-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LQI+jk49wulF2YaIHhslQCrjZcpxGe3wtclLwuPJNeFAzWYjrGAMjAWeqnBGKYWv y7JOJtUzSFN5rKh20+oBWA== 0000950144-97-003208.txt : 19970329 0000950144-97-003208.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950144-97-003208 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVEN PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000815838 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 592767632 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17254 FILM NUMBER: 97567706 BUSINESS ADDRESS: STREET 1: 11960 SW 144TH ST CITY: MIAMI STATE: FL ZIP: 33186 BUSINESS PHONE: 3052535099 MAIL ADDRESS: STREET 1: 11960 SW 144TH STREET CITY: MIAMI STATE: FL ZIP: 33185 10-K 1 NOVEN PHAMAECEUTICALS 10-K 12-31-96 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]. For the fiscal year ended December 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------ Commission file number 0-17254 ------------------------------------------------------- NOVEN PHARMACEUTICALS, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter)
Delaware 59-2767632 - ----------------------------------------------- ----------------------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 11960 S.W. 144th Street, Miami, Florida 33186 - ----------------------------------------------- ----------------------------------------------- (Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (305)253-5099 -------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered Pursuant to Section 12(g) of the Act: Common Stock $.0001 Par Value ----------------------------- (Title of class) 2 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO | | Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (#229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES | | NO |X| The aggregate market value of the voting stock held by non-affiliates of the registrant on March 20, 1997 was $131,957,315, (See definition of affiliate in Rule 405, 17 CFR 230.405). As of March 20, 1997, 19,916,819 shares of common stock, $.0001 par value, were outstanding. 3 DOCUMENTS INCORPORATED BY REFERENCE
Incorporated documents (to the extent indicated herein) Part of Form 10-K - -------------------------------- ----------------- Portions of the Definitive Proxy Part III Statement for the 1997 Annual Meeting of Shareholders Items 10-13
4 NOVEN PHARMACEUTICALS, INC. FORM 10-K TABLE OF CONTENTS
PART I Page ---- Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 21 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . 26 PART III (omitted) PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . 26
5 Item 1. Business Noven is a leader in developing and manufacturing transdermal and transoral drug delivery systems. These systems utilize an adhesive patch containing medication which, when adhered to the skin or the mucosa of the oral cavity, allows the delivery of drugs across the tissues and into the bloodstream over an extended period of time. Noven has developed and patented thin, solid state, multi-laminate transdermal and transoral drug delivery systems that have a small surface area and are adaptable to deliver numerous drug entities. The Company's first product, an estrogen patch for the treatment of menopausal symptoms, was launched in the U.S. in March, 1996 by Ciba-Geigy Corporation ("Ciba- Geigy") under the trade name Vivelle(TM). (In December, 1996, Ciba- Geigy's parent corporation was merged with Sandoz S.A. to form Novartis S.A. (hereinafter "Novartis"). All references to Novartis herein shall include Ciba-Geigy Corporation). Novartis also launched the same product in Canada in June, 1996. Rhone-Poulenc Rorer, Inc. ("RPR") has received regulatory approval to market this product for the treatment of menopausal symptoms in 30 countries and has launched the product under the trade name Menorest in 13 countries including Germany, France and the United Kingdom. Menorest has also been approved in 22 countries as a preventative treatment for osteoporosis and Novartis is conducting clinical trials in the U.S. for this indication. The Company's other major development in hormonal replacement therapy ("HRT"), a combination patch of estrogen and progestogen, has completed Phase III clinical trials in the U.S. and Europe. This product has significant advantages over the estrogen replacement system, inasmuch as the combination of the two hormones reduces the incidences of endometrial hyperplasia and in low dosage forms, taken over several months, may eliminate bleeding for menopausal women. RPR has worldwide marketing rights to this product, and it is anticipated that regulatory filings will commence in Europe and the U.S. in the summer of 1997. Finally, Noven has also developed a second generation estrogen replacement system which has all of the beneficial features of its present patch but is approximately one-third its size. Novartis has marketing rights to this product in the U.S. and Canada and RPR has marketing rights in Japan. Noven has retained marketing rights in all other territories. DentiPatch(TM), the Company's novel transoral anesthetic delivery system, was approved for marketing by the Food and Drug Administration ("FDA") in May, 1996. Test marketing of this product by the Company commenced in the second half of 1996. The Company anticipates launching this product on a national basis in 1997. DentiPatch(TM), which contains lidocaine, the most widely used injectable dental anesthetic, is indicated for the prevention of pain from oral injection and for soft tissue dental procedures. The Company is also developing a range of new products based on its transdermal and transoral technologies, some of which will reach clinical trials in 1997. 1 6 The Company conducts its operations in Dade County, Florida. Commercial production was initiated in Noven's original facility in 1995. The Company's new manufacturing facility, located on approximately 15 acres, was approved by the FDA in April, 1996 and is also in commercial production. This new facility expands Noven's manufacturing capability from approximately 100 million patches to approximately 500 million patches per year. The further development of existing facilities at the new site will significantly increase Noven's manufacturing capacity to accommodate additional products under development. STRATEGY Noven's strategy for continued growth is based on certain key elements: a leadership position with its broad range of HRT products; the successful commercialization of the unique DentiPatch(TM) system; an extensive pipeline of transdermal and transoral drug delivery products under various stages of development in a number of the largest therapeutic classes; and finally, the possible acquisition of technologies and products which are compatible with its long term plans to become a fully integrated pharmaceutical company capable of developing, manufacturing and marketing alternative drug delivery systems. TRANSDERMAL DRUG DELIVERY Transdermal drug delivery systems utilize an adhesive patch containing medication which is administered through the skin and into the bloodstream over an extended period of time. Transdermal drug delivery systems may offer significant advantages over conventional oral and parenteral dosage forms, including non-invasive administration, controlled delivery over an extended period of time, improved patient compliance and avoidance of the problems and adverse side-effects associated with oral and parenteral drug delivery. Transdermal drug delivery also provides benefits to the pharmaceutical industry by reducing costs and expanding the market for certain drugs. Noven's patented, proprietary transdermal drug delivery systems incorporate a thin, solid state, multi-laminate construction with a drug-bearing interpolymeric adhesive. This transdermal drug delivery system, or patch, has a finite area with a specific geometric shape. On one side the patch has a release liner that, when removed, exposes a pressure- sensitive adhesive. This adhesive functions as both the drug platform and as the means of affixing the system to the patient's skin. The outside of the patch is comprised of a specialized backing material that is specifically tailored to the drug being delivered and the length of time the system is intended to be worn. The patch can administer different amounts of drug needed by the patient, and its shape is designed so that it can be worn comfortably. The transdermal drug delivery system is packaged in a pouch designed to maintain the system's stability and protect against contamination. Noven's transdermal drug delivery systems are capable of being modified so that they may be used to deliver various drugs. The techniques utilized to modify the system include those which improve the solubility and diffusability of drugs within the transdermal system and those which improve a drug's percutaneous absorption by changing the skin's ability to retain moisture; by 2 7 softening the skin and improving the skin's permeability; by adding compounds which may act as penetration assistants or hair follicle openers; or by changing the skin's boundary layer. TRANSORAL DRUG DELIVERY Transoral drug delivery systems utilize a bio-adhesive patch containing medication which, when moistened, adheres to the buccal mucosa. These systems then administer the drug across the mucosa and into the bloodstream. The buccal mucosa can be utilized as a drug delivery site due to its thin structure and highly vascular property which allows larger drug molecules, including peptides, proteins and carbohydrates, to be delivered into the bloodstream in therapeutic quantities. Transoral drug delivery systems also have many of the advantages associated with transdermal drug delivery, including non-invasive administration and controlled delivery. There has been only limited medical use of the buccal mucosal route for drug administration, the best known example being nitroglycerin tablets, which dissolve under the tongue and provide a rapid therapeutic response in angina sufferers. Although drugs may pass from these tablet systems across the mucosa into the bloodstream, certain potential disadvantages exist, such as having to position the tablet against the mucosal in a constant fashion; the drug dissolving into the saliva; or the drug being swallowed. A transoral patch presents the advantage of focused drug delivery at the site of the application of the patch in the mouth; saliva will not dilute the delivery of the drug in the same way that it will for a transoral tablet. Transoral patch technology might also provide an alternative to the parenteral administration of large molecules such as peptides, proteins and carbohydrates. Noven's first transoral delivery system is a patented, proprietary technology consisting of a thin, solid state multi-laminate construction with a drug-bearing bio-adhesive. The DentiPatch(TM) system is 2 cm(2) in area with a protective liner on one side that, when removed, exposes an adhesive that is then applied to the mucosa. The drug, which is contained in the adhesive, is absorbed through the buccal mucosa over time. The outside of the patch is comprised of a specialized backing material that is specifically tailored to the drug being delivered, which in the case of the DentiPatch(TM), is lidocaine. The patch is contained in a pouch to maintain its stability and to protect against contamination. This basic system can be modified to deliver various drugs. The techniques used to modify the patch system might include those which improve the solubility and diffusability of drugs within the adhesive matrix and the release characteristics of the drug from the adhesive to the mucosa. 3 8 PRODUCTS The following table summarizes the status of products marketed, approved and under development by the Company and is qualified by reference to the more detailed descriptions elsewhere in this Prospectus.
