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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17254
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NOVEN PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 59-2767632
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11960 S.W. 144th Street, Miami, Florida 33186
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (305)253-5099
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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
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(Title of class)
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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 (Section 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 8, 1996 was $216,447,581, (See definition of
affiliate in Rule 405, 17 CFR 230.405).
As of March 8, 1995, 19,766,666 shares of common stock, $.0001 par
value, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Incorporated documents
(to the extent indicated herein) Part of Form 10-K
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Portions of the Definitive Proxy Part III
Statement for the 1996 Annual
Meeting of Shareholders Items 10-13
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NOVEN PHARMACEUTICALS, INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business................................ 1
Item 2. Properties.............................. 20
Item 3. Legal Proceedings....................... 21
Item 4. Submission of Matters to a Vote
of Security Holders................... 21
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters........... 21
Item 6. Selected Financial Data................. 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 23
Item 8. Financial Statements and Supplementary
Data.................................. 28
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.................. 28
PART III (omitted)
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............... 28
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PART I
Item 1. Business
Noven is a leader in developing and manufacturing transdermal drug
delivery systems. These systems utilize an adhesive patch containing
medication which is administered through the skin and into the bloodstream over
an extended period of time. Noven has developed and patented thin, solid
state, multi-laminate transdermal drug delivery systems that have a small
surface area and the adaptability to deliver numerous drug entities. The
Company is developing products for a broad range of applications, including
hormone replacement therapy, dental pain management, cardiovascular disease,
anti-fungal therapy, asthma, anxiety, neurological and musculoskeletal
disorders.
The Company received approval for its transdermal estrogen delivery
system from the United States Food and Drug Administration ("FDA") as well as
from regulatory authorities in twelve European countries, Canada, Australia,
South Africa, Mexico and New Zealand. Presently, Rhone-Poulenc Rorer, Inc.
("RPR") is selling Noven's transdermal estrogen delivery system under the trade
name Menorest in ten foreign countries, including France, Germany and the
United Kingdom. In March 1996, Ciba-Geigy, Inc. ("Ciba") launched the sale of
this product under the trade name Vivelle(TM) in the United States. The
Company's transdermal nitroglycerin system and transoral mucosal dental
anesthetic is under FDA review. The Company also has other products in various
stages of development, including two products in clinical trials. (See
"Products and Technology Under Development", pages 4, 5 and 6). The Company's
new (40,000 + square foot) manufacturing facility has been inspected by the FDA
and final approval is expected.
TRANSDERMAL DRUG DELIVERY
Conventional methods of drug delivery introduce drugs into the
bloodstream either by absorption in the gastrointestinal ("GI") tract following
oral administration or through parenteral (non-oral) administration.
Conventional dosage forms such as tablets, liquids and injections may have
disadvantages in certain patients, including unpredictable blood levels,
difficult or uncomfortable administration, poor compliance and GI side effects.
Transdermal drug delivery systems may offer significant advantages over these
conventional dosage forms, including non-invasive administration, controlled
delivery over an extended period of time, improved
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patient compliance and avoidance of the problems and adverse side-effects
associated with oral and parenteral drug delivery.
Currently, few drugs are marketed in the form of transdermal drug
delivery systems. These drugs include nitroglycerin for the treatment of
angina, scopolamine for motion sickness, estrogen and estrogen/progestogen for
menopausal symptoms and osteoporosis, isosorbide dinitrate for angina,
clonidine for hypertension, nicotine for smoking cessation, fentanyl for pain
management and testosterone for male hypogonadism. Noven believes there are
numerous other drugs which may be suitable for transdermal drug delivery.
The benefits of transdermal drug delivery include:
Improved Dosage Delivery and Control for Maximum Therapeutic Effect
Transdermal drug delivery helps provide patients with a drug's maximum
therapeutic effect and decreases the risk of adverse side effects or diminished
therapeutic effect due to excessive or insufficient blood concentrations. The
therapeutic effect of a drug is typically achieved only when the drug is within
a specific concentration range in the bloodstream. This blood concentration
range is often called the drug's "therapeutic window." Below this range the
drug may be ineffective, and above it the drug may cause unwanted side effects.
Many conventional forms of drug delivery administer higher concentrations than
are required in order to maintain effective blood levels between doses.
However, blood levels often fall below effective concentrations prior to
administration of the next dose. Transdermal drug delivery systems are
designed to maintain a precise and continuous flow of a drug into the
bloodstream. This results in more stable blood concentrations which
consistently remain within a drug's therapeutic window.
In addition, in contrast to oral administration, transdermal drug
delivery can frequently maximize a drug's therapeutic effect by avoiding the GI
tract and "first pass" liver metabolism. Oral drug delivery can often be
unreliable because the achievement of therapeutic blood levels depends on
several factors, including the drug's chemical composition, the patient's
physical condition, chemical and physical reactions between the drug and
substances in the GI tract and the timing of drug administration. Upon GI
tract
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absorption a drug must pass through the liver before entering the bloodstream.
In many instances, the liver metabolizes a large portion of the drug. As a
result, orally dosed drugs must generally be administered at levels which
exceed optimal therapeutic levels, potentially resulting in adverse side
effects.
Improved Patient Compliance and Safety
Transdermal drug delivery systems are capable of conveniently and
consistently delivering drugs over a number of hours or days, thereby
eliminating many of the compliance problems associated with certain
conventional drug delivery regimens. In order to maintain optimal blood
levels, some conventional forms of drug delivery require frequent doses which
can be difficult to remember or understand, particularly for the elderly
patient. Failure to comply with a recommended drug regimen can endanger a
patient's health.
