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, 2007

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 o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer x Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

     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, 2007
Common stock $.0001 par value	24,552,198

NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES

INDEX

	Page No.
PART I — FINANCIAL INFORMATION
Item 1 - Unaudited Condensed Consolidated Financial Statements		3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006		3
Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006		4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006		5
Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3 - Quantitative and Qualitative Disclosures About Market Risk		50
Item 4 - Controls and Procedures		50
PART II — OTHER INFORMATION
Item 1 - Legal Proceedings		51
Item 1A - Risk Factors		51
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds		57
Item 5 - Other Information		57
Item 6 - Exhibits		58
SIGNATURES		59
EX-10.3 Asset Purchase Agreement
EX-10.4 Development, License and Supply Agreement
EX-10.5 Contract Manufacturing Agreement
EX-10.6 Manufacturing and Supply Agreement
EX-31.1 Section 302 CEO Certification
EX-31.2 Section 302 CFO Certification
EX-32.1 Section 906 CEO Certification
EX-32.2 Section 906 CFO Certification

Cautionary Factors: Statements in this report that are not descriptions of historical facts are “forward-looking statements” provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. Our actual results, performance and achievements may be materially different from those expressed or implied by such statements and readers should consider the risks and uncertainties associated with our business that are discussed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2006 as supplemented by Part II — Item 1A — “Risk Factors” of the quarterly reports on Form 10-Q filed in 2007, as well as other reports filed from time to time with the Securities and Exchange Commission.

Trademark Information: Vivelle^®, Vivelle-Dot^®, Estradot^® and Menorest are trademarks of Novartis AG or its affiliated companies; CombiPatch^® and Estalis^® are registered trademarks of Vivelle Ventures LLC; Daytrana^™ is a trademark of Shire Pharmaceuticals Ireland Limited; Depakote^® is a registered trademark of Abbott Laboratories or its affiliates; Lithobid^® and Pexeva^® are registered trademarks of JDS Pharmaceuticals, LLC or its affiliates.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

	Three Months						Nine Months
	2007			2006			2007			2006
Revenues:
Product revenues — Novogyne:
Product sales	$	5,801		$	5,273		$	15,974		$	13,990
Royalties		2,100			1,791			5,764			5,138
Total product revenues — Novogyne		7,901			7,064			21,738			19,128
Product revenues — third parties		8,789			5,761			25,620			15,648
Total product revenues		16,690			12,825			47,358			34,776
Contract and license revenues:
Contract		280			44			179			1,112
License		4,845			2,839			12,432			7,559
Contract and license revenues		5,125			2,883			12,611			8,671
Net revenues		21,815			15,708			59,969			43,447
Expenses:
Cost of products sold — Novogyne		4,286			3,702			10,530			10,304
Cost of products sold — third parties		5,525			5,339			17,522			16,764
Total cost of products sold		9,811			9,041			28,052			27,068
Acquired in-process research and development		100,150			—			100,150			—
Research and development		3,649			2,527			10,300			8,899
Selling, general and administrative		11,873			6,010			23,003			16,386
Total expenses		125,483			17,578			161,505			52,353
Loss from operations		(103,668	)		(1,870	)		(101,536	)		(8,906	)
Equity in earnings of Novogyne		10,948			8,234			25,025			19,323
Interest income, net		1,306			1,168			4,751			2,890
Income (loss) before income taxes		(91,414	)		7,532			(71,760	)		13,307
Provision (benefit) for income taxes		(32,377	)		2,501			(25,335	)		4,439
Net income (loss)	$	(59,037	)	$	5,031		$	(46,425	)	$	8,868
Basic earnings (loss) per share	$	(2.38	)	$	0.21		$	(1.87	)	$	0.37
Diluted earnings (loss) per share	$	(2.38	)	$	0.20		$	(1.87	)	$	0.37
Weighted average number of common shares outstanding:
Basic		24,792			23,954			24,787			23,768
Diluted		24,792			24,574			24,787			24,142

The accompanying notes are an integral part of these statements.

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

	September 30,			December 31,
	2007			2006
Assets
Current Assets:
Cash and cash equivalents	$	11,253		$	9,144
Short-term investments available-for-sale, at fair value		61,100			144,455
Accounts receivable, net of allowances		9,818			5,038
Milestone payment receivable — Shire		—			25,000
Accounts receivable — Novogyne, net		6,903			7,693
Inventories		12,717			8,651
Net deferred income tax asset, current portion		9,000			4,400
Prepaid income taxes		4,103			3,416
Prepaid and other current assets		3,066			1,919
		117,960			209,716
Property, plant and equipment, net		36,827			37,501
Other Assets:
Investment in Novogyne		24,664			23,296
Net deferred income tax asset		53,172			8,308
Intangible assets, net		40,326			2,317
Goodwill		14,359			—
Deposits and other assets		697			227
		133,218			34,148
	$	288,005		$	281,365
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses	$	7,159		$	5,184
Accrued compensation and related liabilities		6,271			5,308
Other accrued liabilities		20,508			2,085
Current portion of long-term obligations		3,502			109
Deferred rent credit		88			89
Deferred contract revenues		567			1,527
Deferred license revenues — current portion		19,349			15,084
		57,444			29,386
Long-Term Liabilities:
Long-term obligations, less current portion		8,471			279
Deferred license revenues		82,536			74,188
Deferred contract revenues		7,356			—
Other liabilities		1,227			837
		157,034			104,690
Commitments and Contingencies (Note 16)
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 24,873,943 at September 30, 2007 and 24,661,169 at December 31, 2006		2			2
Additional paid-in capital		116,287			109,912
Retained earnings		19,806			66,761
Treasury stock, at cost - 322,345 shares at September 30, 2007		(5,124	)		—
Common stock held in trust		(800	)		—
Deferred compensation obligation		800			—
		130,971			176,675
	$	288,005		$	281,365

The accompanying notes are an integral part of these statements.

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

	2007			2006
Cash flows from operating activities:
Net income (loss)	$	(46,425	)	$	8,868
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
Depreciation, amortization and certain other noncash items		4,468			3,173
Stock-based compensation expense		3,118			2,358
Acquired in-process research and development expense		100,150			—
Income tax benefits on exercise of stock options		461			2,401
Excess tax deduction from exercise of stock options		(390	)		(1,639	)
Deferred income tax benefit		(49,464	)		(52	)
Recognition of deferred license revenues		(12,432	)		(7,559	)
Equity in earnings of Novogyne		(25,025	)		(19,323	)
Distributions from Novogyne		18,465			17,644
Changes in operating assets and liabilities, net of acquisition:
Increase in accounts receivable, net		(375	)		(3,172	)
Decrease in milestone payment receivable — Shire		25,000			—
Decrease in accounts receivable — Novogyne, net		790			1,129
Increase in inventories		(1,745	)		(273	)
Decrease in prepaid income taxes		4,505			3,902
Increase in prepaid and other current assets		(910	)		(1,124	)
Increase in deposits and other assets		(2	)		(15	)
Decrease in accounts payable and accrued expenses		(4,564	)		(988	)
Decrease in accrued liability — Shire		(419	)		(5,069	)
Decrease in accrued compensation and related liabilities		(509	)		(1,042	)
Increase in other accrued liabilities		11,244			555
Increase in deferred contract revenue, net		6,396			277
Increase in deferred license revenue		25,000			51,000
Increase in other liabilities		419			134
Amounts recoverable from Shire and offset against deferred license revenue related to Daytrana™ approval		45			14
Cash flows provided by operating activities		57,801			51,199
Cash flows from investing activities:
Purchases of property, plant and equipment, net		(2,257	)		(5,823	)
Payments for intangible assets, net		(256	)		(539	)
Acquisition of JDS, net of cash acquired		(130,353	)		—
Purchase of company-owned life insurance		(260	)		(185	)
Purchases of short-term investments		(1,276,473	)		(1,012,385	)
Proceeds from sale of short-term investments		1,359,828			899,775
Cash flows used in investing activities		(49,771	)		(119,157	)
Cash flows from financing activities:
Issuance of common stock from exercise of stock options		2,531			8,080
Purchase of treasury stock		(5,124	)		—
Excess tax benefit from exercise of stock options		390			1,639
Payments under long-term obligations		(3,718	)		(49	)
Cash flows provided by (used in) financing activities		(5,921	)		9,670
Net increase (decrease) in cash and cash equivalents		2,109			(58,288	)
Cash and cash equivalents, beginning of period		9,144			66,964
Cash and cash equivalents, end of period	$	11,253		$	8,676

The accompanying notes are an integral part of these statements.

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NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

1. DESCRIPTION OF BUSINESS:

     Since its incorporation in Delaware in 1987, Noven Pharmaceuticals, Inc. (“Noven”) has been primarily engaged in the research, development, manufacture and marketing of advanced transdermal drug delivery technologies and prescription transdermal products.

     On August 14, 2007 (the “Closing Date”), Noven acquired JDS Pharmaceuticals, LLC (“JDS”), a privately-held specialty pharmaceutical company that currently markets two branded prescription psychiatry products through a targeted sales force and has several products in development. The acquisition of JDS was accounted for under the purchase method of accounting and the results of operations of JDS have been included in the consolidated results of Noven from the Closing Date through September 30, 2007 (see Note 3 — “Acquisition of JDS Pharmaceuticals, LLC”).

     Noven and Novartis Pharmaceuticals Corporation (“Novartis”) entered into a joint venture, Vivelle Ventures LLC (d/b/a Novogyne Pharmaceuticals) (“Novogyne”), effective May 1, 1998, to market and sell women’s prescription healthcare products in the United States and Canada. These products include Noven’s transdermal estrogen delivery systems marketed under the brand names Vivelle^®, Vivelle-Dot^® and 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 Condensed Consolidated Statements of Operations. Noven defers the recognition of 49% of its profit on products sold to Novogyne until the products are sold by Novogyne to third party customers.

2. BASIS OF PRESENTATION:

     In management’s opinion, the accompanying unaudited condensed consolidated financial statements of Noven contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position of Noven, the consolidated results of its operations, and its cash flows for the periods presented. Noven’s business is subject to numerous risks and uncertainties including, but not limited to, those set forth in Part I — Item 1A of Noven’s Annual Report on Form 10-K for the year ended December 31, 2006 (“Form 10-K”), and as supplemented by Part II — Item 1A — “Risk Factors” of the quarterly reports on Form 10-Q filed in 2007. Accordingly, the results of operations and cash flows for the periods presented 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 2007 or for periods thereafter.

     The accompanying unaudited condensed consolidated 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 consolidated 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, as updated and supplemented by the following:

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     SEGMENT INFORMATION:

     With the addition of JDS, Noven’s business is now comprised of two reportable segments: (i) the “Transdermal Segment”, which currently consists of research, development, manufacturing and licensing to partners of transdermal drug delivery technologies and prescription transdermal products, and (ii) the “JDS Segment”, which currently consists of development, marketing, sales and distribution of pharmaceutical products. Noven previously had one reportable segment. In accordance with Statement of Financial Accounting Standards No. 131 (“SFAS No. 131”), Disclosures about Segments of an Enterprise and Related Information, information for earlier periods has been recast. See Note 15 — “Segment Information” for Noven’s segmented financial reporting.

     REVENUE RECOGNITION:

     Substantially all of Noven’s Transdermal Segment product revenues were related to the sale of transdermal product to its licensees, Novogyne, Novartis Pharma AG and its affiliates (“Novartis Pharma”), Shire and sanofi-aventis (“Aventis”) (see Notes 12 and 13). All of Noven’s JDS Segment product revenues relate to the commercial sale of its two FDA-approved products, Lithobid^® and Pexeva^®. Revenues from product sales are recognized when both title and the risks and rewards of ownership have been transferred to the buyer.

     Sales allowances for estimated discounts, rebates, returns, chargebacks and other sales allowances are established by Noven concurrently with the recognition of revenue. Sales allowances are established based upon consideration of a variety of factors, including, but not limited to, prescription data, customers’ inventory reports and other information received from customers and other third parties of product in the distribution channel, customers’ right of return, historical information by product, the number and timing of competitive products approved for sale, both historically and as projected, the estimated size of the market for Noven’s products, current and projected economic and market conditions, anticipated future product pricing, future levels of prescriptions for the products and analyses that are performed. Management believes that the sales allowances are reasonably determinable and are based on the information available at that time to arrive at the best estimate.

     The key assumptions management uses to arrive at its best estimate of sales allowances are its estimates of inventory levels in the distribution channel, future price changes and potential returns, as well as historical information by product. The estimates of prescription data, inventory at customers and in the distribution channel are subject to the inherent limitations of estimates that rely on third party data, as certain third party information may itself rely on estimates, and reflect other limitations. Chargebacks, discounts and allowances for doubtful accounts are estimated based on historical payment experience, historical relationships to revenues and contractual arrangements. Management believes that such estimates are readily determinable due to the limited number of assumptions involved and the consistency of historical experience.

     Estimated rebates and returns involve more subjective judgments and are more complex in nature. Actual product returns, rebates and other sales allowances incurred are dependent upon future events. Management periodically monitors the factors that influence sales allowances and makes adjustments to these provisions when it believes that actual results may differ from established allowances. If conditions in future periods change, revisions to previous estimates may be required, potentially by significant amounts. Changes in the level of provisions for estimated product returns, rebates and other sales allowances will affect revenues.

7

     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.

     Sales allowances for estimated discounts, chargebacks, doubtful accounts and certain rebates are recorded as reductions to accounts receivable. Sales allowances for returns, returns of recalled product, estimated Medicaid, managed care and certain other rebates are recorded as other accrued liabilities. Sales allowances are included in the consolidated balance sheets as of September 30, 2007 and December 31, 2006 as follows:

	September 30,			December 31,
	2007			2006
Accounts receivable, net
Gross receivable	$	10,130		$	5,105
Sales allowances and allowances for doubtful accounts		(312	)		(67	)
	$	9,818		$	5,038
Other accrued liabilities
Sales allowances	$	8,372		$	—
Other accrued liabilities		12,136			2,085
	$	20,508		$	2,085

     Noven believes that its revenue recognition policy is in compliance with the requirements of Securities and Exchange Commission Staff Accounting Bulletin Topic 13, “Revenue Recognition”.

     GOODWILL AND INTANGIBLE ASSETS:

     Intangible assets are stated at cost less accumulated amortization. Amortization is generally recorded by either the pattern in which the economic benefit is expected to be realized or the straight-line method as appropriate. Noven periodically reviews the original estimated useful lives of assets as well as the pattern in which the economic benefit is expected to be realized and makes adjustments when events indicate that the period and the pattern of economic benefit should be adjusted.

     Noven accounts for acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The cost to acquire a business, including directly related transaction costs, is allocated to the underlying net assets of the acquired business in proportion to their respective fair values. Amounts allocated to acquired in-process research and development are expensed at the date of acquisition. Intangible assets are amortized over the expected life of the asset. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact Noven’s results of operations. Fair values and useful lives are determined based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset and projected cash flows.

8

     During the three months ended September 30, 2007 Noven recorded goodwill of $14.4 million. Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives be measured for impairment at least annually or whenever events indicate that there may be an impairment. In order to determine if an impairment exists, Noven compares the reporting unit’s carrying value to the reporting unit’s fair value. If it is determined that the full carrying amount of an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. For purposes of this test, the JDS Segment is considered the reporting unit. Determining the reporting unit’s fair value requires Noven to make estimates on market conditions and operational performance. Any resulting impairment loss could have a material adverse impact on Noven’s financial condition and results of operations. See Note 8 — “Goodwill and Intangible Assets” for additional information.

     ADVERTISING COSTS:

     Advertising costs are expensed as incurred. In addition, Noven’s JDS Segment regularly carries inventory of sample product for distribution in the marketplace. Noven’s policy is to immediately expense samples when the title and risk of loss for the samples transfers to Noven. Samples expense is included in selling, general and administrative expenses.

     SHIPPING AND HANDLING COSTS:

     Noven’s JDS Segment does not charge customers for shipping and handling costs. Shipping and handling costs are included in cost of goods sold and were immaterial for the period from the Closing Date through September 30, 2007.

3. ACQUISITION OF JDS PHARMACEUTICALS, LLC:

     Noven acquired JDS on August 14, 2007 pursuant to the terms of the Agreement and Plan of Merger, dated July 9, 2007 (the “Merger Agreement”), among Noven, Noven Acquisition, LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of Noven (“Merger Sub”), JDS and Satow Associates, LLC, solely in its capacity as representative of the equity holders of JDS (the “Member Representative”). On the Closing Date, Merger Sub merged with and into JDS (the “Merger”), with JDS continuing as the surviving company and as an indirect wholly owned subsidiary of Noven following the Merger.

     The purchase price for the acquisition was $125.0 million cash paid at closing, subject to certain working capital adjustments (the “Merger Consideration”). On the Closing Date, a portion of the Merger Consideration in an amount equal to $10.0 million was placed in an escrow account to be held until December 31, 2008 to satisfy any post-closing indemnity claims by Noven in connection with the Merger Agreement as well as certain expenses incurred by the Member Representative. Any adjustments resulting from these post-closing indemnity claims will effectively modify the consideration paid by Noven and as a result modify goodwill recognized. The Merger Consideration, which Noven funded from the sale of short-term investments, was paid at closing to the Member Representative for the benefit of holders of outstanding equity interests of JDS prior to the Merger.

     The total purchase price for the JDS acquisition consisted of $125.0 million paid at closing, approximately $5.4 million of transaction costs consisting primarily of fees paid for financial advisory, legal, valuation and accounting services, and approximately $0.5 million in connection with non-competition agreements entered into with two executives of JDS in connection with the Merger.

9

     The acquisition of JDS was accounted for under the purchase method of accounting. The purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the Closing Date. The purchase price exceeded the amounts allocated to the tangible and intangible assets acquired and liabilities assumed by approximately $14.4 million, which was classified as goodwill. The primary factors that contributed to a purchase price that resulted in the recognition of goodwill in Noven’s acquisition of JDS are (i) the intellectual capital of the skilled sales, marketing and distribution personnel; and (ii) an organized experienced pharmaceutical sales force that is leveragable, both of which do not meet the criteria for recognition as an asset apart from goodwill. The allocation of purchase price has not been finalized due to the pending completion of the valuation and accordingly is subject to change.

     The following table presents the preliminary allocation of the total purchase price for the acquisition of JDS (amounts in thousands):

Current assets, including cash of $0.6 million	$	7,893
Property and equipment		362
Intangible assets
Acquired in-process research and development expenses		100,150
Identifiable intangible assets		38,547
Goodwill		14,359
Other assets		163
Accrued expenses and other current liabilities		(15,344	)
Long-term obligations assumed		(3,711	)
Contingent milestones assumed		(11,500	)
Total purchase price	$	130,919

Acquired In-Process Research and Development (“IPR&D”) Intellectual Property

     IPR&D is defined by Financial Accounting Standards Board’s (FASB) Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method” (“FIN 4”), as being a development project that has been initiated and achieved material progress but (i) has not yet reached technological feasibility or has not yet reached the appropriate regulatory approval; (ii) has no alternative future use; and (iii) the fair value is estimable with reasonable certainty. As required by FIN 4, the portion of the purchase price allocated to IPR&D of $100.2 million was immediately expensed following the completion of the Merger and is reflected in the Noven’s consolidated statement of operations for the three and nine months ended September 30, 2007.

     A project-by-project valuation using the guidance in SFAS No. 141 and the American Institute of Certified Public Accountants Practice Aid “Assets Acquired in a Business Combination to Be Used In Research and Development Activities: A Focus on Software, Electronic Devices and Pharmaceutical Industries” has been conducted to determine the fair value of JDS’s research and development projects that were in-process, but not yet completed as at the completion of the Merger.

     The fair value of IPR&D has been determined by the income approach using the multi-period excess earnings method. The value of the projects has been based on the present value of probability adjusted incremental cash flows, after the deduction of contributory asset charges for other assets employed (including fixed assets, the assembled workforce and working capital). The probability weightings used to determine IPR&D cash flows ranged from 80% to 90%. The discount used to determine the present value of IPR&D cash flows was approximately 23%.

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     The forecast of future IPR&D cash flows required various assumptions to be made including:

• revenue that is likely to result from IPR&D projects, including estimated number of units to be sold, estimated selling prices, estimated market penetration, estimated market share, estimated year-over-year growth rates over the product life cycles and estimated sales allowances;

• cost of sales for the potential product using historical data, industry data or other sources of market data;

• sales and marketing expenses using historical data, industry data or other market data;

• general and administrative expenses; and

• research and development expenses.

     In addition, Noven considered the following in determining the fair value of IPR&D:

• the project’s stage of completion;

• the costs incurred to date;

• the projected costs to complete the IPR&D projects;

• the contribution, if any, of the acquired identifiable intangible assets;

• the projected launch date of the products under development;

• the estimated life of the products under development; and

• the probability of success of launching a commercially viable product.

     To the extent that an IPR&D project is expected to utilize the acquired identified intangible assets, the value of the IPR&D project has been reduced to reflect this utilization.

Identifiable Intangible Assets

     The identifiable intangible assets acquired are attributable to the following categories: (dollar amounts in thousands):

			Asset life
	Fair Value		years(1)
Intellectual Property — approved products
Pexeva®	$	33,040	10
Lithobid®		4,750	6
		37,790
Non-competition agreements		530	2 - 3
Favorable lease		227	10 months
	$	38,547

⁽¹⁾ Asset lives represent the economic period of benefit over which management believes the asset will contribute to the future cash flows of Noven.

Intellectual Property — approved products

     The fair value of the intellectual property rights (including technical processes and institutional understanding) associated with JDS’s products approved by the FDA has been determined by the income approach using the multi-period excess earnings method. Using the multi-period excess earnings method, the approved products’ intellectual property fair value

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has been based on the present value of the incremental after-tax cash flows attributable to the asset, after the deduction of contributory asset charges for other assets employed (including fixed assets, the assembled workforce and working capital). The forecast of future cash flows for approved products requires various assumptions as discussed in “Acquired In-Process Research and Development (“IPR&D”) Intellectual Property” above.

     The valuations of IPR&D intellectual property and identifiable intangible assets are based on information available at the time of the acquisition and the expectations and assumptions that (i) have been deemed reasonable by Noven’s management; and (ii) would be available to and made by a market participant. No assurance can be given that the underlying assumptions or events incorporated into the valuations of such assets will occur as projected. For these reasons, among others, the actual cash flows may vary materially from forecasted future cash flows.

Non-competition agreements

     In accordance with SFAS No. 141, the fair value of non-competition agreements entered into in connection with the Merger was recorded as an intangible asset and is being amortized on a straight-line basis over a period of two to three years, which is the expected period of benefit.

Favorable Lease

     In accordance with SFAS No. 141, the fair value of a favorable lease contract was recorded as an intangible asset and is being amortized over a period of approximately 10 months, which is the period of expected benefit.

Long-term liabilities assumed

     Noven assumed a long-term obligation in the Merger and, in accordance with SFAS No. 141 and EITF Issue No. 98-1, “Valuation of Debt Assumed in a Purchase Business Combination”, this liability was assigned an estimated fair value of $3.7 million based on the present value of the estimated future cash flows at the date of acquisition. The long-term obligation was paid in full by Noven by October 2007.

     Noven also assumed approximately $11.5 million in purchase price contingent sales milestones related to JDS’s acquisition of Pexeva^® from Synthon Pharmaceuticals, Inc. As of the acquisition date, Noven determined that it was probable that these contingent sales milestones would be paid. Therefore, in accordance with SFAS No. 141, the contingent sales milestones were recorded as liabilities of $11.5 million. The contingent sales milestones consist of the following:

• $1.0 million milestone payable when annual net sales of Pexeva^® equal or exceed $7.0 million but are less than $8.0 million in each of 2007 or 2008, which milestone is increased to $2.0 million if annual net sales exceed $8.0 million in each of 2007 or 2008. Pexeva^® net sales exceeded the $8 million threshold for the 2007 Period.

• $1.25 million milestone payable for each of the first two years when annual net sales of Pexeva^® equal or exceed $10.0 million from 2007 to 2017. Pexeva^® net sales exceeded this threshold for the 2007 Period.

• $5.0 million milestone payable in the first year that annual net sales of Pexeva^® (or any paroxetine mesylate product) equal or exceed $30.0 million from 2007 through 2017.

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Supplemental disclosure of pro forma information

     The following represents the pro forma results of the ongoing operations for Noven and JDS as though the acquisition of JDS had occurred at the beginning of each of the three and nine month periods ended September 30, 2007 and 2006. The pro forma financial information for these periods includes the non-recurring adjustment of $100.2 million for IPR&D expense for the nine months ended September 30, 2006. The pro forma information is not necessarily indicative of the results that would have resulted had the acquisition occurred at the beginning of the periods presented, nor is it necessarily indicative of future results. The pro forma information is as follows:

	Three Months				Nine Months
	2007		2006		2007		2006
	(amounts in thousands, except per share data)
Net revenue	$	25,247	$	19,820	$	74,699	$	56,191
Net income (loss)		4,835		2,281		7,197		(64,574	)
Net earnings (loss) per share (Basic)		0.20		0.10		0.29		(2.72	)
Net earnings (loss) per share (Diluted)		0.19		0.09		0.28		(2.72	)

4. RECLASSIFICATIONS:

     Certain reclassifications have been made to the prior period’s balance sheet and statement of cash flows to conform to the current period’s presentation.

5. CASH FLOW INFORMATION:

Income Tax and Interest Payments

     Cash payments for income taxes, net of refunds, were $16.2 million and $0.8 million for the nine months ended September 30, 2007 and 2006, respectively. Cash payments for interest were not material for the nine months ended September 30, 2007 and 2006.

Non-cash Operating Activities

     In 2002, the State of New Jersey enacted legislation that requires Novogyne to remit estimated state income tax payments on behalf of its owners, Noven and Novartis. Through September 30, 2007 and in 2006, Novogyne paid $5.2 million and $2.2 million, respectively, to the New Jersey Department of Revenue, representing Noven’s portion of Novogyne’s estimated state income tax payment. These payments were deemed a distribution to Noven from Novogyne.

     On the Closing Date, Noven entered into a non-competition agreement for $0.3 million with an executive of JDS which was paid by Noven’s grant of 44,297 stock-settled appreciation rights (“SSARs”) and was recorded as an intangible asset.

Non-cash Investing Activities

     During the nine months ended September 30, 2007, Noven entered into a capital lease obligation of $0.1 million for new equipment.

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6. RECENT ACCOUNTING PRONOUNCEMENTS:

     In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value and applies to all entities, including not-for-profit organizations. Most of the provisions of this statement apply only to entities that elect the fair value option. However, the amendment to FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities with available-for-sale and trading securities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements.” Noven is currently assessing the impact of adopting SFAS 159 and the impact it may have on Noven’s results of operations and financial condition.

     In June 2007, the FASB’s Emerging Issue Task Force (“EITF”) issued EITF Issue No. 07-03, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF 07-03”). This EITF requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. Entities should continue to evaluate whether they expect the goods to be delivered or services to be rendered. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. EITF 07-03 is effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Earlier adoption is permitted. Noven is currently assessing the impact of adopting EITF 07-03 and the impact it may have on Noven’s results of operations and financial condition.

7. INVENTORIES:

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

	September 30,		December 31,
	2007		2006
Finished goods	$	4,187	$	893
Work in process		2,263		2,851
Raw materials		6,267		4,907
Total	$	12,717	$	8,651

     The Drug Enforcement Administration (“DEA”) controls access to controlled substances, including methylphenidate, the active ingredient in Daytrana^™. Shire plc (“Shire”) retains title to the active methylphenidate ingredient (“AMI”) in Daytrana^™. AMI is not included in Daytrana^™ product revenues or in Noven’s cost of products sold. Noven records AMI maintained at its manufacturing facility as consignment inventory and bears certain manufacturing risks of loss related to the AMI. These risks include the contractual obligation of Noven to reimburse Shire for the cost of AMI if Noven does not meet certain yield requirements of the finished product. Shire has a reciprocal obligation to pay Noven if the yield requirements are exceeded. Noven

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slightly exceeded the yield requirements for the nine months ended September 30, 2007, resulting in an immaterial payment from Shire to Noven. During the nine months ended September 30, 2007, Noven used $5.0 million of AMI in the finished product. Noven had $1.5 million and $1.0 million of consignment AMI inventory on hand at September 30, 2007 and December 31, 2006, respectively, which is not reflected in the table above.

8. GOODWILL AND INTANGIBLE ASSETS:

     The carrying amount of goodwill is $14.4 million at September 30, 2007, all of which relates to Noven’s acquisition of JDS.

     Noven’s intangible assets at September 30, 2007 are detailed in the table below (amounts in thousands):

	Gross							Amortization
	carrying		Accumulated					period (in
	amount		amortization			Net		years)
Intellectual Property:
Pexeva®	$	33,040	$	(156	)	$	32,884	10
Lithobid®		4,750		(173	)		4,577	6
Noven patent development costs		4,620		(2,446	)		2,174	8-10
		42,410		(2,775	)		39,635
Non-competition agreements		530		(28	)		502	2-3
Favorable lease		227		(38	)		189	10 months
	$	43,167	$	(2,841	)	$	40,326

     All intangible assets above, with the exception of the Noven patent development costs, were acquired on the Closing Date as part of the JDS acquisition. Amortization expense, which was $0.5 and $0.8 million for the three and nine months ended September 30, 2007, respectively, has been calculated on the following bases for each of the intangible assets in the above table:

• Intellectual property is based on the pattern in which the economic benefit is expected to be realized and is included in cost of products sold.

• Non-competition agreements are amortized on a straight-line basis and are included in selling, general and administrative expenses.

• Favorable lease is based on escalating lease payments being amortized on a straight-lined basis and is included in selling, general and administrative expenses.

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     Noven estimates that the annual amortization expense for intangible assets held at September 30, 2007 for each of the five years through 2012 are as follows (amounts in thousands):

	Remainder of
	2007		2008		2009		2010		2011		2012
Cost of goods sold:
Intellectual property	$	792	$	3,335	$	3,297	$	3,452	$	3,670	$	3,983
Selling, general and administrative:
Non-competition agreements		55		221		171		55		—		—
Favorable lease		74		115		—		—		—		—
		129		336		171		55		—		—
Total	$	921	$	3,671	$	3,468	$	3,507	$	3,670	$	3,983

9. OTHER ACCRUED LIABILITIES:

     Other accrued liabilities consist of the following (amounts in thousands):

	September 30,		December 31,
	2007		2006
Income taxes payable	$	5,900	$	204
Accrued medicaid and other rebates		3,399		—
Accrued market withdrawal costs		3,258		—
Accrued research and development costs		2,731		—
Allowance for product returns		1,655		—
Other accrued liabilities		3,565		1,881
Total other accrued liabilities	$	20,508	$	2,085

10. EQUITY PLANS:

     Prior to January 1, 2006, all awards granted to employees under Noven’s 1999 Long-Term Incentive Plan (the “1999 Plan”) were stock options. In 2006, Noven began granting stock-settled stock appreciation rights (“SSARs”) to employees and non-vested shares (“restricted stock”) to non-employee directors in lieu of stock options. Noven accounts for these awards in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”. At September 30, 2007, there were 2,669,414 stock options and 445,843 SSARs issued and outstanding under the 1999 Plan.

     Noven granted 26,244 and 34,344 shares of restricted stock to its non-employee directors in May 2007 and 2006, respectively. The shares vest over each director’s one-year service period at the end of each calendar quarter beginning with the end of the second quarter. As the shares vest, those shares that have been deferred by non-employee directors under Noven’s deferred compensation plan are transferred into a rabbi trust maintained by Noven. In accordance with Emerging Issues Task Force 97-14, “Accounting for Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested”, the deferred shares were recorded at their fair value and classified as common stock held in trust. Since the deferral relates to Noven common stock, an offsetting amount was recorded as deferred compensation obligation in the stockholders’ equity section of the balance sheet. As of September 30, 2007, there were a total of 41,742 shares of common stock in the rabbi trust.

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     On August 14, 2007, Noven granted 8,998 shares of restricted stock to a former executive of JDS for joining Noven’s Board of Directors in connection with the Merger. The shares were vested immediately upon being granted and were expensed for the three and nine months ended September 30, 2007. Also on August 14, 2007, Noven granted 44,297 SSARs as settlement for a non-competition agreement with a former executive of JDS in connection with the Merger.

     The following table summarizes information regarding Noven’s restricted stock at September 30, 2007 (shares in thousands):

				Weighted
				Average
				Grant-Date
	Shares			Fair Value
Nonvested at December 31, 2006		8		$	17.47
Granted		35			21.28
Vested		(30	)		19.54
Forfeited		—			—
Nonvested at September 30, 2007		13		$	22.86

     The assumptions used to value the SSARs for the three months ended September 30, 2007 and 2006 were as follows:

	2007			2006
Volatility		41.8	%		52.8	%
Risk free interest rate		4.50	%		5.17	%
Expected life (years)		4			5

     Total stock-based compensation recognized in Noven’s statements of operations for the three and nine months ended September 30, 2007 and 2006 was as follows (in thousands):

	Three Months				Nine Months
	2007		2006		2007		2006
Selling, general and administrative	$	894	$	649	$	2,372	$	1,791
Research and development		127		109		381		333
Total cost of products sold		121		71		365		234
	$	1,142	$	829	$	3,118	$	2,358
Tax benefit recognized related to compensation expense	$	359	$	198	$	1,020	$	556

     There were no stock-based compensation costs capitalized as part of inventory or fixed assets for the nine months ended September 30, 2007 or 2006.

     Cash received from options exercised under all share-based payment arrangements for the nine months ended September 30, 2007 and 2006 was $2.5 million and $8.1 million,

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respectively. The tax benefit realized on the tax deductions from option exercises under stock-based compensation arrangements totaled $0.5 million and $2.4 million for the nine months ended September 30, 2007 and 2006, of which $0.4 million and $1.6 million was reported as cash flow from financing activities for the nine months ended September 30, 2007 and 2006, respectively.

     Stock option and SSAR transactions related to the 1999 Plan are summarized as follows for the nine months ended September 30, 2007 (options/SSARs and aggregate intrinsic value in thousands):

								Weighted
				Weighted				Average
				Average		Aggregate		Remaining
	Options/			Exercise		Intrinsic		Contractual
	SSARs			Price		Value		Term
Outstanding at beginning of the period		3,275		$	19.26
Granted		49			17.23
Exercised		(162	)		15.64	$	1,581
Canceled and expired		(47	)		25.41
Outstanding at end of the period		3,115		$	19.32	$	4,057		3.4
Outstanding and exercisable at end of the period		2,110		$	20.69	$	1,887		2.6
Vested or expected to vest at end of the period		2,728		$	19.51	$	3,275		3.4

     As of September 30, 2007, the unamortized compensation expense that Noven expects to record in future periods related to currently outstanding unvested stock options, SSARs and restricted stock is approximately $5.9 million before the effect of income taxes, of which $1.0 million, $2.5 million, $1.6 million and $0.8 million is expected to be incurred in the remainder of 2007 and in 2008, 2009 and 2010, respectively. The weighted-average period over which this compensation cost is expected to be recognized is two years.

11. INCOME TAXES:

     On January 1, 2007, Noven adopted the provisions of, and began accounting for uncertainty in income taxes in accordance with, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109” (“FIN 48”). This interpretation requires companies to determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before recognition in the financial statements. FIN 48 requires a two-step approach when evaluating a tax position based on recognition (Step 1) and measurement (Step 2).

     Upon adoption of FIN 48, and as a result of the recognition and measurement of Noven’s tax positions as of January 1, 2007, Noven recognized a charge of approximately $0.5 million to the January 1, 2007 retained earnings balance. The gross amount of unrecognized tax benefits as of the date of adoption, January 1, 2007, was $1.2 million, including $0.3 million in interest and penalties. If the $1.2 million was ultimately recognized, only $0.9 million would affect the effective tax rate due to approximately $0.3 million in federal tax benefit. As of September 30,

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2007 the gross amount of unrecognized tax benefits was approximately $1.8 million. Interest and penalties related to income taxes are classified as a component of income tax expense. It is reasonably possible that the gross amount of unrecognized tax benefits may increase by approximately $0.2 million within 12 months after September 30, 2007.

     Noven is periodically audited by federal and state taxing authorities. The outcome of these audits may result in Noven being assessed taxes in addition to amounts previously paid. Federal tax returns for years 2004 — 2006 remain open and subject to examination by the Internal Revenue Service. Noven files and remits state income taxes in various states where Noven has determined it is required to file state income taxes, and Noven’s filings with those states remain open for audit, inclusively, for the years 2002 — 2006. Noven is not aware of any examinations currently taking place related to its income taxes in any jurisdiction. It is possible that examinations may be initiated by any jurisdiction where Noven operates, or where it can be determined that Noven operates, and the results of which may increase Noven’s income tax liabilities or decrease the amount of deferred tax assets and may also materially change the amount of unrecognized income tax benefits for tax positions taken.

     At September 30, 2007 and December 31, 2006, net deferred tax assets were $62.2 million and $12.7 million, respectively. The net deferred tax asset at September 30, 2007 includes deferred tax assets related to the acquisition of JDS of $38.0 million, of which substantially all relates to temporary differences on acquired IPR&D intangible assets acquired from JDS. Realization of this deferred tax asset depends upon the generation of sufficient future taxable income. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. JDS files separate state income tax returns in states where JDS has determined that it is required to file state income taxes. As a result, state deferred tax assets relating to JDS are evaluated separately in determining whether the state deferred tax assets are realizable. Noven expects that JDS will incur taxable losses in the next few years due to future expected clinical trial expenditures related to product development. These expected taxable losses create negative evidence indicating the need for a valuation allowance at September 30, 2007. Noven recorded a valuation allowance of $3.4 million during the quarter ended September 30, 2007, due to uncertainties in realizing these state deferred tax assets based on Noven’s projection of future state taxable income. If Noven determines, based on future JDS profitability that these state deferred tax assets are more likely than not to be realized, a release of all, or part, of the related valuation allowance could result in an immediate income tax benefit in the period the valuation allowance is released.

12. CONTRACT AND LICENSE AGREEMENTS:

Daytrana^™

     Noven has developed a once-daily transdermal methylphenidate patch for Attention Deficit Hyperactivity Disorder (“ADHD”) called Daytrana^™. In the first quarter of 2003 Noven licensed to Shire the exclusive global rights to market Daytrana^™ for payments by Shire of up to $150.0 million. In consideration for this licensing transaction, Shire agreed to pay Noven as follows: (i) $25.0 million was paid upon closing of the transaction in April 2003; (ii) $50.0 million was paid in April 2006 upon receipt of final marketing approval by the FDA; and (iii) three installments of $25.0 million each are payable upon Shire’s achievement of $25.0 million, $50.0 million and $75.0 million in annual Daytrana^™ net sales, respectively. Shire launched the product in June 2006. Noven received the first $25.0 million sales milestone in the 2007 first quarter, and the second $25.0 million sales milestone in the 2007 third quarter. For purposes of the sales milestones, Shire’s annual net sales are measured quarterly on a trailing 12-month basis, with each milestone payment due 45 days after the end of the first calendar quarter during which trailing 12-month sales exceed the applicable threshold. Noven is currently deferring and recognizing approval and sales milestones as license revenues on a straight-line basis, beginning on the date the milestone is achieved through the first quarter of 2013, which is Noven’s current best estimate of the end of the useful economic life of the product. Noven also manufactures and supplies finished product for Shire.

Amphetamine Transdermal System

     In addition to Noven’s agreements with Shire related to Daytrana^™, in June 2004 Noven entered into an agreement with Shire for the development of a transdermal amphetamine patch for ADHD, and in July 2006, Noven and Shire amended this agreement. Under the amended agreement, Shire paid Noven a non-refundable $1.0 million in August 2006, in exchange for

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the option of purchasing, for an additional $5.9 million, the exclusive developmental rights to the product. The amended agreement further provided that Noven would perform certain early-stage development activities which were previously to be performed by Shire. Noven completed a Phase I clinical study for the product in March 2007. In June 2007, Shire exercised its option to acquire the exclusive development rights to the product and Noven received the $5.9 million option payment. This $5.9 million, as well as the initial $1.0 million received from Shire for the grant of the option, was included in deferred contract revenues on Noven’s balance sheet as of September 30, 2007. Simultaneous with the $5.9 million payment, Shire requested modifications to the patch formulation in order to align the amphetamine patch with Shire’s future direction in ADHD, and has agreed to pay Noven for its development efforts in this regard.

Pexeva^®

     In November 2005, JDS entered into an asset purchase agreement with Synthon Pharmaceuticals, Inc. (“Synthon”) for the purchase of Pexeva^®. In this transaction, JDS purchased certain assets related to Pexeva^® including: the New Drug Application (“NDA”), intellectual property (including patents and trademarks) and certain finished goods inventory. The purchase of Pexeva^® included a cash payment at the time of closing and an obligation to make certain future fixed payments and certain contingent payments.

     Following the Merger, Noven became responsible for the possible future contingent payments of up to $11.5 million under the asset purchase agreement with Synthon. See Note 3 — “Acquisition of JDS Pharmaceuticals, LLC — Long-tem Liabilities Assumed.”

Lithobid^®

     In August 2004, JDS entered into an asset purchase agreement with Solvay Pharmaceuticals, Inc. (“Solvay”) for the purchase of Lithobid^®. In this transaction, JDS purchased certain assets related to Lithobid^® including: the NDA, intellectual property (including trademarks) and certain finished goods inventory, which was paid in full prior to the closing of the Merger. In connection with the acquisition of the product rights for Lithobid^®, JDS entered into an agreement requiring Solvay to manufacture and supply Lithobid^® for up to five years, subject to certain limitations. The manufacturing and supply agreement has been assigned by Solvay to ANI Pharmaceuticals, Inc.

Lithium QD

     In March 2004, JDS entered into an asset purchase agreement with an unrelated third party to acquire certain U.S. and international patents and other intellectual property related to a once daily lithium carbonate product (“Lithium QD”) for the purpose of developing, obtaining regulatory approval, manufacturing and marketing the product in the United States, Canada and certain other countries. The asset purchase agreement provides for potential future payments to the seller of up to $4.0 million subject to the achievement of certain development milestones. JDS has separately entered into an exclusive supply agreement for the manufacture of Lithium QD with another unrelated third party which also provides for additional potential contingent payments of up to $2.0 million.

Stavzor

     In April 2007, JDS entered into a development, license and supply agreement with Banner Pharmacaps Inc. (“Banner”) in which Banner licensed rights to a delayed release valproic acid product (“Stavzor”), as well as rights to future development of an extended release valproic acid product, in return for a payment at closing, royalties on future sales, and up to $6.0 million in

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potential development milestone payments. The agreement also provides that Banner shall be the exclusive supplier of the products licensed under the agreement.

13. INVESTMENT IN VIVELLE VENTURES LLC (d/b/a 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 earned sufficient income in the first quarter of 2007 and 2006 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, 2007 and 2006, Noven had the following transactions with Novogyne (in thousands):

	Three Months				Nine Months
	2007		2006		2007		2006
Revenues:
Product sales	$	5,801	$	5,273	$	15,974	$	13,990
Royalties		2,100		1,791		5,764		5,138
	$	7,901	$	7,064	$	21,738	$	19,128
Reimbursed expenses	$	6,940	$	7,125	$	21,046	$	21,043

     As of September 30, 2007 and December 31, 2006, Noven had amounts due from Novogyne of $6.9 million and $7.7 million, respectively.

     The unaudited condensed statements of operations of Novogyne for the three and nine months ended September 30, 2007 and 2006 are as follows (in thousands):

	Three Months				Nine Months
	2007		2006		2007		2006
Gross revenues	$	45,224	$	39,204	$	125,432	$	112,138
Sales allowances		5,770		4,283		16,769		11,622
Sales return allowances		781		1,193		772		4,576
Sales allowances and returns		6,551		5,476		17,541		16,198
Net revenues		38,673		33,728		107,891		95,940
Cost of sales		8,152		7,529		22,994		22,212
Selling, general and administrative expenses		8,278		9,419		27,990		28,172
Income from operations		22,243		16,780		56,907		45,556
Interest income		286		250		783		564
Net income	$	22,529	$	17,030	$	57,690	$	46,120
Noven’s equity in earnings of Novogyne	$	10,948	$	8,234	$	25,025	$	19,323

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     The activity in the Investment in Novogyne account for the nine months ended September 30, 2007 is as follows (in thousands):

Investment in Novogyne, beginning of period	$	23,296
Equity in earnings of Novogyne		25,025
Cash distributions from Novogyne		(18,465	)
Non-cash distribution from Novogyne (Note 4)		(5,192	)
Investment in Novogyne, end of period	$	24,664

     Subject to the approval of Novogyne’s management committee, Novogyne may, from time to time, distribute cash to Novartis and Noven based upon a contractual formula. For the three and nine months ended September 30, 2007, Noven received cash distributions representing return on investment of $7.5 million and $18.5 million from Novogyne, respectively. For the three and nine months ended September 30, 2006, Noven received cash distributions representing return on investment of $7.4 million and $17.6 million from Novogyne, respectively. In addition, as discussed in Note 5, tax payments of $5.2 million and $2.2 million were made by Novogyne on Noven’s behalf to the New Jersey Department of Revenue during the nine months ended June 30, 2007 and 2006, respectively. These amounts were recorded as reductions in the investment in Novogyne when received (or in the case of the tax payment, when paid).

14. SHARE REPURCHASE PROGRAM:

     In the third quarter of 2007, Noven’s Board of Directors authorized a share repurchase program under which Noven may acquire up to $25.0 million of its common stock. As of September 30, 2007, Noven had repurchased 322,345 shares of its common stock at an aggregate price of approximately $5.1 million. These shares remained in the treasury as of September 30, 2007.

15. SEGMENT INFORMATION:

     Noven has two reportable segments, the “Transdermal Segment”, which currently consists of research, development, manufacture and licensing to partners of advanced transdermal drug delivery technologies and prescription transdermal products and the “JDS Segment”, which currently consists of development, marketing, sales and distribution of pharmaceutical products. Prior to the acquisition of JDS, Noven had one reportable segment. Additionally, certain general and administrative expenses are reported in Corporate/Other. Noven does not report depreciation expense, total assets and capital expenditures by segment as such information is not used by Noven’s chief operating decision maker.

     The accounting policies of the segments are the same as those described in Note 2 of the notes to the financial statements included in Noven’s Form 10-K, as updated and supplemented by this Form 10-Q. The table below presents segment information for the periods identified and provides a reconciliation of segment information to total consolidated information. Reconciliations of segment information for the three and nine months ended September 30, 2006 are not presented as Noven had one segment during those periods. For the Transdermal Segment and the JDS Segment, segment income (loss) from operations represents segment gross profit less direct research and development expenses, acquired IPR&D and direct selling, general and administrative expenses.

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	For the three months ended September 30, 2007
	(amounts in thousands)
	Noven					Corporate
	Transdermal		JDS (1)			Other			Consolidated
Net revenues	$	18,490	$	3,325		$	—		$	21,815
Acquired in-process research and development		—		100,150			—			100,150
Income (loss) from operations		6,328		(101,650	)		(8,346	)		(103,668	)
Equity in earnings of Novogyne		10,948		—			—			10,948

	For the nine months ended September 30, 2007
	(amounts in thousands)
	Noven					Corporate
	Transdermal		JDS(1)			/ Other			Consolidated
Net revenues	$	56,644	$	3,325		$	—		$	59,969
Acquired in-process research and development		—		100,150			—			100,150
Income (loss) from operations		19,590		(101,650	)		(19,476	)		(101,536	)
Equity in earnings of Novogyne		25,025		—			—			25,025

(1) Includes JDS’s results from the Closing Date through September 30, 2007.

16. COMMITMENTS AND CONTINGENCIES:

HT Studies

     As a result of the findings from the Women’s Health Initiative (“WHI”) study and other studies previously disclosed in Noven’s Form 10-K, the FDA has required that “black box” labeling be included on all menopausal hormone therapy (“HT”) products marketed in the United States to warn, among other things, that these products have been associated with increased risks for heart disease, heart attacks, strokes, and breast cancer and that they are not approved for heart disease prevention.

     Researchers continue to analyze data from both arms of the WHI study and other studies. Other studies evaluating HT are currently underway or in the planning stages. The market for Noven’s products could be adversely affected if these studies find that a transdermal estrogen patch is less beneficial than other dosage forms, and Noven could be subject to increased product liability risk if HT patch products are found to increase the risk of adverse health consequences. Noven is currently named as a defendant in six product liability lawsuits involving its HT products and Noven may have liability with respect to other actions in which it has not, to date, been made a party. See “Litigation, Claims and Assessments” below for a further discussion on related product liability lawsuits.

     Since the July 2002 publication of the WHI and other study data, total United States prescriptions have declined for substantially all HT products, including Noven’s products in the aggregate. Prescriptions for CombiPatch^®, Noven’s combination estrogen/progestin patch,

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continue to decline in the post-WHI environment. Novogyne recorded the acquisition of the marketing rights for Noven’s CombiPatch^® product at cost and Novogyne 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 cannot 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 net carrying value of the CombiPatch^® intangible asset.

Production Issues

     In July 2007, Noven submitted a response to the list of observations on Form 483 received from the FDA following an on-site inspection of Noven’s manufacturing facilities. The majority of the observations in the Form 483 relate to the Daytrana^™ patch and difficulties experienced by some patients in removing the release liner of the Daytrana^™ patch, including certain product lots that utilize an enhanced release liner. No assurance can be given that Noven’s response will be acceptable to the FDA or satisfactorily address the FDA’s concerns, and there can be no assurance that the FDA will not take regulatory action that could adversely affect Noven’s business, results of operations and financial position.

     In September 2007, Shire initiated a voluntary market withdrawal of a portion of Daytrana^™ product on the market primarily in response to feedback from patients and caregivers who experienced difficulty removing the release liner from some Daytrana^™ patches. Noven will reimburse Shire for certain costs related to the withdrawal, which are estimated to be approximately $3.3 million. Noven recognized this amount in allowances and expenses associated with the withdrawal in the third quarter of 2007. Specifically, revenues for the three months ended September 30, 2007 are net of approximately $0.8 million in allowances for returns at Noven related to the withdrawal. In addition, for the three months ended September 30, 2007 Noven’s cost of products sold includes $0.3 million of AMI and destruction costs and selling, general and administrative expenses for the three months ended September 30, 2007 included $2.2 million in withdrawal costs. No assurance can be given that the actual amount of the withdrawal costs will not exceed Noven’s estimate.