MARKETING/ PRODUCT INDICATION STATUS MILESTONES - ------- ---------- ------ ---------- TRANSDERMAL/HRT Estrogen/Vivelle(TM) Menopausal -FDA approved -Novartis-- and Menorest Symptoms U.S. and Canada -Approved in 30 -RPR-- all other foreign countries territories -Commercial sales in the United States, Canada and 13 foreign countries Osteoporosis -Approved in 22 -Novartis-- foreign countries U.S. and Canada -RPR--all other territories Combination Menopausal -Phase III clinical -RPR -- Worldwide Estrogen/ Symptoms/ trials in U.S. and -NDA in U.S and Progestogen Osteoporosis Europe completed regulatory filings in -Phase II clinical Europe anticipated in trials in Japan summer of 1997 Second Generation Menopausal -Novartis-- U.S. & Estrogen Symptoms/ -Phase I clinical Canada Osteoporosis trials completed -RPR -- Japan -Regulatory filings anticipated in second half of 1997
4 9 TRANSORAL Lidocaine/ Dental Pain Control -FDA approved -Marketing DentiPatch- -Filed in UK Commenced (Undisclosed Systemic Drug -Pre-Clinical -Clinical trials to Molecules) Delivery Development commence in second half of 1997 OTHER TRANSDERMALS NSAID Musculoskeletal -Phase I clinical ---- (Undisclosed Disorders trials in U.S. Molecules) Nicotine Smoking Cessation -Phase I clinical ---- trials Nitroglycerin Angina Pectoris -FDA tentative ---- approval
5 10 HORMONAL PRODUCTS MARKET OVERVIEW There are more than 40 million post-menopausal women in the U.S. and this group is expected to grow by 50% within the next decade. There are an additional 60 million post-menopausal women in Europe. The Company estimates that worldwide sales of all hormone replacement products, including those delivered transdermally, are approximately $1.5 billion to $2.0 billion annually. With the aging of the population worldwide, conditions and diseases such as menopause, osteoporosis and heart disease, which may benefit from hormone replacement therapy, will become significantly more prevalent. Menopause begins when the ovaries cease to produce estrogen, or when both ovaries are removed surgically prior to natural menopause. The most common acute physical symptoms of natural or surgical menopause are hot flashes and night sweats, which occur in up to 85% of menopausal women. One of the most common problems, after hot flashes, is vaginal dryness. This condition, which affects an estimated 25% percent of women, usually begins within five years after menopause. Moderate-to-severe menopausal symptoms can be treated by replacing the estrogen the body can no longer produce. Estrogen replacement therapy relieves hot flashes and night sweats effectively, and prevents drying and shrinking of the reproductive system. Another condition related to the inability to produce estrogen is osteoporosis, a progressive deterioration of the skeletal system through the loss of bone mass. The loss of estrogen in menopause causes increased skeletal resorption and decreased bone formation. According to the National Osteoporosis Foundation, osteoporosis currently affects 25 million people and contributes to approximately 1.5 million fractures annually in the U.S. Morbidity and suffering associated with these fractures are substantial. Estrogen replacement prevents the loss of bone mass and reduces the incidence of vertebral and hip fractures in older women. Numerous medical studies and the National Institutes of Health recommend estrogen replacement therapy as the most effective method of preventing osteoporosis in post-menopausal women. Heart disease is the number one killer of post-menopausal women in the U.S. There have been in excess of 30 studies that provide evidence that estrogen replacement therapy reduces cardiovascular disease by approximately 50% in post-menopausal women. A recent study conducted by the University of Pittsburgh also concluded that heart disease deaths dropped by 30% in older Caucasian women taking estrogen. Various reported studies have also shown that estrogen replacement therapy may significantly reduce the risk of colon cancer and have shown positive results in preventing or treating osteoarthritis, Alzheimers, strokes, and tooth loss in menopausal women, as well as post-partum depression. 6 11 VIVELLE(TM) AND MENOREST TRANSDERMAL ESTROGEN DELIVERY SYSTEM Noven's products are targeted to the expanding worldwide market for hormonal replacement therapy. Noven's transdermal estrogen delivery system, being sold by Novartis and RPR, is designed to offer a superior alternative to all dosage forms, including other transdermal systems, either currently in the market or under development. Marketing rights to the Company's transdermal estrogen delivery system have been licensed in the United States and Canada to Novartis and in all other territories to RPR. This product has been approved for marketing by the FDA, as well as by regulatory authorities in 30 foreign countries, for the treatment of menopausal symptoms. This product has also been approved in 22 foreign countries for the prevention of osteoporosis. RPR is selling Noven's transdermal estrogen delivery system under the trade name Menorest in thirteen foreign countries, including France, Germany and the United Kingdom. In March and June, 1996, Ciba-Geigy launched the sale of this product under the trade name Vivelle(TM), as an alternative to its older patch, Estraderm(TM), in the United States and Canada, respectively. Vivelle(TM) and Menorest are available by prescription and utilize Noven's advanced transdermal matrix technology. These products deliver 17-beta estradiol, the primary estrogen produced by the ovaries, and are applied twice weekly. Vivelle(TM) and Menorest are the only transdermal estrogen systems currently in the market to offer up to four dosage strengths. This new treatment option allows physicians to maintain patients on the lowest possible dose of estrogen in a skin patch form. This product is also easy to wear due to its small size and is less irritating than other similar systems. TRANSDERMAL COMBINATION ESTROGEN / PROGESTOGEN DELIVERY SYSTEM Noven has developed a combination patch containing 17-beta estradiol and a progestogen, norethindrone acetate (NETA). This product is designed to make hormone replacement therapy available to a greater portion of the female population, including those who terminate HRT due to the adverse side effects of continuous or irregular bleeding. Estrogen is the only hormone that is required in hormone replacement therapy to produce the benefits of menopausal symptom control, osteoporosis prevention and cardiovascular protection. However, in that portion of the female population (80%), who have not undergone hysterectomies, unopposed estrogen has been associated with cancer of the endometrium, the lining of the uterus. Those women who have an intact uterus would avoid these side effects if they were to receive long-term HRT, in the form of combined estrogen and a progestogen. The addition of a progestogen has been shown to reduce the incidence of endometrial cancer to normal levels or even below that of the general population. Further, continuous use of both estrogen and low dose progestogen may be the way to eliminate the monthly menstrual cycle or irregular bleeding. Combination therapy would provide long-term HRT treatment opportunities to all postmenopausal women and could therefore, significantly expand the total HRT market. 7 12 This product has been licensed to RPR on a worldwide basis. Phase III studies in the U.S. and Europe have been completed and the Company anticipates that an NDA will be filed and European regulatory filings will commence in 1997. This product is also in Phase II development in Japan. SECOND GENERATION ESTROGEN The Vivelle(TM) and Menorest products are state-of-the-art matrix patch delivery systems for estrogen. However, Noven continues to make technological breakthroughs and improvements in matrix patch technology which has resulted in a second generation transdermal estrogen replacement system. This second generation system, utilizing Dot Matrix(TM) technology, is only one-third the area of a Vivelle(TM) or Menorest system at any given dosage level, yet provides the same delivery of drug over a four day period. This new system is even more flexible and comfortable to wear than the first generation product, with a lower potential for skin irritation. In addition to these clear-cut benefits in patient satisfaction and compliance, this product could provide Noven with increased profitability through greater gross margins. Novartis has the right to market the product in the U.S. and Canada and RPR has marketing rights in Japan. Other markets are available for licensing and negotiations between Noven and potential marketing partners are ongoing. Phase I trials have been completed and it is anticipated that regulatory submissions for this improved product will be made in the second half of 1997. TRANSORAL PRODUCTS DENTIPATCH(TM) - TRANSORAL LIDOCAINE DELIVERY SYSTEM Injections are rated as the most fear provoking stimulus in all of dentistry; even the sight of the needle is a fear provoking event. These phobias appear to be a major contributor to the avoidance of routine dental care. According to the ADA national survey in 1990, there are approximately 1.2 billion dental procedures performed each year in the U.S. The Company believes that approximately 450 million dental procedures performed each year involving either injections or soft tissues might benefit from the DentiPatch (TM)system. DentiPatch(TM) was approved for marketing by the FDA in May, 1996 and is the world's first approved oral transmucosal patch. The product is the first topical anesthetic clinically proven to prevent injection pain when large needles are inserted into the bone. It is indicated for the prevention of pain from oral injections and soft tissue dental procedures. The DentiPatch(TM) system is applied to the oral mucosa by the dentist or hygienist and quickly releases lidocaine which passes into the soft tissues producing an anesthetic effect. Benefits of this system include: (i) site-specific delivery providing numbing only where needed; (ii) rapid onset in a few minutes with a duration that lasts for 45 minutes throughout most procedures; (iii) increased patient comfort resulting from minimizing fears and anxieties; (iv) enhanced practice building as patients become more receptive to treatment recommendations; (v) no cross-contamination as systems are individually and 8 13 conveniently packaged; and (vi) low risk of toxicity as drug levels in the bloodstream are only approximately one-twentieth that of an injection. Noven commenced test marketing this product in the second half of 1996 and anticipates a commercial launch nationwide in the second quarter of 1997. Additional products using the DentiPatch technology are currently being developed to enhance Noven's dental business. TRANSORAL DRUG DELIVERY PRODUCTS FOR OTHER INDICATIONS Large, complex, biotechnology molecules such as peptides, proteins and carbohydrates typically require an injectable route of delivery. When taken orally (as capsules or tablets) they are broken down and largely inactivated in the stomach and intestines. The transdermal route is usually unsuitable too, as the molecules are often too large to pass through the skin intact. However, transoral drug delivery, utilizing Noven's transoral patch technology, might offer a viable alternative in several cases. The lining of the mouth is thin and highly vascular and drugs can pass across into the bloodstream rapidly without being subjected to breakdown in the gastrointestinal tract. Noven's oral patch technology provides the opportunity of focusing and maintaining a high concentration of drug against the mucosa to maximize absorption. Noven has already proven the feasibility of the approach with lidocaine, and is working on two readily available protein drugs. It is anticipated that clinical data with these two protein drugs will be generated in the second half of 1997. There are a number of therapies that could benefit from the transoral patch approach, including drugs in development for disorders of glucose metabolism, hormone deficiency states and cardiovascular disease. Based on data obtained from studies of the drugs Calcitonin and Vasopressin, Noven intends to develop certain of these agents for transoral delivery, possibly in collaboration with licensing partners. OTHER TRANSDERMAL PRODUCTS MUSCULOSKELETAL DISORDERS Nonsteroidal Anti-Inflammatory Drugs ("NSAIDs") are indicated for a wide range of disorders including musculoskeletal conditions ranging from arthritis to soft tissue injuries. Several members of the NSAID class are also available over-the-counter. As a class, NSAIDs sales exceed $3 billion worldwide with musculoskeletal disorders encompassing approximately two thirds of this market. Although extremely effective, the major drawback of NSAIDs is a potential for irritation and even ulceration of the stomach lining, which can be life-threatening. Transdermal delivery of a NSAID locally and directly to the affected joint or tissue should prove therapeutically beneficial, with the added advantage of a much lower potential for gastrointestinal side effects. 