10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2009
Commission file number 0-17254
NOVEN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
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| STATE OF DELAWARE
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59-2767632 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number) |
11960 S.W. 144th Street, Miami, FL 33186
(Address of principal
executive offices) (Zip Code)
(305) 253-5099
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, the Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| |
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| Large accelerated filer
o |
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Accelerated filer
þ |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date.
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| Class
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Outstanding at April 30, 2009 |
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| Common stock $.0001 par value
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24,914,418 |
NOVEN PHARMACEUTICALS, INC.
INDEX
Cautionary Factors: Statements in this report that are not descriptions of historical
facts are “forward-looking statements” provided under the “safe harbor” protection of the Private
Securities Litigation Reform Act of 1995. Our actual results, performance and achievements may be
materially different from those expressed or implied by such statements and readers should consider
the risks and uncertainties associated with our business that are discussed in Part I — Item 1A —
“Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2008, as well as
other reports filed from time to time with the Securities and Exchange Commission.
Trademark Information: Lithobid®, Pexeva® and Stavzor®
are registered trademarks, and Mesafem™ is a trademark of Noven Therapeutics, LLC;
Vivelle® is a registered trademark of Novartis Pharmaceuticals Corporation;
Estradot® (foreign) and Vivelle-Dot® are registered trademarks, and Menorest
is a trademark, of Novartis AG; CombiPatch® and Estalis® (United States) are
registered trademarks of Vivelle Ventures LLC; and Daytrana® is a registered trademark
of Shire Pharmaceuticals Ireland Limited.
2
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(amounts in thousands, except share data) (unaudited)
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March 31, |
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December 31, |
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2009 |
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2008 |
|
Assets |
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|
|
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|
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Current Assets: |
|
|
|
|
|
|
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|
Cash and cash equivalents |
|
$ |
72,174 |
|
|
$ |
62,875 |
|
Investments in auction rate securities, current portion |
|
|
— |
|
|
|
3,650 |
|
Accounts receivable (less allowances of $217 at 2009
and $509 at 2008) |
|
|
6,729 |
|
|
|
8,577 |
|
Accounts receivable — Novogyne, net |
|
|
6,737 |
|
|
|
6,510 |
|
Inventories |
|
|
14,673 |
|
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|
13,924 |
|
Net deferred income tax asset, current portion |
|
|
7,235 |
|
|
|
7,026 |
|
Prepaid income taxes |
|
|
3,356 |
|
|
|
8,178 |
|
Prepaid and other current assets |
|
|
2,990 |
|
|
|
2,898 |
|
|
|
|
|
|
|
|
|
|
|
113,894 |
|
|
|
113,638 |
|
|
|
|
|
|
|
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Non-current Assets: |
|
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|
|
|
|
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Property, plant and equipment, net |
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34,809 |
|
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|
34,886 |
|
Investments in auction rate securities, non-current portion |
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11,810 |
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|
11,810 |
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Investment in Novogyne |
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19,175 |
|
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|
24,319 |
|
Net deferred income tax asset, non-current portion |
|
|
64,766 |
|
|
|
65,159 |
|
Intangible assets, net |
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|
35,546 |
|
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|
36,508 |
|
Goodwill |
|
|
14,407 |
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|
14,407 |
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Deposits and other non-current assets |
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|
623 |
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|
839 |
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|
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|
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181,136 |
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|
187,928 |
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|
|
|
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|
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|
$ |
295,030 |
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$ |
301,566 |
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|
|
|
|
|
|
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Liabilities and Stockholders’ Equity |
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Current Liabilities: |
|
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Accounts payable and accrued expenses |
|
$ |
7,153 |
|
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$ |
7,384 |
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Accrued compensation and related liabilities |
|
|
5,355 |
|
|
|
7,958 |
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Other accrued liabilities |
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|
17,147 |
|
|
|
17,260 |
|
Current portion of long-term obligations |
|
|
101 |
|
|
|
3,396 |
|
Deferred product revenue — Stavzor® |
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|
1,639 |
|
|
|
1,537 |
|
Deferred license and contract revenues, current portion |
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|
25,390 |
|
|
|
25,459 |
|
|
|
|
|
|
|
|
|
|
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56,785 |
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62,994 |
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|
|
|
|
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Non-current Liabilities: |
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Long-term obligations, less current portion |
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26 |
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27 |
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Deferred license and contract revenues, non-current portion |
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70,892 |
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77,112 |
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Other non-current liabilities |
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|
887 |
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|
997 |
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|
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|
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|
|
|
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71,805 |
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78,136 |
|
|
|
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|
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Total Liabilities |
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128,590 |
|
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141,130 |
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Commitments and Contingencies (Note 14) |
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Stockholders’ Equity: |
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Preferred stock — authorized 100,000 shares par
value $.01 per share; no shares issued or outstanding |
|
|
— |
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— |
|
Common stock — authorized 80,000,000 shares,
par value $.0001 per share; 25,235,763 issued at
March 31, 2009 and December 31, 2008 |
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3 |
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|
3 |
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Additional paid-in capital |
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124,797 |
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|
123,290 |
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Retained earnings |
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|
46,764 |
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|
42,267 |
|
Treasury stock, at cost - 322,345 shares at March 31, 2009
and December 31, 2008 |
|
|
(5,124 |
) |
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|
(5,124 |
) |
Common stock held in trust |
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|
(1,725 |
) |
|
|
(1,569 |
) |
Deferred compensation obligation |
|
|
1,725 |
|
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|
1,569 |
|
|
|
|
|
|
|
|
|
|
|
166,440 |
|
|
|
160,436 |
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|
|
|
|
|
|
|
|
$ |
295,030 |
|
|
$ |
301,566 |
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|
|
|
|
|
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|
The accompanying notes to unaudited condensed consolidated financial statements are an integral
part of these financial statements.
3
NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(amounts in thousands, except per share data)
(unaudited)
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Three Months Ended March 31, |
|
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2009 |
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|
2008 |
|
Revenues: |
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Product revenues — Novogyne: |
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Product sales, net |
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$ |
5,480 |
|
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$ |
2,431 |
|
Royalties |
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|
2,222 |
|
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|
2,180 |
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|
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Total net product revenues — Novogyne |
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|
7,702 |
|
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|
4,611 |
|
Product revenues, net — third parties |
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13,649 |
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|
11,585 |
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|
|
|
|
|
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|
|
|
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|
|
|
|
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Total net product revenues |
|
|
21,351 |
|
|
|
16,196 |
|
|
|
|
|
|
|
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License and contract revenues |
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|
6,289 |
|
|
|
5,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Total net revenues |
|
|
27,640 |
|
|
|
21,482 |
|
|
|
|
|
|
|
|
|
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Costs and Expenses: |
|
|
|
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Cost of products sold — Novogyne |
|
|
3,648 |
|
|
|
3,326 |
|
Cost of products sold — third parties |
|
|
7,768 |
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|
7,983 |
|
|
|
|
|
|
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Total cost of products sold |
|
|
11,416 |
|
|
|
11,309 |
|
Research and development |
|
|
4,653 |
|
|
|
3,319 |
|
Selling and marketing |
|
|
5,013 |
|
|
|
4,823 |
|
General and administrative |
|
|
7,048 |
|
|
|
7,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total costs and expenses |
|
|
28,130 |
|
|
|
26,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(490 |
) |
|
|
(4,991 |
) |
|
|
|
|
|
|
|
|
|
Equity in earnings of Novogyne |
|
|
7,545 |
|
|
|
8,267 |
|
Interest and other income, net |
|
|
89 |
|
|
|
622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
7,144 |
|
|
|
3,898 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
2,647 |
|
|
|
1,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income |
|
$ |
4,497 |
|
|
$ |
2,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic earnings per share |
|
$ |
0.18 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.18 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
24,692 |
|
|
|
24,560 |
|
|
|
|
|
|
|
|
Diluted |
|
|
24,769 |
|
|
|
24,665 |
|
|
|
|
|
|
|
|
The accompanying notes to unaudited condensed consolidated financial statements are an integral
part of these
financial statements.
4
NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders’ Equity
(amounts in thousands)
(unaudited)
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|
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|
|
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|
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| |
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|
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|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Treasury |
|
|
|
|
|
|
|
| |
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Stock |
|
|
Other |
|
|
Total |
|
Balance at December 31, 2008 |
|
|
24,913 |
|
|
$ |
3 |
|
|
$ |
123,290 |
|
|
$ |
42,267 |
|
|
$ |
(5,124 |
) |
|
$ |
— |
|
|
$ |
160,436 |
|
Stock-based compensation expense and issuance
of shares to outside directors |
|
|
— |
|
|
|
— |
|
|
|
1,298 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,298 |
|
Issuance of SSAR in settlement of executive bonus |
|
|
— |
|
|
|
— |
|
|
|
219 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
219 |
|
Tax benefit adjustments |
|
|
— |
|
|
|
— |
|
|
|
(10 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10 |
) |
Common stock held in trust |
|
|
(13 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(156 |
) |
|
|
(156 |
) |
Deferred compensation obligation |
|
|
13 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
156 |
|
|
|
156 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,497 |
|
|
|
— |
|
|
|
— |
|
|
|
4,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009 |
|
|
24,913 |
|
|
$ |
3 |
|
|
$ |
124,797 |
|
|
$ |
46,764 |
|
|
$ |
(5,124 |
) |
|
$ |
— |
|
|
$ |
166,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to unaudited condensed consolidated financial statements are an integral
part of these financial statements.
5
NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,497 |
|
|
$ |
2,592 |
|
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,057 |
|
|
|
2,272 |
|
Loss on disposal of property, plant and equipment |
|
|
— |
|
|
|
11 |
|
Inventory write-offs |
|
|
916 |
|
|
|
3,050 |
|
Stock based compensation expense |
|
|
1,298 |
|
|
|
858 |
|
Income tax benefits on stock-based awards/SSARs |
|
|
— |
|
|
|
37 |
|
Deferred income tax benefit |
|
|
184 |
|
|
|
(2,380 |
) |
Recognition of deferred license and contract revenues |
|
|
(6,289 |
) |
|
|
(5,286 |
) |
Equity in earnings of Novogyne |
|
|
(7,545 |
) |
|
|
(8,267 |
) |
Distributions from Novogyne |
|
|
12,689 |
|
|
|
10,916 |
|
Other noncash items |
|
|
271 |
|
|
|
39 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable — trade, net |
|
|
1,848 |
|
|
|
(1,782 |
) |
(Increase) decrease in accounts receivable — Novogyne, net |
|
|
(227 |
) |
|
|
2,753 |
|
Increase in inventories |
|
|
(1,665 |
) |
|
|
(6,202 |
) |
Decrease in prepaid income taxes |
|
|
4,822 |
|
|
|
2,802 |
|
Decrease (increase) in prepaid and other current assets |
|
|
(92 |
) |
|
|
(462 |
) |
Increase in deposits and other assets |
|
|
(94 |
) |
|
|
(176 |
) |
(Decrease) increase in accounts payable and accrued expenses |
|
|
(240 |
) |
|
|
732 |
|
Decrease in accrued compensation and related liabilities |
|
|
(2,384 |
) |
|
|
(5,165 |
) |
Decrease in other accrued liabilities |
|
|
(101 |
) |
|
|
(110 |
) |
Increase in deferred license and contract revenues |
|
|
— |
|
|
|
346 |
|
Increase in deferred product revenue — Stavzor® |
|
|
102 |
|
|
|
— |
|
Increase in other liabilities |
|
|
(93 |
) |
|
|
(654 |
) |
|
|
|
|
|
|
|
Cash flows provided by (used in) operating activities |
|
|
9,954 |
|
|
|
(4,076 |
) |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(798 |
) |
|
|
(341 |
) |
Payments for intangible assets |
|
|
(211 |
) |
|
|
(96 |
) |
Purchases of investments |
|
|
— |
|
|
|
(550 |
) |
Proceeds from sale of investments |
|
|
3,650 |
|
|
|
18,800 |
|
|
|
|
|
|
|
|
Cash flows provided by investing activities |
|
|
2,641 |
|
|
|
17,813 |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Issuance of common stock from exercise of stock options/SSARs |
|
|
— |
|
|
|
10 |
|
Payments of long-term obligations |
|
|
(3,296 |
) |
|
|
(55 |
) |
|
|
|
|
|
|
|
Cash flows used in financing activities |
|
|
(3,296 |
) |
|
|
(45 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
9,299 |
|
|
|
13,692 |
|
Cash and cash equivalents, beginning of period |
|
|
62,875 |
|
|
|
13,973 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
72,174 |
|
|
$ |
27,665 |
|
|
|
|
|
|
|
|
The accompanying notes to unaudited condensed consolidated financial statements are an integral
part of these financial statements.