     In the first quarter of 2007, Noven and Shire implemented enhancements to the Daytrana^™ release liner intended to improve ease of use of the patch. Noven’s results of operations and financial position could be adversely affected if the Daytrana^™ product that was not subject to the market withdrawal does not improve Daytrana’s ease of use.

Novogyne Supply Agreement

     Noven’s supply agreement with Novogyne for Vivelle^® and Vivelle-Dot^® patches expired in January 2003. While the parties have continued to operate in accordance with certain of the supply agreement’s pricing terms, there is no assurance that the parties will continue to do so. Novogyne’s 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. Since Noven appoints two members of Novogyne’s Management Committee, both Novartis and Noven must agree on Novogyne’s supplier.

Litigation, Claims and Assessments

     In September 2005, Noven, Novogyne and Novartis were served with a summons and complaint from an individual plaintiff in Superior Court of New Jersey Law Division, Atlantic County in which the plaintiff claims personal injury allegedly arising from the use of HT products, including Vivelle^®. The plaintiff claims compensatory, punitive and other damages in

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an unspecified amount. Noven does not expect any activity in this case in the near future, as the court has entered an order to stay proceedings in all its pending and future HT cases except for cases where Wyeth Pharmaceuticals and its affiliates and Pfizer, Inc. are the defendants.

     In April 2006, an individual plaintiff and her husband filed a complaint in the United States District Court, District of Minnesota against Noven, Novogyne, Novartis, Wyeth Inc. and Wyeth Pharmaceuticals, Inc. alleging liability in connection with personal injury claims allegedly arising from the use of HT products, including Noven’s CombiPatch^® product. The plaintiffs claim compensatory and other damages in an unspecified amount.

     In July 2006, four complaints were filed in the United States District Court, District of Minnesota against Noven and other pharmaceutical companies by four separate individual plaintiffs, each filing alone or with her husband. Three of the complaints also name Novartis as a defendant, and of these, two name Novogyne as a defendant as well. Each complaint alleges liability in connection with personal injury claims allegedly arising from the use of HT products, including Vivelle^® in one case and CombiPatch^® in two of the cases. The plaintiffs in each case claim compensatory and other damages in an unspecified amount. Noven has established an accrual for the expected legal fees related to the cases referenced above, although the amount is not material.

     Novartis has advised Noven that Novartis has been named as a defendant in at least 25 lawsuits that include approximately 26 plaintiffs that allege liability in connection with personal injury claims allegedly arising from the use of HT patches distributed and sold by Novartis and Novogyne, including Noven’s Vivelle-Dot^®, Vivelle^®, and CombiPatch^® products. Novogyne has been named as a defendant in one lawsuit in addition to the four lawsuits referenced above. Novartis has indicated that it will seek indemnification from Noven and Novogyne to the extent permitted by the agreements between and among Novartis, Novogyne and Noven. Novogyne’s aggregate limit under its claims-made insurance policy as of September 30, 2007 was $10.0 million. Novogyne has established reserves in the amount of $10.1 million with an offsetting insurance recovery of $7.8 million for expected defense and settlement expenses as well as for estimated future cases alleging use of Noven’s HT products. This accrual represents Novartis management’s best estimate as of September 30, 2007.

     Noven intends to defend all of the foregoing lawsuits vigorously, but the outcome of these product liability lawsuits cannot ultimately be predicted.

     In June 2007, Johnson-Matthey Inc. filed a complaint in the United States District Court, Eastern District of Texas against Noven alleging that Noven was infringing one of its patents through its manufacture and sale of Daytrana™. The plaintiff is seeking injunctions from further infringement and claiming compensatory and other damages in an unspecified amount. Noven intends to vigorously defend this lawsuit. In July 2007, Johnson-Matthey added Shire as a defendant to this lawsuit after Shire filed a declaratory judgment against Johnson-Matthey in the United States District Court, Eastern District of Pennsylvania. In August 2007, Noven filed a motion for a transfer of venue of the case to the United States District Court, Eastern District of Pennsylvania. Noven’s ultimate liability, if any, with respect to the lawsuit is presently not determinable.

     Noven is a party to other pending legal proceedings arising in the normal course of business, none of which Noven believes is material to its financial position, results of operations or cash flows.

JDS Segment commitments

     As part of the acquisition of JDS, Noven has certain commitments and contingencies related to contractual arrangements, primarily related to milestone payments for development, FDA submission, FDA approval and commercial sales of products under development. As of September 30, 2007, Noven was responsible for $23.5 million in such contingent milestones, which may be payable over the next three to five years. As of September 30, 2007, $11.5 million of these milestones were reflected in Noven’s balance sheet. See Note 12 — “Contract and License Agreements” for additional information.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following section addresses material aspects of our financial condition at September 30, 2007, and our results of operations for the three months ended September 30, 2007 (the “2007 Quarter”) and September 30, 2006 (the “2006 Quarter”), and the nine months ended September 30, 2007 (the “2007 Period”) and September 30, 2006 (the “2006 Period”). The contents of this section include:

• An executive summary of our results of operations for the 2007 Quarter;

• An overview of our transdermal business and our Novogyne joint venture;

• An overview of our JDS Segment;

• A review of certain items that may affect the historical or future comparability of our results of operations;

• An analysis of our results of operations and our liquidity and capital resources;

• A discussion of how we apply our critical accounting estimates;

• A discussion of recently-issued accounting standards; and

• An outlook that includes our current financial guidance.

     This discussion should be read in conjunction with Noven’s financial statements for the three and nine months ended September 30, 2007 and 2006 and the related notes included elsewhere in this Form 10-Q, as well as the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” from our Form 10-K.

Executive Summary

     The following Executive Summary is qualified in its entirety by the more detailed discussion and analysis of our financial condition and results of operations appearing in this Item 2 as well as in our financial statements and related notes included in this Form 10-Q.

     Our financial results for the 2007 Quarter are the first results that we have reported following our acquisition of JDS Pharmaceuticals, LLC (“JDS”), a specialty pharmaceutical company focused in psychiatry and women’s health. The JDS acquisition marked our transition from primarily a drug delivery company to a fully-integrated specialty pharmaceutical company. Our results include the results of operations for JDS from August 14, 2007 through September 30, 2007.

     The 2007 Quarter also includes (i) a one-time $100.2 million charge for the JDS purchase price allocated to in-process research and development, which is required under the accounting rules, and (ii) a net $3.3 million charge related to reimbursements to Shire plc in connection with the voluntary withdrawal of a portion of Daytrana^™ product in the trade channel.

     Including the impact of these substantial charges, we reported a net loss of $59.0 million ($2.38 loss per share) for the 2007 Quarter, compared to net income of $5.0 million ($0.20 diluted earnings per share) for the 2006 Quarter.

     Our net revenues in the 2007 Quarter were $21.8 million, an increase of 39% compared to the $15.7 million reported in the 2006 Quarter. This increase reflects the recognition of $3.3 million in net revenues associated with our sales of Pexeva^® and Lithobid^® products. The increase also reflected higher sales of our Vivelle-Dot^® estrogen patch and higher license revenues due to the amortization of additional Daytrana^™ sales milestones.

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     Our gross margin percentage in the 2007 Quarter was 41% compared to 30% in the 2006 Quarter. Gross margin in the 2007 Quarter benefited primarily from higher overall product revenues, greater transdermal facility utilization, and the continuing benefit of cost reductions implemented in the 2006 Quarter. The 2007 Quarter also benefited from a 76% gross margin percentage on JDS product sales.

     Research and development expenses for the 2007 Quarter increased 44% to $3.6 million, primarily attributable to a $0.8 million increase in clinical research associated with our transdermal pipeline and to $0.5 million in JDS-related research and development expenses.

     Selling, general and administrative expenses for the 2007 Quarter increased $5.9 million, or 98%, to $11.9 million, reflecting the addition of $3.5 million in JDS-related expenses and $2.2 million in expenses associated with the voluntary market withdrawal of a portion of Daytrana^™ product.

     We recognized $10.9 million in earnings from Novogyne in the 2007 Quarter, an increase of 33% compared to the 2006 Quarter. Net revenues at Novogyne increased 15% to $38.7 million in the 2007 Quarter, primarily due to increased sales of Vivelle-Dot^®. Novogyne’s gross margin for the 2007 Quarter, at 79%, was consistent with the 2006 Quarter. Selling, general and administrative expenses decreased 12% due to the timing of samples expense. Novogyne’s net income for the 2007 Quarter increased 32% to $22.5 million, compared to $17.0 million in the 2006 Quarter.

     At September 30, 2007, we had an aggregate $72.4 million in cash and cash equivalents and short-term investments, compared to $153.6 million at December 31, 2006. This decrease reflects the payment of $130.4 million in the JDS acquisition; tax payments of $16.2 million; and $5.1 million used to purchase shares under our recently-established share repurchase program, partially offset by the receipt of an aggregate $50.0 million in milestone payments relating to Shire’s sales of Daytrana^™; $18.5 million in distributions received from Novogyne; and $5.9 million received from Shire in connection with our amphetamine patch development program.

     Total prescriptions for Vivelle-Dot^® increased 4% in the 2007 Quarter compared to the 2006 Quarter, and total prescriptions for Novogyne’s products, taken as a whole, increased 2%. By comparison, the overall U.S. HT market declined 8% for the same period. Total prescriptions for Daytrana^™ (launched in June 2006) increased 64% in the 2007 Quarter compared to the 2006 Quarter, while prescriptions for ADHD stimulant therapies as a class increased 8% for the same period. Reflecting ongoing generic substitution, total prescriptions for Lithobid^® decreased 39% in the 2007 Quarter compared to the 2006 Quarter. Total prescriptions for Pexeva^® increased 21% in the 2007 Quarter compared to the 2006 Quarter, while for the same period prescriptions for the SSRI class of antidepressants were largely unchanged.

Overview of Noven’s Transdermal Business and Our Novogyne Joint Venture

     Our transdermal business is focused on developing advanced transdermal patches. We presently derive the majority of our transdermal revenues from sales of transdermal patches for use in menopausal HT. In the United States, our HT products are marketed and sold by Novogyne Pharmaceuticals, the joint venture that we formed with Novartis in 1998. Our business, financial position and results of operations are significantly dependent upon Novogyne and its marketing of our HT products in the United States. A discussion of Novogyne’s results of operations and their impact on our results can be found under the caption “—Results of Operations—Equity in Earnings of Novogyne.”

     In all countries other than the United States, Canada and Japan, we have licensed the marketing rights to these products to Novartis Pharma, which is an affiliate of Novartis. In most of

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these markets, Vivelle^® is marketed under the brand name Menorest, Vivelle-Dot^® is marketed under the brand name Estradot^® and CombiPatch^® is marketed under the brand name Estalis^®.

     We hold a 49% equity interest in Novogyne, and Novartis holds the remaining 51% equity interest. Under the terms of the joint venture agreements, we manufacture and supply our HT products to Novogyne, perform marketing, sales and promotional activities, and receive royalties from Novogyne based on Novogyne’s sales of the estrogen therapy (“ET”) products. Novartis distributes Vivelle^®, Vivelle-Dot^® and CombiPatch^® and provides certain other services to Novogyne, including financial and accounting functions.

     Novartis is entitled to an annual $6.1 million preferred return from Novogyne, which has the effect of reducing our share of Novogyne’s income in the first quarter of each year. After the annual preferred return to Novartis, our share of Novogyne’s income increases as product sales increase, subject to a maximum of 49%. Our share of Novogyne’s income was $10.9 million and $8.2 million for the 2007 Quarter and the 2006 Quarter, respectively. The income we recognize from Novogyne is a non-cash item. Any cash we receive from Novogyne is in the form of cash distributions declared by Novogyne’s Management Committee. Accordingly, the amount of cash that we receive from Novogyne in any period is typically not the same as the amount of income we recognize from Novogyne for that period. For the 2007 Period and the 2006 Period, we received $18.5 million and $17.6 million, respectively, in distributions from Novogyne, which, excluding the $50.0 million Daytrana^™ milestones received from Shire in 2007, accounted for a substantial portion of our net cash flows generated by operating activities for these periods. We expect that for the next several years a significant portion of our earnings will be generated through our interest in Novogyne and a significant portion of our cash flow will also be generated through our interest in Novogyne, as well as any additional milestone payments we may receive from Shire. Any failure by Novogyne to remain profitable or to continue to make distributions would have a material adverse effect on our results of operations and financial condition.

     The market for HT products, including transdermals, significantly declined in the years following the July 2002 publication of the WHI study that found adverse health risks associated with HT, and in current periods the market continues to decline. Comparing the 2007 Quarter to the 2006 Quarter, total prescriptions dispensed in the HT market in the United States decreased 8%. Comparing the same periods, aggregate prescriptions for our United States HT products increased 2%. Total prescriptions in the estrogen segment of the HT market in the United States decreased 9% comparing the same periods, while prescriptions for our Vivelle^® line of products increased 3%. Vivelle-Dot^®, which represented 89% of our total United States HT prescriptions in the 2007 Quarter, increased 4% from the 2006 Quarter. We believe that Vivelle-Dot^® patch prescriptions have benefited from patient conversions from the original Vivelle^® product (the predecessor product to Vivelle-Dot^®), which represented 3% of our total United States prescriptions in the 2007 Quarter. Vivelle^® is in the process of being discontinued in several jurisdictions where our advanced Vivelle-Dot^® ET patch has gained acceptance. We ceased manufacturing of Vivelle^® for the United States market at the end of 2006.

     United States prescriptions for our CombiPatch^® product (which represented approximately 8% of our total United States HT prescriptions in the first quarter of 2007) decreased 9% from the 2006 Quarter to the 2007 Quarter, while prescriptions for the total United States market for fixed combination hormone therapy decreased 10%. The combination therapy arm of the WHI studies involved an oral combination estrogen/progestin product and, accordingly, the combination therapy segment of the HT market has experienced the most significant decline. Further decreases above expectations for our CombiPatch^® product (whether as a result of the WHI studies, competition in the category or otherwise) could require Novogyne (which holds the CombiPatch^® marketing rights) to record an impairment loss related to these marketing rights, which would adversely affect the results of operations of both Noven and Novogyne.

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Overview of Noven’s JDS Segment

     JDS, acquired by us in August 2007, is a specialty pharmaceutical company that is currently marketing two branded prescription psychiatry products and is advancing several developmental products in psychiatry and women’s health. We will seek to leverage JDS’s marketing and sales infrastructure with next-generation psychiatry products and with complementary products that we will seek to develop and/or acquire.

     JDS’s marketed and developmental products consist of:

•	Pexeva®, a selective serotonin re-uptake inhibitor (“SSRI”) antidepressant indicated for major depressive disorder, panic disorder, obsessive compulsive disorder and generalized anxiety disorder. It is one of only two remaining patented brands without a generic equivalent in the over $6.0 billion U.S. SSRI market. Pexeva® is subject to a composition of matter patent that extends to 2017 and other patents extending to 2022.
•	Lithobid®, an extended release lithium product, is the only branded lithium product sold in the U.S. Lithobid® is indicated for the maintenance of bipolar disorder and the treatment of related manic episodes, and participates in an estimated annual market for lithium therapies that exceeds $400 million (calculated at branded prices).
•	Lithium QD, a developmental once-daily form of lithium carbonate, is in clinical development. It is subject to U.S. patents that extend to 2022 and may benefit from three years of exclusivity under the Hatch-Waxman Act. Currently there are no once-daily lithium products on the market. A once-daily lithium product has the potential to improve compliance and reduce high serum level peaks common with products prescribed in multiple doses per day. In October 2007, a Phase 3 clinical trial of Lithium QD did not achieve its primary endpoint with statistical significance. Clinical data from that trial is currently under analysis. We believe that additional clinical studies will be required to complete development of this product, at substantial additional cost, and with no assurance that development will be completed or that the product will ultimately be approved.
•	Stavzor™ & Stavzor™ ER. Through JDS, we hold marketing rights to Stavzor™ (valproic acid delayed release) and Stavzor™ ER (valproic acid extended release) in a proprietary enteric-coated soft gelatin capsule delivery system pursuant to a license with Banner Pharmacaps. If approved, these products are expected to be indicated for bipolar disorder, migraine therapy and epilepsy, and would compete with Abbott Laboratories’ Depakote® and Depakote® ER products. In October 2007, an NDA for Stavzor™ received an approvable letter from the FDA, and although there can be no assurance, the product is expected to be launched in mid-2008. Stavzor™ ER is in pre-clinical development by Banner. There can be no assurance that Stavzor™ ER will be successfully formulated, developed, approved or commercialized.
•	Mesafem™. The pipeline that we acquired in the JDS transaction also includes a women’s health product called Mesafem™ that, if approved, would complement our expertise in the women’s health area. Mesafem™ is a low-dose paroxetine mesylate capsule under development for the treatment of vasomotor symptoms associated with menopause, including hot flashes and night sweats. Published clinical data has demonstrated the efficacy of paroxetine for this indication. Mesafem™ is subject to the same patents as Pexeva®, as well as other pending patent applications, and may benefit from three years of exclusivity under the Hatch-Waxman Act. Although there can be no assurance, we expect that Mesafem™ will enter Phase 3 studies in the first half of 2008.
	Our expectations for future JDS Segment results are addressed under “Outlook” below.

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Certain Items that May Affect Historical or Future Comparability

     For a discussion of certain items that may affect the historical or future comparability of our results of operations and financial condition, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K as well as the following updated and/or supplemented items. Such disclosure is not intended to address every item that may affect the historical or future comparability of our results of operations or financial condition and such disclosure should be read in conjunction with the discussion and analysis of our results of operations, liquidity and capital resources and outlook appearing elsewhere in this Item 2.

JDS Pharmaceuticals, LLC

     We acquired JDS on August 14, 2007. The total purchase price for the JDS acquisition consisted of $125.0 million paid at closing, approximately $5.4 million of transaction costs consisting primarily of fees paid for financial advisory, legal, valuation and accounting services, and approximately $0.5 million in connection with non-competition agreements entered into with two executives of JDS in connection with the Merger. Noven funded the Merger from the sale of short-term investments. The acquisition of JDS was accounted for under the purchase method of accounting. The total purchase price for the acquisition has been preliminary allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the Closing Date, which increased our assets and liabilities on the Closing Date as follows (amounts in thousands):

Current assets, including cash of $0.6 million	$	7,893
Property and equipment		362
Intangible assets
Acquired in-process research and development expenses		100,150
Identifiable intangible assets		38,547
Goodwill		14,359
Other assets		163
Accrued expenses and other current liabilities		(15,344	)
Long-term obligations assumed		(3,711	)
Contingent milestones assumed		(11,500	)
Total purchase price	$	130,919

     As noted in the table above, $100.2 million of the purchase price has been allocated IPR&D, which was expensed in the 2007 Quarter immediately following the completion of the Merger. The IPR&D expense resulted in our significant losses for the three and nine months ended September 30, 2007.

     The $38.5 million in Identifiable Intangible Assets relate to (i) intellectual property rights associated with JDS’s products approved by the FDA; (ii) favorable lease intangible asset; and (iii) non-competition agreements with two executives of JDS. At September 30, 2007, the carrying amount of Noven’s intangible assets (including certain patent development costs unrelated to the JDS acquisition) totaled $40.3 million. Noven estimates that the annual amortization expense for intangible assets held at September 30, 2007 for each of the five years through 2012 are as follows (amounts in thousands):

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	Remainder of
	2007		2008		2009		2010		2011		2012
Cost of goods sold:
Intellectual property	$	792	$	3,335	$	3,297	$	3,452	$	3,670	$	3,983
Selling, general and administrative:
Non-competition agreements		55		221		171		55		—		—
Favorable lease		74		115		—		—		—		—
		129		336		171		55		—		—
Total	$	921	$	3,671	$	3,468	$	3,507	$	3,670	$	3,983

     We are required to test our intangible assets, including our goodwill, for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the asset might be impaired. If after testing the intangible assets and goodwill, we determine that these assets are impaired, then we would be required to write-down the impaired asset to fair value in the period when the determination is made.

     Substantially all of the acquired long-term obligation of $3.7 million was paid immediately after closing. The $11.5 million contingent milestones assumed relates to contingent sales milestones related to JDS’s acquisition of Pexeva^® from Synthon Pharmaceuticals, Inc. which are payable upon the achievement of specified sales levels of the product.

Daytrana^™

     In September 2007, Shire initiated a voluntary market withdrawal of a portion of Daytrana^™ product on the market primarily in response to feedback from patients and caregivers who experienced difficulty removing the release liner from some Daytrana^™ patches. We will reimburse Shire for certain costs related to the withdrawal, which are estimated to be approximately $3.3 million. We recognized this amount in allowances and expenses associated with the withdrawal in the 2007 Quarter. Specifically, revenues for the 2007 Quarter are net of approximately $0.8 million in allowances for returns related to the voluntary market withdrawal of Daytrana^™. In addition, our cost of products sold includes $0.3 million of AMI and destruction costs and our selling, general and administrative expenses in the 2007 Quarter include $2.2 million in costs associated with this voluntary market withdrawal. No assurance can be given that the actual amount of the costs related to the market withdrawal will not exceed Noven’s estimate.

     In the first quarter of 2007, Noven and Shire implemented enhancements to the Daytrana^™ release liner intended to improve ease of use of the patch. Noven’s results of operations and financial position could be adversely affected if the Daytrana^™ product that was not subject to the market withdrawal does not improve Daytrana^™’s ease of use.

     In July 2007, we submitted a response to the list of observations on Form 483 received from the FDA following an on-site inspection of our manufacturing facilities. The majority of the observations in the Form 483 relate to the Daytrana^™ patch and difficulties experienced by some patients in removing the release liner of the Daytrana^™ patch, including certain product lots that utilize an enhanced release liner. No assurance can be given that our response will be acceptable to the FDA or satisfactorily address the FDA’s concerns, and there can be no assurance that the FDA will not take regulatory action that could adversely affect our business, results of operations and financial position.

     The DEA controls access to controlled substances, including methylphenidate, the active ingredient in Daytrana^™. Manufacturers of products containing controlled substances must annually apply to the DEA for procurement quota in order to obtain these substances for manufacturing. At this time, we have received sufficient methylphenidate quota to meet expected Daytrana^™ product orders from Shire for the remainder of 2007. No assurance can be given that we will receive sufficient quota in 2008 or any other future period. Given the DEA’s current approach to awarding controlled substance quota, we expect at any given time to have applications pending with the DEA for procurement quota (either annual or supplemental) that are likely to be critical to continued Daytrana^™ production. Production is also dependent on receiving timely shipments of methylphenidate from suppliers. Any shortage, delay or stoppage in the supply of the active methylphenidate ingredient could cause us to lose revenues or incur additional costs (including those related to expedited production), which could have an adverse effect on our results of operations in general and our gross margin in particular.

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Results of Operations

Three and nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2006.

Revenues

     Total revenues for the three and nine months ended September 30, 2007 and 2006 are summarized as follows (dollar amounts in thousands):

	Three Months							Nine Months
	2007		2006		% Change			2007		2006		% Change
Product revenues — Novogyne:
Product sales	$	5,801	$	5,273		10	%	$	15,974	$	13,990		14	%
Royalties		2,100		1,791		17	%		5,764		5,138		12	%
		7,901		7,064		12	%		21,738		19,128		14	%
Product revenues — third parties:
Product sales		8,697		5,671		53	%		25,381		15,402		65	%
Royalties		92		90		2	%		239		246		(3	%)
		8,789		5,761		53	%		25,620		15,648		64	%
Total product revenues		16,690		12,825		30	%		47,358		34,776		36	%
Contract and license revenues:
Contract		280		44		536	%		179		1,112		(84	%)
License		4,845		2,839		71	%		12,432		7,559		64	%
		5,125		2,883		78	%		12,611		8,671		45	%
Net revenues	$	21,815	$	15,708		39	%	$	59,969	$	43,447		38	%

Net Revenues

     As described in more detail below, the 39% increase in net revenues for the 2007 Quarter as compared to the 2006 Quarter was primarily attributable to the addition of $3.3 million in Pexeva^® and Lithobid^® revenues to product revenues — third parties due to the acquisition of JDS on August 14, 2007. In addition, there were increases in license revenues due to additional amortization of deferred revenue related to Daytrana^™ milestones and increases in Vivelle-Dot^® product revenues.

     As described in more detail below, the 38% increase in net revenues for the 2007 Period as compared to the 2006 Period was primarily attributable to increased sales of Daytrana^™ and an increase in license revenue associated with that product. In addition, aggregate international product sales increased due to the timing of orders and higher minimum price reconciliation payments as compared to the 2006 Period. Aggregate sales to Novogyne increased primarily due to increased sales of Vivelle-Dot^®. In addition, revenues in the 2007 Period benefited from the inclusion of Pexeva^® and Lithobid^® sales beginning with our acquisition of JDS on August 14, 2007.

Product Revenues — Novogyne

     Product revenues — Novogyne consists of our sales of Vivelle-Dot^®/Estradot^®, CombiPatch^® and Vivelle^® hormone therapy patches to Novogyne at a fixed price for product sampling and resale by Novogyne primarily in the United States as well as the royalties we receive as a result of Novogyne’s sales of Vivelle-Dot^® and Vivelle^®.

     The $0.8 million increase in product revenues from Novogyne for the 2007 Quarter as compared to the 2006 Quarter primarily related to a $0.8 million increase in sales of Vivelle-Dot^®. The Vivelle-Dot^® increase reflects a $1.2 million increase in trade product sales primarily due to the timing of orders from Novogyne and a $0.4 million increase due to pricing, partially offset by a $0.8 million decrease in samples attributable to the timing of orders from Novogyne.

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     The $2.6 million increase in product revenues from Novogyne for the 2007 Period as compared to the 2006 Period primarily related to a $2.6 million increase in Vivelle-Dot^®, of which $1.3 million related to trade product sales due to increased prescription trends, $0.8 million related to the timing of orders from Novogyne for samples of Vivelle-Dot^® and $0.5 million related to price. Royalties increased $0.6 million due to higher sales by Novogyne for the 2007 Period. These increases are partially offset by a $0.4 million decline in Estradot^® sales due to timing of orders.

     As noted below under “Novogyne Net Revenues”, Novogyne sells its products to trade customers, including wholesalers, distributors and chain pharmacies and the timing of orders by trade customers is difficult to predict and can lead to significant variability in trade customers ordering patterns. As a result, there may be significant period-to-period variability in Novogyne’s ordering patterns from Noven.

Product Revenues — Third Parties

     Product revenues — third parties consists of (i) sales of Estradot^®, Estalis^® and Menorest hormone therapy patches to Novartis Pharma at a price based on a percentage of Novartis Pharma’s net selling price (subject to certain minima) for resale primarily outside the United States and Japan, together with royalties generated from Novartis Pharma’s sales of Vivelle^® and Estradot^® in Canada; (ii) sales of Daytrana^™ to Shire for commercial resale in the United States; and (iii) beginning on August 14, 2007, Noven’s commercial sales of Pexeva^® and Lithobid^® to trade customers, including wholesalers, distributors and chain pharmacies.

     The $3.0 million increase in product revenues — third parties for the 2007 Quarter as compared to the 2006 Quarter primarily related to the addition of $3.3 million in Pexeva^® and Lithobid^® revenues, as well as to a $0.3 million increase related to HT product revenue partially offset by a $0.6 million decrease in sales of Daytrana^™. The increase related to HT product revenue was attributable to the recognition of a $0.5 million higher price adjustment payment received from Novartis Pharma in the 2007 Quarter compared to the 2006 Quarter. This increase was partially offset by a $0.2 million decline in unit sales. The decrease in Daytrana^™ is primarily due to $0.8 million in allowances for returns related to the voluntary market withdrawal of the product.

     The $10.0 million increase in product revenues — third parties for the 2007 Period as compared to the 2006 Period primarily related to $5.4 million increase in unit sales of Daytrana^™, the addition of $3.3 million in Pexeva^® and Lithobid^® revenues and a $1.3 million increase related to HT product pricing with Novartis Pharma. Daytrana^™ product sales in the 2007 Period were $11.0 million compared to $5.7 million in the 2006 Period. Sales of Daytrana^™ commenced in the second quarter of 2006. The increase related to HT product pricing was primarily due to the recognition of a higher price adjustment payment received from Novartis Pharma in the 2007 Period compared to the 2006 Period.

Contract and License Revenues

     Contract revenues consist of the recognition of payments received as work is performed on research and development projects. The payments received may take the form of non-refundable up-front payments, payments received upon the completion of certain phases of work and success milestone payments. License revenues consist of the recognition of non-refundable up-front, milestone and similar payments under license agreements.

     Contract revenue increased $0.2 million for the 2007 Quarter due to termination of a contract for which we have no further continuing involvement. Contract revenues declined $0.9 million for the 2007 Period, primarily reflecting a decline in contract work performed.

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     License revenues increased $2.0 million for the 2007 Quarter compared to the 2006 Quarter, mostly attributable to a $2.1 million increase in the recognition of deferred license revenues related to Daytrana^™ due to the recognition of an additional $50.0 million in sales milestones. License revenues increased $4.9 million for the 2007 Period compared to the 2006 Period, mostly attributable to a $6.0 million increase in the recognition of deferred license revenues due to the amortization of the $50.0 million approval milestone for three quarters in comparison to two quarters in the 2006 Period, amortization of the $25.0 million milestone triggered in the fourth quarter of 2006 as well as amortization of the $25.0 million milestone triggered in the second quarter of 2007. The 2006 Period benefited from the recognition of $1.0 million in deferred license revenues related to one-time non-refundable payment from a third party.

Gross to Net Revenues

     We record revenues net of sales allowances for rebates, chargebacks, cash and other discounts, as well as sales returns allowances. The following table sets forth the reconciliation of our gross sales to net sales for both our Transdermal Segment as well as our JDS Segment:

	Three Months								Nine Months
	2007			2006		% Change			2007			2006		% Change
Noven transdermal
Gross revenues	$	19,332		$	15,708		23	%	$	57,486		$	43,447		32	%
Sales returns allowances		(842	)		—		N/M			(842	)		—		N/M
Net revenues		18,490			15,708		18	%		56,644			43,447		30	%
JDS
Gross revenues		5,066			—		N/M			5,066			—		N/M
Sales allowances		(1,550	)		—		N/M			(1,550	)		—		N/M
Sales returns allowances		(191	)		—		N/M			(191	)		—		N/M
Net revenues		3,325			—		N/M			3,325			—		N/M
Total net revenues	$	21,815		$	15,708		39	%	$	59,969		$	43,447		38	%

Gross Margin

     This section discusses our gross margin percentages relating to our product revenues (i) across all of our products (“Overall Gross Margin”), (ii) on our product revenues from Novogyne (“Gross Margin — Novogyne”), which for accounting purposes is considered a related party, and (iii) on our product revenues from third parties (“Gross Margin — Third Parties”). Product revenues from third parties include HT product sales to Novartis Pharma for resale primarily outside the U.S. and Japan, Daytrana^™ product sales to Shire and, starting on August 14, 2007, JDS sales of Pexeva^® and Lithobid^® to trade customers.

     The allocation of overhead costs impacts our calculation of gross margins for each of our transdermal products. Overhead costs, which were in excess of $6.0 million and $18.0 million in the 2007 Quarter and 2007 Period, respectively, consist of salaries and benefits, supplies and tools, equipment costs, depreciation, and insurance costs. Overhead costs represent a substantial portion of our inventory production costs and the allocation of overhead among our various products requires us to make significant estimates that involve subjective and often complex judgments. Using different estimates would likely result in materially different results for Gross Margin — Novogyne and Gross Margin — Third Parties than are presented in the gross margin table below.

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     Our gross margins for the three and nine months ended September 30, 2007 and 2006 are summarized as follows (dollar amounts in thousands):

	Three Months						Nine Months
	2007			2006			2007			2006
Overall Gross Margin:
Product revenues	$	16,690		$	12,825		$	47,358		$	34,776
Cost of products sold		9,811			9,041			28,052			27,068
Gross profit (product revenues less cost of products sold)		6,879			3,784			19,306			7,708
Gross margin (gross profit as a percentage of product revenues)		41	%		30	%		41	%		22	%

	Three Months						Nine Months
	2007			2006			2007			2006
Gross Margin Novogyne:
Product revenues	$	7,901		$	7,064		$	21,738		$	19,128
Cost of products sold		4,286			3,702			10,530			10,304
Gross profit (product revenues less cost of products sold)		3,615			3,362			11,208			8,824
Gross margin (gross profit as a percentage of product revenues)		46	%		48	%		52	%		46	%

	Three Months						Nine Months
	2007			2006			2007			2006
Gross Margin Third Parties:
Product revenues	$	8,789		$	5,761		$	25,620		$	15,648
Cost of products sold		5,525			5,339			17,522			16,764
Gross profit/(loss) (product revenues less cost of products sold)		3,264			422			8,098			(1,116	)
Gross margin/(loss) (gross profit (loss) as a percentage of product revenues)		37	%		7	%		32	%		(7	%)

     In general, our sales of Pexeva^® and Lithobid^® have a higher gross margin than our other products because we sell these products to trade customers at wholesale and commercial prices. Our sales of HT products to Novogyne for resale in the U.S. have a higher gross margin than our other transdermal products, reflecting favorable pricing, larger production orders and other factors. Our sales of HT products to Novartis Pharma for resale in international markets generally have a lower gross margin than sales of HT products sold to Novogyne due to, among other things, unfavorable pricing environments in foreign markets, and smaller production orders.

     As noted in the tables above, Overall Gross Margin improved significantly in both the 2007 Quarter and in the 2007 Period as compared to the similar periods in 2006. During the 2006 Quarter, our Overall Gross Margin was materially and adversely affected by start-up expenses associated with commencing production of Daytrana^™, and production inefficiencies including lower than desired yields and increased costs associated with meeting critical launch timelines. To a lesser extent,

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Overall Gross Margin in the 2006 Quarter was also negatively affected by increased personnel and other resources dedicated to quality control in our HT operations and by lower production volume in our HT business due to the timing of orders.

     Overall Gross Margin in the 2007 Quarter and the 2007 Period benefited from (i) the addition of our Pexeva^® and Lithobid^® products, which had net sales of $3.3 million and related cost of products sold of $0.8 million, resulting in a gross margin of 76% for those products; (ii) significantly higher product revenues; higher facility utilization for our transdermal products, which contributed to improved overhead absorption; and cost savings associated with our cost reduction program that we implemented in the third quarter of 2006 to reduce costs and improve operating efficiency; and (iii) a $0.5 million and $1.3 million increase in price reconciliation payments relating to international sales of our HT products for the 2007 Quarter and in the 2007 Period in comparison to the same periods in 2006, respectively. These payments increase product revenues without increasing costs.

     Overall Gross Margin in the 2007 Quarter and 2007 Period was negatively affected by our gross margin on Daytrana^™ product sales during the 2007 Quarter. We sell Daytrana^™ finished product to Shire at a fixed cost, so our profit on product sales of Daytrana^™ depends on our ability to manufacture the product efficiently and to fully utilize our facilities. For the 2007 Quarter, Daytrana^™ product revenues were $1.4 million, (which reflects a $0.8 million adjustment in allowances for returns at Noven related to the Daytrana^™ market withdrawal) and cost of products sold related to Daytrana^™ was $2.0 million (which reflects a $0.3 million adjustment for AMI and destruction costs related to the withdrawal), resulting in a negative quarterly gross margin for the product.

     Our expectations for future gross margin performance are addressed under “Outlook” below.

Operating Expenses

     Operating expenses for the three and nine months ended September 30, 2007 and 2006 are summarized as follows (dollar amounts in thousands):

	Three Months							Nine Months
	2007		2006		% Change			2007		2006		% Change
Research and development	$	3,649	$	2,527		44	%	$	10,300	$	8,899		16	%
Acquired in-process research and development		100,150		—		N/M			100,150		—		N/M
Selling, general and administrative		11,873		6,010		98	%		23,003		16,386		40	%

Research and Development

     Research and development expenses include costs associated with, among other things, product formulation, pre-clinical testing, clinical research and studies, regulatory and medical affairs, production for clinical and regulatory purposes, production related development engineering for developmental products, and the personnel associated with each of these functions. The $1.1 million increase in research and development expenses for the 2007 Quarter as compared to the 2006 Quarter was primarily attributable to the addition of $0.5 million of JDS expenses since the Closing Date related to clinical studies and an increase in our transdermal clinical research cost of $0.8 million, partially offset by $0.1 million decline in development engineering related to Daytrana^™ and other products. The $1.4 million increase in research and development expenses for the 2007 Period as

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compared to the 2006 Period was primarily due to a $1.6 million increase in clinical research costs, $0.5 million in JDS expenses since August 14, 2007 related to clinical studies and a $0.3 million increase in personnel costs, partially offset by a $0.7 million decline in development engineering related to Daytrana^™ and other products.

Acquired In-Process Research and Development

     We immediately expensed $100.2 million in the 2007 Quarter and the 2007 Period representing the portion of the purchase price allocated to IPR&D in our acquisition of JDS. This amount represents the value assigned to projects that have been initiated and achieved material progress but (i) have not yet reached technological feasibility or have not yet reached the appropriate regulatory approval; (ii) have no alternative future use; and (iii) the fair value is estimable with reasonable certainty.

Selling, General and Administrative

     Selling, general and administrative expenses increased $5.9 million for the 2007 Quarter as compared to the 2006 Quarter primarily due to the addition of $3.5 million of JDS expenses since the Closing Date primarily related to sales and marketing expenses. In addition, Noven’s transdermal selling, general and administrative expenses increased $2.4 million, primarily due to a $2.2 million in costs associated with the voluntary withdrawal of Daytrana^™, $0.8 million increase in professional fees and a $0.2 million increase in stock-based compensation, partially offset by a $0.8 million decline in salary and related benefits.

     Selling, general and administrative expenses increased $6.6 million for the 2007 Period as compared to the 2006 Period primarily due to the addition of $3.5 million of JDS expenses since the Closing Date. In addition, Noven’s transdermal selling, general and administrative expenses had a $3.1 million increase which was attributable to $2.2 million in costs associated with the voluntary withdrawal of Daytrana^™, $0.9 million increase in professional fees and a $0.6 million increase in stock-based compensation. These increases were partially offset by a $0.4 million decline in salary and related benefits.

Other Income and Expenses

Interest Income

     Interest income increased $0.1 million and $1.9 million for the 2007 Quarter and the 2007 Period as compared to the 2006 Quarter and the 2006 Period, respectively. These increases were primarily attributable to an increase in cash available for investment due to our receipt from Shire of milestone payments of $50.0 million in April 2006, $25.0 million in March 2007 and $25.0 million in August 2007, partially offset by the $130.4 million in consideration related to the JDS acquisition, which decreased our cash available for investment in the 2007 Quarter.

Income Taxes

     Our effective tax rate was approximately 35% and 33% for the 2007 Period and the 2006 Period, respectively. The increase in our effective tax rate for the 2007 Period as compared to the 2006 Period related primarily to a higher percentage of our income that was subject to state income taxes and lower tax-free interest income as a percentage of our total loss due to the sale of short-term investments for payments relating to the Merger and the immediate expensing of IPR&D related to the JDS acquisition.

     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

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amount of annual taxable income in the years that the liability is expected to be settled or the asset recovered. The effect of adjusting the expected tax rate related to the net deferred income tax assets is included in the provision for income taxes. The acquisition of JDS caused our deferred income tax assets to significantly increase, primarily due to the fact that the $100.2 million IPR&D expense recognized in the 2007 Quarter and the 2007 Period is not immediately deductible for tax purposes. As of September 30, 2007, we had a net deferred tax asset of $62.2 million compared to $19.4 million at June 30, 2007. Realization of this deferred tax asset depends upon the generation of sufficient future taxable income. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. JDS files separate state income tax returns in states where JDS has determined that it is required to file state income taxes. As a result, state deferred tax assets relating to JDS are evaluated separately in determining whether the state deferred tax assets are realizable. We expect that JDS will incur taxable losses in the next few years due to future expected clinical trial expenditures related to product development. These expected taxable losses create negative evidence indicating the need for a valuation allowance at September 30, 2007. We recorded a valuation allowance of $3.4 million during the quarter ended September 30, 2007, due to uncertainties in realizing these state deferred tax assets based on our projection of future state taxable income. If we determine, based on future JDS profitability that these state deferred tax assets are more likely than not to be realized, a release of all, or part, of the related valuation allowance could result in an immediate income tax benefit in the period the valuation allowance is released.

Equity in Earnings of Novogyne

     We share in the earnings of Novogyne according to an established formula after satisfaction of an annual preferred return of $6.1 million to Novartis. Our share of Novogyne’s earnings (a non-cash item) increases as Novogyne’s product sales increase, subject to a cap of 49%. Novogyne earned sufficient income in the first quarter of each of 2007 and 2006 to meet Novartis’ annual preferred return for those periods and for us to recognize earnings from Novogyne under the formula. We report our share of Novogyne’s earnings as “Equity in earnings of Novogyne” in our unaudited statements of operations.

     The financial results of Novogyne for the three and nine months ended September 30, 2007 and 2006 are summarized as follows (dollar amounts in thousands):

	Three Months									Nine Months
	2007			2006			% Change			2007			2006			% Change
Gross revenues1	$	45,224		$	39,204			15	%	$	125,432		$	112,138			12	%
Sales allowances		5,770			4,283			35	%		16,769			11,622			44	%
Sales returns allowances		781			1,193			(35	%)		772			4,576			(83	%)
Sales and returns allowances		6,551			5,476			20	%		17,541			16,198			8	%
Net revenues		38,673			33,728			15	%		107,891			95,940			12	%
Cost of sales		8,152			7,529			8	%		22,994			22,212			4	%
Gross profit		30,521			26,199			16	%		84,897			73,728			15	%
Gross margin percentage		79	%		78	%					79	%		77	%
Selling, general and administrative expenses		8,278			9,419			(12	%)		27,990			28,172			(1	%)
Income from operations		22,243			16,780			33	%		56,907			45,556			25	%
Interest income		286			250			14	%		783			564			39	%
Net income	$	22,529		$	17,030			32	%	$	57,690		$	46,120			25	%
Noven’s equity in earnings of Novogyne	$	10,948		$	8,234			33	%	$	25,025		$	19,323			30	%

¹ Novogyne’s gross revenues, which are calculated by adding sales allowances and sales returns allowances to net revenues, are discussed in this section because Noven’s management believes it is a useful measure to evaluate and compare Novogyne’s sales period to period in light of the significant historic fluctuations in Novogyne’s sales allowances and returns.

Novogyne Net Revenues

     Novogyne sells its products to trade customers, including wholesalers, distributors and chain pharmacies. As has historically been the case, the timing of purchases by trade customers is driven by the inventory needs of each customer and other factors, and does not necessarily track underlying

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prescription trends in any given period or coincide with Novogyne’s quarterly financial reporting periods. As a result, the timing of orders by trade customers is difficult to predict and can lead to significant variability in Novogyne’s quarterly results.

     Novogyne’s gross revenues increased $6.0 million for the 2007 Quarter as compared to the 2006 Quarter. By product, Vivelle-Dot^® and CombiPatch^® increased $6.4 million and $0.1 million, respectively, while Estradot^® decreased $0.5 million. The $6.4 million Vivelle-Dot^® increase consisted of a $2.5 million increase related to pricing and a $3.9 million increase in unit sales due to increased product demand and to the timing of orders. The decrease in Estradot^® sales to an affiliate of Novartis Pharma in Canada was attributable to the timing of orders. The increase in CombiPatch^® was attributable to a $0.3 million increase related to pricing, partially offset by a $0.2 million decline in unit sales as a result of the continuing decline in the market for combination therapies as well as the impact of a competitive product.

     Novogyne’s gross revenues increased $13.3 million for the 2007 Period as compared to the 2006 Period. By product, Vivelle-Dot^® increased $14.4 million while Estradot^® and CombiPatch^® declined $0.9 million and $0.2 million, respectively. The $14.4 million Vivelle-Dot^® increase consisted of a $8.4 million increase related to pricing and a $5.9 million increase in unit sales due to increased product demand and to the timing of orders. The decline in Estradot^® was attributable to the timing of orders. The decline in CombiPatch^® was attributable to a $1.2 million decline in unit sales as a result of the continuing decline in the market for combination therapies as well as the impact of a competitive product. This CombiPatch^® decline was partially offset by a $1.0 million increase related to pricing.

     Sales allowances consist of chargebacks, Medicaid rebates, managed healthcare rebates, cash discounts and other allowances, which tend to fluctuate based on changes in gross revenues. These sales allowances were 13% and 11% of gross revenues for the 2007 Quarter and the 2006 Quarter, respectively. For the 2007 Period and the 2006 Period, these sales allowances were 13% and 10%, respectively. The increase in sales allowances was attributable to increases in actual managed healthcare rebates and cash discounts and allowances related to price increases that took effect in the 2007 Period.

     Sales returns allowances consist of allowances for returns of expiring product. The activity for sales returns allowances for the three and nine months ended September 30, 2007 and 2006 was as follows:

	Three Months						Nine Months
	2007			2006			2007			2006
Increases in allowances for returns primarily of expiring product	$	781		$	1,193		$	772		$	4,576
Actual returns primarily for expiring product	$	(880	)	$	(862	)	$	(2,354	)	$	(3,135	)

     The decrease in allowances for returns of expiring product for the three and nine months ended September 30, 2007 was primarily related to lower actual returns of CombiPatch^® as compared to the same period in the prior year. The higher returns of CombiPatch^® in the prior period primarily related to returns of a superseded packaging configuration.

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Novogyne Gross Margin

     Novogyne’s gross margin was largely unchanged for the 2007 Quarter compared to the 2006 Quarter as higher pricing was partially offset by higher aggregate sales and returns allowances as a percentage of revenue.

     The 2% gross margin increase for the 2007 Period as compared to the 2006 Period was primarily related to higher pricing, especially for Vivelle-Dot^®, and to a lesser extent an aggregate decrease in sales returns allowances as a percentage of revenues.

Novogyne Selling, General and Administrative Expenses

     Novogyne’s selling, general and administrative expenses for the 2007 Quarter decreased $1.1 million compared to the 2006 Quarter primarily due to lower sample expenses due to timing of orders. Novogyne’s policy is to immediately expense samples when title transfers from Noven.

     Novogyne’s selling, general and administrative expenses decreased $0.2 million for the 2007 Period as compared to the 2006 Period due to a $0.9 million decline in HT litigation expenses and a $0.1 million decline in sales, marketing and advertising expenses. These declines were partially offset by a $0.9 million increase in sample expenses due to the timing of sample orders by Novogyne.

Liquidity and Capital Resources

     As of September 30, 2007 and December 31, 2006, we had the following (amounts in thousands):

	September 30, 2007		December 31, 2006
Cash and cash equivalents	$	11,253	$	9,144
Short-term investments		61,100		144,455
Working capital		60,516		180,330

     Cash provided by (used in) operating, investing and financing activities for the 2007 Period and 2006 Period is summarized as follows (amounts in thousands):

	Nine Months
	2007			2006
Cash flows:
Operating activities	$	57,801		$	51,199
Investing activities		(49,771	)		(119,157	)
Financing activities		(5,921	)		9,670

Operating Activities

     Net cash provided by operating activities for the 2007 Period primarily resulted from our receipt of $50.0 million in milestone payments from Shire, our receipt of $18.5 million in cash distributions from Novogyne, and our receipt of $5.9 million in connection with the amphetamine transdermal system agreement with Shire. These amounts were partially offset by changes in working capital due to the timing of certain payments, including $16.2 million in tax payments, $2.9 million related to insurance and $2.6 million in compensation and related liabilities.

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     Net cash provided by operating activities for the 2006 Period primarily resulted from our receipt of $50.0 million related to the Daytrana^™ approval and $17.6 million in cash distributions from Novogyne. These amounts were partially offset by changes in working capital due to the timing of certain payments, including those related to insurance, compensation and related liabilities and payments to Shire for clinical trial costs incurred in connection with obtaining Daytrana^™ regulatory approval.

Investing Activities

     We invest a portion of our cash in short-term investments, which primarily consist of investment grade, asset backed, variable rate debt obligations and municipal auction rate securities, which are categorized as available-for-sale under the provisions of SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”.

     Net cash used in investing activities for the 2007 Period was primarily attributable to $130.4 million in acquisition costs related to the acquisition of JDS in the 2007 Quarter, net of cash acquired, and $2.3 million in equipment purchases to support operations and expansion of facilities, partially offset by $83.4 million in net proceeds from the sale of short-term investments.

     Net cash used in investing activities for the 2006 Period was primarily attributable to $112.6 million in net purchases of short-term investments, as well as the purchase of $5.8 million in fixed assets to expand production capacity for future products.

Financing Activities

     Net cash used in financing activities for the 2007 Period was primarily attributable to the open-market purchase of $5.1 million of shares of our common stock under the stock repurchase program established in the 2007 Quarter and the payment of $3.7 million in long-term obligations assumed as part of the Merger with JDS. These payments were offset by $2.5 million received in connection with the issuance of common stock from the exercise of stock options. In addition, the 2007 Period benefited from $0.4 million in excess tax deductions from the exercise of stock options.

     Net cash provided by financing activities for the 2006 Period was primarily attributable to $8.1 million received in connection with the issuance of common stock from the exercise of stock options and $1.6 million in excess tax deductions from the exercise of stock options.

Short-Term and Long-Term Liquidity

     Our principal sources of short-term liquidity are existing cash, cash generated from product sales, milestones, fees and royalties under development and license agreements and distributions from Novogyne. For the 2007 Period, a significant portion of our income before income taxes was comprised of equity in earnings of Novogyne and the recognition of deferred license revenue, both of which are non-cash items. Accordingly, our net income may not be reflective of our cash flow.

     Our short-term cash flow is dependent on distributions from Novogyne and sales, royalties and license fees associated with our products. Any decrease in sales of those products by us or our licensees or any increase in returns of products to us or to Novogyne (including any such changes resulting from the HT studies), the further decline of the HT market, or the inability or failure of Novogyne to pay distributions would have a material adverse effect on our short-term cash flow and require us to rely on our existing cash balances or on borrowings to support our operations and business.