9 14 The Company believes that this novel therapeutic approach could be a valuable addition in the management of certain musculoskeletal disorders. Noven has developed transdermal systems containing NSAIDs and is focusing on one product which has completed preclinical testing. An IND for one agent was filed in the fourth quarter of 1996 and clinical research will commence in the first half of 1997. NICOTINE Transdermal nicotine is marketed by several companies as an aid to smoking cessation for the relief of nicotine withdrawal symptoms. As a prescription therapy, nicotine patches achieved only modest success. However, with the recent recommendation for over the counter approval by the FDA Advisory Panel of some products, with others expected to follow, this market could expand significantly. Noven has developed a transdermal nicotine system for a third party which is in Phase I clinical trials. CARDIOVASCULAR DISEASE Nitroglycerin, a drug used to control angina pectoris, is available in several conventional dosage forms including sublingual tablets and other oral and topical formulations. Many of these dosage forms, however, have limitations. Therefore, transdermal drug delivery systems have become a widely used form of nitroglycerin delivery. First introduced commercially in 1982, transdermal nitroglycerin delivery systems are currently marketed by several companies and according to published data, worldwide sales are in excess of $600 million. The Company has developed a transdermal nitroglycerin delivery system which has all of the attributes of the most advanced systems currently on the market, such as a small surface area, appropriate adhesive qualities and a cosmetically attractive appearance. An ANDA was filed with the FDA for this product in 1992. This product was tentatively approved in November 1996. ANXIETY DISORDERS Noven has developed a transdermal alprazolam delivery system for the treatment of anxiety disorders. The transdermal delivery of alprazolam may provide a more optimal delivery system with dosing intervals of once a day or longer. IND was filed for this product with the FDA in December 1993. Although further refinement of this product has occurred, the extent and pace of further development will depend, in large measure, on the relative priority attached to this product as compared to others. OTHER DRUGS Noven believes that a large number of currently available drugs which are not patent protected, or will relatively soon lose patent protection, would benefit from the addition of a transdermal line extension. In all cases these drugs are currently only available in conventional 10 15 delivery forms. These drugs cover a number of therapeutic areas, including a range of cardiovascular disorders, pain control and central nervous system disorders. Preliminary work is ongoing and it is expected that feasibility studies will commence on several of these agents by 1997. The Company intends to further develop the most attractive products in 1998. The ability of Noven to develop and commercialize these products depends, to a great extent, upon the funds available for and dedicated to these products. IONTOPHORETIC DRUG DELIVERY Noven is also involved in the development of new technologies in the transdermal drug delivery area, including iontophoresis. Iontophoresis is a technique whereby positively or negatively charged drug molecules are driven by a painless low level electric current from a transdermal device through the skin and into the bloodstream. Certain higher molecular weight drugs, such as those composed of peptides, may require modification of the barrier properties of the skin in order to be delivered transdermally. Noven believes its iontophoretic transdermal drug delivery system may accommodate these higher molecular weight drugs and may thereby increase the number of drugs suitable for transdermal delivery, possibly including certain genetically engineered molecules. Although some work in this area may continue, Noven's other priorities in the near future may slow the progress of Noven's work on this technology. RESEARCH AND DEVELOPMENT Noven's research and development philosophy is based on the identification of drugs that can be delivered either transdermally or transorally and which can be developed rapidly. The majority of drugs that Noven will work on are already established agents being delivered to patients by means other than transdermally or transorally. Noven seeks therapies that can be improved by using Noven's innovative technologies, and which have substantial market potential. Research and development currently involves twenty-four persons, consisting of formulation experts, analytical chemists and a medical and regulatory group. MARKETING Noven has licensed its transdermal estrogen delivery system worldwide to two major pharmaceutical companies, Novartis and RPR, who are selling the product in the U.S., Canada and other foreign countries. In addition, Noven has licensed its transdermal combination estrogen/progestogen delivery system worldwide to RPR and its second generation estrogen delivery system to Novartis in the U.S. and Canada and to RPR in Japan. In May, 1996, RPR formed a global strategic alliance with Novo Nordisk A/S to offer a comprehensive range of hormone replacement therapies. The Company believes that this development will enhance the marketing and sales of Menorest. 11 16 The Company is currently developing and implementing its own marketing and sales plan with respect to the DentiPatch(TM) system. This product became available nationally in the second half of 1996. Initially, Noven marketed this product regionally, and anticipates a national roll-out in the second quarter of 1997. Noven is establishing an in-house sales department that will include an Executive Director of Marketing & Sales, a Senior Director of Sales, a national and six district sales managers, a product manager, a professional programs team and marketing and sales support staff. The national roll-out will combine the efforts of two of the largest dental dealer houses and a specific periodontal sales force and two full time associates. The marketing plan will focus primarily on dental schools and periodontists in highly populated progressive areas and will emphasize "pain control" and soft tissue procedures. As Noven develops new products it will evaluate whether to license products to a larger company with an established sales force or to develop its own marketing and sales capabilities. The Company's evaluation will be conducted on an individual product basis and will include consideration of the estimated costs associated with sales, marketing and distribution. These combined costs and the Company's financial position will be factored into the decision of whether to license or directly market the product. MANUFACTURING Noven manufactures Menorest for RPR and Vivelle(TM)for Novartis pursuant to certain supply agreements. These supply agreements govern the specifications of the product, price, required quantities and other aspects of the manufacturing relationship. The Novartis agreement is for a term of three years terminating in March, 1999. The RPR agreement is for a term coextensive with the term of the last to expire foreign patent related to the Menorest product, presently approximately eighteen years. Noven has the capacity of designing, developing, building and maintaining its production equipment, including fabrication of replacement parts where appropriate. Additionally, Noven's engineering expertise provides valuable support to its research and development groups by rapidly fabricating or modifying equipment essential in the product development program. Noven's original facility in Dade County, which consists of approximately 11,400 square feet, is fully equipped and has a manufacturing capacity of approximately 100 million transdermal patches per year. This facility has been approved to commercially manufacture Vivelle(TM) and Menorest for Novartis and RPR, respectively, and has also received a pre-approval inspection for the manufacture of the DentiPatch(TM) system and Noven's transdermal nitroglycerin product. Noven's newer 15 acre site in Dade County includes two adjacent buildings, each with approximately 40,000 square feet. One of the buildings has been fully renovated and equipped. This site was inspected and approved by the FDA and the Medicines Control Agency of the United Kingdom and is currently producing Menorest and Vivelle(TM) for commercial sale by its licensing partners. The facility will have a capacity of approximately 400 million transdermal patches per 12 17 year. It is anticipated that full development of this site, including possible new construction on the property, can accommodate Noven's space requirements for its foreseeable long term growth. COMPETITION Noven's operations are conducted in highly competitive areas. All drug delivery products being developed by the Company will face competition from both conventional forms of drug delivery (i.e., oral and parenteral), and possibly alternate forms of drug delivery, such as controlled release oral delivery, liposomes and implants. Competition in drug delivery systems is generally based on a company's marketing strength, product performance characteristics (i.e., reliability, safety, patient convenience) and product price. Acceptance by physicians and other health care providers including managed care groups is also critical to the success of a product. In a highly competitive marketplace and with evolving technology, there can be no assurances that additional product introductions or developments by others will not render the Company's products or technologies noncompetitive or obsolete. Noven's transdermal delivery technology will face competition from other transdermal products. Other companies, including Alza Corporation, Cygnus Therapeutic Systems, Elan Corporation, plc, TheraTech, Inc., Ethical Holdings, plc, Cilag, a division of Johnson & Johnson, Schering-Plough and 3M Corp. are developing and marketing competing transdermal drug delivery products. In January 1995, 3M Pharmaceuticals/Drug Delivery Systems and Berlex Laboratories, Inc. announced the receipt of FDA approval to market an estradiol transdermal system in the United States in two dosage strengths. Berlex Laboratories, Inc., along with Forest Laboratories, Inc., have U.S. marketing rights for this product. Commercial distribution of this transdermal delivery product commenced in the second quarter of 1995. It is estimated that this product has captured approximately twenty percent (20%) of the transdermal estrogen market in the U.S., with the balance substantially held by Estraderm(TM), a Novartis product. In addition, TheraTech, Inc. announced in December, 1996 that it had received FDA approval to market its transdermal estrogen system under the name Alora. It is anticipated that Proctor and Gamble will commence marketing this product in the spring of 1997. Noven has attempted to minimize certain competitive risks by its technological innovativeness and by developing strategic alliances. For example, Noven has aligned itself with two worldwide marketing organizations, Novartis and RPR, for marketing its estrogen delivery system as Vivelle(TM) in the U.S. and Canada and as Menorest elsewhere. In this regard, Novartis' introduction of Vivelle(TM), as an alternative to Estraderm(TM), should enhance the product's competitive position. Noven also believes that its estrogen replacement system has certain competitive advantages due to the product's characteristics, such as its small size, reduced irritation and availability in several different dosages. Further, Noven believes that its technological expertise in developing, manufacturing and commercializing other transdermal hormonal systems, such as its combination estrogen/progestogen delivery system and the second generation estrogen delivery system, will enable it to successfully compete in the global marketplace. 13 18 Noven's transoral lidocaine delivery system, DentiPatch(TM), faces competition from all other forms of topical anesthetics, such as gels, rinses and swabs. Septodont and Astra are the largest suppliers of these forms of anesthetics and it is unclear at this time how these competitors will respond to the introduction of the DentiPatch(TM) system in the market. Noven's competitive position will also be substantially affected by the product's degree of acceptance in the dental community, and the time required to obtain such acceptance. PATENTS AND PROPRIETARY RIGHTS Noven has obtained 11 U.S. patents relating to its transdermal and transoral delivery systems and manufacturing processes and has over 100 pending patent applications worldwide. As a result of the changes in the United States patent law under the General Agreement on Tariffs and Trade and the accompanying Agreement on Trade-Related Aspects of Intellectual Property Law, which took effect in their entirety on January 1, 1996, the terms of some existing Noven patents have been extended beyond the term of seventeen years from the date of grant. Noven patents filed after June 7, 1997 will have a term of twenty years computed from the effective filing date. The Company is unaware of the existence of any challenges to the validity of its patents or of any third party claim of patent infringement with respect to its products. However, no assurance can be given that challenges to its patents or claims of patent infringement will not be asserted in the future. Although there is a statutory presumption as to a patent's validity, the issuance of a patent is not conclusive as to such validity, or as to the enforceable scope of the claims of the patent. There is no assurance that Noven's patents or any future patents will prevent other companies from developing similar or functionally equivalent products. Furthermore, there is no assurance that any of the Company's future processes or products will be patentable, that any pending or additional patents will be issued in any or all appropriate jurisdictions or that Noven's processes or products will not infringe upon the patents of third parties. None of the drug chemical entities Noven uses for the products now in clinical trials are patented in the U.S. However, some of the drugs which may be incorporated in the Company's future products may be patented by others. Therefore, the ability of Noven to market such products prior to the expiration of such patents may depend, among other things, upon its ability to enter into arrangements with the holders of such patents. Noven also attempts to protect its proprietary information under trade secret laws. Generally, Noven's agreements with each employee, licensing partner, consultant, university, pharmaceutical company and agent contain provisions designed to protect the confidentiality of its proprietary information. There can be no assurance that these agreements will not be breached, that the Company will have adequate legal remedies as a result thereof, or that the Company's trade secrets will not otherwise become known or be independently developed by others. 