Transdermal drug delivery may also improve the safety of drug
administration. A transdermal drug delivery system can be removed quickly and
easily. If a patient has an adverse reaction to a drug, removing the
transdermal drug delivery system may assist in minimizing the extent of such an
adverse reaction.
Improved Patient Convenience and Reduced Cost
Transdermal drug delivery systems can eliminate the need for the
frequent doses of conventional forms of certain drugs. In addition,
transdermal drug delivery, particularly when compared to invasive forms of drug
delivery, may result in significant savings of cost and time, and may offer
increased patient comfort and convenience.
Pharmaceutical Industry Benefits
In addition to patient, physician and health care provider benefits,
transdermal drug delivery may provide certain economic benefits to the
pharmaceutical industry. Research and development and obtaining FDA approval
for new drugs can take many years and involve the expenditure of substantial
funds. Transdermal drug delivery systems that utilize drugs which have been
previously approved in conventional dosage forms may be commercialized faster,
and with substantially less cost and risk than new chemical
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entities for pharmaceutical applications. Transdermal drug delivery may also
extend the patent life for those drugs which are approaching patent expiration.
Additionally, transdermal drug delivery may expand the market for drugs which
would benefit from the numerous advantages of this form of drug delivery.
Further, transdermal drug delivery may be the only viable dosage form for
certain new chemical entities.
NOVEN'S TRANSDERMAL DRUG DELIVERY TECHNOLOGY
Noven's patented, proprietary transdermal drug delivery systems
incorporate a thin, solid state, multi-laminate construc-tion with a
drug-bearing interpolymeric adhesive. The 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 size of the patch is dependent upon the amount of drug needed by the
patient, and its shape is designed so that the patch 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 system is capable of being modified
so that it may be used to deliver various drugs. The techniques utilized to
modify the system include those which improve the solubility and diffusibility
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
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.
PRODUCTS AND TECHNOLOGY UNDER DEVELOPMENT
The following table sets forth information regarding products and
technology under development by the Company and is qualified by reference to
the more detailed descriptions elsewhere in this Form 10-K.
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DRUG/
TECHNOLOGY THERAPEUTIC USES STATUS LICENSEES
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Hormone
Replacement
Estrogen Menopausal Symptoms FDA approved; Ciba-Geigy--
approved in 17 U.S. & Canada;
foreign countries; RPR--Worldwide,
commercial sales (excluding U.S.
in the United and Canada)
States (commenced
March 1996) and ten
foreign countries;
regulatory filings
in numerous other
foreign countries
Combination Menopausal Symptoms Phase II/III RPR-Worldwide
Estrogen/Pro- Clinical Trials
gestogen
Second Genera- Menopausal Symptoms Development Ciba-Geigy--
tion Estrogen U.S. & Canada;
RPR--Japan
Other Products
Nitroglycerin Angina ANDA filed --
Transoral Dental Anesthetic NDA filed --
Mucosal
Anesthetic
Antifungal Onychomycosis Phase I/II Clinical --
Trials
Alprazolam Anxiety IND filed --
Albuterol Asthma IND filed --
Selegiline Selected Neurological Pre-Clinical --
Disorders
Nicotine Smoking Cessation Pre-Clinical --
Nonsteroidal Arthritis & Soft Pre-Clinical --
Anti-Inflam- Tissue Injuries
matory Drug
Iontophoretic Transdermal Drug Development --
Technology Delivery
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TRANSDERMAL ESTROGEN DELIVERY SYSTEM
It has been estimated that during the next 50 years the overall
population of the United States will increase by 40%, while the group of
individuals over 65 years old will increase by 160%. Worldwide, the elderly
population is increasing at a rate approximately 50% faster than overall
population growth. It has also been estimated that there are approximately 35
to 40 million post-menopausal women in the U.S. and this group is one of the
fastest growing demographic segments in the nation. With the aging of the
population over the next several decades, conditions and diseases such as
menopause and osteoporosis, which may benefit from hormone replacement therapy,
will become significantly more prevalent.
At the onset of menopause, women lose their ability to produce
estrogen. A diminished estrogen supply in post-menopausal women can cause hot
flashes, insomnia, vaginal atrophy, irritability, anxiety, moodiness and
excessive sweating. Estrogen replacement therapy ("ERT") can reverse or
prevent these serious physical and psychological symptoms. Another condition
related to the inability to produce estrogen is osteoporosis, a progressive
deterioration of the skeletal system through the loss of bone mass. According
to the National Osteoporosis Foundation, osteoporosis currently affects
approximately 25 million people in the U.S. It is estimated that 80% of all hip
fractures in elderly patients are associated with osteoporosis and that nearly
20% of all patients with hip fractures will die from complications within six
months of the event. Numerous medical studies and the National Institutes of
Health recommend ERT as the most effective method of preventing osteoporosis in
post-menopausal women. In addition, a ten year study of approximately 49,000
post-menopausal women, published in The New England Journal of Medicine in
1991, found that women who take estrogen after menopause can reduce their risk
of heart disease by fifty percent.
On October 28, 1994, Noven received full FDA approval for an advanced
transdermal estrogen replacement system which delivers 17-beta estradiol
continuously for 84 hours (3.5 days) in four separate dosages for the treatment
of moderate to severe menopausal symptoms. To date, regulatory authorities in
seventeen foreign countries also issued approval for the transdermal estrogen
replacement system. This product is being sold by RPR in nine
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countries in Europe (including the United Kingdom, Germany and France) and in
Australia under the name Menorest. In March 1996, Ciba-Geigy launched the
commercial sale of Noven's transdermal estrogen replacement system under the
name Vivelle(TM) in the United States. The Company has licensed this product on
a worldwide basis to Ciba-Geigy in the United States and Canada and to RPR in
Europe, Japan and all other territories. This product has also been submitted
for regulatory approval in numerous other foreign countries.
