombiPatch® and Vivelle-Dot®, we are not providing 2003 fourth quarter revenue or earnings guidance.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Noven had no variable rate debt outstanding during the nine months ended September 30, 2003. Therefore, changes in interest rates did not affect interest expense, earnings or cash flows in 2003. We cannot predict market fluctuations in interest rates and their impact on any variable rate debt that we may have outstanding from time to time, nor can there be any assurance that fixed rate long-term debt will be available at favorable rates, if at all.

Item 4. Controls and Procedures

     Pursuant to Exchange Act Rule 13a-15, as of the end of the quarterly period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of the last evaluation. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to Noven required to be included in our periodic Securities and Exchange Commission filings. However, that conclusion should be considered in light of the various limitations described below on the effectiveness of those controls and procedures, some of which pertain to most if not all business enterprises, and some of which arise as a result of the nature of our business. Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all error and all improper conduct. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of improper conduct, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns

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can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Further, the design of any system of controls also is based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Furthermore, our level of historical and current equity participation in Novogyne may substantially impact the effectiveness of our disclosure controls and procedures. Because we do not control Novogyne, and Novogyne’s financial, accounting, inventory and sales deductions functions are performed by Novartis, our disclosure controls and procedures with respect to Novogyne are necessarily more limited than those we maintain with respect to ourselves. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the Chief Executive Officer’s and Chief Financial Officer’s evaluation.

     Provided with this quarterly report on Form 10-Q are certificates of our Chief Executive Officer and Chief Financial Officer. We are required to provide those certifications by Section 302 of the Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission’s implementing regulations. This Item 4 of this quarterly report is the information concerning the evaluation referred to in those certifications, and you should read this information in conjunction with those certifications for a more complete understanding of the topics presented.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Miller Donovan v. Noven Pharmaceuticals, Inc., Robert C. Strauss, James B. Messiry, and Juan A. Mantelle, United States District Court, Southern District of Florida; August 7, 2003.

     Plaintiff filed the above referenced action on behalf of a purported class of purchasers of Noven’s common stock during the period from October 29, 2001 through April 28, 2003. The complaint alleges that, during the subject period, Noven and its officers named as defendants violated the Securities Exchange Act of 1934 by making false and misleading statements regarding Noven’s rationale for approval of its MethyPatch® product and marketing strategies. The press release states that Plaintiff is seeking to recover damages on behalf of all purchasers of Noven common stock during the subject period. Following the filing of Plaintiff’s complaint, five other substantially similar complaints were filed against Noven and its officers named as defendants in the above referenced action. A joint motion was filed with the Court in October 2003 seeking to consolidate all of the six actions into a single consolidated action. This development did not have a material effect on the action or on Noven’s financial position or results of operations.

     Noven believes the lawsuit is without merit, and intends to vigorously defend the lawsuit, but its outcome cannot be predicted. The lawsuit, if determined adversely to Noven, could have a material adverse effect on Noven’s financial position and results of operations. Noven’s ultimate liability, if any, with respect to the lawsuit is presently not determinable.

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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

10.1	Agreement between Shire US, Inc. and Noven Pharmaceuticals, Inc. dated November 5, 2003*
10.2	Amended and Restated Employment Agreement between Robert C. Strauss and Noven Pharmaceuticals, Inc. dated as of November 5, 2003**
31.1	Certification of Robert C. Strauss, President, Chief Executive Officer and Chairman of the Board pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Diane M. Barrett, Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Robert C. Strauss, President, Chief Executive Officer and Chairman of the Board, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Diane M. Barrett, Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)	Reports on Form 8-K
	No reports on Form 8-K were filed by the Registrant during the three months ended September 30, 2003.

*	Certain exhibits and schedules to this document have not been filed. The registrant agrees to furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.
**	Compensation Plan or Agreement.

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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: November 13, 2003 By: /s/ Diane M. Barrett
Diane M. Barrett
Vice President and
Chief Financial Officer