     As discussed above, we acquired JDS for approximately $125.0 million in cash at closing plus approximately $5.4 million in transaction related costs. In addition, we assumed approximately

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$15.3 million of accrued expenses and other current liabilities and assumed certain contractual arrangements whereby we may be required to pay to third parties up to $23.5 million in product development and sales milestones that could become due over the next five years. We funded the purchase price and related transaction expenses from our sale of short-term investments. In addition, we expect to increase our research and development expense in the remaining 2007-2009 timeframe by up to an aggregate $35 million related to the development of JDS products. These amounts are in addition to our expected research and development expense for our transdermal programs during the same periods. We expect to fund the additional research and development expenses from our existing cash and short-term investments as well as the sources of funds described above.

     We currently have no long-term debt. To the extent the sources of funds described above together with our existing cash and short-term investments are insufficient to fund our operations, including our anticipated increased research and development expenses, we would expect to undertake a debt and/or equity financing as a source of liquidity.

     Our liquidity is also dependent on our receipt from Shire of the third milestone payment related to our Daytrana^™ patch. In the second quarter of 2006, we received a $50.0 million Daytrana^™ approval milestone. In the 2007 first quarter, we received the first of three potential Daytrana^™ sales milestones. In the 2007 third quarter, we received the second $25.0 million sales milestone. We cannot assure that we will achieve the third $25.0 million sales milestone, which is triggered upon Shire’s achievement of $75.0 million in annual net sales of Daytrana^™. For the 2007 Period, we paid an aggregate $16.2 million in taxes, the majority of which relate to the $50.0 million Daytrana^™ approval milestone. We expect to continue to make tax payments on the $50.0 million milestone for the remainder of 2007 and into early 2008. The majority of the income taxes related to the first and second milestones are expected to be paid in 2008 and into early 2009.

     In July 2007, the FDA completed an on-site inspection of our manufacturing facilities. At the completion of the inspection, we received a list of observations on Form 483. The majority of the observations in the Form 483 relate to the Daytrana^™ patch and difficulties experienced by some patients in removing the release liner of the Daytrana^™ patch, including certain product lots that utilize an enhanced release liner. We have submitted our written response to the observations to the FDA. No assurance can be given that our response will be acceptable to the FDA or satisfactorily address the FDA’s concerns, and there can be no assurance that the FDA will not take regulatory action that could adversely affect our business, results of operations and financial position.

     In September 2007, Shire initiated a voluntary market withdrawal of a limited portion of Daytrana^™ product. Shire took this action primarily in response to feedback from patients and caregivers who had experienced difficulty removing the release liner from some Daytrana^™ patches. We recognized an aggregate $3.3 million in allowances and expenses associated with the withdrawal in the 2007 Quarter.

     In the first quarter of 2007, Noven and Shire implemented enhancements to the Daytrana^™ release liner intended to improve ease of use of the patch. Noven’s results of operations and financial position could be adversely affected if the Daytrana^™ product that was not subject to the market withdrawal does not improve Daytrana^™’s ease of use.

     Our liquidity for the 2007 Period benefited from $2.5 million received as the exercise price paid by option holders in connection with their exercise of employee stock options. We expect this

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amount to fluctuate from period to period depending on the performance of Noven’s stock and equity award exercises. Beginning in 2006, we began granting SSARs to employees and restricted stock to non-employee directors in lieu of stock options. These types of awards do not provide cash to us upon their exercise.

     A portion of our cash and short-term investments in the 2007 Quarter was used to repurchase our common stock under our stock repurchase program. As of September 30, 2007, Noven had repurchased 322,345 shares of its common stock at an aggregate price of approximately $5.1 million.

     Capital expenditures were $2.3 million for the 2007 Period. We expect to fund our foreseeable capital expenditures from our existing cash and short-term investments. As a general matter, we believe that we have sufficient liquidity available to meet our operating needs and anticipated short-term capital requirements.

     If our products under development are successful, we expect that our cash requirements will increase to fund plant and equipment purchases to expand production capacity. 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, including those acquired as part of our acquisition of JDS. 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. If such funds are not sufficient to fund plant and equipment purchases to expand production capacity, we may rely on debt and/or equity financing to fund such expansion.

     We cannot assure that we will successfully complete the development of such products, that we will obtain regulatory approval for any such products, that any approved product will be produced in commercial quantities, at reasonable costs, and be successfully marketed, or that we will successfully negotiate future licensing or product acquisition arrangements. Because much of the cost associated with product development and expansion of manufacturing facilities is incurred prior to product launch, if we are unsuccessful in out-licensing, or if we are unable to launch additional commercially-viable products that we develop or that we license or acquire from others, we will have incurred the up-front costs associated with product development or acquisition without the benefit of the liquidity generated by sales of those products, which could adversely affect our long-term liquidity needs. Factors that could impact our ability to develop or acquire and launch additional commercially-viable products are discussed in Part I — Item 1A of our Form 10-K, as supplemented by Part II — Item 1A — “Risk Factors” of the quarterly reports on Form 10-Q filed in 2007, as well as other reports filed from time to time with the Securities and Exchange Commission.

     In addition to the acquisition of JDS, our strategic plan includes the acquisition of one or more products, technologies or businesses that we believe may be complementary to our business. We expect to draw upon our existing cash and short-term investments to fund all or a portion of these potential strategic acquisitions. To the extent our existing cash and short-term investments are insufficient to fund any potential acquisitions, we may be required to seek debt financing or to issue equity or debt securities. If we ultimately elect to finance all or any portion of an acquisition through debt financing or debt securities, we would be required to devote funds to service and ultimately repay such debt and could be subject to financial or operational covenants that could limit or hinder our ability to conduct our business.

     To the extent that we seek debt or equity financing, no assurance can be given that such 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, plant and equipment and strategic acquisitions, in order to meet our future cash requirements.

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Outlook

     A summary of our current financial guidance is provided below. Our guidance includes certain items related to the impact on our financial results of our acquisition of JDS, which closed on August 14, 2007. The forward-looking information contained in this section is based on our current assumptions and expectations, many of which are beyond our control to achieve. In particular, for purposes of this guidance we have assumed, among other things, that during the remainder of 2007 and into 2008/2009 there will not be any material:

• acquisitions of products, companies, or technologies or other transactions;

• changes in Noven’s or Novogyne’s accounting or accounting principles or any of the estimates or judgments underlying our critical accounting policies;

• regulatory or technological developments;

• changes in the supply of, demand for, or distribution of our products (including any changes resulting from competitive products, product recalls/withdrawals, or new study results);

• negative actions with respect to our applications for methylphenidate quota or other disruptions in supplies of raw materials;

• changes in our business relationships/collaborations; or

• changes in the economy or the health care sector generally.

     Financial guidance is inherently uncertain. Accordingly, we cannot assure that we will achieve results consistent with this guidance, and our actual financial results could differ materially from the expected results discussed below. For a discussion of certain factors that may impact our actual financial results for the periods referenced, including additional risks and uncertainties related to JDS, readers should carefully consider the risks, uncertainties and cautionary factors discussed in Part I — Item 1A of our Form 10-K, as supplemented by Part II — Item 1A — “Risk Factors” of the quarterly reports on Form 10-Q filed in 2007, as well as other reports filed from time to time with the Securities and Exchange Commission.

     Daytrana^™. We expect our product sales of Daytrana^™ to Shire for full-year 2007 to be in the $15 million range, subject to the availability of sufficient methylphenidate raw material supply. During 2006, we received a $50.0 million milestone payment from Shire relating to the final marketing approval of Daytrana^™ by the FDA. In the first quarter of 2007, we received the first of three potential $25.0 million sales milestones. In the 2007 Quarter, we received the second $25.0 million sales milestone. The third $25.0 million sales milestone may be achieved in 2008. We expect to continue to defer and recognize the approval milestone and all sales milestones as license revenues on a straight-line basis, beginning on the date the milestone is achieved through the first quarter of 2013, which is our current best estimate of the end of the useful economic life of the product. Reflecting the impact of this recognition schedule, license revenues in 2007 will substantially exceed 2006 levels.

     HT Product Sales. We expect Noven’s global HT product revenues for full-year 2007 to increase in the 10% range compared to 2006 levels, largely reflecting expected increases in our Vivelle-Dot^® product sales to Novogyne.

     JDS Product Sales. We expect to report aggregate product revenues from sales of JDS’s Pexeva^® and Lithobid^® products from the Closing Date through December 31, 2007 in the $9 million to $10 million range.

     Gross Margin. We expect our overall gross margin percentage for full year 2007 to be in the low 40% range, reflecting a gross margin percentage associated with the Transdermal Segment in the 35% range, and an estimated gross margin percentage associated with the JDS Segment in the 80%

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range. We expect our cost of goods will include roughly $800,000 per quarter for ongoing amortization associated with JDS’s commercialized products, subject to adjustment in future periods depending on sales forecasts and other factors.

     Research and Development Expense. We estimate our consolidated research and development expense for full year 2007 to be in the $15 million range, increasing to mid-$30 million range in 2008, and decreasing to the low-to-mid $30 million range in 2009. Estimates of research and development expenses for future periods are subject to substantial adjustment as each product advances through various stages of development.

     Selling, General and Administrative Expense. We expect our consolidated selling, general and administrative expense for full year 2007 to be in the $37.0 million range, including costs associated with Shire’s voluntary withdrawal of a portion of Daytrana^™ product, and certain costs associated with the expected commercial launch of Stavzor^™ in 2008. We expect our consolidated selling, general and administrative expense for full year 2008 to be in the mid-to-upper $40.0 million range, subject to adjustment depending on the timing of the possible launch of Stavzor^™ in 2008.

     Novogyne. We expect Novogyne’s full year 2007 net revenues to increase in the 10% range compared to 2006 levels, and we expect Novogyne’s net income to increase in the 18% range compared to 2006 levels.

     Interest Income. Interest income is expected to decrease for periods after the acquisition of JDS, reflecting lower cash and short-term investment balances following payment of the JDS purchase price.

     Effective Tax Rate. We estimate that our effective tax rate for full-year 2007 will be in the 35% to 36% range.

Aggregate Contractual Obligations

     As a result of the JDS acquisition, the aggregate contractual obligations disclosed in our Form 10-K as of December 31, 2006 have materially changed. We may be required to pay to third parties up to $23.5 million in sales and product development milestones for commercialized and developmental products, as follows:

• Pexeva^® Sales Milestones — $11.5 million in contingent sales milestones, which amount was recorded as a liability on our balance sheet upon closing of the JDS acquisition, may be payable to Synthon Pharmaceuticals upon Pexeva^®’s achievement of the following sales thresholds:

• $2.0 million milestone payable when annual net sales exceed $8.0 million in each of 2007 and 2008. Pexeva^® net sales exceeded this threshold for the 2007 Period.

• $1.25 million milestone payable for each of the first two years in which annual net sales of Pexeva^® equal or exceed $10.0 million from 2007 to 2017. Pexeva^® net sales exceeded this threshold for the 2007 Period.

• $5.0 million milestone payable in the first year that annual net sales of Pexeva^® (or any paroxetine mesylate product) exceed $30.0 million from 2007 through 2017.

• Lithium QD Development Milestones — $4.0 million in contingent development and sales milestones may be payable to a third party related to the Lithium QD product, and an additional $2.0 million in contingent payments may be payable to the manufacturer under the Lithium QD supply agreement, in each case depending on future product development and other events.

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• Stavzor^™ and Stavzor^™ ER Development Milestones — $6.0 million in contingent development and sales milestones may be payable to Banner over the course of development of Stavzor^™ and Stavzor^™ ER, depending on the achievement of specified development and sales milestones.

     All these milestones are dependent on the achievement of different development and sales milestones and there is no assurance that such milestones will be achieved and paid. In addition to the contingent milestones, as part of the JDS acquisition, we assumed the operating lease of office space that JDS uses for their operations in New York, New York. Total rental expense for this operating lease was $0.1 million for the 2007 Quarter and the 2007 Period. The minimum rental payments over the remaining lease term are $0.1 million for the remainder of 2007 and $0.2 million in 2008.

Critical Accounting Estimates

     For a discussion of our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates”, which is included in our Form 10-K, as updated and supplemented by the following:

Revenue Recognition

     Revenues, primarily for Pexeva^® and Lithobid^® products, are reduced at the time of sale to reflect expected returns that are estimated based on historical experience. Additionally, provisions are made at the time of sale for all discounts, rebates and estimated sales allowances based on historical experience updated for changes in facts and circumstances, as appropriate. Such provisions are recorded as a reduction of revenue.

     These deductions represent estimates of the related obligations, requiring the use of judgment when estimating the impact of these sales deductions on gross sales for a reporting period. These estimates for revenue deductions are derived utilizing a combination of information received from third parties, including market data, inventory reports from its major wholesale customers, historical information and other analysis. Our management believes that it is able to reasonably estimate these sales deductions.

     The following briefly describes the nature of each revenue deduction and how we estimate the related accruals:

     The United States Medicaid program is a state-government-administered program that uses state and federal funds to provide assistance to certain vulnerable and needy individuals and families. In 1990, the Medicaid Drug Rebate Program was established to reduce state and federal expenditures for prescription drugs. Under the rebate program, rebates are paid to states based on drugs paid for by those states. Provisions for estimating Medicaid rebates are calculated using a combination of historical experience, product and population growth, price increases, the impact of contracting strategies and specific terms in the individual state agreements. These provisions are then adjusted based upon the established re-filing process with individual states. For Medicaid, the calculation of rebates involves interpretation of relevant regulations, which are subject to challenge or change in interpretative guidance by government authorities. Since Medicaid rebates are typically billed up to six months after the product is dispensed, any rebate adjustments may involve revisions of accruals for several quarters.

     The products also participate in prescription drug savings programs that offer savings to patients that are eligible participants under United States Medicare programs. These savings vary

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based on a patient’s current drug coverage and personal income levels. Provisions for the obligations under these programs are based on historical experience, trend analysis and current program terms.

     On January 1, 2006, an additional prescription drug benefit was added to the United States Medicare program which funds healthcare benefits to individuals over the age of 65. Individuals that previously had dual Medicaid/Medicare drug benefit eligibility had their Medicaid prescription drug coverage replaced on January 1, 2006, by the new Medicare Part D coverage provided through private prescription drug plans. The change led to a significant shift of plan participants between programs in which products participate. Provisions for Medicare Part D rebates are estimated using a combination of specific terms of individual plan agreements, product and population growth, price increases and the impact of contracting strategies.

     Wholesaler chargebacks relate to contractual arrangements with certain indirect customers to sell products at prices that are lower than the list price charged to wholesalers. A wholesaler chargeback represents the difference between the invoice price charged to the wholesaler and the indirect customer’s contract discount price. Provisions for estimating chargebacks are calculated using a combination of historical experience, product growth rates and the specific terms in each agreement. Wholesaler chargebacks are generally settled within a few weeks of incurring the liability.

     Managed health care rebates are offered to key managed health care, group purchasing organizations and other direct and indirect customers to sustain and increase product market share. These rebate programs provide that the customer receive a rebate after attaining certain performance parameters relating to product purchases, formulary status and/or pre-established market share milestones relative to competitors. Since rebates are contractually agreed upon, rebates are estimated based on the specific terms in each agreement, historical experience and product growth rates. The sales performance of products subject to managed health care rebates and other contract discounts and levels of inventory in the distribution channel are tracked, and adjustments to the accrual are made periodically to reflect actual experience.

     In order to evaluate adequacy of ending accrual balances, we use both internal and external estimates of the level of inventory in the distribution channel and the rebate claims processing lag time. External data sources include periodic reports of wholesalers and purchased third party market data. Management internally estimates the inventory level in the retail channel and in transit.

     It is customary in the pharmaceutical industry to allow returns of unused stocks with remaining shelf lives of six months or less. Generally, our policy is that no product will be shipped to customers with less than nine months of remaining shelf-life and we generally will accept returns due to expiration within twelve months after the product has expired. These policies cause a significant lag time between when a product is sold and the latest date on which a return could occur. An allowance for estimated sales returns is recorded based on (i) the historical experience of actual product returns and (ii) the estimated lag time between when an actual sale takes place in relation to when the products are physically returned by a customer. The historical actual returns rate is then applied to product sales during the estimated lag period to develop the returns estimate. We also consider trends and expectations for future demand and trade inventory levels. We believe this is a reasonable basis on which to estimate returns exposure and incorporates the key factors that contribute to returns. These estimates are based on currently available information, and the ultimate outcome may be different than the amounts estimated given the subjective nature and complexities inherent in this area and in the pharmaceutical industry.

     Our product supply policy is to maintain inventories on a consistent level from year to year based on the pattern of consumption. Wholesaler inventory levels are monitored monthly based on gross sales volume, prescription volumes based on third party data and information received from key wholesalers. Based on this information, the inventories on hand at wholesalers and other

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     distribution channels are estimated to be approximately one to one and one-half month at September 30, 2007 for Pexeva^® and Lithobid^® products. We believe the third party data sources are sufficiently reliable; however, its accuracy cannot be independently verified.

     Cash discounts are offered to customers to encourage prompt payment. Cash discounts, which are typically 2% of gross sales, are accrued at the time of sale.

     Other sales discounts, such as consumer coupons and discount cards, are also offered. These discounts are recorded at the time of sale and estimated utilizing historical experience and the specific terms for each program.

Goodwill

     As of September 30, 2007, Noven recorded goodwill of $14.4 million. SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives be measured for impairment at least annually or whenever events indicate that there may be an impairment. In order to determine if an impairment exists, Noven compares the reporting unit’s carrying value to the reporting unit’s fair value. If it is determined that the full carrying amount of an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. For purposes of this test, the JDS Segment is considered the reporting unit. Determining the reporting unit’s fair value requires Noven to make estimates on market conditions and operational performance. Any resulting impairment loss could have a material adverse impact on Noven’s financial condition and results of operations. See Note 8 — “Goodwill and Intangible Assets” for additional information.

Deferred Income Taxes

     Accounting principles generally accepted in the United States require that we not record a valuation allowance against our net deferred tax asset if it is “more likely than not” that we will be able to generate sufficient future taxable income to utilize our net deferred tax asset, which due to the JDS acquisition increased to $62.2 million as of September 30, 2007 primarily related to the non-deductibility of the immediately expensed IPR&D of $100.2 million. Estimates of future taxable income requires us to make significant estimates that involve subjective and often complex judgments, the most significant of which relates to future cash flows of approved products and products in IPR&D. The forecast of future IPR&D cash flows required various assumptions to be made including:

• revenue that is likely to result from the approved products or IPR&D projects, including estimated number of units to be sold, estimated selling prices, estimated market penetration, estimated market share, year-over-year growth rates over the product life cycles and estimated sales allowances;

• contract and license revenues generated by approved products or IPR&D projects;

• cost of sales for the potential product using historical data, industry data or other sources of market data;

• sales and marketing expenses using historical data, industry data or other market data;

• general and administrative expenses;

• research and development expenses; and

• future equity in earnings of Novogyne.

     Additional considerations for IPR&D projects include:

• the project’s stage of completion;

• the costs incurred to date;

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• the projected costs to complete IPR&D projects;

• the contribution, if any, of the acquired identifiable intangible assets;

• the projected launch date of the products under development;

• the estimated life of the products under development; and

• the probability of success of launching a commercially viable product.

     Realization of this deferred tax asset depends upon the generation of sufficient future taxable income. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. JDS files separate state income tax returns in states where JDS has determined that it is required to file state income taxes. As a result, state deferred tax assets relating to JDS are evaluated separately in determining whether the state deferred tax assets are realizable. We expect that JDS will incur taxable losses in the next few years due to future expected clinical trial expenditures related to product development. These expected taxable losses create negative evidence indicating the need for a valuation allowance at September 30, 2007. We recorded a valuation allowance of $3.4 million during the quarter ended September 30, 2007, due to uncertainties in realizing these state deferred tax assets based on our projection of future state taxable income. If we determine, based on future JDS profitability that these state deferred tax assets are more likely than not to be realized, a release of all, or part, of the related valuation allowance could result in an immediate income tax benefit in the period the valuation allowance is released.

Accounting for Uncertainty in Income Taxes

     On January 1, 2007, we adopted the provisions of and began accounting for uncertainty in income taxes in accordance with FIN 48. This interpretation requires companies to determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. Under FIN 48 an enterprise cannot recognize a tax benefit for a tax position that is not likely to be sustained. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations and guidance surrounding income tax laws and regulations change over time. As a result, changes in our subjective assumptions, estimates and judgments can materially affect amounts recognized in our financial statements. See Note 10 to the condensed consolidated financial statements, “Income Taxes” for additional information on our uncertain tax positions.

Recent Accounting Pronouncements

     In February 2007, the FASB issued SFAS 159. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value and applies to all entities, including not-for-profit organizations. Most of the provisions of this statement apply only to entities that elect the fair value option. However, the amendment to FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities with available-for-sale and trading securities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements.” We are assessing the impact of adopting SFAS 159 and the impact it may have on Noven’s results of operations and financial condition.

     In June 2007, the FASB’s Emerging Issue Task Force (“EITF”) issued EITF Issue No. 07-03, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities” (“EITF 07-03”). This EITF requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. Entities should continue to evaluate whether they expect the good to be delivered or services to be rendered. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. EITF 07-03 is effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Earlier adoption is permitted. We are currently assessing the impact of adopting EITF 07-03 and the impact it may have on Noven’s results of operations and financial condition.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Not Applicable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

     As of the end of the 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 the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934. Based upon that evaluation, our 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 our 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 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, sales and sales deductions functions are performed by Novartis, our disclosure controls and procedures with respect to our equity investment in Novogyne are necessarily more limited than those we maintain with respect to ourself.

Changes in Internal Control over Financial Reporting

     For purposes of Management’s evaluation of our internal control over financial reporting as of September 30, 2007, we have elected to exclude JDS from the scope of management’s assessment as permitted by guidance provided by the Securities and Exchange Commission (“SEC”). JDS represented approximately 21% of our consolidated assets at September 30, 2007 and contributed approximately 6% of total revenues for the 2007 period. The JDS business will be included in management’s assessment of the effectiveness of our internal controls over financial reporting in fiscal year 2008.

     Other than the acquisition of JDS, no changes were made in our internal control over financial reporting subsequent to the date of our Chief Executive Officer’s and Chief Financial

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Officer’s evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Certificates

     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 SEC’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

     Certain lawsuits and legal proceedings in which we are involved are described in Part I, Item 3 “Legal Proceedings” of our Form 10-K. The following is a description of material developments related to our legal proceedings during the period covered by this Form 10-Q, and through the filing of this Form 10-Q, and should be read in conjunction with the report referenced above. Unless otherwise indicated, all proceedings discussed in the reports referenced above remain outstanding.

     In addition to the HT cases previously disclosed in our filings with the Securities and Exchange Commission, Novartis has advised us that Novartis has been named as a defendant in at least 25 lawsuits that include approximately 26 plaintiffs that allege liability in connection with personal injury claims allegedly arising from the use of HT patches distributed and sold by Novartis and Novogyne, including our Vivelle-Dot^®, Vivelle^®, and CombiPatch^® products. Novartis has indicated that it will seek indemnification from Noven and Novogyne to the extent permitted by the agreements between and among Novartis, Novogyne and Noven.

     We intend to defend all of the foregoing lawsuits vigorously, but the outcome of these product liability lawsuits cannot ultimately be predicted.

     In June 2007, Johnson-Matthey Inc. filed a complaint in the United States District Court, Eastern District of Texas against us alleging that we were infringing one of its patents through our manufacture and sale of Daytrana™. The plaintiff is seeking injunctions from further infringement and claiming compensatory and other damages in an unspecified amount. We intend to vigorously defend this lawsuit. In July 2007, Johnson-Matthey added Shire as a defendant to this lawsuit after Shire filed a declaratory judgment against Johnson-Matthey in the United States District Court, Eastern District of Pennsylvania. In August 2007, we filed a motion for a transfer of venue of the case to the United States District Court, Eastern District of Pennsylvania.

     We are a party to other pending legal proceedings arising in the normal course of business, none of which we believe is material to our financial position or results of operations.

Item 1A. Risk Factors

     Except as described below, there have been no material changes to the risk factors previously disclosed in our Form 10-K or in our quarterly reports on Form 10-Q filed during 2007. Readers are urged to carefully review our risk factors because they may cause our results to differ from the “forward-looking statements” made in this report or otherwise made by or on our behalf. The risk factors are not listed in order of priority and are not the only ones we face. If any of these risks actually occurs, our business, financial condition and results of operations would suffer. Additional risks not presently known to us or other factors not perceived by us to present significant

51

risks to our business at this time also may impair our business operation. 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.

We may not realize the expected benefits of our acquisition of JDS.

     We may be unable to take advantage of the opportunities that we expect to obtain from the JDS acquisition. We cannot be certain of the future success of JDS’s current products and, more importantly, those in its pipeline. The potential success of a new pharmaceutical product is subject to many risks, including but not limited to:

• the failure of ongoing and planned clinical trials and the risk that results from early-stage clinical trials may not be indicative of results in later-stage trials;

• the unproven safety and efficacy of products under development;

• the difficulty of predicting FDA approvals, including the timing of approval and that approval may not be granted at all;

• while FDA approval may be granted, the possibility that any expected period of exclusivity may not be realized and that we may not be able to produce commercially viable quantities;

• the difficulty of predicting acceptance and demand for new pharmaceutical products;

• the impact of competitive products, pricing and managed care and formulary status;

• the possibility that any product launch may be delayed or that product acceptance may be less than anticipated;

• the possibility that patent applications may not result in issued patents, and that issued patents may not be enforceable or could be invalidated;

• the commercial markets that we intend to enter with new products may not develop in the manner or to the extent that we anticipate; and

• the potential negative impact of competitive responses to our sales, marketing and strategic efforts.

Any of the above factors may have a material adverse effect on our business, financial position and results of operations. As previously announced, a Phase III clinical study of Lithium QD, a developmental once-daily form of lithium carbonate acquired in connection with the JDS acquisition, did not achieve its primary endpoint with statistical significance. While we intend to continue development of this product, there is no assurance that it will be successful.

Our acquisition of JDS is expected to dilute our earnings for an undetermined period of time.

Following the closing of the JDS transaction, our financial results will reflect significant amortization and other ongoing integration-related expenses associated with the acquisition. In addition, we will have significant increases in our research and development expenses for an extended period of time as we continue development of the products in JDS’s pipeline. No assurance can be given as to the future success of the products in JDS’s pipeline and as to whether we will be able to recover our initial and ongoing investment in JDS and its products.

Our acquisition of JDS may expose us to unexpected costs and liabilities.

Our acquisition of JDS entails an inherent risk that we could become subject to contingent or other liabilities, including liabilities arising from events or conduct pre-dating the acquisition. While the owners of JDS have agreed in the merger agreement to indemnify us for certain breaches of

52

covenants, warranties and representations, our right to indemnity is limited to a maximum of $10 million and subject to time and other restrictions. These indemnification obligations may be inadequate to fully address any costs or damages we may incur, and any such costs or damages may have a material adverse effect on our business, financial position and results of operations. We may also incur significantly greater expenditures in integrating JDS than we had anticipated.

Our acquisition of JDS has resulted in a substantial increase in our intangible assets, which will subject us to the risk of impairment charges.

Intangible assets in the form of patent development costs and goodwill from the acquisition of JDS form a significant portion of our total assets. We are required to test our intangible assets, including our goodwill, for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the asset might be impaired. If after testing the intangible assets and goodwill, we determine that these assets are impaired, then we would be required to write-down the impaired asset to fair value in the period when the determination is made. Such a write-down could have a material adverse effect on our results of operations.

We may not successfully integrate JDS into our existing business, or such integration may be more costly or more difficult than expected.

The JDS acquisition involves the integration of companies that have previously operated independently, which is a complex, costly and time-consuming process. In addition, this is the first time that we have undertaken an acquisition of this size. The difficulties of combining the companies’ operations include, among other things:

• retaining key customer and vendor relationships;

• the necessity of coordinating geographically disparate organizations, systems and facilities;

• consolidating corporate and administrative functions and eliminating redundancies;

• limiting the diversion of management resources necessary to facilitate the integration;

• implementing compatible information and communication systems, as well as common operating procedures;

• creating compatible financial controls and comparable human resource management practices;

• expenses of any undisclosed or potential legal liabilities;

• preserving, and preventing disruption of, the important contractual and other relationships of each company; and

• assimilating and retaining employees with diverse business backgrounds.

The successful integration of JDS’s business will require us to take on new functions (such as commercial distribution and managed care) with which we do not have significant experience. Consistent with JDS’s practice prior to the acquisition, we intend to outsource many of these functions to third parties. No assurance can be given that we will be successful in our efforts to develop or oversee these new capabilities in our business.

The process of integrating operations could cause an interruption of the activities of our business (including the operations of JDS’s business) and the loss of key personnel. The diversion of management’s attention, any delays or difficulties encountered in connection with the business combination and the integration of the companies’ operations or the costs associated with these activities could have a material adverse effect on our business, financial position and results of

53

operations. There is no assurance that we can successfully integrate JDS’s business with our operations, that we will otherwise succeed in operating JDS’s business and continue the development of its products or that the financial results of the combined companies will meet or exceed the financial results that we would have achieved without the acquisition.

The voluntary market withdrawal of certain Daytrana^™ product could have a material adverse effect on our results of operations and/or financial position.

The voluntary market withdrawal of certain Daytrana^™ product could have a significant financial impact on us in several ways. In addition to our costs directly relating to the withdrawal, we could be further affected if product not subject to the withdrawal does not continue to improve ease of use of the product. We may also face supply interruptions resulting from delays or inability to obtain DEA methylphenidate quota to replace withdrawn product. Additionally, we face the risk that the market withdrawal will affect sales of Daytrana^™ to an extent that would inhibit or delay achievement of the third Daytrana^™ milestone payment under our agreement with Shire.

There are inherent uncertainties involved in the estimates, judgments and assumptions used in the preparation of our financial statements, and any changes in those estimates, judgments and assumptions could have a material adverse effect on our financial position and results of operations.

The consolidated and condensed consolidated financial statements that we file with the SEC are prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of financial statements in accordance with U.S. GAAP involves making estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The most significant estimates we are required to make under U.S. GAAP include, but are not limited to, those related to revenue recognition, sales allowances, inventories and cost of goods sold, determining the useful life or impairment of goodwill and other long-lived assets, litigation settlements and related liabilities, and income taxes. We periodically evaluate estimates used in the preparation of the consolidated financial statements for reasonableness, including estimates provided by third parties. Appropriate adjustments to the estimates will be made prospectively, as necessary, based on such periodic evaluations. We base our estimates on, among other things, currently available information, market conditions, historical experience and various assumptions, which together form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although we believe that our assumptions are reasonable under the circumstances, estimates would differ if different assumptions were utilized and these estimates may prove in the future to have been inaccurate.

54

We are subject to chargebacks and rebates when our products are resold to or reimbursed by governmental agencies and managed care buying groups, which may reduce our net revenues and impact our operating results.

Chargebacks and rebates are the difference between the prices at which we sell our products to wholesalers and the price that third party payors, such as governmental agencies and managed care buying groups, ultimately pay pursuant to fixed price contracts. Medicare, Medicaid and reimbursement legislation or programs regulate drug coverage and reimbursement levels for most of the population in the United States. Federal law requires all pharmaceutical manufacturers to rebate a percentage of their revenue arising from Medicaid-reimbursed drug sales to individual states. We record an estimate of the amount either to be charged back to us or rebated to the end-users at the time of sale to the wholesaler. Managed care organizations use these chargebacks and rebates as a method to reduce overall costs in drug procurement. We record an accrual for chargebacks and rebates based upon factors including current contract prices, historical chargeback and rebate rates and actual chargebacks and rebates claimed. The amount of actual chargebacks claimed could, however, be higher than the amounts we accrue, and could reduce our net revenues during the period in which claims are made. If we over or under estimate the level of chargebacks and rebates, there may be a material impact to our operating results.

If our estimates for returned products are incorrect, there may be a materially adverse impact on our net sales as well as an impact on our operating results.

In the pharmaceutical industry, customers are normally granted the right to return product for a refund if the product has not been used by its expiration date. Management is required to estimate the level of sales that will ultimately be returned pursuant to our return policy and to record a related reserve at the time of sale. These amounts are deducted from our gross sales to determine our net sales. We believe that we have sufficient data to estimate future returns at the time of sale. Management periodically reviews the allowances for returns and adjusts them based on actual experience. In order to reasonably estimate future returns, we analyze both quantitative and qualitative information including, but not limited to, actual return rates by product, the level of product in the distribution channel, expected shelf life of the product, product demand, the introduction of competitive or generic products that may erode current demand, our new product launches and general economic and industry wide indicators. There are inherent limitations in estimating future product returns due to the time lapse between sale and actual return of the product. If we over or under estimate the level of sales that will ultimately be returned, there may be a material impact to our operating results.

Because we rely on independent manufacturers for some of our products, any production or regulatory problems these third parties experience could be disruptive to our inventory supply.

Pexeva^® and Lithobid^® are manufactured and supplied to us by independent companies. Any productions issues experienced by our independent manufactures or delays in shipping products to us may affect our product supply and ultimately have a negative impact on our sales and profitability. All manufacturers of pharmaceutical products sold in the United States must comply with cGMP requirements and manufacturing operations and processes are subject to FDA inspection. Failure to comply with cGMP requirements can lead to the shutdown of a facility, the seizure of product distributed by that facility and other sanctions. Any regulatory issues experienced by our independent manufacturers could interrupt our ability to sell our products and adversely affect our present and future sales margins and market share, as well as harm our overall business.

State pharmaceutical marketing compliance and reporting requirements may expose us to regulatory and legal action by state governments or other government authorities.

In recent years, several states and localities, including California, the District of Columbia, Maine, Massachusetts, Michigan, Minnesota, New Mexico, Ohio, Rhode Island, Vermont, and West Virginia, have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs, and file periodic reports with the state or make periodic public disclosures on sales, marketing, pricing, clinical trials, and other activities. Similar legislation is being considered in other states. Many of these requirements are new and uncertain, and the penalties for failure to comply with these requirements are unclear. We are currently in the process of developing a formal compliance infrastructure and standard operating procedures to comply with such laws. Unless we are in full compliance with these laws, we could face enforcement action and fines and other penalties, and could receive adverse publicity.

55

If we market products in a manner that violates health care fraud and abuse laws, we may be subject to civil or criminal penalties.

Federal health care program anti-kickback statutes prohibit, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under Medicare, Medicaid, or other federally financed health care programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, patients, purchasers and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing, or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Pharmaceutical companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in promotion for uses that the FDA has not approved, or off-label uses, that caused claims to be submitted to Medicaid for non-covered off-label uses; and submitting inflated best price information to the Medicaid Rebate Program.

The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines, and imprisonment. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which would also harm our financial condition. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of such laws.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     The following table provides information with respect to our stock repurchases during the third quarter of 2007:

					Total Number of
					Shares		Approximate
					Purchased as		Dollar Value
					Part of		That May Yet
	Total Number of		Average Price		Publicly		be Purchased
	Shares		Paid		Announced		under the
	Purchased		Per Share		Program		Program(1)
July 1, 2007 to July 31, 2007		—		—		—		—
August 1, 2007 to August 31, 2007		—		—		—		—
September 1, 2007 to September 30, 2007		322,345	$	15.90		322,345	$	19,876,238
Totals		322,345	$	15.90		322,345	$	19,876,238

(1) In September 2007, we announced a stock repurchase program authorizing the repurchase of up to $25.0 million of our common stock. There is no expiration date specified for this program.

Item 5. Other Information

     The following executive officers have currently effective trading plans intended to comply with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934: Eduardo A. Abrao, Diane M. Barrett, Jeffrey F. Eisenberg and W. Neil Jones. Other Noven executive officers (as well as Noven employees) may adopt Rule 10b5-1 trading plans from time to time. These plans generally provide for the exercise of stock options and the subsequent sale of the acquired shares on the open market, subject to specified limitations and minimum price thresholds. Under these plans, the executive officers do not control the specific timing of any option exercise or sale. Rule 10b5-1 permits corporate officers and directors to adopt written, pre-arranged stock trading plans when they are not in possession of material, non-public information. Public disclosure of the transactions under these plans is required to be made by the executive officers through Form 144 and Form 4 filings with the SEC.

     Noven is in the process of negotiating a new employment agreement with Robert C. Strauss, Noven’s President and Chief Executive Officer. The term of the existing employment agreement between Noven and Mr. Strauss, dated November 5, 2003, was not extended an additional year by Noven and, accordingly, the existing agreement will expire on December 31, 2007.

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Item 6. Exhibits

2.1	Agreement and Plan of Merger, dated as of July 9, 2007, by and among Noven Pharmaceuticals, Inc., Noven Acquisition, LLC, JDS Pharmaceuticals, LLC, and Satow Associates, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Noven Pharmaceuticals, Inc. filed on July 10, 2007).*
10.1	Non-Competition Agreement between Noven Pharmaceuticals, Inc. and Phillip Satow, dated as of August 14, 2007 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Noven Pharmaceuticals, Inc. filed on August 20, 2007).
10.2	Consulting Agreement between JDS Pharmaceuticals, LLC and Phillip Satow, dated as of August 14, 2007 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Noven Pharmaceuticals, Inc. filed on August 20, 2007).
10.3	Asset Purchase Agreement by and between Synthon Pharmaceuticals, Inc. and JDS Pharmaceuticals, LLC dated October 17, 2005 (with certain provisions omitted pursuant to Rule 24b-2).*
10.4	Development, License and Supply Agreement by and between Banner Pharmacaps Inc. and JDS Pharmaceuticals, LLC dated April 26, 2007 (with certain provisions omitted pursuant to Rule 24b-2).*
10.5	Contract Manufacturing Agreement between OSG Norwich Pharmaceuticals, Inc. and JDS Pharmaceuticals, LLC dated November 1, 2005 (with certain provisions omitted pursuant to Rule 24b-2).*
10.6	Manufacturing and Supply Agreement between Solvay Pharmaceuticals, Inc. and JDS Pharmaceuticals, LLC dated August 25, 2004 (with certain provisions omitted pursuant to Rule 24b-2).*
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.**

*	Certain exhibits and schedules to this document have not been filed. The Registrant agrees to furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.
**	Pursuant to Item 601(b)(32) of Regulation S-K, this exhibit is furnished rather than filed with this Form 10-Q.

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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 9, 2007	By:	/s/ Diane M. Barrett
		Diane M. Barrett
		Vice President and Chief Financial Officer

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EX-10.3

Exhibit 10.3

The confidential portions of this exhibit have been filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request in accordance with Rule 24b-2 of the Securities and Exchange Act of 1934, as amended. REDACTED PORTIONS OF THIS EXHIBIT ARE MARKED BY AN ***.

ASSET PURCHASE AGREEMENT

by and between

SYNTHON PHARMACEUTICALS, INC.

and

JDS PHARMACEUTICALS, LLC

relating to

Purchase Of PEXEVA^® Product Line

Dated October 17, 2005

TABLE OF CONTENTS

				Page
1.	Definitions				1
2.	Purchase and Sale of Purchased Assets				6
		2.1.	Purchase and Sale		6
		2.2.	Inventory		6
		2.3.	Retained Assets		7
		2.4.	Delivery of Know-How		7
		2.5.	Contracts and NDA		7
		2.6.	Patent License		7
		2.7.	Right to Use Equipment and Machinery		7
3.	Purchase Price				8
		3.1.	Payments of Purchase Price		8
		3.2.	Purchase Price Adjustment for Inventory		8
		3.3.	Purchase Price Adjustment for Distribution Channel Inventory		8
		3.4.	Additional Fee		9
4.	Representations and Warranties of Synthon				11
		4.1.	Organization; Standing		11
		4.2.	Authorization; Binding Effect		11
		4.3.	No Conflict; Consents		11
		4.4.	Title to Purchased Assets; Liens and Encumbrances		11
		4.5.	Claims; Litigation		11
		4.6.	Product Intellectual Property		11
		4.7.	Contracts		13
		4.8.	Legal and Regulatory Compliance; Specifications		13
		4.9.	Financial and Other Information		14
		4.10.	Inventory		14
		4.11.	Environmental Representation		14
		4.12.	Employment Matters		15
		4.13.	Full Disclosure		15
5.	Representations and Warranties of JDS				15
		5.1.	Organization; Standing		15
		5.2.	Authorization; Binding Effect		16
		5.3.	No Conflict; Consents		16
		5.4.	No Violation; Litigation or Regulatory Action		16
		5.5.	Availability of Financing		16
		5.6.	Disclosure		16
		5.7.	Hart-Scott-Rodino Compliance		16

i

				Page
6.	Covenants of Synthon and JDS				16
		6.1.	Access		16
		6.2.	Notice by Synthon; Statements by Synthon Representatives		17
		6.3.	Chargebacks, Rebates and Returns		17
		6.4.	Manufacturing Agreements		19
		6.5.	Stability Programs; Complaints		19
		6.6.	Safety Data		20
		6.7.	Transition Services		20
		6.8.	Regulatory Matters		20
		6.9.	Offers of Employment		21
		6.10.	Conduct Pending Closing		21
		6.11.	Financial Statements		21
		6.12.	Insurance		22
		6.13.	Synthon Covenant Regarding the Trademarks		22
		6.14.	Retained Asset Dispositions		22
		6.15.	Prohibition on Assignment		22
7.	Closing				22
		7.1.	Time and Place		22
		7.2.	Conditions Precedent to JDS’s Obligations		22
		7.3.	Conditions Precedent to Synthon’s Obligations		23
		7.4.	Deliveries at Closing		24
8.	Confidentiality and Cooperation; Non-Competition				25
		8.1.	Confidential Information		25
		8.2.	Confidentiality Obligation		25
		8.3.	Cooperation		25
		8.4.	Non-Competition		26
9.	Further Assurances				26
10.	Indemnification; Insurance				26
		10.1.	Indemnification Obligations of the Parties		26
		10.2.	Limitations on Indemnification Liability		27
		10.3.	Procedure for Indemnification		27
		10.4.	Representation		28
11.	Survival of Indemnification Obligations and Covenants				28
12.	Dispute Resolution				28
		12.1.	Negotiation		28
		12.2.	Arbitration		28
		12.3.	Interim Relief		28

ii

				Page
13.	Termination				28
		13.1.	Termination		28
		13.2.	Survival		29
14.	Specific Performance				29
15.	Assignment				29
16.	Choice of Law				29
17.	Notices				29
18.	Miscellaneous				30
		18.1.	Entire Agreement		30
		18.2.	Amendment and Modification		30
		18.3.	Severability		30
		18.4.	Non-Disclosure		30
		18.5.	Brokerage Indemnity		30
		18.6.	Execution; Facsimile Signatures		30

Schedule 1A & 1B	—	Licensed Patents
Schedule 1C	—	Patents
Schedule 1D	—	Manufacturing Agreements
Schedule 1E	—	Inventory Costs
Schedule 1F	—	Equipment and Machinery
Schedule 3.3(a)	—	Intentionally Deleted
Schedule 3.3(c)	—	Intentionally Deleted
Schedule 4	—	Exceptions
Schedule 4.6(a)	—	Product Intellectual Property
Schedule 4.7	—	Contracts
Schedule 4.10	—	Inventory As of September 30, 2005
Schedule 4.12	—	Employment Matters
Schedule 6.3(f)	—	Synthon Returned Goods Policy
Schedule 7.2(f)	—	Synthon Consents and Approvals
Schedule 7.3(e)	—	JDS Consents and Approvals
Exhibit A	—	Form of Transition Services Agreement
Exhibit B	—	Form of Pledge and Security Agreement
Exhibit C	—	Form of License
Exhibit D	—	Form of Supply Agreement
Exhibit E	—	Form of Guaranty

iii

ASSET PURCHASE AGREEMENT

     ASSET PURCHASE AGREEMENT (“Agreement”) dated this 17^th day of October, 2005 by and between SYNTHON PHARMACEUTICALS, INC., a North Carolina corporation having its principal offices at 9000 Development Drive, Research Triangle Park, North Carolina 27709 (“Synthon”) and JDS PHARMACEUTICALS, LLC, a Delaware limited liability company having its principal offices at 122 East 42^nd Street, 41^st Floor, New York, New York 10168 (“JDS”).

R E C I T A L S:

     A. Synthon owns the proprietary rights to a pharmaceutical product manufactured, marketed and sold by or on behalf of Synthon under the trademark “PEXEVA^®” (as more fully defined herein).

     B. JDS desires to purchase certain assets relating to the Product (as more fully defined in Section 1, the “Purchased Assets”) from Synthon for purposes of marketing and selling the Product in the Territory (as defined herein), and Synthon has agreed to sell the Purchased Assets to JDS, all in accordance with, and subject to, the terms and conditions hereinafter set forth.

     NOW, THEREFORE, in consideration of the foregoing and of the terms and conditions hereinafter set forth, and good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

     1. Definitions. As used herein, the following terms shall have the respective meanings set forth below:

          “Additional Fee” shall have the meaning set forth in Section 3.4 (a).

          “Additional Fee Aggregate Minimum” shall have the meaning set forth in Section 3.4 (d).

          “Additional Fee Credit” shall have the meaning set forth in Section 3.4 (f).

          “Additional Fee Expiration Date” shall mean the last date on which U.S. Patent No. 5,874,447 or any divisional thereof (provided such divisional is listed in the FDA publication entitled “Food and Drug Administration Center for Drug Evaluation and Research Approved Drug Products with Therapeutic Equivalent Evaluations” with respect to the Product (the “Orange Book”)) expires (including any patent term extension).

          “Additional Fee Period” shall mean the period commencing on the Closing Date and ending on Additional Fee Expiration Date or such earlier date as there has been a judicial finding of invalidity of U.S. Patent No. 5,874,447 and all divisionals thereof (provided such divisionals are listed in the Orange Book with respect to the Product) as to which no appeal has or can be taken.

          “Affiliate” shall mean any person or legal entity controlling, controlled by or under common control with the person with respect to whom such status is at issue and shall include, without limitation, any corporation 50% or more of the voting power of which (or other comparable ownership interest for an entity other than a corporation) is owned, directly or indirectly, by a party hereto or any corporation, person or entity which owns 50% or more of such voting power of a party hereto. With respect to Synthon, the term “Affiliate” shall include, but not be limited to, Synthon Holding BV, Synthon BV, Synthon BCT Technologies, LLC and Synthon IP Inc.

1

          “API” shall mean the compound generally referred to as paroxetine mesylate.

          “Average Selling Price” shall mean ***.

          “Average Wholesaler Inventory” shall have the meaning specified in Section 3.3(a).

          “Chargebacks” shall mean discounts or rebates provided in the form of chargeback and similar payments to wholesalers or other distributors in connection with the Product.

          “Closing” shall have the meaning set forth in Section 7.1.

          “Closing Date” shall have the meaning set forth in Section 7.1.

          “Closing Wholesaler Inventory” shall have the meaning specified in Section 3.3(b).

          “Confidential Information” shall have the meaning set forth in Section 8.1.

          “Contracts” shall mean all contracts, agreements, arrangements or understandings, to the extent directly related to the Purchased Assets or the Product in the Territory or related to the synthesis or manufacture of the Product or any component thereof anywhere in the world to the extent exclusively related to the marketing, sale, offer for sale, distribution, or use of the Product in the Territory as set forth on Schedule 4.7. Contracts shall include, without limitation, contracts or arrangements relating to the sale, use or marketing of the Product in the Territory (including agreements with managed care organizations and hospitals to the extent specifically related to the Product in the Territory) and shall include the Manufacturing Agreements and shall include contracts, agreements, arrangements or understandings relating to the synthesis or manufacture of the Product or any component thereof executed or to be performed outside of the Territory which relate to the marketing, sale, offer for sale, distribution or use of the Product in the Territory.

          “Credits” shall mean credits, utilization based rebates (other than Medicaid rebates), reimbursements, and similar payments to buying groups, managed care organizations and benefit managers, insurers and other institutions in connection with the Product.

          “Damages” shall have the meaning set forth in Section 10.1.

          “Dollars” or “$” shall mean U.S. dollars.

          “Encumbrance” shall mean any mortgage, pledge, security interest, deed of trust, lease, lien, adverse claim (including any claim of adverse ownership), levy, charge, easement, right of way, covenant, restriction, or other encumbrance, third-party right or retained right of any kind whatsoever, or any conditional sale or title retention agreement or other agreement to give any of the foregoing in the future.

          “Environmental Law” shall have the meaning set forth in Section 4.11.

          “ERISA” and “ERISA Plans” shall have the respective meanings assigned to those terms in Section 4.12.

          “FDA” shall mean the United States Food and Drug Administration or any successor agency having a similar jurisdiction and the corresponding regulatory agency in Canada.

          “Federal Program” shall have the meaning set forth in Section 6.3(d).

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          “Financial Data” shall have the meaning set forth in Section 4.9.

          “Indemnifying Party” shall have the meaning set forth in Section 10.1(c).

          “Indemnitee” shall have the meaning set forth in Section 10.1(c).

          “Inventory” shall mean all saleable inventory of Product with at least twelve (12) months of remaining shelf-life as of the Closing in finished form (and whether in bulk tablet or final packaged form) and inventory of finished samples which comply with the NDA on hand at Synthon as of the Closing.

          “Inventory Cost” with respect to a unit of Inventory shall mean Synthon’s inventory cost determined in accordance with US GAAP. Schedule 1E sets forth a schedule of Inventory Cost for units of Inventory.

          “JDS Know-How” shall have the meaning set forth in the last sentence of the definition of “Know-How” below.

          “Know-How” shall mean all methods, processes, techniques, compositions, technology, information, data, results of tests, studies, statistical and other analyses and expertise, whether patented or unpatented to the extent related to the Product in the Territory or to the extent related to the synthesis or manufacture of the Product or any component thereof anywhere in the world to the extent exclusively related to the marketing, selling, offering for sale, distributing or using the Product in the Territory, now in possession of Synthon or an Affiliate of Synthon, which are at the time of the Closing used in development, formulation, manufacture of the Product. Know-How shall include, without limitation, pharmacology, toxicology, drug stability, manufacturing and formulation methodologies and techniques, clinical and non clinical safety and efficacy studies, marketing studies and absorption, excretion, metabolism studies, quality control and quality assurance, and all tangible manifestations thereof, subject to Synthon’s rights to retain a copy of documents set forth in the definition of “Purchased Assets” below. To the extent any of such information, technology or know-how has applicability to products other than the Product in the Territory or other than to the synthesis or manufacture of the Product or any component thereof anywhere in the world to the extent exclusively related to the marketing, selling, offering for sale, distribution or use of the Product in the Territory, the assignment of Know-How hereunder shall be limited to the grant of a fully paid, exclusive (with respect to the Territory), perpetual license to use such information, technology or know-how only to the extent related to the Product. “JDS Know-How” shall mean any such Know-How now or hereafter possessed by JDS which would be defined in this Section if possessed or developed by Synthon.