14 19 GOVERNMENT REGULATION United States The marketing of pharmaceutical products requires the approval of the FDA in the U.S. The FDA has established regulations, guidelines and safety standards which apply to the pre-clinical evaluation, clinical testing, manufacturing and marketing of pharmaceutical products. The process of obtaining FDA approval for a new product may take several years and is likely to involve the expenditure of substantial resources. The steps required before a product can be produced and marketed for human use include: (i) pre-clinical studies; (ii) submission to the FDA of an IND, which must become effective before human clinical trials may commence in the U.S.; (iii) adequate and well controlled human clinical trials; (iv) submission to the FDA of an NDA or, in some cases, an ANDA; and (v) review and approval of the NDA or an ANDA by the FDA. An ANDA may be submitted for products that have the same active ingredient(s), indication, route of administration, dosage form and dosage strength as an existing FDA-approved product, if clinical studies have demonstrated bio-equivalence of the new product to the FDA-approved product. Under FDA ANDA regulations, companies that seek to introduce a generic product must also certify that the product does not infringe on the approved product's patent. In such circumstances, legal action may ensue to determine the relative rights of the parties and the application of the patent. This patent certification process may involve Noven's transdermal nitroglycerin product, due to the FDA's full approval of another transdermal nitroglycerin product in April, 1995. Accordingly, it is possible that Noven's ability to obtain FDA approval for the marketing of its transdermal nitroglycerin product could involve litigation over the applicability of another patent to Noven's product. This type of litigation is already ongoing with respect to two other parties efforts to commercialize a transdermal nitroglycerin delivery system. The Company is assessing various alternatives in anticipation of these developments. An NDA generally is required for products with new active ingredients, new indications, new routes of administration, new dosage forms or new strengths. An NDA requires that complete clinical studies of a product's safety and efficacy be submitted to the FDA, the cost of which is substantial. These costs can be reduced, however, for delivery systems which utilize approved drugs. Limited testing may begin on humans after submission and approval of the IND. Pre-clinical studies are conducted to obtain preliminary information on a product's efficacy and safety. The results of these studies are submitted to the FDA as part of the IND and are reviewed by the FDA before human clinical trials begin. Human clinical trials may commence 30 days after receipt of the IND by the FDA, unless the FDA objects to the commencement of clinical trials. Human clinical trials are typically conducted in three sequential phases, but the phases may overlap. Phase I trials consist of testing the product primarily for safety in a small number of patients at one or more doses. In Phase II trials, the safety and efficacy of the product are evaluated 15 20 in a patient population somewhat larger than the Phase I trials. Phase III trials typically involve additional testing for safety and clinical efficacy in an expanded population at different test sites. A clinical plan, or protocol, accompanied by the approval of the institution participating in the trials, must be reviewed by the FDA prior to commencement of each phase of the clinical trials. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time. The results of product development and pre-clinical and clinical studies are submitted to the FDA as an NDA or an ANDA for approval. If an application is submitted, there can be no assurance that the FDA will review and approve the NDA or an ANDA in a timely manner. The FDA may deny an NDA or an ANDA if applicable regulatory criteria are not satisfied or it may require additional clinical testing. Even if such data is submitted, the FDA may ultimately deny approval of the product. Further, if there are any modifications to the drug, including changes in indication, manufacturing process, labeling, or a change in a manufacturing facility, an NDA or an ANDA supplement may be required to be submitted to the FDA. Product approvals may be withdrawn after the product reaches the market if compliance with regulatory standards is not maintained or if problems occur regarding the safety or efficacy of the product. The FDA may require testing and surveillance programs to monitor the effect of products which have been commercialized, and has the power to prevent or limit further marketing of these products based on the results of these post-marketing programs. The Prescription Drug User Fee Act of 1992 (the "Fee Act") authorized the FDA to collect three types of fees from prescription drug manufacturers: (1) one-time application fees imposed upon submission to the FDA for approval, (2) establishment fees, and (3) product fees which are imposed annually. Payment of application fees are required for each human drug application including an NDA, certain ANDAs, certain initial certification/approval of certain antibiotic drugs, and licensure under the Public Health Service Act of certain biological products. The Fee Act also mandates a fee on supplements (containing clinical data) to human drug applications. The amount of the fee is dependent on whether the application is accompanied by clinical data on safety and efficacy (other than bioavailability or bioequivalence studies). Through September 30, 1996 the application fee for human drug applications was $204,000, while applications without clinical data and supplements with clinical data were one-half of that fee. Payment of establishment fees are required for prescription drug establishments at which at least one prescription drug product is manufactured. Through September 30, 1996 the establishment fee was $135,300. Payment of product fees are required for each strength and dosage form of an approved prescription drug product at $12,600 through September 30, 1996. The corresponding fees for the period from October 1, 1996 through December 31, 1996 were $205,000, $115,700 and $13,200. The Fee Act provides for fee exceptions, waivers and reductions, including payment deferrals under certain circumstances, primarily for the benefit of small businesses. While Noven will endeavor to request such fee exceptions, waivers and reductions where it believes it can demonstrate eligibility, there is no assurance that the FDA will grant any such request. Foreign and domestic manufacturing facilities are subject to periodic inspections for compliance with the FDA's GMP regulations and each domestic drug manufacturing facility must 16 21 be registered with the FDA. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money and effort in the area of quality assurance to insure full technical compliance. Facilities handling controlled substances, such as Noven, must be licensed by the U.S. Drug Enforcement Administration ("DEA"). The Company has produced transdermal drug delivery products in accordance with the FDA's GMP regulations for clinical trials, manufacturing process validation studies and commercial sale. Noven's activities are subject to various federal, state and local laws and regulations regarding occupational safety, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and possible future local, state, federal and foreign regulations. Under certain of these laws, Noven could be liable for substantial costs and penalties in the event that waste is disposed of improperly. Noven utilizes one waste management firm to provide for proper disposal of hazardous waste. The Company believes that its hazardous waste disposal procedure prevents improper disposal. Foreign Noven intends to have its products marketed in certain foreign countries. Therefore, approval by these countries' regulatory authorities must be obtained. The approval procedures vary from country to country, and the time required for approval may be longer or shorter than that required for FDA approval. Even after foreign approvals are obtained, further delays may be encountered before products may be marketed. For example, many countries require additional governmental approval for price reimbursement under national health insurance systems. Such approval can be critical to any extensive marketing of drug products in such countries. If practical and acceptable to the FDA, Noven intends to design its FDA protocols for the clinical studies of its products to permit acceptance of the data by foreign regulatory authorities and to thereby reduce the risk of duplication of clinical studies. However, additional studies may be required to obtain foreign regulatory approval. Further, some foreign regulatory agencies may require additional studies involving patients located in their countries. As a result of the enactment of the FDA Export Reform & Enhancement Act of 1996, a drug not yet approved in the United States may be exported to certain foreign markets as long as the product: (i) is approved by the importing nation; (ii) is labeled for export and (iii) the product is not in conflict with the laws of the country to which it is intended for export. EMPLOYMENT The Company employs approximately one hundred and forty people; approximately fifty-eight are engaged in manufacturing and process development, twenty-four in research and development, thirty-eight in medical affairs, regulatory affairs, quality assurance and quality control and twenty-one in marketing and administration. Most of the Company's scientific and engineering employees have had prior experience with pharmaceutical or medical product companies. No 17 22 employee is represented by a union and Noven has never experienced a work stoppage. The Company believes its employee relations are excellent. INSURANCE The Company has procured general liability insurance, in an amount of $8 million per incident and $9 million in the aggregate per annum. This policy provides coverage on an occurrence basis and is subject to annual renewal. The Company has also procured product liability insurance in an amount of $12 million per incident and $12 million in the aggregate per annum. This policy provides coverage on a claims made basis and is subject to annual renewal. No assurance can be given that the coverage limits will be adequate. Item 2. Properties. The Company owns a 20,000+ square foot building which is used for laboratory, engineering, office and administrative purposes on one and one-half acres. The Company also owns 9.5 acres of vacant land that could accommodate 160,000+ square feet of new buildings for a variety of manufacturing, warehousing and developmental purposes. RPR owns, on a contiguous site, two existing buildings of approximately 80,000+ square feet on four acres. One of the buildings is being used by Noven for manufacturing purposes. The other building is presently utilized for engineering. The RPR facility is leased to the Company for a term of 31.5 years on favorable terms. The lease grants Noven a purchase option. RPR may terminate the lease prior to the expiration of its term upon termination or expiration of the license agreement entered into in June 1992. These facilities, it is believed, will provide sufficient space for the Company's projected growth in the foreseeable future. The Company leases real property at 13300 Southwest 128th Street, Miami, Florida, under standard leases that expire on December 31, 1998. The aggregate annual rental under these leases is approximately $186,000 per year, subject to certain adjustments. Substantially all of the approximately 11,400 square feet under lease at this location is used for manufacturing and packaging. The Company believes that its existing properties are well maintained and in good operating condition and that there is no excessive obsolescence. Item 3. Legal Proceedings. The Company is not a party to any legal proceedings and to the knowledge of the Company, none are threatened. Item 4. Submission of Matters to a Vote of Security Holders. 18 23 The Company did not submit any matters to a vote of stockholders during the fourth quarter of the fiscal year ended December 31, 1996. PART II Item 5. Market for Common Equity and Related Stockholder Matters. (a) Market Information The following table sets forth, for the periods indicated, the high and low sale prices for the Common Stock as reported on the Nasdaq National Market.