34 EX-10.1 3 g85728exv10w1.txt EX-10.1 AGREEMENT DATED NOVEMBER 5, 2003 EXHIBIT 10.1 November 5, 2003 Shire US Inc. One Riverfront Place Newport, Kentucky 41071 Attention: William A. Nuerge RE: TRANSACTION AGREEMENT, DATED AS OF FEBRUARY 26, 2003, BY AND AMONG NOVEN PHARMACEUTICALS, INC., SHIRE US INC. AND SHIRE PHARMACEUTICALS GROUP PLC (THE "TRANSACTION AGREEMENT") Dear Bill: This letter agreement (together with the Exhibits hereto, this "Agreement") sets forth the mutual agreement and understanding of Noven Pharmaceuticals, Inc. ("Noven") and Shire US Inc. ("Shire US"), acting on behalf of itself and its affiliate Shire Pharmaceuticals Ireland Limited ("Shire Ireland" and, together with Shire US, "Shire") with respect to Shire's performance of a product study of Noven's transdermal methylphenidate drug delivery system (the "Product"), for which New Drug Application 21-514 (the "Product NDA") is currently pending. Capitalized terms used and not defined in this Agreement shall have the meanings set forth in the Transaction Agreement. The parties acknowledge the following background facts. The closing of the transactions contemplated by the Transaction Agreement took place on April 7, 2003, at which time Noven and Shire Ireland entered into a license agreement (the "License Agreement") for the license of certain intellectual property of Noven to Shire Ireland for the purpose of the development and sale of the Product by Shire Ireland, as well as a Toll Conversion and Supply Agreement (the "Toll Conversion and Supply Agreement") pursuant to which Noven agreed to manufacture the Product for Shire Ireland. The Transaction Agreement provides that upon receipt of Regulatory Approval of the Product by the FDA, the Product NDA, along with related regulatory materials, will be transferred to Shire US. On April 25, 2003, Noven received a letter from the FDA notifying Noven that the Product NDA was "not approvable" under Section 505(d) of the FDC Act (the "FDA Notice"). Since Noven's receipt of the FDA Notice, Noven and Shire have cooperated in good faith in exploring various ways in which Regulatory Approval of the Product NDA may be obtained despite the FDA Notice. The parties hereby agree that the study protocol synopsis attached as EXHIBIT A hereto, which shall serve as a preliminary outline for a finalized protocol (as such finalized protocol may be subsequently amended or supplemented as contemplated herein, the "Protocol"), reflects the agreement of the parties regarding the terms of a pivotal controlled study of the Product, which study shall be followed by a six (6) month open-label study of the Product pursuant to a protocol to be agreed upon between the parties (such studies together constituting the "Product Study"), which Product Study shall be conducted by Shire in accordance with the terms and conditions set forth herein. Shire agrees to submit the Protocol to the FDA for review as soon as practicable following the date of this Agreement. Shire further agrees to use reasonable efforts to commence the Product Study as soon as practicable, and in any event within four (4) months, following the date of the FDA's approval of the Protocol; provided that Noven has fulfilled its obligations with regard to Clinical Supplies as set forth below. As soon as practicable prior to the commencement of the open-label study, Shire shall submit to Noven the proposed protocol for such study, which protocol shall be agreed upon by the parties in good faith. The Product Study shall be designed and managed by Shire, performed in accordance with the Protocol and conducted by the individuals listed in EXHIBIT B hereto. Any material deviation from the Protocol prior to the date of commencement of the Product Study shall require the prior written approval of Noven. Any material deviation from the Protocol after the commencement of the Product Study shall be made in accordance with Shire SOPs; PROVIDED, that Shire shall provide at least three (3) days written notice of any such proposed deviation to Noven, during which time Noven shall have the opportunity to submit an objection to such deviation. In the event that Noven does not object within such three (3) day period, the deviation proposed by Shire shall automatically take effect. In the event that Noven does object to any such proposed deviation, Shire shall have the option to implement such deviation notwithstanding Noven's objection, subject to Shire's indemnification obligation as contemplated below. Shire agrees to provide monthly reports to Noven during the performance of the Product Study regarding the activities undertaken to date and the status of the Product Study. Noven shall (a) reimburse Shire for all of Shire's reasonable out-of-pocket expenses actually incurred by Shire and paid to a third party in connection with the Product Study including, without limitation except as otherwise contemplated below, costs related to contract research organizations, laboratory services, document control, protocol development, investigator meetings, study conduct and close out, drug safety monitoring and reporting, data retrieval and management, statistical analysis and reporting, investigator grants, expenses and preparation and storage and distribution of study materials, and (b) absorb all costs with respect to the manufacture by Noven of the Product for the Product Study including, without limitation, the cost of the active ingredient and all inactive ingredients of the Product, manufacturing costs, testing, quality-related costs, packaging and labeling costs, shipment, delivery, storage and handling costs and costs of insurance for the Product; PROVIDED HOWEVER, that notwithstanding the foregoing, Noven shall have no obligation to pay or reimburse Shire for (i) Shire's creation, design, development, implementation, management, monitoring or documentation of the Product Study which are not performed by a third party or any similar internal costs of Shire associated with the Product Study, (ii) any labor or other costs related to Shire's employees, or (iii) any costs or expenses incurred by Shire in connection with executing this Agreement (including without limitation attorneys' fees and expenses); and PROVIDED FURTHER, that the aggregate costs and expenses to be paid to Shire under this Agreement shall not exceed $10,900,000 (plus the costs actually incurred by Shire for any API used in Clinical Supplies) without the prior written approval of Noven (it being understood that, except for its indemnification obligations set forth 2 herein and any obligations undertaken by Noven directly, all such costs shall be paid directly to Shire and that Noven shall have no liability to any third party pursuant to this Agreement). Noven shall defend, indemnify and hold harmless Shire and its Affiliates and each of their respective officers, directors, agents, employees and shareholders (collectively "Shire Indemnitees") from and against any all Damages which Shire Indemnitees may incur or suffer arising out of the Product Study or arising out of Noven's breach of the terms hereof, except to the extent that those Damages arise out of (i) any material deviation from the Protocol after commencement of the Product Study to which Noven shall have submitted an objection during the three (3) day period contemplated above, or (ii) the misconduct or negligence of, or a violation of any Applicable Law by, Shire or Shire Indemnitees; PROVIDED, that Noven shall have no obligation to indemnify Shire for any Damages incurred by Shire in connection with Shire's indemnification of third parties with respect to performance of the Product Study, other than Shire's indemnification of third parties for Damages relating to the Product. Shire shall defend, indemnify and hold harmless Noven and its Affiliates and each of their respective officers, directors, agents, employees and shareholders (collectively "Noven Indemnitees") from and against any and all Damages which Noven Indemnitees may incur or suffer arising out of (i) any material deviation from the Protocol after commencement of the Product Study to which Noven shall have submitted an objection during the three (3) day period contemplated above, (ii) Shire's breach of the terms hereof, or (iii) Shire's misconduct or negligence in the conduct of the Product Study or a violation of any Applicable Law by Shire or Shire Indemnitees. Shire agrees that in connection with its performance of the Product Study, including without limitation the negotiation of agreements or other arrangements with third parties in connection therewith, Shire shall conduct the Product Study as if Shire were solely responsible for all costs and expenses, as well as any potential liabilities or obligations, associated with the Product Study. Shire shall submit invoices to Noven monthly to the Finance Contact listed below, together with supporting documentation for each expense for which Shire seeks reimbursement; PROVIDED that Shire shall review each third party invoice for accuracy before submitting it to Noven. Shire's review shall be conducted as if Shire were solely responsible for payment of the invoice. Noven shall pay each invoice received from Shire within thirty (30) days of receipt. In the event that Noven breaches any of its payment obligations set forth herein, in addition to any rights or remedies that Shire may have at law or under the Transaction Agreement, Shire may in its sole discretion complete the Product Study at Shire's cost and may seek reimbursement from Noven for any costs and expenses incurred by Shire and contemplated to be paid to Shire or absorbed by Noven in accordance with this Agreement; PROVIDED, that the failure of Noven to perform its payment obligations hereunder shall not give rise to a right of termination of any party (not otherwise existing) under any of the Transaction Documents. Accounts Payable Noven Pharmaceuticals, Inc. 11960 SW 144th Street Miami, Florida 33186 3 Shire shall submit to Noven orders for supply of the Product and placebos necessary for the Product Study (the "Clinical Supplies"). The manufacture of Clinical Supplies shall be pursuant to and in accordance with the terms and conditions set forth in Section 5.01 of the Toll Conversion and Supply Agreement. Notwithstanding anything to the contrary in the Toll Conversion and Supply Agreement, (i) Noven agrees that it has sufficient quantities of Active Ingredient on hand to manufacture all Clinical Supplies, (ii) with regard to quality releases of Clinical Supplies, Noven shall provide a release of bulk, packaged Clinical Supplies to Shire, Shire shall arrange for the labeling of such bulk Clinical Supplies and Shire shall release the final Clinical Supplies for use in the Product Study and (iii) Noven shall conduct any and all testing necessary for the manufacture, packaging or release of Clinical Supplies. The parties covenant and agree that, at the conclusion of the Product Study, if Shire does not exercise its termination option set forth in the next paragraph, each party shall cooperate in good faith with the other to submit the results of the Product Study, along with the Product NDA, to the FDA for the purpose of seeking Regulatory Approval of the Product NDA, and shall continue to cooperate in good faith with each other and with the FDA to pursue diligently Regulatory Approval of the Product until the earlier of (i) receipt of Regulatory Approval, (ii) receipt of a Non-Approval Notice, or (iii) such time as the parties shall reach mutual agreement to abandon pursuit of Regulatory Approval ("Abandonment"), and that neither party shall have the right to terminate this Agreement without the prior written consent of the other party prior to such time. With respect to the Product Study, and except as otherwise contemplated in the following paragraph, Noven shall appoint Shire as the agent for the Product IND and Shire shall assume a leadership role with respect to all registration strategies, communication, correspondence and meeting attendance with the FDA; PROVIDED, that Noven shall at all times remain the sponsor of the Product IND and the Product NDA and shall be represented in all such communications, correspondence and meetings with the FDA. In the event that after the unblinding of the data from the Product Study, Shire determines in its reasonable opinion based upon such data that the submission of the Product Study and the Product NDA to the FDA will not render a commercially viable Product, Shire shall have the option to terminate this Agreement, the Transaction Agreement and the other Transaction Documents upon written notice to Noven; PROVIDED, that all assets purchased by Shire pursuant to the Transaction Agreement shall thereupon be repurchased by Noven for an aggregate consideration of $1.00, the License Agreement shall be automatically terminated and Shire shall forfeit any remedies otherwise available to it under the Transaction Documents, including without limitation the right to receive $5,000,000 in consideration for the repurchase of such assets. Shire's option to terminate this Agreement, the Transaction Agreement and the other Transaction Documents shall expire sixty (60) days after the unblinding of the data from the Product Study. In the event Shire shall exercise such right of termination, Noven shall have the right to make any submission to, and to engage in necessary correspondence and meetings with, the FDA in an effort to obtain Regulatory Approval of the Product without the participation or approval of Shire. Shire hereby covenants and agrees that from and after the date hereof and until the termination of this Agreement, whether by (i) receipt of Regulatory Approval, (ii) receipt of a Non-Approval Notice, (iii) Abandonment or (iv) Shire's termination of this Agreement in accordance with the foregoing paragraph (the "Product Study Period"), Shire shall not exercise 4 any right under the Transaction Agreement or any of the other Transaction Documents, including without limitation Section 9.02(c) of the Transaction Agreement, to terminate the Transaction Agreement or any of the other Transaction Documents or to demand that Noven repurchase the assets purchased by Shire under the Transaction Agreement. To the extent required, the foregoing constitutes an express waiver of Shire's rights under Section 9.02(c) of the Transaction Agreement for and during the Product Study Period in accordance with Section 13.07 of the Transaction Agreement. The parties acknowledge and agree that except as otherwise contemplated above, Shire is not waiving any rights it may have under Section 9.02(c) for any period after the conclusion of the Product Study Period. The parties further acknowledge and agree that Shire has no right under Section 9.02(c) of the Transaction Agreement to demand that Noven repurchase the assets purchased by Shire under the Transaction Agreement or to terminate the License Agreement by reason of Noven's receipt of the FDA Notice. The parties acknowledge and agree that other than with respect to the FDA Notice and except as otherwise contemplated above, Section 9.02(c)(i) of the Transaction Agreement remains in full force and effect. The parties agree that Section 11.01(a) of the Transaction Agreement is hereby amended such that the rights of the respective parties to make a claim for breach of any of the representations or warranties made in the Transaction Agreement shall survive the date of the first commercial sale of Product for a period of one year thereafter. To the extent required, the parties acknowledge and agree that this Agreement constitutes an amendment to the Transaction Documents in accordance with the terms and conditions thereof, and that except as the context of this Agreement requires to give effect to the intent and purposes hereof, the Transaction Documents shall remain in full force and effect without any further amendments or modifications. This Agreement shall be construed in accordance with and governed by the substantive laws of the State of Delaware, without giving effect to the conflict of laws principles thereof. This Agreement shall become binding when any one or more counterparts hereof, individually or in the aggregate, shall bear the signatures of each of the parties hereto. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original as against the party whose signature appears thereon, but all of which taken together shall constitute one and the same instrument. Facsimile signatures of authorized signatories of the parties shall constitute the due execution and delivery of this Agreement. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their successors and permitted assigns. Any disputes arising under this Agreement shall be resolved in accordance with the dispute resolution mechanism provided in the Transaction Agreement. Very truly yours, /s/ Robert C. Strauss ----------------------------------------- Robert C. Strauss President, CEO and Chairman 5 ACKNOWLEDGED AND AGREED THIS 5th DAY OF NOVEMBER, 2003: SHIRE US INC. /s/ William A. Nuerge - ---------------------------------- By: William A. Nuerge Title: President and CEO 6 EX-10.2 4 g85728exv10w2.txt EX-10.2 EMPLOYMENT AGREEMENT - ROBERT C. STRAUSS EXHIBIT 10.2 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 5th day of November, 2003 by and between NOVEN PHARMACEUTICALS, INC., a Delaware corporation (hereinafter called the "Company"), and ROBERT C. STRAUSS (hereinafter called the "Executive"). RECITALS A. The Board of Directors of the Company (the "Board") recognizes and desires to assure the Company of Executive's continued employment in an executive capacity and to compensate him therefor. B. Executive is willing to make his services available to the Company on the terms and conditions hereinafter set forth. C. The Company and Executive desire to amend and restate in its entirety their existing Employment Agreement, dated as of December 12, 1997 (the "Existing Agreement"). AGREEMENT NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties agree as follows: 1. EMPLOYMENT. 