6
NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Incorporated in Delaware in 1987, Noven Pharmaceuticals, Inc. (“Noven”) is a specialty
pharmaceutical company engaged in the research, development, manufacturing, licensing,
marketing and sale of prescription pharmaceutical products. Noven’s business is focused in
three principal areas: (i) Noven Transdermals, the transdermal drug delivery segment; (ii)
Novogyne Pharmaceuticals (“Novogyne”), the women’s health joint venture with Novartis
Pharmaceuticals Corporation (“Novartis”); and (iii) Noven Therapeutics, the specialty
pharmaceutical segment.
Noven’s primary commercialized products include prescription transdermal patches utilizing
its proprietary transdermal drug delivery technology for use in the treatment of Attention
Deficit Hyperactivity Disorder (“ADHD”) and in menopausal hormone therapy (“HT”), as well as
oral prescription products for use in the treatment of certain psychiatric conditions. Noven’s
developmental pipeline includes products in the women’s health and central nervous system
(“CNS”) categories.
Noven operates in three segments distinguished along product categories and nature of the
business unit: (i) Noven Transdermals, which currently engages in the development,
manufacturing and licensing to partners of prescription transdermal products; (ii) Novogyne,
the women’s health joint venture with Novartis in which Noven owns a 49% equity interest and
for which Noven reports its share of Novogyne’s earnings as “Equity in earnings of Novogyne” on
its Condensed Consolidated Statements of Operations; and (iii) Noven Therapeutics, which
currently engages in the marketing and sale of pharmaceutical products. Historically, Novogyne
was viewed as a component of the Noven Transdermals unit since the joint venture’s primary
activity involves the marketing and sale of patches manufactured by Noven Transdermals. In the
fourth quarter of 2008, as a result of organizational changes throughout 2008, Noven revised
its presentation of reportable segments to reflect the joint venture as a reportable unit
distinct from Noven Transdermals, which is consistent with the manner in which information is
reported for management decision making. See Note 15 — “Segment Data” for Noven’s segment
financial reporting.
In management’s opinion, the accompanying Unaudited Condensed Consolidated Financial
Statements of Noven contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly, in all material respects, the consolidated financial position of
Noven, the results of its operations, and its cash flows for the periods presented. Noven’s
business is subject to numerous risks and uncertainties including, but not limited to, those
set forth in Part I — Item 1A — “Risk Factors” of Noven’s Annual Report on Form 10-K for the
year ended December 31, 2008 (“Form 10-K”). Accordingly, the results of operations and cash
flows for the periods presented are not, and should not be construed as, necessarily indicative
of the results of operations or cash flows which may be reported for the remainder of 2009 or
for periods thereafter.
The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission for reporting
on Form 10-Q. Pursuant to such rules and regulations, certain information and footnote
disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) have been condensed or
omitted. The Unaudited Condensed Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial
Statements included in Noven’s Form 10-K. The accounting policies followed for interim
financial reporting are the same as those disclosed in Note 2 — “Summary of Significant
Accounting Policies” of the Notes to Consolidated Financial Statements included in Noven’s Form
10-K.
7
Noven
Therapeutics commercially launched Stavzor® in August 2008. Noven sells
Stavzor® to pharmaceutical wholesalers and chain drug stores. These companies have
the right to return Stavzor® for up to one year after product expiration. As a
result of the commercial launch of Stavzor® in the third quarter of 2008, Noven does
not yet have sufficient sales history to reasonably estimate product returns of
Stavzor®. Noven’s customers are no longer permitted to return the product after it
has been dispensed. Under Statement of Financial Accounting Standards (“SFAS”) No. 48, “Revenue
Recognition When Right of Return Exists” (“SFAS No. 48”), Noven cannot recognize revenue on
product shipments until it can reasonably estimate returns relating to these shipments. In
accordance with SFAS No. 48, Noven has deferred recognition of revenue on product shipments of
Stavzor® to Noven’s customers until such time as Stavzor® units are
dispensed through patient prescriptions. Noven estimates the volume of prescription units
dispensed at pharmacies based on data provided by external, independent sources. These sources
poll pharmacies, hospitals, mail order and other retail outlets for Stavzor®
prescriptions and project this sample on a national level. Noven will recognize revenue based
on prescription units dispensed until Noven has sufficient sales history to reasonably estimate
product returns. Noven recognized $0.7 million of net revenues for Stavzor® in the
first quarter of 2009, and $1.6 million of deferred product revenue relating to
Stavzor® was reflected on Noven’s Condensed Consolidated Balance Sheet as of March
31, 2009.
Certain reclassifications have been made to the prior period’s Condensed Consolidated
Statements of Cash Flows to conform to the current period’s presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS:
The following information updates the discussion of recent accounting pronouncements in
Note 2 — “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial
Statements included in Noven’s Form 10-K.
In November 2008, the Emerging Issues Task Force (“EITF”) of the Financial Accounting
Standards Board (“FASB”) ratified the consensus reached in EITF Issue No. 08-6, “Equity Method
Investment Accounting Considerations” (“EITF 08-6”). The application of the equity method is
affected by the accounting for business combinations under SFAS No. 141(R) and the accounting
for consolidated subsidiaries under SFAS No. 160. Therefore, the objective of EITF 08-6 is to
clarify how to account for certain transactions and impairment considerations involving equity
method investments. EITF 08-6 is effective for fiscal years beginning on or after December 15,
2008, and interim periods within those fiscal years, consistent with the effective dates of SFAS
No. 141(R) and SFAS No. 160. EITF 08-6 applies prospectively. The adoption of EITF 08-6 did not
impact Noven’s consolidated financial condition, results of operations or cash flows.
In October 2008, the FASB issued FASB Staff Position (“FSP”) SFAS 157-3, “Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP SFAS
157-3”). FSP SFAS 157-3 clarifies the application of SFAS No. 157, “Fair Value Measurements,”
(“SFAS No. 157”) when determining the fair value of a financial asset when the market for that
asset is not currently active. FSP SFAS 157-3 emphasizes that approaches other than the market
approach to determining fair value may be appropriate when it is determined that, as a result of
market inactivity, other valuation approaches are more representative of fair value. Other
valuation approaches can involve significant assumptions regarding
future cash flows. FSP SFAS 157-3 clarifies that these assumptions must incorporate adjustments
for nonperformance and liquidity risks that market participants would consider in valuing the
asset in an inactive market. FSP SFAS 157-3 emphasizes the existing disclosure requirements
under SFAS No. 157 regarding significant unobservable inputs (Level 3 inputs). FSP SFAS 157-3
became effective upon issuance, including with respect to prior periods for which financial
statements have not been issued. The adoption of FSP SFAS 157-3 did not impact Noven’s
consolidated financial condition, results of operations or cash flows.
8
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and
the framework for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP. This statement will be
effective 60 days following the Securities Exchange and Commission’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles.” The adoption of SFAS No. 162 did
not impact Noven’s consolidated financial condition, results of operations or cash flows.
In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The intent of FSP
142-3 is to improve the consistency between the useful life of a recognized intangible asset
under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the
asset under GAAP and SFAS No. 141(R), “Business Combinations.” For a recognized intangible
asset, an entity shall disclose information that enables users of financial statements to assess
the extent to which the expected future cash flows associated with the asset are affected by the
entity’s intent and/or ability to renew or extend the arrangement. FSP 142-3 is effective for
financial statements issued for fiscal years and interim periods beginning after December 15,
2008, with early adoption prohibited. FSP 142-3 requires the guidance for determining the useful
life of a recognized intangible asset to be applied prospectively to intangible assets acquired
after the effective date. The disclosure requirements shall be applied prospectively to all
intangible assets recognized as of, and subsequent to, the effective date. The adoption of FSP
142-3 did not impact Noven’s consolidated financial condition, results of operations or cash
flows.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements — an Amendment of Accounting Research Bulletin (“ARB”) No. 51” (“SFAS No.
160”). SFAS No. 160 establishes accounting and reporting standards for the noncontrolling
interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. SFAS
No. 160 amends certain of ARB 51’s consolidation procedures to conform them to the requirements
of SFAS No. 141(R), “Business Combinations”, which was issued at the same time as SFAS No. 160.
This new statement is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (that is, January 1, 2009, for entities with calendar
year-ends). SFAS No. 160 applies prospectively as of the beginning of the fiscal year in which
this statement is initially applied, except for the presentation and disclosure requirements,
which must be applied retrospectively for all periods presented. The adoption of SFAS No. 160
did not impact Noven’s consolidated financial condition, results of operations or cash flows.
In December 2007, the FASB revised SFAS No. 141, “Business Combinations” (“SFAS No.
141(R)”). SFAS No. 141(R) establishes principles and requirements for how an acquirer: (i)
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree; (ii) recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase;
and (iii) determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies
to all transactions or other events in which an entity (the acquirer) obtains control of one or
more businesses (the acquiree), including those sometimes referred to as “true mergers” or
“mergers of equals” and combinations achieved without the transfer of consideration, for
example, by contract alone or through the
lapse of minority veto rights. In April 2009, the FASB issued FSP SFAS 141(R)-1,
“Accounting for Assets and Liabilities Assumed in a Business Combination That Arise from
Contingencies” (“FSP SFAS 141(R)-1”) to amend and clarify the application of SFAS No. 141(R) to
assets and liabilities arising from contingencies in a business combination. SFAS No. 141(R) and
FSP SFAS 141(R)-1 apply prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or after December
15, 2008. Noven will apply the provisions of SFAS No. 141(R), as amended by FSP SFAS 141(R)-1,
to any business combination transactions consummated after December 31, 2008.
9
In December 2007, the EITF reached a consensus on EITF Issue No. 07-1, “Accounting for
Collaborative Arrangements” (“EITF 07-1”). EITF 07-1 discusses the appropriate income statement
presentation and classification for the activities and payments between the participants in
arrangements related to the development and commercialization of intellectual property. It
requires certain transactions between collaborators to be recorded in the income statement on
either a gross or net basis within expenses when certain characteristics exist in the
collaboration relationship. The sufficiency of disclosure related to these arrangements is also
specified. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. The
adoption of EITF 07-1 did not impact Noven’s consolidated financial condition, results of
operations or cash flows.