High Price Low Price ---------- --------- First Quarter, 1995 12 3/8 6 1/2 Second Quarter, 1995 9 1/8 6 3/4 Third Quarter, 1995 11 7 Fourth Quarter, 1995 11 1/2 8 1/4 First Quarter, 1996 16 1/2 10 7/8 Second Quarter, 1996 18 3/4 10 1/2 Third Quarter, 1996 16 3/8 11 1/4 Fourth Quarter, 1996 16 1/4 8 3/4
(b) Holders. As of December 31, 1996, the number of stockholders of record was 636 and the approximate number of beneficial owners was 4,737. (c) Dividends. The Company has never paid a cash dividend on its Common Stock, intends to retain all earnings for the operation and expansion of its business and does not anticipate paying cash dividends in the future. Any future declaration and payment of dividends will be determined by the Board of Directors in light of conditions then existing, including the Company's earnings, financial condition, capital requirements, as well as such other factors as the Company's Board of Directors may consider. 19 24 Item 6. Selected Financial Data. SELECTED FINANCIAL DATA The selected financial data presented below are derived from the financial statements of the Company. The financial statements for the years ended December 31, 1994, 1995 and 1996 and the reports thereon, are included elsewhere in this Form 10-K. The selected financial data as of December 31, 1992 and 1993 are derived from financial statements previously filed with the Commission and not included in this Form 10-K. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Financial Statements.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Product Sales $ -- $ -- $ 295 $ 8,747 $19,652 License revenue 1,927 3,125 4,155 1,703 815 Interest income 803 624 1,214 1,682 1,177 Other income 192 345 381 52 -- ------- ------- ------- ------- ------- Total 2,922 4,094 6,045 12,184 21,644 Expenses: Cost of products sold -- -- 148 4,814 10,020 Research and development 4,127 5,161 8,036 10,509 8,730 Marketing, general and administrative 1,836 2,244 2,805 3,442 4,878 ------- ------- ------ ------- ------- Total 5,963 7,405 10,989 18,765 23,628 Net loss $(3,041) $(3,311) $(4,944) $(6,581) $(1,984) ======= ======= ======= ======= ======= Net loss per share $ (.21) $ (.21) $ (.28) $ (.34) $ (.10) ======= ======= ======= ======= ======= Weighted average shares of common stock and common stock equivalents 14,761 15,925 17,440 19,237 19,800
20 25
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Working capital $ 20,781 $ 14,822 $ 35,047 $ 27,560 $24,859 Total assets 23,289 29,860 54,365 48,646 44,229 Long-term obligations -- -- -- -- -- Accumulated deficit (7,228) (10,539) (15,483) ( 22,063) (24,047) Total stockholders' equity 20,740 20,693 44,546 38,030 36,077
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. GENERAL From inception (1987) through 1994, the Company primarily engaged in the research and development of transdermal drug delivery systems. During this period, the Company's revenues were principally generated by license fees, milestone payments pursuant to various license agreements and interest earned on funds raised through the sale of its common stock. In 1995, due to the receipt of regulatory approvals for its transdermal estrogen delivery system, a significant portion of the Company revenues were derived from the sale of this product to the Company's two licensing partners. In 1996, revenues from the sale of these products increased substantially as the Company's licensing partners initiated marketing and distribution. Noven expects that revenues from product sales to its licensing partners will fluctuate from quarter and year to year depending upon various factors not in Noven's control, including, but not limited to, the inventory requirements of each licensing partner at different times throughout the year, possible special selling efforts undertaken by each licensing partner at different times during the year, and, in the case of RPR, the introduction of the product into new territories. Noven experienced fluctuations in sales of its transdermal estrogen delivery systems, Vivelle(TM) and Menorest, to its licensing partners from the first three quarters to the last quarter of 1996, and into the first quarter of 1997, when sales to these licensing partners declined. Although in-market sales of Noven's transdermal estrogen delivery system continue to increase on a global basis, it is anticipated that inventory balancing by the Company's licensing partners will result in significantly lower levels of reorders during the first half of 1997, causing losses. After this circumstance has been corrected, Noven expects that product sales to its licensing partners will significantly increase in the second half of 1997. 21 26 Noven also expects to generate revenues in 1997 from licensing agreements with respect to products under development, although such revenues will fluctuate from period to period depending upon such factors as the number of new agreements finalized, timely achievement of milestones and strategic decisions affecting self-funding of products. Finally, during calendar year 1996, the Company commenced the marketing of its Denti-Patch(TM) system. It is anticipated that significant revenues will be generated from the sale of this product commencing in the second half of 1997. RESULTS OF OPERATIONS 1996 Compared to 1995 Total revenues increased approximately 78% from approximately $12,184,000 in 1995 to approximately $21,644,000 in 1996. The increase in revenues from $8,748,000 in 1995 to $19,652,000 in 1996 was primarily a result of the increase in product sales of the Company's transdermal estrogen delivery system to its two licensing partners. Royalties from transdermal estrogen delivery systems are included in product sales. License revenues decreased approximately 52% from approximately $1,703,000 in 1995 to approximately $815,000 in 1996. Interest income decreased approximately 30% from approximately $1,682,000 in 1995 to approximately $1,178,000 in 1996 due to lower average security balances. Cost of product sold increased approximately 108% from approximately $4,814,000 in 1995 to approximately $10,021,000 in 1996. The gross margin percentage was approximately 49% in 1996 and approximately 45% in 1995. The gross margins vary depending on the amount of product sold to each licensing partner and manufacturing efficiencies, including those relating to production volumes. Research and development expenses decreased approximately 17% from approximately $10,509,000 in 1995 to approximately $8,730,000 in 1996. The decrease in research and development expenses was attributable to less process development activity and a reduced amount of costs associated with the validation of manufacturing equipment and facilities. In 1996 research and development expenses for new product development continued at the same rate as in 1995. New product development included work related to the transoral dental anesthetic system (DentiPatch(TM)), an estrogen/progestogen combination delivery system, a second generation estrogen delivery system, a transdermal system delivering a nonsteroidal anti-inflammatory drug, an albuterol delivery system and a nicotine delivery system. Marketing, general and administrative expenses increased approximately 42% from approximately $3,442,000 in 1995 to approximately $4,878,000 in 1996. The increase in marketing, general and administrative expenses was primarily due to initial marketing expense to support the launch of the DentiPatch(TM) system and increases in staffing and associated office expenses. 22 27 1995 Compared to 1994 Total revenues increased approximately 102% from approximately $6,045,000 in 1994 to approximately $12,184,000 in 1995. The increase in revenues during 1995 was primarily a result of the increase in product sales of the Company's transdermal estrogen delivery system to its licensing partners from $295,000 in 1994 to $8,748,000 in 1995. Royalties for product sold to one licensee will be recognized after the product is launched. License revenues decreased approximately 59% from approximately $4,155,000 in 1994 to approximately $1,703,000 in 1995. Interest income increased approximately 39% from approximately $1,214,000 in 1994 to approximately $1,682,000 in 1995 primarily as a result of the investment of the proceeds of the 1994 public offering of common stock. Cost of product sold increased from approximately $148,000 in 1994 to approximately $4,814,000 in 1995. The gross margin percentage was 50% in 1994 and 45% in 1995. These manufacturing costs and attendant gross margins were primarily attributable to expenses incurred in the early stages of manufacturing the transdermal estrogen delivery systems. Research and development expenses increased approximately 31% from approximately $8,036,000 in 1994 to approximately $10,509,000 in 1995. The increase in research and development expenses was attributable to new product development, manufacturing process engineering and development costs, preproduction start-up expense and the hiring of additional staff for new and existing programs. New product development included the transoral dental anesthetic system and the transdermal estrogen/progestogen combination delivery system. Preproduction start-up includes the costs associated with staffing, obtaining regulatory approvals and preparing for product commercialization. Marketing, general and administrative expenses increased approximately 23% from approximately $2,805,000 in 1994 to approximately $3,442,000 in 1995 primarily because of increases in staffing, recruiting expenses and professional fees. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations through public offerings of common stock, including the exercise of warrants issued in connection with the first such offering, private placements of its equity securities, license and contract revenues, and interest income. However, since the launch of its first commercial product in 1995, the Company's operations have been principally financed increasingly by revenues from the sale of its transdermal estrogen delivery system to its licensing partners. The Company has neither utilized debt nor has it engaged in significant commercial lease transactions to finance its operations. As of December 31, 1996 and 1995, the Company had approximately $19,149,000 and $24,013,000 respectively, in cash and securities held to maturity. 23 28 Net cash used in operating activities for the year ended December 31, 1996 was approximately $3,353,000 compared to approximately $9,375,000 for the year ended December 31, 1995. Cash used in 1996 was primarily due to decreases in accounts payable and accrued liabilities, along with the net operating loss and increases in accounts receivable, partially offset by a decrease in inventories. In 1995 net cash used by operating activities was primarily attributable to the net operating loss along with increases in inventories and accounts receivable, partially offset by increases in accounts payable and accrued liabilities. During the year ended December 31, 1996, the Company's investing activities used approximately $7,352,000, compared to approximately $13,371,000 in the prior year. Net cash used during 1996 in investing activities was primarily for the purchase of securities held to maturity and additionally for commercial manufacturing equipment, improvements at the new manufacturing site and investments in patents. New cash provided in 1995 resulted primarily from the sale of securities held to maturity to finance operating activities, partially offset by capital expenditures for manufacturing equipment, buildout of manufacturing facilities and investments in patents. As of December 31, 1996 the Company had no significant commitments for capital expenditures. Net cash provided by financing activities of $31,000 and $65,000 for the years ended December 31, 1996 and 1995 respectively, resulted from the exercise of options in the employee stock option plan. The Company expects to incur additional costs related to product development activities, increased marketing, general and administrative expenses and the completion of its manufacturing facilities. Although the Company believes that existing cash, anticipated contract and manufacturing revenues will be adequate for the foreseeable future, circumstances could arise which may result in a desire to raise additional capital. There can be no assurance that such capital will be available to acceptable terms, or at all. FORWARD LOOKING STATEMENTS From time to time, Noven may publish forward looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, usage and development activities and some other matters. The words "may", "will", "expect", "anticipate", "continue", "estimate", "project", "intend" and similar expressions are intended to identify such forward looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward looking statements. In order to comply with the terms of the safe harbor, Noven notes that a variety of factors could cause its actual results and experience to differ materially from anticipated results and other expectations expressed by Noven's forward looking statements. The risks and uncertainties that may effect the operations, performance, development and results of Noven's business, include the following: 1. Dependence upon RPR and Novartis, its two licensing partners, with respect to (i) the commercialization and marketing of certain transdermal hormonal products and (ii) obtaining 24 29 regulatory approval of certain other transdermal hormonal products. Noven's revenues in any period can be materially affected by the sales and marketing performance of either or both of its licensing partners. 