TRANSDERMAL COMBINATION ESTROGEN/PROGESTOGEN DELIVERY SYSTEM
Progestogen is a hormone that is frequently prescribed in conjunction
with estrogen in order to mitigate the potential side effects of unopposed
estrogen replacement therapy. Clinical studies suggest that unopposed estrogen
replacement therapy may increase the risk of uterine cancer. The
adminis-tration of estrogen and progestogen together more closely imitates the
natural female hormonal cycle. Noven's combination estrogen/progestogen
transdermal drug delivery system combines the advantages of both compounds in a
single delivery system. To date, no approved progestogen or combined
estrogen/progestogen transdermal drug delivery systems are available in the
U.S. Phase II/III clinical trials are being conducted by RPR for the
transdermal combination estrogen/progestogen delivery system. The Company has
licensed these products on a worldwide basis to RPR.
TRANSORAL MUCOSAL DENTAL ANESTHETIC DELIVERY SYSTEM
FOR DENTAL PAIN MANAGEMENT
Intraoral injection is often accompanied by significant discomfort or
pain. Therefore, the use of topical anesthetics prior to intraoral injection
is a widely accepted dental practice. Topical agents including gels, ointments
and sprays are used to anesthetize the oral mucosa, but each of these dosage
forms has distinct disadvantages. Sprays, ointments and gels make it difficult
to control the amount of drug applied and to confine the drug to a desired
site, and can become diluted in the oral cavity.
Noven has developed a unique transoral mucosal dental anesthetic
delivery system that can be applied to the oral mucosa and which will be used
for pre-injection numbing. Additional studies will be required for its
application to certain dental
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procedures requiring minor to moderate pain relief such as periodontal
curettage, periodontal scaling and dental cleaning. The transoral mucosal
dental anesthetic may also be used to relieve the pain from oral sores and
lesions. A transoral drug delivery system for dental anesthesia offers several
potential advantages over conventional intraoral injections, including reduced
patient discomfort, improved safety and reduced risk of cross-infection. In
addition, the transoral mucosal dental anesthetic may offer increased
convenience to the dentist and may result in increased patient visits. Noven
completed Phase III clinical trials for its transoral mucosal dental anesthetic
delivery system and an NDA was filed in May 1995.
TRANSDERMAL NITROGLYCERIN DELIVERY SYSTEM FOR
CARDIOVASCULAR DISEASE
Angina pectoris is a condition caused by the temporary inability of
the coronary arteries to supply a sufficient quantity of oxygenated blood to
the heart muscle. An angina attack is accompanied by steady, severe pain and
intense pressure in the region of the heart. Angina attacks may be relieved by
the administration of nitroglycerin, a known coronary vasodilator, which
increases the flow of oxygenated blood to the heart. The American Heart
Association estimates that angina affects over three million people in the
United States.
Nitroglycerin 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. Worldwide sales in 1993
of this product were estimated to be in excess of $500 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 Abbreviated New Drug Application
("ANDA") was filed with the FDA for this product in 1992. This product is
currently
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under active FDA review. The Company intends to market this product either
independently or with a marketing partner.
TRANSDERMAL ANTIFUNGAL DELIVERY SYSTEM FOR ONYCHOMYCOSIS
Onychomycosis, a nail fungal infection, is the most frequent cause of
nail disease and occurs in approximately 2-5% of the population. Onychomycosis
can result in splitting, thickening, roughness and discoloration of the nail.
This infection can be painful as well as cosmetically unappealing.
Current treatment for onychomycosis includes orally administered
antifungal agents and topical creams and ointments. Many of the oral dosage
forms which are absorbed systemically have been associated with undesirable
side effects. Current topical treatments are limited in effectiveness by
insufficient penetration of the drug into the nail bed.
Noven has developed a transdermal delivery system to treat
onychomycosis. Noven's transdermal antifungal patch may provide enhanced and
convenient delivery, nonsystemic administration and controlled dosing. The
active ingredient for the Company's system is an antifungal agent that has been
approved by the FDA in other dosage forms. The Company is conducting Phase I/II
clinical trials for this product.
TRANSDERMAL ALPRAZOLAM DELIVERY SYSTEM FOR ANXIETY DISORDERS
Anxiety is the most common mental health problem in the United States.
Although some anxiety or tension associated with the stress of everyday life is
normal, anxiety can become disabling when people suffer from excessive or
unrealistic anxiety or worry. Symptoms of a severe anxiety disorder include
trembling, restlessness, shortness of breath, palpitations, nausea and
insomnia. Anxiety is often treated with antianxiety medication and/or
psychotherapy. Alprazolam, which is only available in tablet form, is a mild
anti-anxiety agent used primarily to relieve mild to moderate anxiety and
nervous tension.
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. An Investigational New
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Drug Application ("IND") was filed for this product with the FDA in December
1993.
TRANSDERMAL ALBUTEROL DELIVERY SYSTEM FOR ASTHMA
Asthma effects approximately 12 million Americans, including four
million children under the age of eighteen. Asthma, which is a chronic
affliction of the bronchial tubes, is often triggered by viral infections,
allergens or pollutants. Symptoms of an asthma attack include forced
breathing, coughing and loss of consciousness. Treatments for asthma include
bronchodilators and anti-inflammatory drugs. Albuterol, which is available in
aerosol, syrup and tablet dosage form, is a commonly prescribed drug for the
treatment of asthma.
Noven has developed a transdermal albuterol delivery system for the
treatment of asthma. Noven believes that the transdermal delivery of albuterol
could improve the overall bioavailability, dosing requirements and patient
compliance when compared to other albuterol products. An IND was filed for
this product with the FDA in December 1993.