3. CASH FLOW INFORMATION:
Income Tax and Interest Payments
Cash payments for income taxes were $0.2 million and $1.2 million for the three months
ended March 31, 2009 and 2008, respectively. In 2002, the State of New Jersey enacted
legislation that requires Novogyne to remit estimated state income tax payments on behalf of its
owners, Noven and Novartis. These payments are deemed distributions to Noven from Novogyne.
Noven received tax refunds directly from the State of New Jersey of $2.9 million and $2.7
million during the three months ended March 31, 2009 and 2008, respectively, related to these
state income tax payments made on Noven’s behalf. Cash payments for interest were not material
for the three months ended March 31, 2009 or 2008.
Non-cash Operating Activities
Noven recorded $37,000 income tax benefit as additional paid-in capital derived from the
exercise of non-qualified stock options and disqualifying dispositions of incentive stock
options for the three months ended March 31, 2008.
Non-cash Investing Activities
Noven recorded $0.5 million in unrealized losses on its investments in auction rate
securities for the three months ended March 31, 2008. The unrealized losses were recorded as a
reduction of stockholders’ equity through other comprehensive income.
Non-cash Financing Activities
Noven issued immediately exercisable SSARs with a fair value of $0.2 million as a portion
of the President and Chief Executive Officer’s 2008 incentive bonus award during the three
months ended March 31, 2009.
4. INVESTMENTS AVAILABLE-FOR-SALE:
At March 31, 2009, Noven held investments in auction rate securities (classified as
available-for-sale) with a par value and fair value of $12.3 million and $11.8 million,
respectively. Noven liquidated $3.7 million of its investments in auction rate securities at par
value during the three months ended March 31,
2009. Due to uncertainty regarding the timing of Noven’s future investment liquidations,
Noven continues to classify its auction rate securities as non-current assets as of March 31,
2009.
10
In the fourth quarter of 2008, Noven determined that a $0.5 million unrealized decline in
fair value of its auction rate portfolio was other-than-temporary. As a result, Noven
recognized the impairments in its 2008 Consolidated Statement of Operations. The determination
that the unrealized losses were other-than-temporary was primarily based on the length of time
that the securities have been impaired and the fact that the continuing auction failures do not
enable Noven to reliably estimate when the value of the securities may recover. To the extent
future declines in fair value are determined to be other-than-temporary, additional impairment
charges will result. Such impairment charges could materially and adversely affect Noven’s
consolidated financial condition and results of operations.
5. FAIR VALUE MEASUREMENTS:
Noven adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) in 2008. As of
March 31, 2009, the total par value and fair value of Noven’s investments in auction rate
securities were $12.3 million and $11.8 million, respectively. Due to continuing auction
failures beginning in February 2008, Noven utilized valuation models to determine the fair
values of its investments in auction rate securities. The fair values of the investments were
calculated based on the following: (i) the underlying structure of each security; (ii) the
present value of future principal and interest payments discounted at rates considered to
reflect current market conditions; (iii) consideration of the probabilities of default, auction
failure, or repurchase at par for each period; and (iv) consideration of third party credit
enhancement. These estimated fair values could change significantly based on future market
conditions.
Changes to investments measured at fair value on a recurring basis using unobservable
inputs (Level 3) during the three months ended March 31, 2009 were as follows (in thousands):
| |
|
|
|
|
Balance at December 31, 2008 |
|
$ |
15,460 |
|
Redemptions of investments at par value |
|
|
(3,650 |
) |
|
|
|
|
Balance at March 31, 2009 |
|
$ |
11,810 |
|
|
|
|
|
6. INVENTORIES:
The following are the major classes of inventories (amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2009 |
|
|
2008 |
|
Finished goods |
|
$ |
3,431 |
|
|
$ |
3,200 |
|
Work in process |
|
|
3,239 |
|
|
|
2,510 |
|
Raw materials |
|
|
8,003 |
|
|
|
8,214 |
|
|
|
|
|
|
|
|
|
|
$ |
14,673 |
|
|
$ |
13,924 |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2009, Noven recorded a $0.9 million charge to cost
of products sold related to the write-off of inventories, of which approximately $0.8 million
related to Daytrana® product and $0.1 million related to other products in the
ordinary course of business.
Shire plc (“Shire”) retains title to the active methylphenidate ingredient (“AMI”) in
Daytrana®. The value of the AMI is neither included in Daytrana® product
revenues nor in Noven’s cost of products sold. Noven bears certain manufacturing risks of loss
related to the AMI. These risks include the contractual obligation of Noven to reimburse Shire
for the cost of AMI if Noven does not meet certain minimum yields
of the finished product. Shire has a reciprocal obligation to pay Noven if the yield
requirements are exceeded. Noven exceeded the yield requirements for the three months ended
March 31, 2009, resulting in an immaterial payment from Shire to Noven during the three months
ended March 31, 2009. During the three months ended March 31, 2009, Noven used $1.0 million of
Shire’s AMI in the finished product, and had $2.3 million and $2.6 million of consignment AMI
inventory on hand at March 31, 2009 and December 31, 2008, respectively, which is not reflected
in the table above.
11
7. GOODWILL AND INTANGIBLE ASSETS:
All of Noven’s goodwill arose from the Noven Therapeutics acquisition in August 2007 and,
thus, relates to the Noven Therapeutics segment. The carrying amount of goodwill is $14.4
million at March 31, 2009 and December 31, 2008. Goodwill is tested for impairment annually in
the fourth quarter or more frequently, when events or other changes in circumstances indicate
that the carrying value of goodwill may not be recoverable. If after testing the intangible
assets and goodwill, Noven determines that these assets are impaired, then Noven would be
required to write-down the impaired asset to fair value and record a corresponding expense in
the period when the determination is made. Such a write-down and corresponding expense could
have a material adverse effect on Noven’s results of operations.
Noven’s intangible assets, all of which are subject to amortization, are summarized in the
tables below as of March 31, 2009 and December 31, 2008 (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
|
|
|
|
Net |
|
|
Average |
|
| |
|
Gross Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Remaining |
|
| |
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Life (years) |
|
As of March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent development costs |
|
$ |
5,140 |
|
|
$ |
(3,183 |
) |
|
$ |
1,957 |
|
|
|
8.1 |
|
Acquired product intangibles |
|
|
39,290 |
|
|
|
(6,234 |
) |
|
|
33,056 |
|
|
|
8.8 |
|
Non-competition agreements |
|
|
530 |
|
|
|
(359 |
) |
|
|
171 |
|
|
|
1.1 |
|
Favorable lease |
|
|
790 |
|
|
|
(428 |
) |
|
|
362 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
45,750 |
|
|
$ |
(10,204 |
) |
|
$ |
35,546 |
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent development costs |
|
$ |
4,929 |
|
|
$ |
(3,070 |
) |
|
$ |
1,859 |
|
|
|
7.2 |
|
Acquired product intangibles |
|
|
39,290 |
|
|
|
(5,289 |
) |
|
|
34,001 |
|
|
|
9.0 |
|
Non-competition agreements |
|
|
530 |
|
|
|
(304 |
) |
|
|
226 |
|
|
|
1.6 |
|
Favorable lease |
|
|
790 |
|
|
|
(368 |
) |
|
|
422 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
45,539 |
|
|
$ |
(9,031 |
) |
|
$ |
36,508 |
|
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intangible assets for acquired products, non-competition agreements and favorable lease
included in the tables above resulted primarily from the Noven Therapeutics acquisition.
Amortization expense was $1.2 million and $1.1 million for the three months ended March 31, 2009
and 2008, respectively.
12
Noven estimates that the annual amortization expense for intangible assets held at March
31, 2009 for each of the five years through 2014 is as follows (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Remainder |
|
|
Years Ending December 31, |
|
| |
|
of 2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Cost of goods sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property |
|
$ |
3,174 |
|
|
$ |
4,174 |
|
|
$ |
4,109 |
|
|
$ |
4,096 |
|
|
$ |
4,042 |
|
|
$ |
3,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete and
favorable
lease agreements |
|
|
297 |
|
|
|
236 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,471 |
|
|
$ |
4,410 |
|
|
$ |
4,109 |
|
|
$ |
4,096 |
|
|
$ |
4,042 |
|
|
$ |
3,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. OTHER ACCRUED LIABILITIES:
Other accrued liabilities consist of the following (amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2009 |
|
|
2008 |
|
Income taxes payable |
|
$ |
2,463 |
|
|
$ |
2,197 |
|
Accrued medicaid and other rebates |
|
|
3,417 |
|
|
|
2,726 |
|
Accrued market withdrawal costs |
|
|
3,758 |
|
|
|
3,598 |
|
Allowance for product returns |
|
|
3,034 |
|
|
|
3,070 |
|
Other accrued liabilities |
|
|
4,475 |
|
|
|
5,669 |
|
|
|
|
|
|
|
|
Total other accrued liabilities |
|
$ |
17,147 |
|
|
$ |
17,260 |
|
|
|
|
|
|
|
|
9. EQUITY PLANS:
Prior to January 1, 2006, all awards granted to employees under Noven’s 1999 Long-Term
Incentive Plan (the “1999 Plan”) were stock options. In 2006, Noven began granting
stock-settled stock appreciation rights (“SSARs”) and nonvested shares of common stock
(“restricted stock”). Noven accounts for these awards in accordance with SFAS No. 123 Revised,
“Share-Based Payment” (“SFAS No. 123 (R)”). At March 31, 2009, there were 1.5 million stock
options and 2.6 million SSARs outstanding under the 1999 Plan.
The weighted average grant date fair values of SSARs granted during the three months ended
March 31, 2009 and 2008 were $3.96 and $5.11, respectively, using the Black-Scholes
option-pricing model with the assumptions below:
| |
|
|
|
|
|
|
|
|
| |
|
2009 |
|
2008 |
Volatility |
|
|
52.2 |
% |
|
|
45.5 |
% |
Risk free interest rate |
|
|
1.75 |
% |
|
|
2.63 |
% |
Expected life (years) |
|
|
3.9 |
|
|
|
4.8 |
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
13
Total stock-based compensation recognized in Noven’s Condensed Consolidated Statements of
Operations for the three months ended March 31, 2009 and 2008 was as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
Selling and marketing |
|
$ |
166 |
|
|
$ |
154 |
|
General and administrative |
|
|
859 |
|
|
|
469 |
|
Research and development |
|
|
145 |
|
|
|
90 |
|
Total cost of products sold |
|
|
128 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
$ |
1,298 |
|
|
$ |
858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit recognized related to
compensation expense |
|
$ |
491 |
|
|
$ |
293 |
|
|
|
|
|
|
|
|
In accordance with SFAS No. 123(R), tax benefits at the time of exercise in excess of those
recognized in conjunction with compensation expense are reported as cash flow from financing
activities. No stock options or SSARs were exercised during the three months ended March 31,
2009. Due to the small number of exercises during the three months ended March 31, 2008, cash
received from stock option exercises, the tax benefit realized from exercises, and the total
intrinsic value of stock options exercised for the three months ended March 31, 2008 were not
material.
Noven granted 70,847 and 26,244 shares of restricted stock to Noven’s non-employee
directors in June 2008 and May 2007, respectively, as compensation for their service on the
Board of Directors. The grants fall under the definition of nonvested shares under SFAS No.