1.1. EMPLOYMENT AND TERM. The Company hereby agrees to continue to employ Executive and Executive hereby agrees to serve the Company, on the terms and conditions set forth herein, for the period commencing on the date hereof and expiring on December 31, 2006 (the "Initial Term") unless sooner terminated as hereinafter set forth; PROVIDED, HOWEVER, that commencing on January 1, 2007 and each January 1 thereafter, the Initial Term of this Agreement shall automatically be extended for one additional year unless at least ninety (90) days prior to such January 1 date, the Company shall have delivered to Executive or Executive shall have delivered to the Company written notice that the term of Executive 's employment hereunder will not be extended. 1.2. DUTIES OF EXECUTIVE. Executive shall serve as the President and Chief Executive Officer of the Company and shall have powers and authority superior to any other officer or employee of the Company or of any subsidiary of the Company. Subject to the preceding sentence, during the term of Employment, Executive shall diligently perform all services as may be reasonably assigned to him by the Board, and shall exercise such power and authority as may from time to time be delegated to him by the Board. In addition, Executive shall regularly consult with and provide information to the Chairman of the Board with respect to the Company's business and affairs. Executive shall be required to report solely to, and shall be subject solely to the supervision and direction of the Board or any committee thereof at duly called meetings thereof, and no other person or group shall be given authority to supervise or direct Executive in the performance of his duties. Executive shall devote substantially all his working time and attention to the business and affairs of the Company (excluding any vacation and sick leave to which Executive is entitled), render such services to the best of his ability, and use his reasonable best efforts to promote the interests of the Company. It shall not be a violation of this Agreement for Executive to (A) serve on corporate, civic or charitable boards or committees (it being agreed that in no event shall Executive serve on the board of directors of more than two other corporations and the acceptance of any new directorship after the date hereof shall be subject to the consent of the Board, which shall not be unreasonably withheld), (B) deliver lectures, fulfill speaking engagements or teach at educational institutions, and (C) manage personal investments, so long as such activities do not unreasonably interfere with the performance of Executive's responsibilities as an employee of the Company in accordance with this Agreement. Notwithstanding the foregoing, it is agreed and acknowledged that Executive presently serves on the board of directors of four other corporations, and that he shall not be deemed to be in breach of this Agreement if he reduces the number of such other directorships he holds to no more than three within twelve months from the date hereof and two within twenty-four months from the date hereof. 1.3. PLACE OF PERFORMANCE. In connection with his employment by the Company, Executive shall be based at the Company's principal executive offices except for travel reasonably necessary in connection with the Company's business. The Company shall not, without the written consent of Executive, relocate or transfer its principal executive offices outside Dade or Broward County, Florida. 2. COMPENSATION. 2.1. BASE SALARY. Executive shall receive a base salary at the annual rate of not less than $522,500 (the "Base Salary") during the term of this Agreement, with such Base Salary payable in installments consistent with the Company's normal payroll schedule. The Base Salary shall also be reviewed, at least annually, for merit increases (if any) and may, by action and in the discretion of the Board, be increased at any time or from time to time. The Base Salary, if increased, shall not thereafter be decreased for any reason. 2.2. INCENTIVE COMPENSATION. Executive shall be entitled to receive such bonus payments or incentive compensation as may be determined at any time or from time to time by the Board (or any authorized committee hereof) in its discretion. Such potential bonus payments and/or incentive compensation shall be considered at least annually by the Board (it being agreed that such consideration shall not create any implication that the Board shall award any such bonus or incentive compensation). In addition, and without limiting the generality of the foregoing, (i) Executive shall be entitled to participate in the Company's 2003 Management Incentive Plan, a copy of which is attached hereto as EXHIBIT A, as well as all similar short-term management incentive plans that may be adopted by the Company, the Board and/or the Board's Compensation and Stock Option Committee (the "Committee") in the future, and (ii) the Committee shall consider, at least annually and in connection with awards to other Company executives, stock option and other equity-based incentive awards to Executive (it being agreed that such consideration shall not create any implication that the Committee shall award any such options or other equity-based incentive awards). 2 2.3 WITHHOLDING. All payments under this Agreement or otherwise pursuant to Executive's employment relationship shall be made net of any applicable withholding taxes or other amounts required to be withheld by law. 3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS. 3.1. EXPENSE REIMBURSEMENT. During the term of Executive's employment hereunder, the Company, upon the submission of reasonable supporting documentation by Executive, shall reimburse Executive for all reasonable expenses actually paid or incurred by Executive in the course of and pursuant to the business of the Company, including expenses for travel and entertainment. 3.2. INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the term of Executive's employment hereunder, Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable to other key executives of the Company and its subsidiaries, in each case comparable to those currently in effect or as subsequently amended. Such plans, practices, policies and programs, in the aggregate, shall provide Executive with compensation, benefits and reward opportunities at least as favorable as the most favorable of such compensation, benefits and reward opportunities provided at any time hereafter with respect to other key executives. 3.3. WELFARE BENEFIT PLANS. During the term of Executive's employment hereunder, Executive and Executive's family shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its subsidiaries (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs), at least as favorable as the most favorable of such plans, practices, policies and programs in effect at any time hereafter with respect to other key executives. In addition, and without limiting the generality of the foregoing, (i) at Executive's option, reimburse Executive for all costs of an annual physical examination, (ii) reimburse Executive for up to $2,500 of annual financial and tax planning assistance, and (iii) notwithstanding anything herein to the contrary, during the time period commencing with the termination of Executive's employment for retirement, termination without "Cause" (as hereinafter defined) and voluntary termination with "Good Reason" and ending on Executive's death, the Company shall afford Executive the opportunity to participate in a Continuation of Medical Benefits Plan (or similar plan) in the same capacity as that of any other active senior executive (with the regular employee portion of the premium due and payable by Executive annually on a pre-paid basis), and upon Executive's death, his spouse shall be eligible for COBRA benefits as a participant to the extent permitted by law (the post-employment medical benefits contemplated by this clause (iii) are referred to herein as the "Post-Employment Medical Benefits"). Notwithstanding the foregoing, (a) in no event shall the Company, in connection with providing the Post-Employment Medical Benefits, be required to pay a greater premium than that paid by it for providing medical benefits for any other employee of the Company in the same category as Executive (e.g. insurance for husband and wife) and (b) if the (i) Company's health insurer on the date of termination (the "Termination Date Health Insurance Provider") does not permit the provision of Post-Employment Medical Benefits as provided above or (ii) Termination Date Health Insurance Provider permits the provision of Post-Employment Medical Benefits and the Company thereafter changes its health insurance provider and such new 3 provider does not permit the provision of Post-Employment Medical Benefits at the costs set forth above, then the Company can discharge in full any obligations for providing Post-Employment Medical Benefits hereunder by paying Executive a lump sum equal to the Discharge Amount (as hereafter defined). For purposes hereof, the "Discharge Amount" means the net present value of the stream of the Company's portion of payments for health premiums for the estimated balance (the "Balance") of Executive's life which shall be based upon the premiums being paid by the Company for health insurance benefits or Post-Employment Medical Benefits, as the case may be, at the time the Company's obligation to make the Discharge Payment arises. The Balance shall be determined by an actuary utilized by the Company. The Net Present Value shall be determined by the Company's independent certified accounting firm utilizing a reasonable discount factor. The determination of the Balance and the Net Present Value as provided above shall be final, conclusive and binding on the parties hereto. 3.4. WORKING FACILITIES. During the term of Executive's employment hereunder, the Company shall furnish Executive with an office, a secretary and such other facilities and services suitable to his position and adequate for the performance of his duties hereunder. 3.5. AUTOMOBILE ALLOWANCE. During the term of Executive's employment hereunder, the Company shall provide Executive with a non-accountable automobile allowance of Eight Hundred Fifty Dollars ($850.00) per month, which amount is intended to compensate Executive for wear and tear and, in addition, reimburse Executive for all costs of gasoline, oil, repairs, maintenance, insurance and other expenses incurred by Executive by reason of the use of Executive's automobile for Company business from time to time. 3.6. VACATION. During the Initial Term, Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its subsidiaries as in effect at any time hereafter with respect to other key executives of the Company and its subsidiaries; PROVIDED, HOWEVER, that in no event shall Executive be entitled to less than five weeks paid vacation per year. 4. TERMINATION. 4.1. TERMINATION FOR CAUSE. Notwithstanding anything contained to the contrary in this Agreement, this Agreement may be terminated by the Company for Cause. As used in this Agreement, "Cause" shall only mean (i) any material act or acts of personal dishonesty taken by Executive which is either (x) at the expense of the Company, or (y) reasonably likely to bring significant disrepute to the Company, (ii) subject to the following sentences, any violation by Executive of Executive's material obligations under this Agreement which is demonstrably willful and deliberate on Executive's part and which is not remedied within ten business days after receipt of written notice from the Company, (iii) the conviction of Executive for any criminal act which is a felony or a misdemeanor involving moral turpitude, or (iv) a material breach of the Confidentiality and Invention Agreement referenced in Section 6.1 hereof. Upon any determination by the Company's Board of Directors that Cause exists under clause (ii) of the preceding sentence, the Company shall cause a special meeting of the Board to be called and held at a time mutually convenient to the Board and Executive, but in no event later than ten (10) business days after Executive's receipt of the notice contemplated by clause (ii). Executive shall have the right to appear before such special meeting of the Board with legal 4 counsel of his choosing to refute any determination of Cause specified in such notice, and any termination of Executive's employment by reason of such Cause determination shall not be effective until Executive is afforded such opportunity to appear. Any termination for Cause pursuant to clause (i), (iii) or (iv) of the first sentence of this Section 4.1 shall be made in writing to Executive, which notice shall set forth in detail all acts or omissions upon which the Company is relying for such termination. Upon any termination pursuant to this Section 4.1, Executive shall be entitled to be paid his Base Salary to the date of termination and the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination). 4.2. DISABILITY. Notwithstanding anything contained in this Agreement to the contrary, the Company, by written notice to Executive, shall at all times have the right to terminate this Agreement, and Executive's employment hereunder, if Executive shall, as the result of mental or physical incapacity, illness or disability, fail to perform his duties and responsibilities provided for herein for a period of more than one hundred twenty (120) days in any 12-month period. Upon any termination pursuant to this Section 4.2, Executive shall be entitled to be paid his Base Salary to the date of termination and the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination and the provision of Post-Employment Medical Benefits). 4.3. DEATH. In the event of the death of Executive during the term of his employment hereunder, the Company shall pay to the estate of the deceased Executive an amount equal to the sum of (x) any unpaid amounts of his Base Salary to the date of his death, plus (y) six months of Base Salary, and the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of Executive's death). 4.4. TERMINATION WITHOUT CAUSE. At any time the Company shall have the right to terminate Executive's employment hereunder by written notice to Executive; PROVIDED, HOWEVER, that the Company shall: (i) pay to Executive in a lump sum in cash within 30 days of the effective date of such termination the sum of (x) Executive's annual Base Salary through the date of such termination notice, PLUS (y) the product of (1) the greater of (A) the annual bonus paid or payable by the Company including by reason of deferral, to Executive in respect of the Company's most recent fiscal year, and (B) the "Recent Average Bonus," as hereinafter defined (such greater amount is referred to herein as the "Highest Annual Bonus"), MULTIPLIED BY (2) a fraction, the numerator of which is the number of days in the current fiscal year through the date of such termination notice, and the denominator of which is 365, PLUS (z) 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; (ii) provide the Post-Employment Medical Benefits; and (iii) pay to Executive in a lump sum, in cash within 30 days after the effective date of such termination or 30 days after the effectuation of a "Change of Control" with respect to a Third Party Requested Termination (as hereinafter defined) an amount 5 equal to the product of (A)2.0 (2.75 in the event of (i) any termination pursuant to clause (e) of the following definition of "Good Reason," (ii) any termination of Executive other than for Cause at the request of a third party who has taken steps reasonably calculated to effect a "Change in Control" provided that such a "Change of Control" is effectuated within ninety (90) days after the effective date of such termination (a "Third Party Requested Termination") or (iii) any termination of Executive, other than for Cause, within six months following a "Change in Control"), MULTIPLIED BY (B) the sum of (x) Executive's annual Base Salary as in effect at the effective date of termination, PLUS (y) the Highest Annual Bonus (the "Termination Payment"). The Company shall be deemed to have terminated Executive's employment pursuant to this Section 4.4 if such employment is terminated (i) by the Company without Cause, or (ii) by Executive voluntarily for "Good Reason," as hereinafter defined. For purposes of this Agreement, (i) "Recent Average Bonus" means the average annual bonus paid or payable by the Company, including by reason of deferral, to Executive in respect of the three fiscal years immediately preceding the fiscal year in which Executive's employment termination occurs, and (ii) "Good Reason" means: (a) the assignment to Executive of any duties inconsistent in any respect with Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 1.2 of this Agreement, or any other action by the Company, which results in a significant diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company within ten (10) business days after receipt of notice thereof given by Executive; (b) any failure by the Company to comply with any of the provisions of Section 2, Section 3 or Section 7 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (c) the Company's requiring Executive to be based at any office or location other than Miami-Dade County or Broward County, Florida, except for travel reasonably required in the performance of Executive's responsibilities; (d) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement; or (e) any voluntary termination by Executive during the six-month period following the effective date of any "Change in Control." 5. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in Control" shall mean: (a) The acquisition (other than by or from the Company), at any time after the date hereof, by any person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act"), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either the then outstanding shares of common stock or the combined voting power of the 6 Company's then outstanding voting securities entitled to vote generally in the election of directors; or (b) The six (6) individuals who, after the appointment of Executive as a director pursuant to Section 7 hereof, constitute the Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or (c) Approval by the shareholders of the Company of (A) a reorganization, merger or consolidation with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 51% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, (B) a liquidation or dissolution of the Company, or (C) the sale of all or substantially all of the assets of the Company, unless the approved reorganization, merger, consolidation, liquidation, dissolution or sale is subsequently abandoned. (d) The approval by the Board of a distribution (or series of distributions) of assets representing more than 50% of the Company's current assets. 6. RESTRICTIVE COVENANTS. 6.1. CONFIDENTIALITY. Executive agrees to comply with the Company's Confidentiality and Invention Agreement heretofore executed by him. 6.2. NONSOLICITATION OF EMPLOYEES. While employed by the Company and for a period of twenty-four (24) months thereafter, Executive shall not directly or indirectly, for himself or for any other person, firm, corporation, partnership, association or other entity, attempt to employ or enter into any contractual arrangement with any employee or former employee of the Company, unless such employee or former employee has not been employed by the Company for a period in excess of six months. 6.3. NON-COMPETITION. While employed by the Company and for a period of twenty-four (24) months thereafter, Executive shall not, directly or indirectly, whether as principal, agent, shareholder (except as set forth below) or in any other capacity, whether or not compensation is received, engage or participate in any activity for, be employed by, assist or have an equity interest in (other than as a passive investor of no more than ten percent (10%) with no involvement in the management or conduct of the affairs of business of such entity) any business or other entity which is or plans to develop, manufacture, market or sell any pharmaceutical product designed to compete directly with the transdermal/transoral topical or other products of the Company and its subsidiaries which are under active development or are manufactured, marketed or sold or other businesses in which the Company is engaged during the 7 term of Executive's employment hereunder. Executive acknowledges that the provisions of this Section 6.3 are reasonably necessary for the purposes of protecting the Company's legitimate business interests and goodwill. It is accordingly the intention of the parties that this Section 6.3 be enforceable to the fullest extent permissible under applicable law. Executive agrees, however, that in the event any restriction or limitation of this Section 6.3, or any portion thereof, shall be declared or held to be invalid or unenforceable by a court of competent jurisdiction, then such restriction or limitation shall be deemed amended to substitute or modify it, as either or both may be necessary, to render it valid and enforceable. 6.4. INJUNCTION. It is recognized and hereby acknowledged by the parties hereto that a breach by Executive of any of the covenants contained in Section 6.2 or 6.3 of this Agreement will cause irreparable injury to the Company's legitimate business interests and goodwill. As a result, Executive recognizes and hereby acknowledges that the Company shall be entitled (without the posting of bond or security or the proving of actual damages) to an injunction from any court of competent jurisdiction enjoining and restraining any violation of any or all of the covenants contained in Section 6 of this Agreement by Executive or any of his affiliates, associates, partners or agents, either directly or indirectly, and that such right to injunction shall be cumulative and in addition to whatever other remedies the Company may possess. 7. ELECTION OF EXECUTIVE AS DIRECTOR. For so long as Executive serves as an employee of the Company, the Company shall cause the nomination of Executive as a director of the Company at each shareholder meeting at which election of directors is considered. 8. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. 9. NOTICES: Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered by hand or when deposited in the United States mail, by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: Noven Pharmaceuticals, Inc. 11960 S.W. 144th Street Miami, Florida 33186 Attention: Chairman of Compensation and Stock Option Committee If to Executive: Robert C. Strauss 760 San Bruno Coral Gables, Florida 33146 With a copy to: Greenberg Traurig, LLP 2375 E. Camelback Road, Suite 700 Phoenix, Arizona 85016 Attention: Bruce E. Macdonough or to such other addresses as either party hereto may from time to time give notice of to the other in the aforesaid manner. 8 10. SUCCESSORS. (a) This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's legal representatives. (b) This Agreement shall inure to the benefit of, be enforceable by and be binding upon the Company's successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise. 11. SEVERABILITY. The invalidity of any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall not affect the enforceability of the remaining portions of this Agreement or any part thereof, all of which are inserted conditionally on their being valid in law, and, in the event that any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall be declared invalid, this Agreement shall be construed as if such invalid word or words, phrase or phrases, sentence or sentences, clause or clauses, or section or sections had not been inserted. If such invalidity is caused by length of time or size of area, or both, the otherwise invalid provision will be considered to be reduced to a period or area which would cure such invalidity. 12. WAIVERS. The waiver by either party hereto of a breach or violation of any term or provision of this Agreement shall not operate nor be construed as a waiver of any subsequent breach or violation. 13. DAMAGES. Nothing contained herein shall be construed to prevent the Company or Executive from seeking and recovering from the other damages sustained by either or both of them as a result of its or his breach of any term or provision of this Agreement. 14. NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any person (other than the parties hereto and, in the case of Executive, his heirs, personal representative(s) and/or legal representative) any rights or remedies under or by reason of this Agreement. 15. FULL SETTLEMENT. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others (it being agreed that nothing herein shall require any severance or other payment following a proper termination of Executive's employment for Cause). In no event shall Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement. 9 16. 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, distribution or other action 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 16) (each a "Payment"), would be subject to an excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Executive with respect to any such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall make a payment to the Executive (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any Excise Tax) imposed upon the Gross-Up Payment, the Executive retains (or has had paid to the Internal Revenue Service on his behalf) an amount of the Gross-Up Payment equal to the sum of (x) the Excise Tax imposed upon the Payments, PLUS (y) the product of (i) any deductions disallowed because of the inclusion of the Gross-Up Payment in the Executive's adjusted gross income, MULTIPLIED BY (ii) the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. (b) Subject to the provisions of paragraph (c) of this Section 16, all determinations required to be made under this Section 16 (including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment, and the assumptions to be utilized in arriving at such determination) shall be made by the Company's independent public accountants (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 applicable Change of Control, the Executive shall appoint (with the consent of the Company, which consent shall not be unreasonably withheld or delayed) 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 16, 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 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 16 and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount 10 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 he 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 16(c), the Company shall control all proceedings taken in connection with such contest and, at its reasonable option, may pursue or forego 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 reasonably 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 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 11 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 16(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 16(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 16(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. 17. REIMBURSEMENT OF LEGAL EXPENSES. The Company shall promptly reimburse Executive for up to $5,000 of all reasonable legal fees incurred by Executive in connection with the preparation, negotiation and execution of this Agreement and ancillary documents. 18. DISPUTE RESOLUTION. If the parties should have a material dispute arising out of or relating to this Agreement or the parties' respective rights and duties hereunder, then the parties will resolve such dispute in the following manner: (i) any party may at any time deliver to the other a written dispute notice setting forth a brief description of the issue for which such notice initiates the dispute resolution mechanism contemplated by this Section 18, (ii) during the thirty (30) day period following the delivery of the notice described in Section 18(i) above, appropriate representatives of the various parties will meet and seek to resolve the disputed issue through negotiation, (iii) if representatives of the parties are unable to resolve the disputed issue through negotiation, then within ten (10) days after the period described in Section 18(ii) above, the parties will refer the issue (to the exclusion of a court of law) to final and binding arbitration in Miami, Florida, regardless of principles of conflicts laws. In any arbitration pursuant to this Agreement, (i) the AAA Commercial Arbitration Rules and AAA Optional Rules for Emergency Measures of Protection shall apply to the proceedings and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof, (ii) discovery shall be allowed and governed by the Florida Code of Civil Procedure, and (iii) the award or decision shall be rendered by a majority of the members of a Board of Arbitration consisting of three (3) members, one of whom shall be appointed by each of the respective parties and the third of whom shall be the chairman of the panel and be appointed by mutual agreement of said two party-appointed arbitrators. In the event of failure of said two arbitrators to agree within thirty (30) days after the commencement of the arbitration proceeding upon the appointment of the third arbitrator, the third arbitrator shall be appointed by the AAA in accordance with the Rules. In the event that either party shall fail to appoint an arbitrator within ten (10) days after the commencement of the arbitration proceedings, such arbitrator and the third arbitrator shall be appointed by the AAA in accordance with the Rules. Nothing set forth above shall be interpreted to prevent the parties from agreeing in writing to submit any dispute to a single arbitrator in lieu of a three (3) member Board of Arbitration. Upon the completion of the selection of the Board of Arbitration (or if the parties agree otherwise in writing, a single arbitrator), an award or decision shall be rendered within no more than thirty (30) days. 12 Notwithstanding the foregoing, the request by either party for preliminary or permanent injunctive relief, whether prohibitive or mandatory, shall not be subject to arbitration and may be adjudicated only by the courts of the State of Florida. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR PROCEEDING RELATING TO OR ARISING OUT OF THIS AGREEMENT, OR ANY TRANSACTION OR CONDUCT IN CONNECTION HEREWITH, IS WAIVED. 19. EXISTING AGREEMENT. The Existing Agreement is hereby superceded by this Agreement; PROVIDED, HOWEVER, that nothing herein shall adversely effect (i) the compensation, stock options and other benefits heretofore paid, granted or otherwise provided by the Company to Executive prior to the date hereof, or (ii) the Company's existing contractual and other indemnification obligations owed to Executive. 13 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. COMPANY: NOVEN PHARMACEUTICALS, INC. By: /s/ Jeffrey F. Eisenberg ------------------------------------------ Jeffrey F. Eisenberg, Vice President - Strategic Alliances, General Counsel and Corporate Secretary EXECUTIVE: /s/ Robert C. Strauss ---------------------------------------------- ROBERT C. STRAUSS 14 EX-31.1 5 g85728exv31w1.txt EX-31.1 CEO CERTIFICATION PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATIONS Certification of Principal Executive Officer I, Robert C. Strauss, President, Chief Executive Officer and Chairman of the Board of Noven Pharmaceuticals, Inc., certify that: 1) I have reviewed this quarterly report on Form 10-Q of Noven Pharmaceuticals, Inc.; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Robert C. Strauss - ------------------------------------------------------------------- Name: Robert C. Strauss Title: President, Chief Executive Officer and Chairman of the Board Date: November 13, 2003 35 EX-31.2 6 g85728exv31w2.txt EX-31.2 CFO CERTIFICATION PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATIONS Certification of Principal Financial Officer I, Diane M. Barrett, Vice President and Chief Financial Officer of Noven Pharmaceuticals, Inc., certify that: 1) I have reviewed this quarterly report on Form 10-Q of Noven Pharmaceuticals, Inc.; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Diane M. Barrett - ------------------------------------------------- Name: Diane M. Barrett Title: Vice President and Chief Financial Officer Date: November 13, 2003 36 EX-32.1 7 g85728exv32w1.txt EX-32.1 CEO CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT 32.1 Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Form 10-Q of Noven Pharmaceuticals, Inc. ("Noven") for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert C. Strauss, President, Chief Executive Officer and Chairman of the Board of Noven, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Noven. /s/ Robert C. Strauss - ------------------------------------------------------------------- Name: Robert C. Strauss Title: President, Chief Executive Officer and Chairman of the Board Date: November 13, 2003 A signed original of this written statement required by Section 906 has been provided to Noven Pharmaceuticals, Inc. and will be retained by Noven Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 37 EX-32.2 8 g85728exv32w2.txt EX-32.2 CFO CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT 32.2 Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Form 10-Q of Noven Pharmaceuticals, Inc. ("Noven") for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Diane M. Barrett, Vice President and Chief Financial Officer of Noven, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Noven. /s/ Diane M. Barrett - ------------------------------------------------- Name: Diane M. Barrett Title: Vice President and Chief Financial Officer Date: November 13, 2003 A signed original of this written statement required by Section 906 has been provided to Noven Pharmaceuticals, Inc. and will be retained by Noven Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 38 -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.1