          “Law” shall mean all applicable laws (including, without limitation, the Federal Food, Drug and Cosmetic Act, as amended, corresponding Canadian law and other national, state, provincial and local laws) governing the manufacture, marketing, advertising, distribution and sale of the Product or any other obligations of the parties thereunder, including regulations promulgated thereunder.

          “Licensed Patents” shall mean

          (a) each claim of each patent of Synthon or any Affiliate listed on Schedule 1A and Schedule 1B;

          (b) each claim of each patent issuing from or on each patent application listed on Schedule 1A and Schedule 1B; and

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          (c) each claim of each application for letters patent which has been filed by or assigned to Synthon, or any of its Affiliates, as the case may be, and each claim of each patent issuing from or on any such application, claiming the Product or methods for making or using the Product and in each case (including subsections (a) and (b) above) including extensions, continuations, continuations-in-part, reissues and divisions thereof, and any other patents or patent applications relating to any form or derivative of paroxetine, including, but not limited to, salts, esters, chelates, enantiomers, diastereoisomers, prodrugs and metabolites.

          For purposes of this definition only, the term “Product” shall be deemed to include any form or derivative of paroxetine, including but not limited to, salts, esters, chelates, enantiomers, diastereoisomers, prodrugs and metabolites. From and after the date hereof, from time to time as appropriate, Synthon shall update Schedules 1A and 1B to reflect any additional patents and patent applications which fall within the scope of subsection (c) above.

          “Manufacturing Agreements” shall mean the contracts and agreements identified on Schedule 1D relating to the formulation, manufacture, packaging, testing, validation, storage or shipment of the Product or any component thereof.

          “Marketing Authorization” shall mean the approval by a Regulatory Authority permitting the marketing, sale and distribution (and, if applicable, pricing and reimbursement) of the Product within the Territory, including, without limitation, the NDA.

          “Marketing Information” shall have the meaning set forth in Section 4.9.

          “Marketing Materials and Data” shall mean all physician lists, customer lists, marketing studies, market research materials, advertising and promotional materials, other similar information and data, including without limitation, records of sales and cost data for the immediate three (3) years preceding the Closing, to the extent pertaining to the marketing or distribution of the Product in the Territory which items are in the possession or control of Synthon or any of its Affiliates, promotional booths and displays, and all equipment and other materials used in connection with the sale or promotion of the Product whether or not located at Synthon’s offices.

          “NDA” shall mean a New Drug Application including amendments and supplements thereto approved by the FDA in respect of the marketing of the Product in the United States and all corresponding applications and approvals in Canada.

          “Net Sales” of the Product for a period following the Closing shall mean the gross proceeds from sales of the Product in the Territory by JDS and its Affiliates or permitted licensees to unaffiliated third parties, less (i) allowances for returns and discounts given to customers, including, without limitation, discounts made by means of rebates, Chargebacks or contract administration fees with customers that are directly related to sales of Product in the Territory (and including rebates or other payments required to be paid to governmental entities in connection with sales of Product in the Territory pursuant to the Omnibus Budget Reconciliation Act of 1990 and similar or other Federal or state legislation or programs) and (ii) any taxes or duties included in gross invoice amounts. For purposes of the definition of Net Sales, the term “Product” shall include all products marketed by JDS or a permitted licensee within the Territory which contain paroxetine mesylate. The Net Sales shall be calculated in accordance with US GAAP.

          “Patents” shall mean:

          (a) each claim of each patent of Synthon or any Affiliate listed on Schedule 1C; and

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          (b) each claim of each patent issuing from or on each patent application listed on Schedule 1C.

          “Product” shall mean any pharmaceutical product containing paroxetine mesylate in all dosage forms and formulations, including, without limitation, the pharmaceutical product known as Pexeva^® paroxetine mesylate approved for marketing in the United States pursuant to NDA 21-299, whether sold under the “Pexeva^®” trademark, any other brand name or as a generic product.

          “Product Intellectual Property” shall mean any and all of the following intellectual property rights now owned or controlled (including, without limitation, by means of in-license) by Synthon or any Affiliate to the extent used in the development, manufacture, sale, use, marketing and distribution of the Product in the Territory or to the extent used in the synthesis or manufacture of the Product or any component anywhere in the world to the extent exclusively related to the marketing, sale, offer to sell, distribution or use of the Product in the Territory, or in obtaining Marketing Authorizations: (i) Patents (other than those listed in Schedules 1A and 1B which are addressed as “Licensed Patents” in Section 2.6); (ii) Know-How; (iii) copyrights in any copyrightable Marketing Material and Data; and (iv) Trademarks, proprietary rights to universal resource locators (URLs), websites and web pages to the extent exclusively related to the Product within the Territory.

          “Purchase Price” shall mean the consideration as further defined in Section 3.1 below paid by JDS to Synthon for the transfer of Synthon and it Affiliates’ entire right, title, and interest in the Product in the Territory and with respect to the synthesis and manufacture of the Product or any component thereof anywhere in the world to the extent exclusively related to the marketing, sale, offer for sale, distribution or use of the Product in the Territory.

          “Purchased Assets” shall mean the following: (i) the Product Intellectual Property; (ii) the license to the Licensed Patents referred to in Section 2.6, (iii) all outstanding orders relating to the Product in the Territory and Contracts; (iv) the Inventory (but only to the extent JDS has elected to acquire Inventory at Closing pursuant to Section 2.2); (v) the Marketing Material and Data; (vi) the NDA; (vii) all rights or claims of Synthon or any Affiliate in respect to any of the foregoing against any third party including, without limitation, any prior owner of Product Intellectual Property but excluding any right of Synthon to receive payment for Product shipped prior to Closing; (viii) a nonexclusive right to use all Synthon equipment and machinery located at facilities where Product is manufactured (as set forth on Schedule 1F, which Schedule includes the location of such equipment and machinery) as long as JDS is manufacturing Product at such facility and in accordance with the further provisions set forth in Section 2.7; and (ix) all goodwill relating to any of the above. Synthon may retain a copy of all documents or materials included in the Purchased Assets for archival purposes, for purposes of fulfilling its obligations under this Agreement and under applicable Law and to the extent such documents or materials include or relate to Retained Assets (as hereinafter defined).

          “Quarter” shall mean the calendar quarterly periods ending March 31, June 30, September 30 and December 31.

          “Regulatory Authority” shall mean any governmental regulatory authority involved in the granting of approvals for the manufacture, sale, marketing, reimbursement or pricing of the Product (including, without limitation, the FDA) in the Territory.

          “Retained Assets” shall mean all assets of Synthon of any type, nature, status or description whatsoever, other than the Purchased Assets. For purposes of clarity and not of limitation, “Retained Assets” shall include (i) any Synthon intellectual property other than Product Intellectual Property and (ii) plant, equipment and fixed assets of Synthon other than as expressly included in the Purchased Assets.

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          “Security Agreement” shall have the meaning set forth in Section 3.1(b).

          “Specifications” shall have the meaning set forth in Section 4.8.

          “Supply Agreement” shall mean that certain supply agreement to be entered into between Synthon and JDS on the Closing Date whereby Synthon has agreed to supply JDS with certain quantities of API and Inventory from time to time pursuant to the terms of such agreement in form and substance as annexed hereto as Exhibit D.

          “Territory” shall mean the United States and Canada.

          “Threshold Loss Amount” shall have the meaning set forth in Section 10.2(a).

          “Trademarks” shall mean the trademarks set forth on Schedule 4.6(a), including all goodwill associated therewith.

          “Transition Period” shall mean a period not to exceed ninety (90) days from the Closing during which time Synthon will assist JDS with certain defined services more fully set forth in the Transition Services Agreement.

          “Transition Services” shall mean the services provided by Synthon during the Transition Period under the Transition Services Agreement.

          “Transition Services Agreement” shall mean that certain transition services agreement entered into between Synthon and JDS on the Closing Date whereby Synthon will provide the Transition Services to JDS during the Transition Period in form and substance as annexed hereto as Exhibit A.

          “United States” shall mean the United States of America, and its territories and possessions, including Puerto Rico irrespective of its political status.

          “US GAAP” shall mean generally accepted accounting principles that are in effect in the United States.

     2. Purchase and Sale of Purchased Assets.

          2.1. Purchase and Sale. Subject to the terms and conditions of this Agreement, at the Closing, Synthon shall sell, transfer, convey, assign and deliver, or cause to be sold, transferred, conveyed, assigned and delivered, to JDS, free and clear of all Encumbrances, and JDS, or any assignee or Affiliate of JDS, shall purchase, acquire and accept from Synthon (and, to the extent applicable, Affiliates of Synthon) all of Synthon’s (and, if applicable, its Affiliates’) right, title and interest in and to the Purchased Assets.

          2.2. Inventory. Prior to the Closing Date, the Parties shall cooperate to provide information to JDS as to Inventory (including lot numbers, dosage strengths and dating) which Synthon reasonably expects to have available as of the Closing Date. At least two (2) business days prior to the Closing Date, JDS will provide Synthon with a written notice of Inventory which JDS intends to purchase at closing (the “Inventory Notice). Promptly following receipt of the Inventory Notice, and in any event no later than, the business day prior to the Closing, Synthon shall provide JDS with written notice based

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on the Inventory Notice indicating the number of lots of Inventory with at least 18 months left before expiration that it will have available at Closing, including specific dosage strengths and dating information (the “Closing Inventory”). JDS may elect, but shall not be obligated, to purchase some or all of the Closing Inventory at Inventory Cost. By notice to Synthon delivered at the Closing, JDS will indicate which lots of inventory are to be included in the Purchased Assets. Synthon shall deliver at Closing a Certificate stating that the Closing Inventory delivered to JDS as part of the Purchased Assets conforms to the description of the Closing Inventory (e.g., the number of lots, dosage strengths and dating) set forth on the JDS Inventory Notice. To the extent JDS has so elected to purchase Inventory at Closing, the cash portion of the Purchase Price payable pursuant to Section 3.1 will be increased as provided by Section 3.2. Any remaining Inventory may be purchased by JDS from time to time pursuant to the Supply Agreement, provided, however, Inventory with less than twelve (12) months before expiration may be donated to accredited or recognized charitable organizations by Synthon outside of the Territory (subject to JDS prior written consent and provided the recipient agrees in writing not to export the Inventory to the Territory) or destroyed by Synthon. To the extent that Inventory purchased by JDS at Closing or pursuant to the Supply Agreement is not sold in the ordinary course, JDS may return to Synthon remaining Inventory with less than twelve (12) months left before expiration for a full refund, which JDS may obtain by offsetting the amount thereof against payments due to Synthon pursuant to 3.4 below, or to any other payments due to Synthon pursuant to this Agreement or the Supply Agreement.

          2.3. Retained Assets. Notwithstanding anything contained in this Agreement to the contrary, from and after the Closing, Synthon shall retain all of its right, title and interest in and to the Retained Assets. Notwithstanding the foregoing, except as expressly provided elsewhere in this Agreement, Synthon shall retain no interest, royalty or intellectual property rights relating to the Product in the Territory or relating to the synthesis or manufacture of the Product or any component thereof anywhere in the world to the extent exclusively related to the marketing, selling, offering for sale, distribution or use of the Product in the Territory.

          2.4. Delivery of Know-How. As described herein, Synthon shall disclose to JDS any Know-How in its possession on the Closing Date relating to the Product in the Territory or with respect to the synthesis or manufacture of the Product or any component thereof anywhere in the world to the extent exclusively related to the marketing, sale, offer for sale, distribution or use of the Product in the Territory and shall deliver to JDS at the Closing all tangible manifestations thereof, subject to the rights of Synthon to retain copies provided herein. From and after the Closing Date, Synthon shall continue to cooperate with JDS, as JDS may from time to time reasonably request, in order to more fully convey the Know-How to JDS.

          2.5. Contracts and NDA. Subject only to the provisions of the Transition Services Agreement and as set forth below, JDS will assume the obligations under the Contracts and the NDA to the extent arising from and after the Closing.

          2.6. Patent License. At the Closing, Synthon shall grant to JDS a fully paid-up, perpetual license in form and substance as set forth on Exhibit C.

          2.7. Right to Use Equipment and Machinery. In connection with and during the term of the grant by Synthon to JDS of the non-exclusive right to use the equipment and machinery listed on Schedule 1E included in the Purchased Assets, Synthon agrees that it shall not remove or relocate any of such equipment or machinery from its current location or use or authorize the use of any such equipment or machinery in any manner which would prevent or delay the use thereof by JDS for the manufacture of Product. To the extent Synthon uses or grants a licensee the use of any of the equipment or machinery for any purpose, any incremental costs incurred in connection with the use of such equipment or machinery for the manufacture of Product, including but not limited to costs associated with cleaning or validation of the equipment and machinery, shall be for Synthon’s account.

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     3. Purchase Price.

          3.1. Payments of Purchase Price. As full consideration for the Purchased Assets, JDS shall pay or cause to be paid to Synthon the following separate and distinct payments which together constitute the Purchase Price (the “Purchase Price”):

          (a) US $10,000,000, subject to adjustment as set forth in Sections 3.2 and 3.3 below, to be paid by wire transfer of immediately available funds on the Closing Date to an account designated by Synthon in writing;

          (b) US $2,000,000 on each of December 31, 2007 and December 31, 2008 plus (i) $1,000,000 if Net Sales during the calendar year ending on the date of such payment equal or exceed US $7,000,000 but are less than US $8,000,000 or (ii) $2,000,000 if Net Sales during the calendar year ending on the date of such payment equal or exceed US $8,000,000. Any additional payment pursuant to subclauses (i) or (ii) of this Section shall be paid by wire transfer on the last business day of the first calendar quarter of the year immediately following the calendar year in respect of which such payment became due. At the Closing, JDS and Synthon will execute and deliver a security agreement in substantially the form and substance as annexed hereto as Exhibit B (the “Security Agreement”) pursuant to which JDS will provide collateral security to Synthon for the payments contemplated by this subsection (b) in accordance with the terms and conditions therein set forth. JDS reserves the right to prepay all or any portion of the Purchase Price provided by this Section 3.1(b) at any time on or after the Closing. The parties agree that any such prepayment will be discounted at a rate of 9.75% per annum from the original due date of the payment to the date of payment prepaid based on the number of days in such period, determined in the inverse order of maturity. Notwithstanding the foregoing, any prepayment which does not include payment with respect to amounts which may become due pursuant to subclauses (i) or (ii) above will not discharge the obligation to make any such payments as they otherwise become due and payable;

          (c) US $1,250,000, payable with respect to each of the first two calendar years, if any, from 2007 through 2017, inclusive, as to which annual Net Sales equal or exceed US $10,000,000. Each such payment shall be paid by wire transfer on the last business day of the first calendar quarter of the year immediately following the calendar year in respect of which such payment became due. In the event one or both of the payments provided by this subsection does not accrue before January 1, 2009, any of such payments which subsequently become due shall be increased by a factor of 5% per annum commencing on January 1, 2009; and

          (d) US $5,000,000, payable with respect to the first calendar year, if any, from the Closing through and including 2017, as to which annual Net Sales equal or exceed US $30,000,000. Such payment shall be made by wire transfer on or before the last business day of the first calendar quarter of the year immediately following the calendar year in respect of which such payment became due.

          3.2. Purchase Price Adjustment for Inventory. To the extent JDS has elected to purchase Inventory as of the Closing Date, the Purchase Price payment pursuant to Section 3.1(a) shall be increased by an amount equal to the product of (i) the number and type of units of Inventory purchased multiplied by (ii) the Inventory Cost for each such Unit.

          3.3. Purchase Price Adjustment for Distribution Channel Inventory. In addition to the adjustment provided by Section 3.2 and whether or not JDS has elected to purchase Inventory at the

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Closing, the Purchase Price payable pursuant to Section 3.1(a) shall be adjusted to reflect Inventory of Product sold by Synthon prior to the Closing and then held by wholesalers or other distributors in accordance with the following provisions of this Section:

          (a) Synthon and JDS agree that the average quantities of Product historically maintained by wholesalers in the Territory or to the extent exclusively maintained for sale, offer for sale, distribution or use in the Territory (the “Average Wholesaler Inventory”) is *** bottles.

          (b) Prior to the Closing, Synthon shall obtain and disclose to JDS inventory reports from McKesson, Amerisource Bergen, and Cardinal, which reports provide information as to wholesaler inventory and in-transit in-bound quantities of Product as of the most recent practicable date prior to the Closing Date (the “Closing Wholesaler Inventory”). The parties agree that the sum of the McKesson, Amerisource Bergen, and Cardinal inventory reports shall be deemed to constitute eighty-five percent (85%) of the Closing Wholesaler Inventory.

          (c) In the event the Closing Wholesaler Inventory exceeds the Average Wholesaler Inventory, the Purchase Price payable pursuant to Section 3.1 (as adjusted, to the extent required, by Section 3.2) shall be reduced by an amount equal to the product of (i) the number of bottles by which the Closing Wholesaler Inventory exceeds the Average Wholesaler Inventory and (ii) the Average Selling Price.

          3.4. Additional Fee.

          (a) As part of the Purchase Price delivered in consideration for the Purchased Assets, and in addition to the amounts set forth in Section 3.1 hereof, JDS shall pay Synthon $.075 for each tablet of the Product or any product containing paroxetine mesylate as an active ingredient that is sold for commercial distribution by JDS, its agents or Affiliates (the “Additional Fee”) during the Additional Fee Period. For purposes of clarification, no Additional Fee shall be attributed to the Product or any product containing paroxetine mesylate as an active ingredient distributed as samples or held in inventory by JDS, its agents or Affiliates. Additional Fee shall be payable Quarterly within 45 days of the end of the Quarter to which each payment relates. Each payment of Additional Fee shall be accompanied by a statement setting forth the number of tablets sold by JDS, its agent or Affiliate for the Quarter.

          (b) Subject to sections (c), (e) and (f) below, in the event the Additional Fee payments for a calendar year are less than $350,000, JDS shall pay Synthon the difference between the total Additional Fee paid with respect to such calendar year and $350,000, which amount shall be paid together with the Additional Fee payment for the first Quarter of the following calendar year.

          (c) In the event the Additional Fee payments for any calendar year are in excess of $350,000, the excess shall be applied to reduce the annual minimum Additional Fee obligation for the next (and subsequent) calendar years until such entire excess has been so applied.

          (d) JDS’s total payments of Additional Fees to Synthon with respect to sales of the Product or any product containing paroxetine mesylate as an active ingredient during the Additional Fee Period shall equal at least the Additional Fee Aggregate Minimum (as defined below). The Additional Fee Aggregate Minimum shall be equal to $10,000,000, provided however, if the Additional Fee Period ends prior to the Additional Fee Expiration Date, the Additional Fee Aggregate Minimum shall be adjusted to equal $10,000,000 multiplied by a fraction, the numerator of which is the number of months in the Additional Fee Period and the denominator of which shall be the number of months from the Closing Date until June 10, 2017. In the event payments of Additional Fee pursuant to this Section during the Additional Fee Period are less than the Additional Fee Aggregate Minimum, JDS shall pay the

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difference between the total Additional Fee paid and the Additional Fee Aggregate Minimum within 45 days of the Additional Fee Period. JDS reserves the right to prepay the amount of any Additional Fee Aggregate Minimum remaining due (after taking into account all previous payments of Additional Fee) at any time on or after Closing. The parties agree that any such prepayment will be discounted at a rate of 9.75% per annum from June 10, 2017 to the date of payment prepaid based on the number of days in such period. The prepayment of the Additional Fee Aggregate Minimum shall constitute payment in full of all obligations pursuant to this Section 3.4 and no further payments of Additional Fee shall be due thereafter.

          (e) With respect to the partial calendar years at the beginning and the end of the Additional Fee Period, that is (i) the period from the Closing Date until the end of the first Calendar Year and (ii) the period from January 1 of the final year of the Additional Fee Period and the last day of the Additional Fee Period, (assuming the last day is prior to December 31 of the final year of the Additional Fee Period) the minimum threshold amount described in Section 3.4(b) shall be adjusted downward on a pro rata basis. For example, if there are only 292 days in a partial calendar year, the minimum Additional Fees for such period shall be $280,000.

          (f) To the extent that JDS has purchased Inventory, excluding samples, from Synthon as of the Closing Date pursuant to Section 3.2 above, a credit in the amount of $.075 times each Tablet included in the purchased Inventory, excluding samples, (the “Additional Fee Credit”) shall be applied (i) to reduce any Additional Fee payment required pursuant to Section 3.4 (a) as such Additional Fee becomes due and payable until the entire Additional Fee Credit has been so applied and (ii) to reduce the $350,000 Additional Fee minimum payable pursuant to Section 3.4(b) until the entire Additional Fee Credit has been so applied, provided, however, the Additional Fee Credit shall not be applied to reduce the $10,000,000 total Additional Fee Aggregate Minimum payable pursuant to Section 3.4(d).

          (g) JDS shall maintain accurate books and records for a period of no less than three years from the periods covered reflecting commercial sales of Product during the Additional Fee Period, which books and records shall be available for audit and inspection by Synthon or an independent auditing firm to which JDS has no reasonable objection from time to time upon reasonable advance notice solely for purposes of verifying the amount of Additional Fees and other payments due under this Agreement. In the event any such audit discloses that Additional Fee payments or other payments were underpaid by 5% or more with respect to any consecutive six (6) month period, JDS shall reimburse Synthon for the reasonable cost of the audit and shall be liable for interest equivalent to 1% compounded monthly of the aggregate amount of the discrepancy from the date such payments were due.

          3.5. Adjustments upon Transfer. Unless otherwise waived by means of a written waiver by Synthon, JDS shall not assign, transfer or exclusively license (whether by means of a sale of substantially all of JDS’s business or assets, or by merger, stock sale or similar corporate reorganization) its rights to the Product to any third party other than an Affiliate unless, effective with closing of any such transaction, all Purchase Price provided by Section 3.1(b) (except to the extent of additional payments pursuant to subclause (i) or (ii) thereof not yet due, which will be treated in accordance with the further provisions of this Section) and the Additional Fee Aggregate Minimum provided by Section 3.4(d) and not yet payable as of such date, shall have been paid to Synthon, provided that each such payment shall be discounted at a rate of 9.75% per annum from the original due date of the payment to the date of payment prepaid based on the number of days in such period, determined in the inverse order of maturity. The prepayment of the Additional Fee Aggregate Minimum shall constitute payment in full of all obligations pursuant to Section 3.4 and no further payments of Additional Fee shall be due thereafter. In addition, JDS shall be required to cause the purchaser or transferee of JDS’s rights to the Product to assume in writing for the benefit of Synthon the obligation to make all other payments pursuant to Section 3.1 as and when such payments would otherwise become due and payable hereunder. In the event the purchaser or transferee of JDS’s rights to the Product defaults in any payment obligation pursuant to Section 3.1,

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JDS shall remain liable for the full amount of such obligation until such time as the amount is paid in full and shall promptly, and in no event later than ninety (90) days, remit such payment to Synthon upon receipt of a notice of payment default on the part of such purchaser or transferee. JDS agrees to provide notice to Synthon of the pendency of any transaction referred to in this Section 3.5 as promptly as practicable in advance of the closing of any such transaction.

     4. Representations and Warranties of Synthon. Except as otherwise disclosed on Schedule 4 (Exceptions) (which Schedule indicates the section to which each exception relates), Synthon hereby represents and warrants to JDS as follows:

          4.1. Organization; Standing. Synthon is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby.

          4.2. Authorization; Binding Effect. The execution and delivery by Synthon of this Agreement, the performance by Synthon of its obligations hereunder and the consummation by Synthon of the transactions contemplated hereby have been duly authorized by all necessary action on the part of Synthon. This Agreement has been duly executed and delivered by a duly authorized representative of Synthon and constitutes the valid and legally binding obligation of Synthon enforceable against Synthon in accordance with its terms.

          4.3. No Conflict; Consents. The execution, delivery and performance of this Agreement by Synthon do not (a) violate or result in the breach of, constitute a default under, or accelerate the performance required by, any term of any covenant, agreement or understanding to which Synthon or any Affiliate is a party, or any judgment, order, decree, law, rule or regulation to which Synthon or any Affiliate is subject or (b) require the consent or agreement of any third party (including governmental bodies).

          4.4. Title to Purchased Assets; Liens and Encumbrances. Synthon or an Affiliate has, and on the Closing Date will have, good title to the Purchased Assets, free and clear of all Encumbrances whatsoever. Synthon’s disclosure and delivery of the Product Intellectual Property, including Know-How, prior to, on or after the Closing Date to JDS in the manner contemplated hereby will not violate the rights of any third party.

          4.5. Claims; Litigation. There is no action, arbitration, or other legal or administrative proceeding, pending, or, to the knowledge of Synthon, threatened, against Synthon or any Affiliate pertaining to the Product or the Purchased Assets (including, without limitation, claims in the nature of product liability or patent or other intellectual property infringement), no claims by any individual named on Schedule 4.12 against Synthon, and, to the best of Synthon’s knowledge, no governmental investigation pertaining to any of the foregoing is pending or threatened, in each such case in any country. Synthon has in good faith made available to JDS all of its files and the files of each Affiliate relating to the Purchased Assets and has delivered true and complete copies thereof to JDS, all communications with regulatory authorities in the Territory with respect to the Product (except for purely ministerial, non-substantive communications).

          4.6. Product Intellectual Property.

          (a) Schedule 4.6(a) constitutes a true and correct list of all Product Intellectual Property (inclusive of such properties as are owned, or in-licensed by Synthon or any Affiliate or presently used by Synthon or its Affiliates). Synthon or an Affiliate owns all right, title and interest in

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and to all of the Synthon or Affiliate owned properties, and the full right and interest in and to the in-licensed properties, and is legally entitled to transfer to JDS, all of the Product Intellectual Property. Such transfer to JDS is free and clear of all Encumbrances (for all properties) and free of license or royalty obligations to any third party whatsoever (other than those designated as in-licensed, in which case any royalty or other obligation of Synthon or any Affiliate to any third party is separately identified and disclosed on Schedule 4.6(a)) and free of all license or royalty obligations to any party other than the identified licensor and obligations for in-licensed properties identified on Schedule 4.6(a). No third party (including, for this purpose, directors, officers, employees or other consultants to or agents for Synthon or any Affiliate) has any legal or beneficial interest in the Product Intellectual Property or any right to restrict, limit or terminate any of Synthon’s or its Affiliates’ rights to the Product Intellectual Property.

          (b) All necessary registration, maintenance and renewal fees due in connection with such Product Intellectual Property have been paid through the Closing Date and all necessary documents and certificates in connection with such Product Intellectual Property have been filed with the relevant patent, copyright or other governmental or Regulatory Authorities for the purposes of maintaining such Product Intellectual Property.

          (c) Synthon does not know of any reasonable basis for anyone to assert that the manufacture, importation, sale, marketing, promotion or use of the Product infringes or misappropriates the intellectual property rights of any third party in the Territory, or anywhere in the world with respect to Purchased Assets to the extent utilized by Synthon for purpose of making, using, selling, offering to sell, or distributing the Product in the Territory or synthesizing or making the Product anywhere in the world to the extent exclusively related to the marketing, sale, offer for sale, distribution or use of the Product in the Territory, and has not received any notice from any person of any claims of infringement or misappropriation with respect thereto. Other than the patent interference proceedings with GlaxoSmithKline described further on Schedule 4 that were resolved in Synthon’s favor, no claim of ownership, infringement or invalidity adverse to the ownership or use by Synthon or any Affiliate of any of the Product Intellectual Property (including without limitation, any such claim by any shareholder, officer, director, manager, employee, consultant or agent of Synthon or any Affiliate) has been asserted nor does Synthon know of any reasonable basis for any such claim. Synthon does not know of any activity being conducted which would constitute an infringement of the Product Intellectual Property in the Territory or with respect to Purchased Assets to the extent utilized by Synthon for purposes of marketing, selling, offering for sale, distribution or use of the Product in the Territory or utilized by Synthon for purpose of synthesizing or manufacturing the Product anywhere in the world to the extent exclusively related to the marketing sale, offer for sale, distribution or use of the Product in the Territory.

          (d) All Trademarks relating to the Product are the sole property of Synthon. Synthon has no knowledge of any prior use, infringement, piracy or counterfeiting of such Trademarks, any superior rights by any third party in such Trademarks, or any adverse claims pertaining to such Trademarks.

          (e) The Product Intellectual Property includes all of Synthon’s and its Affiliates interest and rights to make, use, sell, offer to sell, distribute and import the Product in the Territory and to synthesize or manufacture the Product or any component thereof anywhere in the world to the extent exclusively related to the marketing, sale, offer for sale, distribution or use of the Product in the Territory and all of its rights to prevent others from making, selling, offering to sell, distributing, using or importing the Product in the Territory and from synthesizing or manufacturing the Product or any component thereof anywhere in the world to the extent exclusively related to the marketing, sale, offer for sale, distribution or use of the Product in the Territory.

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          (f) For purposes of this Section 4.6, the term “Product Intellectual Property” shall be deemed to include the Licensed Patents.

          4.7. Contracts. Set forth on Schedule 4.7 is a true, correct and complete list of the Contracts. Synthon has previously furnished to JDS, or has provided JDS with access to, true, complete and correct copies of the Contracts (or with respect to any of the Contracts which are in oral form true, complete and correct written descriptions thereof). Except as otherwise set forth on Schedule 4.7, the Contracts constitute the only contracts, licenses, agreements, commitments and arrangements, whether oral or written, used by Synthon or any Affiliate or of which Synthon or any Affiliate has the benefit, with respect to the marketing, promotion, sale or distribution of the Product in the Territory or with respect to formulation, manufacture, validation, testing or storage of the Product anywhere in the world to the extent exclusively related to the sale, offer for sale, marketing, distribution or use of the Product in the Territory. The Contracts are in full force and effect, without revocation or change, and neither Synthon nor, to Synthon’s knowledge, any other party to any of the Contracts is in default of its respective obligations thereunder, nor does any condition exist which, with notice or lapse of time or both, would constitute a default by any such party of its respective obligations under any of the Contracts. Synthon is not aware of any dispute with respect to the performance of any material term or condition of any of the Contracts.

          4.8. Legal and Regulatory Compliance; Specifications. To the best of Synthon’s knowledge, the NDA included in the Purchased Assets is the only governmental permit, authorization or approval required for the manufacture, labeling, packaging, sale, shipment, marketing or promotion of the Product in the United States excepting any such permits, authorizations or approvals applicable generally to the transaction of pharmaceutical business by corporations in jurisdictions where Synthon and its Affiliates currently conduct business, including, without limitation, state prescription drug wholesaler licenses. The Product, as manufactured, sold and delivered by Synthon or its Affiliates in the Territory or anywhere in the world to the extent exclusively related to the making, sale, offer for sale, distribution or use of the Product in the United States prior to the date hereof (including, without limitation, the Inventory) was (i) manufactured, packaged, labeled, stored, sold and shipped in compliance with the NDA and with the quality control procedures, formulae and specifications (collectively “Specifications”) previously furnished to JDS in writing and in substantial compliance with all applicable FDA, and federal, state and local laws and regulations, including, without limitation, applicable current Good Manufacturing Practice regulations promulgated by the FDA and all rules and regulations promulgated thereunder; and (ii) free from all material defects in manufacture, storage, packaging and the printing and affixing of labels. The Product and the Inventory at the date hereof is labeled in compliance with all applicable FDA and state and local regulations. The Specifications substantially comply with all applicable FDA and corresponding state and local regulations, including, without limitation, applicable current Good Manufacturing Practice regulations promulgated by the FDA. The NDA remains in effect and Synthon has submitted all reports to the FDA with respect to the NDA required to have been submitted prior to the date hereof. No regulatory action is pending or to Synthon’s knowledge threatened with respect to the NDA. To the best of Synthon’s knowledge, no regulatory action is pending or threatened with respect to the Product or any component thereof anywhere in the world where the Product or any such component is being manufactured, stored or shipped to the extent exclusively related to the marketing, sale, offer for sale, use or distribution in the Territory. Synthon has paid all fees applicable to its ownership of the NDA for all periods prior to the Closing.

          During the past two (2) years, Synthon has been in material compliance with all Laws relating to the marketing and distribution of the Product in the Territory and has filed or submitted all reports and information required by such Laws on a timely basis.

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          4.9. Financial and Other Information. Synthon has previously furnished to JDS or has identified to JDS and provided JDS an opportunity to review, (i) a copy of the NDA included in the Purchased Assets and copies of all correspondence and other communications between Synthon and the FDA related thereto; (ii) all representative information and data in Synthon’s possession or control concerning the manufacturing formulae, manufacturing and control procedures, quality control specifications, validation data and stability data in respect of the manufacture, packaging, labeling, storing, sale and delivery of the Product in or with respect to the Territory; (iii) representative financial information (including, without limitation, (A) sales of Product in the Territory through December 31, 2004 and the six-month period ended June 30, 2005, (B) representative wholesaler stocking data and return and allowance percentages and other data possessed by Synthon with respect to returns and allowances pertaining to the Product with respect to the Territory, (C) representative sales data and costs to Synthon of the manufacture, packaging, labeling, storage, sale and delivery of the Product with respect to the Territory, and (D) representative sales, promotional, advertising and marketing expenses relating to the Product with respect to the Territory (collectively, the “Financial Data”)); and (iv) representative information in Synthon’s possession or control (“Marketing Information”) relating to the sale, promotion, advertising and marketing of the Product in the Territory other than the Financial Data. Sales, cost and expense information included in the Financial Data were prepared on a basis consistent with generally accepted accounting principles. The Financial Data furnished or to be furnished by Synthon to JDS do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the facts disclosed therein not materially misleading in light of the circumstances in which disclosed. The Marketing Information is representative of such information utilized by Synthon in connection with its marketing and distribution of the Product in the Territory. In addition, Synthon has furnished to JDS complete and unaltered copies of all marketing data pertaining to the Product with respect to the Territory in the possession or control of Synthon or any Affiliate prepared by third parties on behalf of Synthon or any such Affiliate.

          As used in this Section 4.9, the term “representative” as applied to data or information shall not necessarily mean every item of such data or information but shall mean data or information which, when taken as a whole, presents a fair and accurate depiction of the subject matter of the data or information being presented and which does not reasonably require the provision of other data or information in respect of such subject matter to make the data and information presented not materially misleading.

          4.10. Inventory. Schedule 4.10 sets forth the amount, kind and dating of Inventory on hand as of September 30, 2005, including batch numbers by SKU and corresponding expiration dates. As of the Closing Date, all such Inventory is in good and marketable condition and is in compliance with all applicable federal, state and local laws and regulations applicable to its manufacture, labeling and storage. The expiration dates applicable to all such Inventory (which provide for at least twelve (12) months dating) are sufficient to permit the sale thereof in the normal course of business as has historically been conducted by Synthon with respect to its sales of the Product in the Territory.

          4.11. Environmental Representation.

          (a) To the best of its knowledge, Synthon is not in violation, or alleged to be in violation, of any federal, state or local judgment, decree, order, consent agreement, law (including common law), license, rule or regulation pertaining to environmental health or safety matters, including without limitation those arising under the Resource Conservation and Recovery Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Superfund Amendments and Reauthorization Act of 1986 as amended, the Water Act, as amended, the Federal Clean Air Act, as amended, the Toxic Substances Control Act, or any state or local analogue (an “Environmental Law”).

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          (b) Synthon has not received any notice, complaint, order, directive, claim or citation from any third party, including without limitation any federal, state or local governmental authority, indicating or alleging that Synthon or any predecessor may have any liability or obligation under any Environmental Law.

          4.12. Employment Matters.

          (a) Schedule 4.12 sets forth the name of each employee (other than the vice president of sales and marketing) of Synthon as of September 30, 2005 with responsibilities in the detailing of the Product to physicians or other customers including employees with responsibilities for communications with managed care organizations, long-term care providers, Federal and state governmental agencies and other institutions to which the Product is marketed or sold), together with the annual compensation and bonus paid to each such employee from February 1, 2004 to September 30, 2005. Schedule 4.12 also includes a true and complete description of (a) each incentive compensation plan or other compensation plan, including any retention bonus plan, currently in effect or in effect since January 1, 2004 in which such employees currently participate or have participated since January 1, 2004, (b) all employment agreements, whether oral or written, to which Synthon or any Affiliate and any of such employees are parties and a description of the terms and conditions applicable to current at-will employment arrangements to which such employees are subject and (c) each “multiemployer pension plan,” “employee welfare benefit plan” or “employee pension benefit plan” (as such terms are defined in the Employee Retirement Income Security Act of 1974, as amended to date and the regulations promulgated thereunder (“ERISA”) and referred to collectively hereinafter as “ERISA Plans”) covering any of such employees or which covered any of such employees from January 1, 2004 to the date hereof. To the extent JDS hires employees of Synthon as contemplated by Section 6.9 and in connection with such employment offers incentive compensation or retention bonuses which credit employees for service to Synthon under comparable Synthon incentive compensation or bonus programs, payments of incentive compensation or retention bonuses shall be apportioned between JDS and Synthon on a pro rata basis based on the period of employment of the affected employee by each company, respectively.

          (b) To the best of Synthon’s knowledge: each ERISA Plan complies in all material respects with all applicable laws and regulations and is operated in accordance with its terms; neither Synthon nor any Affiliate has withdrawn from any “multiemployer pension plan” included in the ERISA Plans; each of Synthon and its Affiliates has paid all premiums (and interest and late payment charges, if applicable) due for any period prior to the Closing to the Pension Benefit Guaranty Compensation (“PBGC”) with respect to each ERISA Plan; there has been no “reportable event” as defined in Section 4043(b) of ERISA and regulations of the PBGC; and the PBGC has not instituted proceedings to terminate any ERISA Plan.

          4.13. Full Disclosure. Synthon has not failed to disclose to JDS any documents, contracts, information and data in its possession or control which are materially adverse to the Purchased Assets. To the best of Synthon’s knowledge, none of the information supplied or to be supplied to JDS by Synthon under or in connection with this Agreement, contains or will contain any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading.

     5. Representations and Warranties of JDS. JDS hereby represents and warrants to Synthon as follows:

          5.1. Organization; Standing. JDS is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware, USA and has all requisite power and authority to execute and deliver this Agreement, to own, lease and operate its properties and to carry on its business as now being conducted, including the performing of all its obligations hereunder and to consummate the transactions contemplated hereby.

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          5.2. Authorization; Binding Effect. The execution and delivery by JDS of this Agreement, the performance by JDS of its obligations hereunder and the consummation by JDS of the transactions contemplated hereby have been duly authorized by all necessary action on the part of JDS. This Agreement has been duly executed and delivered by a duly authorized officer of JDS and constitutes the valid and legally binding obligation of JDS enforceable against JDS in accordance with its terms.

          5.3. No Conflict; Consents. The execution, delivery and performance of this Agreement by JDS will not violate or result in the breach of, constitute a default under, or accelerate the performance required by, any term of any covenant, agreement or understanding to which JDS or any Affiliate is a party, or any judgment, order, decree, law, rule or regulation to which JDS or any Affiliate is subject and no consents or agreements of any third party (including governmental bodies) are necessary for the performance by JDS of its obligations under this Agreement.

          5.4. No Violation, Litigation or Regulatory Action. As of date hereof, there are no actions pending or, to the knowledge of JDS, threatened against JDS or any Affiliate that are reasonably expected to materially impair the ability of JDS to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby. As of the date hereof, there is no action pending or, to the knowledge of JDS, threatened that questions the legality or propriety of the transactions contemplated by this Agreement.

          5.5. Availability of Financing. JDS has, and on the Closing Date will have available funds adequate to pay the Purchase Price payable pursuant to Section 3.1(a).

          5.6. Disclosure. No representation or warranty by JDS contained in this Agreement, and to the best of JDS’s knowledge, no statement contained in any other document, certificate or other instrument delivered by or on behalf of JDS pursuant to this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary, in light of the circumstances under which it was made, in order to make the statements herein or therein not misleading.

          5.7. Hart-Scott-Rodino Compliance. JDS has performed an estimate of the fair market value of the Purchased Assets in accordance with Rule 801.10(c) of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 16 C.F.R. § 801.10(c), and determined that the value of the assets being acquired is less than $53.1 million.

     6. Covenants of Synthon and JDS.

          6.1. Access. Synthon will permit JDS and its representatives, for as long as Synthon is required to maintain the applicable records pursuant to any legal or regulatory requirement in the Territory, to review from time to time during normal business hours, on reasonable notice, for reasonable business purposes and in such manner as does not unreasonably interfere with the conduct of Synthon’s business, all books, records and documents of Synthon or any Affiliate pertaining to (i) the manufacture, formulae, manufacturing and control procedures, stability data and cost of the Product in the Territory, (ii) all regulatory status and claims information relating to the Product in the Territory, and (iii) all clinical data, stability data, bioavailability data and reports pertaining to the Product in the Territory, to the extent any of the foregoing has not previously been furnished to JDS. In addition, upon JDS’s request, Synthon agrees to make available to JDS, from time to time during such period, at the facilities of Synthon, personnel of Synthon or its Affiliates who then have positions of responsibility with respect to the matters above set forth in this Section (and, to the extent then employed by Synthon or any Affiliate, additional

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personnel to the extent their familiarity with such matters may reasonably be required). To the extent any of such assistance is best provided by personnel who are no longer employed by Synthon, Synthon shall, upon JDS’s request, provide JDS with information Synthon may possess and may lawfully disclose as to the whereabouts of such personnel for purposes of consultation with JDS or its designated representatives. If Synthon is in possession of information as to the whereabouts of such former personnel and is unable to disclose such information to JDS, Synthon will so notify JDS and will transmit any information including JDS’s contact information to such personnel at JDS’s sole cost and expense.

          6.2. Notice by Synthon; Statements by Synthon Representatives. Within three (3) business days after the Closing Date, or as soon as practicable thereafter, Synthon agrees to mail a written notice in form and substance as agreed to by the parties to all current customers in the Territory listed in Synthon’s records. All sales representatives and national account managers of Synthon and its Affiliates shall be instructed that, in connection with any inquiries regarding the Product with respect to the Territory (other than inquiries related to the use of the Product in the Territory prior to the date hereof) from and after the date hereof, they will indicate (i) if such representatives or managers have not elected to become employees of JDS following the Closing, that the Product with respect to the Territory has been acquired by JDS and that JDS should be contacted for further information with respect thereto and (ii) if such representatives or managers have elected to become employees of JDS following the Closing, that the Product with respect to the Territory has been acquired by JDS and such employees will continue to represent the Product to such customers on behalf of JDS. The parties will cooperate as may be reasonably required to assure a smooth transition of sales and marketing efforts with respect to the Product with respect to the Territory.

          6.3. Chargebacks, Rebates and Returns. The parties have agreed to proceed as set forth below with respect to Chargebacks, Credits or government contracting and similar obligations:

          (a) Chargebacks and Credits. All Chargebacks or Credits with respect to Product sales which occurred prior to the Closing pursuant to a Contract or with respect to Product sales for which Synthon received the purchase price thereof shall be for the account of Synthon and all Chargebacks or Credits with respect to Product sales which occur after the Closing pursuant to a Contract or with respect to which Product was sold by or on behalf of JDS shall be for the account of JDS. For the avoidance of doubt, the parties agree that the party that ultimately receives the benefit of the underlying Product sale shall be responsible for handling and paying any related Chargeback or Credit.

               Notwithstanding the preceding, in light of the difficulties of determining which party may have sold Product which is the subject of a wholesaler Chargeback or Credit as to which lot numbers are not included in the relevant Chargeback invoice, the parties have agreed to assign responsibility for such Chargebacks and Credits (“Unidentified Claims”) as follows: All such Unidentified Claims with respect to wholesaler invoices to the trade dated on or before the Closing Date plus 24 days shall be for the account of Synthon and all such Unidentified Claims with respect to wholesaler invoices to the trade dated after such date shall be for the account of JDS. In addition, the responsibility for the allocation of wholesaler corrections and customer re-bills, irrespective of when received by Synthon or JDS, shall be allocated in accordance with the preceding provisions based upon the date for the wholesaler invoice which originally reflected the sales to which such correction or re-bill is made. The parties will cooperate and share all relevant wholesaler data so as to be able to allocate the responsibility for Chargebacks and Credits in accordance with the foregoing and to verify such allocations.

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          (b) Medicaid Information. With respect to any Product sold by JDS after the Closing Date which bears a National Drug Code number of Synthon or any of its Affiliates, JDS will deliver to Synthon, within fifteen (15) days after the end of each calendar quarter, the following information: (i) the “best price” (as defined under the Social Security Act, 42 U.S.C. §1396r-8(c)(1)(C) for each Product identified by National Drug Code number, (ii) the “average manufacturer price” (as defined under the Social Security Act, 42 U.S.C. §1396r-8(k)(1)) and the number of sales units and dollars for the Product, each identified by National Drug Code number and (iii) any penalties, including without limitation CPI based rebates. JDS agrees to provide to Synthon any additional data or other information regarding sales or pricing of the Product by JDS which Synthon requests as necessary for the calculation of the rebates contemplated in this Section. JDS agrees that Synthon may use all information described in this Section in Synthon’s reporting to the Center for Medicaid Services. Synthon shall provide to JDS the base date average manufacturer price and any assumptions with respect to the calculation thereof for the Products.

          (c) Medicaid Rebates for Products. Synthon shall be responsible for paying the percentage of all Medicaid rebates incurred in the quarter in which the Closing Date occurs determined by dividing the number of days in the quarter up to the Closing Date plus 24 days by the total number of days in such quarter. JDS shall be responsible for paying directly or upon receipt of an invoice from Synthon as the case may be) the percentage of Medicaid rebates incurred in the quarter in which the Closing Date occurs determined by dividing the number of days in the quarter remaining following the Closing Date (after subtracting 24 days from the previous sentence) by the total number of days in such quarter. Thereafter, JDS shall be responsible for paying all Medicaid rebates (directly or upon receipt of an invoice from Synthon as the case may be) in all subsequent quarters. Each party may invoice the other for the direct cost of processing any such Medicaid rebates. In the event that Net Sales in the quarter in which the Closing Date occurs change by more than twenty-five percent (25%) over the previous quarter, the parties shall in good faith negotiate their respective payment obligations hereunder. Synthon understands that it shall continue to be responsible for paying when due all Medicaid rebate claims stemming from Synthon labeling of the Product which may arise after the Closing Date. JDS agrees to reimburse Synthon for all Medicaid rebate claims paid by Synthon for which JDS is responsible hereunder. The foregoing provisions notwithstanding, if there is sufficient information to reasonably determine the party responsible for the sale of the Product to which such Medicaid rebate claim relates, in which case such selling party shall be responsible for such Medicaid rebate. Any and all payments due and owing under this Section shall be paid no later than seven (7) days following Synthon’s or JDS’s receipt of the other party’s invoice therefore, which invoice shall include reasonable supporting documentation and shall specify: (i) each rebate program to which the rebate is paid, (ii) the period covered by the payment, (iii) the specific amount of the rebate paid to any such program; and (iv) a reasonable description of the direct cost to such party of processing such claim. Synthon may, from time to time upon reasonable notice and request to JDS, audit rebates charged to it by JDS, and JDS shall reasonably cooperate with any such audit or inquiry by Synthon with respect to the amount or validity of any rebate, subject to any confidentiality obligations to which JDS is subjected. Subject only to the foregoing, each party shall at all times have the exclusive responsibility for the processing and payment of any and all rebates arising from or with respect to Product bearing its National Drug Code numbers. For clarification, Synthon shall be responsible for the processing and payment of all Medicaid rebates for Products bearing its NDC number and shall invoice JDS for any and all such rebates that are JDS’s responsibility under the terms of this Section 6.3(c).

          (d) Federal Government Pricing Programs. Subject to the provisions of the Transition Services Agreement, promptly after the Closing Date, Synthon shall notify the Center for Medicaid Services, the United States Department of Defense, the Office of Drug Pricing and the Veteran’s Affairs National Acquisition Center (the foregoing being hereinafter collectively referred to as the “Federal Programs”) of JDS’s distribution rights with respect to the Product, and that as of the Closing Date that Synthon will no longer support or sell the Product under any contracts in place with said Federal Programs. JDS shall establish its own contractual relationships with the Federal Programs as soon as commercially reasonable, and Synthon shall cooperate with JDS to assure the smooth transition of federal contracting to JDS.

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          (e) Recalls. If any Regulatory Authority with applicable jurisdiction shall order, or it shall otherwise become necessary to perform, any corrective action or market action with respect to the Product following the Closing (including, without limitation, any recall, field correction, market withdrawal, stock recovery, customer notice or restriction), JDS shall have the exclusive responsibility to appropriately manage such action. If such corrective action or market action is necessitated by the breach by one of the parties of any of its warranties, representations, obligations, covenants or agreements contained herein, then such party shall be liable, and shall reimburse the other party, for all reasonable costs incurred by the non-breaching party in connection with such action (including, without limitation, reasonable attorney’s fees and expenses). If each of the parties is partly responsible for such corrective action or market action, then each party shall be responsible for its proportionate share of such costs. If neither party is responsible for such corrective action or market action, then JDS shall be responsible for such costs. JDS shall also be exclusively responsible for handling all customer complaints, inquiries and the like, and Synthon shall appropriately cooperate with JDS, including the completion of an investigation and the preparation and submission of a complaint report to JDS or its designees. The preceding shall not be in lieu or limitation of any obligation of indemnity of a Party pursuant to Sections 10.1 or 10.2.

          (f) Product Returns. Returns shall be the responsibility of the party who shipped the lot with respect to which a return has occurred. From and after the Closing, Synthon shall be responsible for, and shall reimburse JDS for, the invoiced value of the returns of the Product from batches from which any sale has been made by Synthon prior to the Closing Date other than as set forth on Schedule 4.10. Schedule 4.10 sets forth all batch numbers by SKU and expiration date of batches existing on the Closing Date from which no sale has been made by Synthon other than as specifically set forth on Schedule 4.10. The mechanism for handling returns is set forth in the Transition Services Agreement. During the Transition Period, JDS shall not engage in any special pricing, rebate allowance, promotional or marketing program or activities, special returns policy or special restocking program that would impact the normal course or level of expected returns with respect to the Product.