123(R). The shares vest over each director’s one-year service period at the end of each calendar
quarter beginning with the end of the second quarter. As the shares vest, those shares that
have been deferred by non-employee directors under Noven’s deferred compensation plan are
transferred into a rabbi trust maintained by Noven. As of March 31, 2009 and December 31, 2008,
there were a total of 105,469 and 92,818 shares of common stock in the rabbi trust,
respectively.
Stock option and SSAR transactions under the 1999 Plan for the three months ended March 31,
2009 are summarized as follows (stock options/SSARs and aggregate intrinsic value amounts in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
|
Weighted Average |
|
|
|
|
| |
|
Stock |
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
| |
|
Options/ |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
| |
|
SSARs |
|
|
Price |
|
|
Life (years) |
|
|
Value |
|
Outstanding at
beginning of period |
|
|
4,093 |
|
|
$ |
14.31 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
102 |
|
|
|
9.62 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Canceled or expired |
|
|
(33 |
) |
|
|
16.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end
of period |
|
|
4,162 |
|
|
$ |
14.18 |
|
|
|
4.6 |
|
|
$ |
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end
of period |
|
|
1,806 |
|
|
$ |
16.56 |
|
|
|
2.6 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common
stock reserved |
|
|
4,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
As of March 31, 2009, the unamortized compensation expense that Noven expects to record in
future periods related to currently outstanding unvested stock options, SSARs and nonvested
shares of restricted stock, as determined in accordance with SFAS No. 123(R), is approximately
$10.4 million before the effect of income taxes. The weighted average period over which this
compensation cost is expected to be recognized is 4.0 years. The total fair value of equity
grants that vested in the three months ended March 31, 2009 was $0.5 million. As of March 31,
2009, approximately 3.6 million outstanding stock options/SSARs are vested or are expected to
vest. Such stock options have a weighted average exercise price of $14.44, a $0.1 million
aggregate intrinsic value and a weighted average remaining life of 4.4 years at March 31, 2009.
Noven has granted a total of 388,780 shares of restricted stock under the 1999 Plan. The
following table summarizes information regarding Noven’s restricted stock at March 31, 2009
(share amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted Average |
|
| |
|
Shares |
|
|
Grant-Date Fair Value |
|
Nonvested at
December 31, 2008 |
|
|
221 |
|
|
$ |
9.43 |
|
Granted |
|
|
— |
|
|
|
— |
|
Vested |
|
|
(19 |
) |
|
|
12.41 |
|
|
|
|
|
|
|
|
Nonvested at
March 31, 2009 |
|
|
202 |
|
|
$ |
9.16 |
|
|
|
|
|
|
|
|
10. INCOME TAXES:
On January 1, 2007, Noven adopted the provisions of, and began accounting for uncertainty
in income taxes in accordance with, FASB Interpretation No. (“FIN”) 48, “Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”).
As of March 31, 2009, the gross amount of unrecognized tax benefits was approximately $1.5
million. If the $1.5 million is ultimately recognized, approximately $1.1 million would affect
the effective tax rate due to approximately $0.4 million in related federal tax benefit. As of
December 31, 2008, the gross amount of unrecognized tax benefits was approximately $1.3 million.
If the $1.3 million is ultimately recognized, approximately $0.9 million would impact the
effective income tax rate due to a federal tax benefit of approximately $0.4 million. Interest
and penalties related to income taxes are classified as a component of
income tax expense. Approximately $0.5 million were accrued for interest and penalties as
of March 31, 2009 and December 31, 2008. Noven does not expect the gross amount of unrecognized
tax benefits to significantly increase or decrease within 12 months after March 31, 2009. All
of Noven’s unrecognized tax benefits relate to state tax positions.
Noven is periodically audited by federal and state taxing authorities. The outcome of these
audits may result in Noven being assessed taxes in addition to amounts previously paid. The
accruals are determined based upon Noven’s best estimate of possible assessments by the Internal
Revenue Service (“IRS”) or other taxing authorities and are adjusted, from time to time, based
upon changing facts and circumstances. Federal returns for years 2005 through 2007 remain open
and subject to examination by the IRS. During the third quarter of 2008, the IRS initiated an
examination of Noven’s federal income tax returns for the years ended December 31, 2006 and
2007. Noven files and remits state income taxes in various states where Noven has determined it
is required to file state income taxes. Noven’s filings with those states remain open for audit
for the years 2004 through 2007. In January 2009, the State of New Jersey Division of Taxation
initiated an examination of Noven’s tax returns for 2004 through 2007. Noven does not expect
the outcome of the examinations to materially impact its tax liabilities. Other than the IRS and
New Jersey examinations described above, as well as routine state tax inquiries, Noven has not
been notified of any, and is not aware of, other examinations currently taking place related to
income taxes in any jurisdiction. It is possible that examinations
may be initiated by any
jurisdiction where Noven operates, or where it can be determined that Noven operates, and the
results of which can materially change the amount of unrecognized income tax benefits for tax
positions taken, which may increase Noven’s income tax liabilities or decrease the amount of
deferred tax assets.
15
At March 31, 2009 and December 31, 2008, net deferred tax assets were $72.0 million and
$72.2 million, respectively. Realization of these deferred tax assets depends upon the
generation of sufficient future taxable income. A valuation allowance is established if it is
more likely than not that all or a portion of the deferred tax asset will not be realized.
Noven Therapeutics files separate state income tax returns in states where Noven Therapeutics
has determined that it is required to file state income taxes. As a result, state deferred tax
assets relating to Noven Therapeutics are evaluated separately in determining whether the state
deferred tax assets are realizable. Noven Therapeutics has historically reported taxable losses
in these states and expects to continue to incur state taxable losses in the next few years.
These circumstances create negative evidence indicating the need for a valuation allowance at
March 31, 2009 and December 31, 2008. Noven’s valuation allowance for state deferred tax assets
was $3.5 million as of March 31, 2009 and December 31, 2008, due to uncertainty regarding
Noven’s ability to realize these state deferred tax assets based on Noven’s projection of future
state taxable income relating to Noven Therapeutics. If Noven determines, based on Noven
Therapeutics’ potential future profitability, that these state deferred tax assets will more
likely than not be realized, a release of all, or part, of the related valuation allowance could
result in an immediate income tax benefit in the period the valuation allowance is released.
11. CONTRACT AND LICENSE AGREEMENTS:
SHIRE COLLABORATION
Noven has developed a once-daily transdermal methylphenidate patch for Attention Deficit
Hyperactivity Disorder (“ADHD”) called Daytrana®. In the first quarter of 2003,
Noven licensed to Shire the exclusive global rights to market Daytrana® for payments
by Shire of up to $150.0 million. In consideration for this licensing transaction, Shire has
paid Noven as follows: (i) $25.0 million upon the closing of the transaction in April 2003;
(ii) $50.0 million upon receipt of final marketing approval by the FDA in April 2006; and (iii)
three installments of $25.0 million each upon Shire’s achievement of $25.0 million, $50.0
million and $75.0 million in annual Daytrana® net sales. Noven received the first
$25.0 million sales milestone payment in the first quarter of 2007, the second $25.0 million
sales milestone payment in the third quarter of 2007 and the third $25.0 million sales milestone
payment in the third quarter of 2008. Noven is currently deferring and recognizing approval and
sales milestone payments as license revenues on a straight-line basis, beginning on the date the milestone was achieved through the first quarter of
2013, which is Noven’s current best estimate of the end of the useful economic life of the
product.
SYNTHON PHARMACEUTICALS COLLABORATION
In November 2005, JDS Pharmaceuticals, LLC (“JDS”), now Noven Therapeutics, entered into an
asset purchase agreement with Synthon Pharmaceuticals, Inc. (“Synthon”) for the purchase of
Pexeva®. In this transaction, JDS purchased certain assets related to
Pexeva® including the New Drug Application (“NDA”), intellectual property (including
patents and trademarks) and certain finished goods inventory. The purchase of
Pexeva® included a cash payment at the time of closing and an obligation to make
certain future fixed payments and certain contingent payments.
Following Noven’s acquisition of JDS, Noven became responsible for possible future
contingent milestone payments of up to $11.5 million in the event sales of Pexeva®
achieve certain levels under the asset purchase agreement with Synthon. Based on net sales of
Pexeva® in 2007 and 2008, Noven Therapeutics was required to make milestone payments
to Synthon of $3.3 million for each of those years. The 2007 sales milestone was paid in April
2008 and the 2008 sales milestone was paid in March 2009. In addition to the amounts already
paid, Noven is obligated to make another $5.0 milestone payment if
annual net sales of Pexeva® (or a future product utilizing the same compound as is used in
Pexeva®) achieves $30.0 million or more through 2017. Noven recorded a liability for
these contingent milestone payments at the time of closing of the Noven Therapeutics acquisition
based on projected future sales of Pexeva® which indicated that the achievement of
each of the specified sales levels was probable. In the third quarter of 2008, Noven determined
that the achievement of $30.0 million in annual net sales for Pexeva®, the next
specified sales level, was no longer probable, resulting in a change in accounting estimate. The
change resulted from lower forecasted long-term prescription growth than originally expected, as
well as a redistribution of selling efforts to support Stavzor®, which was
commercially launched in August 2008. In the third quarter of 2008, Noven recognized $5.0
million in operating income as a result of the reversal of the accrued liability. Although Noven
reversed the $5.0 million accrued liability, Noven remains contingently liable for the $5.0
million payment if annual net sales of Pexeva® (or a future product utilizing the
same compound as is used in Pexeva®) achieves $30.0 million or more through 2017.
16
12. INVESTMENT IN VIVELLE VENTURES LLC (d/b/a NOVOGYNE):
Noven shares in the earnings of Novogyne, after satisfaction of an annual preferred return
of $6.1 million to Novartis, according to an established formula. Noven’s share of Novogyne’s
earnings increases as Novogyne’s product sales increase, subject to a cap of 49%. Novogyne
earned sufficient income in the first quarter of 2009 and 2008 to meet Novartis’ annual
preferred return for those periods and for Noven to recognize earnings from Novogyne under the
formula.
During the three months ended March 31, 2009 and 2008, Noven had the following transactions
with Novogyne (amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
5,480 |
|
|
$ |
2,431 |
|
Royalties |
|
|
2,222 |
|
|
|
2,180 |
|
|
|
|
|
|
|
|
|
|
$ |
7,702 |
|
|
$ |
4,611 |
|
|
|
|
|
|
|
|
Reimbursed expenses |
|
$ |
8,146 |
|
|
$ |
7,272 |
|
|
|
|
|
|
|
|
Reimbursed expenses are primarily comprised of selling and marketing expenses paid by Noven
on behalf of Novogyne. As of March 31, 2009 and December 31, 2008, Noven had amounts due from
Novogyne of $6.7 million and $6.5 million, respectively.