                                                                    EXHIBIT 10.1


                                November 5, 2003



Shire US Inc.
One Riverfront Place
Newport, Kentucky  41071
Attention: William A. Nuerge

         RE:      TRANSACTION AGREEMENT, DATED AS OF FEBRUARY 26, 2003, BY AND
                  AMONG NOVEN PHARMACEUTICALS, INC., SHIRE US INC. AND SHIRE
                  PHARMACEUTICALS GROUP PLC (THE "TRANSACTION AGREEMENT")

Dear Bill:

         This letter agreement (together with the Exhibits hereto, this
"Agreement") sets forth the mutual agreement and understanding of Noven
Pharmaceuticals, Inc. ("Noven") and Shire US Inc. ("Shire US"), acting on behalf
of itself and its affiliate Shire Pharmaceuticals Ireland Limited ("Shire
Ireland" and, together with Shire US, "Shire") with respect to Shire's
performance of a product study of Noven's transdermal methylphenidate drug
delivery system (the "Product"), for which New Drug Application 21-514 (the
"Product NDA") is currently pending. Capitalized terms used and not defined in
this Agreement shall have the meanings set forth in the Transaction Agreement.

         The parties acknowledge the following background facts. The closing of
the transactions contemplated by the Transaction Agreement took place on April
7, 2003, at which time Noven and Shire Ireland entered into a license agreement
(the "License Agreement") for the license of certain intellectual property of
Noven to Shire Ireland for the purpose of the development and sale of the
Product by Shire Ireland, as well as a Toll Conversion and Supply Agreement (the
"Toll Conversion and Supply Agreement") pursuant to which Noven agreed to
manufacture the Product for Shire Ireland. The Transaction Agreement provides
that upon receipt of Regulatory Approval of the Product by the FDA, the Product
NDA, along with related regulatory materials, will be transferred to Shire US.

         On April 25, 2003, Noven received a letter from the FDA notifying Noven
that the Product NDA was "not approvable" under Section 505(d) of the FDC Act
(the "FDA Notice"). Since Noven's receipt of the FDA Notice, Noven and Shire
have cooperated in good faith in exploring various ways in which Regulatory
Approval of the Product NDA may be obtained despite the FDA Notice.

         The parties hereby agree that the study protocol synopsis attached as
EXHIBIT A hereto, which shall serve as a preliminary outline for a finalized
protocol (as such finalized protocol may be subsequently amended or supplemented
as contemplated herein, the "Protocol"), reflects the agreement of the parties
regarding the terms of a pivotal controlled study of the Product, which





study shall be followed by a six (6) month open-label study of the Product
pursuant to a protocol to be agreed upon between the parties (such studies
together constituting the "Product Study"), which Product Study shall be
conducted by Shire in accordance with the terms and conditions set forth herein.
Shire agrees to submit the Protocol to the FDA for review as soon as practicable
following the date of this Agreement. Shire further agrees to use reasonable
efforts to commence the Product Study as soon as practicable, and in any event
within four (4) months, following the date of the FDA's approval of the
Protocol; provided that Noven has fulfilled its obligations with regard to
Clinical Supplies as set forth below. As soon as practicable prior to the
commencement of the open-label study, Shire shall submit to Noven the proposed
protocol for such study, which protocol shall be agreed upon by the parties in
good faith. The Product Study shall be designed and managed by Shire, performed
in accordance with the Protocol and conducted by the individuals listed in
EXHIBIT B hereto.

         Any material deviation from the Protocol prior to the date of
commencement of the Product Study shall require the prior written approval of
Noven. Any material deviation from the Protocol after the commencement of the
Product Study shall be made in accordance with Shire SOPs; PROVIDED, that Shire
shall provide at least three (3) days written notice of any such proposed
deviation to Noven, during which time Noven shall have the opportunity to submit
an objection to such deviation. In the event that Noven does not object within
such three (3) day period, the deviation proposed by Shire shall automatically
take effect. In the event that Noven does object to any such proposed deviation,
Shire shall have the option to implement such deviation notwithstanding Noven's
objection, subject to Shire's indemnification obligation as contemplated below.
Shire agrees to provide monthly reports to Noven during the performance of the
Product Study regarding the activities undertaken to date and the status of the
Product Study.

         Noven shall (a) reimburse Shire for all of Shire's reasonable
out-of-pocket expenses actually incurred by Shire and paid to a third party in
connection with the Product Study including, without limitation except as
otherwise contemplated below, costs related to contract research organizations,
laboratory services, document control, protocol development, investigator
meetings, study conduct and close out, drug safety monitoring and reporting,
data retrieval and management, statistical analysis and reporting, investigator
grants, expenses and preparation and storage and distribution of study
materials, and (b) absorb all costs with respect to the manufacture by Noven of
the Product for the Product Study including, without limitation, the cost of the
active ingredient and all inactive ingredients of the Product, manufacturing
costs, testing, quality-related costs, packaging and labeling costs, shipment,
delivery, storage and handling costs and costs of insurance for the Product;
PROVIDED HOWEVER, that notwithstanding the foregoing, Noven shall have no
obligation to pay or reimburse Shire for (i) Shire's creation, design,
development, implementation, management, monitoring or documentation of the
Product Study which are not performed by a third party or any similar internal
costs of Shire associated with the Product Study, (ii) any labor or other costs
related to Shire's employees, or (iii) any costs or expenses incurred by Shire
in connection with executing this Agreement (including without limitation
attorneys' fees and expenses); and PROVIDED FURTHER, that the aggregate costs
and expenses to be paid to Shire under this Agreement shall not exceed
$10,900,000 (plus the costs actually incurred by Shire for any API used in
Clinical Supplies) without the prior written approval of Noven (it being
understood that, except for its indemnification obligations set forth



                                       2


herein and any obligations undertaken by Noven directly, all such costs shall be
paid directly to Shire and that Noven shall have no liability to any third party
pursuant to this Agreement).

         Noven shall defend, indemnify and hold harmless Shire and its
Affiliates and each of their respective officers, directors, agents, employees
and shareholders (collectively "Shire Indemnitees") from and against any all
Damages which Shire Indemnitees may incur or suffer arising out of the Product
Study or arising out of Noven's breach of the terms hereof, except to the extent
that those Damages arise out of (i) any material deviation from the Protocol
after commencement of the Product Study to which Noven shall have submitted an
objection during the three (3) day period contemplated above, or (ii) the
misconduct or negligence of, or a violation of any Applicable Law by, Shire or
Shire Indemnitees; PROVIDED, that Noven shall have no obligation to indemnify
Shire for any Damages incurred by Shire in connection with Shire's
indemnification of third parties with respect to performance of the Product
Study, other than Shire's indemnification of third parties for Damages relating
to the Product. Shire shall defend, indemnify and hold harmless Noven and its
Affiliates and each of their respective officers, directors, agents, employees
and shareholders (collectively "Noven Indemnitees") from and against any and all
Damages which Noven Indemnitees may incur or suffer arising out of (i) any
material deviation from the Protocol after commencement of the Product Study to
which Noven shall have submitted an objection during the three (3) day period
contemplated above, (ii) Shire's breach of the terms hereof, or (iii) Shire's
misconduct or negligence in the conduct of the Product Study or a violation of
any Applicable Law by Shire or Shire Indemnitees.

         Shire agrees that in connection with its performance of the Product
Study, including without limitation the negotiation of agreements or other
arrangements with third parties in connection therewith, Shire shall conduct the
Product Study as if Shire were solely responsible for all costs and expenses, as
well as any potential liabilities or obligations, associated with the Product
Study.

         Shire shall submit invoices to Noven monthly to the Finance Contact
listed below, together with supporting documentation for each expense for which
Shire seeks reimbursement; PROVIDED that Shire shall review each third party
invoice for accuracy before submitting it to Noven. Shire's review shall be
conducted as if Shire were solely responsible for payment of the invoice. Noven
shall pay each invoice received from Shire within thirty (30) days of receipt.
In the event that Noven breaches any of its payment obligations set forth
herein, in addition to any rights or remedies that Shire may have at law or
under the Transaction Agreement, Shire may in its sole discretion complete the
Product Study at Shire's cost and may seek reimbursement from Noven for any
costs and expenses incurred by Shire and contemplated to be paid to Shire or
absorbed by Noven in accordance with this Agreement; PROVIDED, that the failure
of Noven to perform its payment obligations hereunder shall not give rise to a
right of termination of any party (not otherwise existing) under any of the
Transaction Documents.

                  Accounts Payable
                  Noven Pharmaceuticals, Inc.
                  11960 SW 144th Street
                  Miami, Florida  33186





                                       3


         Shire shall submit to Noven orders for supply of the Product and
placebos necessary for the Product Study (the "Clinical Supplies"). The
manufacture of Clinical Supplies shall be pursuant to and in accordance with the
terms and conditions set forth in Section 5.01 of the Toll Conversion and Supply
Agreement. Notwithstanding anything to the contrary in the Toll Conversion and
Supply Agreement, (i) Noven agrees that it has sufficient quantities of Active
Ingredient on hand to manufacture all Clinical Supplies, (ii) with regard to
quality releases of Clinical Supplies, Noven shall provide a release of bulk,
packaged Clinical Supplies to Shire, Shire shall arrange for the labeling of
such bulk Clinical Supplies and Shire shall release the final Clinical Supplies
for use in the Product Study and (iii) Noven shall conduct any and all testing
necessary for the manufacture, packaging or release of Clinical Supplies.

         The parties covenant and agree that, at the conclusion of the Product
Study, if Shire does not exercise its termination option set forth in the next
paragraph, each party shall cooperate in good faith with the other to submit the
results of the Product Study, along with the Product NDA, to the FDA for the
purpose of seeking Regulatory Approval of the Product NDA, and shall continue to
cooperate in good faith with each other and with the FDA to pursue diligently
Regulatory Approval of the Product until the earlier of (i) receipt of
Regulatory Approval, (ii) receipt of a Non-Approval Notice, or (iii) such time
as the parties shall reach mutual agreement to abandon pursuit of Regulatory
Approval ("Abandonment"), and that neither party shall have the right to
terminate this Agreement without the prior written consent of the other party
prior to such time. With respect to the Product Study, and except as otherwise
contemplated in the following paragraph, Noven shall appoint Shire as the agent
for the Product IND and Shire shall assume a leadership role with respect to all
registration strategies, communication, correspondence and meeting attendance
with the FDA; PROVIDED, that Noven shall at all times remain the sponsor of the
Product IND and the Product NDA and shall be represented in all such
communications, correspondence and meetings with the FDA.

         In the event that after the unblinding of the data from the Product
Study, Shire determines in its reasonable opinion based upon such data that the
submission of the Product Study and the Product NDA to the FDA will not render a
commercially viable Product, Shire shall have the option to terminate this
Agreement, the Transaction Agreement and the other Transaction Documents upon
written notice to Noven; PROVIDED, that all assets purchased by Shire pursuant
to the Transaction Agreement shall thereupon be repurchased by Noven for an
aggregate consideration of $1.00, the License Agreement shall be automatically
terminated and Shire shall forfeit any remedies otherwise available to it under
the Transaction Documents, including without limitation the right to receive
$5,000,000 in consideration for the repurchase of such assets. Shire's option to
terminate this Agreement, the Transaction Agreement and the other Transaction
Documents shall expire sixty (60) days after the unblinding of the data from the
Product Study. In the event Shire shall exercise such right of termination,
Noven shall have the right to make any submission to, and to engage in necessary
correspondence and meetings with, the FDA in an effort to obtain Regulatory
Approval of the Product without the participation or approval of Shire.