          (g) Cooperation. The parties shall cooperate following the Closing (including, without limitation, through tracking and exchange of lot number information and pro-ration of amounts due pursuant to Contracts) from time to time and for such period as may reasonably be required to implement the intended allocation of economic responsibilities set forth in subsections (a) through (f) above.

          6.4. Contracts. To the extent requested by JDS, each of Synthon and JDS will use commercially reasonable efforts and shall cooperate (including, without limitation, by providing access to information, assistance in negotiations) to obtain assignments of the Contracts (excluding the Manufacturing Agreements) to JDS, together with obtaining such amendments or modifications thereto as JDS may reasonably request by the end of the Transition Period. In the event Synthon is unable to assign any such Contract to JDS by the end of the Transition Period, the parties agree to cooperate so that JDS will continue to receive the benefit of such Contract, subject to JDS’s accepting the obligations thereunder, in similar fashion as provided by the Transition Services Agreement until the expiration of any such Contract.

          6.5. Stability Programs; Complaints. As of the date hereof Synthon represents that it is conducting or causing to be conducted all stability testing required by applicable laws or regulations in the Territory to be conducted. Synthon shall continue such testing through its completion at JDS’s sole cost and expense. Synthon shall report the results of such tests to JDS as soon as practicable, but in no event later than thirty (30) days after each stability testing station.

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          6.6. Safety Data. Each of the parties hereto shall disclose to the other party all safety reports and other information (collectively “Safety Data”) which they may from time to time receive or obtain (whether from sources within or without the Territory) with respect to any adverse drug experiences with respect to the Product, in accordance with a reporting protocol to be mutually agreed by the parties as promptly as possible following the Closing Date. JDS shall be responsible for the reporting of Safety Data to regulatory authorities in the Territory.

          6.7. Transition Services. During the Transition Period, Synthon agrees to provide the Transition Services as more fully set forth in the Transition Services Agreement.

          6.8. Regulatory Matters.

          (a) Responsibility for the Product. Subject to compliance by the parties with the applicable provisions of the Transition Services Agreement, from and after the Closing Date, JDS shall have all regulatory responsibilities under applicable laws and regulations, reporting and otherwise, in connection with the Product in the Territory.

          (b) Transfer of NDA. Subject only to the respective obligations of the parties set forth in the Transition Services Agreement:

     (i) On the Closing Date, the parties shall file with the FDA all of the documents and information required by the FDA to effect the transfer of the NDA in the Territory from Synthon or any Affiliate to JDS or an Affiliate of JDS designated by JDS. Synthon shall file and shall cause its Affiliates to file all of the documents and the information required of a former owner, including but not limited to a letter acknowledging the transfer of ownership of the NDA, and JDS shall file the information required of a new owner. Each of JDS and Synthon shall take any and all other actions required by the FDA or other relevant Regulatory Authorities, if any, to effect the transfer of the NDA from Synthon or its Affiliate to JDS or its designated Affiliate as soon as reasonably practicable. Synthon may retain an archival copy of the NDA, including supplements and records that are required to be kept under 21 C.F.R. §314.81.

     (ii) From and after the Closing Date, JDS shall assume from Synthon or its Affiliate all responsibility for any and all fee obligations for holders or owners of approved NDAs relating to the Product in the Territory, including, but not limited to, those defined under the Prescription Drug User Fee Act of 1992, as the same may be amended from time to time.

     (iii) From and after the Closing Date, JDS shall assume all regulatory responsibility with respect to the Product including those related to (A) the marketing and promotion of the Product in the Territory; (B) Adverse Drug Reaction reporting relating to the Product in the Territory; and (C) the filing of NDAs and / or supplements to NDAs for product line extensions, extensions of the expiry date and additional product claims or additions to the labeling of the Product.

          (c) Communications with Regulatory Agencies. Subject to the respective obligations of the parties set forth in the Transition Services Agreement, from and after the Closing Date, JDS shall have responsibility for all communication with the FDA with respect to the matters relating to the Product in or with respect to the Territory. From and after the Closing Date, Synthon shall make available to JDS, copies of all correspondence to or from the FDA or other applicable Regulatory Authority relating to the manufacturing and testing of the Product. From and after the Closing Date, Synthon shall make available to JDS copies of all regulatory correspondence regarding regulatory warning letters, withdrawal of any Product, and correspondence bearing on the safety and efficacy of the Product.

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          (d) Additional Information. From and after the Closing Date, Synthon shall provide to JDS in a timely manner, but in no event less than sixty (60) days prior to the due date of JDS’s annual report to the FDA with respect to the Product, all information (in written form) which JDS reasonably requests regarding the manufacture of the Product which may be needed for JDS to comply with applicable annual reporting requirements of the FDA and applicable Laws.

          6.9. Offers of Employment. Subject to the accuracy of the relevant representations and warranties of Synthon set forth herein and relevant information provided to JDS by Synthon hereunder, JDS shall offer or shall arrange to have a third party contract sales organization offer in writing to employ the individuals named on Schedule 4.12, effective at the expiration of the Transition Period. Such offers of employment will include (i) base salary and incentive compensation opportunities substantially equivalent to the base salary and incentive compensation opportunities currently provided to such employees by Synthon, (ii) the waiver of waiting periods for health insurance coverage to the extent permitted by JDS’s insurance carrier or in the event JDS determines that such waiver is impracticable to obtain, an obligation to reimburse premium payments for continuation coverage with respect to health insurance currently maintained by Synthon pursuant to COBRA or similar state law, and (iii) credit for such employee’s period of employment with Synthon towards retirement plans of JDS, if any. All other economic and other terms and conditions of such employment offered shall be in the sole discretion of JDS. Unless otherwise determined by JDS in its sole discretion, such offers of employment will be on an “at-will” basis (as such term is generally interpreted in accordance with the laws of the State of New York). To the extent any of such employees are based in the offices of Synthon or any Affiliate, any such offers of employment may be made be conditional upon the relocation of the employee to the New York metropolitan area.

          6.10. Conduct Pending Closing.

          (a) Each party agrees that from and after the date hereof until the Closing Date, it shall conduct its business operations so that the representations and warranties made by it hereunder shall remain true and correct throughout such period. If notwithstanding such efforts, one or more of such representations or warranties shall be rendered materially untrue or incorrect, the party making such representation shall endeavor to eliminate such condition at the earliest possible date, rendering the representation or warranty true and correct before the Closing Date.

          (b) Synthon agrees that from and after the date hereof until the Closing Date, it shall conduct its business operations with respect to the Product in the ordinary course of business consistent with past practices. Without limiting the generality of the foregoing, Synthon shall not institute any price discounts or other promotional programs or price increases not in effect as of the date hereof without the prior written consent of JDS.

          6.11. Financial Statements. In the event JDS determines that it requires financial statements relating to the Product with respect to the Territory prepared and audited in accordance with US GAAP for any period prior to the Closing, Synthon shall cooperate with JDS at JDS’s sole expense to create and have audited such financial statements.

          6.12. Insurance. From and after the Closing, JDS shall procure and maintain, at its expense, insurance policies covering the risks associated with the manufacture, marketing, sale distribution and use of the Product in or with respect to the Territory (including, without limitation, product liability insurance of no less than *** individually and in the aggregate), which policies shall be of such character and in such amounts as are customarily maintained by entities engaged in such activities with respect to products similar to the Product. JDS shall, at Synthon’s request, provide evidence of such insurance reasonably satisfactory to Synthon.

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          6.13. Synthon Covenant Regarding the Trademarks. From and after the Closing, Synthon agrees that it will not utilize or seek to utilize the Trademarks or the goodwill associated therewith anywhere in the world.

          6.14. Retained Asset Dispositions. Synthon will not sell, transfer, assign or otherwise dispose of any of the Retained Assets without making adequate provision, to the reasonable satisfaction of JDS, for the assumption and performance by any assignee or transferee of Synthon’s obligations to JDS hereunder, and under the Transition Services Agreement.

          6.15. Prohibition on Assignment. From and after the Closing, JDS will not assign, transfer or sub-license the Product unless it complies with the provisions of Section 3.5.

     7. Closing.

          7.1. Time and Place. The Closing of the transactions contemplated by this Agreement, including the purchase and sale of the Purchased Assets (the “Closing”), shall take place at the offices of Hutchinson + Mason PLLC, Raleigh, North Carolina, counsel to Synthon, on November 1, 2005 or as soon as practicable thereafter (the “Closing Date”). In the event the Closing has not occurred by December 31, 2005, either party (unless such party is the cause of the delay in Closing) may elect to terminate this Agreement (without prejudice to any other right or remedy provided such party hereunder) by furnishing written notice to the other party.

          7.2. Conditions Precedent to JDS’s Obligations. Each and every obligation of JDS to be performed on the Closing Date shall be subject to the satisfaction prior to or on the Closing Date of each of the following conditions, any or all of which may be waived by JDS in writing:

          (a) Representations and Warranties True on the Closing Date; No Adverse Change. Each of the representations and warranties made by Synthon in this Agreement shall be true and correct in all material respects when made and shall be true and correct in all material respects at and as of the Closing Date as though such representations and warranties were made or given on and as of the Closing Date, except for any changes permitted by the terms of this Agreement or consented to in writing by JDS, and no event or condition exists or has occurred which may have a material adverse effect, nor has there been any damage, destruction or loss materially affecting the Purchased Assets or the properties, business or condition of Synthon to the extent related to the Purchased Assets or the Product, whether or not covered by insurance.

          (b) Compliance with Agreement. Synthon shall have in all material respects performed and complied with all of its agreements and obligations under this Agreement which are to be performed or complied with by it prior to or on the Closing Date, including the delivery of the closing instruments and documents specified in Section 7.4(a).

          (c) Absence of Litigation. No material litigation related to the Product or the Purchased Assets shall have been commenced or threatened, and no material investigation by any government entity shall have been commenced, against JDS, Synthon or any of the Affiliates, officers, directors or managers of any of them, which, in the reasonable judgment of JDS, might materially impair JDS’s title to the Purchased Assets or the transactions contemplated hereby.

          (d) Transition Services Agreement, Security Agreement & Guaranty. Synthon shall have executed and delivered the Transition Services Agreement and the Security Agreement, each of which shall be in full force and effect and legally binding in accordance with its terms. Synthon shall have caused Synthon Holding BV to have executed and delivered the Guaranty in form and substance as Exhibit E attached hereto having an effective date of even date herewith and which shall be in full force and effect and legally binding in accordance with its terms.

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          (e) Manufacturing Agreements. JDS shall have entered into binding contractual obligations reasonably satisfactory to it providing for the performance of equivalent manufacturing, packaging, validation and testing of Product and Product components for sale, distribution and future development in the Territory *** with each of OSG Norwich Pharmaceuticals, Inc. and Synthon (which agreement with Synthon shall be in the form and substance as set forth on Exhibit D).

          (f) Consents and Approvals. Except as otherwise specifically provided in this Agreement, Synthon shall have received all approvals, consents and waivers as set forth on Schedule 7.2(f) that are required to effect the transactions contemplated hereby and copies of such documents which are in Synthon’s possession shall have been received, and copies thereof shall have been delivered to JDS on or prior to the Closing Date.

          (g) Promotion Agreements. ***

          7.3. Conditions Precedent to Synthon’s Obligations. Each and every obligation of Synthon to be performed on the Closing Date shall be subject to the satisfaction prior to or on the Closing Date of each of the following conditions, any or all of which may be waived by Synthon in writing:

          (a) Representations and Warranties True on the Closing Date. Each of the representations and warranties made by JDS in this Agreement shall be true and correct in all material respects when made and shall be true and correct in all material respects at and as of the Closing Date as though such representations and warranties were made or given on and as of the Closing Date, except for any changes permitted by the terms of this Agreement or consented to in writing by Synthon.

          (b) Compliance with Agreement. JDS shall have in all material respects performed and complied with all of its agreements and obligations under this Agreement which are to be performed or complied with by it prior to or on the Closing Date, including the delivery of the Purchase Price and the closing documents specified in Section 7.4(b).

          (c) Absence of Litigation. No material litigation shall have been commenced or threatened, and no material investigation by any government entity shall have been commenced, against JDS, Synthon or any of the Affiliates, officers, directors or managers of any of them, which might, in the reasonable judgment of Synthon, materially impair the transactions contemplated hereby.

          (d) Transition Services Agreement and Security Agreement. JDS shall have executed and delivered the Transition Services Agreement and the Security Agreement, each of which shall be in full force and effect and legally binding in accordance with its terms.

          (e) Consents and Approvals. Except as otherwise specifically provided in this Agreement, all approvals, consents and waivers as set forth on Schedule 7.3(e) that are required to effect the transactions contemplated hereby shall have been received, and copies thereof shall have been delivered to Synthon on or prior to the Closing Date.

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          7.4. Deliveries at Closing.

          (a) Synthon Deliveries. At or as part of the Closing, Synthon shall have delivered or caused to be delivered to JDS:

     (i) physical possession (or the implementation of arrangements reasonably satisfactory to JDS of transfer and delivery of physical possession) of all tangible personal property (or copies thereof) included in the Purchased Assets, including all tangible personal property included in the Product Intellectual Property and appropriate documents of transfer related thereto in form and substance reasonably acceptable to Synthon and JDS;

     (ii) a Bill of Sale and assignments of the Product Intellectual Property duly executed on behalf of Synthon or its Affiliates, as the case may be, in customary form;

     (iii) the License duly executed on behalf of Synthon or its Affiliates, as the case may be;

     (iv) a certificate, dated the Closing Date and signed by a duly authorized officer, to the effect that all corporate proceedings required to be taken by Synthon in connection with the transactions contemplated hereby have been taken and that all representations and warranties are true and correct as of the Closing Date;

     (v) duly executed counterparts of the Transition Services Agreement and Security Agreement;

     (vi) the Guaranty of Synthon Holding BV in form and substance as Exhibit E attached hereto;

     (vii) notifications to Regulatory Authorities effecting the transfer of the NDA and any other Marketing Authorization to JDS, in customary form;

     (viii) employee personnel records for all sales representatives and national account managers who accept employment with JDS or its designee prior to Closing which Synthon may lawfully deliver, provided, however, in the event employees are engaged by a designee of JDS, Synthon shall deliver such personal records to such designee; and

     (ix) such other documents, instruments and certificates as JDS and Synthon may mutually agree upon.

          (b) Deliveries by JDS. At or as part of Closing, JDS shall deliver or cause to be delivered to Synthon:

     (i) the portion of the Purchase Price specified in Section 3.1(a), as adjusted in accordance with Sections 3.2 and 3.3, by certified or bank check or wire transfer;

     (ii) a certificate, dated the Closing Date and signed by a duly authorized officer, to the effect that all proceedings required to be taken by JDS in connection with the transactions contemplated hereby have been taken and that all representations and warranties are true and correct as of the Closing Date;

     (iii) duly executed counterparts of the License, the Transition Services Agreement and the Security Agreement;

     (iv) a list of employees with outstanding employment offers from JDS or its designee which have not yet been accepted; and

     (v) such other documents, instruments and certificates as JDS and Synthon may mutually agree upon.

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     8. Confidentiality and Cooperation; Non-Competition.

          8.1. Confidential Information. For purposes of this Agreement, the term “Confidential Information” shall mean any Know-How, including JDS Know-How or any other information and any non-public Product Intellectual Property, whether or not reduced to writing, which any party shall from time to time possess in relation to the development, formulation, manufacture, testing, marketing or distribution of the Product in the Territory or in relation to the manufacture or synthesis of the Product or any component thereof anywhere in the world to the extent exclusively related to the marketing, sale, offer for sale, distribution or use of the Product in the Territory and which is not generally known to the public or within the pharmaceutical industry and which one party hereto discloses to the other party. For purposes of the preceding definition, Know-How included in the Purchased Assets shall be deemed “Confidential Information” of JDS from and after the Closing. Confidential Information does not include information that (a) is or becomes part of the public domain through no act of the receiving party in breach of this Agreement, (b) was lawfully in the possession of the receiving party without any restriction on use or disclosure prior to its disclosure hereunder, (c) is lawfully received from another source subsequent to the date of this Agreement without any restriction on use or disclosure, (d) is deemed in writing by the disclosing entity no longer to be Confidential Information, (e) is developed by or for the receiving party independently of disclosures hereunder, as shown by written records, or (f) is required to be disclosed by order of any court of competent jurisdiction or other governmental authority (provided, however, in such latter case, however, that the receiving party shall timely inform the disclosing party of all such legal or governmental proceedings so that the disclosing party may attempt by appropriate legal means to limit such disclosure, and the receiving party shall further use its best efforts to limit the disclosure and maintain confidentiality to the maximum extent possible).

          8.2. Confidentiality Obligation. The parties shall each keep in strictest confidence all Confidential Information and shall not use or disclose such Confidential Information except as necessary in connection with the transactions provided for or contemplated hereby including such disclosures to permitted licensees, sublicensees, assigns or successors to the business of a party or its pharmaceutical business, as may be reasonably required to permit the exploitation of the Product in the Territory, the Purchased Assets, or the Retained Assets. To the extent either party is permitted to disclose Confidential Information pursuant to the previous sentence, such party shall only disclose the Confidential Information to employees, consultants or other agents who need to receive such Confidential Information for the purpose of achieving an objective of this Agreement and who are bound by obligations of confidentiality with respect thereto, or as may otherwise be required by law and to the extent related to the exploitation of the Product in the Territory, the Purchased Assets or the Retained Assets. Each such licensee, sublicense, assignee or successor shall be obligated to execute an agreement of confidentiality which shall be applicable both within and without the Territory. The parties shall exercise all necessary precautions to safeguard the secrecy of Confidential Information and to prevent the unauthorized disclosure thereof. Except as otherwise provided herein, the obligations of this Section shall survive the termination or expiration of this Agreement for a period of ten years following the Closing Date.

          8.3. Cooperation.

          (a) Each party covenants and agrees as to any third-party suit, action, arbitration or judicial proceeding or any governmental investigation or inquiry, relating to the Purchased Assets or the Product, being prosecuted or defended by the other party, to cooperate in making records available to such other party and to provide such access to, and use of, such information and data as reasonably requested by such other party in connection therewith. Each party will reimburse the party providing such cooperation for its reasonable out-of-pocket expenses incurred in connection with its obligations under this Section 8.3(a).

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          (b) From time to time after the Closing, the parties hereto shall deliver to each other such information and data concerning the transactions contemplated hereby as either party may reasonably request including that required in order to enable such party to complete and file all national, state and local forms which may be required to be filed by it and to complete all customary tax and accounting procedures and otherwise to enable such party to satisfy its internal accounting, tax and other requirements.

          8.4. Noncompetition. Synthon agrees that from the Closing Date until the later to occur of *** neither Synthon nor any Affiliate or third party licensed or authorized by Synthon or any Affiliate will engage in the marketing, sale or distribution of the Product in the Territory or any pharmaceutical product containing paroxetine mesylate or any pharmaceutically acceptable form of paroxetine, including, without limitation, salts, esters, chelates, enantiomers, diastereoisomers, prodrugs, and metabolites; and all pharmaceutically acceptable paroxetine containing materials and derivatives, including, but not limited to, salts, esters, chelates, enantiomers, diastereoisomers, prodrugs and metabolites. *** Notwithstanding the foregoing, Synthon’s receipt of royalties pursuant to the terms of the license to be granted at Closing pursuant to Section 2.6 shall not be deemed a breach of this Section.

     9. Further Assurances. From time to time after the Closing, without further consideration, Synthon and its Affiliates, as the case may be, shall perform all such other actions and shall execute, acknowledge and deliver all such assignments, transfers, consents and other documents as JDS or its counsel may reasonably request to vest more fully in JDS, and perfect JDS’s right, title and interest in, the Purchased Assets and to more completely convey the Know-How. Synthon will, at JDS’s sole expense, cooperate and will ensure the cooperation of its personnel and the personnel of its Affiliates, including, without limitation, by the provision of testimony by affidavit or in person as may be requested by JDS in connection with any patent prosecution, maintenance or infringement action.

     10. Indemnification; Insurance.

          10.1. Indemnification Obligations of the Parties.

          (a) Synthon shall indemnify and hold JDS (including for this purpose its Affiliates, officers, directors and agents) harmless from and against any direct costs, expenses (including, without limitation, reasonable attorneys’ fees and expenses), or damages (collectively, “Damages”) incurred by JDS which arise from (i) the breach by Synthon of any of its representations, covenants, warranties or obligations set forth herein, (ii) the development, registration, manufacture, marketing, sale or distribution of the Product before the Closing (including, without limitation, lawsuits, regulatory or other actions or proceedings, recalls, complaints or other Damages incurred with respect to the Product sold by Synthon prior to the Closing Date) except to the extent such Damages are caused by or arise from the negligence or willful misconduct of JDS or its Affiliates, ***.

          (b) JDS shall indemnify and hold Synthon (including for this purpose its Affiliates, officers, directors and agents) harmless from and against any Damages incurred by Synthon which arise from (i) the breach by JDS of any of its representations, covenants, warranties or obligations set forth herein, (ii) the development, registration, marketing, sale or distribution of the Product by JDS from and after the Closing, (iii) the manufacture of the Product anywhere in the world to the extent relating to the marketing, sale, offer for sale, distribution or use of the Product in the Territory following the Closing (including, without limitation, lawsuits, regulatory or other actions or proceedings, recalls, complaints or other Damages incurred with respect to the Product sold by JDS from and after the Closing Date or with

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respect to Product manufactured by JDS following the Closing Date) except to the extent that such Damages were caused by or arise from the negligence or willful misconduct of Synthon or its Affiliates; and (iv) any claim by Relialab respecting the promotion and marketing services provided by JDS pursuant to the Transition Services Agreement during the termination period.

          (c) The party obligated to provide indemnity pursuant to this Section is hereinafter referred to as the “Indemnifying Party” and the party to be indemnified (together with its Affiliates, officers, directors and agents) is hereinafter referred to as the “Indemnitee.”

          10.2. Limitations on Indemnification Liability.

          (a) The Indemnifying Party’s indemnification obligations under Section 10.1 shall not arise for any individual claim for damages in an amount less than $5,000 and until the sum of the aggregate amount of damages for which the Indemnifying Party is so required to indemnify exceeds $75,000 (the “Threshold Loss Amount”), provided that once the amount of individual claims exceeds the Threshold Loss Amount the indemnification obligation shall apply to all claims including those below the Threshold Loss Amount. Individual claims for damages that are similar in subject matter or that arise out of like or similar circumstances shall, where appropriate (based on all facts and circumstances including the nature and timing of the relevant claim for Damages) constitute a single claim for the purpose of this Section 10.2.

          (b) The limitations on indemnification liability provided in this Section shall not apply to the allocation of responsibility for Chargebacks, Credits and rebates set forth in Section 6.3 above. In no event shall either party be liable for punitive, consequential, special, incidental or similar damages under or in connection with this Agreement.

          10.3. Procedure for Indemnification. Promptly after the receipt by any party hereto of notice of (i) any third-party claim or (ii) the commencement of any suit, action, arbitration or judicial proceeding by a third-party, such party will, if a claim with respect thereto is to be made against any party obligated to provide indemnification pursuant to Section 10.1 hereof, give such Indemnifying Party written notice of such claim or the commencement of such action or proceeding. Such Indemnifying Party shall have the right, at its option, to compromise or defend, at its own expense and by its counsel, any such matter involving the asserted liability of the party seeking such indemnification subject to the consent of the Indemnitee which shall not be unreasonably withheld, conditioned or delayed. Such notice, and the opportunity to compromise or defend, shall be a condition precedent to any liability of the Indemnifying Party under the indemnification agreement contained in said Section 10.1. In the event that any Indemnifying Party shall undertake to compromise or defend any such asserted liability, it shall promptly notify the Indemnitee of its intention to do so, and the Indemnitee agrees to cooperate fully with the Indemnifying Party and its counsel in the compromise of, or defense against, any such asserted liability. In any event, the Indemnitee shall have the right, at its own expense, to participate in the defense of such asserted liability, provided that the Indemnifying Party shall make all final decisions concerning the defense or compromise or settlement of such litigation and the Indemnitee shall have the right to be separately represented by counsel at the expense of the Indemnifying Party if there is a conflict of interest in representation by a single counsel. Notwithstanding the foregoing, no compromise or settlement of any claim, action, liability, etc. pursuant to this Section 10.3 may be effected by the Indemnifying Party without Indemnitee’s consent, which shall not be unreasonably withheld, conditioned or delayed, unless (A) there is no finding or admission of any violation of legal requirements or any violation of the right of any person or entity and no effect on any other claims that may be made against the Indemnitee and (B) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party.

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          10.4. Representation. Each of the parties hereto shall be entitled to be represented at any action, arbitration or proceeding brought by the other party against a third party under this Section 10 by its own counsel, at its own expense, and shall fully cooperate with the other party in any such proceeding, provided it is adequately reimbursed for its out-of-pocket costs and expenses, excluding attorneys’ fees.

     11. Survival of Indemnification Obligations and Covenants. Except as otherwise expressly set forth herein, all indemnifications, obligations, agreements and covenants contained in this Agreement shall survive the Closing Date and shall remain in full force and effect for a period of ten years following the Closing Date, provided, however, that the obligations relating to the representations and warranties (except to the extent related to indemnity obligations for third party claims, with respect to which such representations and warranties shall remain in full force and effect for the duration of such indemnity obligations) shall remain in full force and effect for a period of twelve (12) months following the Closing Date.

     12. Dispute Resolution.

          12.1. Negotiation. Any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination, or invalidity hereof shall be submitted for negotiation and settlement in the first instance to the Chief Operating Officer of Synthon, or such person’s designee of equivalent or superior position, and the Chief Operating Officer of JDS, or such person’s designee of equivalent or superior position.

          12.2. Arbitration. If the parties are unable to settle a dispute, controversy or claim hereunder pursuant to Section 12.1, the matter shall be finally resolved by arbitration in accordance with the rules of American Arbitration Association, except as modified by this Section 12.2. The number of arbitrators shall be three (3), one (1) of whom is selected by JDS, one (1) of whom is selected by Synthon and one (1) of whom is selected by Synthon and JDS (or by the other two (2) arbitrators if the parties cannot agree). The arbitration proceeding shall be conducted in the English language. The arbitration proceeding shall be brought in the District of Columbia, unless the parties agree in writing to conduct the arbitration in another location. The arbitration decision shall be binding and not be appealable to any court in any jurisdiction. The prevailing party may enter such decision in any court having competent jurisdiction. Each party shall pay its own expenses of arbitration and the expenses of the arbitrators shall be equally shared except that if, in the opinion of the arbitrators, any claim by a party hereto or any defense or objection thereto by the other party was unreasonable, the arbitrators may in their discretion assess as part of the award any part of the arbitration expenses of the other party (including reasonable attorneys’ fees) and expenses of the arbitrators against the party raising such unreasonable claim, defense or objection.

          12.3. Interim Relief. Any party may, without inconsistency with this Agreement, apply to any court having jurisdiction hereof and seek injunctive relief so as to maintain the status quo or to prevent irreparable harm as to any matter as to which there is no adequate remedy at law until such time as the arbitration award is rendered or the controversy is otherwise resolved.

     13. Termination.

          13.1. Termination. Either party shall have the right to terminate this Agreement, effective upon written notice to the other party, if the Closing has not occurred on or before December 31, 2005 and the terminating party is not otherwise in material default hereunder.

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          13.2. Survival.

          (a) Provisions of the Agreement which recite by their terms that they apply to a period of time beyond the Closing Date shall survive the Closing in accordance with their terms.

          (b) In the event that this Agreement is terminated as a result of the default of either party, the obligations of confidentiality shall survive and continue to bind the parties, and in all other respects the rights and obligations of the parties shall be determined in accordance with the provisions of this Agreement.

     14. Specific Performance. Each party agrees that a breach of Section 8.1 or Section 8.2 of this Agreement will cause irreparable injury to the other, and that such other party shall be entitled, in addition to any other rights and remedies it may have hereunder or at law or in equity, to seek an injunction or similar equitable remedy or conservatory and interim measures enjoining and restraining any such breach or threatened breach thereof.

     15. Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective assigns and successors in interest. Without limiting the generality of the foregoing, subject only to Section 3.5, the parties acknowledge that JDS shall have the right to assign all of its right, title and interest hereunder to any third party.

     16. Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware without giving effect to its principles of conflicts of law.

     17. Notices. Any notice, request or other communication required or permitted by this Agreement to be given by any party to the other shall be in writing and either mailed by registered or certified mail, return receipt requested, by express delivery service or by facsimile transmission, addressed to such party as set forth below or to such other address as such party may previously have designated by like written notice. Notice shall be deemed to have been given upon receipt.

If to JDS:	JDS Pharmaceuticals, LLC
	122 East 42nd Street, 41st Floor
	New York, New York 10168
	Facsimile No.: (212) 682-1946
With a copy to:	Dornbush Schaeffer Strongin & Weinstein, LLP
	747 Third Avenue
	New York, NY 10017
	Attn: Herschel S. Weinstein, Esq.
	Facsimile No.: (212) 753-7673

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If to Synthon:	Synthon Pharmaceuticals, Ltd.
	9000 Development Drive
	Research Triangle Park, NC 27709
	Attn: President & CEO
	Facsimile No.: (919) 493-6104
With a copy to:	Hutchison+Mason
	3110 Edwards Mill Road, Suite 100
	Raleigh, North Carolina 27612
	Attn: Fred D. Hutchison, Esq.
	Facsimile No.: (919) 829-9696

     18. Miscellaneous.

          18.1. Entire Agreement. This Agreement, the Transition Services Agreement and the Pledge and Security Agreement constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior written or oral agreements or understandings concerning the subject matter hereof or in conflict with their terms.

          18.2. Amendment and Modification. No modification or waiver of any of the terms of this Agreement shall be deemed valid unless it is in writing and signed by both parties. The failure of either party to insist upon the strict performance of any term of this Agreement or the waiver by either party of any breach under this Agreement shall not prevent the subsequent strict enforcement of such term nor be deemed a waiver of any subsequent breach.

          18.3. Severability. Should any part or provision of this Agreement be held unenforceable or in conflict with the applicable laws or regulations of any applicable jurisdiction, the invalid or unenforceable part or provision shall, provided that it does not go to the essence of this Agreement, be replaced with a revision which accomplishes, to the extent possible, the original commercial purpose of such part or provision in a valid and enforceable manner, and the balance of this Agreement shall remain in full force and effect and binding upon the parties hereto.

          18.4. Non-Disclosure. Prior to Closing, neither party shall publicly disclose the subject matter or terms and conditions hereof without the prior consent of the other, except to the extent of disclosures which either party may be required to make by any applicable Laws or regulations. On and after Closing, each party shall grant the other the opportunity to review, comment upon, and approve any proposed press release describing the transactions contemplated hereby prior to public release.

          18.5. Brokerage Indemnity. Each party represents to the other that no brokerage or finders fee is due to any third party with respect to the transactions contemplated hereby and hereby indemnifies the other against any claim therefore arising with respect to such party.

          18.6. Execution; Facsimile Signatures. This Agreement may be executed in counterparts, each of which will be considered an original and all of which together will be considered one and the same instrument. Any counterpart may be signed and transmitted by facsimile with the same force and effect as if such counterpart was an ink-signed original.

[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

JDS PHARMACEUTICALS, LLC
By:	/s/ Michael Satow
	Name:	Michael Satow
	Title:	Chief Operating Officer

SYNTHON PHARMACEUTICALS, INC.
By:	/s/ Peter van Straelen
	Name:	Peter van Straelen
	Title:	President and Chief Operating Officer

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EX-10.4

Exhibit 10.4

The confidential portions of this exhibit have been filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request in accordance with Rule 24b-2 of the Securities and Exchange Act of 1934, as amended. REDACTED PORTIONS OF THIS EXHIBIT ARE MARKED BY AN ***.

DEVELOPMENT, LICENSE AND SUPPLY AGREEMENT

by and between

BANNER PHARMACAPS INC.,
a Delaware
Corporation

and

JDS PHARMACEUTICALS, LLC,
a Delaware Limited
Liability Company

dated

April 26, 2007

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TABLE OF CONTENTS

Page

Article 1.	Definitions and Construction Principles	3
Article 2.	Registration; Regulatory Matters; Product Development; Milestone Payments	7
Article 3.	Purchase/Supply of Product(s); Exclusivity; Non-Competition	13
Article 4.	Terms of Purchase of Product(s) from Banner	17
Article 5.	Supply of Ingredients, Finishing, and Packaging	22
Article 6.	Performance Standards	23
Article 7.	Product(s) Complaints; Recalls; Withdrawals	24
Article 8.	Product(s) Marketing and Sales	28
Article 9.	Term and Termination	29
Article 10.	Treatment of Confidential Information	32
Article 11.	Indemnities; Insurance	32
Article 12.	Intellectual Property	34
Article 13.	Miscellaneous	40
Appendix A.	Active Ingredient, Product(s), Specifications
Appendix B.	Agreement Indications
Appendix C.	Shipping Instructions
Sch. 3.4	Non-Competition
Sch. 12.1.	Banner Intellectual Property	1

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THIS DEVELOPMENT, LICENSE AND SUPPLY AGREEMENT (“Agreement”) is entered into as of the 26^th day of April, 2007 (the “Commencement Date”), by and between BANNER PHARMACAPS INC. (“Banner”), a Delaware corporation, having an office at 4125 Premier Drive, High Point, North Carolina 27265, and JDS PHARMACEUTICALS, LLC, (“JDS”) a Delaware Limited Liability Company, having an office at The Chrysler Building, 405 Lexington Avenue, 59th Floor, New York, New York 10174.

RECITALS

a. Banner possesses expertise in the manufacture of pharmaceutical Product(s) in softgel and other dosage forms. Banner has filed (or intends to file) an NDA(s) for FDA approval to market and sell the Product(s) (as such capitalized terms are defined below).

b. JDS possesses expertise in the marketing and sales of pharmaceuticals and desires to obtain the rights to market and sell the Product(s) consistent with the NDA(s) filed by Banner and to have Banner supply the Product(s) in accordance with the terms of this Agreement.

c. Both parties desire this Agreement to set forth the terms and conditions pursuant to which Banner will supply for sale to JDS, and JDS will purchase from Banner and market the Product(s) in the Territory based on Banner’s NDA(s).

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

Article 1. Definitions and Construction Principles.

1.1 Definitions. The terms defined in this Section 1.1 shall for all purposes of this Agreement have the meanings specified in this Section 1.1. These definitions are applicable in the possessive, singular and plural forms.

“Act” shall mean the United States Food, Drug and Cosmetic Act and its associated regulations, all as amended from time to time.

“Active Ingredient” shall mean the active pharmaceutical ingredient listed in Appendix A attached hereto.

“Adverse Event” shall mean any event associated with the Product(s), whether or not considered drug-related, that could reasonably be expected to have an adverse impact on the Regulatory Approval, safety, efficacy or marketability of the Product(s).

“Affiliate” shall mean any corporation, partnership, association, trust, or other business entity or organization, directly or indirectly controlling, controlled by, or under common control with such party. For purposes of this definition, “control” shall mean (a) in the

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case of corporate entities, direct or indirect ownership of more than fifty percent (50%) of the stock or shares having the right to vote for the election of directors and (b) in the case of non-corporate entities, direct or indirect ownership of at least fifty percent (50%) of the equity interest with the power to direct the management and policies of such noncorporate entity.

“Agreement Indications” shall mean ***.

“Applicable Law” shall mean all applicable laws, rules, regulations and guidelines (including any amendments, extensions or replacements thereto) of a Governmental Body, including, without limitation, cGMPs and the Act.

“cGMPs” shall mean current Good Manufacturing Practices as further defined in regulations promulgated by the FDA under the Act.

“CNS Physicians” shall mean ***.

“Commercially Available” shall mean (i) that all validation required by the FDA is completed as to the applicable Product, and (ii) that Banner has made and is ready to deliver at least *** Unit batches of each dosage strength listed on Appendix A for the applicable Product to JDS, for shipment by JDS to its third party customers and/or for physician samples as determined and allocated by JDS.

“Commencement Date” shall have the meaning assigned to it in the first paragraph of this Agreement.

“Direct Competitor” shall mean ***.

“Dispute” shall have the meaning assigned to it in Section 13.3.

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“FDA” shall mean the United States Food and Drug Administration and any of its successor agencies or departments.

“First Commercial Sale” shall mean the date of the first sale of Product(s) on a Product by Product basis by JDS to JDS’s third party customer.

“Generally Applicable Technology” shall mean technology used or useful to make Product(s) which is owned or controlled by Banner and which has general application to the development, use or manufacture of soft gelatin capsules and, as such, the technology is not predominately or exclusively used or useful for Product(s).

“Governmental Body” shall mean any nation or government, any state, province, or other political subdivision thereof, or any entity with legal authority to exercise executive, legislative, judicial, regulatory, or administrative functions or pertaining to government in the Territory.

“Initial Term” shall have the meaning assigned to it in Section 9.1.

“Initial Valproic Acid EnteriCare™ Minimum Royalty Period” shall mean the period of time commencing with the First Commercial Sale of the Valproic Acid EnteriCare™ Product and continuing for *** following the occurrence of the First Commercial Sale of the Valproic Acid EnteriCare™ Product.

“Initial Valproic Acid Versatrol™ Minimum Royalty Period” shall mean the period of time commencing with the First Commercial Sale of the Valproic Acid Versatrol™ Product and continuing for *** following the occurrence of the First Commercial Sale of the Valproic Acid Versatrol™ Product.

“Intellectual Property” shall mean any patent, patent application, trademark, service mark, trade name, trade dress, copyright, trade secret, proprietary know-how, discovery, development or invention, whether or not patentable.

“Latent Defect” shall mean any instance where Product fails to conform to the applicable Specifications, and such failure would not be discoverable upon visual inspection of such Product by JDS. For the purposes of this Agreement, “visual inspection” shall mean: (a) comparing the applicable Purchase Order against documentation accompanying the shipment to verify that the delivery date, identity, quantity and exterior shipment labeling comply with the Purchase Order, and (b) visually inspecting the exterior of the shipment of Products to verify that the shipment appears to be in good condition.

“Minimum Royalty Payment(s)” shall mean the sum(s) payable by JDS to Banner in accordance with Section 3.3.

“NDA” shall mean a duly prepared New Drug Application filed with the FDA for the purpose of obtaining Regulatory Approval to market the Product(s) in the Territory.

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“Net Sales Revenue” shall mean gross revenue invoiced by JDS for sales of the Product(s) to unrelated third parties reduced by (a) reasonable customer discounts, and (b) amounts repaid or credited, returns, chargebacks, rebates (including government mandated rebates) and allowances given in the ordinary course of business (including amounts refunded or credited for Product that was rejected, spoiled, damaged, outdated or returned). JDS shall determine Net Sales Revenue in accordance with generally accepted accounting principles.

“Nonconformity” means a Product(s) characteristic that causes any Product(s) to fail to conform to the Specifications.

“Opt Out Right” shall mean ***

“Packaged Product” shall mean quantities of Product(s) packaged in retail size containers or as physician samples, as the case may be, and not intended for repackaging or re-labeling under the Act.

“Product(s)” shall mean either the Valproic Acid EnteriCare™ Product or the Valproic Acid Versatrol™ Product, or both of them, in Packaged Product form, which are intended for resale for the Agreement Indications.

“Purchase Forecast” shall have the meaning assigned to it in Section 4.4.

“Purchase Order” shall have the meaning assigned to it in Section 4.4.

“Recall” shall mean removal of Product(s) from distribution or retail locations or from patients ordered or directed by the FDA or other Governmental Body.

“Regulatory Approval” shall mean the approval by the FDA necessary and effective for the commercial manufacture, distribution, marketing, promotion, offer of sale, sale and use of the Product(s) in the Territory including, without limitation, the approval of the NDA, but not including pricing and third party reimbursement approvals.

“Royalty Payment” shall mean a royalty payment made by JDS to Banner under Section 4.1 (e) of this Agreement.

“Section 2.3(b) Notice” shall have the meaning set forth in Section 2.3(b).

“Shipping Instructions” shall have the meaning set forth in Section 7.2(e).

“Specifications” shall mean those specifications, tests and associated values contained in the NDA, as approved by the FDA, for the composition and manufacture of the Product(s) including the imprinting and packaging thereof.

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“Term” shall mean the periods of time measured separately with respect to the Valproic Acid Versatrol™ Product and to the Valproic Acid EnteriCare™ Product as defined in Section 9.1.

“Territory” shall mean the United States of America and its territories and possessions, including without limitation, Puerto Rico.

“Withdrawal” shall mean a voluntary withdrawal of Product(s) from distribution or retail locations or from patients by the manufacturer or distributor not requested by the FDA or other Governmental Body.

“Unit” shall mean each soft gelatin capsule of Product(s) with specifications and characteristics set forth in Section 6.1.

“Valproic Acid EnteriCare™ Product” shall mean enteric release soft gelatin capsules containing the Active Ingredient in the dosage strengths and dosage forms for the Valproic Acid EnteriCare™ Product described in Appendix A attached hereto and made using Banner’s EnteriCare™ technology.

“Valproic Acid Versatrol™ Product” shall mean extended release soft gelatin capsules containing the Active Ingredient in the dosage strengths and dosage forms for the Valproic Acid Versatrol™ Product described in Appendix A attached hereto and made using Banner’s Versatrol™ technology.

1.2 Construction Principles. As used in this Agreement:

(a) references to Sections shall mean sections of this Agreement, unless otherwise expressly indicated;

(b) references to days, weeks, months, quarters, and years shall be references to calendar days, weeks, months, quarters, and years, unless otherwise stated in this Agreement, for example, in Section 3.3(a);

(c) all sums of money are in United States Dollars.

Article 2. Registration; Regulatory Matters; Product Development; Milestone Payments.

2.1 Regulatory Matters.

(a)	Responsibility for Regulatory Submissions.
	(i) Banner shall be responsible for interacting with the FDA and shall diligently act to complete any requirements for obtaining Regulatory Approval of the Product(s). Banner may discharge its responsibility under this Section 2.1(a)(i) directly or through a third party. Banner shall consult

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	with JDS prior to selection of any such third party, Banner shall be responsible to maintain all Regulatory Approvals or other FDA-filings or applications for Regulatory Approval as long as required for use in connection with either party’s activities under this Agreement.
	(ii) JDS shall be responsible, with Banner’s full cooperation, to prepare FDA approvable label copy, proposed samples of packaging and artwork for Products, and shall use reasonable commercial efforts to provide such label copy and artwork to Banner in sufficient time to prevent any delay in obtaining Regulatory Approval due to the label copy, proposed samples of packaging or artwork; provided however, that in the case of the Valproic Acid EnteriCare™ Product, such proposed label copy and artwork (but not samples of packaging) shall be provided by JDS to Banner no later than ***. All such JDS label copy and final packaging specifications shall be subject to Banner’s prior approval to the extent it contains information subject to Regulatory Approval.
	(iii) Upon request by Banner, JDS shall cooperate with Banner in, and shall provide Banner with, all other information with respect to JDS or its activities hereunder reasonably necessary for filing in connection with obtaining or maintaining the Regulatory Approval of the Product(s) and/or in responding to any questions or requests for additional information by the FDA.
(b)	NDA Ownership. Banner owns the rights to and shall retain all Regulatory Approvals and all applications for Regulatory Approval (including, without limitation, any NDA and any other registration or FDA-filed dossier) for the Product(s).
(c)	Costs and Expenses of Registration Activities and Maintaining Regulatory Approval. Banner shall be responsible for and timely make payment for the costs and expenses related to the maintenance, preparation and filing of NDA or other documents necessary to obtain and/or maintain the Regulatory Approval of the Product(s). JDS shall be responsible for and timely make payment of all costs and expenses related to the development and preparation of the label copy, samples of packaging and artwork for the Product(s).
(d)	Extraordinary Regulatory Events. ***

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***

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***

     2.2 Milestone Payments to Banner. In consideration of Banner’s regulatory and development services related to the Product(s), JDS shall make milestone payments to Banner in immediately available funds payable to an account specified by Banner, which when paid shall be nonrefundable. Milestone payments payable by JDS to Banner are as follows:

(a) $1,900,000.00 (one million nine hundred thousand dollars) shall be due and payable immediately upon execution and delivery of this Agreement by both parties.

(b) $1,500,000.00 (one million five hundred thousand dollars) shall be due and payable ***.

(c) $500,000.00 (five hundred thousand dollars) shall be due and payable ***.

(d) $1,000,000.00 (one million dollars) shall be due and payable ***.

(e) Subject to *** $3,000,000.00 (three million dollars) ***

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***

2.3

Product Developments.

(a) Dosage Strengths. From time to time during the Term, Banner and JDS may agree to develop dosage strengths of Products for the Agreement Indications in addition to the dosage strengths listed on Appendix A attached hereto. Upon agreement to develop such dosage strengths, (i) Banner and JDS shall negotiate in good faith and enter into a development agreement specifying, among other things, defined timelines and an established budget pursuant to which JDS shall reimburse Banner for all costs of developing such mutually agreed to additional dosage strengths, including without limitation, actual direct out of pocket costs, Banner’s internal research and development costs determined in an established project accounting system at standard hourly rates, and the costs to obtain Regulatory Approval to market the additional strengths in the Territory. Banner shall invoice JDS for such costs for developing the additional dosage strengths and JDS shall pay such invoices within thirty (30) days from the date of the invoice received, and (ii) Appendix A attached hereto shall be amended to include such additional dosage strengths so that the terms and conditions of this Agreement shall then be applicable to the additional dosage strengths so added. If in developing the additional dosage strengths, Banner develops, discovers or creates patentable Intellectual Property that provides a commercial advantage for Product(s) over the then existing technology used to make, use or sell Product(s), and the parties agree that it is commercially advantageous for Banner to implement such Intellectual Property to develop, make, use or sell the Product(s) in new dosage strengths, the parties shall negotiate in good faith appropriate fair compensation to Banner for the added commercial value of such new Banner Intellectual Property (e.g., by upfront milestone fees and/or additional royalties on sales of the new Product dosage strengths). The determination of such fair compensation to Banner will take into consideration, among other things, the amount of funds already expended and to be expended by JDS in developing the Product(s) in additional dosage strengths, the contribution of JDS to the development of the product concept, and the financial return likely to be earned from the proposed

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commercialization of the Product(s) in new dosage strengths. However, if the parties cannot agree to the appropriate fair compensation to Banner for the added commercial value of such new Intellectual Property for the new Product dosage strengths, Appendix A shall not be amended to include such new dosage strengths and such new dosage strengths shall not be included in the Product(s) covered by this Agreement.

(b) Additional Indications. ***

(c) Dosage Forms. If during the Term, Banner decides to develop additional dosage forms of Valproic Acid or its salts for the Agreement Indications (i.e., dosage forms other than soft gelatin capsules and enrobed tablets), then Banner shall notify JDS of its decision in writing and shall provide information as reasonably requested by JDS with respect to such development projects from time to time. ***

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***

Article 3. Purchase/Supply of Product(s); Exclusivity; Non-Competition.

3.1 Banner’s Supply Commitments. Banner shall manufacture, imprint and supply Product(s) to JDS pursuant to JDS’s Purchase Orders (submitted by JDS pursuant to the terms and conditions of this Agreement) and in accordance with the Regulatory Approval, the Specifications and in compliance with Applicable Law.

3.2 JDS’s Commitment.

(a) Exclusive Purchases. JDS shall, during the Term, purchase exclusively from Banner all of JDS’s requirements of the Product(s) for distribution and sale in the Territory in accordance with the terms and conditions of this Agreement.

(b) Efforts. JDS shall use reasonable commercial efforts (i) to achieve the First Commercial Sale of each Product within *** after the Regulatory Approval for that Product provided that such Product is Commercially Available; and (ii) to thereafter legally maximize JDS’s sales volume of that Product throughout the Territory. Notwithstanding the foregoing, JDS shall have no obligation to achieve the First Commercial Sale of a Product on or before ***, unless an earlier launch date is agreed to in writing by the parties.

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3.3	Exclusivity.
	(a) Definition. As used in this Section 3.3, “year” means each period of twelve (12) full consecutive calendar months during the Term, with the first “year” beginning on the First Commercial Sale of each Product and ending at the end of the twelfth full calendar month after the First Commercial Sale of such Product.
	(b) Minimum Royalty Payments. JDS shall have the exclusive right to sell the Products in the Territory, provided that JDS pays Banner at least the Minimum Royalty Payment each year for each Product.

(i) Product Contributions to Minimum Royalty Payment. The respective dollar contribution of each Product to the Minimum Royalty Payment shall be calculated as follows:

***

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*** 

(ii) Carryover Contributions. If in any year the Royalty Payments actually paid by JDS to Banner exceed the Minimum Royalty Payment required for that year, the excess amount shall be credited in the immediately following year solely to the extent needed to allow JDS to achieve the Minimum Royalty Payment.

(iii) Minimum Royalty Payment Abatement. If for reasons directly attributable to Banner’s actions or failure to act, or to Force Majeure, JDS cannot fulfill JDS’s customer orders for Product(s) and, as a consequence, JDS’s Net Sales Revenue is reduced, and not merely delayed, then JDS may reduce the Minimum Royalty Payment due to Banner for the applicable year by an amount proportionate to the amount that JDS’s Net Sales Revenue was reduced in such year because of Banner’s actions or failure to act, or because of Force Majeure.