17
The Unaudited Condensed Statements of Operations of Novogyne for the three months ended
March 31, 2009 and 2008 are as follows (amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
Gross revenues |
|
$ |
48,230 |
|
|
$ |
45,294 |
|
|
|
|
|
|
|
|
|
|
Sales allowances |
|
|
6,666 |
|
|
|
5,853 |
|
Sales return allowances |
|
|
1,373 |
|
|
|
(85 |
) |
|
|
|
|
|
|
|
Sales allowances and returns |
|
|
8,039 |
|
|
|
5,768 |
|
|
|
|
|
|
|
|
Net revenues |
|
|
40,191 |
|
|
|
39,526 |
|
Cost of sales |
|
|
8,077 |
|
|
|
7,808 |
|
Selling, general and
administrative expenses |
|
|
10,711 |
|
|
|
9,012 |
|
|
|
|
|
|
|
|
Income from operations |
|
|
21,403 |
|
|
|
22,706 |
|
Interest income |
|
|
94 |
|
|
|
267 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
21,497 |
|
|
$ |
22,973 |
|
|
|
|
|
|
|
|
Noven’s equity in earnings of
Novogyne |
|
$ |
7,545 |
|
|
$ |
8,267 |
|
|
|
|
|
|
|
|
The activity in the Investment in Novogyne account for the three months ended March 31,
2009 is as follows (amounts in thousands):
| |
|
|
|
|
Investment in Novogyne, beginning of period |
|
$ |
24,319 |
|
Equity in earnings of Novogyne |
|
|
7,545 |
|
Cash distributions from Novogyne |
|
|
(12,689 |
) |
|
|
|
|
Investment in Novogyne, end of period |
|
$ |
19,175 |
|
|
|
|
|
Subject to the approval of Novogyne’s management committee, Novogyne may, from time to
time, distribute cash to Novartis and Noven based upon a contractual formula. For the three
months ended March 31, 2009 and 2008, Noven received cash distributions from Novogyne
representing return on investment of $12.7 million and $10.9 million, respectively. This amount
was recorded as a reduction in the investment in Novogyne when received.
13. SHARE REPURCHASE PROGRAM:
In September 2007, Noven’s Board of Directors authorized a share repurchase program under
which Noven may acquire up to $25.0 million of its common stock. During the fourth quarter of
2007, Noven repurchased 322,345 shares of its common stock at an aggregate price of
approximately $5.1 million. These shares remained in treasury as of March 31, 2009 and December
31, 2008, and no additional shares have been repurchased under the program since December 31,
2007.
14. COMMITMENTS AND CONTINGENCIES:
HORMONE THERAPY (“HT”) STUDIES:
Since 2002, several studies, including the Women’s Health Initiative (“WHI”) study
performed by the National Institutes of Health (“NIH”) and a study performed by the National
Cancer Institute (“NCI”), have identified increased risks from the use of HT, including
increased risks of invasive breast cancer, ovarian cancer, stroke, heart attacks and blood
clots. As a result of the findings from these and other studies, the FDA has required that
“black box” labeling be included on all HT products marketed in the United States to warn, among
other things, that these products have been associated with increased risks for heart disease,
heart attacks, strokes and breast cancer and that they are not approved for heart disease
prevention. Since the July 2002 publication of the WHI and NCI study data, total United States
prescriptions have declined for substantially all HT products, including our HT products in the
aggregate. Researchers continue to analyze data from the WHI study and other studies. Other
studies evaluating HT are currently underway or in the planning stage. In particular, a private
foundation is funding a clinical study aimed at determining whether estrogen therapy (“ET”) use,
by women aged 42 to 58, reduces the risk of heart disease. The study also seeks to determine if
transdermal estrogen patches are more or less beneficial than an oral HT product. While Noven’s
HT products are not being used in the study, the market for Noven’s HT products could be
adversely affected if this study finds that a transdermal estrogen patch is less beneficial than
other dosage forms, and Noven could be subject to increased product liability risk if HT patch
products are found to increase the risk of adverse health consequences. Noven’s products have
been named in lawsuits filed against Noven, Novogyne and Novartis.
18
SUPPLY AGREEMENTS:
Noven’s supply agreement with Novogyne for Vivelle® and Vivelle-Dot®
patches expired in January 2003. While the parties have continued to operate in accordance with
certain of the supply agreement’s pricing terms, there is no assurance that the parties will
continue to do so. Novogyne’s designation of a new supplier and approval of a new supply
agreement would require the affirmative vote of four of the five members of Novogyne’s
Management Committee. Since Noven appoints two members of Novogyne’s Management Committee, both
Novartis and Noven must agree on Novogyne’s supplier. In connection with a transition to
Vivelle-Dot®, effective December 2006, Noven ceased supplying Vivelle®
product to Novogyne.
Noven and Shire are also parties to a long-term supply agreement under which Noven
manufactures and supplies Daytrana® to Shire at a fixed price. During the three
months ended March 31, 2009 and 2008, Noven’s net product sales of Daytrana® to Shire
were $2.9 million and $3.0 million, respectively. The supply agreement gives Shire the right to
qualify a second manufacturing source and purchase a portion of its requirements from that
source.
LITIGATION, CLAIMS AND ASSESSMENTS:
In September 2005, Noven, Novogyne and Novartis were served with a summons and complaint
from an individual plaintiff in Superior Court of New Jersey Law Division, Atlantic County in
which the plaintiff claims personal injury allegedly arising from the use of HT products,
including Vivelle®. The plaintiff claims compensatory, punitive and other damages in
an unspecified amount. Noven does not expect any activity in this case in the near future, as
the court has entered an order to stay proceedings in all its pending and future HT cases except
for cases where Wyeth Pharmaceuticals and its affiliates and Pfizer Inc. are the defendants.
In April 2006, an individual plaintiff and her husband filed a complaint in the United
States District Court, District of Minnesota against Noven, Novogyne, Novartis, Wyeth Inc. and
Wyeth Pharmaceuticals, Inc. alleging liability in connection with personal injury claims
allegedly arising from the use of HT products, including Noven’s CombiPatch® product.
The plaintiffs claim compensatory and other damages in an unspecified amount.
In July 2006, four complaints were filed in the United States District Court, District of
Minnesota against Noven and other pharmaceutical companies by four separate individual
plaintiffs, each filing alone or with her husband. Three of the complaints also name Novartis as
a defendant, and of these, two name Novogyne as a defendant as well. Each complaint alleges
liability in connection with personal injury claims allegedly arising from the use of HT
products, including Vivelle® in one case and CombiPatch® in two of the
cases. The plaintiffs in each case claim compensatory and other damages in an unspecified
amount.
19
In July 2008, a complaint was filed in the United States District Court, District of
Minnesota against Wyeth Inc. and other named pharmaceutical companies, including Noven, Novogyne
and Novartis. The complaint alleges liability in connection with personal injury claims
allegedly arising from the use of HT products, including Vivelle-Dot®. The
plaintiffs claim compensatory and other damages in an unspecified amount.
In March 2009, a complaint was filed in the United States District Court, Southern District
of Illinois against Wyeth Inc. and other named pharmaceutical companies, including Noven,
Novogyne and Novartis. The complaint alleges liability in connection with personal injury claims
allegedly arising from the use of HT products, including CombiPatch®. The plaintiff
claims compensatory and other damages in an unspecified amount. Noven has not yet been served
with the complaint.
In April 2009, a complaint was filed in the United States District Court, District of Oregon
against Noven and Novartis. The complaint alleges liability in connection with personal injury
claims allegedly arising from the use of the HT product, CombiPatch®. The plaintiff
claims compensatory and other damages in an unspecified amount. Noven has not yet been served with
the complaint.
Each of the aforementioned federal court cases has been, or is expected to be, transferred
to the federal multi-district litigation proceedings that are pending in the United States
District Court, Eastern District of Arkansas.
Novartis has advised Noven that Novartis is currently named as a defendant in at least 28
additional lawsuits that include approximately 29 plaintiffs that allege liability in connection
with personal injury claims allegedly arising from the use of HT patches distributed and sold by
Novartis and Novogyne, including Noven’s Vivelle-Dot®, Vivelle®, and
CombiPatch® products. Novogyne has been named as a defendant in one lawsuit in
addition to five of the lawsuits specifically referenced above. Novartis has indicated that it
will seek indemnification from Noven and Novogyne to the extent permitted by the agreements
between and among Novartis, Novogyne and Noven. Novogyne’s aggregate limit under its
claims-made insurance policy as of March 31, 2009 was $10.0 million. Novogyne has established
reserves in the amount of $9.6 million with an
offsetting insurance recovery of $7.1 million for expected defense and settlement expenses
as well as for estimated future cases alleging use of Noven’s HT products. This accrual
represents Novartis management’s best estimate as of March 31, 2009.
In June 2007, Johnson-Matthey Inc. filed a complaint in the United States District Court,
Eastern District of Texas against Noven alleging that Noven was infringing one of its patents
through Noven’s manufacture and sale of Daytrana®. The plaintiff is seeking
injunctions from further infringement and claiming compensatory and other damages in an
unspecified amount. In July 2007, Johnson-Matthey added Shire as a defendant in this lawsuit.
The parties have commenced formal discovery and the case has been scheduled for trial in late
2009.
As
of March 31, 2009 and December 31, 2008, Noven had reserved $1.2 million and $2.0
million, respectively, for the matters described above. Noven intends to vigorously defend all
of the foregoing lawsuits, but the outcome of these lawsuits cannot ultimately be predicted.
Noven is a party to other pending legal proceedings arising in the normal course of
business, none of which Noven believes is material to its consolidated financial condition,
results of operations or cash flows.
FDA WARNING LETTER:
Daytrana®
is Noven’s transdermal methylphenidate system for the treatment of
ADHD, which Noven has licensed globally to Shire. Noven and Shire have received reports from
some consumers concerning the difficulty of removing the release liner from certain
Daytrana® patches. In the first quarter of 2007, Noven, together with Shire,
implemented enhancements to the
Daytrana® release liner. While the enhanced release
liner has reduced the level of consumer reports, some patients and caregivers continue to have
difficulty in removing the release liner from some Daytrana® patches.
20
In July 2007, Noven received a list of observations from the FDA on Form 483 following an
on-site inspection of its manufacturing facilities. The majority of the observations in the Form
483 related to the Daytrana® patch and difficulties experienced by some patients in
removing the release liner, including certain product lots that utilize the enhanced release
liner. In July 2007, Noven submitted to the FDA its response to the Form 483.
In the third quarter of 2007, Shire initiated two voluntary recalls of a portion of the
Daytrana® product on the market primarily in response to feedback from patients and
caregivers who experienced difficulty removing the release liner from some Daytrana®
patches. Noven paid Shire $3.3 million in February 2008 related to those recalls. This payment
was charged to operations in 2007.
In January 2008, Noven received a warning letter from the FDA in connection with the FDA’s
July 2007 inspection of its manufacturing facilities. In the warning letter, which is posted at
the FDA’s website, the FDA cited Current Good Manufacturing Practice deficiencies related to:
(i) peel force specifications for removal of Daytrana’s® release liner; and (ii) data
supporting the peel force characteristics of Daytrana’s® enhanced release liner
throughout the product’s shelf life. Noven submitted its response to the warning letter on
January 30, 2008, which remains under review by the FDA.
In April 2008, a Noven stability protocol identified certain Daytrana® lots
exhibiting high peel force characteristics. In June 2008, Shire initiated the voluntary recall
of two lots of Daytrana® that did not meet the product’s release liner removal
specification. In August 2008, Shire initiated the voluntary recall of two additional lots of
Daytrana® that did not meet the product’s release liner removal specification. Noven
paid Shire $3.7 million related to its June and August 2008 recalls, of which approximately $3.1
million has been charged to general and administrative expenses, $0.4 million was recorded as a
reduction in revenues and $0.2 million was charged to cost of products sold in 2008. For each
of the recalls described above, the amounts reflected as reductions of revenue represent the
amounts recognized for product which is expected to be returned, the charge to cost of product
sold represents the value of AMI included in such product for which
Noven is required to reimburse Shire, and the amount charged to general and administrative
expenses represents amounts Noven is obligated to reimburse Shire for direct costs of the
recalls.