         Shire hereby covenants and agrees that from and after the date hereof
and until the termination of this Agreement, whether by (i) receipt of
Regulatory Approval, (ii) receipt of a Non-Approval Notice, (iii) Abandonment or
(iv) Shire's termination of this Agreement in accordance with the foregoing
paragraph (the "Product Study Period"), Shire shall not exercise



                                       4


any right under the Transaction Agreement or any of the other Transaction
Documents, including without limitation Section 9.02(c) of the Transaction
Agreement, to terminate the Transaction Agreement or any of the other
Transaction Documents or to demand that Noven repurchase the assets purchased by
Shire under the Transaction Agreement. To the extent required, the foregoing
constitutes an express waiver of Shire's rights under Section 9.02(c) of the
Transaction Agreement for and during the Product Study Period in accordance with
Section 13.07 of the Transaction Agreement. The parties acknowledge and agree
that except as otherwise contemplated above, Shire is not waiving any rights it
may have under Section 9.02(c) for any period after the conclusion of the
Product Study Period.

         The parties further acknowledge and agree that Shire has no right under
Section 9.02(c) of the Transaction Agreement to demand that Noven repurchase the
assets purchased by Shire under the Transaction Agreement or to terminate the
License Agreement by reason of Noven's receipt of the FDA Notice. The parties
acknowledge and agree that other than with respect to the FDA Notice and except
as otherwise contemplated above, Section 9.02(c)(i) of the Transaction Agreement
remains in full force and effect.

         The parties agree that Section 11.01(a) of the Transaction Agreement is
hereby amended such that the rights of the respective parties to make a claim
for breach of any of the representations or warranties made in the Transaction
Agreement shall survive the date of the first commercial sale of Product for a
period of one year thereafter.

         To the extent required, the parties acknowledge and agree that this
Agreement constitutes an amendment to the Transaction Documents in accordance
with the terms and conditions thereof, and that except as the context of this
Agreement requires to give effect to the intent and purposes hereof, the
Transaction Documents shall remain in full force and effect without any further
amendments or modifications. This Agreement shall be construed in accordance
with and governed by the substantive laws of the State of Delaware, without
giving effect to the conflict of laws principles thereof. This Agreement shall
become binding when any one or more counterparts hereof, individually or in the
aggregate, shall bear the signatures of each of the parties hereto. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original as against the party whose signature appears thereon, but all
of which taken together shall constitute one and the same instrument. Facsimile
signatures of authorized signatories of the parties shall constitute the due
execution and delivery of this Agreement. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their successors and
permitted assigns. Any disputes arising under this Agreement shall be resolved
in accordance with the dispute resolution mechanism provided in the Transaction
Agreement.

                                       Very truly yours,


                                       /s/ Robert C. Strauss
                                       -----------------------------------------
                                       Robert C. Strauss
                                       President, CEO and Chairman





                                       5


ACKNOWLEDGED AND AGREED THIS
5th DAY OF NOVEMBER, 2003:


SHIRE US INC.

/s/ William A. Nuerge
- ----------------------------------
By:    William A. Nuerge
Title: President and CEO




                                       6

EX-10.2

                                                                    EXHIBIT 10.2


                              AMENDED AND RESTATED
                              EMPLOYMENT AGREEMENT


         THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") is made
and entered into as of the 5th day of November, 2003 by and between NOVEN
PHARMACEUTICALS, INC., a Delaware corporation (hereinafter called the
"Company"), and ROBERT C. STRAUSS (hereinafter called the "Executive").

                                    RECITALS

         A. The Board of Directors of the Company (the "Board") recognizes and
desires to assure the Company of Executive's continued employment in an
executive capacity and to compensate him therefor.

         B. Executive is willing to make his services available to the Company
on the terms and conditions hereinafter set forth.

         C. The Company and Executive desire to amend and restate in its
entirety their existing Employment Agreement, dated as of December 12, 1997 (the
"Existing Agreement").

                                    AGREEMENT

         NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties agree as follows:

         1. EMPLOYMENT.

                  1.1. EMPLOYMENT AND TERM. The Company hereby agrees to
continue to employ Executive and Executive hereby agrees to serve the Company,
on the terms and conditions set forth herein, for the period commencing on the
date hereof and expiring on December 31, 2006 (the "Initial Term") unless sooner
terminated as hereinafter set forth; PROVIDED, HOWEVER, that commencing on
January 1, 2007 and each January 1 thereafter, the Initial Term of this
Agreement shall automatically be extended for one additional year unless at
least ninety (90) days prior to such January 1 date, the Company shall have
delivered to Executive or Executive shall have delivered to the Company written
notice that the term of Executive 's employment hereunder will not be extended.

                  1.2. DUTIES OF EXECUTIVE. Executive shall serve as the
President and Chief Executive Officer of the Company and shall have powers and
authority superior to any other officer or employee of the Company or of any
subsidiary of the Company. Subject to the preceding sentence, during the term of
Employment, Executive shall diligently perform all services as may be reasonably
assigned to him by the Board, and shall exercise such power and authority as may
from time to time be delegated to him by the Board. In addition, Executive shall
regularly consult with and provide information to the Chairman of the Board with
respect to the Company's business and affairs. Executive shall be required to
report solely to, and shall be subject solely to the supervision and direction
of the Board or any committee thereof at duly called meetings thereof, and no
other person or group shall be given authority to supervise or





direct Executive in the performance of his duties. Executive shall devote
substantially all his working time and attention to the business and affairs of
the Company (excluding any vacation and sick leave to which Executive is
entitled), render such services to the best of his ability, and use his
reasonable best efforts to promote the interests of the Company. It shall not be
a violation of this Agreement for Executive to (A) serve on corporate, civic or
charitable boards or committees (it being agreed that in no event shall
Executive serve on the board of directors of more than two other corporations
and the acceptance of any new directorship after the date hereof shall be
subject to the consent of the Board, which shall not be unreasonably withheld),
(B) deliver lectures, fulfill speaking engagements or teach at educational
institutions, and (C) manage personal investments, so long as such activities do
not unreasonably interfere with the performance of Executive's responsibilities
as an employee of the Company in accordance with this Agreement. Notwithstanding
the foregoing, it is agreed and acknowledged that Executive presently serves on
the board of directors of four other corporations, and that he shall not be
deemed to be in breach of this Agreement if he reduces the number of such other
directorships he holds to no more than three within twelve months from the date
hereof and two within twenty-four months from the date hereof.

                  1.3. PLACE OF PERFORMANCE. In connection with his employment
by the Company, Executive shall be based at the Company's principal executive
offices except for travel reasonably necessary in connection with the Company's
business. The Company shall not, without the written consent of Executive,
relocate or transfer its principal executive offices outside Dade or Broward
County, Florida.

         2. COMPENSATION.

                  2.1. BASE SALARY. Executive shall receive a base salary at the
annual rate of not less than $522,500 (the "Base Salary") during the term of
this Agreement, with such Base Salary payable in installments consistent with
the Company's normal payroll schedule. The Base Salary shall also be reviewed,
at least annually, for merit increases (if any) and may, by action and in the
discretion of the Board, be increased at any time or from time to time. The Base
Salary, if increased, shall not thereafter be decreased for any reason.

                  2.2. INCENTIVE COMPENSATION. Executive shall be entitled to
receive such bonus payments or incentive compensation as may be determined at
any time or from time to time by the Board (or any authorized committee hereof)
in its discretion. Such potential bonus payments and/or incentive compensation
shall be considered at least annually by the Board (it being agreed that such
consideration shall not create any implication that the Board shall award any
such bonus or incentive compensation). In addition, and without limiting the
generality of the foregoing, (i) Executive shall be entitled to participate in
the Company's 2003 Management Incentive Plan, a copy of which is attached hereto
as EXHIBIT A, as well as all similar short-term management incentive plans that
may be adopted by the Company, the Board and/or the Board's Compensation and
Stock Option Committee (the "Committee") in the future, and (ii) the Committee
shall consider, at least annually and in connection with awards to other Company
executives, stock option and other equity-based incentive awards to Executive
(it being agreed that such consideration shall not create any implication that
the Committee shall award any such options or other equity-based incentive
awards).




                                       2


                  2.3 WITHHOLDING. All payments under this Agreement or
otherwise pursuant to Executive's employment relationship shall be made net of
any applicable withholding taxes or other amounts required to be withheld by
law.

         3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.

                  3.1. EXPENSE REIMBURSEMENT. During the term of Executive's
employment hereunder, the Company, upon the submission of reasonable supporting
documentation by Executive, shall reimburse Executive for all reasonable
expenses actually paid or incurred by Executive in the course of and pursuant to
the business of the Company, including expenses for travel and entertainment.

                  3.2. INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the term
of Executive's employment hereunder, Executive shall be entitled to participate
in all incentive, savings and retirement plans, practices, policies and programs
applicable to other key executives of the Company and its subsidiaries, in each
case comparable to those currently in effect or as subsequently amended. Such
plans, practices, policies and programs, in the aggregate, shall provide
Executive with compensation, benefits and reward opportunities at least as
favorable as the most favorable of such compensation, benefits and reward
opportunities provided at any time hereafter with respect to other key
executives.

                  3.3. WELFARE BENEFIT PLANS. During the term of Executive's
employment hereunder, Executive and Executive's family shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its subsidiaries
(including, without limitation, medical, prescription, dental, disability,
salary continuance, employee life, group life, accidental death and travel
accident insurance plans and programs), at least as favorable as the most
favorable of such plans, practices, policies and programs in effect at any time
hereafter with respect to other key executives. In addition, and without
limiting the generality of the foregoing, (i) at Executive's option, reimburse
Executive for all costs of an annual physical examination, (ii) reimburse
Executive for up to $2,500 of annual financial and tax planning assistance, and
(iii) notwithstanding anything herein to the contrary, during the time period
commencing with the termination of Executive's employment for retirement,
termination without "Cause" (as hereinafter defined) and voluntary termination
with "Good Reason" and ending on Executive's death, the Company shall afford
Executive the opportunity to participate in a Continuation of Medical Benefits
Plan (or similar plan) in the same capacity as that of any other active senior
executive (with the regular employee portion of the premium due and payable by
Executive annually on a pre-paid basis), and upon Executive's death, his spouse
shall be eligible for COBRA benefits as a participant to the extent permitted by
law (the post-employment medical benefits contemplated by this clause (iii) are
referred to herein as the "Post-Employment Medical Benefits"). Notwithstanding
the foregoing, (a) in no event shall the Company, in connection with providing
the Post-Employment Medical Benefits, be required to pay a greater premium than
that paid by it for providing medical benefits for any other employee of the
Company in the same category as Executive (e.g. insurance for husband and wife)
and (b) if the (i) Company's health insurer on the date of termination (the
"Termination Date Health Insurance Provider") does not permit the provision of
Post-Employment Medical Benefits as provided above or (ii) Termination Date
Health Insurance Provider permits the provision of Post-Employment Medical
Benefits and the Company thereafter changes its health insurance provider and
such new



                                       3


provider does not permit the provision of Post-Employment Medical Benefits at
the costs set forth above, then the Company can discharge in full any
obligations for providing Post-Employment Medical Benefits hereunder by paying
Executive a lump sum equal to the Discharge Amount (as hereafter defined). For
purposes hereof, the "Discharge Amount" means the net present value of the
stream of the Company's portion of payments for health premiums for the
estimated balance (the "Balance") of Executive's life which shall be based upon
the premiums being paid by the Company for health insurance benefits or
Post-Employment Medical Benefits, as the case may be, at the time the Company's
obligation to make the Discharge Payment arises. The Balance shall be determined
by an actuary utilized by the Company. The Net Present Value shall be determined
by the Company's independent certified accounting firm utilizing a reasonable
discount factor. The determination of the Balance and the Net Present Value as
provided above shall be final, conclusive and binding on the parties hereto.