PRODUCT FOR SELECT NEUROLOGICAL DISORDERS
Selegiline is a drug currently being marketed by Somerset
Pharmaceuticals, Inc. ("Somerset") as Eldepryl(R) tablets for the treatment of
late stage Parkinson's disease. U.S. sales of Eldepryl(R) in 1994 were
approximately $125 million.
In June, 1994 Noven entered into an agreement with Somerset to develop
and manufacture a transdermal formulation of Selegiline. Although this
agreement concluded in 1995, Noven is continuing to develop this product and
anticipates clinical investigation commencing in 1996.
PRODUCT FOR MUSCULOSKELETAL DISORDERS
NonSteroidal Anti-Inflammatory Drug ("NSAID") for musculoskeletal
disorders are of the most widely prescribed therapies for conditions ranging
from arthritis to soft tissue injuries; some members of the NSAID class are
also available over-the-counter. Although extremely effective, the major
drawback of NSAID is a potential for irritation and even ulceration of the
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stomach lining which can be life-threatening. Transdermal delivery of an NSAID
directly to the affected joint or tissue should prove therapeutically
beneficial with the added advantage of much lower potential for
gastrointestinal side effects.
Noven has developed transdermal systems containing NSAID. These
products are in preclinical testing and an IND is anticipated in 1996.
OTHER PRODUCTS AND TECHNOLOGY
Several other products are in the preliminary stages of pre-clinical
testing and research and development. Noven has developed a second generation
estrogen transdermal delivery system which is one-third the size of the
Company's current transdermal delivery system, and a transdermal nicotine
system for smoking cessation, which is in pre-clinical testing. Products in
the research and development stage include the transoral mucosal system which
incorporate several pharmaceutical compounds (other than anesthetics) for the
treatment of various oral conditions.
Noven is also actively involved in the development of new technologies
in the transdermal drug delivery area, such as iontophoresis. Iontophoresis is
a technique whereby positively or negatively charged drug molecules are driven
by an 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.
MARKETING
Noven is committed to becoming a fully integrated pharmaceutical
company with capabilities for developing, manufacturing and marketing
pharmaceutical products which incorporate alternate drug delivery technologies.
With respect to certain products, however, Noven has entered into and
anticipates that it will enter into license, development and manufacturing
agreements. For the domestic market, prior to expected product
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approvals from the FDA, the Company 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.
Noven has licensed its transdermal estrogen replacement system
worldwide to two major pharmaceutical companies, Ciba-Geigy and RPR. In
addition, Noven has licensed its transdermal progestogen delivery system and
its transdermal combination estrogen/progestogen delivery system worldwide to
RPR.
The agreement with Ciba-Geigy provides it with the right to market the
transdermal estrogen delivery system in the U.S. and Canada. Ciba-Geigy
will market Noven's system in the U.S. and Canada as Vivelle(TM).
The agreement with RPR provides it with the right to market (i) the
transdermal estrogen delivery system in all territories exclusive of the United
States and Canada and (ii) the transdermal combination estrogen/progestogen
delivery system and transdermal progestogen delivery system worldwide. RPR
will market Noven's transdermal estrogen delivery system as Menorest in its
territory.
The Company is currently examining the possible development of its own
marketing and sales capabilities with respect to the transoral mucosal dental
anesthetic product in the United States.
MANUFACTURING
Noven's original facility in Dade County, which consists of
approximately 18,300 square feet, is fully equipped and has a manufacturing
capacity of approximately 100 million transdermal units per year. This
facility complied with U.S. and European regulatory requirements and has been
inspected by the FDA and the Medicines Control Agency of the United Kingdom.
This facility is used to commercially manufacture Vivelle(TM) and Menorest for
Ciba-Geigy and RPR, respectively. This facility also received a pre-approval
inspection for the manufacture of Noven's transoral
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mucosal dental anesthetic product and its 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 facility was inspected and approved
by the Medicines Control Agency of the United Kingdom. The FDA inspected this
facility in late 1995 and full approval is expected. After FDA approval of
this facility, product manufactured on this site can be marketed to the public.
This facility will have a capacity of approximately 400 million transdermal
units per 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.
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.
COMPETITION
Noven's operations are conducted in highly competitive areas. All
transdermal drug delivery products being developed by the Company will face
competition both from conventional forms of drug delivery (i.e., oral and
parenteral), other transdermal products and, possibly, alternate forms of drug
delivery, such as controlled release oral delivery, liposomes and implants.
Noven, therefore, faces potential competition from numerous pharmaceutical
companies, many of which have greater financial resources, technical staffing
and manufacturing and marketing capabilities.
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
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technologies noncompetitive or obsolete. Noven has attempted to minimize these
risks, however, by its technological innovativeness and by developing strategic
alliances. For example, Noven has aligned itself with two world wide marketing
organizations, Ciba-Geigy and RPR, for marketing its estrogen delivery system
as Vivelle(TM) in the U.S. and Canada and as Menorest elsewhere.
In January 1995, 3M Pharmaceuticals/Drug Delivery Systems and Berlex
Laboratories, Inc. announced the receipt of FDA approval to market Climara(TM),
an estradiol transdermal system, in the United States in two dosage strengths.
Berlex Laboratories, Inc. has U.S. marketing rights for Climara(TM).
Commercial distribution of this transdermal delivery product commenced in the
second quarter of 1995.
To the Company's knowledge, Ciba-Geigy is the leader in marketing
transdermal estrogen replacement products in the U.S. as well as in European
markets. Noven believes that the quality of Vivelle(TM) and the marketing
ability of Ciba-Geigy in the United States will give this product a competitive
advantage in the marketplace. However, it is impossible to predict, at this
time, the market share Noven's product will receive or the effect Climara(TM)
(or other future competing transdermal systems) will have on sales.