2. Uncertainties regarding (i) the market share for Noven's transdermal hormonal products which can be captured by Noven's licensing partners, and (ii) the market for the Denti-Patch(TM) product and Noven's ability to successfully establish and effectuate a marketing program. 3. Unanticipated difficulties associated with the manufacturing process of Menorest and Vivelle for its licensing partners as well as its Denti Patch(TM) product, that could result in delays in delivery and shortages of product. 4. Competition from other entities engaged in transdermal and/or transoral research, development, manufacturing and marketing, as well as other entities engaged in alternative drug delivery technologies. 5. Difficulties associated with (i) identifying appropriate licensing partners capable of meeting the financial requirements of research and development and/or marketing new products, and (ii) consummating satisfactory licensing agreements. 6. The time required to obtain regulatory approval of products and its associated expenses. 7. The possible exposure to product liability suits in excess of insurance policy limits or excluded from insurance coverage. Readers are cautioned not to place undue reliance on forward looking statements when made, which speak only as of the date made. Noven undertakes no obligation to publicly release the results of any revision of these forward looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. Also, unless expressly stated, Noven does not adopt projections, forecasts or other forward looking statements which may be disseminated from time to time by analysts and other third parties. Item 8. Financial Statements and Supplementary Data 25 30 INDEX TO FINANCIAL STATEMENTS
PAGE ---- REPORT OF INDEPENDENT AUDITORS' Deloitte & Touche LLP F-1 FINANCIAL STATEMENTS Balance Sheets as of December 31, 1996 and 1995 F-2 Statements of Operations for the years ended December 31, 1996, 1995 and 1994 F-3 Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 F-4 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 F-5 Notes to Financial Statements F-6
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable PART III Omitted pursuant to General Instruction G(3) to Form 10-K PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements included in Part II of this Report. 26 31 2. Exhibits
Exhibit Number Description of Document 3.1 --Certificate of Incorporation of the Registrant dated April 10, 1987 and January 28, 1987, incorporated by reference to Exhibit 3(a) of Registration Statement on Form S-18 (Commission File No. 33-20331-A). 3.2 --Amendments to Certificate of Incorporation of the Registrant dated April 10, 1987 and January 28, 1988, incorporated by reference to Exhibit 3(b) of Registration Statement on Form S-18 (Commission File No. 33-20331-A). 3.3 --Amendment to Certificate of Incorporation of the Registrant dated June 21, 1991, incorporated by reference to Exhibit 3.3 of Registration Statement on Form S-2 (Commission File No. 33-45784). 3.4 --Amendment to Certificate of Incorporation of the Registrant dated August 17, 1992, incorporated by reference to Exhibit 3.4 of Form 10-K filed with the Securities and Exchange Commission on March 31, 1994. 3.5 --By-laws of the Registrant, as amended and restated as of April 28, 1992, incorporated by reference to Exhibit 3.5 of Form 10-K filed with the Securities and Exchange Commission on March 31, 1994. 3.6 --Amendment to Certificate of Incorporation of the Registrant dated August 2, 1994 incorporated by reference to Exhibit 3.6 of Form 10-K filed with the Securities and Exchange Commission on March 31, 1995. 10.2 --Agreement between the Registrant and Rorer Group, Inc. (now known as Rhone-Poulenc Rorer, Inc.) dated April 27, 1989 (with certain provisions omitted pursuant to Rule 24b-2), as amended on June 22, 1990 (with certain provisions omitted pursuant to Rule 24b-2), incorporated by reference to Exhibit 10-2 of Form 10-K filed with the Securities and Exchange Commission on March 31, 1996. 10.3 --Amended and Restated Stock Option Plan of the Registrant, incorporated by reference to Exhibit 10.10 of Form 10-K for the year ended December 31, 1990 filed with the Securities and Exchange Commission on March 28, 1991, as further amended on June 23, 1992 and incorporated by reference to the 1992 Proxy Statement filed with the Securities and Exchange Commission on April 30, 1992.
27 32 10.5 --Parkside Plaza Office Lease between Maxine Chin and the Registrant dated April 1, 1991, incorporated by reference to Exhibit 10-5 of Form 10-K filed with the Securities and Exchange Commission on March 31, 1996. 10.6 --Parkside Plaza Office Lease between James/ W. Keen and the Registrant dated July 2, 1992, incorporated by reference to Exhibit 10-6 of Form 10-K filed with the Securities and Exchange Commission on March 31, 1996. 10.7 --Parkside Plaza Office Lease between Mark Rubino and the Registrant dated November 28, 1990, incorporated by reference to Exhibit 10-7 of Form 10-K filed with the Securities and Exchange Commission on March 31, 1996. 10.8 --Parkside Plaza Office Lease between Bud Eiskant and the Registrant dated June 1, 1990, incorporated by reference to Exhibit 10-8 of Form 10-K filed with the Securities and Exchange Commission on March 31, 1996. 10.9 --License Agreement between the Registrant and Ciba-Geigy Corporation dated November 15, 1991 (with certain provisions omitted pursuant to Rule 406) incorporated by reference to Exhibit 10.9 of Amendment No. 1 to Registration Statement on Form S-2 (Commission File No. 33-45784). 10.12 --Warrant and Warrant Agreement between the Registrant and Ciba-Geigy Corporation dated November 15, 1991, incorporated by reference to Exhibit 10.12 of Registration Statement on Form S-2 (Commission File No. 33-45784). 10.13 --License Agreement and Supply Agreement between the Registrant and Rhone-Poulenc Rorer Pharmaceuticals Inc. dated June 26, 1992 (with certain provisions omitted pursuant to Rule 24b-2), incorporated by reference to Exhibit 10.13 of Form 10-K for the year ended December 31, 1992, filed with the Securities and Exchange Commission on March 31, 1993. 10.14 --Warrant and Warrant Agreement between the Registrant and Rhone-Poulenc Rorer Pharmaceuticals Inc. dated June 26, 1992, incorporated by reference to Exhibit 10.14 of Form 10-K for the year ended December 31, 1992, filed with the Securities and Exchange Commission on March 31, 1993. 10.15 --Parkside Plaza Office Lease between Scott E. Stuckey and Annamarie Stuckey and Registrant dated July 27, 1992, incorporated by reference to Exhibit 10.15 of Form 10-K for the year ended December 31, 1992, filed with the Securities and Exchange Commission on March 31, 1993. 10.16 --Parkside Plaza Office Lease between Lawrence T. Deddy, Trustee and the Registrant dated July 29, 1992, incorporated by reference to Exhibit 10.16 of Form
28 33 10-K for the year ended December 31, 1992, filed with the Securities and Exchange Commission on March 31, 1993. 10.17 --Agreement between the Registrant and Turnpike-McNeil Development Limited dated January 29, 1993 (re: real property), incorporated by reference to Exhibit 10.17 of Form 10-K for the year ended December 31, 1992, filed with the Securities and Exchange Commission on March 31, 1993. 10.18 --Agreement between the Registrant and Turnpike-McNeil Development Limited dated January 29, 1993 (re: real property and building), incorporated by reference to Exhibit 10.18 of Form 10-K for the year ended December 31, 1992, filed with the Securities and Exchange Commission on March 31, 1993. 10.19 --Warrant issued to Ciba-Geigy Corporation dated April 1, 1993, incorporated by reference to Exhibit 10.19 of Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission on March 31, 1994. 10.20 --Industrial Lease between Rhone-Poulenc Rorer Pharmaceuticals Inc. and the Registrant dated March 23, 1993 and effective February 16, 1993 (with certain provisions omitted pursuant to Rule 24b-2), incorporated by reference to Exhibit 10.20 of Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission on March 31, 1994. 10.21 --Second Amendment dated May 13, 1993 to Agreement between the Registrant and Rhone-Poulenc Rorer, Inc. (successor to Rorer Group, Inc.) dated April 27, 1989 (with certain provisions omitted pursuant to Rule 24b-2), incorporated by reference to Exhibit 10.21 of Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission on March 31, 1994. 10.22 --Amendment dated May 17, 1994 to Warrant dated November 15, 1991 issued to Ciba-Geigy Corporation incorporated by reference to Exhibit 10.22 of Form 10-K for the year ended December 31, 1994, filed with the Securities and Exchange Commission on March 31, 1995. 10.23 --Warrant issued to Ciba-Geigy Corporation dated November 28, 1994 incorporated by reference to Exhibit 10.23 of Form 10-K for the year ended December 31, 1994, filed with the Securities and Exchange Commission on March 31, 1995. 10.24 --Employment Agreement between Steven Sablotsky and the Registrant dated December 31, 1994 incorporated by reference to Exhibit 10.24 of Form 10-K for the year ended December 31, 1994, filed with the Securities and Exchange Commission on March 31, 1995.
29 34 10.25 --Employment Agreement between Mitchell Goldberg and the Registrant dated December 31, 1994 incorporated by reference to Exhibit 10.25 of Form 10-K for the year ended December 31, 1994, filed with the Securities and Exchange Commission on March 31, 1995. 10.26 --Employment Agreement between Colin A. Norris and the Registrant dated February 1, 1995, incorporated by reference to Exhibit 10-26 of Form 10-K for the year ended December 31, 1995, filed with the Securities and Exchange Commission on March 31, 1996. 10.27 --Supply Agreement between the Registrant and Ciba-Geigy Corporation, Pharmaceuticals Division, dated August 31, 1995 and effective March, 1996 (certain portions have been omitted pursuant to Rule 24b-2), incorporated by reference to Exhibit 10.27 of Form 10-Q(A-2) for the quarter ended March 31, 1996, filed with the Securities and Exchange Commission on November 1, 1996. 10.28 --Amendment dated May 6, 1996 to the June 9, 1994 Amendment to the License Agreement and the Supply Agreement, each dated April 27, 1989 by and between the Company and Rhone-Poulenc Rorer, Inc. (with certain portions omitted pursuant to Rule 24b-2), incorporated by reference to Exhibit 10.28 of Form 10-Q(A) for the quarter ended June 30, 1996, filed with the Securities and Exchange Commission on December 3, 1996. 27 --Financial Data Schedule (For S.E.C. use only). (b) Reports on Form 8-K-None.