                  3.4. WORKING FACILITIES. During the term of Executive's
employment hereunder, the Company shall furnish Executive with an office, a
secretary and such other facilities and services suitable to his position and
adequate for the performance of his duties hereunder.

                  3.5. AUTOMOBILE ALLOWANCE. During the term of Executive's
employment hereunder, the Company shall provide Executive with a non-accountable
automobile allowance of Eight Hundred Fifty Dollars ($850.00) per month, which
amount is intended to compensate Executive for wear and tear and, in addition,
reimburse Executive for all costs of gasoline, oil, repairs, maintenance,
insurance and other expenses incurred by Executive by reason of the use of
Executive's automobile for Company business from time to time.

                  3.6. VACATION. During the Initial Term, Executive shall be
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its subsidiaries as in effect at any
time hereafter with respect to other key executives of the Company and its
subsidiaries; PROVIDED, HOWEVER, that in no event shall Executive be entitled to
less than five weeks paid vacation per year.

         4. TERMINATION.

                  4.1. TERMINATION FOR CAUSE. Notwithstanding anything contained
to the contrary in this Agreement, this Agreement may be terminated by the
Company for Cause. As used in this Agreement, "Cause" shall only mean (i) any
material act or acts of personal dishonesty taken by Executive which is either
(x) at the expense of the Company, or (y) reasonably likely to bring significant
disrepute to the Company, (ii) subject to the following sentences, any violation
by Executive of Executive's material obligations under this Agreement which is
demonstrably willful and deliberate on Executive's part and which is not
remedied within ten business days after receipt of written notice from the
Company, (iii) the conviction of Executive for any criminal act which is a
felony or a misdemeanor involving moral turpitude, or (iv) a material breach of
the Confidentiality and Invention Agreement referenced in Section 6.1 hereof.
Upon any determination by the Company's Board of Directors that Cause exists
under clause (ii) of the preceding sentence, the Company shall cause a special
meeting of the Board to be called and held at a time mutually convenient to the
Board and Executive, but in no event later than ten (10) business days after
Executive's receipt of the notice contemplated by clause (ii). Executive shall
have the right to appear before such special meeting of the Board with legal




                                       4


counsel of his choosing to refute any determination of Cause specified in such
notice, and any termination of Executive's employment by reason of such Cause
determination shall not be effective until Executive is afforded such
opportunity to appear. Any termination for Cause pursuant to clause (i), (iii)
or (iv) of the first sentence of this Section 4.1 shall be made in writing to
Executive, which notice shall set forth in detail all acts or omissions upon
which the Company is relying for such termination. Upon any termination pursuant
to this Section 4.1, Executive shall be entitled to be paid his Base Salary to
the date of termination and the Company shall have no further liability
hereunder (other than for reimbursement for reasonable business expenses
incurred prior to the date of termination).

                  4.2. DISABILITY. Notwithstanding anything contained in this
Agreement to the contrary, the Company, by written notice to Executive, shall at
all times have the right to terminate this Agreement, and Executive's employment
hereunder, if Executive shall, as the result of mental or physical incapacity,
illness or disability, fail to perform his duties and responsibilities provided
for herein for a period of more than one hundred twenty (120) days in any
12-month period. Upon any termination pursuant to this Section 4.2, Executive
shall be entitled to be paid his Base Salary to the date of termination and the
Company shall have no further liability hereunder (other than for reimbursement
for reasonable business expenses incurred prior to the date of termination and
the provision of Post-Employment Medical Benefits).

                  4.3. DEATH. In the event of the death of Executive during the
term of his employment hereunder, the Company shall pay to the estate of the
deceased Executive an amount equal to the sum of (x) any unpaid amounts of his
Base Salary to the date of his death, plus (y) six months of Base Salary, and
the Company shall have no further liability hereunder (other than for
reimbursement for reasonable business expenses incurred prior to the date of
Executive's death).

                  4.4. TERMINATION WITHOUT CAUSE. At any time the Company shall
have the right to terminate Executive's employment hereunder by written notice
to Executive; PROVIDED, HOWEVER, that the Company shall:

                                    (i) pay to Executive in a lump sum in cash
within 30 days of the effective date of such termination the sum of (x)
Executive's annual Base Salary through the date of such termination notice, PLUS
(y) the product of (1) the greater of (A) the annual bonus paid or payable by
the Company including by reason of deferral, to Executive in respect of the
Company's most recent fiscal year, and (B) the "Recent Average Bonus," as
hereinafter defined (such greater amount is referred to herein as the "Highest
Annual Bonus"), MULTIPLIED BY (2) a fraction, the numerator of which is the
number of days in the current fiscal year through the date of such termination
notice, and the denominator of which is 365, PLUS (z) 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;

                                    (ii) provide the Post-Employment Medical
Benefits; and

                                    (iii) pay to Executive in a lump sum, in
cash within 30 days after the effective date of such termination or 30 days
after the effectuation of a "Change of Control" with respect to a Third Party
Requested Termination (as hereinafter defined) an amount



                                       5


equal to the product of (A)2.0 (2.75 in the event of (i) any termination
pursuant to clause (e) of the following definition of "Good Reason," (ii) any
termination of Executive other than for Cause at the request of a third party
who has taken steps reasonably calculated to effect a "Change in Control"
provided that such a "Change of Control" is effectuated within ninety (90) days
after the effective date of such termination (a "Third Party Requested
Termination") or (iii) any termination of Executive, other than for Cause,
within six months following a "Change in Control"), MULTIPLIED BY (B) the sum of
(x) Executive's annual Base Salary as in effect at the effective date of
termination, PLUS (y) the Highest Annual Bonus (the "Termination Payment"). The
Company shall be deemed to have terminated Executive's employment pursuant to
this Section 4.4 if such employment is terminated (i) by the Company without
Cause, or (ii) by Executive voluntarily for "Good Reason," as hereinafter
defined. For purposes of this Agreement, (i) "Recent Average Bonus" means the
average annual bonus paid or payable by the Company, including by reason of
deferral, to Executive in respect of the three fiscal years immediately
preceding the fiscal year in which Executive's employment termination occurs,
and (ii) "Good Reason" means:

                           (a) the assignment to Executive of any duties
inconsistent in any respect with Executive's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 1.2 of this Agreement, or any other
action by the Company, which results in a significant diminution in such
position, authority, duties or responsibilities, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith and which
is remedied by the Company within ten (10) business days after receipt of notice
thereof given by Executive;

                           (b) any failure by the Company to comply with any of
the provisions of Section 2, Section 3 or Section 7 of this Agreement, other
than an isolated, insubstantial and inadvertent failure not occurring in bad
faith and which is remedied by the Company promptly after receipt of notice
thereof given by Executive;

                           (c) the Company's requiring Executive to be based at
any office or location other than Miami-Dade County or Broward County, Florida,
except for travel reasonably required in the performance of Executive's
responsibilities;

                           (d) any failure by the Company to comply with and
satisfy Section 10(c) of this Agreement; or

                           (e) any voluntary termination by Executive during the
six-month period following the effective date of any "Change in Control."

         5. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" shall mean:

                           (a) The acquisition (other than by or from the
Company), at any time after the date hereof, by any person, entity or "group",
within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934 (the "Exchange Act"), of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either the then
outstanding shares of common stock or the combined voting power of the



                                       6


Company's then outstanding voting securities entitled to vote generally in the
election of directors; or

                           (b) The six (6) individuals who, after the
appointment of Executive as a director pursuant to Section 7 hereof, constitute
the Board (as of the date hereof the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any person becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board (other than an
election or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the directors of the Company, as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of
this Agreement, considered as though such person were a member of the Incumbent
Board; or

                           (c) Approval by the shareholders of the Company of
(A) a reorganization, merger or consolidation with respect to which persons who
were the shareholders of the Company immediately prior to such reorganization,
merger or consolidation do not, immediately thereafter, own more than 51% of the
combined voting power entitled to vote generally in the election of directors of
the reorganized, merged or consolidated company's then outstanding voting
securities, (B) a liquidation or dissolution of the Company, or (C) the sale of
all or substantially all of the assets of the Company, unless the approved
reorganization, merger, consolidation, liquidation, dissolution or sale is
subsequently abandoned.

                           (d) The approval by the Board of a distribution (or
series of distributions) of assets representing more than 50% of the Company's
current assets.

         6. RESTRICTIVE COVENANTS.

                  6.1. CONFIDENTIALITY. Executive agrees to comply with the
Company's Confidentiality and Invention Agreement heretofore executed by him.

                  6.2. NONSOLICITATION OF EMPLOYEES. While employed by the
Company and for a period of twenty-four (24) months thereafter, Executive shall
not directly or indirectly, for himself or for any other person, firm,
corporation, partnership, association or other entity, attempt to employ or
enter into any contractual arrangement with any employee or former employee of
the Company, unless such employee or former employee has not been employed by
the Company for a period in excess of six months.

                  6.3. NON-COMPETITION. While employed by the Company and for a
period of twenty-four (24) months thereafter, Executive shall not, directly or
indirectly, whether as principal, agent, shareholder (except as set forth below)
or in any other capacity, whether or not compensation is received, engage or
participate in any activity for, be employed by, assist or have an equity
interest in (other than as a passive investor of no more than ten percent (10%)
with no involvement in the management or conduct of the affairs of business of
such entity) any business or other entity which is or plans to develop,
manufacture, market or sell any pharmaceutical product designed to compete
directly with the transdermal/transoral topical or other products of the Company
and its subsidiaries which are under active development or are manufactured,
marketed or sold or other businesses in which the Company is engaged during the



                                       7


term of Executive's employment hereunder. Executive acknowledges that the
provisions of this Section 6.3 are reasonably necessary for the purposes of
protecting the Company's legitimate business interests and goodwill. It is
accordingly the intention of the parties that this Section 6.3 be enforceable to
the fullest extent permissible under applicable law. Executive agrees, however,
that in the event any restriction or limitation of this Section 6.3, or any
portion thereof, shall be declared or held to be invalid or unenforceable by a
court of competent jurisdiction, then such restriction or limitation shall be
deemed amended to substitute or modify it, as either or both may be necessary,
to render it valid and enforceable.