(c) Termination of Exclusivity. Banner shall have the right, in its sole discretion, upon thirty (30) days prior written notice to JDS, to terminate JDS’s exclusive right to sell the Product(s) in the Territory, on a Product by Product basis, and thereafter shall have the right to offer coextensive rights to one or more third parties if both of the following conditions exist during the same year: ***

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	*** Should Banner terminate JDS’s exclusive right to sell one or more Product(s) in the Territory under this Section 3.3(c) then the non-competition restrictions imposed on Banner under Section 3.4 shall also terminate with respect to such Product(s).
3.4	Non-Competition.
	(a) Subject to Section 3.3(c), with the exception of soft gelatin capsules containing as an active ingredient Valproic Acid, salts thereof or oligomers thereof that Banner supplies to third parties in the Territory as of the Commencement Date pursuant to written agreements as of the Commencement Date, which third parties and agreements are listed on Schedule 3.4 attached hereto (the “Exception”), Banner shall not, directly or indirectly, either itself or through a third party, supply for sale, market or otherwise commercialize in the Territory any Valproic Acid, salt thereof or oligomer thereof, in each case, in the form of a soft gelatin capsule, hard gelatin capsule or tablet product that possesses FDA marketing approval for any Agreement Indication. For the avoidance of doubt, the Exception shall be limited to the specific products that Banner is supplying in the Territory to the scheduled third parties, or their successors, pursuant to the scheduled written agreements as of the Commencement Date.
	(b) Other than the Products supplied by Banner under this Agreement, JDS shall not, directly or indirectly, either itself or through a third party, offer for sale, market or otherwise commercialize in the Territory any Valproic Acid, salt thereof or oligomer thereof, in each case, in the form of a soft gelatin capsule, hard gelatin capsule or tablet product that possesses FDA marketing approval for the Agreement Indications.
	(c) Banner shall be free to sell the Products and any other Valproic Acid product, including salts thereof and oligomers thereof in any dosage form, any dosage strength and for any indication, to one or more third parties for resale or distribution outside the Territory without restriction except as follows:
	***

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     ***

Article 4. Terms of Purchase of Product(s) from Banner.

4.1	Pricing; Royalties.
	(a) The price as of the Commencement Date for Valproic Acid EnteriCare™ Products in Packaged Product form shall be:
	***
	(b) The price for Valproic Acid Versatrol™ Products in Packaged Product form shall be determined according to Banner’s standard cost systems in accordance with generally accepted accounting principles and shall be consistent with Banner’s determination of the Valproic Acid EnteriCare™ Product price in Packaged Product form charged by Banner to JDS. Banner shall provide JDS with summary documentation to support such price determination, including, without limitation, to the extent that the pricing of Valproic Acid

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Versatrol™ Product is greater than the pricing of Valproic Acid EnteriCare™ Product, the components and the costs associated with such components that caused such increase in pricing. The price for Valproic Acid Versatrol™ Product shall be fixed only after the formulation for the Valproic Acid Versatrol™ Product is finalized and scale up to full batch size is completed.

(c) At JDS’s option, up to ***

(d) Pricing provided under this Section 4.1 is based on a minimum production lot size of *** Units. Should JDS require smaller or larger size lots, pricing shall be negotiated in good faith and pricing adjusted accordingly.

(e) In addition to the Product(s) price set forth above, JDS shall make Royalty Payments to Banner as follows:

***

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***

(f) JDS shall make Royalty Payments quarterly. Accrued but unpaid Royalty Payments shall be paid within thirty (30) days after the end of each quarter, in the same manner as invoice payments under Section 4.3. With each Royalty Payment, JDS shall provide to Banner a summary statement of Net Sales Revenue for the applicable quarter.

(g) If there is a delay in achieving the First Commercial Sale of Valproic Acid EnteriCare™ Product so that it does not occur before *** and this delay is due to circumstances beyond JDS’s reasonable control including delay in obtaining Regulatory Approval not attributable to JDS and Force Majeure, then the Royalty Payment set forth in Section 4.1(e)(i) shall commence on the date of the First Commercial Sale of the Valproic Acid EnteriCare™ Product and shall end *** thereafter, and the beginning of each new Royalty Payment set forth in Sections 4.1(ii), (iii) and (iv) shall be extended and commence accordingly.

(h) Upon request of JDS, the parties shall discuss in good faith terms and conditions under which JDS could buy out its obligation to make Royalty Payments under this Agreement, however, neither party is bound to agree to or accept any such term or condition.

4.2 Price Adjustments. Banner shall be entitled to increase the labor and overhead component of the price of the Product(s) annually at a percentage rate equal to the change in the United States Department of Labor’s Bureau of Labor Statistics’ Producer Price Index for Pharmaceutical Preparations from the previous year, provided however, that in the event Banner determines that an extraordinary labor condition exists that has caused or will cause Banner’s labor and overhead costs to increase at a rate exceeding the annual adjustment, Banner shall provide JDS with reasonably detailed documentation of the actual or projected increased labor and overhead costs and the parties shall negotiate in good faith appropriate price increases to compensate Banner for the extraordinary labor condition on a going forward basis. In addition, no more than once per calendar quarter, Banner shall decrease or increase the price of Products to reflect decreased or increased raw materials costs for new Purchase Orders if the aggregate decrease or increase in raw materials costs is at least five percent (5%) of the raw materials cost at the Commencement Date or at the date the last price decrease or increase due to raw materials costs was implemented, whichever is later. The benefits of decreases in raw material prices shall be shared by the parties equally so that price decreases implemented by Banner shall not exceed an amount greater that *** of the subject aggregate raw material price decrease. Banner shall provide JDS with sixty (60) days written notice of any price increase or decrease under this Section 4.2. If requested, Banner shall provide JDS with reasonable written evidence of raw material cost increases and decreases, and with the calculation of any extraordinary increase in labor and overhead costs.

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4.3 Payment Terms. Banner shall invoice JDS upon each shipment of Product(s), and JDS shall pay such invoices within *** from the date of such invoice. Banner shall deliver to JDS correct and complete invoices at, or promptly after, the date Product(s) ship to JDS. Payment shall be in U.S. dollars and paid to an account designated by Banner in writing. All amounts payable by JDS to Banner under this Agreement shall, if delinquent, accrue interest at one (1%) percent per month from the date of the delinquency.

4.4	Purchase Forecasts.
	(a) JDS shall submit to Banner a forecast of the quantity of Product(s) that JDS anticipates ordering from Banner for the first twelve (12) months of the Term (the “Purchase Forecast”). JDS’s initial Purchase Forecast shall be due at a date agreed to by the parties which date shall be a reasonable period in advance of the anticipated date of the Regulatory Approval. JDS shall update this Purchase Forecast on or before the tenth (10th) day of every calendar month, thereby creating a 12-month rolling forecast. The first four (4) months of such forecast shall be a binding purchase commitment and the remaining eight (8) months shall be non-binding. Banner shall use commercially reasonable efforts, but is not obligated, to supply any monthly forecast that exceeds one hundred and twenty percent (120%) of the quantity previously forecast for that month.
	(b) At least six (6) months prior to the anticipated date of Regulatory Approval of a Product, Banner and JDS shall cooperate to determine the details of the first Purchase Forecast, including without limitation, the launch quantities of such Product, the Product mix (e.g., dosage strengths) and the desirable mix of Product quantities as physicians samples and as retail size containers. As promptly as practicable following the delivery to Banner of the first Purchase Forecast JDS shall provide Banner with binding firm orders (each a “Purchase Order”) for the first four (4) months of the Purchase Forecast. The Purchase Orders shall meet the requirements for Purchase Orders set forth in Section 4.5.
4.5	Purchase Orders.
	(a) Each month within two (2) weeks after submission of the Purchase Forecast for that month, JDS shall provide Banner with Purchase Orders for the fourth month (i.e., the month newly added to the binding purchase commitment under Section 4.4). The Purchase Order shall specify: the specific Product(s) being ordered, the proposed shipment date to JDS, the quantities of Product(s) ordered (which total monthly volume for the order period shall be no less than the applicable binding portion of the Purchase Forecast as provided in Section 4.4), and the requested place and manner of delivery, including any carrier designated for use by JDS. If JDS does not designate a carrier, then Banner shall select the carrier. In no event shall Banner be obligated to accept any Purchase Order for less than the minimum batch size of ***

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***. Banner shall be provided a minimum lead-time for delivery of *** on Purchase Orders. Within five (5) business days after receipt of a Purchase Order, Banner shall notify JDS of its acceptance of such Purchase Order as a binding order or shall indicate what portion of the amounts covered by the Purchase Order Banner is willing to accept as a binding order. Such confirmation shall also confirm the proposed shipment date or specify a reasonable alternate shipment date. Both parties shall make reasonable good faith efforts to adjust order requirements to reflect market conditions, except that change requests may not be made within *** from the scheduled ship date of the subject Product(s) without Banner’s written approval not to be unreasonably withheld.

(b) Banner’s acceptance of any Purchase Order is limited to the terms and conditions stated in this Agreement. All terms and conditions proposed by JDS in any Purchase Order or otherwise which are different from or in addition to this Agreement are expressly rejected. No purported oral or verbal agreement or other understanding which attempts in any way to modify the conditions stated herein will be binding, unless both parties agree to the modification, in advance and in writing.

(c) If Banner (i) is unable to fulfill JDS Purchase Orders for Product or (ii) becomes aware of any circumstances (including Force Majeure) that will cause Banner to become unable to fulfill JDS Purchase Orders, in each case, for any continuous sixty (60) day period, Banner shall give JDS prompt written notice, describing such circumstances together with a proposed course of action to remedy such failure, which may include supplying Product from a second source (including without limitation a Banner Affiliate) qualified to provide Product under the Regulatory Approval. In the event Banner cannot fulfill JDS Purchase Orders from a qualified second source, JDS may, in its discretion, cancel each affected Purchase Order and/or meet the shortfall from any alternate source or sources selected by JDS in its sole discretion. Any procurement by JDS from such alternative sources shall be limited to the extent of the material shortfall by Banner and such procurement shall cease as soon as Banner is able to resume normal supplies, subject to depletion of any inventory on hand that was purchased or is to be delivered pursuant to binding contractual commitments to purchase from the alternate source or sources. In meeting its requirements under this Section 4.5(c), JDS shall not enter into any long term supply commitments with any third party source. The Net Sales Revenue from the product that JDS purchases from a source other than Banner under the terms of this Agreement shall be included in Net Sales Revenue.

(d) If Banner orders a specific raw material ingredient for a Product(s) and the raw material is delayed or fails to meet Banner’s acceptance criteria, through no act or omission by Banner, then for all purposes of this Agreement, Banner’s shipment timetable shall be extended by the period of such delay, or in the case of unacceptable material to allow Banner adequate time to obtain an acceptable

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	replacement material, but if the delay exceeds sixty (60) days then the provisions of Section 4.5(c) shall apply.
4.6	Shipment.
	(a) With respect to Products: (i) Banner or it’s third party finish packager will ship each order of Product(s) Ex Works the packaging facility, (ii) Banner shall package the Product(s), or arrange to have the Product(s) packaged, for shipment in accordance with customary practices in the trade and shall arrange for shipment to the location designated by JDS, and (iii) freight and insurance shall be for the account of JDS, and JDS shall bear the risk of loss, delay or damage in transit from and after delivery by Banner or such third party finish packager to the carrier for shipment to JDS.
	(b) Any extra reasonable cost incurred by Banner on account of shipment changes requested by JDS shall be reimbursed by JDS.
	(c) Banner shall include the following with each shipment of the Product(s): (i) the Purchase Order number; (ii) the lot number; (iii) the quantity of the Product(s); and (i) a certificate of analysis as required by Section 6.2 hereof.

Article 5. Supply of Ingredients, Finishing, and Packaging.

5.1 Product Ingredients. Banner shall supply the Active Ingredient and all other raw materials as required for compounding, processing and imprinting the Product(s), and the components for bulk packaging and bulk labeling, if applicable. Banner’s receipt, processing, handling and storage of the Active Ingredient and all raw materials required hereunder shall be conducted in accordance with Applicable Law. In the manufacture of Product(s), Banner shall not use any materials that fail to meet the current standards for materials under Applicable Law, where such standards are established and are applicable.

5.2 Finish Packaging. Banner shall supply, or arrange for the supply of, all finish packaging components, including without limitation and if applicable, bottles, labels, outserts, caps, blister and corrugated materials. Banner may finish package Product itself or arrange for finish packaging by a third party. In the latter case, Banner hereby assumes the liabilities, responsibilities and obligations pertaining to arranging for finish packaging of Product(s). Banner shall, in its own discretion, select the third party finish packager after consultation with JDS regarding the selection. Banner shall cause the finished packaging of the Product(s) to be conducted in accordance with all Applicable Law. Banner shall not assume any obligation, responsibility or liability of JDS with respect to the content, development or supply of label copy, or artwork.

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Article 6. Performance Standards.

6.1 Specifications and Characteristics. Banner shall manufacture and provide to JDS Product(s) in compliance with the Regulatory Approval, the Specifications and Applicable Law. The Product(s) shall have a minimum shelf life of at least *** with respect to finished Product(s) and at least *** with respect to physician samples, at the time of delivery to JDS (provided JDS takes delivery in accordance with requested date of delivery on the applicable Purchase Order). After Banner completes stability studies in accordance with Applicable Law which Banner undertakes to complete within a reasonable period of time after the Commencement Date, Product(s) shall have a minimum shelf life of at least *** at the time of delivery to JDS (provided JDS takes delivery in accordance with requested date of delivery on the applicable Purchase Order).

6.2 Certificate of Analysis. Concurrent with shipment, Banner shall deliver to JDS a certificate of analysis, in Banner’s customary form, for each lot of Product(s) sold to JDS, confirming that the Product(s) meets the Specifications.

6.3 Product(s) Acceptance.

(a) Within thirty (30) days of receipt of Product(s) by JDS, JDS or its designee shall conduct a visual inspection of Product(s). Should the visual inspection indicate a deviation from the Specifications, JDS shall promptly notify Banner in writing by facsimile. If after conducting its own investigation of the samples within fourteen (14) calendar days, Banner agrees that such samples do not conform to the Specifications, and unless Banner reasonably determines that the Nonconformity is directly attributable to JDS’s or its agents’ shipping, handling, distribution or storage of the nonconforming Products, Banner shall promptly provide JDS, free of any additional charge, with new deliveries of the same quantity of the Product(s) as the delivered shipment, or identifiable subset thereof, from which the sample was taken, or, in Banner’s discretion and at its cost, and if appropriate under Applicable Law, Banner may promptly reprocess the nonconforming Product(s) to meet the Specifications. In either event (unless Banner reasonably determines that the Nonconformity is directly attributable to JDS or its agents’ shipping, handling, distribution or storage of the nonconforming Products), JDS shall return, at Banner’s expense, the particular lot, portion, or shipment of the non-conforming Product(s) if requested to do so by Banner; provided that if Banner elects to destroy such nonconforming Product(s), Banner shall arrange for such destruction at its expense. If Banner reasonably determines that the Nonconformity is directly attributable to JDS’s or its agent’s shipping, handling, distribution or storage of the nonconforming Products, and JDS disagrees, the matter shall be submitted to an independent testing laboratory pursuant to Section 6.3(c). Except as to Latent Defects, if JDS fails to notify Banner of a non-conforming Product(s) by the thirty-fifth (35^th) day following JDS’s receipt of the Product(s), then JDS shall be deemed to have accepted such Product(s).

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(b) Promptly after either Banner or JDS become aware of a Latent Defect, it shall notify the other of the batch involved, and at JDS’s election, the batch shall be quarantined as of the date of such notice. If the parties agree that the Product(s) have one or more Latent Defects, then if Banner is responsible for the Latent Defect Banner shall refund all monies paid for that shipment of Product to JDS, and shall reimburse JDS for its reasonable and customary actual out of pocket costs and expenses incurred in accepting returns from its customers and shall be responsible for all actual out of pocket costs reasonably incurred by JDS in recalling Product(s) that have Latent Defects, including costs of destroying such Products as necessary. If it is determined that JDS is responsible for the Latent Defect, then JDS shall pay Banner the purchase price for such Product in accordance with the terms of this Agreement and shall be responsible for any and all costs of recalling the Product(s), including costs of destroying such Products as necessary and the cost of accepting returns. Banner shall replace each nonconforming shipment of Product, or the nonconforming portion thereof, with conforming Product as soon as reasonably practicable after receipt of notice of rejection thereof. If the parties do not agree on whether Product(s) have Latent Defects, testing shall be performed in accordance with Section 6.3(c).

(c) If Banner and JDS do not agree on whether the Product(s) conforms to the Specifications, the matter will be submitted to an independent testing laboratory acceptable to both parties for its review and determination. The parties will agree on an inter-laboratory methods transfer process to be implemented at the laboratory to ensure acceptable data from a scientific and regulatory (cGMP) basis. The determination of such independent laboratory will be binding on both parties. The cost of the independent laboratory shall be borne by the party whose testing results were in error. If the Product(s) is determined not to conform to the Specifications, then Banner and JDS shall have the obligations with respect to the non-conforming Product(s) set forth in Section 6.3(a) or 6.3(b) as applicable. If the Product(s) is determined to conform to the Specifications, then JDS shall accept and pay for the Product(s) in accordance with the terms of this Agreement.

(d) Subject to the indemnification obligations of Section 11.1, Banner’s obligations including to reprocess or replace Product(s) in this Section 6.3 shall constitute JDS’s sole remedy for non-conforming Product(s) and is not in addition to any other remedy.

Article 7. Product(s) Complaints; Recalls; Withdrawals.

7.1 Product(s) Complaints; Nonconformities; Adverse Events. Any and all confirmed Product(s) complaints, Nonconformities, or Adverse Events of which either party becomes aware relating to any Product(s) shall be promptly reported to the other party. JDS shall also forward summary reports of complaints it receives from end-users to Banner on a monthly basis. JDS shall report serious Adverse Events to Banner within

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five (5) days of its knowledge of such serious Adverse Event. Notification of serious Adverse Events shall be given by facsimile. Banner shall be responsible for completion and submission of all required reports to applicable authorities with respect to Adverse Events in accordance with Applicable Law.

7.2	Investigations.
	(a) General. The parties shall investigate all reports of Nonconformities, Product(s) complaints and Adverse Events in order to assure the conformity of Product(s) to Specifications and Applicable Law and the safety and efficacy of the Product(s). The parties shall act promptly and shall cooperate fully in such investigations.
	(b) Direction. Banner, as the holder of the NDA, shall have the responsibility and sole right to control and direct any or all aspects of an investigation conducted under this Section 7.2. Banner shall advise JDS from time to time throughout such investigation of Banner’s intentions regarding control and direction of the investigation.
	(c) Assistance. Upon written request, each party shall provide all reasonably requested assistance and information to the other in connection with an investigation of any Nonconformity, Product(s) complaint or Adverse Event. Each party shall have the right to conduct at its own expense any further tests it deems appropriate regarding such investigation provided that it shall share the results with the other.
	(d) Reporting. Each party shall provide to the other (i) a preliminary written report of its determinations and conclusions from any investigation conducted by it, testing or other requested assistance related to such investigation as soon as reasonably practicable, but in no event later than five (5) days after the completion of such investigation, and (ii) preliminary samples (if available) of the affected Product(s). Any final report regarding a Nonconformity, Product(s) complaint or Adverse Event shall be submitted to the other party within thirty (30) days of a notification given by the other party under Section 7.1. Upon request, Banner shall provide to JDS a written report of Banner’s determinations and conclusions from any investigation, report, testing, or portions thereof. Each party shall hold all communications related to such investigation, testing or other requested assistance in confidence according to the provisions of Section 10. Banner shall be responsible for maintaining Adverse Event and complaint master files in accordance with Applicable Law.
	(e) Costs of Investigations and Reporting. Costs, if any, associated with investigations, shall be borne by the party that is determined to be responsible for the Nonconformity, Product(s) complaint or Adverse Event. If neither party is responsible, or fault cannot be determined, then Banner shall bear such costs if JDS can demonstrate through applicable records that the shipping, handling and

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	storage of the Products, after delivery to JDS or its agent, are in compliance with Applicable Law and with Shipping Instructions; provided however, that if despite such records, Banner can demonstrate that JDS or its agent is responsible for such Nonconformity, Product(s) complaint or Adverse Event then JDS shall bear the costs associated with the investigations. For purposes of this Agreement, “Shipping Instructions” shall mean Banner’s written instructions for shipping, handling and storage of the Products, a copy of which is attached hereto as Appendix C, as may be amended by Banner as reasonably necessary and in accordance with customary industry practices for soft gelatin capsules, upon prior written notice to JDS. The parties shall equally share the reasonable, customary and required costs of (i) Adverse Event reporting, (ii) the maintenance of Adverse Event records, and (iii) pharmacovigilance activities related to the Product(s).
7.3	Certain Product(s) Events.
	(a) Notification and Cooperation. In the event Banner, after consultation with JDS on how best to proceed, initiates a Recall, Withdrawal or field correction, field alert report or comparable report with respect to Product(s), whether or not such Recall, Withdrawal, field correction or field alert report has been requested or ordered by any Governmental Body, Banner shall notify JDS in writing, and Banner and JDS shall fully cooperate with each other to implement the same.
	(b) Coordination of Efforts. In the event either party becomes aware of information that may warrant Banner taking any action with respect to Product(s), it shall immediately provide the other with such information in writing. The parties shall cooperate with each other in determining the necessity and nature of such action; provided, however, that JDS shall take no action to effect the same without the written concurrence of Banner.
	(c) Contacts and Statements. With respect to any Recall, Withdrawal, field correction, field alert report or comparable report with respect to any Product(s), Banner shall consult with JDS and Banner shall make all contacts with the applicable Governmental Body and shall be responsible for coordinating all of the necessary activities in connection with any such Recall, Withdrawal, field correction, field alert report or comparable report. Banner and JDS shall meaningfully consult with each other with respect to statements to the media made by JDS and/or Banner, including press releases and interviews for publication or broadcast, but Banner as the NDA owner, acting reasonably and in good faith, shall have the right of final approval of such media statements.

7.4 Retained Samples; Stability Studies; Product(s) Storage. Banner shall retain the Active Ingredient raw material and samples, in each case, from each batch of Product(s) for a period of one (1) year after the expiration date of such batch or such longer period required by Applicable Law for record keeping, testing and regulatory purposes for each Product(s). When storing Product(s), Nonconforming Product(s) or

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Product(s) returns, JDS shall comply with, and shall maintain all storage facilities in compliance with applicable provisions of this Agreement, the Specifications and Applicable Law. Banner shall be responsible, at its expense unless otherwise agreed by the parties in writing, to conduct on-going stability studies on the Products and report thereon to the FDA in accordance with Applicable Law, with a copy of such report promptly forwarded to JDS.

7.5 Recall, Withdrawal, Field Correction Costs. In the event of any Recall, Withdrawal, or field correction with respect to any Product(s), the party that is determined to be responsible for the cause of the Recall or Withdrawal, or field corrections shall be responsible for the costs of such Recall, Withdrawal, or field correction (including cost of goods, distribution expenses, destruction costs, and third party recall expenses), in addition to the cost of promptly replacing, or if practicable, reprocessing, the affected quantity of Product(s). If neither party is responsible, or fault cannot be determined, then Banner shall bear such costs if JDS can demonstrate through applicable records that the shipping, handling and storage of the Products, after delivery to JDS or its agent, are in compliance with Applicable Law and with Shipping Instructions; provided however, that if despite such records Banner can demonstrate that JDS or its agent is responsible, then JDS shall bear such costs.

7.6	Inspections and Reports by Regulatory Authorities.
	(a) Inspections. Each party shall notify the other party in writing within five (5) days in the event of any inspection by representatives of any Governmental Body with respect to the Product(s) or to its cGMP compliance status relating to or affecting the manufacture of the Product(s), and shall provide to the other party summary descriptions of any correspondence with the Governmental Body relating to such inspection to the extent related to the Product(s), including, without limitation, summaries of the respective Governmental Body’s inspection report and the party’s response.
	(b) Reports. Each party shall promptly notify the other of its receipt from the FDA of a Form 483 report (or any similar form or notice from a governmental oversight authority) specifically addressing the Product(s) or matters affecting a Party’s or its subcontractor’s performance under this Agreement. Each party shall provide to the other summaries of (i) all material correspondence, notices or responses received from and to the FDA and other Governmental Bodies relating to the Product(s) and its manufacture or marketing, including, without limitation, all inspection reports issued by the FDA and such other authorities during the Term, and related correspondence, and (ii) reports and correspondence relating to the Products and their manufacture as become available in connection with any of the following events: (a) receipt of a Warning Letter or similar advisory from the FDA or any other Governmental Body relating to the manufacture, packaging and storage of the Products; and (b) any regulatory comments relating to the manufacture of the Products requiring a response or action by the notifying party, including without limitation, a 483 Report and the party’s responses thereto.

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7.7 Product(s) Returns from the Field. In the event that any third party returns any Product(s) to JDS, JDS shall promptly notify Banner in writing and include all information JDS has relating to the return. JDS shall promptly forward all such Product(s) to a location specified by Banner, and shall take no other action regarding such Product(s) (except for safeguarding such Product(s)), unless requested in writing by Banner or required by Applicable Law. This Section 7.7 shall not apply to Product(s) returned to JDS due to excess inventory or expired or short-dated shelf life.

Article 8. Product(s) Marketing and Sales.

8.1 Marketing and Sales Activities. With the exception of materials associated with the Regulatory Approval that Banner has the right to approve consistent with its ownership of the Regulatory Approval in accordance with Section 2.1 (a)(ii), JDS shall be solely responsible for the conduct of all marketing and sales activities of the Product(s) sold hereunder in the Territory and shall have commercial operating freedom in its discretion with respect to all commercialization matters relating to the Products, including, without limitation, with respect to the use of trademarks, trade names, logos, and trade dress owned by JDS, provided that JDS shall conduct all marketing and sales activities at all times in compliance with the Regulatory Approval and Applicable Laws, and provided further that JDS complies with Section 12.1(e). JDS may engage a third party sales force to assist in the marketing and sales of Product(s) subject to Banner’s prior written consent, not to be unreasonably withheld.

8.2 Packaging, Labeling. Marketing and Promotional Materials. JDS shall be solely responsible for the content of the package label copy, content of labeling, marketing and promotional materials for the Product(s), subject only to Banner’s right of prior approval of package label copy and final packaging materials for compliance with the Regulatory Approval under Section 2.1(a)(ii). JDS covenants and agrees that such materials will at all times comply with the Regulatory Approval and Applicable Law. JDS shall provide Banner with samples of such packaging, content of labeling, marketing and promotional materials upon request. Banner shall have no responsibility or liability for JDS’s packaging, advertising, promotional materials, trademarks or content of labeling, except with respect to any changes, additions, or modifications requested by Banner. JDS shall not make any claims or statements whether in or on its packaging, labeling, promotional materials or otherwise, that is not in compliance with, or that is outside, the scope of the Regulatory Approval.

8.3 Terms and Conditions of Sale. JDS shall determine the price, terms and conditions of sales of Product(s) to JDS’s customers.

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Article 9. Term and Termination.

9.1 Term; Renewal. For the Valproic Acid EnteriCare™ Product, the Term of this Agreement shall start on the Commencement Date and continue for an initial period of five (5) years following the date the Regulatory Approval is received for the Valproic Acid EnteriCare™ Product (the “Initial Term” for Valproic Acid EnteriCare™ Products). For the Valproic Acid Versatrol™ Product, the Term of this Agreement shall start on the Commencement Date and continue for an initial period of five (5) years following the date the Regulatory Approval is received for the Valproic Acid Versatrol™ Product (the “Initial Term” for Valproic Acid Versatrol™ Products). Upon expiration of each such Initial Term, this Agreement shall automatically renew as to the pertinent Product for successive renewal terms of two (2) years without further action of the parties.

9.2 Termination by Either Party. This Agreement may be terminated by either party, at any time, on a Product by Product basis, by providing written notice to the non-terminating party upon the occurrence of the following events or conditions:

(a) If the other party commits a material breach of any of its obligations herein (other than an obligation to pay money owed) and fails (i) to remedy that breach within sixty (60) days after written notice from the non-breaching party where a remedy is reasonably possible and is required by the non-breaching party; or (ii) where a remedy is not reasonably possible within sixty (60) days after written notice from the non-breaching party, and the non-breaching party requests remedy of such breach, to propose a plan within sixty (60) days which is reasonably capable of providing a remedy, and subsequently fails to diligently and continuously execute the proposed plan;

(b) If a party fails to pay any amounts due and payable hereunder to the other party within ten (10) days after written notice of such failure to pay;

(c) If the other party (i) applies for or consents to the appointment of a receiver, trustee or liquidator of it or of its properties and assets; (ii) admits in writing its inability to pay its debts as they mature; (iii) makes a general assignment for the benefit of creditors; (iv) is adjudicated a bankrupt or insolvent; (v) files a voluntary petition under the United States Federal Bankruptcy Code or takes advantage of any insolvency, readjustment of debt, dissolution or liquidation law or statute or files an answer admitting the material allegations of a petition filed against it at any proceeding under any such law; or (vi) has entered against it an order, judgment or decree issued by any court of competent jurisdiction approving a petition seeking reorganization of it or of its properties and assets or appointing a receiver, trustee or liquidator of it;

(d) If the other party has received from the FDA a Form 483 report with respect to Product(s) or the packaging or manufacturing facilities thereof, which Form 483 report would prevent the party who received the Form 483 report from materially performing its obligations under this Agreement, and such party has not taken appropriate and necessary actions to address the matters raised in such Form 483 and is thereby not diligently pursuing corrective action in response thereto.

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(e) If the other party is prevented by reason of any circumstances referred to in Section 9.5 of this Agreement from performing any of its obligations hereunder for a continuous period of six (6) months.

9.3 Termination by Banner. This Agreement may be terminated by Banner, upon thirty (30) days written notice to JDS, effective at the end of any calendar year during the Term beginning at the end of 2008 if:

(a) both of the following conditions exist during the same calendar year after the end of 2007: ***; or

(b) all three of the following conditions exist during the same calendar year after the end of 2007:***.

9.4 Termination by JDS.

     ***

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	***
	(b) This Agreement may be terminated by JDS upon thirty (30) days prior written notice to Banner if Banner fails to obtain Regulatory Approval for the Valproic Acid EnteriCare™ Product on or before ***.
	(c) JDS may elect to terminate all of this Agreement or only the portions of this Agreement related to a specific Product pursuant to Section 12.4(d).
9.5	Post Termination Obligations.
	(a) Upon termination of this Agreement by Banner under Section 9.2 or Section 9.3, JDS shall purchase from Banner and pay Banner for all Product(s) for which JDS has outstanding Purchase Orders that have been accepted by Banner and shall reimburse Banner for the actual cost of materials obtained by Banner due to the rolling forecast provided by JDS and which materials Banner cannot use because of the termination of this Agreement.
	(b) Upon termination of this Agreement under Section 9.2(unless due to the breach of Banner), Section 9.3, Section 9.4(a) or Section 9.4(c), at Banner’s election, JDS and Banner shall negotiate in good faith appropriate terms and conditions for Banner to purchase from JDS the trademarks and trade dress associated with the Product(s).
	(c) In the event this Agreement is terminated by JDS under Section 9.2(a) Banner shall use reasonable commercial efforts to continue to satisfy JDS’s requirements for the Products consistent with the terms of this Agreement for a period, at JDS’s option, of up to twelve (12) months following such termination.

9.6 Quality Agreement. Banner and JDS agree to enter into a quality agreement for the manufacture of the Product(s), which will specify each party’s responsibility for quality, compliance, and regulatory matters, within ninety (90) days from the Commencement Date.

9.7 Force Majeure. Neither Banner nor JDS shall be considered in default or be liable to the other party for any delay in performance or for non-performance of the terms of this Agreement caused by circumstances that the delaying party can establish was beyond the reasonable control of such party and not due to its act or failure to act, including but not limited to, acts of God; explosion; fire; flood; earthquake or tremor; war, whether declared or not; acts of terrorism; substantial unavailability, shortage or interruption in the usual supply of raw materials; unusually severe weather; insurrection; riot; sabotage; accident; labor strike or labor disturbances; or orders or decrees of any court; provided, however, that the terms of this Section 9.7 shall not forgive or excuse any failure of a party hereto to make a payment to the other party or a third party when and as required under this Agreement.

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Article 10. Treatment of Confidential Information.

During the Term of this Agreement and for a period ending at the occurrence of one of the exceptions to restrictions (a) through (c) or (e) found below in this Article 10, JDS and Banner each shall keep, and shall cause its respective Affiliates, officers, directors, employees and agents to keep, confidential all information proprietary to the other party and that has been acquired by it through its participation in the negotiation and performance of this Agreement, and each shall use such information solely for purposes of performing its obligations or exercising its rights hereunder, provided that the foregoing restriction shall not apply to information that (a) is or hereafter becomes generally available to the public other than by reason of any default with respect to confidentiality under this Agreement; (b) is hereafter disclosed to such party by a third party who is not in default of any confidentiality obligation to the other party (and such disclosure can be properly demonstrated by the receiving party); (c) was previously or is hereafter developed by or on behalf of such party, without reference to confidential information of the other party acquired prior to or after the date hereof (and such can be properly demonstrated by the receiving party); (d) is required to be disclosed in compliance with applicable laws or regulations or order by a court or other governmental or regulatory agency or body having competent jurisdiction, provided that reasonable measures shall be taken to assure confidential treatment of such information, but the disclosure restrictions shall only be released to the extent of such specific disclosure required under this clause (d); (e) is provided by such party under appropriate terms and conditions, including confidentiality provisions equivalent to those in this Agreement, to accountants and/or lawyers; or (f) if such party considers it reasonably necessary to disclose such information in connection with any action, suit or proceeding before any court or any governmental or other regulatory agency or body or any arbitral panel, or any audit or investigation brought by any governmental or other regulatory agency or body, or the assertion of any claim against any insurer or other third party, but then only after providing prompt written notice to the other party and a reasonable opportunity for the other party to object to disclosure and protect its rights. Each of JDS and Banner recognizes that any violation of this confidentiality provision may cause the other irreparable harm and agrees that the other party shall be entitled, in addition to any other right or remedy it may have, at law or in equity, to an injunction without the posting of any bond or other security, enjoining the disclosing party, its Affiliates and their respective officers, directors, employees and agents from any violation or potential violation of this Article 10. The terms of this Article 10 shall survive any termination of this Agreement.

Article 11. Indemnities; Insurance,

11.1 Indemnification By Banner. Notwithstanding anything contained in this Agreement to the contrary, Banner shall indemnify and hold JDS and its Affiliates and their respective officers, directors, members, shareholders and employees harmless against any and all liability, damage, loss, cost or expense (including reasonable and actual attorneys fees) resulting from any third party claim made or suit brought against

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JDS or such persons to the extent such claim (a) is caused by Banner’s gross negligence or willful misconduct; or (b) is caused by Banner’s material breach of any representation, warranty, covenants, or term of this Agreement; (c) is caused by a Product’s failure to conform to the Applicable Law, the Regulatory Approval or the Specifications and such failure is attributable to Banner’s or its agents’ actions or failure to act; or (d) is caused by any infringement or alleged infringement of any Intellectual Property right of a third party resulting from or relating to Banner’s use of Generally Applicable Technology. Upon being notified of the filing of any such claim or suit, JDS shall promptly notify Banner thereof and shall permit Banner, at its cost, to handle and control such claim or suit with counsel of Banner’s own choosing. JDS shall have the right to participate in the defense of such claim or suit at its own expense. Banner shall make no admission on behalf of JDS without JDS’s prior express written consent.

11.2 Indemnification By JDS. JDS shall indemnify and hold Banner and its Affiliates and their respective officers, directors, members, shareholders and employees harmless against any and all liability, damage, loss, cost or expense (including reasonable and actual attorney fees) resulting from any third party claim made or suit brought against Banner or such persons to the extent such claim (a) is caused by JDS’s gross negligence or willful misconduct; (b) is caused by JDS’s material breach of any representation, warranty, covenant, or term of this Agreement; (c) is caused by a Product’s failure to conform to the Applicable Law, the Regulatory Approval or the Specifications and the failure is attributable to JDS ‘s or its agents’ actions or failure to act; (d) alleges any infringement by the Product(s)’s retail packaging copy, artwork, content of labeling, advertising or marketing materials, of Intellectual Property rights of third parties. Upon being notified of the filing of any such claim or suit, Banner shall immediately notify JDS thereof and shall permit JDS at its cost to handle and control such claim or suit with counsel of its own choosing. Banner shall have the right to participate in the defense of such claim or suit at its own expense. JDS shall make no admission on behalf of Banner without Banner’s prior express written consent signed by its President or its Global Vice President/Legal and Public Affairs.

11.3 Claims. No claim shall be made, or be enforceable against either party, under this Article 11 unless written notice thereof with full particulars is received by the indemnifying party within thirty (30) days after the existence of the claim is known to the indemnified party, however, failure to notify the indemnifying party within such thirty (30) day period shall not relieve the indemnifying party of its obligations under this Article 11 unless such indemnifying party is demonstrably prejudiced as a result of the delay.

11.4 Insurance. Both JDS and Banner shall each maintain, during the Term of this Agreement and the three (3) years thereafter, at least *** in Product(s) liability coverage, with the other party listed as an additional insured. Within thirty (30) days following the date of this Agreement and then annually thereafter for the Term of this Agreement and the three (3) years thereafter, each party shall provide the other with a certificate of insurance evidencing the coverage maintained in accordance with this Section 11.4.

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11.5 LIABILITY LIMITATIONS. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, BUT EXCEPT AS EXPRESSLY PROVIDED IN ARTICLE 12, NEITHER BANNER NOR JDS SHALL BE LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, LOST PROFITS OR REVENUE, IN EACH CASE WHETHER OR NOT DETERMINED TO BE A DIRECT OR INDIRECT DAMAGE), WHETHER OR NOT FORESEEABLE, OR WHETHER OR NOT EITHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, RESULTING FROM THE FAILURE OF THE PRODUCT(S) TO MEET THE SPECIFICATIONS OR FOR ANY BREACH OF THIS AGREEMENT. SUCH LIMITATION SHALL APPLY TO ALL CLAIMS MADE UNDER OR RELATING TO THIS AGREEMENT EXCEPT AS EXPRESSLY PROVIDED IN ARTICLE 12, INCLUDING, WITHOUT LIMITATION, ANY CLAIM FOR INDEMNIFICATION UNDER THIS ARTICLE 11.

Article 12. Intellectual Property

12.1	Banner Intellectual Property.
	(a) Title to and the right of enforcement for all Banner formulations, technology, all other Banner Intellectual Property applicable to the Product(s) (including, without limitation, the patents and patent applications listed on Schedule 12.1 attached hereto) owned by Banner prior to the Commencement Date shall remain with Banner. Banner shall use reasonable efforts to notify JDS of additional patents or patent applications relating directly to the Products that are filed by or on behalf of Banner in the Territory during the Term.
	(b) Banner shall own and retain all right, title and interest in and to any and all inventions, whether invented, developed or discovered solely by Banner or jointly by Banner and JDS, relating to (i) excipient system formulations, fill formulations, or gelatin or non-gelatin shell formulations, (including, without limitation, relating in any manner to Banner’s Versatrol™ or EnteriCare™ technologies), or (ii) making Product(s) utilizing gelatin or non-gelatin technology, or (iii) otherwise relating to developing, using or making soft gel capsules or enrobed tablets.
	(c) Banner shall own and retain all right, title and interest in and to any and all Intellectual Property of a non-technical nature invented, created or discovered by Banner under this Agreement.
	(d) Banner grants to JDS a non-transferable (except as set forth in Section 13.4), license consistent in scope with the terms and conditions of this Agreement under Banner Intellectual Property, whether existing at the Commencement Date or thereafter developed or acquired, only to the extent necessary to use, have used, market, distribute, sell and have sold Products in the Territory except that JDS shall not use, or permit its customers to use, Banner’s name or trademarks in any advertising, promotions, marketing, and/or labeling of the Product(s) or similar Product(s), without the prior written consent of Banner. JDS may grant sublicenses to a third party sales force consistent with the provisions of Section 8.1.

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	(e) When applicable to the Product(s), JDS shall cause a reference to Banner’s patent numbers relative to the Product(s) to be placed on the finished packaging for the Product(s). At Banner’s request and when applicable, JDS shall also cause the term “patent pending” and/or Banner’s EnteriCare™ or Versatrol™ trademark to be placed on the finished packaging for the Product(s). Changes to the finished packaging of the Products, including changes to the listing of patent numbers relative to the Product(s), that are requested by Banner shall be at Banner’s expense if not necessitated by the Regulatory Approval or Governmental Bodies.
	(f) JDS acknowledges that it will not acquire any Intellectual Property rights in and to the Product(s) subject to Section 12.2, or to the trademarks Versatrol™ or EnteriCare™.
	(g) Except as set forth in Section 3.4 or as otherwise expressly set forth in this Agreement, this Agreement does not restrict Banner from using any soft gelatin capsule related technology whether previously owned or controlled, or subsequently owned or controlled, or developed or acquired as a result of this Agreement, for other Banner customers, or for Banner’s own account.
12.2	JDS Intellectual Property.
	(a) Title to and the right of enforcement for all JDS Intellectual Property owned by JDS prior to the Commencement Date shall remain with JDS.
	(b) JDS shall own and retain all right, title and interest in and to any and all Intellectual Property related to the sales, marketing, promotion and distribution of the Product(s) which is invented, developed or discovered by JDS or jointly by JDS and Banner, including, without limitation, trademarks, trade names, logos and trade dress with respect to the Product(s), and including, without limitation, capsule color and color combination, and graphics. For the avoidance of doubt, Banner shall have title to the trademarks Versatrol™ and EnteriCare™.
	(c) JDS grants to Banner a non-exclusive license under JDS Intellectual Property only to the extent necessary for Banner to receive and maintain Regulatory Approval within the Territory.

12.3 Publicity/ Press Releases. Unless required to do so by law or regulation, neither party shall issue any press release or other public communication related to the relationship between the parties or the existence of this Agreement without the prior written consent of the other party. The party desiring to issue the communication shall provide the other party with an advance copy of the proposed text of the public

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communication for review and shall adopt any reasonable changes requested by the reviewing party prior to issuing such public communication.

12.4	Intellectual Property Enforcement and Defense.
(a)	Intellectual Property Enforcement. Unless otherwise specifically agreed by the parties in writing:
	(i) If either Banner or JDS suspects third party infringement of any of the Intellectual Property covering or relating to Product(s), that party shall promptly advise the other as to the facts and circumstances surrounding the suspected infringement. If Banner determines that an infringement action is commercially reasonable (taking into account the likelihood of success and relative cost/benefits), Banner may institute an infringement action against said third party. However, should Banner decide not to bring an infringement action, JDS may request Banner to undertake such infringement action using counsel of Banner’s choice (after conferring with JDS) at JDS’s expense. Banner and JDS shall confer regarding strategy for any patent infringement action brought under this Section 12.4(a) but Banner shall be solely responsible for the management and control of such patent infringement action. Notwithstanding the foregoing, nothing in this Section 12.4(a)(i) shall require JDS to participate in or contribute to the cost of Banner’s Intellectual Property enforcement efforts unless the third party’s infringement directly and materially adversely impacts, or is reasonably likely to directly and materially adversely impact, sales of the Product(s) and, in all other situations Banner is free to enforce Banner Intellectual Property on its own behalf, at its own cost, and without contribution or indemnification thereof by JDS. In this latter case, Banner shall retain for itself all awards paid by third parties (whether by settlement or otherwise) as a result of Banner’s enforcement efforts.
	(ii) Subject to Section 12.4(a)(i), the costs and expenses of any enforcement action by Banner (including reasonable fees and expenses of attorneys and other third parties) shall be paid by Banner and one-half (1/2) of any such costs and expenses incurred by Banner shall be invoiced to JDS monthly and paid net thirty (30) days of issuance.
	(iii) Each party shall execute all necessary and proper documents and take such actions as shall be reasonably requested by the other to allow it to institute and prosecute any such enforcement actions, including being named as a co-plaintiff in the action if warranted, in accordance with the terms of this Section.
	(iv) Provided that JDS has actually participated in the cost of enforcement efforts pursuant to Section 12.4(a)(i) and (ii) and to the extent any award paid by third parties as a result of such an enforcement

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	action (whether by way of settlement or otherwise) relates to lost revenue associated with the Product(s), such award shall be treated as Net Sales Revenue hereunder (after deduction by Banner and JDS, as the case may be, of all costs and expenses, including, without limitation internal personnel costs, relating to such action). All other awards, or portions of awards not related to lost revenue associated with the Products, shall be shared by the parties equally.
(b)	Declaratory Relief.
	(i) If a third party commences an action for declaratory relief or similar action against Banner attacking the applicability, validity or enforceability of any Intellectual Property relating to Product(s), Banner shall advise JDS as to the facts and circumstances surrounding the action. Banner shall defend said action and/or institute an infringement counterclaim against the third party if Banner determines it is legally advisable and commercially reasonable to do so (taking into account the likelihood of success and relative cost/benefits). However, should Banner decide not to defend said action and/or institute an infringement counterclaim against the third party, JDS may request Banner to undertake such action using counsel of Banner’s choice (after conferring with JDS) at JDS’s expense. Banner and JDS shall confer regarding strategy for any action or defense brought under this Section 12.4(b) but Banner shall be solely responsible for the management and control of such action. Notwithstanding the foregoing, nothing in this Section 12.4(b)(i) shall require JDS to participate or contribute to the cost of Banner’s Intellectual Property enforcement or defense efforts unless the third party’s legal action (if successful) or infringement directly and materially adversely impacts, or is reasonably likely to directly and materially adversely impact, sales of the Product(s) and, in all other declaratory judgment actions relating to the Banner Intellectual Property, Banner is free to defend suit (including asserting Banner Intellectual Property infringement as a counterclaim) on its own behalf, at its own cost, and without contribution or indemnification thereof by JDS. In this latter case, Banner shall retain for itself all awards paid by third parties (whether by settlement or otherwise) as a result of Banner’s enforcement efforts.
	(ii) Subject to Section 12.4(b)(i), the costs and expenses of any such defense and/or counterclaim by Banner (including reasonable fees and expenses of attorneys and other third parties) shall be treated in the same manner as patent enforcement expenses pursuant to Section 12.4(a)(ii).
	(iii) Each party shall execute all necessary and proper documents and take such actions as shall be reasonably requested by the other to defend said action and/or institute and prosecute such counterclaim, including being named as a co-plaintiff or co-defendant in the action and/or counterclaim if warranted, in accordance with the terms of this Section.

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	(iv) Provided that JDS has actually participated in the cost of enforcement efforts pursuant to Section 12.4(b)(i) and (ii), any award paid by third parties as a result of a counterclaim brought under this Section 12.4(b) (whether by way of settlement or otherwise) shall be treated in the same manner as patent enforcement award pursuant to Section 12.4(a)(iv). Any award due to third parties as a result of the action shall be treated in the same manner as an award pursuant to Section 12.4(c)(iv).
(c)	Intellectual Property Defense.
	(i) In the event a third party commences an action against Banner for Intellectual Property infringement, or threatens to do so, for activities pertaining to the making, using, or selling of Product(s) and not primarily pertaining to the Generally Applicable Technology, Banner shall advise JDS as to the facts and circumstances surrounding the action. Banner shall defend said action if Banner determines it is legally advisable and commercially reasonable to do so (taking into account the likelihood of success and relative cost/benefits). However, should Banner decide not to defend said action, JDS may request Banner to undertake such defense using counsel of Banner’s choice (after conferring with JDS) at JDS’s expense, and in this case, JDS shall pay all damages awarded as a result of the action directly relating to the Products as well as expenses reasonably incurred by Banner in maintaining such action, for example, reasonable internal personnel costs; provided, however, that JDS shall have a right to reimburse itself and deduct such damages and expenses from the Royalty Payments otherwise due to Banner under Section 4.1(e). In the event a third party commences an action against Banner for Intellectual Property infringement, or threatens to do so, for activities pertaining to the making, using, or selling of Product(s) but primarily pertaining to the Generally Applicable Technology, Banner shall advise JDS as to the facts and circumstances surrounding the action, and the parties shall discuss and negotiate in good faith the allocation between them of costs and expenses of any such defense and/or counterclaim. Banner and JDS shall confer regarding strategy for any defense maintained under this Section 12.4(c) but Banner shall be solely responsible for the management and control of such action.
	(ii) Except as set forth in Section 12.4(c)(i), the costs and expenses of any such defense and/or counterclaim by Banner (including reasonable fees and expenses of attorneys and other third parties) shall be shared equally by the parties and paid in the same manner as Intellectual Property enforcement expenses pursuant to Section 12.4(a)(ii).

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(iii) Each party shall execute all necessary and proper documents and take such actions as shall be reasonably requested by the other to defend said action, including being named as a co-plaintiff in the action and/or any counterclaim if warranted, in accordance with the terms of this Section.

(iv) Except as provided in Section 12.4(c)(i), any damages award paid to third parties as a result of an infringement action brought by any third party (whether by way of settlement or otherwise) shall be shared equally by the parties. The parties shall agree with respect to any settlement requiring payments by way of royalties or otherwise that are unrelated to actual damages for past infringement.

(d) Notwithstanding anything in this Section 12.4 to the contrary unless where JDS has requested Banner to undertake actions for infringement, enforcement or defense pursuant to Section 12.4(a)(i), 12.4(b)(i) or 12.4(c)(i), if JDS determines that the risks and/or costs presented by the actions for infringement, enforcement or defense hereunder outweigh the benefits of such actions, then JDS shall have the right, upon written notice to Banner if given prior to the date of the close of discovery, to terminate this Agreement with respect to the Product(s) which are the subject of such actions and JDS shall have no further obligation to participate in or contribute to the cost of going forward with such actions, provided, however that JDS shall participate in any damage award (whether by way of settlement or otherwise) as provided under Section 12.4(c)(iv) subject to the following limit (i) fifty percent (50%) of the greater of the amount of damages sought by or accrued to the third party at the time of JDS triggering this provision; (ii) fifty percent (50%) of the lowest good faith settlement offer by the opposing litigant that is acceptable to JDS but that is unacceptable to Banner; or (iii) fifty percent (50%) of the actual award paid by Banner, whichever is less. Promptly following such notice, the parties shall amend this Agreement to remove the provisions affected by such termination and, thereafter, Banner shall have unrestricted rights to commercialize the effected Product(s), including, but not limited to, the right to offer to any third party exclusive rights to such Product(s) in any dosage forms, in any dosage strengths and for any indications, notwithstanding any provision of this Agreement to the contrary.

(e) If any actions for infringement, enforcement or defense in which JDS participates pursuant to the terms of this Section 12.4 relates to the Products and other Banner products, then the parties will discuss in good faith to determine an appropriate allocation of costs and expenses of any such action and any damages payable by JDS.

(f) Banner shall provide JDS with information reasonably requested by JDS with respect to any action contemplated by this Section 12, and Banner shall promptly provide JDS with written notice and a reasonably detailed description of any settlement offers by the third party.