30 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 28, 1997 NOVEN PHARMACEUTICALS, INC. By:/s/ Steven Sablotsky -------------------------- STEVEN SABLOTSKY, Chairman of the Board and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- By: /s/ Steven Sablotsky ------------------------- Principal Executive March 28, 1997 Steven Sablotsky Officer and Director (Chairman of the Board and President) By: /s/ William A. Pecora ------------------------- Principal Financial March 28, 1997 William A. Pecora and Accounting Officer (Chief Financial Officer) By: /s/ Mitchell Goldberg ------------------------- Director March 28, 1997 Mitchell Goldberg (Executive Vice President) By: /s/ Sheldon H. Becher ------------------------ Director March 28, 1997 Sheldon H. Becher
33 36 By: /s/ Sidney Braginsky Director March 28, 1997 ---------------------- Sidney Braginsky By: /s/ Lawrence J. Dubow ---------------------- Director March 28, 1997 Lawrence J. Dubow
34 37 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Noven Pharmaceuticals, Inc.: We have audited the accompanying balance sheets of Noven Pharmaceuticals, Inc. ("Noven") as of December 31, 1996 and 1995, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of Noven's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Noven Pharmaceuticals, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Miami, Florida February 14, 1997 F-1 38 NOVEN PHARMACEUTICALS, INC. BALANCE SHEETS DECEMBER 31, 1996 AND 1995 - --------------------------------------------------------------------------------
ASSETS 1996 1995 CURRENT ASSETS: Cash and cash equivalents $ 5,456,826 $ 16,131,263 Securities held to maturity 13,692,010 7,881,397 Accounts receivable 3,366,489 2,512,561 Inventories 4,151,020 5,069,946 Prepaid and other current assets 248,357 258,220 ------------- ------------- Total current assets 26,914,702 31,853,387 ------------- ------------- PROPERTY AND EQUIPMENT: Property and equipment, at cost 18,574,875 17,506,935 Less: accumulated depreciation and amortization 2,873,401 1,974,138 ------------- ------------- Total net property and equipment 15,701,474 15,532,797 ------------- ------------- OTHER ASSETS: Patent development costs, net 1,547,434 1,218,630 Deposits and other assets 65,128 40,738 ------------- ------------- Total other assets 1,612,562 1,259,368 ------------- ------------- TOTAL $ 44,228,738 $ 48,645,552 ---------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 2,055,780 $ 4,293,185 ------------- ------------- DEFERRED LICENSE REVENUE 6,096,015 6,322,011 ------------- ------------- COMMITMENTS AND CONTINGENCIES (Note 4) STOCKHOLDERS' EQUITY: Preferred stock - authorized 100,000 shares of $.01 par value; no shares issued or outstanding Common stock - authorized 30,000,000 shares of $.0001 par value; issued and outstanding 19,831,538 shares in 1996 and 19,674,144 in 1995 1,983 1,967 Additional paid-in capital 60,122,275 60,091,751 Accumulated deficit (24,047,315) (22,063,362) ------------- ------------- Total stockholders' equity 36,076,943 38,030,356 ------------- ------------- TOTAL $ 44,228,738 $ 48,645,552 ------------- -------------
See accompanying notes to financial statements. F-2 39 NOVEN PHARMACEUTICALS, INC. STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - --------------------------------------------------------------------------------
1996 1995 1994 REVENUES: Product sales $19,651,872 $ 8,747,965 $ 294,814 License revenue 814,996 1,702,780 4,155,163 Interest income 1,177,535 1,681,688 1,213,479 Other income 51,908 381,095 ------------ ------------ ------------ Total revenues 21,644,403 12,184,341 6,044,551 ------------ ------------ ------------ EXPENSES: Cost of products sold 10,020,614 4,814,349 147,866 Research and development 8,729,709 10,508,763 8,035,782 Marketing, general and administrative 4,878,033 3,441,837 2,805,128 ------------ ------------ ------------ Total expenses 23,628,356 18,764,949 10,988,776 ------------ ------------ ------------ NET LOSS $(1,983,953) $(6,580,608) $(4,944,225) ------------ ------------ ------------ NET LOSS PER SHARE $ (0.10) $ (0.34) $ (0.28) ------------ ------------ ------------ WEIGHTED AVERAGE SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS 19,800,115 19,236,807 17,439,955 ------------ ------------ ------------
See accompanying notes to financial statements. F-3 40 NOVEN PHARMACEUTICALS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - --------------------------------------------------------------------------------
ADDITIONAL COMMON STOCK PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL BALANCE, DECEMBER 31, 1993 16,148,000 $1,615 $31,230,400 $(10,538,529) $20,693,486 ---------- ------ ----------- ------------ ----------- Issuance of 441,068 shares of stock pursuant to stock option plan, net 441,068 44 16,585 16,629 Sale of 2,250,000 shares of common stock in a public offering , net 2,250,000 225 28,317,348 28,317,573 Grant of stock purchase warrant 462,500 462,500 Net loss (4,944,225) (4,944,225) ---------- ------ ----------- ------------ ----------- BALANCE, DECEMBER 31, 1994 18,839,068 1,884 60,026,833 (15,482,754) 44,545,963 ---------- ------ ----------- ------------ ----------- Issuance of 726,347 shares of stock pursuant to stock option plan, net 726,347 72 64,929 - 65,001 Issuance of 108,729 shares for acquisition of property and equipment 108,729 11 (11) Net loss (6,580,608) (6,580,608) ---------- ------ ----------- ------------ ----------- BALANCE, DECEMBER 31, 1995 19,674,144 1,967 60,091,751 (22,063,362) 38,030,356 ---------- ------ ----------- ------------ ----------- Issuance of 157,394 shares of stock pursuant to stock option plan, net 157,394 16 30,524 30,540 Net loss (1,983,953) (1,983,953) ---------- ------ ----------- ------------ ----------- BALANCE, DECEMBER 31, 1996 19,831,538 $1,983 $60,122,275 $(24,047,315) $36,076,943 ---------- ------ ----------- ------------ -----------
See accompanying notes to financial statements. F-4 41 NOVEN PHARMACEUTICALS, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,983,953) $ (6,580,608) $ (4,944,225) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 899,263 1,327,254 861,312 Amortization of patent costs 120,480 120,480 90,490 Decrease (increase) in inventories 918,926 (3,805,393) (563,914) (Increase) decrease in prepaid and other current assets 9,863 566,939 (237,981) Increase in accounts receivable (853,928) (1,800,106) (712,455) (Decrease) increase in accounts payable and accrued liabilities (2,237,405) 1,022,528 2,127,803 Decrease in deferred license revenue (225,996) (225,996) (1,475,996) ------------- ------------ ------------ Cash flows used in operating activities (3,352,750) (9,374,902) (4,854,966) ------------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: (Purchase) maturity of securities (5,835,613) 15,563,673 (11,426,090) Purchase of fixed assets, net (1,067,940) (1,837,528) (2,772,381) Payments for patent development costs (449,284) (359,909) (311,205) Refund (payment) of deposits 610 4,656 (19,975) ------------- ------------ ------------ Cash flows (used in) provided in investing activities (7,352,227) 13,370,892 (14,529,651) ------------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Sale of common stock 30,540 65,001 28,334,202 ============= ============ ============ Grant of stock purchase warrant 462,500 Cash flows provided by financing activities 30,540 65,001 28,796,702 ------------- ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (10,674,437) 4,060,991 9,412,085 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,131,263 12,070,272 2,658,187 ------------- ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $5,456,826 $16,131,263 $ 12,070,272 ------------- ------------ ------------ See accompanying notes to financial statements.