Ciba-Geigy and Schering-Plough Corporation dominate the world market
in transdermal nitroglycerin products. Noven believes that other companies,
including Alza Corporation, Cygnus Therapeutic Systems, Elan Corporation, plc,
TheraTech, Inc., Ethical Holdings, plc, Cilag, a division of Johnson & Johnson,
and 3M Corp. are also developing competing transdermal drug delivery products.
PATENTS AND PROPRIETARY RIGHTS
Noven has obtained eleven U.S. patents and has over 100 pending patent
applications worldwide.
The United States has changed its patent laws in fundamental respects
to fulfill certain obligations under the General Agreement on Tariffs and Trade
(GATT) and specifically under the accompanying Agreement on Trade-Related
Aspects of Intellectual Property Law (TRIPs). These changes became law on
December 8, 1994 when President Clinton signed the Uruguay Round Agreements
Act, and took
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effect in their entirety on January 1, 1996. All patent owners, as well as
pending and future patent applications, will be affected. The immediate
consequences to Noven will be that the term for some existing patents will be
reset beyond their current term of 17 years from issue, thereby extending their
potential commercial value. The long term consequences of these changes are,
at this time, unknown.
The Company is unaware of the existence of any challenges to the
validity of its patents or of any claim made by a third-party of patent
infringement with respect to its products. However, no assurance can be given
that such challenges or claims 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.
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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.
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.
For products in this category, 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.
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Human clinical trials are typically conducted in three sequential
phases, but the phases may overlap. Phase I trials consist of testing the
product primarily for safety in a small number of patients at one or more
doses. In Phase II trials, the safety and efficacy of the product are
evaluated in a patient population somewhat larger than the Phase I trials.
Phase III trials typically involve additional testing for safety and clinical
efficacy in an expanded population at different test sites. A clinical plan,
or protocol, accompanied by the approval of the institution participating in
the trials, must be reviewed by the FDA prior to commencement of each phase of
the clinical trials. The FDA may order the temporary or permanent
discontinuation of a clinical trial at any time.
The results of product development and pre-clinical and clinical
studies are submitted to the FDA as an NDA or an ANDA for approval. If an
application is submitted, there can be no assurance that the FDA will review
and approve the NDA or an ANDA in a timely manner. The FDA may deny an NDA or
an ANDA if applicable regulatory criteria are not satisfied or it may require
additional clinical testing. Even if such data is submitted, the FDA may
ultimately deny approval of the product. Further, if there are any
modifications to the drug, including changes in indication, manufacturing
process, labeling, or a change in a manufacturing facility, an NDA or an ANDA
supplement may be required to be submitted to the FDA. Product approvals may
be withdrawn after the product reaches the market if compliance with regulatory
standards is not maintained or if 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
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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). For 1996, the estimated application fee for human drug applications
is $204,000, while applications without clinical data and supplements with
clinical data are 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. For 1996, the estimated
establishment fee is $135,300. Payment of product fees are required for each
strength and dosage form of an approved prescription drug product, and are
estimated for 1996 at $12,500. 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 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 control 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 manufacture.
Noven's activities may also be 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 two waste management firms to provide for proper
disposal of hazardous waste. The Company believes that its hazardous waste
disposal procedure prevents improper disposal.
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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 Drug Export Amendments Act of
1986, a drug not yet approved in the United States, but for which an IND
exemption for human testing has been obtained and for which FDA approval is
being actively pursued, 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) is approved for export by the FDA. However, because numerous
restrictions and reporting requirements are imposed under this law, the cost of
exporting such products can be expected to exceed the costs of exporting
products that have been approved for sale in the United States.
EMPLOYMENT
The Company employs two hundred and twenty-six people; approximately
one hundred and twenty-eight are engaged in process development and
manufacturing, thirty in research and development, fifty four in medical
affairs studies, regulatory affairs, quality assurance and quality control and
fourteen in administration. Most of the Company's scientific and engineering
employees have had
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prior experience with pharmaceutical or medical product companies. No 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
$8,000,000 per incident and $9,000,000 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 expiring on December 31, 1996 with
various option periods. The aggregate annual rental under these leases is
approximately $128,000 per year, subject to certain adjustments. Of the
approximately 18,000 square feet under lease at this location, approximately
16,000 square feet is
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used for manufacturing, packaging and a laboratory, and approximately 2,000
square feet is used for a warehouse.
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.
The Company did not submit any matters to a vote of stockholders
during the fourth quarter of the fiscal year ended December 31, 1995.
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, 1994 19 1/4 13 1/8
Second Quarter, 1994 17 3/4 12 3/4
Third Quarter, 1994 15 1/2 10 1/4
Fourth Quarter, 1994 16 3/4 11 1/8
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
(b) Holders.
As of December 31, 1995, the number of stockholders of record was 693
and the approximate number of beneficial owners was 6,000.
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(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.