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(g) Effect of Opt Out Right. JDS’s obligations under this Section 12.4 are subject to JDS’s Opt Out Right such that, if JDS has elected to exercise its Opt Out Right, then JDS shall have no obligations or rights under this Section 12.4 to the extent that any Intellectual Property infringement, enforcement or defense action is related solely to the Valproic Acid Versatrol™ Product, provided however, that to the extent that any action relates to both the Valproic Acid Versatrol™ Product and the Valproic Acid EnteriCare™ Product, then JDS shall be obligated under this Section 12.4 in the same proportion that the harm alleged in such action relates to the Valproic Acid EnteriCare™ Product.

Article 13. Miscellaneous.

13.1 Inspection. Either party and their respective representatives shall have the right, at reasonable intervals, on at least ten (10) business days prior notice and during normal business hours, to inspect the other party’s (or such party’s subcontractor provided that Banner shall use reasonable commercial efforts to include substantially similar inspection rights with respect to its third party packager) applicable areas of their performance, manufacturing, laboratory, packaging and warehousing facilities used in the manufacture, packaging, storage, testing, shipping and receiving of the Product(s) or its components. The frequency and extent of routine inspections shall be no more than once per calendar year, unless upon just cause, or as otherwise mutually agreed to by the parties. Any information learned through such inspection shall be confidential in accordance with Section 10.

13.2 Representations and Warranties.

(a) Banner Representations and Warranties. Banner represents and warrants that:

(i) Products manufactured hereunder shall conform to the applicable Specifications;

(ii) Products shall be manufactured, tested, packaged and stored in compliance with the Regulatory Approval and all Applicable Laws, and shall not be adulterated or misbranded under any Applicable Law;

(iii) It does not, to its best knowledge, (A) employ an individual who has been debarred by the FDA pursuant to 21 U.S.C. § 335a(a) or (b) (“Debarred Individual”) to provide services in any capacity to a person or entity that has an approved or pending drug product application, or an employer, employee or partner of such a Debarred Individual or, (B) utilize a corporation, partnership or association that has been debarred by FDA pursuant to 21 U.S.C. § 335a(a) or 21 U.S.C. § 335a(b) (“Debarred Entity”) from submitting or assisting in the submission of a drug application, or an employee, partner, shareholder, member, subsidiary, or Affiliate of a Debarred Entity.

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(iv) As of the Commencement Date:

(a) It has the right to grant the rights and licenses granted to JDS hereunder;

(b) To its best knowledge, it is the owner of the Banner Intellectual Property to the extent related primarily to the Product(s); and to its best knowledge, there is no pending or threatened action, suit, proceeding or claim by others challenging Banner’s rights in or to Banner Intellectual Property to the extent related primarily to the Product(s);

(c) To its best knowledge, there is no pending or threatened action, suit, proceeding or claim by others challenging the validity or scope of the Banner Intellectual Property to the extent related primarily to the Product(s);

(d) To its best knowledge, there is no pending or threatened action, suit, proceeding or claim by others that the development, making, using or selling of the Product(s) infringes or otherwise violates any patent or trade secret rights of others; and

(e) To its best knowledge, there is no patent or patent application of another which contains claims that dominate or may dominate any Banner Intellectual Property to the extent related primarily to the Products.

For purposes of this Section 13.2(a), “best knowledge” shall mean those matters known to Banner’s directors, officers, key employees or its legal counsel after due inquiry.

     (b) Mutual Representations and Warranties. Each of Banner and JDS represents and warrants that:

(i) It has full corporate power and authority to enter into this Agreement and consummate the transactions contemplated hereby;

(ii) It has such permits, licenses and authorizations of Governmental Bodies as are necessary to own its respective properties, conduct its business and consummate the transactions contemplated hereby; and

(iii) There are no agreements with third parties that conflict with or impair its right to enter into this Agreement or to grant the rights or accept the obligations hereunder.

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	(c) EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, BANNER AND JDS MAKE NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, CONCERNING “PRODUCT(S)” OR THEIR RESPECTIVE PERFORMANCE UNDER THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO “PRODUCT(S).”
13.3	Dispute Resolution.
	(a) Good Faith Negotiation. The parties agree that, before resorting to any formal dispute resolution process concerning any dispute arising from or in any way relating to this Agreement (a “Dispute”), they will first attempt to engage in good faith negotiations in an effort to find a solution that serves their respective and mutual interests, including their continuing business/professional relationship. If after thirty (30) days following receipt of notice by one party from the other of a Dispute, the parties are unable to resolve the Dispute, then within ten (10) business days following the end of such thirty (30) day period, the parties shall each appoint a principal to personally review the facts of the Dispute and seek to resolve the matter by means of direct discussion between the appointed principals. Unless otherwise agreed in writing, the parties shall have five (5) business days from the date the principals are appointed to begin the direct discussions between them and ten (10) business days to resolve the Dispute by such direct discussions.
	(b) Mediation. If the principals are not appointed, or the negotiations do not take place within the time provided in Section 13.3(a), or if the negotiations do not conclude with a mutually agreed upon solution within that time frame (or its agreed upon extension), the parties agree to mediate any Dispute. If the parties cannot agree upon a mediator within ten (10) days following the conclusion of their good faith negotiations or expiration of the time within which to negotiate as provided in Section 13.3(a), then each shall select one name from a list of mediators maintained by any bona fide dispute resolution provider or other private mediator; the two selected shall then choose a third person who will serve as mediator. The parties agree to appoint principals to participate in the mediation process, including being reasonably present throughout the mediation session(s). The parties shall have thirty (30) days within which to commence the first mediation session following the conclusion of their good faith negotiations or expiration of the time within which to negotiate as provided in Section 13.3(a). The parties further confirm their motivating purpose in selecting mediation is to find a solution that serves their respective and mutual interests, including their continuing business/professional relationship.
	(c) Costs. The parties agree to share the mediator’s fees equally.

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(d) Notice of Dispute. The notice of a Dispute shall be in writing. It shall provide sufficient details of the Dispute to apprise the other party of the basis of the disputant’s claims. The notice should include the invitation to begin negotiation, and where unsuccessful, mediation.

(e) Litigation. Should the negotiations and mediations contemplated by this Section 13.3 fail to achieve a mutually acceptable resolution of the Dispute, either party may file a lawsuit related to the Dispute. Except for disputes predominantly related to intellectual property which may be brought in any jurisdiction at the sole discretion of the party bringing the lawsuit, the party filing the lawsuit shall file it in the state or federal judicial district where the other party’s principal U.S. executive offices are located.

(f) Injunctive Relief. Each party has the right before or during the negotiation and/or mediation contemplated by this Section 13.3 to seek and obtain from a court of competent jurisdiction equitable relief in the form of preliminary injunction to avoid irreparable harm, maintain the status quo or preserve the subject matter of the Dispute.

13.4 Successors and Assigns. Neither party may assign this Agreement or assign or subcontract any of its rights, duties or obligations hereunder without the express prior written consent of the other party, which shall not be unreasonably withheld, except that Banner may assign part or all of its responsibilities and obligations under this Agreement to one or more wholly-owned subsidiaries, and except that either party may assign this Agreement and its rights, subject to its obligations, hereunder in connection with the transfer of all or substantially all of its business or assets, or in the case of its merger, consolidation, change of control or similar transaction, provided that JDS may not assign this Agreement or any of its rights or obligations hereunder to a Direct Competitor of Banner.

13.5 Entire Agreement. This Agreement and any attachments, appendices and exhibits which are referenced herein set forth the entire agreement between the parties relating to the subject matter contained herein, and supersede any prior agreement with respect to the subject matter herein (written or verbal) between the parties. Neither this Agreement, nor any of its provisions, may be modified, amended or waived except by a written agreement signed by the parties hereto

13.6 Severability. The provisions of this Agreement shall be deemed separate. Therefore, if any part of this Agreement is rendered void, invalid or unenforceable, such rendering shall not affect the validity and enforceability of the remainder of this Agreement unless the part or parts which are void, invalid or unenforceable shall substantially impair the value of the whole Agreement to either party.

13.7 Notices. Unless otherwise stated in this Agreement, any and all communications required as provided for in this Agreement shall be in writing and sent by (a) Certified or Registered Mail, postage prepaid, return receipt requested; (b) facsimile followed by a

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letter of confirmation; or (c) by an express overnight courier service, postage prepaid, return receipt requested and addressed as set forth below. Notices shall be deemed given three (3) days following mailing by Certified or Registered Mail, and one (1) day following the date sent by facsimile or overnight courier.

Any notice to be given to Banner shall be addressed to:

Banner Pharmacaps Inc.
4125 Premier Drive
High Point, North Carolina 27265
Attention: President and CEO

With a copy (which shall not constitute notice) to;

Banner Pharmacaps Inc.
4100 Mendenhall Oaks Parkway, Suite 301
High Point, NC 27265
Attention: Global Vice-President/Legal and Public Affairs

Any notice to be given to JDS shall be addressed to:

JDS Pharmaceuticals, LLC. The
Chrysler Building
405 Lexington Avenue
59th Floor
New York, New York 10174
Attention: Michael Satow

With a copy (which shall not constitute notice) to:

Cohen Tauber Spievack & Wagner, LLP
420 Lexington Avenue, Suite 2400
New York, New York 10170
Attention: Y. Jerry Cohen, Esq.

Either party may give written notice of a change of address, and after such notice has been received, any notice thereafter shall be given to such party as provided above at such changed address.

13.8 Headings. The headings used in this Agreement are for the convenience of the parties only, and shall not be considered in interpreting or applying the provisions of this Agreement.

13.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which taken together shall be one and the same agreement.

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13.10 Relationship of the Parties. The relationship of Banner and JDS established by this Agreement is that of independent contractors, and nothing contained herein shall be construed to (a) give either party any right or authority to create or assume any obligation of any kind on behalf of the other or (b) constitute the parties as partners, joint venturers, co-owners or otherwise as participants in a joint or common undertaking.

13.11 Survival. The following sections of this Agreement, and the definitions referenced therein, as well as any other section necessary to interpret such sections shall survive termination of this Agreement for any reason: Sections 1.1, 1.2, 7.1-7.7 but only to the extent applicable to Product(s) supplied under this Agreement, Sections 9.5, 9.7, 10, 11.1-11.5, 12.1, 12.2, 12.3, 12.4, 13.2, 13.11 and 13.12.

13.12 Governing Law: Jurisdiction. This Agreement shall be governed and construed in all respects by and under the laws of the State of North Carolina. The federal courts located in the States of North Carolina and New York and courts of the States of North Carolina and New York shall have non-exclusive jurisdiction to hear any and all disputes arising under or concerning this Agreement.

[Signature page follows.]

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IN WITNESS WHEREOF, the parties hereto have duly executed and delivered, or caused to be duly executed and delivered, this Agreement as of the day and year first above written.

BANNER PHARMACAPS INC.
By:	/s/ Roger E. Gordon
	Roger E. Gordon, Ph.D. President and CEO

JDS PHARMACEUTICALS, LLC
By:	/s/ Phillip M. Satow
	Phillip M. Satow Chairman and CEO

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EX-10.5

Exhibit 10.5

The confidential portions of this exhibit have been filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request in accordance with Rule 24b-2 of the Securities and Exchange Act of 1934, as amended. REDACTED PORTIONS OF THIS EXHIBIT ARE MARKED BY AN ***.

November 1, 2005

CONTRACT MANUFACTURING AGREEMENT

between

OSG NORWICH PHARMACEUTICALS, INC.

and

JDS PHARMACEUTICALS, LLC.

THIS CONTRACT MANUFACTURING AGREEMENT (the “Agreement”) is made this 1^st.day of November, 2005 (the “Agreement Date”), by and between JDS Pharmaceuticals, LLC. (“JDS”), a Delaware Limited Liability Company with a principal place of business at 122 East 42^nd. Street New York, NY 10168 USA, and OSG NORWICH PHARMACEUTICALS, INC (“NPI”), a Delaware corporation with a principal place of business at 6826 State Highway 12, Norwich, NY 13815 USA.

Recitals

     A. JDS is engaged in the business of, among other things, marketing and distributing certain pharmaceutical products.

     B. NPI is in the business of contract manufacturing and packaging pharmaceutical products, and providing related services.

     C. JDS has agreed to purchase from NPI, and NPI has agreed to provide to JDS, certain manufacturing and quality assurance services relating to certain of JDS’s products, on the terms and conditions set forth herein.

     NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, JDS and NPI the (“Parties”) agree as follows:

Article 1 — Definitions

     The following terms used in this Agreement shall have the meanings set forth below. Other terms of less general applicability are defined where appropriate and are listed in the List of Defined Terms in the Appendix.

     1.1 “Confidential Information” means any and all trademarks, trademark applications, tradenames, copyrights, patents, patent applications, technical information, know-how, formulae, processes, clinical studies, trade secrets, confidential and/or proprietary information and other know-how, information, documents and/or materials, technology, formulations, specifications, testing data and analytical methods and, in addition, information which would be considered a trade secret under the Uniform Trade Secrets Act as in force and effect in the State of New York.

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     1.2 “Manufacture”, or any variation thereof, means all operations necessary to produce the Products to the specified state of completion in accordance with the terms and conditions of this Agreement. Without limiting the foregoing, the term “Manufacture” shall include (i) all receipt and storage of Materials incident to such operations, and (ii) the performance of all quality control procedures pertaining to the Products which are required by applicable regulations on the Agreement Date, and/or which become required by such regulations after the Agreement Date, and which NPI has agreed in writing to perform.

     1.3 “Product” or “Products” means those products of JDS more fully described on Schedule 1.3 in the presentation forms listed in Schedule 1.3.

     1.4 “Materials” means raw materials (chemicals) and packaging materials used to Manufacture and package Products.

     1.5 “Printed Matter” means all printed Materials required pursuant to the Specifications or necessary to sell the Product in compliance with the Laws, Rules and Regulations, including labeling required to be affixed to and/or packaged with Products delivered to JDS hereunder.

     1.6 “Specifications” mean the written methods, formulae, procedures, specifications, tests (and testing protocols) and standards pertaining to each presentation form of the Products set forth in Schedule 1.6, as modified from time to time.

     1.7 “Supply Term” means the period starting on the Agreement Date and continuing for the initial term of this Agreement and any subsequent extension period as set forth in Section 7.1 hereof, subject to any earlier termination of this Agreement pursuant to Section 7.2 hereof.

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     1.8 “Laws, Rules and Regulations” means the Federal Food, Drug, and Cosmetic Act (“FDCA”) and all regulations promulgated thereunder, including, but not limited to, the current Good Manufacturing Practices for finished pharmaceuticals (“cGMPs”), as promulgated by the U.S. Food and Drug Administration (“FDA”) in Parts 210 and 211 of Title 21, United States Code of Federal Regulations (“C.F.R.”), or when appropriate, any corresponding statutes and/or regulations of any other country’s prescription pharmaceuticals regulating health authority / agency, now existing and hereafter promulgated.

     1.9 “Commercially Reasonable Efforts” mean that degree of effort, expertise and resources which a person, of ordinary skill, ability and experience in the matters addressed herein, would utilize or otherwise apply with respect to fulfilling the obligations assumed hereunder.

Article 2 —Supply of Product

     2.1 Obligations of the Parties.

          (a) Relationship of the Parties. The Parties acknowledge that no partnership, joint venture, or agency relationship is created between the Parties with respect to this Agreement.

          (b) Manufacture of Products. Subject to the terms and conditions hereof, NPI shall Manufacture Products in accordance with applicable Laws, Rules and Regulations, the Specifications provided to NPI by JDS, and the Quality Assurance Agreement attached as Schedule 2.1(b).

          (c) Product Recalls. JDS shall be responsible for conducting product recalls, and shall promptly notify NPI of any recall notice for supplied Products. NPI shall use commercially reasonable efforts to cooperate with and assist JDS in the performance of such duties and obligations. NPI shall promptly notify JDS if it receives

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any notice, including a recall notice, which relates to the marketability, safety, or effectiveness of any Product. JDS shall be responsible for the expense of all recalls initiated by JDS, except where the recall results from NPI’s breach of warranties under this Agreement, defective manufacture or packaging, or other breach or fault of NPI, its employees and agents, in which case NPI shall be responsible for the expense of the recall. For purposes of this Agreement, the “expense of the recall” shall be the reasonable out-of-pocket expenses associated with JDS notification, product return, replacement or destruction, and any other charges incurred in order to comply with recall procedures.

          (d) Stability Testing. JDS shall bear the cost of stability testing required for Products in both finished packaged and semi-finished pack forms. The cost of NPI-supplied Stability services is included in Schedule 2.1 (d).

          (e) Adverse Drug Experience Reports. JDS shall be responsible for filing, with the responsible regulatory body in any country where JDS markets Products, any and all adverse drug reaction reports that it receives.

          (f) Product Complaints. JDS shall have the responsibility for fielding, investigating and responding to all Product complaints. NPI shall provide reasonable cooperation in promptly investigating and reporting to JDS the results of investigations for all Product complaints that may involve the Products not meeting specifications. In the event that NPI receives any Product complaints, NPI shall notify JDS of all such complaints within five (5) days of receipt. NPI shall notify JDS of any report of (i) a non-serious adverse drug reaction (as defined in 21 C.F.R. section 314.80(a)) concerning any Product within three (3) days of receipt and for a serious adverse drug reaction (as defined in 21 C.F.R. section 314.80(a)) concerning any Product within twenty-four (24) hours of receipt and (ii) provide JDS with information as required by applicable Law Rules and regulations.

     2.2 Technology Rights. Subject to the terms and conditions hereof, NPI shall have the right to use JDS’s Confidential Information, which relates in any way to the Products, to Manufacture the Products for JDS or JDS’s successors or assigns. The Parties acknowledge and agree that JDS is the owner of its Confidential Information and that NPI has no ownership rights thereto, and no right to use JDS’s Confidential Information except as provided in this Agreement.

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     2.3 Purchase, Receipt and Storage of Materials. NPI shall be responsible to purchase, receive and store Materials to support the Manufacture of JDS Products. JDS may, at its option and upon prior notice to NPI, purchase or supply the Materials. However, to the extent that NPI is tasked with purchasing Materials that will serve as active or inactive drug ingredients in any Product, JDS shall provide NPI with a list of vendors from which NPI may purchase such Materials. NPI may not purchase active or inactive drug ingredients for use in any Products from any other vendor without JDS’s prior written approval. A list of Materials that NPI will purchase is provided in Schedule 2.3. Any Materials not listed in Schedule 2.3 will be provided at the expense of JDS. All materials provided to Norwich by JDS will be stored in accordance with Law, Rules and Regulations and will be conspicuously labeled as JDS property.

     2.4 Shipment of Finished Goods All finished, labeled Products delivered hereunder to JDS shall have proper dating on the labels and have at least 30 months shelf life remaining at time of delivery.. All Products delivered to JDS hereunder shall be shipped F.O.B. point of manufacture by a common carrier (“Carrier”) approved and paid for by JDS. NPI shall ship such quantities to the destination(s) and at the time(s) specified in Purchase Orders (as defined in Section 3.2 hereof) by JDS or its designee. JDS will designate an approved Carrier, or will provide a schedule of approved Carriers of which NPI will choose one from the list.

     2.5 Labeling and Packaging of Supplied Products. JDS shall, at its own cost and expense, supply NPI with the mechanical design of artwork for all Printed Matter to be used by NPI in connection with packaging the Products. NPI shall be responsible for the printing of all finished Printed Matter and for ensuring that the proper Printed Matter is affixed to, or included with each Product. Each set of artwork supplied by JDS, and each partial set and/or alteration or amendment thereto, for each piece of Printed Matter shall be identified by a unique item control number or code (the “Code”) supplied by JDS, which is consistent with NPI’s existing control practices. All physical specifications of all Printed Matter shall comply with NPI’s control numbering system, quality control requirements and manufacturing process constraints as provided by NPI. No changes to printed matter will be made in the Master Packaging Record Specifications without the prior written consent of JDS.

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     2.6 Inspections. Upon reasonable prior written notice, during NPI regular business hours, and subject to NPI’s normal confidentiality and safety regulations governing visitors, JDS’s representatives, including without limitation its employees, officers, agents, contractors and consultants, shall have the right to enter and inspect the facility at which the Products are Manufactured and to request samples of the Products being Manufactured. Such inspections shall be conducted in a manner and at the times such as to cause the least possible amount of interference with NPI’s operations, but, in any event, NPI shall permit the inspection no later than three days following after the inspection date stated in JDS’s written notice. NPI shall maintain, in compliance with applicable Laws, Rules and Regulations and make available to JDS, upon reasonable request, true and accurate records of chemical, physical and other tests of the raw materials for the Products. Such Inspections are typically scheduled not more frequently than annually; however, specific events may require more frequent inspections, such as, without limitation, failure investigations, implementation and/or validation of manufacturing or packaging changes, and the failure of NPI to comply with the terms of this Agreement. JDS’s representatives shall be bound by the provisions of Section 8.1 of this Agreement regarding any Confidential Information of NPI obtained by such representatives as a result of any inspection conducted pursuant to this provision.

     2.7 Governmental Action. If any governmental or regulatory authority notifies NPI that it will inspect NPI’s facility, or any of NPI’s records, equipment, or procedures related to the manufacture of the Product, NPI shall notify JDS as soon as is practicable (to the extent possible, within two (2) business days and prior to the inspection or action), allow the authority to conduct an inspection or take other legal action, and provide JDS with copies of any documents issued to NPI by the authority (including, but not limited to, Lists of Inspectional Observations (FDA Form 483), Establishment Inspection Reports (“EIRs”), and Warning Letters). Where appropriate, NPI shall also provide its proposed response to such documents to JDS for JDS’s prior review and approval (such approval not to be unreasonably withheld). NPI shall provide JDS with copies of all such final documents submitted to FDA or other governmental agencies within one (1) business day of submission.

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     2.8 Customer Service. NPI shall maintain systems, staffing, and procedures in place to consistently maintain excellent customer service to JDS. Upon notice by JDS, NPI and JDS shall immediately and appropriately address and remedy any failure of NPI to maintain excellent customer service.

Article 3 — Purchase of Product

     3.1 Purchase Obligation. JDS shall purchase and receive from NPI, and NPI shall sell and deliver to JDS or its designated agent, JDS’s orders for Products, to be ordered pursuant to the terms hereof in the quantities set forth in the Purchase Orders (as defined herein). The cost of shipping all such Products shall be borne by JDS. Title to Products shipped by NPI in accordance with the terms and conditions of this Agreement shall pass to JDS upon acceptance by the Carrier; provided, however, pursuant to the Laws, Rules and Regulations, JDS shall always retain title to the active pharmaceutical ingredient provided by or on behalf of JDS and any products produced therefrom.

     3.2 Production Scheduling. At least thirty (30) days prior to the start of each calendar quarter (the “First Quarter”) during the Supply Term, JDS or its designated agent shall, by written notice hereunder, deliver to NPI: (i) a Purchase Order, if an order is being placed, setting forth the Products to be purchased during the next succeeding calendar quarter (the “Second Quarter”) and the desired delivery date(s) (which date(s) shall be no more than once each month during the Second Quarter for each quantity so ordered; and (ii) a written forecast (the “Forecast”) of JDS’s expected requirements of Products and the presentation forms thereof for the next three (3) calendar quarters after the Second Quarter, together with the expected quantity and delivery date(s) for each quantity so forecast to be ordered during such quarters. JDS may not reject as non-conforming orders filled within 10% of the requested order quantity, provided that the Products are otherwise satisfactory.

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     (a) Release for Shipment. NPI shall release for shipment quantities of Product consistent with the Purchase Order issued by JDS. If there is any discrepancy between the terms of the Purchase Order and the terms of this Agreement, the terms of this Agreement shall control.

     (b) Limitations. JDS shall use commercially reasonable efforts to ensure that JDS’s Purchase Orders comply as closely as possible with the Forecasts for each calendar quarter during the term hereof. In no event shall NPI be obligated to deliver to JDS in the Second Quarter more than one hundred twenty-five percent (125%) of the total quantity set forth in the Second Quarter forecast. In no event shall JDS’s Purchase Order for the Second Quarter be less than seventy-five percent (75%) of the total quantity set forth in Second Quarter forecast. If JDS’s Purchase Orders in the Second Quarter are more than one hundred twenty-five percent (125%) of the total quantity set forth in the Second Quarter forecast (the “Excess Order”), NPI shall determine feasibility of meeting the Purchase Order request. If feasible, NPI shall produce and invoice JDS for any premium costs required to deliver the product that exceeds one hundred twenty-five percent (125%) of the Second Quarter forecast; provided, however, that NPI shall provide JDS notice of the proposed premium costs at least three (3) days prior to the production of Product of such Excess Order and JDS shall have the right to alter or amend the Excess Order. If JDS’s Purchase Order in the Second Quarter is less than seventy-five percent (75%) of the Second Quarter forecast, NPI shall invoice JDS for raw materials held in inventory pursuant to the Second Quarter forecast that are in excess of the Second Quarter forecast, but less than what is necessary for one hundred twenty-five percent (125%) of the Second Quarter forecast, at cost plus a 15% carrying fee. Any raw materials paid for pursuant to this paragraph will become the property of JDS.

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     3.3 Certificate of Analysis and Release for Shipment. NPI shall provide a certificate of analysis (“Certificate of Analysis”) to JDS or its designated agent prior to each shipment of Supplied Product made hereunder. Such Certificate of Analysis shall certify with respect to each shipment and lot (identified by batch/lot or control number): (i) the quantity of the shipment and (ii) that the Product delivered was manufactured in accordance with the Specifications, the Master Batch Records, the requirements of Laws, Rules and Regulations, and production SOP’s; and (iii) that all documentation required by Laws, Rules and Regulations and/or production SOPs are complete and accurate. Such Certificate of Analysis also shall be accompanied by the following documents: (i) complete processing/packaging batch record(s); (ii) laboratory test data and a release recommendation; (iii) a GMP statement (as per the QA Agreement); (iv) applicable variance/out-of-specification/manufacturing failure investigations; and (v) reconciliation calculation(s). Within ten (10) business days of receiving the Certificate of Analysis and accompanying documents, JDS will notify NPI that the shipment is either approved for delivery to JDS or rejected because it is not in compliance with the terms of this Agreement, unless if JDS notifies NPI prior to the ten (10) days that additional information is needed in order to determine whether the shipment is approved for delivery or rejected. In such case, both parties will agree to cooperate to address the concern in as timely a manner as possible. However, in such case, resolution may require more than ten (10) business days. No Product shall be released by NPI prior to receiving JDS’s approval for shipment. The parties agree that they will develop and execute a qualification plan that will reduce the batch record transmission and the laboratory test data review by JDS in favor of a release decision to ship to JDS by NPI with the document review by JDS reduced to an audit basis.

     3.4 Testing Upon Delivery. Promptly following receipt of the Products in any shipment, JDS may check the compliance of such batch with the Specifications. Such compliance check shall be performed by JDS’s Quality Assurance department and shall be certified by the head of such department (or his/her designee). If JDS deems that any Products delivered to JDS hereunder fail to conform to written and approved Specifications upon delivery to JDS, then JDS shall notify NPI thereof in writing (such notice to include test results) within thirty (30) days from delivery of such Products to JDS. JDS shall retain the non-conforming Products and NPI shall have the right to inspect such Products. If NPI batch records show Products met JDS Specifications at time of delivery to Carrier, and it can be demonstrated that Product damage was due to shipping, handling or other events taking place after transfer to the Carrier, then NPI shall not be liable for any damage.

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     (a) Undisputed Claims. NPI shall, if it agrees with JDS’s complaint, replace any such non-conforming Products with an equal quantity of Products complying with the Specifications at no cost to JDS and without undue delay subject to the provisions of Section 8.2 of this Agreement (force majeure). JDS shall dispose of any Products that are not in compliance with the Specifications at NPI cost, and in compliance with all applicable laws, except that JDS shall follow any reasonable instructions from NPI to return such Products to NPI, in which case, NPI shall provide JDS with a written certification that all Products returned to NPI were destroyed in accordance with applicable laws, rules, and regulations. NPI will reimburse JDS for the out-of-pocket costs of JDS for any Materials, including any active pharmaceutical ingredient, supplied by or paid for by JDS and contained in the non-conforming Products where the cause for the non-conforming product loss is within control of NPI. NPI shall not be responsible for active pharmaceutical ingredient, that is lost, spilled, scrapped or damaged in the ordinary course of business in an amount up to and including an agreed upon yield loss of the active pharmaceutical ingredient supplied by JDS or paid for by JDS. The ongoing yield loss percentage will be based on the first ten (10) production lots, and the percentage loss will be reached by mutual agreement between the Parties.

     (b) Disputed Claims. If NPI does not agree with JDS’s complaint, then NPI shall notify JDS of such disagreement within thirty (30) days of receipt of notice of deficiency. If the Parties cannot themselves resolve such disagreement within ten (10) business days of JDS’s receipt of NPI notice of disagreement, then the matter shall be submitted (without undue delay) to an independent laboratory agreed by the Parties in order to resolve the discrepancy in the analysis of the Products in question. The assessment of such laboratory shall be binding upon the Parties and any related expense shall be borne by the party whose analysis was in error. If such independent laboratory declares that the Products are non-conforming, then the provisions of Section 3.4(a) hereinabove shall apply.

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     3.5 Violations. Each party shall notify the other of any violation of any Laws, Rules and Regulations applicable to the Products alleged by a third party promptly following receipt of notice of such allegation.

     3.6 Taxes. JDS agrees to pay all taxes assessed on all materials excluding finished product to which they have title respectively. JDS shall pay all taxes assessed on finished product.

Article 4 — Pricing and Payment Terms

     4.1 Pricing. The price (the “Price”) for Products Manufactured hereunder shall be as per the attached Schedule 4.1. All pricing and shipment terms shall be F.O.B. producing plant. The Price shall be adjusted as follows:

     (a) Material Prices. Starting the January after the execution of this Agreement, and annually thereafter, NPI may notify JDS of any changes in Material pricing. Changes to Material Prices may include supplier price increases or decreases. *** Changes in Pricing will be effective one month after the price change notification date (February 1^st) of each year of the Supply Term.

     (b) Non-Material Costs. Components of NPI’s cost of the Products and the Manufacture thereof, other than the cost of Materials, shall hereinafter be referred to as Non-Material Costs. ***

     4.2 Payment Terms. The Price for all Product Manufactured hereunder shall be due and owing to NPI net *** after shipment of Product (s) to JDS or its designee and receipt from NPI of a complete and correct invoice, and shall be payable in currency of the United States in immediately available funds. NPI may withhold subsequent deliveries of Product or take other action it deems appropriate should JDS fail to pay any complete and correct invoice within the terms set forth herein. NPI shall give notice to JDS hereunder prior to any such action.

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     4.3 Capital. The equipment listed in Schedule 4.3 is owned by or licensed to JDS and has been provided to NPI for the manufacture of Product or Products. NPI shall maintain the equipment as in the normal course of operation in a pharmaceutical environment and accordance with Laws, Rules and Regulations. NPI will not make use of this equipment for other products that would interfere with the timely delivery of Product to JDS.

     4.4 Product Scrap. In the event NPI realizes Product Scrap costs which are (i) caused by process capability issues inherent in the production formulation and/or design, and (ii) not within the control of NPI personnel, NPI will invoice JDS for a) the cost of the Materials of the Product scrapped, but only if purchased by NPI and not previously reimbursed by JDS; b) out-of-pocket environmental disposal fees; and c) a product handling fee of 15% for Materials acquired by NPI.

Article 5 — Change Management

     5.1 Required Manufacturing Changes. With respect to changes to the Specifications or manufacturing process which are required by applicable Laws, Rules and Regulations or by action (or inaction) of any legally competent government or other regulatory body or authority, or by medical or scientific concerns as to the toxicity, safety and/or efficacy of the Products (collectively, “Required Manufacturing Changes”), the Parties shall co-operate in making such changes promptly. NPI may not implement any Required Manufacturing Changes without receiving written agreement in advance from JDS. The cost for authorized Product or JDS- specific Required Manufacturing Changes shall be borne by JDS. Facility and NPI Equipment-related Required Manufacturing Changes shall be borne by NPI. For Product or JDS-specific Required Manufacturing Changes, JDS shall pay all the costs of all remaining obsolete stock of Products, all inventories of affected raw materials (at NPI actual acquisition cost plus 15%) and all remaining obsolete work in process of Products resulting from any such changes. In no event shall JDS be responsible for the costs of any JDS-specific

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Required Manufacturing Change necessitated by the failure of NPI to comply with any Laws, Rules and Regulations or Specifications. In cooperating in making such changes, JDS shall be responsible for communicating with regulatory agencies with respect to the health registrations and marketing authorizations for the Products. Required Manufacturing Changes: (i) do not include changes to the labeling only (which are dealt with in Section 5.3 hereof), and (ii) do include changes resulting from or arising out of changes to or withdrawal of third party Materials.

     5.2 Discretionary Manufacturing Changes. With respect to changes to the Specifications or the manufacturing process for Products which are not Required Manufacturing Changes (collectively, “Discretionary Manufacturing Changes”), the Parties shall, to the extent commercially reasonable under the circumstances, cooperate in making such changes and the party initiating such change(s) shall bear all the costs associated with and resulting from any such changes. In no event shall NPI implement a Discretionary Manufacturing Change without providing JDS with six (6) months written notice of the change and, where appropriate, providing JDS with all documentation necessary to support a regulatory submission for the change. If the proposed change is judged to require a prospective process validation or regulatory submission, then the costs to execute and resource such validation or submission shall be the responsibility of the initiating party. All regulatory submissions will be filed by JDS.

     5.3 Labeling Changes. With respect to changes to the Printed Matter, the Parties shall cooperate in making such changes promptly and JDS shall, unless otherwise agreed, reimburse NPI for all remaining obsolete stock of Products, all inventory of Printed Matter (at NPI actual acquisition cost plus 15%) and all remaining obsolete work in process of Products resulting from any such change or amendment to the Printed Matter as long as the amount of material does not exceed 125% of the most recent forecast. JDS may, at any time during the Supply Term, change or amend any item of the labeling by notice hereunder, such change or amendment to be effective after appropriate advance written notice hereof. Under no circumstances may NPI make changes to the Printed Matter without the express written permission of JDS.

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     5.4 Changes to Specifications. JDS may make changes to the Specifications from time to time, provided that all such changes, including Required Manufacturing Changes, are to be communicated to NPI in writing and promptly acknowledged by NPI in writing. Under no circumstances may NPI make changes to the Specifications without the express written permission of JDS. NPI will have 30 days to assess any potential cost impact for such changes and shall pass on any cost impact of such changes to JDS.

     5.5 Authorizations. During the Supply Term, NPI shall obtain and maintain in force all licenses and authorizations necessary for NPI to Manufacture Products including, where required, the FDA establishment fee. Except as may be required by Sections 5.1 or 5.2 hereof, NPI shall bear the full cost and expense of so obtaining and maintaining such licenses and authorizations. JDS shall give NPI all help reasonably necessary to assist NPI in so obtaining and maintaining such licenses and authorizations and shall bear the full cost and expense of so assisting NPI. In the event JDS Products require licenses in a new country or territory, JDS shall pay the costs of new license requirements. JDS shall bear all costs associated with maintenance of the health registrations for the Products, including new drug application (“NDAs”) approvals under section 505 of the FDCA.

Article 6 — Liabilities and Indemnification

     6.1 Representations and Warranties .

     (a) NPI. NPI hereby represents and warrants to JDS that (i) it has the power and authority to enter into this Agreement and to perform its obligations hereunder; (ii) all work to be performed under this Agreement, including the Manufacture of all Products, shall be performed in a professional manner, in accordance with the Quality Assurance Agreement (Schedule 2.1(b)) and all applicable Laws, Rules and Regulations, including all health and safety ordinances and the cGMPs; and (iii) NPI has all permits and authorizations necessary to fulfill its obligations under this Agreement.

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     (b) JDS. JDS hereby represents and warrants to NPI that (i) it has the power and authority to enter into this Agreement and to perform its obligations hereunder; (ii) it is, or has filed with the FDA to become, the owner of all proprietary information, or the holder of licenses thereto, necessary to allow NPI to Manufacture the Products, and no Products, when Manufactured in accordance with the Specifications, will infringe upon the rights of any third party; and (iii) it has, or has filed with the FDA to obtain, all licenses, permits, and other authorizations necessary to fulfill its obligations under this Agreement.

     6.2 Product Warranties. NPI represents and warrants to JDS that the Products shall, on the date of delivery to JDS’s carrier: (i) meet the requirements therefore set forth in the Specifications; (ii) not be adulterated within the meaning of Section 501 of the FDCA and the regulations promulgated thereunder as each may be amended from time to time ; and (iii) comply in all material respects with all federal, state and local laws (including without limitation cGMP) applicable to the Manufacture of the Products in accordance with the Specifications. NPI makes no warranties with respect to the Products other than those specifically set forth in this section. No other warranty is expressed or implied by NPI including any warranty of merchantability or fitness for a particular purpose and none shall be implied. Further, all warranties with respect to the Products shall be only in effect for the period beginning with the date NPI delivers such products to the Carrier, and shall not apply to any product that is subsequently altered by JDS or the Carrier.

     6.3 Consequential Damages. With regard to any alleged breaches of this Agreement and any indemnification obligations herein, neither party shall be liable to the other for incidental, consequential, or special damages of any kind whatsoever, even if the party alleged to be at fault has been made aware of the possible occurrence of such damages.

     6.4 JDS Insurance. JDS shall provide NPI with evidence that it has in place the following policies with a reputable and responsible insurance carrier, which shall remain in full force and effect throughout the Supply Term: (i) All risk property insurance policy covering the full replacement cost of JDS property; (ii) general liability

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including product and completed operations coverage in a minimum amount of *** insuring NPI against liability for injury to persons occurring in, upon, or adjacent to NPI’s facilities. JDS shall provide evidence that NPI has been named as an additional insured under the policies described herein during the Supply Term.

     6.5 NPI Insurance. NPI shall provide JDS with evidence that it has in place with a reputable and responsible insurance carrier, which shall remain in full force and effect throughout the Supply Term, a minimum amount of *** insuring NPI against liability for Product defects. NPI shall provide evidence that NPI has been named as an additional insured under policies described herein during the term of this Agreement.

     6.6 JDS Indemnity. JDS shall indemnify, defend and hold harmless NPI, NPI’s affiliates, and each of their respective officers, directors (past, present and future), employees, representatives and agents (collectively, “Affiliates”) from and against any and all claims, loss, damage, liability, payment, and obligation, and all expenses, including without limitation reasonable legal fees (collectively, “Losses”) whether such Losses are based in contract, strict liability, negligence, warranty, statutes or regulations, or any other legal theory, including without limitation injury to or death of persons and/or property or contamination of or adverse effect on humans, animals, aquatic life or the environment, arising out of or caused by: (i) the Manufacture, use, sale or distribution of the Products, as long as such Products are in accordance with Specifications and are not adulterated under Section 501 of the FDCA; (ii) any claim threatened or brought against NPI alleging that the Specifications for any Product, including the labeling for such Product, violate any applicable United States federal, state, or local rule, regulation, law or ordinance, to the extent that such Specifications were provided to NPI by JDS and the Products in question were manufactured in compliance with such Specifications and all applicable Laws, Rules and Regulations; (iii) any material inaccuracy in or material breach of any representation, warranty, or covenant made by JDS in this Agreement; (iv) the willful misconduct or any negligent or reckless acts or omissions of any of JDS’s officers, directors, agents, affiliates, employees and/or representatives, or any allegations of the same; (v) any claim

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threatened or brought against NPI alleging that the Manufacture, in accordance with the design or Specifications of any Product, as provided to NPI by JDS, infringes upon any intellectual property interest of a third party; (vi) any product warranty claim or product liability claim threatened or brought against NPI with respect to the Products, as long as the Products involved in the claim meet the Specifications and are not adulterated under Section 501 of the FDCA ; and (vii) any claim, including damage to any property, or injury to any person (including JDS’s employees, representatives, agents, associates, or other persons invited by JDS to inspect NPI’s facilities on behalf of JDS), arising out of, or related to the inspection of NPI’s facilities contemplated by Section 2.6 of this Agreement.

     6.7 NPI Indemnity. NPI shall indemnify, defend and hold harmless JDS and JDS’s Affiliates from and against any and all Losses, arising out of or caused by; (i) the failure of the Products transferred to JDS hereunder to meet the requirements of Section 6.2 hereof, (ii) bodily injury or property damage in connection with the Manufacture of the Products; (iii) a material breach by NPI of any representation, warranty or covenant of this Agreement, or (iv) the willful misconduct or any negligent or reckless acts or omissions of any of NPI’s officers, directors, agents, affiliates, employees and/or representatives, or any allegations of the same.

     6.8 Joint Negligence. If any Loss incurred by or rendered against either party is determined by an independent tribunal to be due to the negligence or willful misconduct of both NPI and JDS, then the Parties shall share the costs attributable to such Loss (including but not limited to the cost of defense thereof) in accordance with the proportion of each party’s relative fault, as determined by the independent tribunal. Each party shall give the other notice of any Loss to which the preceding sentence applies and the Parties shall cooperate in the defense thereof.

     6.9 Notice and Opportunity to Defend. No party against whom a claim of indemnity shall be made pursuant to Section 6.6 or 6.7 hereof (the “Indemnifying Party”) shall be liable thereunder unless the party making such claim (the “Claiming Party”) shall notify the Indemnifying Party of such claim promptly upon becoming aware of the existence or threatened existence of any Loss giving rise to, or which may give rise to, a

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claim of indemnity under Section 6.6 or 6.7 hereof, but in no event later than ten (10) business days after the service (or discovery, if later) of the claim against the Claiming Party. Upon such notice becoming effective hereunder, the Indemnifying Party will handle and control the defense of such Loss. If both Parties claim indemnification hereunder for the same Loss or if the Indemnifying Party in good faith rejects the claim of indemnity, then the party or Parties named as defendant in the subject litigation will handle and control the defense of such Loss pending final resolution of the Parties’ respective claims for or with respect to indemnity hereunder. At the time of such resolution, defense costs incurred pursuant to the preceding sentence shall be apportioned between the Parties in the same manner as the Parties share ultimate liability for the underlying Loss pursuant to Sections 6.6 and 6.7 hereof. In all cases, the party not handling and controlling such defense shall cooperate in such defense and may, at its own expense, participate in such defense through counsel of its choice. The party handling and controlling such defense shall not settle or otherwise voluntarily dispose of or agree to dispose of such matter without prior approval of the other party, which shall not be unreasonably withheld.

Article 7 — Term and Termination

     7.1 Term. Subject to the provisions of Section 7.2 hereof, the initial term of this Agreement shall commence on the Agreement Date and shall continue in full force and effect, unless otherwise terminated earlier, for a period of thirty-six (36) months from the date first above written. The term of this Agreement may be extended for two additional two-year terms by written notice from JDS to NPI, and upon written acceptance from NPI to JDS, given at least twelve (12) months before the expiration of the then current term. ***

     7.2 Termination. This Agreement shall not be terminated at any time prior to the expiration of the Supply Term except in accordance with the terms and conditions of this Section 7.2.

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     (a) Default. This Agreement may be terminated by written notice by either party if the other party breaches any material provision of this Agreement and does not remedy such breach within sixty (60) days of written notice of such breach.

     (b) Termination without Cause. Either Party may, at any time, terminate its obligation to purchase or supply Product, by giving written notice to the other party at least eighteen (18) months prior to the effective date of such termination.

     (c) Termination with Cause. Either party may terminate this Agreement at any time effective upon delivery of written notice of such termination, upon the occurrence of any of the following: (i) improper assignment of this Agreement by the non-terminating party; (ii) an assignment for the benefit of creditors by the non-terminating party; or (iii) commencement of voluntary or involuntary liquidation proceedings by the non-terminating party.

     7.3 Effects of Termination.

     (a) Raw Materials. If NPI has quantities of raw materials or packaging materials in excess of JDS requirements therefore after expiration or termination of this Agreement, or if NPI is required to order quantities of such raw materials or packaging materials in excess of JDS requirements therefore after termination of this Agreement, JDS shall, upon such termination, purchase all finished product at the agreed prices, and such Materials at NPI out of pocket cost plus 15% F.O.B. producing plant.

     (b) Survival of Obligations. Termination or expiration of this Agreement shall not affect the Parties’ obligations with respect to Sections 6.6, 6.7, and 8.1 of this Agreement.

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Article 8 — General Provisions

     8.1 Confidentiality. During the Supply Term, and for a period of ten (10) years thereafter, the Parties, and all of their respective employees, agents, representatives, and advisors, shall maintain in confidence all of the other party’s Confidential Information, and shall not disclose Confidential Information to any third party, or use Confidential Information in any way or for the benefit of any person other than as expressly permitted in this Agreement. For the purposes of this covenant, the Parties shall have no obligation with respect to any information which has been either published or is otherwise in the public domain; is lawfully acquired from a third party under no obligation of confidentiality to the owner of the Confidential Information; is derived from information that is not otherwise confidential; or is required to be disclosed pursuant to a court order or in connection with a legal proceeding. If either party is required by law to disclose the other’s Confidential Information the disclosing party will promptly notify the owner of the Confidential Information of the requirement and will cooperate in all reasonable respects with the owner of the Confidential Information to limit the amount of information to be disclosed.

     8.2 Force Majeure.

     (a) Neither party shall be subject to any liability for delay in performance (other than the payment of money) or nonperformance hereunder as a result of contingencies and circumstances beyond its reasonable control (including, but not limited to, fire, flood, or other natural catastrophe, strike, labor trouble, accident, riot, war, act of governmental authority, or act of God) interfering with the Production, supply, transportation or receipt of Product or with the supply of any raw materials used in the Manufacture thereof, or any other required performance under this Agreement. Quantities so affected may be eliminated from this Agreement without liability, but the Agreement shall otherwise remain unaffected.

     (b) Except where the nature of the event shall prevent it from doing so, the party suffering such force majeure shall promptly notify the other party in writing after the occurrence of such force majeure and shall in every instance, to the extent reasonable and lawful under the circumstances, use its best efforts to remove or remedy such cause with all reasonable dispatch.

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     (c) When the force majeure conditions in question cease to exist, the affected party shall promptly notify the other party in written form about the force majeure termination.

     (d) Should a circumstance of force majeure prevent performance of this Agreement by either party for a continuous three (3) month period, the other party may terminate this Agreement upon thirty (30) days written notice during the continuance of such force majeure in excess of three (3) months.

     8.3 Entire Agreement. This Agreement, and all exhibits and attachments hereto, constitutes the full understanding of the Parties, a complete allocation of risk between them and a complete and exclusive statement of the terms and conditions of their Agreement relating to the Manufacture of Product hereunder and supersedes and replaces any and all prior or contemporaneous agreements, arrangements, understandings, and negotiations, whether written or oral, that may exist between the Parties with respect to the subject matter hereof. Except as provided otherwise in this Agreement, no conditions, usage of trade, course of dealing or performance, understanding or agreement purporting to modify, vary, explain or supplement the terms or conditions of this Agreement shall be binding on the Parties unless described as a modification or amendment of this Agreement made in writing and signed by the Parties to be bound. No modification hereof shall be effected by the acknowledgment or acceptance of any purchase order or shipping instruction forms containing terms and conditions at variance with or in addition to those set forth in this Agreement.

     8.4 Headings. Section and article headings as to the contents of particular sections and articles are for convenience only and are in no way to be construed as part of this Agreement or as a limitation of the scope of the particular sections or articles to which they refer.

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     8.5 Relations Between the Parties. NPI shall act as independent contractor of JDS in performing its obligations hereunder and shall furnish all labor, supervision, machinery and equipment necessary for performance hereunder and shall obtain and maintain all building and other permits and licenses required by public authorities in connection therewith.

     8.6 Assignment. Neither this Agreement nor any claim arising directly or indirectly out of or in connection with the performance of either Party hereunder shall be assignable by either Party hereto without the prior written consent of the other Party, which shall not be unreasonably withheld. The foregoing shall include merger or acquisition of either Party. JDS reserves the right to reduce or discontinue purchases under this Agreement, or to terminate this Agreement, without obligation, if any new entity or person obtains whole or more than 50% corporate ownership or control of NPI. No such assignment or transfer shall relieve or release the assignor or transferor from any of its liabilities or obligations under this Agreement. This Agreement is assignable to a wholly-owned subsidiary of JDS without the consent of NPI.

     8.7 Notice. All communications under this Agreement shall be in writing and shall be either faxed, sent by courier (Federal Express or equivalent) or mailed by first class mail, postage prepaid, to the fax number and/or address specified below. If faxed, such communication shall be deemed to be given when sent; provided, however, that such fax shall be confirmed by sending a hard copy by courier or first class mail (by the methods specified herein) within one (1) working day of the sending of such fax. If sent by courier or mailed by first class mail as specified below, such communication shall be deemed to be given either two (2) business days after sending (for communication sent by courier) or five (5) business days after mailing (for communication sent by mail). Either party may change its address for notice purposes by complying with the provisions of this Section 8.7. All communications hereunder shall be sent:

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     (a) if to NPI at its address shown below or such other address as it may give to JDS by notice hereunder:

	Christopher R. Calhoun, President
	OSG Norwich Pharmaceuticals, Inc.
	6826 State Highway 12
	Norwich, NY 13815
	Fax: (607) 335-3100
With a copy to:	Perry Morgan, Chief Financial Officer
	Outsourcing Services Group
	50 Tice Boulevard
	Woodcliff Lake, NJ 07677
	Fax: (201) 782-0499

     (b) if to JDS, at its address shown below or such other address as it may give to NPI by notice hereunder

	Mr. Phillip M. Satow, CEO
	JDS Pharmaceuticals, LLC.
	122 East 42nd Street
	New York, NY 10168
	Fax: (212) 682-1946
with a copy to:	Mr. Herschel Weinstein, Esq.
	Dornbush Schaeffer Strongin & Weinstein, LLP
	747 Third Avenue
	New York, NY 10017
	Attn: Herschel S. Weinstein, Esq.
	Fax: (212)-753-7673

     8.8 Severability. If any provision of this Agreement is found or declared to be invalid or unenforceable by any court or other competent authority having jurisdiction, such finding or declaration will not invalidate any other provision hereof and this Agreement shall thereafter continue in full force and effect, except that such invalid or unenforceable provision, and (if necessary) other provisions thereof, shall be reformed

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by a court of competent jurisdiction so as to effect, insofar as is practicable, the intention of the Parties as set forth in this Agreement, provided that if such court is unable or unwilling to effect such reformation, the invalid or unenforceable provisions shall be deemed deleted to the same extent as if it had never existed.