In the fourth quarter of 2008, Noven implemented: (i) new product release testing intended
to predict which Daytrana® lots are at risk of developing peel force issues during
the product’s shelf life; and (ii) new manufacturing processes and procedures that helped
improve efficiencies associated with existing Daytrana® production. Product that
fails to meet the predictive release test will be destroyed, which will result in increased
Daytrana® manufacturing costs, including reimbursements to Shire for the AMI included
in the destroyed product. For the three months ended March 31, 2009, Daytrana® cost
of products sold exceeded Noven’s Daytrana® net revenues by $0.7 million. Although
Noven has implemented the new manufacturing processes and procedures described above, Noven
expects the peel force issue to continue to negatively affect margins as a result of increased
Daytrana® manufacturing costs, including reimbursements to Shire for the AMI included
in destroyed product, unless and until the peel force issue is resolved.
In March 2009, Shire initiated a voluntary recall of certain lots of Daytrana®
due to the failure of some of the patches to meet the product’s release liner removal
specification. Noven believes the reserve established in 2008 ($3.7 million at March 31, 2009)
will be sufficient to cover Noven’s cost related to this recall. Although the new release
testing is designed to reduce the likelihood that newly-manufactured product will be withdrawn
or recalled in the future, Noven cannot assure that its predictive release testing will detect
all production issues or that there will not be future Daytrana® market withdrawals
or recalls.
In January 2009, Noven received from the FDA a list of observations on Form 483 following
an on-site inspection of its manufacturing facilities. Like the warning letter and the prior
Form 483, the majority of the observations in the Form 483 relate to the manufacture of
Daytrana® product that exhibits high peel force characteristics, an issue which Noven
and Shire continue to work to resolve. In February 2009, Noven submitted its response to the
Form 483. Failure to adequately address the issues raised by the FDA in the warning letter as
well as the production and other issues involving Daytrana® could result in
additional regulatory action, including fines, recalls of products, injunctions, seizures,
suspension of production or withdrawal of the approval of products. Any such regulatory action
would be expected to have a material adverse effect on Noven, including the potential for
litigation related to this matter, harm to Noven’s reputation and various costs associated with
the foregoing.
21
CONTRACT AND LICENSE AGREEMENTS:
Noven is obligated to perform under its contract and license agreements. In certain
circumstances, Noven is required to indemnify its licensees from damages caused by the products
Noven manufactures as well as claims or losses related to patent infringement.
CREDIT FACILITY:
In July 2008, Noven entered into an agreement for a $15.0 million credit facility. In
connection with the credit facility and in lieu of granting a security interest in Noven’s
assets, Noven agreed not to pledge, grant any security interest in, or allow any lien or
encumbrance in or on, certain of Noven’s financial assets. As of March 31, 2009, no borrowings
were outstanding under this facility.
15. SEGMENT DATA:
The accounting policies of Noven’s segments are the same as those described in Note 2 —
“Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements
included in Noven’s Form 10-K. In the fourth quarter of 2008, as a result of management and
organizational changes throughout 2008, Noven revised its presentation of reportable segments to
reflect Novogyne as a reportable unit distinct from the manufacturing and licensing activities
of Noven Transdermals. Noven evaluates segment performance for Noven Transdermals and Noven
Therapeutics based on segment profit (loss) which consists
of segment net revenues less cost of products sold and selling and marketing expenses.
Noven evaluates segment performance for Novogyne based on Noven’s equity in earnings of
Novogyne. Noven Transdermals’ net revenues include product revenues from sales to Novogyne of
$7.7 million and $4.6 million for the three months ended March 31, 2009 and 2008, respectively.
Noven defers the recognition of 49% of its profit on products sold to Novogyne until the
products are sold by Novogyne to third party customers. There are no other inter-segment
revenues.
22
The table below presents segment information for the periods identified and reconciles
segment profit (loss) to the applicable consolidated amounts. Segment disclosures for 2008 have
been revised to conform to the current presentation (amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
Net Revenues: |
|
|
|
|
|
|
|
|
Noven Transdermals |
|
|
|
|
|
|
|
|
Product revenues |
|
$ |
14,777 |
|
|
$ |
10,491 |
|
License and contract revenues |
|
|
6,289 |
|
|
|
5,286 |
|
|
|
|
|
|
|
|
|
|
|
21,066 |
|
|
|
15,777 |
|
|
|
|
|
|
|
|
|
|
Noven Therapeutics |
|
|
|
|
|
|
|
|
Product revenues |
|
$ |
6,574 |
|
|
$ |
5,705 |
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
27,640 |
|
|
$ |
21,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss): |
|
|
|
|
|
|
|
|
Noven Transdermals |
|
$ |
11,681 |
|
|
$ |
6,310 |
|
Noven Therapeutics |
|
|
(470 |
) |
|
|
(960 |
) |
Equity in earnings of Novogyne |
|
|
7,545 |
|
|
|
8,267 |
|
|
|
|
|
|
|
|
Total segment profit |
|
$ |
18,756 |
|
|
$ |
13,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of segment profit to income
before income taxes: |
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
18,756 |
|
|
$ |
13,617 |
|
Research and development |
|
|
(4,653 |
) |
|
|
(3,319 |
) |
General and administrative |
|
|
(7,048 |
) |
|
|
(7,022 |
) |
Interest and other income, net |
|
|
89 |
|
|
|
622 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
7,144 |
|
|
$ |
3,898 |
|
|
|
|
|
|
|
|
Segment assets consisted of the following as of March 31, 2009 and December 31, 2008
(amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2009 |
|
|
2008 |
|
Noven Transdermals |
|
$ |
56,018 |
|
|
$ |
56,362 |
|
Noven Therapeutics |
|
|
54,489 |
|
|
|
55,902 |
|
Novogyne |
|
|
19,175 |
|
|
|
24,319 |
|
Assets not allocated to segments1 |
|
|
165,348 |
|
|
|
164,983 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
295,030 |
|
|
$ |
301,566 |
|
|
|
|
|
|
|
|
|
|
|
| 1 |
|
Assets not allocated to segments consist primarily of cash and cash
equivalents, investments
in auction rate securities and deferred income taxes. |
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The following section addresses material aspects of our consolidated financial condition as of
March 31, 2009, and our consolidated results of operations for the three months ended March 31,
2009 (the “2009 Quarter”) and March 31, 2008 (the “2008 Quarter”). The contents of this section
include:
| |
• |
|
An executive summary of our consolidated results of operations for the 2009 Quarter; |
| |
| |
• |
|
A review of certain items that may affect the historical or future comparability of
our consolidated results of operations; |
| |
| |
• |
|
An analysis of our consolidated results of operations and our liquidity and capital
resources; and |
| |
| |
• |
|
An outlook that includes our current financial guidance for 2009. |
This discussion should be read in conjunction with Noven’s Unaudited Condensed Consolidated
Financial Statements for the three months ended March 31, 2009 and 2008 and the related notes
included elsewhere in this Form 10-Q, as well as the section “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” from our Form 10-K.
Executive Summary
The following Executive Summary is qualified in its entirety by the more detailed discussion
and analysis of our financial condition and results of operations appearing in this Item 2 as well
as in our Unaudited Condensed Consolidated Financial Statements and related notes included in this
Form 10-Q.
For the 2009 Quarter, we reported net income of $4.5 million ($0.18 diluted earnings per
share), compared to net income of $2.6 million ($0.11 diluted earnings per share) for the 2008
Quarter. Our net revenues in the 2009 Quarter were $27.6 million, a 29% increase over the 2008
Quarter. Contributing to this comparative increase, net revenues in the 2008 Quarter were
negatively affected by an equipment failure in transdermal manufacturing. The increase in net
revenues in the 2009 Quarter also reflected higher license and contract revenues, primarily due to
amortization of deferred revenue from the additional Daytrana® sales milestone payment
(received in the third quarter of 2008), as well as product sales of Stavzor®
(commercially launched in August 2008).
Gross margin, as a percentage of net product revenues, was 47% in the 2009 Quarter compared to
30% in the 2008 Quarter. Gross margin for the 2009 Quarter benefited from new manufacturing
processes and procedures implemented in the fourth quarter of 2008 designed to improve efficiencies
associated with transdermal production. Gross margin for the 2008 Quarter was negatively affected
by the impact of the equipment failure in transdermal manufacturing, as well as increased quality
assurance activities and expenses, primarily related to Daytrana® production.
Notwithstanding improvements following implementation of new manufacturing processes, we expect the
peel force issue to continue to negatively affect margins unless and until this issue is resolved.
Research and development expenses in the 2009 Quarter increased $1.3 million, or 40%, compared
to the 2008 Quarter, primarily reflecting expenses associated with the Mesafem™ Phase 2
clinical study and additional research and development expenses to support our long-term growth
objectives. Compared to the 2008 Quarter, selling and marketing expenses increased $0.2 million,
or 4%, and general and administrative expenses remained substantially unchanged.
We recognized $7.5 million in equity in earnings of Novogyne in the 2009 Quarter, a decrease
of 9% compared to the 2008 Quarter. Net revenues at Novogyne increased 2% to $40.2 million in the
2009 Quarter compared to the 2008 Quarter, reflecting higher gross sales of
Vivelle-Dot®,
driven primarily by pricing and increased prescription demand, substantially offset by a decrease
in sales volume resulting from inventory reductions in the distribution channel. The increase in
gross revenues was also partially offset by higher sales deductions for product returns. Demand
for Vivelle-Dot® increased for the period, with new and total prescriptions for the
product increasing 6% and 3%, respectively, compared to the 2008 Quarter. Novogyne’s gross margin percentage for the 2009
Quarter remained substantially unchanged at 80%. Novogyne’s selling, general and administrative
expenses for the 2009 Quarter were $10.7 million, a 19% increase over the 2008 Quarter, primarily
due to the timing of sample shipments and other expenses in support of Vivelle-Dot®.
Novogyne’s net income for the 2009 Quarter decreased 6% to $21.5 million compared to the 2008
Quarter.
24
At March 31, 2009, we had $72.2 million in cash and cash equivalents and $11.8 million in
investments in auction rate securities. This compares to $62.9 million in cash and cash
equivalents and $15.5 million in investments in auction rate securities at December 31, 2008. Our
investments in auction rate securities at March 31, 2009 had a fair value of $11.8 million, and all
were classified as non-current on our balance sheet. We liquidated $3.7 million of these
investments at par value in the 2009 Quarter. As of March 31, 2009, no amounts were outstanding
under our $15.0 million revolving credit facility.
Total prescriptions for Vivelle-Dot® increased 3% in the 2009 Quarter compared to
the 2008 Quarter, and total prescriptions for Novogyne’s HT products, taken as a whole, increased
1% over the same period. By comparison, the United States HT market declined 5% for the same
period. Total prescriptions for Daytrana® decreased 13% in the 2009 Quarter compared to
the 2008 Quarter, while prescriptions for ADHD stimulant therapies as a class increased 9% over the
same period. Total prescriptions for Pexeva® decreased 21% in the 2009 Quarter compared
to the 2008 Quarter, while for the same period prescriptions for the selective serotonin re-uptake
inhibitor (“SSRI”) class increased 1%. Reflecting ongoing generic substitution, total
prescriptions for Lithobid® decreased 32% in the 2009 Quarter compared to the 2008
Quarter.