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, 1993, 1994 and 1995 and the reports thereon, are included
elsewhere in this Form 10-K. The selected financial data as of December 31,
1991 and 1992 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,
-------------------------------------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF
OPERATIONS DATA:
Revenues:
Product Sales $ -- $ -- $ -- $ 295 $ 8,747
License revenue 139 1,927 3,125 4,155 1,703
Interest income 60 803 624 1,214 1,682
Other income -- 192 345 381 52
------- ------- ------- ------- -------
Total 199 2,922 4,094 6,045 12,184
Expenses:
Cost of products
sold -- -- -- 148 4,814
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Research and
development 2,164 4,127 5,161 8,036 10,509
General and
administrative 1,133 1,836 2,244 2,805 3,442
----- ----- ----- ----- -----
Total 3,297 5,963 7,405 10,989 18,765
Net loss $(3,098) $(3,041) $(3,311) $(4,944) $(6,581)
======= ======== ======== ======= =======
Net loss per share $ (.02) $ (.25) $ (.21) $ (.28) (.34)
======== ======= ======== ======= =======
Weighted average
shares of common
stock and common
stock equivalents 12,246 14,761 15,925 17,440 19,237
AT DECEMBER 31,
-----------------------------------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital $ 1,946 $ 20,781 $ 14,822 $ 35,047 $ 27,560
Total assets 3,534 23,289 29,860 54,365 48,646
Long-term obligations -- -- -- ----
Accumulated deficit (4,186) (7,228) (10,539) (15,483) (22,063)
Total stockholders'
equity 1,562 20,740 20,693 44,546 38,030
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
Since commencing operations in 1987, the Company has been engaged
primarily in the research and development of transdermal drug delivery systems.
The Company's revenues have been generated principally by license fees,
milestone payments pursuant to various license agreements and interest. A
significant portion of revenues in 1995, however, is attributable to the
purchase by the Company's licensee partners of transdermal estrogen delivery
systems for commercial sale in Europe and in anticipation of that product's
commercial launch in the United States.
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To date, the Company's product development efforts have been
undertaken independently and pursuant to license agreements with Rhone-Poulenc
Rorer, Inc. and/or its affiliates ("RPR") and Ciba-Geigy Corporation
("Ciba-Geigy"). Under these agreements a license fee was paid upon execution.
All of the agreements provided for the payment of monthly development fees or
cost reimbursements for product development and/or milestone payments upon
achieving certain technical and regulatory goals.
The Company's results of operations vary significantly from quarter to
quarter and depend, among other factors, on the commercial sale of its
products, execution of new product development agreements, the timing of fees
and milestone payments made by its licensees, the progress of clinical trials
conducted by the Company and/or its licensees and costs associated with the
development of the Company's products. The timing of the Company's revenue may
not match the timing of the Company's associated product development expenses
for any particular period.
RESULTS OF OPERATIONS
1995 Compared to 1994
Total revenues increased approximately 100% 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' transdermal estrogen delivery system to its licensee 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 60% from approximately $4,155,000 in 1994 to
approximately $1,703,000 in 1995. The Company believes that license revenues
will fluctuate from period to period depending on contributing factors which
include, but are not limited to, future success in finalizing new collaborative
agreements, timely achievement of milestones and strategic decisions on
self-funding certain projects. Interest income increased approximately 39%
from approximately $1,214,000 in 1994 to $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
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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 systems 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. 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.
1994 Compared to 1993
Total revenues increased from $4,094,000 in 1993 to $6,045,000 in
1994. The Company's license revenue increased approximately $1 million or 33%
in 1994 from 1993 due to certain milestone payments. The increase in interest
income of approximately $600,000 or 95% in 1994 was attributable to the
investment of the proceeds of the June 1994 public offering of common stock.
Research and development expenses increased approximately $2,900,000
or 56% due to research activities related to new products such as the
transoral dental anesthetic system, the transdermal estrogen/progestogen
combination delivery system, and the transdermal antifungal delivery system,
among others. The increase in research and development expenses was also
attributable to increases in the number of research, development, clinical and
regulatory personnel, and preproduction expenses relating to the launch of the
estradiol product including materials used in preproduction and training runs
to test and validate manufacturing equipment and processes. The increase in
general and
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administrative expenses of approximately $560,000 or 25% was primarily due to
increases in staffing.
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, interest income and during the 1995
calendar year, through the sale of product. From its inception through
December 31, 1995, the Company received net proceeds of approximately
$56,000,000 from the sale of equity securities, approximately $14,000,000 from
license agreements, approximately $5,000,000 from interest income and
approximately $9,000,000 from product sales. At the end of December 31, 1995
the Company had approximately $24,000,000 in cash and securities held to
maturity.
The decrease in cash, cash equivalents and securities held to maturity
of $11,503,000 during 1995 primarily reflects the funding of a net loss of
$6,581,000, an increase in inventory of $3,805,000, an increase in accounts
receivable of $1,800,000 to support the worldwide launch of the transdermal
estrogen replacement system and a $1,838,000 investment in property and
equipment. As of December 31, 1995 the Company had no significant commitments
for capital expenditures.
The Company's future capital requirements depend upon numerous
factors, including (i) the progress of its product development programs, (ii)
the time required to obtain government regulatory approvals of products in
development, (iii) the resources that the Company devotes to the development of
self-funded products, proprietary manufacturing methods, advanced technologies
and a marketing and sales administration infrastructure, (iv) the ability of
the Company to obtain additional license agreements and to manufacture products
pursuant to those agreements and (v) the demand for its products, if and when
approved by regulatory authorities.
The Company expects to incur additional costs related to product
development activities, increased general and administrative expenses and the
completion of its manufacturing facilities. Although the Company believes
that existing cash,
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cash equivalents and securities held to maturity, 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 on
acceptable terms, or at all.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". SFAS No. 121 establishes accounting
standards for long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. SFAS No. 121 requires that
long-lived asets and certain identifiable intangibles to be held and used by
an entity be reviewed for impairment whenever events or changes in
circumstances indicated that the carrying amount of an asset may not be
recoverable. SFAS No. 121 will apply to Noven for the year ended December 31,
1996. Management believes that the adoption of this statement will not have a
material impact on Noven's financial statements.
The FASB has also issued SFAS No. 123, "Accounting for Stock-Based
Compensation". This statement defines a fair value based method of accounting
for an employee stock option. This statement also permits a company to
continue to measure compensation costs for their stock option plan using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS
No. 123 requires disclosure of the pro forma net income and earnings per share
that would be recorded if the fair value method was utilized. Noven plans to
continue to utilize the provisions of APB 25 to account for such compensation
costs, and will provide the pro forma disclosures required by SFAS 123 in its
1996 financial statements.