     8.9 Governing Law; Venue. The provisions of this Agreement shall be governed by the laws of the State of New York, USA without regard to the rules on conflict of laws thereof. All disputes between the parties to this Agreement arising out of or in connection with the execution, interpretation and performance of this Agreement (including the validity, scope and enforceability of this arbitration provision) shall be solely and finally settled by a board of arbitrators consisting of three arbitrators. The arbitration proceedings shall be conducted in accordance with the Commercial Arbitration Rules (the “AAA Rules”) of the American Arbitration Association (the “AAA”). Except as provided under the Federal Arbitration Act, 9 U.S.C. §§10 and 11, the parties agree that the award of the Arbitrators shall be final and binding and shall not be subject to judicial review. Judgment on the arbitration award may be entered and enforced in any court having jurisdiction over the Parties or their assets. It is the intent of the Parties that the arbitration provisions hereof be enforced to the fullest extent permitted by applicable law, including the Federal Arbitration Act, 9 U.S.C. §2. The award of the arbitrators may be confirmed upon application of either party in any court having jurisdiction over the subject matter and the parties.

     8.10 Remedies. No right or remedy herein conferred upon the Parties is intended to be exclusive of any other right or remedy, and each and every right or remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity or by statute.

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     8.11 Attachments. The attachments to this Agreement are hereby incorporated in and made a part of this Agreement. The Parties may, by mutual consent, amend any attachment hereto at any time during the term hereof by executing a version of such attachments dated after the then current version.

     8.12 Waiver; Amendment. Any waiver by either party hereto of a breach or a default of any provision of this Agreement by any other party hereto shall not be construed as a waiver of any succeeding breach of the same or any other provision, nor shall any delay or omission on the part of any party hereto to exercise or avail itself of any right, power or privilege that it has or may have hereunder operate as a waiver of any such right, power or privilege by such party. Any amendment or supplementation of this Agreement shall be effective only if in writing signed by both of the Parties hereto.

     8.13 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and same instrument. The Parties have agreed that for this purpose, facsimile signatures will be accepted as originals.

     8.14 No Public Announcement. No public announcements will be made by either party regarding the transactions contemplated hereby until after the execution and delivery of the Agreements by all parties to the transaction. Not less than three business days prior to any public announcement, a party proposing to make such announcement shall furnish the content of the announcement to the other party and shall specify the date that the announcement will be made. The parties shall jointly cooperate in the preparation and content of any press releases announcing the transaction.

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the date first above written.

JDS PHARMACEUTICALS, LLC.	OSG NORWICH PHARMACEUTICALS, INC.
(JDS)	(NPI)
By:	By:
/s/ Phillip M. Satow	/s/ Christopher R. Calhoun
Title: CEO	Title: President

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EX-10.6

Exhibit 10.6

     The confidential portions of this exhibit have been filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request in accordance with Rule 24b-2 of the Securities and Exchange Act of 1934, as amended. REDACTED PORTIONS OF THIS EXHIBIT ARE MARKED BY AN ***.

MANUFACTURING AND SUPPLY AGREEMENT

     THIS MANUFACTURING AND SUPPLY AGREEMENT (this “Agreement”) is dated as of August 25, 2004 and is between SOLVAY PHARMACEUTICALS, INC., a Georgia corporation (“SOLVAY”), and JDS PHARMACEUTICALS, LLC, a New York limited liability company, (“JDS”).

     The parties wish to set forth the terms and conditions under which SOLVAY will manufacture for and supply to JDS the Product described herein. Accordingly, in consideration of the mutual promises and undertakings contained herein and intending to be legally bound hereby, the parties hereto agree as follows:

ARTICLE I
DEFINITIONS

     When used in this Agreement, the following terms shall have the meanings set forth below:

     “Act” shall mean the Federal Food, Drug and Cosmetic Act, as amended, and the regulations promulgated thereunder from time to time.

     “Additional Purchase Price” shall have the meaning given to that term in Section 2.4(b) hereof.

     “Affiliate” shall mean any person or legal entity controlling, controlled by or under common control with the person with respect to whom such status is at issue and shall include, without limitation, any corporation 50% or more of the voting power of which (or other comparable ownership interest for an entity other than a corporation) is owned, directly or indirectly, by a party hereto or any corporation, person or entity which owns 50% of more of such voting power of a party hereto.

     “Agreement” shall have the meaning given to that term in the introductory paragraph hereof.

     “Asset Purchase Agreement” shall mean the Asset Purchase Agreement dated August ___, 2004, between JDS and SOLVAY providing for the sale and purchase of the Purchased Assets (as defined therein) by SOLVAY to JDS.

     “cGMP” means the current Good Manufacturing Practice regulations applicable to the manufacture of the Product hereunder.

     “Claims” shall have the meaning given to that term in Section 5.1 hereof.

     “Confidential Information” shall have the meaning given to that term in Section 7.1 hereof.

     “Contract Quarter” shall mean (i) the period from the date of this Agreement through and including September 30, 2004 and (ii) thereafter, each period of three (3) successive calendar months during each Contract Year.

     “Contract Year” shall mean (i) the period from the date of this Agreement through and including December 31, 2004 and (ii) thereafter, January 1 through December 31 of each succeeding calendar year, unless terminated before such later date as provided herein.

     “FDA” shall mean the United States Food and Drug Administration and any successor agency.

     “Force Majeure Event” shall have the meaning given to that term in Section 9.1 hereof.

     “Form” shall have the meaning given to that term in Section 2.3 hereof.

     “Indemnitee” shall have the meaning given to that term in Section 5.3 hereof.

     “Indemnitor” shall have the meaning given to that term in Section 5.3 hereof.

     “Labeling” shall mean all unit Product labels, package inserts, carton imprints, tablet debossing and/or imprinting and all other markings on packaging for, or other similar materials related to, the Product that are defined as labels or labeling under any applicable law or regulation.

     “Labeling Specifications” shall mean the labeling and packaging specifications for the Product attached hereto as Exhibit B and made a part hereof, as such specifications may be amended from time to time by mutual agreement in writing of the Parties.

     “Law” means any applicable statute, law, ordinance, rule, regulation, order, judgment, ruling or decree enacted, adopted, issued or promulgated by any Regulatory Authority.

     “Manufacturing Standards” shall mean all U.S. Laws applicable to the manufacture of the Product.

     “Net Sales” shall have the meaning given to that term in Section 2.4(b)(iii) hereof.

     “Nonconformance” shall have the meaning given to that term in Section 2.7(c) hereof.

     “PPI” shall have the meaning given to that term in Section 2.4(c) hereof.

     “Product” shall mean the pharmaceutical dosage form consisting of Lithium Carbonate as an active ingredient in the presentations specified in Exhibit A hereto and incorporated herein by reference, including, without limitation, bulk form, whether to be ultimately sold by JDS under the LITHOBID^® (Lithium Carbonate, USP, Slow-Release Tablets) trademark or in generic form.

     “Product Specifications” shall mean the specifications for the Product attached hereto as Exhibit C, incorporated by reference herein, the Product specifications and methods set forth as of the date hereof in the manufacturing and control sections of the new drug application heretofore submitted to and approved by the FDA for the Product (including any Labeling requirements specified therein) and any amendments to such specifications that may be mutually agreed upon by the parties in writing.

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     “Regulatory Authority” shall mean any U.S. governmental regulatory authority involved in granting approvals for the manufacture, marketing, sale, reimbursement and/or pricing of Product in the U.S., including, without limitation, the FDA and any judicial or administrative decisions relating thereto.

     “Regulatory Change” shall have the meaning given to that term in Section 9.2 hereof.

     “Regulatory Standards” shall mean all laws, rules, regulations and Regulatory Authority advisory opinions or orders applicable to the manufacturing, marketing, sale, reimbursement and/or pricing of any Product.

     “Sales Year” shall have the meaning given to that term in Section 2.4(b) hereof.

     “SOLVAY’s Shipping Point” shall mean either SOLVAY’s facility in Marietta, Georgia or Baudette, Minnesota, as SOLVAY may designate.

     “Specifications” shall mean the Product Specifications and the Labeling Specifications.

     “Standard Cost” shall have the meaning given to that term in Section 2.4(c) hereof.

ARTICLE II
SUPPLY

     2.1 Generally. Subject to the terms and conditions of this Agreement, SOLVAY shall supply to JDS and JDS shall purchase from SOLVAY the Product in such quantities as JDS may order hereunder from time to time for its worldwide requirements. Except for such quantities of the Product as JDS may order in bulk in accordance with the terms hereof, SOLVAY shall supply the Product in finished, packaged form and tested in accordance with the Specifications and Manufacturing Standards. SOLVAY will not implement any change in materials, components, processes or test methods without consulting with and receiving the prior written approval of JDS. SOLVAY will utilize its change control processes in this regard. In addition, a Quality Agreement will be developed for quality governance substantially in the form attached hereto as Exhibit D.

     2.2 Forecasts

          (a) Initial Forecast. Within fifteen (15) business days of the signing of this Agreement, JDS shall submit to SOLVAY a written forecast of its requirements for the Product for the first Contract Year, the first Contract Quarter of which shall constitute a firm commitment of JDS.

          (b) Subsequent Forecasts. JDS shall submit to SOLVAY by the first day of each successive Contract Quarter a 12-month rolling forecast, by Contract Quarter, of its requirements for the Product, the first quarter of which shall constitute a firm commitment of JDS.

     2.3 Purchase Orders. Within thirty (30) days of the signing of this Agreement, JDS shall place its initial purchase order for the first quarter which is the firm commitment period described in Section 2.2(a). JDS shall place orders for Product only in whole number multiples of specified-size lots. JDS shall place each subsequent order for Product by delivering to SOLVAY a written purchase order specifying the quantity and delivery date (which delivery date shall not be less than ninety (90) days after the date such purchase order is delivered to SOLVAY unless otherwise agreed). Unless the parties otherwise agree, quantities specified in purchase orders for each Product for the second and subsequent

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Contract Quarters may not be less than 80% nor more than 120% of those set forth for such quarter in the most recent forecast submitted to SOLVAY hereunder; provided, however, that SOLVAY will use commercially reasonable efforts to fill any orders for quantities in excess of such maximum amount. SOLVAY shall acknowledge and accept each purchase order received from JDS which complies with the forecast and order procedures set forth herein, within four (4) business days after receipt. All contrary, inconsistent or additional provisions, terms and conditions of any purchase order, sales or order acknowledgment, invoice or other standard business form (a “Form”) of either party shall be superseded by this Agreement and shall be disregarded and have no force or effect. If a Form purports to be conditioned in any manner on agreement to and/or acceptance of any provisions, terms or conditions other than those set forth herein, then such condition is hereby deemed waived.

     2.4 Pricing and Payment.

          (a) General Price. The purchase price of Product supplied to JDS hereunder shall be equal to (i) *** plus (ii) any applicable sales or use taxes, duties and other similar taxes, unless JDS provides SOLVAY with a valid resale certificate or other proof of exemption.

          (b) Additional Purchase Price. During any period that SOLVAY continues to supply JDS’s requirements of Product from a SOLVAY facility pursuant to the terms hereof, JDS agrees to pay SOLVAY, as additional purchase price (the “Additional Purchase Price”), an amount equal to ***, payable in accordance with, and subject to the following terms and conditions:

               (i) Additional Purchase Price shall only be payable in respect of a Sales Year if, during such Sales Year, ***.

               (ii) Additional Purchase Price due shall be payable within 60 days of the end of the Sales Year to which such payment relates. Each payment of Additional Purchase Price will be accompanied by a statement which sets forth the calculation of Additional Purchase Price with reasonable specificity. JDS shall maintain accurate books and records reflecting Net Sales, which books and records shall be available for inspection and audit by SOLVAY no more than once per Sales Year solely to the extent necessary, and for purposes of, verifying the amount of Additional Purchase Price payable hereunder. The cost of any such inspection and audit shall be for the account of SOLVAY; provided that if any such audit reveals an underpayment of Additional Purchase Price for any Sales Year of 5% of more, JDS shall be responsible for the reasonable costs of such audit together with correcting the payment shortfall.

               (iii) For purposes of this Section, “Net Sales” shall mean the amount invoiced by JDS, its Affiliates or licensees for Product in the Territory to third parties, less deductions for returns (including withdrawals and recalls), allowance for doubtful accounts, rebates (price reductions, including Medicaid and similar types of discounts or rebates, e.g., chargebacks and administrative fees charged by third parties directly related to Product sales), volume and cash discounts earned, and sales, use, excise and other taxes incurred directly in connection with the sales of Product. Sales and deductions from sales shall be recognized and accrued in accordance with generally accepted accounting principles. Net Sales shall be determined on the basis of the Product alone and shall not reflect discounts or price concessions attributable to the purchase of any other JDS product.

          (c) Price Changes. ***

          (d) Other Increases and/or Payments: ***

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          (e) Invoicing and Payment. SOLVAY shall invoice JDS for each shipment of the Product simultaneously with SOLVAY’s actual shipment of Product and delivery to JDS of a certificate of analysis relating to such shipment. Payment shall be due within thirty (30) days from invoice date. Past due balances shall be subject to a service charge of 12% per annum, but in no event shall such charge exceed the maximum rate permitted by law. All payments shall be made in U.S. dollars.

          (f) Books and Records. SOLVAY shall maintain accurate books and records of Standard Cost and other costs for which JDS is responsible pursuant to Section 2.4 which shall be made available for inspection and audit by JDS at least once per year solely for the purpose of verifying price increases pursuant to this Section 2.4 and other costs for which JDS is responsible. JDS shall be responsible for the costs of any such inspection and audit, provided that if it is determined that JDS has paid costs which exceed the costs as to which JDS is responsible pursuant to Section 2.4 by more than 5%, SOLVAY shall be responsible for the reasonable costs of such audit, as well as for refunding the amount of the JDS overpayment.

     2.5 Delivery.

          (a) Generally. All Product sold to JDS hereunder shall be delivered to JDS FOB SOLVAY’s Shipping Point. All risk of loss shall pass to JDS when SOLVAY so delivers Product to carrier for JDS. JDS shall designate a carrier and mode of shipment on each purchase order submitted to SOLVAY; provided, however, that should JDS fail to designate a carrier on its purchase order, SOLVAY may select a common carrier for the account and risk of JDS.

          (b) Deviation from Agreed Delivery Time. SOLVAY shall use commercially reasonable efforts to fill each purchase order submitted hereunder by the specified shipment date. Originally agreed times for delivery to JDS’s carrier are not to be deemed of the essence of an accepted order, and reasonable deviations from originally agreed times will be accepted by JDS. Deviations of more than *** shall be deemed unreasonable, unless JDS has on hand an inventory of Product sufficient to meet JDS’s requirements (based on its forecasts delivered to SOLVAY under Section 2.2) for ***, in which case deviations of more than *** will be deemed unreasonable.

          (c) Delay in Delivery. JDS recognizes the inherent difficulty in producing the Product and also recognizes that delays in shipment, while non-routine, may occur from time to time. SOLVAY shall notify JDS promptly of any circumstance that may cause a delay in making Product available for shipment FOB SOLVAY’s Shipping Point, stating the estimated period of delay and the reasons therefore. SOLVAY shall use commercially reasonable efforts to avoid or minimize the delay, including, when necessary or at JDS’s request, the expenditure of premium time and shipping via air or other expedited routing. Any additional cost caused by such requirements shall be borne by the party causing the delay to the extent of any culpability. If no culpability can be assigned to either party, such additional costs for premium time and air shipment requested by JDS shall be borne solely by JDS. Nothing herein may be construed to prejudice any of the express rights or remedies provided to either party in this Agreement. In addition to any such rights JDS may have hereunder, JDS shall have the right to cancel any order which is not made available for shipment FOB SOLVAY’s Shipping Point for more than *** after its agreed shipment date for causes other than Force Majeure Events or Regulatory Changes so long as such delay has arisen through no fault or negligence of JDS. Notwithstanding the foregoing, SOLVAY shall not be liable in any way (including, without limitation, for the additional costs caused by the requirements set forth above in this section) for any delay excused hereunder or under Article IX hereof.

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          (d) Priority of Supply. If for any reason (including without limitation, a back order situation, a Force Majeure Event or a Regulatory Change) SOLVAY is unable to supply JDS’s demand for Product and the demands of SOLVAY’s other customers (including SOLVAY’s affiliates), SOLVAY shall give JDS’s demand at least equal priority to those of SOLVAY’s other customers.

     2.6 Labeling and Packaging.

          (a) Generally. JDS shall provide to SOLVAY and shall bear the sole responsibility for ensuring the accuracy of the information contained in all Labeling Specifications and for compliance thereof with all Regulatory Standards. SOLVAY shall be responsible for procuring all Labeling, which shall be created in accordance with the Labeling Specifications. With respect to all Product to be supplied in finished, packaged form, SOLVAY shall procure sufficient Labeling to cover quantities of the Product as to which JDS’s forecasts under Section 2.2 hereof constitute a firm commitment. Acquisition of additional inventory of Labeling components beyond the three (3) month commitment shall be made only with advance consultation of JDS.

          (b) Changes. Should JDS desire or be required to change any component of Labeling or to introduce a new packaging component to which Labeling will be affixed, JDS shall so inform SOLVAY and shall be responsible for updating the artwork or text, as applicable, and providing it to SOLVAY in camera-ready or electronic form and in compliance with the Labeling Specifications. SOLVAY shall make all necessary arrangements for such Labeling to be printed and shall provide to JDS printer’s proofs of all Labeling for JDS’s review. Within fifteen (15) business days of its receipt of such proofs, JDS shall either provide to SOLVAY any necessary corrections thereto or notify SOLVAY of its approval of such proofs. Upon JDS’s acceptance thereof, SOLVAY shall return all artwork provided by JDS. SOLVAY shall be entitled to directly charge JDS, amounts to take account of only those costs incurred in making changes to Labeling and/or packaging as provided for in this Section 2.6(b). Allowable transition cost charges include, without limitation, the costs of acquiring new Labeling in a timely manner to meet JDS’s pending purchase orders and forecast demand and the acquisition and disposal costs associated with obsolete inventory of Labeling, films, plates and packaging. SOLVAY will charge JDS direct, out-of-pocket expenses in a one-time charge after completion of the Labeling transition.

     2.7 Stability Testing; Inspection of Product.

          (a) Stability Testing. SOLVAY shall provide stability testing for Product manufactured hereunder, and shall provide all stability results to JDS in a timely fashion. SOLVAY and JDS shall agree to a work outline to accomplish an acceptable stability program. SOLVAY shall retain a suitable quantity of retained samples. Any costs associated with the agreed upon stability testing program for the Product beyond those which SOLVAY customarily and routinely incurs in connection with stability testing shall be charged to and shall be the sole responsibility of JDS (through an adjustment to the Standard Cost). SOLVAY will notify JDS of stability failures within 48 hours of SOLVAY’s becoming aware of any such failure.

          (b) Certificate of Analysis. SOLVAY will provide JDS with a certificate of analysis for all batches of Product shipped to JDS which shall include, without limitation, the expiry date. Such certificate of analysis shall be delivered to JDS at the time of shipment of the Product. Delivery of any Product by SOLVAY to JDS shall constitute a certification by SOLVAY that at the time of delivery the Product conforms to the certificate of analysis provided therewith and the Product Specifications and was manufactured in accordance the Manufacturing Standards. JDS shall store all Product in conditions as specified in the Product Specifications. All Product delivered to JDS shall have a remaining expiry

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period of no more than four months less than the total initial labeled expiry period. To avoid confusion, and as an example: for Product that has an initial labeled expiry period of 18 months, the Product delivered must have at least 14 months remaining expiry period upon receipt by JDS.

          (c) Nonconformance. Within thirty (30) days after its receipt of each shipment of Product at the destination specified in the shipping instructions, JDS shall inspect such shipment for material nonconformance with the applicable purchase order, the applicable Specifications or the representations and warranties of SOLVAY set forth herein (“Nonconformance”). If, upon such inspection, JDS discovers any Nonconformance, JDS may reject the nonconforming portion of such shipment by giving prompt written notice to SOLVAY. Such notice shall include a copy of JDS’s test results and specify the precise Nonconformance upon which such rejection is based. Absent such notification, JDS shall be deemed to have accepted the shipment, except as to latent defects that could not have been detected in such 30-day period. In no event shall SOLVAY be liable for any Nonconformance arising out of the shipment, storage, use or handling of the Product following its delivery FOB SOLVAY’s Shipping Point.

          (d) Procedure. Upon notifying SOLVAY of any Nonconformance, JDS shall afford SOLVAY a reasonable opportunity to inspect the shipment in question and make any appropriate adjustment or replacement. The parties shall submit any dispute regarding the proper rejection of a shipment to a mutually selected independent laboratory, the determination of which shall be binding on the parties and the costs of which shall be borne by the party against whom such determination is rendered. If such laboratory confirms a Nonconformance in the shipment in question (or any part of it) at the time of delivery to the carrier, or if the parties agree that there is a shortage or a Nonconformance, then SOLVAY shall use commercially reasonable efforts to make up the shortage or replace any nonconforming Product, as the case may be, with such new Product to be shipped at SOLVAY’s expense to the same destination as the original shipment. If SOLVAY is unable to make up the shortage or replace any nonconforming Product, it shall promptly refund any money paid by JDS with respect to such undelivered or nonconforming Product and reimburse JDS for the costs of shipping such Product. SOLVAY may, at its sole option, either direct JDS to return nonconforming Product to SOLVAY, have it destroyed by JDS, or destroy them (and certify such destruction to SOLVAY), all at SOLVAY’s expense. SOLVAY’s supply of substitute Product which conform to the applicable Specifications or, as the case may be, payment of the refund and reimbursement provided for herein, shall satisfy and discharge all claims or potential claims which JDS may have against SOLVAY with respect to undelivered or nonconforming Product in that shipment, provided replacement Product is available to JDS within thirty (30) days of the identified shortage.

     2.8 Inspection of Facility. JDS or its designees may, at its sole expense, inspect the facilities being used by SOLVAY to manufacture, package, store or ship the Product to assure compliance with Manufacturing Standards. Each such inspection shall be conducted upon reasonable advance notice, at mutually agreed times during regular business hours and in a manner which minimizes disruption of SOLVAY’s business operations. JDS may conduct such inspections no more than twice each Contract Year unless it has a good faith reason to believe such facility is not materially in compliance with Manufacturing Standards.

     2.9 Recalls. If any Regulatory Authority with applicable jurisdiction shall order, or it shall otherwise become necessary to perform, any corrective action or market action with respect to any Product (including, without limitation, any recall, field correction, market withdrawal, stock recovery, customer notice or restriction), JDS shall have the exclusive responsibility to appropriately manage such action. If such corrective action or market action is necessitated by the breach by one of the parties of any of its warranties, representations, obligations, covenants or agreements contained herein, then such party

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shall be liable, and shall reimburse the other party, for all reasonable costs incurred by the non-breaching party in connection with such action (including, without limitation, reasonable attorney’s fees and expenses). If each of the parties is partly responsible for such corrective action or market action, then each party shall be responsible for its proportionate share of such costs. If neither party is responsible for such corrective action or market action, then JDS shall be responsible for such costs. JDS shall also be exclusively responsible for handling all customer complaints, inquiries and the like, and SOLVAY shall appropriately cooperate with JDS, including the completion of an investigation and the preparation and submission of a complaint report to JDS or its designees.

     2.10 Process Improvements and Development Activities. JDS recognizes that SOLVAY has been conducting activities to support process changes and improvements in the manufacturing and analysis of the Product. ***

ARTICLE III
REPRESENTATIONS AND WARRANTIES

     3.1 Representations and Warranties of SOLVAY. SOLVAY represents and warrants to JDS as follows:

          (a) Conformance of Product. Subject to JDS’s obligations with respect to supplies of the Labeling Specifications under Section 2.6 hereof, each certification by SOLVAY pursuant to Section 2.7(b) shall be deemed a representation and warranty hereunder, any breach of which representation and warranty being subject to the provisions of Section 5.1, Section 2.7(c) and Section 2.7(d) and the limitations contained in Section 3.3.

          (b) Adulteration; Misbranding. Subject to JDS’s obligations with respect to supplies of the Labeling Specifications under Section 2.6 hereof, no Product supplied by SOLVAY to JDS under this Agreement shall, at the time of delivery to the carrier FOB SOLVAY’s Shipping Point, be adulterated or misbranded within the meaning of the Act or be an article which may not be introduced into interstate commerce under the provisions of Section 505 of the Act.

          (c) Organization; Standing. SOLVAY is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted.

          (d) Authorization; Binding Effect. The execution and delivery by SOLVAY of this Agreement, the performance by SOLVAY of its obligations hereunder and the consummation by SOLVAY of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of SOLVAY. This Agreement has been duly executed and delivered by a duly authorized officer of SOLVAY and constitutes the valid and legally binding obligation of SOLVAY enforceable against SOLVAY in accordance with its terms.

          (e) No Conflict; Consents. The execution and delivery of this Agreement by SOLVAY will not violate or result in the breach of, constitute a default under, or accelerate the performance required by, any term of any covenant, agreement or understanding to which SOLVAY or any Affiliate is a party, or any Law to which SOLVAY or any Affiliate is subject and (b) no consents or agreements of any third party (including governmental bodies) is necessary for the performance by SOLVAY of its obligations under this Agreement.

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     3.2 Representations and Warranties of JDS. JDS represents and warrants to SOLVAY as follows:

          (a) Organization; Standing. JDS is a limited liability company duly organized, validly existing and in good standing under the laws of the State of New York and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted.

          (b) Authorization; Binding Effect. The execution and delivery by JDS of this Agreement, the performance by JDS of its obligations hereunder and the consummation by JDS of the transactions contemplated hereby have been duly authorized by all necessary action on the part of JDS. This Agreement has been duly executed and delivered by a duly authorized officer of JDS and constitutes the valid and legally binding obligation of JDS enforceable against JDS in accordance with its terms.

          (c) No Conflict; Consents. The execution and delivery of this Agreement by JDS will not violate or result in the breach of, constitute a default under, or accelerate the performance required by, any term of any covenant, agreement or understanding to which JDS or any Affiliate is a party, or any Law to which JDS or any Affiliate is subject and (b) no consents or agreements of any third party (including governmental bodies) is necessary for the performance by JDS of its obligations under this Agreement.

     3.3 Limitations. (a) EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, THE PARTIES AGREE THAT SOLVAY MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS, IMPLIED OR OTHERWISE, AND SPECIFICALLY DISCLAIMS AND SHALL NOT BE LIABLE TO JDS OR OTHERS IN RESPECT OF:

          (i) ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE PRODUCT, WHETHER USED ALONE OR IN COMBINATION WITH OTHER SUBSTANCES OR MATERIALS;

          (ii) ANY LIABILITY FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (OTHER THAN TO THE EXTENT REASONABLY FORESEEABLE IN LIGHT OF THE OBJECTIVES OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND THE ASSET PURCHASE AGREEMENT, BUT SUBJECT TO THE FURTHER LIMITATIONS IN SECTION 3.3(C) BELOW), WHETHER ARISING OUT OF A BREACH OF THE REPRESENTATIONS AND WARRANTIES CONTAINED HEREIN OR OTHERWISE AND WHETHER IN CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHERWISE; AND

          (iii) ANY LIABILITY TO THE EXTENT ARISING AS A RESULT OF PRODUCT: (I) HAVING BEEN TAMPERED WITH OTHER THAN BY SOLVAY OR ITS AGENTS, (II) HAVING BEEN SUBJECT TO MISUSE, NEGLIGENCE OR ACCIDENT OTHER THAN BY SOLVAY OR ITS AGENTS, (III) HAVING BEEN STORED, HANDLED OR USED OTHER THAN BY SOLVAY OR ITS AGENTS IN A MANNER CONTRARY TO REGULATORY STANDARDS OR THE INSTRUCTIONS CONTAINED ON LABELING, OR (IV) HAVING EXCEEDED ITS STATED EXPIRATION.

          (b) IN NO EVENT SHALL SOLVAY’S LIABLITY FOR REASONABLY FORSEEABLE CONSEQUENTIAL DAMAGES EXCEED THE ORIGINAL PRINCIPAL AMOUNT OF THE NOTE AND ANY SUCH LIABILITY SHALL BE SATISFIED SOLELY BY OFFSET

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AGAINST THE PAYMENTS OF INTEREST AND PRINCIPAL UNDER THE NOTE (UNLESS THE NOTE HAS BEEN PREPAID BY JDS, IN WHICH CASE SOLVAY’S LIABLITY FOR REASONABLY FORSEEABLE CONSEQUENTIAL DAMAGES SHALL NOT EXCEED AN AMOUNT EQUAL TO THE PRINCIPAL AND INTEREST THAT WOULD HAVE BEEN OUTSTANDING (ASSUMING TIMELY AMORTIZATION OF THE NOTE) AT THE TIME OF THE RELEVANT CLAIM HAD THE NOTE NOT BEEN PREPAID).

          (c) THE MAXIMUM AGGREGATE LIABILITY OF SOLVAY UNDER THIS AGREEMENT, WHEN AGGREGATED WITH ANY LIABILITY UNDER THE ASSET PURCHASE AGREEMENT, SHALL NOT IN ANY EVENT EXCEED *** (BUT THIS LIMITATION SHALL NOT AFFECT JDS’S RIGHT TO BRING ANY CLAIM UNDER THE ASSET PURCHASE AGREEMENT WHICH IS NOT SUBJECT TO A MAXIMUM THEREUNDER).

          (d) NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, NONE OF THE LIMITATIONS ON LIABILITY SET FORTH IN THIS SECTION SHALL APPLY TO ACTS OR OMISSIONS OF SOLVAY TAKEN OR OMITTED TO BE TAKEN WITH INTENT TO BREACH THE REPRESENTATIONS, WARRANTIES OR OBLIGATIONS OF SOLVAY UNDER THIS AGREEMENT.

ARTICLE IV
TERM AND TERMINATION

     4.1 Term. The term of this Agreement shall commence on the date hereof and shall continue for a period of five years, unless terminated earlier pursuant to Section 4.2 or Section 4.3 hereof. This Agreement may be renewed for such additional period and upon such other terms as the parties may mutually agree.

     4.2 Termination Without Cause; SOLVAY Reserved Right.

          (a) By Mutual Agreement. The parties may terminate this Agreement any time by mutual written agreement.

          (b) By SOLVAY. SOLVAY may terminate this Agreement at any time upon not less than eighteen (18) months notice to JDS; provided, however, that no such notice may be furnished prior to the second anniversary of the date hereof and further provided that no such termination shall be effective prior to July 1, 2009, unless JDS has secured or caused an alternative manufacturer to secure all regulatory approvals necessary to manufacture the Product at an alternative manufacturing site and shall have had a reasonable period to assure a smooth transition of supply arrangements.

          (c) By JDS. JDS may terminate this Agreement at any time upon not less than twelve (12) months notice to SOLVAY.

          (d) Alternative Facility. Within fifteen (15) months of the date of this Agreement, JDS shall commence and thereafter diligently pursue with commercially reasonable efforts all activities necessary to secure an alternative manufacturer for the Product and shall keep SOLVAY advised of its progress. Toward this end, SOLVAY agrees to provide reasonable assistance and/or consultation to JDS to support its development and qualification activities. These services will be defined by written agreement prior to the initiation of any activities. JDS agrees to reimburse SOLVAY for all pertinent time, materials, reasonable travel and related expenses associated with this assistance and/or consultation.

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          (e) SOLVAY Reserved Right. SOLVAY reserves the right, at its discretion and at its sole cost and expense but in consultation with JDS, to commence and diligently pursue all activities necessary to secure an alternative manufacturer for the Product, prior to the termination period in Section 4.2(b), should SOLVAY (i) elect to cease manufacturing operations in its Baudette, Minnesota Main Street facility, (ii) have business requirements that necessitate the cessation of the manufacture of Product, or (iii) if JDS has not been diligent in the pursuit of an alternative facility as required in Section 4.2(d). If an alternative manufacturer identified by SOLVAY under this Section 4.2(e) charges more for the Product than SOLVAY would have charged under the terms of this Agreement, then SOLVAY shall, during the minimum period of time it would have been obligated to supply Product hereunder, bear the cost of such excess, except in the case of Section 4.2(e)(iii), in which case JDS shall bear any such excess. To be utilized as a source of supply hereunder, any such alternative manufacturer shall be duly qualified under all applicable Manufacturing Standards and Regulatory Standards. Subject to JDS’s obligations pursuant to Section 4.2(d), the use of an alternate supplier by SOLVAY pursuant to this Section shall not limit, modify or amend the obligations, representations or warranties of the parties hereto.

     4.3 Termination Upon Material Breach. Subject to the last two sentences of this Section 4.3, either party may terminate this Agreement upon not less than sixty (60) days written notice thereof to the other party of the material breach by the other party of any of its representations, warranties, covenants or agreements contained in this Agreement (provided, however, that the breaching party may extend such notice period by up to thirty (30) additional days upon its written certification that (i) such breach is not reasonably capable of being cured within such 60-day period and (ii) it has commenced and is diligently pursuing efforts to cure such breach). Upon the expiration of such notice period, this Agreement shall terminate without the need for further action by either party; provided, however, that if the breach upon which such notice of termination is based shall have been fully cured to the reasonable satisfaction of the non-breaching party within such notice period, then such notice of termination shall be deemed rescinded, and this Agreement shall be deemed reinstated and in full force and effect. Such right of termination shall be in addition to such other rights and remedies as the terminating party may have under any Law. The time periods for termination stated above in this Section 4.3, shall be suspended during the period commencing upon a bona fide dispute arising between the parties as to whether a material breach has occurred and ending upon the date such dispute is finally determined. In the event such final determination provides for the payment of money and such amount is paid in full by the obligor within ten (10) days of such determination, no termination right shall arise hereunder with respect to the matter in question.

     4.4 Rights and Duties Upon Termination.

          (a) Supply and Purchase of Product. Unless otherwise mutually agreed by the parties, SOLVAY shall supply, and JDS shall purchase in accordance with the provisions hereof, all quantities of Product ordered by JDS hereunder prior to the date of expiration or termination; provided, however, that SOLVAY shall not be required to supply volumes of Product which exceed the amounts for which SOLVAY is responsible under the forecast and firm order procedures herein for the balance of the Calendar Quarter in which the termination occurs. In addition, JDS shall remain liable for and shall duly pay all costs incurred prior to the effective date of expiration or termination which are properly chargeable to JDS pursuant to the terms of this Agreement. JDS shall have the right to use and sell any such Product in the ordinary course including Product which may contain reference to SOLVAY.

          (b) Purchase of Additional Materials. Upon the expiration or termination of this Agreement, JDS shall, if so requested by SOLVAY, purchase (i) all materials acquired by SOLVAY hereunder to manufacture the Product, at SOLVAY’s actual cost thereof, (ii) all work-in-progress of the Product at SOLVAY’s

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actual cost thereof, and (iii) all inventory of finished Product then in SOLVAY’s possession at the then-current purchase price hereunder. In addition, in such case JDS shall pay SOLVAY the actual out of pocket cost for any non-cancelable commitments made by SOLVAY for materials hereunder. Notwithstanding anything to the contrary in the preceding two sentences, the foregoing purchase and payment obligations of JDS shall be limited solely to materials obtained, Product manufactured and non-cancelable commitments incurred by SOLVAY for quantities of the Product as to which JDS’s forecasts under Section 2.2 hereof constitute a firm commitment or for which purchase orders have been received and which, in the case of Product, comply with the Product Specifications and all Manufacturing Standards. All materials purchased by JDS become the property of JDS and SOLVAY will, at the request of JDS, arrange to ship such materials to locations designated by JDS. The cost of the freight shall be borne by JDS. The foregoing purchase and payment obligations shall not apply in the event of a termination by JDS based on a breach by SOLVAY of its supply obligations.

ARTICLE V
INDEMNIFICATION

     5.1 By SOLVAY. Subject to the limitations described in Section 3.3, SOLVAY shall defend, indemnify and hold harmless JDS and its Affiliates, successors, permitted assigns and their respective officers, directors, stockholders, partners and employees from and against any and all Claims arising out of (a) any breach of any representation, warranty or covenant of SOLVAY hereunder, (b) any negligent storage or handling of the Product by SOLVAY prior to delivery to JDS FOB SOLVAY’s Shipping Point, or (c) any negligent act or omission of SOLVAY or its employees, agents or other contractors with respect to the Product. For purposes of this Agreement, “Claims” shall mean any and all liabilities and expenses whatsoever, including, without limitation, claims, adversary proceedings (whether before a court, Regulatory Authority or any other tribunal), damages (other than special, incidental, consequential or punitive damages except to the extent awarded to a third party), judgments, awards, penalties, settlements, investigations, costs, and attorneys’ fees and disbursements.

     5.2 By JDS. JDS shall defend, indemnify and hold harmless SOLVAY and its Affiliates, successors, permitted assigns and their respective officers, directors, stockholders, partners and employees from and against any and all Claims arising out of (a) any breach of any representation, warranty or covenant of JDS hereunder, (b) any negligent act or omission of JDS or its employees, agents or other contractors with respect to the Product, (c) the failure of JDS to comply with any applicable Regulatory Standards with respect to the importation, marketing, distribution or sale of the Product, (d) any Labeling for the Product approved by JDS, (e) the infringement of any patent, trademark or other intellectual property rights by the manufacture, sale or use of the Product, or (f) all personal injury (including death) and/or property damage resulting from the manufacture handling, possession, marketing, promotion or use of the Product following SOLVAY’s delivery of the Product to JDS FOB SOLVAY’s Shipping Point. Notwithstanding the preceding sentence, JDS shall not be required to indemnify SOLVAY with respect to any Claim arising from SOLVAY’s breach of its representations, warranties or covenants hereunder or under the Asset Purchase Agreement or SOLVAY’s willful misconduct with respect to the Product.

     5.3 Procedure. Any person or entity intending to claim indemnification hereunder (an “Indemnitee”) shall notify the party hereunder from whom indemnification is sought (the “Indemnitor”) in writing within a reasonable time of any third-party Claim for which indemnification is sought hereunder. The failure to give timely notice to the Indemnitor shall not release the Indemnitor from any liability to the Indemnitee to the extent the Indemnitor is not prejudiced thereby. The Indemnitor shall have the right, by notice to the Indemnitee within fifteen (15) days after the Indemnitor’s receipt of notice thereof, to assume the defense of any such third-party Claim with counsel of the Indemnitor’s choice and at Indemnitor’s sole expense. If the Indemnitor so assumes such defense, the Indemnitee may participate therein through counsel of its choice, but at its sole expense. The party not assuming the defense of the third-party Claim shall render all

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reasonable assistance to the party assuming the defense, and all reasonable out-of-pocket costs of such assistance shall be for the account of the Indemnitor. No such third-party Claim shall be settled other than by the party defending it, and then only with the consent of the other party (which shall not be unreasonably withheld or delayed). The Indemnitee shall, however, have no obligation to consent to any settlement which imposes on the Indemnitee any liability or obligation which cannot be assumed and performed in full by the Indemnitor, and the Indemnitee shall have no right to withhold its consent to any settlement which involves only the payment of money by the Indemnitor or its insurer.

ARTICLE VI
ADVERSE EVENT REPORTS

JDS shall be solely responsible for receiving, recording and responding to all customer inquiries and complaints and all reports of alleged adverse events relating to the Product, and for reporting all such matters to appropriate Regulatory Authorities in accordance with applicable law. SOLVAY shall provide JDS with any technical information relating to formulation, manufacture or stability of the Product reasonably necessary to enable JDS to perform all such activities. Should SOLVAY receive any notice or inquiry regarding adverse events, it shall immediately transmit them to JDS.

ARTICLE VII
CONFIDENTIALITY

     7.1 Generally. Each party shall hold all Confidential Information disclosed to it by the other in the strictest confidence and shall protect all such Confidential Information with the same degree of care that it exercises with respect to its own proprietary information. Without the prior written consent of the disclosing entity, the receiving party shall neither use, disclose, divulge or otherwise disseminate any Confidential Information to any person or entity, except for the receiving party’s attorney and such other professionals as the receiving party may retain in order for it to enforce the provisions of this Agreement. For purposes of this Agreement, “Confidential Information” shall consist of nonpublic, proprietary materials disclosed by a party in writing and marked “confidential.”

     7.2 Restriction. Neither party shall use the other’s name or disclose the existence or terms of this Agreement without the written permission of the other except for references in Product packaging or labeling required by law or otherwise contemplated herein or in the Asset Purchase Agreement or the Transition Services Agreement (as defined in the Asset Purchase Agreement).

     7.3 Exceptions. Notwithstanding Section 7.1 hereof, neither party shall have any obligations with respect to any Confidential Information which (a) is or becomes within the public domain through no act of the receiving party in breach of this Agreement, (b) was lawfully in the possession of the receiving party without any restriction on use or disclosure prior to its disclosure hereunder, (c) is lawfully received from another source subsequent to the date of this Agreement without any restriction on use or disclosure, (d) is deemed in writing by the disclosing entity no longer to be Confidential Information, or (e) is required to be disclosed by order of any court of competent jurisdiction or other governmental authority (provided, however, in such latter case, however, that the receiving party shall timely inform the disclosing party of all such legal or governmental proceedings so that the disclosing party may attempt by appropriate legal means to limit such disclosure, and the receiving party shall further use its best efforts to limit the disclosure and maintain confidentiality to the maximum extent possible).

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ARTICLE VIII
COOPERATION WITH GOVERNMENTAL REQUIREMENTS

     The parties shall cooperate with one another as may be reasonably necessary or appropriate to satisfy all governmental requirements and obtain all needed permits, approvals and licenses with respect to the manufacture, storage, packaging and sale of the Product. Such cooperation shall include, without limitation, communicating with Regulatory Authorities and making available as promptly as reasonably practicable all information, documents and other materials which result from the performance by SOLVAY of its obligations hereunder which JDS is required to submit. The costs and expenses of such cooperation, if applicable, shall be subject to the parties’ mutual agreement. JDS shall be responsible for all regulatory reporting of Product. SOLVAY shall assist JDS by providing necessary support and information and shall prepare the annual cGMP Product reviews.

ARTICLE IX
FORCE MAJEURE

     9.1 Effects of Force Majeure. Notwithstanding any other provision of this Agreement to the contrary, neither party shall be held liable or responsible for failure or delay in fulfilling or performing any of its obligations under this Agreement to the extent that such failure or delay results from any cause beyond its reasonable control, including, without limitation, fire, flood, explosion, war, strike, labor unrest, riot, embargo, inability to obtain necessary raw materials or supplies, acts or omissions of carriers, or act of God (each, a “Force Majeure Event”). Subject to Section 9.4, such excuse shall continue as long as the Force Majeure Event continues, following which such party shall promptly resume performance hereunder.

     9.2 Effects of Regulatory Changes. Notwithstanding any other provision of this Agreement to the contrary, neither party shall be held responsible or liable for failure or delay in fulfilling or performing any of its obligations under this Agreement to the extent that such failure or delay results from good faith efforts to comply with the enactment or revision of any law, rule, regulation or regulatory advisory opinion or order applicable to the manufacturing, marketing, sale, reimbursement and/or pricing of the Product (a “Regulatory Change”). Such excuse shall continue as long as performance is prevented by the affected party’s good faith efforts to comply with such Regulatory Change, following which such party shall promptly resume performance hereunder.

     9.3 Notice. The party affected by a Force Majeure Event or a Regulatory Change shall notify the other party thereof as promptly as practicable after its occurrence. Such notice shall describe the nature of such Force Majeure Event or Regulatory Change and the extent and expected duration of the affected party’s inability fully to perform its obligations hereunder. The affected party shall use due diligence, where practicable, to minimize the effects of or end any such event so as to facilitate the resumption of full performance hereunder and shall notify the other party when it is again fully able to perform such obligations.

     9.4 Limitation. Notwithstanding anything to the contrary herein, in the event a Regulatory Change or Force Majeure Event continues for more than 18 months, JDS shall have the right to terminate this Agreement upon notice and upon JDS’s request, SOLVAY shall cooperate to assist in the transfer of technology to a new manufacturer. JDS shall bear the cost and expense of the foregoing technology transfer in the case of a Regulatory Change, and the parties shall bear the cost and expense of a technology transfer in such proportion as is just and equitable in the case of a Force Majeure Event.

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ARTICLE X
INDEPENDENT CONTRACTORS

     The relationship between SOLVAY and JDS is that of independent contractors, and nothing herein shall be deemed to constitute the relationship of partners, joint venturers, nor of principal and agent between SOLVAY and JDS. Neither party shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other party or to bind the other party to any contract, agreement or undertaking with any third party.

ARTICLE XI
FURTHER ACTIONS

     The parties shall execute such additional documents and perform all such other and further acts as may be necessary to carry out the purposes and intents of this Agreement.

ARTICLE XII
MISCELLANEOUS

     12.1 Notices. All notices, requests, instructions, consents and other communications to be given pursuant to this Agreement shall be in writing and shall be deemed received (a) on the same day if delivered in person, by same-day courier or by telegraph, telex, facsimile, electronic mail or other electronic transmission, (b) on the next day if delivered by overnight mail or courier, or (c) on the date indicated on the return receipt, or if there is no such receipt, on the third calendar day (excluding Sundays) if delivered by certified or registered mail, postage prepaid, to the party for whom intended to the following addresses:

     If to JDS:

JDS Pharmaceuticals, LLC
158 Mercer Street
New York, NY 10012
Attn: Chairman

     With a copy to:

Dornbush Schaeffer Strongin & Weinstein, LLP
747 Third Avenue
New York, NY 10017
Attn: Herschel S. Weinstein, Esq.
Fax: (212) 753-7673

     If to SOLVAY:

Solvay Pharmaceuticals, Inc.
901 Sawyer Road
Marietta, GA 30062
Attention: President & CEO

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     With a copy to:

Solvay Pharmaceuticals, Inc.
901 Sawyer Road
Marietta, GA 30062
Attention: Law Department
Fax: (770) 578-5749

     Each party may by written notice given to the other in accordance with this Agreement change the address to which notices to such party are to be delivered.

     12.2 Entire Agreement. This Agreement and the agreements being executed contemporaneously herewith contain the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior agreements and understandings, whether written or oral, between them with respect to the subject matter hereof and thereof. Each party has executed this Agreement without reliance upon any promise, representation or warranty other than those expressly set forth herein and in such other agreements.

     12.3 Amendment. No amendment of this Agreement shall be effective unless embodied in a written instrument executed by both of the parties.

     12.4 Waiver of Breach. The failure of either party at any time to enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any provisions hereof or the right of any party hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party against whom or which enforcement of such waiver is sought; and no waiver of any such breach shall be construed or deemed to be a waiver of any other or subsequent breach.

     12.5 Assignability. Either party may assign this agreement upon notice to the other party. In the event that this Agreement is assigned by JDS to a competitor of SOLVAY, SOLVAY shall have the right to increase the price charged for Product hereunder to include a conventional contract manufacturer’s profit. This Agreement shall be binding upon and inure to the benefit of the parties, their successors and permitted assigns.

     12.6 Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of Delaware, without regard to its conflicts of laws principles. The parties consent to the personal jurisdiction and venue of the United States Federal Courts and further consent that any process, notice of motion or other application to either such court or a judge thereof may be served by registered or certified mail or by personal service, provided that a reasonable time for appearance is allowed.

     12.7 Severability. All of the provisions of this Agreement are intended to be distinct and severable. If any provision of this Agreement is or is declared to be invalid or unenforceable in any jurisdiction, it shall be ineffective in such jurisdiction only to the extent of such invalidity or unenforceability. Such invalidity or unenforceability shall not affect either the balance of such provision, to the extent it is not invalid or unenforceable, or the remaining provisions hereof, nor render invalid or unenforceable such provision in any other jurisdiction.

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     12.8 Publicity. Neither party shall issue any press release or make any similar public announcement concerning the transactions contemplated in this Agreement, except as may be required by law (including federal securities law) or judicial order, without the prior written consent of the other party. Neither party shall issue any press release or make any similar announcement which includes the name of the other party or its affiliates or otherwise uses the name of the other party in any public statement or publicly released document except as required by law (including federal securities law) or with the prior written consent of the other party.

     12.9 Survival. The provisions of Section 2.5 (Delivery), Section 2.7 (Inspection of Product), Section 2.9 (Recalls), Section 3 (Representation and Warranties), Section 4.4 (Rights and Duties Upon Termination), Article V (Indemnification), Article VI (Adverse Event Reports), Article VII (Confidentiality), Section 12.6 (Governing Law; Jurisdiction), Section 12.8 (Publicity) and this Section 12.9 (Survival) shall survive the termination or expiration of this Agreement for any reason.

     12.10 Headings. The headings of sections and subsections have been included for convenience only and shall not be considered in interpreting this Agreement.

     12.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, and all of which together shall constitute one and the same Agreement. This Agreement may be executed and delivered via electronic facsimile transmission with the same force and effect as if it were executed and delivered by the parties simultaneously in the presence of one another.

     12.12 Execution. At the time of execution of this Agreement, the parties shall cause their authorized officers to execute two original copies of this Agreement, one copy of which shall be maintained by each party at that party’s offices. Each party represents that the person who executes this Agreement is authorized and empowered to obligate and bind his party under this Agreement.

     12.13 Facsimile Signatures. Any counterpart of this Agreement may be signed and transmitted by facsimile with the same force and effect as if such counterpart was an ink-signed original.

[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the date first written above.

SOLVAY PHARMACEUTICALS, INC.
By:	/s/ W. A. Linscott
	Name:	W. A. Linscott
	Title:	V.P. Law, Gov't + Public Affairs

By:	/s/ Harold H. Shlevin
	Name:	Harold H. Shlevin
	Title:	President & CEO

JDS PHARMAECUTICALS, LLC
By:	SATOW ASSOCIATES, LLC
	as its sole member
By:	/s/ Phillip M. Satow
	Name:	Phillip M. Satow
	Title:	Manager

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EX-31.1

Exhibit 31.1

Certifications
Certification of Principal Executive Officer

I, Robert C. Strauss, 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 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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 functions):

(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 9, 2007

EX-31.2

Exhibit 31.2

Certifications

Certification of Principal Financial Officer

I, Diane M. Barrett, 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 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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 functions):

(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 9, 2007

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 three and nine months ended September 30, 2007 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. §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 9, 2007

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 three and nine months ended September 30, 2007 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. §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 9, 2007