Certain Items that May Affect Historical or Future Comparability
Set forth below are certain items that may affect the historical or future comparability of
our consolidated results of operations and financial condition. Such disclosure is not intended to
address every item that may affect the historical or future comparability of our consolidated
results of operations or financial condition and such disclosure should be read in conjunction with
the discussion and analysis of our consolidated results of operations, liquidity and capital
resources and outlook appearing elsewhere in this Item 2.
Daytrana®
Daytrana® is our transdermal methylphenidate system for the treatment of ADHD,
which we have licensed globally to Shire. We and Shire have received reports from some consumers
concerning the difficulty of removing the release liner from certain Daytrana® patches.
In the first quarter of 2007, we, together with Shire, implemented enhancements to the
Daytrana® release liner. While the enhanced release liner has reduced the level of
consumer reports, some patients and caregivers continue to have difficulty in removing the release
liner from some Daytrana® patches.
In July 2007, we received from the FDA a list of observations on Form 483 following an on-site
inspection of our manufacturing facilities. The majority of the observations in the Form 483
related to the Daytrana® patch and difficulties experienced by some patients in removing
the release liner, including certain product lots that utilize the enhanced release liner. In July
2007, we submitted to the FDA our response to the Form 483.
In the third quarter of 2007, Shire initiated two voluntary recalls of a portion of the
Daytrana® product on the market primarily in response to feedback from patients and
caregivers who experienced difficulty removing the release liner from some Daytrana®
patches. We paid Shire $3.3 million in February 2008 related to those recalls. This payment was
charged to operations in 2007.
In January 2008, we received a warning letter from the FDA in connection with the FDA’s July
2007 inspection of our manufacturing facilities. In the warning letter, which is posted at the
FDA’s website, the FDA cited Current Good Manufacturing Practice deficiencies related to: (i) peel
force specifications for removal of Daytrana’s® release liner; and (ii) data supporting the peel force characteristics
of Daytrana’s® enhanced release liner throughout the product’s shelf life. We submitted
our response to the warning letter on January 30, 2008, which remains under review by the FDA.
25
In April 2008, a Noven stability protocol identified certain Daytrana® lots
exhibiting high peel force characteristics. In June 2008, Shire initiated the voluntary recall of
two lots of Daytrana® that did not meet the product’s release liner removal
specification. In August 2008, Shire initiated the voluntary recall of two additional lots of
Daytrana® that did not meet the product’s release liner removal specification. During
2008, we paid Shire $3.7 million related to its June and August 2008 recalls, of which
approximately $3.1 million has been charged to general and administrative expenses, $0.4 million
was recorded as a reduction in revenues and $0.2 million was charged to cost of products sold in
2008. For each of the recalls described above, the amount charged to general and administrative
expenses represents amounts we are obligated to reimburse Shire for direct costs of the recalls,
the amounts reflected as reductions of revenue represent the amounts recognized for product which
is expected to be returned and the charge to cost of product sold represents the value of AMI
included in such product for which we are required to reimburse Shire.
In the fourth quarter of 2008, we implemented: (i) new product release testing intended to
predict which Daytrana® lots are at risk of developing peel force issues during the
product’s shelf life; and (ii) new manufacturing processes and procedures that helped improve
efficiencies associated with existing Daytrana® production. Product that fails to meet
the predictive release test will be destroyed, which will result in increased Daytrana®
manufacturing costs, including reimbursements to Shire for the AMI included in the destroyed
product. In the 2009 Quarter, Daytrana® cost of products sold exceeded our
Daytrana® net revenues by $0.7 million. Although we have implemented new manufacturing
processes and procedures that helped improve efficiencies associated with existing
Daytrana® production in the fourth quarter of 2008, we expect the peel force issue to
continue to negatively affect margins as a result of increased Daytrana® manufacturing
costs, including reimbursements to Shire for the AMI included in destroyed product, unless and
until the peel force issue is resolved.
In March 2009, Shire initiated a voluntary recall of certain lots of Daytrana® due
to the failure of some of the patches to meet the product’s release liner removal specification. We
believe the reserve established in 2008 ($3.7 million at March 31, 2009) will be sufficient to
cover our cost related to this recall. Although the new release testing is designed to reduce the
likelihood that newly-manufactured product will be withdrawn or recalled in the future, we cannot
assure that our predictive release testing will detect all production issues or that there will not
be future Daytrana® market withdrawals or recalls.
In January 2009, we received from the FDA a list of observations on Form 483 following an
on-site inspection of our manufacturing facilities. Like the warning letter and the prior Form
483, the majority of the observations in the Form 483 relate to the manufacture of
Daytrana® product that exhibits high peel force characteristics, an issue which Noven
and Shire continue to work to resolve. In February 2009, we submitted our response to the Form 483.
We believe we have identified the root cause of the peel force issue, and are testing
manufacturing solutions intended to address the issue. Implementation of a solution will require
the prior agreement of the FDA. We estimate that the steps necessary to begin manufacturing
commercial product incorporating a solution, including obtaining the FDA’s agreement, may carry
over into 2010. We cannot assure, however, that we will receive the FDA’s agreement on a timely
basis or at all. Noven’s January 2008 response to the warning letter remains under review by the
FDA.
In March 2009, Shire announced its withdrawal of the European Marketing Authorization
Application (“MAA”) for Daytrana®. Shire indicated that its decision to withdraw the
MAA was based on the fact that European regulatory authorities had requested an additional clinical
study for Daytrana® in a European patient population, and that Shire planned to enter
the European ADHD market through its previously-announced pending acquisition of an oral
methylphenidate product that is already approved in Europe.
26
Results of Operations
As discussed in Note 15 — “Segment Data” to our Unaudited Condensed Consolidated Financial
Statements, we operate in three segments distinguished along product categories and nature of the
business unit: (i) Noven Transdermals, which currently engages in the manufacturing, licensing and
sale to partners of prescription transdermal products; (ii) Novogyne, our women’s health joint
venture with Novartis in which we own a 49% equity interest; and (iii) Noven Therapeutics, which
currently engages in the marketing and sale of pharmaceutical products.
2009 Quarter compared to the 2008 Quarter
Revenues
Our revenues by segment and type for the 2009 Quarter and the 2008 Quarter are summarized as
follows (dollar amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
|
% Change |
|
Noven Transdermals |
|
|
|
|
|
|
|
|
|
|
|
|
Novogyne: |
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
5,480 |
|
|
$ |
2,431 |
|
|
|
125 |
% |
Royalties |
|
|
2,222 |
|
|
|
2,180 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
Product revenues — Novogyne |
|
|
7,702 |
|
|
|
4,611 |
|
|
|
67 |
% |
|
|
|
|
|
|
|
|
|
|
|
Third Parties: |
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
|
7,004 |
|
|
|
5,801 |
|
|
|
21 |
% |
Royalties |
|
|
71 |
|
|
|
79 |
|
|
|
-10 |
% |
|
|
|
|
|
|
|
|
|
|
|
Product revenues — third parties |
|
|
7,075 |
|
|
|
5,880 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total product revenues |
|
|
14,777 |
|
|
|
10,491 |
|
|
|
41 |
% |
License and contract revenues |
|
|
6,289 |
|
|
|
5,286 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total Transdermals |
|
|
21,066 |
|
|
|
15,777 |
|
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noven Therapeutics |
|
|
|
|
|
|
|
|
|
|
|
|
Third Parties: |
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
|
6,574 |
|
|
|
5,705 |
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
27,640 |
|
|
$ |
21,482 |
|
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
As described in more detail below, our net revenues in the 2009 Quarter were $27.6 million, an
increase of 29% compared to $21.5 million reported in the 2008 Quarter. The increase was primarily
due to a $4.3 million increase in product revenues from our Noven Transdermals segment comprised
primarily of a $2.9 million increase in sales of Vivelle-Dot® and a $1.2 million
increase in transdermal product revenues from third parties in the 2009 Quarter. This increase was
also due to a $1.0 million, or 19%, increase in license and contract revenues and a $0.9 million
increase in product revenues from our Noven Therapeutics segment compared to the 2008 Quarter.
Product Revenues — Novogyne
Product revenues — Novogyne consists of our sales of
Vivelle-Dot®/Estradot® and CombiPatch® to Novogyne at a fixed
price for resale and product sampling by Novogyne primarily in the United States as well as the
royalties we receive as a result of Novogyne’s sales of Vivelle-Dot®.
27
The $3.1 million increase in Novogyne product revenues for the 2009 Quarter compared to the
2008 Quarter was primarily due to the impact of an equipment failure in transdermal manufacturing
which negatively affected product revenues in the 2008 Quarter, as well as the timing of orders
from Novogyne. By product, Vivelle-Dot® increased $2.9 million primarily due to the
equipment failure in the 2008 Quarter and CombiPatch® increased $0.3 million primarily
due to the timing of orders.
Product Revenues — Third Parties
Product revenues — third parties primarily consist of: (i) sales of Estradot® and
Estalis® HT patches to Novartis Pharma at a price based on a percentage of Novartis
Pharma’s net selling price (subject to certain minimum amounts) for resale primarily outside the
United States and Japan, together with royalties generated from Novartis Pharma’s sales of
Estradot® in Canada; (ii) sales of Daytrana® to Shire for commercial resale
in the United States; (iii) sales of Pexeva® and Lithobid® to trade
customers, including wholesalers, distributors and chain pharmacies; and (iv) beginning in August
2008, sales of Stavzor® to trade customers, including wholesalers, distributors and
chain pharmacies.
The $1.2 million increase in product revenues — third parties in our Noven Transdermals
segment for the 2009 Quarter compared to the 2008 Quarter primarily consisted of a $0.8 million
increase in unit sales and a $0.4 million increase related to pricing. The increase in unit sales
was primarily due to the impact of an equipment failure in transdermal manufacturing which occurred
in the 2008 Quarter, as well as the timing of orders from Novartis Pharma. With respect to pricing,
we recognize the benefit from price increases for our third party HT product through periodic price
reconciliation payments received from Novartis Pharma. We receive such payments from time to time
upon Novartis Pharma’s determination that its actual sales price of our product entitles us to
receive amounts in excess of the minimum transfer price at which we initially sold the product to
Novartis Pharma. We recognized $1.6 million and $1.2 million of such payments in the 2009 Quarter
and 2008 Quarter, respectively.
Noven Therapeutics generated $6.6 million of net revenues in the 2009 Quarter from sales of
Stavzor®, Pexeva® and Lithobid® compared to $5.7
million of net revenues in the 2008 Quarter from sales of Pexeva® and
Lithobid®. By product, the addition of Stavzor® contributed to $0.7 million
of the increase, Lithobid® increased $0.5 million due to the timing of orders from trade
customers as prescriptions have declined. The increase in net revenues was partially offset by a
$0.3 million decrease in net revenues for Pexeva® primarily due to lower prescriptions.
We sell Stavzor® to pharmaceutical wholesalers and chain drug stores. These
companies have the right to return Stavzor® for up to one year after product expiration.
As a result of the commercial launch of Stavzor® in the third quarter of 2008, we do not
yet have sufficient sales history to reasonably estimate product returns of Stavzor®.