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Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT AUDITORS'
Deloitte & Touche LLP F-1
FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1995 and 1994 F-2
Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-3
Statements of Stockholders' Equity for the years
ended December 31, 1995, 1994 and 1993 F-4
Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 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.
2. Exhibits
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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).
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
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34
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.
10.5 --Parkside Plaza Office Lease between Maxine Chin and the
Registrant dated April 1, 1991.
10.6 --Parkside Plaza Office Lease between James W. Keen and the
Registrant dated July 2, 1992.
10.7 --Parkside Plaza Office Lease between Mark Rubino and the
Registrant dated November 28, 1990.
10.8 --Parkside Plaza Office Lease between Bud Eiskant and the
Registrant dated June 1, 1990.
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
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35
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 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.
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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 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
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 filed with the Securities and
Exchange Commission on March 31, 1995.
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 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.
(b) Reports on Form 8-K - None
32
37
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 29, 1996 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 29, 1996
---------------------- Officer and Director
Steven Sablotsky
(Chairman of the
Board and President)
By: /s/ William A. Pecora Principal Financial March 29, 1996
---------------------- and Accounting Officer
William A. Pecora
(Chief Financial
Officer)
By: Director March , 1996
----------------------
Mitchell Goldberg
(Executive Vice
President)
33
38
By:/s/ Sheldon H. Becher Director March 29, 1996
----------------------
Sheldon H. Becher
By: /s/ Sidney Braginsky Director March 29, 1996
----------------------
Sidney Braginsky
By: /s/ Lawrence J. Dubow Director March 29, 1996
----------------------
Lawrence J. Dubow
34
39
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, 1995 and 1994, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years
ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and its cash flows for
each of the three years ended December 31, 1995, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Miami, Florida
February 16, 1996
F-1
40
NOVEN PHARMACEUTICALS, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
- -----------------------------------------------------------------------------------------------------------
ASSETS 1995 1994
CURRENT ASSETS:
Cash and cash equivalents $ 16,131,263 $ 12,070,272
Securities held to maturity 7,881,397 23,445,070
Accounts receivable 2,512,561 712,455
Inventories 5,069,946 1,264,553
Prepaid and other current assets 258,220 825,159
------------- -------------
Total current assets 31,853,387 38,317,509
------------- -------------
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 17,506,935 16,098,902
Less: accumulated depreciation and amortization 1,974,138 1,076,379
------------- -------------
Total net property and equipment 15,532,797 15,022,523
------------- -------------
OTHER ASSETS:
Patent development costs, net 1,218,630 979,201
Deposits and other assets 40,738 45,394
------------- -------------
Total other assets 1,259,368 1,024,595
------------- -------------
TOTAL $ 48,645,552 $ 54,364,627
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 4,293,185 $ 3,270,657
------------- -------------
DEFERRED LICENSE REVENUE 6,322,011 6,548,007
------------- -------------
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
19,674,144 shares in 1995 and 18,839,068 in 1994 1,967 1,884
Additional paid-in capital 60,091,751 60,026,833
Accumulated deficit (22,063,362) (15,482,754)
------------- -------------
Total stockholders' equity 38,030,356 44,545,963
------------- -------------
TOTAL $ 48,645,552 $ 54,364,627
------------- -------------
See accompanying notes to financial statements.
F-2
41
NOVEN PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- -----------------------------------------------------------------------------------------------------------------------
1995 1994 1993
REVENUES:
Product sales $ 8,747,965 $ 294,814
License revenue 1,702,780 4,155,163 $ 3,124,447
Interest income 1,681,688 1,213,479 623,621
Other income 51,908 381,095 345,480
--------------- ------------- ------------
Total revenues 12,184,341 6,044,551 4,093,548
--------------- ------------- ------------
EXPENSES:
Cost of products sold 4,814,349 147,866
Research and development 10,508,763 8,035,782 5,160,235
General and administrative 3,441,837 2,805,128 2,244,291
--------------- ------------- ------------
Total expenses 18,764,949 10,988,776 7,404,526
--------------- ------------- ------------
NET LOSS $ (6,580,608) $ (4,944,225) $ (3,310,978)
--------------- ------------- ------------
NET LOSS PER SHARE $ (0.34) $ (0.28) $ (0.21)
--------------- ------------- ------------
WEIGHTED AVERAGE SHARES
OF COMMON STOCK AND
COMMON STOCK EQUIVALENTS 19,236,807 17,439,955 15,924,719
--------------- ------------- ------------
See accompanying notes to financial statements.
F-3
42
NOVEN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- ---------------------------------------------------------------------------------------------------
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
BALANCE, DECEMBER 31, 1992 15,591,626 $1,559 $27,965,537 $(7,227,551) $20,739,545
---------- ------ ----------- ------------ -----------
Issuance of 255,716 shares of
stock for acquisition of
property and equipment 255,716 26 3,003,974 3,004,000
Issuance of 300,658 shares of
stock pursuant to stock
option plan, net 300,658 30 76,005 76,035
Grant of stock purchase warrant 184,884 184,884
Net loss (3,310,978) (3,310,978)
---------- ------ ----------- ------------ -----------
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
---------- ------ ----------- ------------ -----------
See accompanying notes to financial statements.