F-5 42 NOVEN PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Noven Pharmaceuticals, Inc. ("Noven") was incorporated in Delaware in January 1987 to become a fully integrated pharmaceutical company capable of developing, manufacturing and marketing pharmaceutical products which incorporate alternate drug delivery technologies. The following is a summary of significant accounting policies of Noven: PERVASIVENESS OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash and securities with a remaining maturity of three months or less. SECURITIES HELD TO MATURITy - Securities held to maturity consist mainly of U.S. Government obligations with maturities no longer than one year. The securities are recorded at cost which approximates fair value. INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The following are the major classes of inventories as of December 31:
1996 1995 Finished goods $1,399,858 $2,226,603 Work in process 491,014 1,262,657 Raw materials 2,260,148 1,580,686 ---------- ---------- TOTAL $4,151,020 $5,069,946 ---------- ----------
Inventories at December 31, 1996 and 1995 related primarily to the Company's transdermal estrogen delivery system. To date Noven has not experienced and does not anticipate in the future, any difficulty acquiring materials necessary to manufacture its transdermal systems. PROPERTY AND EQUIPMENT - Property and equipment is recorded at cost. Depreciation is provided over the estimated useful lives of the assets ranging up to 31 years. Leasehold improvements are amortized over the life of the lease or the service life of the improvements, whichever is shorter. The straight-line method of depreciation is principally followed for financial purposes. Fully depreciated assets are removed from the cost and accumulated depreciation accounts. PATENT DEVELOPMENT COSTS - Costs, principally legal fees, related to the development of patents are capitalized and amortized over the lesser of their estimated economic useful lives or their remaining legal lives. F-6 43 INCOME TAXES - Noven accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS 109 provides that income taxes are accounted for using an asset and liability method which requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities. As there is no assurance that the Company will generate sufficient earnings to utilize its available tax assets for carryforwards, a valuation allowance has been established to offset the existing net deferred tax asset. At December 31, 1996 and 1995, Noven had net operating loss carryforwards of approximately $26,000,000 and $24,000,000. Additionally, at December 31, 1996 and 1995, Noven had research and development credit carryforwards of approximately $2,600,000 and $2,200,000 respectively. Carryforwards expire through 2011. REVENUE RECOGNITION - Revenue from product sales is recognized at the time of shipment. Royalty revenue is recognized when earned and is included in product sales. License revenue is recognized into income when earned under the terms of the agreements. Substantially all of Noven's product sales were to its principal licensees (see Note 3). COSTS OF PRODUCT SOLD - Direct and indirect costs associated with manufacturing the transdermal estrogen delivery system are included in costs of products sold. Pre-production expenses incurred during the start-up phase are charged to research and development. RESEARCH AND DEVELOPMENT COSTS - Research and development costs consist of self-funded research and development costs and the costs associated with work performed under license agreements. Research and development costs included direct and allocated expenses and are expensed as incurred. Research and development costs under license agreements partially funded by the licensees are recorded as license revenue or other income. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and cash equivalents, securities held to maturity, accounts receivable, accounts payable and accrued expenses approximate fair value due to the relatively short maturity of the respective instruments. LOSS PER SHARE - Loss per share is based on the weighted average number of shares outstanding. RECLASSIFICATIONS - Certain amounts in the 1995 financial statements have been reclassified to conform with the 1996 presentation. 2. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 1996 and 1995:
1996 1995 Land $ 2,540,035 $ 2,540,035 Building 2,267,859 2,055,714 Leased property and leasehold improvements 8,053,841 7,978,592 Manufacturing and testing equipment 5,172,775 4,481,370 Furniture 540,365 451,224 ----------- ----------- 18,574,875 17,506,935 Less accumulated depreciation and amortization 2,873,401 1,974,138 ----------- ----------- $15,701,474 $15,532,797 ----------- -----------
F-7 44 On February 16, 1993, Noven purchased a 20,000 square foot building and 9.5 acres of vacant land in two separate transactions. The $1.1 million purchase price for the building was paid with $300,000 in cash and 87,317 shares of restricted Noven common stock. The purchase price for the vacant land, $2,204,000 was paid with 168,399 shares of Noven restricted stock. The price protection provisions of the contract resulted in the issuance of 108,729 additional shares of Noven restricted stock on March 15, 1995. The land and building are adjacent to two 40,000 square foot manufacturing facilities which are leased by Noven from a licensee as part of a license agreement. 3. LICENSE AGREEMENTS In 1989 Noven entered into a license agreement which gave the licensee the right to market Noven's transdermal estrogen delivery system worldwide except for Japan. In 1990 Noven reacquired exclusive marketing rights to the United States and Canada. Licensee fees and milestone payments received in connection with this agreement were fully recognized into income by 1994. In 1991 Noven entered into a license agreement which gave the licensee the right to market Noven's transdermal estrogen delivery system in the United States and Canada. License fees and milestone payments received in connection with this agreement were fully recognized into income by 1994. This agreement also provides for receipt of royalty payments based upon the sales of the licensee. In addition, warrants to purchase 1,091,151 shares of common stock were granted under this agreement. The exercise prices of these warrants range from $2.5875 to $15.34. The term of the warrants range from five to seven years. In addition, during a 30-day period subsequent to any public or private sale of common stock by Noven, the licensee has the right to purchase shares of common stock at the same price and in an amount sufficient to maintain the same ownership percentage (inclusive of shares subject to warrants held by the licensee) in outstanding common stock held prior to any such sales. As of December 31, 1996, no warrants have been exercised. In 1992 Noven entered into an additional license agreement which granted the licensee the right to market Noven's transdermal progestogen delivery system and its transdermal combination estrogen/progestogen delivery system worldwide. The agreement also expanded the licensee's marketing rights for the transdermal estrogen delivery system to include Japan. The licensee will fund all development and clinical costs for the licensed products and will provide Noven certain milestone payments. In addition, Noven granted a warrant to the licensee for the right to purchase up to 1,000,000 shares of Noven common stock at a price of $8 per share for a period of 5 years. As part of this license agreement, the licensee funded the construction of a manufacturing facility for the production of transdermal drug delivery systems. The facility is leased by Noven at a substantially below market rate. Noven retains the right to purchase the facility at any time in the future at the licensee's book value. Noven has recorded both the facility and deferred revenue at amounts equal to the funds advanced by the licensee which are depreciated/amortized to depreciation expense and license revenue over the life of the underlying lease (see Note 2). 4. COMMITMENTS AND CONTINGENCIES Noven has operating lease commitments, principally for research and development facilities and office space. Future minimum annual rental payments on existing noncancelable leases, at December 31, 1996, approximate the following: 1997 $207,000 1998 155,000 1999 12,000 -------- Total $374,000
F-8 45 Rent expense for the years ended December 31, 1996, 1995 and 1994 amounted to approximately $186,000, $172,000 and $167,000 respectively. Noven has employment agreements that provide for base salaries subject to cost of living increases each year and other increases and bonuses as determined by the Compensation Committee. These agreements provide for annual commitments of approximately $700,000 in the aggregate. 5. RELATED PARTY TRANSACTIONS Professional services have been rendered by an accounting firm of which a director of Noven is a substantial shareholder. For the years ended December 31, 1996, 1995 and 1994, Noven paid approximately $76,000, $80,000 and $46,000 for these services. 6. STOCK OPTIONS Noven had a stock option plan (the "Plan") that provided for the granting of 10,000,000 incentive and non-qualified stock options to selected individuals or entities. This plan terminated on December 31, 1996. The terms and conditions (including price, exercise date and number of shares) were determined by the Stock Option Committee, which administered the Plan. The per share exercise price of (i) non-qualified stock options granted to directors and all other persons, could not be less than the fair market value and 50% of the fair market value, respectively, of the common stock on the date of grant and (ii) incentive stock options granted to employees and employees owning in excess of 10% of the issued and outstanding common stock, could not be less than the fair market value and 110% of the fair market value, respectively, of the common stock on the date of grant. Noven has not granted any options at less than fair market value. Each option issued under the Plan is exercisable after the period(s) specified in the option agreement, but no option can be exercised after 10 years from the date of grant (or five years from the date of grant in the case of a grantee holding more than 10% of the issued and outstanding common stock). Options may be exercised only if the grantee has been in the continuous employment of, or affiliation with, or has continuously acted as a consultant for Noven from the date of grant to the date of exercise, except in the event of death or permanent disability. At December 31, 1996 and 1995, Noven had reserved 3,750,000 shares of common stock for issuance under the Plan. Noven has adopted a new stock option plan effective January 1, 1997 that provides for the granting of up to 4,000,000 incentive and non-qualified stock options. This plan is subject to approval at the 1997 Annual Stockholders Meeting. No options have been granted under the new plan. The provisions thereunder are substantially the same as the Plan. The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its Plan. Accordingly, no compensation expense has been recognized. Had compensation cost for the Company's Plan been determined based upon the fair value at the grant date for awards under this Plan consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, Accounting for Stock Based F-9 46 Compensation, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1996 1995 ----------- ----------- Net Income: As Reported $(1,983,953) $(6,580,608) Pro forma (2,698,116) (6,961,488) Earnings per Share: As Reported $(0.10) $(0.34) Pro forma (0.14) (0.36)
The fair value of the options granted during 1996 and 1995, is estimated as $6.44 and $4.24, respectively, on the date of the grant using the Black Scholes option-pricing model with the assumptions listed below. The discount rate reflects the reduction in value due to transfer restrictions on the stock.
1996 1995 ------ ------ Volatility 65.9% 62.4% Risk free interest rate 6.21% 6.09% Expected Life (years) 7 7 Discount rate 33.3% 33.3%
Stock option transactions related to the Plan are summarized as follows :
--------------------- ------------------- ----------------------- 1996 1995 1994 --------------------- ------------------- ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Shares Price Shares Price Shares Price - ------- ----------- -------- --------- -------- --------- ------- Outstanding at beginning of year 1,509,363 $ 6.79 2,042,149 $ 4.23 2,536,771 $ 3.62 Granted 362,675 14.38 628,700 9.08 36,750 14.16 Exercised (189,158) 2.17 (961,636) 2.13 (513,433) 1.75 Canceled (117,875) 8.86 (199,850) 10.31 (17,939) 9.41 --------- ------ --------- ------ --------- ------ Outstanding at year end 1,565,005 $ 8.95 1,509,363 $ 6.79 2,042,149 $ 4.23 --------- ------ --------- ------ --------- ------ Options exercisable at year end 489,048 663,031 1,458,377 --------- ------ --------- ------ --------- ------
F-10 47 The following tables summarize information concerning outstanding and exercisable options at December 31, 1996 and 1995:
YEAR ENDED DECEMBER 31, 1996 ----------------------------------------------------------------------------- Options Outstanding Options Exercisable ----------------------------------------------- ----------------------------- Number Weighted Average Number Range of Outstanding Remaining Weighted Average Exercisable Weighted Average Exercise Price 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price ----------------------------------------------- ----------------------------- $0 - $4 413,834 2.17 $ 2.37 179,384 $ 2.44 $4 - $8 97,500 5.42 7.63 6,750 7.57 $8 - $12 614,546 4.07 9.62 232,140 9.59 $12 - $18 439,125 6.03 14.49 70,774 14.78 --------- ---- ------ ------- ------ 1,565,005 4.20 $ 8.95 489,048 $ 7.69
YEAR ENDED DECEMBER 31, 1995 ------------------------------------------------------------------------------ Options Outstanding Options Exercisable ----------------------------------------------- ----------------------------- Number Weighted Average Number Range of Outstanding Remaining Weighted Average Exercisable Weighted Average Exercise Price 12/31/95 Contractual Life Exercise Price 12/31/95 Exercise Price ----------- ---------------- ---------------- ----------- ---------------- $0 - $4 602,667 2.21 $ 2.30 355,169 $ 2.31 $4 - $8 167,500 6.30 7.68 0 0 $8 - $12 650,596 5.12 9.61 255,231 9.78 $12 - $18 88,600 3.03 14.83 52,631 14.78 --------- ---- ------ ------- ------ 1,509,363 3.97 $ 6.79 663,031 $ 6.17
F-11 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF NOVEN PHARMACEUTICALS, INC. FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 5,456,826 13,692,010 3,366,489 0 4,151,020 26,914,702 18,574,875 2,873,401 44,228,738 2,055,780 0 0 0 1,983 36,074,960 44,228,738 19,651,872 21,644,403 10,020,614 10,020,614 8,729,709 0 0 (1,983,953) 0 (1,983,953) 0 0 0 (1,983,953) (.10) (.10)
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