                  6.4. INJUNCTION. It is recognized and hereby acknowledged by
the parties hereto that a breach by Executive of any of the covenants contained
in Section 6.2 or 6.3 of this Agreement will cause irreparable injury to the
Company's legitimate business interests and goodwill. As a result, Executive
recognizes and hereby acknowledges that the Company shall be entitled (without
the posting of bond or security or the proving of actual damages) to an
injunction from any court of competent jurisdiction enjoining and restraining
any violation of any or all of the covenants contained in Section 6 of this
Agreement by Executive or any of his affiliates, associates, partners or agents,
either directly or indirectly, and that such right to injunction shall be
cumulative and in addition to whatever other remedies the Company may possess.

         7. ELECTION OF EXECUTIVE AS DIRECTOR. For so long as Executive serves
as an employee of the Company, the Company shall cause the nomination of
Executive as a director of the Company at each shareholder meeting at which
election of directors is considered.

         8. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida.

         9. NOTICES: Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
delivered by hand or when deposited in the United States mail, by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Company:                  Noven Pharmaceuticals, Inc.
                                    11960 S.W. 144th Street
                                    Miami, Florida  33186
                                    Attention:  Chairman of Compensation and
                                    Stock Option Committee

  If to Executive:                  Robert C. Strauss
                                    760 San Bruno
                                    Coral Gables, Florida 33146

  With a copy to:                   Greenberg Traurig, LLP
                                    2375 E. Camelback Road, Suite 700
                                    Phoenix, Arizona  85016
                                    Attention:  Bruce E. Macdonough

or to such  other  addresses  as either  party  hereto  may from  time to time
give  notice of to the other in the aforesaid manner.




                                       8


         10. SUCCESSORS.

                           (a) This Agreement is personal to Executive and
without the prior written consent of the Company shall not be assignable by
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by Executive's legal
representatives.

                           (b) This Agreement shall inure to the benefit of, be
enforceable by and be binding upon the Company's successors and assigns.

                           (c) The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets which
assumes and agrees to perform this Agreement by operation of law or otherwise.

         11. SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by length of time or size of
area, or both, the otherwise invalid provision will be considered to be reduced
to a period or area which would cure such invalidity.

         12. WAIVERS. The waiver by either party hereto of a breach or violation
of any term or provision of this Agreement shall not operate nor be construed as
a waiver of any subsequent breach or violation.

         13. DAMAGES. Nothing contained herein shall be construed to prevent the
Company or Executive from seeking and recovering from the other damages
sustained by either or both of them as a result of its or his breach of any term
or provision of this Agreement.

         14. NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person
(other than the parties hereto and, in the case of Executive, his heirs,
personal representative(s) and/or legal representative) any rights or remedies
under or by reason of this Agreement.

         15. FULL SETTLEMENT. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against
Executive or others (it being agreed that nothing herein shall require any
severance or other payment following a proper termination of Executive's
employment for Cause). In no event shall Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to Executive under any of the provisions of this Agreement.



                                       9


         16. 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,
distribution or other action 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 16) (each a "Payment"), would be
subject to an excise tax imposed by Section 4999 of the Internal Revenue Code of
1986, as amended (the "Code"), or any interest or penalties are incurred by the
Executive with respect to any such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), the Company shall make a payment to the Executive (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any Excise Tax) imposed upon the Gross-Up Payment, the Executive
retains (or has had paid to the Internal Revenue Service on his behalf) an
amount of the Gross-Up Payment equal to the sum of (x) the Excise Tax imposed
upon the Payments, PLUS (y) the product of (i) any deductions disallowed because
of the inclusion of the Gross-Up Payment in the Executive's adjusted gross
income, MULTIPLIED BY (ii) the highest applicable marginal rate of federal
income taxation for the calendar year in which the Gross-Up Payment is to be
made. For purposes of determining the amount of the Gross-Up Payment, the
Executive shall be deemed to pay federal income taxes at the highest marginal
rates of federal income taxation for the calendar year in which the Gross-Up
Payment is to be made.

                           (b) Subject to the provisions of paragraph (c) of
this Section 16, all determinations required to be made under this Section 16
(including whether and when a Gross-Up Payment is required, the amount of such
Gross-Up Payment, and the assumptions to be utilized in arriving at such
determination) shall be made by the Company's independent public accountants
(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
applicable Change of Control, the Executive shall appoint (with the consent of
the Company, which consent shall not be unreasonably withheld or delayed)
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 16, 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 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 16 and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount



                                       10


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 he 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 16(c), the
Company shall control all proceedings taken in connection with such contest and,
at its reasonable option, may pursue or forego 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
reasonably 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 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



                                       11


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 16(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 16(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 16(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.

         17. REIMBURSEMENT OF LEGAL EXPENSES. The Company shall promptly
reimburse Executive for up to $5,000 of all reasonable legal fees incurred by
Executive in connection with the preparation, negotiation and execution of this
Agreement and ancillary documents.

         18. DISPUTE RESOLUTION. If the parties should have a material
dispute arising out of or relating to this Agreement or the parties' respective
rights and duties hereunder, then the parties will resolve such dispute in the
following manner: (i) any party may at any time deliver to the other a written
dispute notice setting forth a brief description of the issue for which such
notice initiates the dispute resolution mechanism contemplated by this Section
18, (ii) during the thirty (30) day period following the delivery of the notice
described in Section 18(i) above, appropriate representatives of the various
parties will meet and seek to resolve the disputed issue through negotiation,
(iii) if representatives of the parties are unable to resolve the disputed issue
through negotiation, then within ten (10) days after the period described in
Section 18(ii) above, the parties will refer the issue (to the exclusion of a
court of law) to final and binding arbitration in Miami, Florida, regardless of
principles of conflicts laws. In any arbitration pursuant to this Agreement, (i)
the AAA Commercial Arbitration Rules and AAA Optional Rules for Emergency
Measures of Protection shall apply to the proceedings and judgment on the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction
thereof, (ii) discovery shall be allowed and governed by the Florida Code of
Civil Procedure, and (iii) the award or decision shall be rendered by a majority
of the members of a Board of Arbitration consisting of three (3) members, one of
whom shall be appointed by each of the respective parties and the third of whom
shall be the chairman of the panel and be appointed by mutual agreement of said
two party-appointed arbitrators. In the event of failure of said two arbitrators
to agree within thirty (30) days after the commencement of the arbitration
proceeding upon the appointment of the third arbitrator, the third arbitrator
shall be appointed by the AAA in accordance with the Rules. In the event that
either party shall fail to appoint an arbitrator within ten (10) days after the
commencement of the arbitration proceedings, such arbitrator and the third
arbitrator shall be appointed by the AAA in accordance with the Rules. Nothing
set forth above shall be interpreted to prevent the parties from agreeing in
writing to submit any dispute to a single arbitrator in lieu of a three (3)
member Board of Arbitration. Upon the completion of the selection of the Board
of Arbitration (or if the parties agree otherwise in writing, a single
arbitrator), an award or decision shall be rendered within no more than thirty
(30) days.



                                       12


Notwithstanding the foregoing, the request by either party for preliminary or
permanent injunctive relief, whether prohibitive or mandatory, shall not be
subject to arbitration and may be adjudicated only by the courts of the State of
Florida. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR PROCEEDING
RELATING TO OR ARISING OUT OF THIS AGREEMENT, OR ANY TRANSACTION OR CONDUCT IN
CONNECTION HEREWITH, IS WAIVED.

         19. EXISTING AGREEMENT. The Existing Agreement is hereby superceded by
this Agreement; PROVIDED, HOWEVER, that nothing herein shall adversely effect
(i) the compensation, stock options and other benefits heretofore paid, granted
or otherwise provided by the Company to Executive prior to the date hereof, or
(ii) the Company's existing contractual and other indemnification obligations
owed to Executive.





                                       13


         IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.

                                  COMPANY:

                                  NOVEN PHARMACEUTICALS, INC.


                                  By: /s/ Jeffrey F. Eisenberg
                                      ------------------------------------------
                                      Jeffrey F. Eisenberg,
                                      Vice President - Strategic Alliances,
                                      General Counsel and Corporate Secretary



                                  EXECUTIVE:


                                  /s/ Robert C. Strauss
                                  ----------------------------------------------
                                  ROBERT C. STRAUSS











                                       14

EX-31.1

                                                                    EXHIBIT 31.1

                                 CERTIFICATIONS

                  Certification of Principal Executive Officer

I, Robert C. Strauss, President, Chief Executive Officer and Chairman of the
Board of Noven Pharmaceuticals, Inc., certify that:

1) I have reviewed this quarterly report on Form 10-Q of Noven Pharmaceuticals,
Inc.;

2) Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and

5) The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.



/s/ Robert C. Strauss
- -------------------------------------------------------------------
Name:  Robert C. Strauss
Title: President, Chief Executive Officer and Chairman of the Board
Date:  November 13, 2003

                                       35

EX-31.2

                                                                    EXHIBIT 31.2

                                 CERTIFICATIONS

                  Certification of Principal Financial Officer

I, Diane M. Barrett, Vice President and Chief Financial Officer of Noven
Pharmaceuticals, Inc., certify that:

1) I have reviewed this quarterly report on Form 10-Q of Noven Pharmaceuticals,
Inc.;

2) Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and

5) The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.



/s/ Diane M. Barrett
- -------------------------------------------------
Name:  Diane M. Barrett
Title: Vice President and Chief Financial Officer
Date:  November 13, 2003

                                       36

EX-32.1

                                                                    EXHIBIT 32.1

    Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
                 Section 906 of the Sarbanes-Oxley Act of 2002

         In connection with the Form 10-Q of Noven Pharmaceuticals, Inc.
("Noven") for the period ended September 30, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Robert C. Strauss,
President, Chief Executive Officer and Chairman of the Board of Noven, certify,
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:

1)       the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and

2)       the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of Noven.



/s/ Robert C. Strauss
- -------------------------------------------------------------------
Name:  Robert C. Strauss
Title: President, Chief Executive Officer and Chairman of the Board
Date:  November 13, 2003

A signed original of this written statement required by Section 906 has been
provided to Noven Pharmaceuticals, Inc. and will be retained by Noven
Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.

                                       37

EX-32.2

                                                                    EXHIBIT 32.2

    Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
                 Section 906 of the Sarbanes-Oxley Act of 2002

         In connection with the Form 10-Q of Noven Pharmaceuticals, Inc.
("Noven") for the period ended September 30, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Diane M. Barrett,
Vice President and Chief Financial Officer of Noven, certify, pursuant to 18
U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:

1)       the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and

2)       the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of Noven.



/s/ Diane M. Barrett
- -------------------------------------------------
Name:  Diane M. Barrett
Title: Vice President and Chief Financial Officer
Date:  November 13, 2003

A signed original of this written statement required by Section 906 has been
provided to Noven Pharmaceuticals, Inc. and will be retained by Noven
Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.

                                       38