F-4
43
NOVEN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- -----------------------------------------------------------------------------------------------------------------
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,580,608) $ (4,944,225) $ (3,310,978)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,327,254 861,312 779,437
Amortization of patent costs 120,480 90,490 55,363
Increase in inventories (3,805,393) (563,914) (157,084)
(Increase) decrease in prepaid and other
current assets 566,939 (237,981) (511,185)
Increase in accounts receivable (1,800,106) (712,455)
Increase (decrease) in accounts payable and
accrued liabilities 1,022,528 2,127,803 (156,932)
Decrease in deferred license revenue (225,996) (1,475,996) (225,997)
----------- ----------- -----------
Cash flows used in operating activities (9,374,902) (4,854,966) (3,527,376)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) maturity of securities 15,563,673 (11,426,090) 972,679
Purchase of fixed assets, net (1,837,528) (2,772,381) (3,179,294)
Payments for patent development costs (359,909) (311,205) (329,770)
(Payment) refund of deposits 4,656 (19,975) (8,663)
---------- ----------- -----------
Cash flows provided (used) in investing
activities 13,370,892 (14,529,651) (2,545,048)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 65,001 28,334,202 76,035
Grant of stock purchase warrant 462,500 184,884
------------ ------------ ------------
Cash flows provided by financing activities 65,001 28,796,702 260,919
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4,060,991 9,412,085 (5,811,505)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 12,070,272 2,658,187 8,469,692
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 16,131,263 $ 12,070,272 $ 2,658,187
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired in exchange
of common stock and in connection with
license agreement $10,004,000
-----------
See accompanying notes to financial statements.
F-5
44
NOVEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- -------------------------------------------------------------------------------
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:
1995 1994
Finished goods $2,226,603 $ 520,928
Work in process 1,262,657 69,133
Raw Materials 1,580,686 674,492
---------- ----------
TOTAL $5,069,946 $1,264,553
---------- ----------
Inventories at December 31, 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
45
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 carryfowards, a valuation allowance has been established to
offset the existing net deferred tax asset. At December 31, 1995 and 1994,
Noven had net operating loss carryforwards of approximately $24,000,000 and
$18,000,000. Additionally, at December 31, 1995 and 1994, Noven had
research and development credit carryforwards of approximately $2,200,000
and $1,800,000 respectively. Carryforwards expire through 2010.
REVENUE RECOGNITION - Revenue from product sales is recognized at the time
of shipment. License revenue is recognized into income when earned under
the terms of the agreements. Substantially all of Noven's product sales
were to the 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.
NEW ACCOUNTING STANDARDS - In March 1995, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No.
121 establishes accounting standards for the impairment of the long-lived
assets, certain identifiable intangibles and goodwill related to those
assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of". SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicated that the carrying amount of an asset may not
recoverable. SFAS No. 121 will apply to Noven for the year ended December
31, 1996. Management believes that the adoption of this statement will not
have a material impact on Noven's financial statements.
The FASB has also issued SFAS No. 123, "Accounting for Stock-Based
Compensation". This statement defines a fair value based method of
accounting for an employee stock option. This statement also permits a
company to continue to measure compensation costs for their stock option
plan using the intrinsic value based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees". SFAS No. 123 requires disclosure of the pro forma
net income and earnings per share that would be recorded if the fair value
method was utilized. Noven plans to continue to utilize the provisions of
APB 25 to account for such compensation costs, and will provide the pro
forma disclosures required by SFAS 123 its 1996 financial statements.
RECLASSIFICATIONS - Certain amounts in the 1994 financial statements have
been reclassified to conform with the 1995 presentation.
F-7
46
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1995 and
1994:
1995 1994
Land $ 2,540,035 $ 2,540,035
Building 2,055,714 2,011,006
Leased property and leasehold improvements 7,978,592 7,870,807
Manufacturing and testing equipment 4,481,370 3,260,086
Furniture 451,224 416,968
----------- -----------
17,506,935 16,098,902
Less accumulated depreciation and amortization 1,974,138 1,076,379
----------- -----------
$15,532,797 $15,022,523
----------- -----------
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 upon the
commercialization of the product. Through December 31, 1995, no royalty
payments have been received nor accrued. 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. At December 31,
1995, 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
F-8
47
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, 1995, approximate
the following:
1996 $227,000
1997 89,000
1998 69,000
1999 12,000
--------
Total $397,000
========
Rent expense for the years ended December 31, 1995, 1994 and 1993
amounted to approximately $172,000, $167,000 and $193,000, respectively.
Noven has long term employment agreements. The agreements 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 $800,000 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, 1995, 1994 and 1993, Noven paid approximately $80,000, $46,000 and
$79,000 for these services.
6. STOCK OPTIONS
Noven has a stock option plan (the "Plan") that provides for the granting of
10,000,000 incentive and non-qualified stock options to selected individuals
or entities. The terms and conditions (including price, exercise date and
number of shares) are determined by the Stock Option Committee, which
administers the Plan. The per share exercise price of (i) non-qualified
stock options granted to directors and all other persons, may 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, may 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 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.
F-9
48
At December 31, 1995 and 1994, Noven had reserved 3,750,000 shares of common
stock for issuance under the Plan.
A summary of the stock option activity for the years ended December 31, 1995
and 1994 is as follows:
1995 1994
Outstanding at beginning of year 2,042,149 2,536,771
Granted 628,700 36,750
Exercised/canceled (1,161,486) (531,372)
-------------- ----------------
Outstanding at end of year 1,509,363 2,042,149
-------------- ----------------
Exercisable at end of year 659,952 1,455,660
-------------- ----------------
Available for future grants (from 3,750,000 shares
reserved at December 31, 1995 and 1994.) 297,959 725,803
-------------- ----------------
Range of prices for all options outstanding $ .20 - $17.25 $ .20 - $17.25
-------------- ----------------
Range of prices for options granted in each year $7.50 - $10.50 $11.625 - 17.25
-------------- ----------------
F-10