Our customers are no longer permitted to return the product once it has been dispensed. Under SFAS
No. 48, we cannot recognize revenue on product shipments until we can reasonably estimate returns
relating to these shipments. In accordance with SFAS No. 48, we have deferred recognition of
revenue on product shipments of Stavzor® to our customers until such time as
Stavzor® units are dispensed through patient prescriptions. We estimate the volume of
prescription units dispensed at pharmacies based on data provided by external, independent sources.
These sources poll pharmacies, hospitals, mail order and other retail outlets for
Stavzor® prescriptions and project this sample on a national level. We will recognize
revenue based on prescription units dispensed until we have sufficient sales history to reasonably
estimate product returns. We recognized $0.7 million of net revenues for Stavzor® in the
2009 Quarter, and $1.6 million of deferred product revenue relating to Stavzor® was
reflected on our Condensed Consolidated Balance Sheet as of March 31, 2009.
License and Contract Revenues
License revenues consist of the recognition of non-refundable up-front, milestone and similar
payments under license agreements. Contract revenues consist of the recognition of payments
received as work is performed on research and development projects. The payments received may take
the form of non-refundable up-front payments, payments received upon the completion of certain
phases of development work and success milestone payments.
28
License and contract revenues increased $1.0 million for the 2009 Quarter compared to the 2008
Quarter, primarily attributable to a $1.3 million increase in amortization of milestone payments
received from Shire related to the license of Daytrana®, partially offset by a $0.4
million decrease in contract revenues during the 2009 Quarter due to the timing of work performed
on research and development projects.
Gross to Net Revenues
We record revenues net of sales allowances for rebates, chargebacks, cash and other discounts,
as well as sales returns allowances. We establish return allowances on product sold through our
Noven Transdermals segment when it is probable that such product will be recalled or withdrawn.
Sales returns allowances in our Noven Therapeutics segment represent allowances for estimated
product returns based on expiration dating and are estimated based on historical return rates,
current sales levels and other factors on a product-by-product basis. The following table sets
forth the reconciliation of our gross revenues to net revenues for the 2009 Quarter and 2008
Quarter, respectively (dollar amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
| |
|
|
|
|
|
gross |
|
|
|
|
|
gross |
| |
|
2009 |
|
|
revenues |
|
2008 |
|
|
revenues |
Noven Transdermals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenues |
|
$ |
21,135 |
|
|
|
100 |
% |
|
$ |
16,013 |
|
|
|
100 |
% |
Sales returns allowances |
|
|
(69 |
) |
|
|
0 |
% |
|
|
(236 |
) |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
21,066 |
|
|
|
100 |
% |
|
$ |
15,777 |
|
|
|
99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noven Therapeutics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenues |
|
$ |
9,531 |
|
|
|
100 |
% |
|
$ |
9,508 |
|
|
|
100 |
% |
Cash discounts |
|
|
(172 |
) |
|
|
2 |
% |
|
|
(192 |
) |
|
|
2 |
% |
Medicaid, Medicare & State
program rebates and credits including
redemption offers |
|
|
(2,038 |
) |
|
|
21 |
% |
|
|
(2,289 |
) |
|
|
24 |
% |
Chargebacks |
|
|
(163 |
) |
|
|
2 |
% |
|
|
(267 |
) |
|
|
3 |
% |
Wholesaler fees |
|
|
(389 |
) |
|
|
4 |
% |
|
|
(594 |
) |
|
|
6 |
% |
Sales returns allowances |
|
|
(195 |
) |
|
|
2 |
% |
|
|
(461 |
) |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and returns allowances |
|
|
(2,957 |
) |
|
|
31 |
% |
|
|
(3,803 |
) |
|
|
40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
6,574 |
|
|
|
69 |
% |
|
$ |
5,705 |
|
|
|
60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in Medicaid, Medicare & state program rebates and credits for Noven Therapeutics
(as a percentage of gross revenues) is attributable to our decision not to renew unprofitable
managed care contracts. The decrease in sales returns allowances for Noven Therapeutics (as a
percentage of gross revenues) was primarily attributable to a decrease in return reserves for
Lithobid® due to lower actual returns of product.
Gross Margin
This section discusses gross margins relating to our product revenues: (i) across all of our
products (“Overall Gross Margin”); (ii) on our transdermal product revenues from Novogyne (“Gross
Margin — Novogyne”), which for accounting purposes is considered a related party; (iii) on our
transdermal product revenues from third parties (“Gross Margin — Third Parties”); and (iv) on our
Noven Therapeutics products.
29
For our Noven Transdermals segment, the allocation of manufacturing expenses impacts our
determination of inventory costs and, consequently, gross margins for each of our products.
Manufacturing expenses, which totaled $7.0 million and $7.9 million in the 2009 Quarter and the
2008 Quarter, respectively, include compensation and benefits, supplies and tools, equipment costs,
depreciation and amortization, and insurance costs, and represent a substantial portion of our
inventory production costs. The allocation of manufacturing expenses among manufactured products
requires us to make significant estimates that involve subjective and often complex judgments.
Using different estimates would likely result in materially different results for Gross Margin —
Novogyne and Gross Margin — Third Parties than are presented in the gross margin table below.
Our gross margins are summarized as follows (dollar amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
Noven Transdermals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Novogyne: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
$ |
7,702 |
|
|
|
|
|
|
$ |
4,611 |
|
|
|
|
|
Cost of products sold |
|
|
3,648 |
|
|
|
|
|
|
|
3,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
4,054 |
|
|
|
53 |
% |
|
|
1,285 |
|
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
|
7,075 |
|
|
|
|
|
|
|
5,880 |
|
|
|
|
|
Cost of products sold |
|
|
5,737 |
|
|
|
|
|
|
|
5,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
1,338 |
|
|
|
19 |
% |
|
|
(67 |
) |
|
|
-1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noven Transdermals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
|
14,777 |
|
|
|
|
|
|
|
10,491 |
|
|
|
|
|
Cost of products sold |
|
|
9,385 |
|
|
|
|
|
|
|
9,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
5,392 |
|
|
|
36 |
% |
|
|
1,218 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noven Therapeutics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
|
6,574 |
|
|
|
|
|
|
|
5,705 |
|
|
|
|
|
Cost of products sold |
|
|
2,031 |
|
|
|
|
|
|
|
2,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
4,543 |
|
|
|
69 |
% |
|
|
3,669 |
|
|
|
64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
|
21,351 |
|
|
|
|
|
|
|
16,196 |
|
|
|
|
|
Cost of products sold |
|
|
11,416 |
|
|
|
|
|
|
|
11,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
9,935 |
|
|
|
47 |
% |
|
$ |
4,887 |
|
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In general, Noven Therapeutics’ products have higher gross margins than our transdermal
products because we sell Noven Therapeutics’ products directly to trade customers at wholesale and
commercial prices. Our sales of HT products to Novogyne for resale in the United States have a
higher gross margin than our other
transdermal products, reflecting favorable pricing, larger production orders and other
factors. Our sales of HT products to Novartis Pharma for resale in international markets generally
have lower gross margins than sales of HT products sold to Novogyne due to, among other things,
unfavorable pricing environments in foreign markets, and smaller production orders. Our gross
margin on product sales of Daytrana® to Shire has been negatively affected by the
factors described below.
30
As noted in the tables above, Overall Gross Margin increased in the 2009 Quarter compared to
the 2008 Quarter. Improvement in overall Gross Margin in the 2009 Quarter resulted primarily from:
(i) the impact of inventory write-offs of $2.8 million which occurred in the 2008 Quarter due to an
equipment failure in transdermal manufacturing (comprised of $1.8 million of write-offs of products
manufactured for Novogyne and $1.0 million of third party HT product write-offs), as well as
additional manufacturing costs incurred in the 2008 Quarter to address this issue; (ii) the
reduction of approximately $0.9 million in manufacturing expenses compared to the 2008 Quarter; and
(iii) improved gross margins for our Noven Therapeutics products. Overall Gross Margin in the 2009
Quarter was negatively affected by inventory write-offs of approximately $0.8 million related to
Daytrana® product, of which $0.3 million related to the peel force issue.
We sell Daytrana® finished product to Shire at a fixed cost, and consequently, our
profit on product sales of Daytrana® depends on our ability to manufacture the product
efficiently and to fully utilize our facilities. For the 2009 Quarter, Daytrana® net
product revenues were $2.9 million and cost of products sold related to Daytrana® was
$3.6 million, resulting in negative gross margin for the product. This compares with
Daytrana® product revenues of $3.0 million and cost of products sold related to
Daytrana® of $3.3 million for the 2008 Quarter.
Although we have implemented new manufacturing practices and procedures in the fourth quarter of
2008 designed to improve efficiencies associated with existing Daytrana® production, we
expect the peel force issue to continue to negatively affect margins as a result of increased
Daytrana® manufacturing costs, including reimbursements to Shire for the AMI included in
destroyed product, unless and until the peel force issue is resolved.
We expect to continue to incur increased quality assurance costs related to our continued
efforts to improve our quality assurance systems and to address the issues raised by the FDA and a
significant portion of these continuing costs will be allocated to Daytrana®, which we
expect to negatively affect the gross margin on sales of this product for the remainder of 2009 and
beyond.
Our expectations for gross margins for all of 2009 are addressed under “Outlook” below.
Operating Expenses
Operating expenses for the 2009 Quarter and the 2008 Quarter are summarized as follows (dollar
amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
|
| |
|
Ended March 31, |
|
|
| |
|
2009 |
|
2008 |
|
% Change |
Research and development |
|
$ |
4,653 |
|
|
$ |
3,319 |
|
|
|
40 |
% |
Selling and marketing |
|
|
5,013 |
|
|
|
4,823 |
|
|
|
4 |
% |
General and administrative |
|
|
7,048 |
|
|
|
7,022 |
|
|
|
0 |
% |
Research and Development
Research and development expenses include costs associated with, among other things, product
formulation, pre-clinical testing, clinical studies, regulatory and medical affairs, production for
clinical and regulatory purposes, production related development engineering for developmental
products, and the personnel associated with each of these functions. The $1.3 million increase in
research and development expenses for the 2009 Quarter compared to the 2008 Quarter was primarily
attributable to $0.8 million associated with Mesafem™ Phase 2 clinical trials and $0.5 million in
additional research and development expenses to support our long-term growth objectives.
31
Selling and Marketing
The $0.2 million increase in selling and marketing costs for the 2009 Quarter compared to the
2008 Quarter was primarily related to the timing of sample shipments to the sales force.
General and Administrative
General and administrative expenses remained substantially unchanged for the 2009 Quarter
compared to the 2008 Quarter, primarily due to a $0.9 million increase in salary and related
benefits, which was offset by a $0.7 million decrease in audit and accounting fees and a $0.2
million decrease in executive recruiting fees.
Other Income and Expenses
Interest and Other Income
Interest and other income decreased $0.5 million for the 2009 Quarter compared to the 2008
Quarter. This decrease was primarily attributable to sales of $39.0 million of our investments in
auction rate securities at par value during 2008 and reinvestment of the proceeds into
lower-yielding, cash equivalent investments.
Income Taxes
Our effective tax rate was approximately 37% and 34% for the 2009 Quarter and 2008 Quarter,
respectively. The provision for income taxes is based on the Federal statutory and state income
tax rates. Net deferred income tax assets are measured using the average graduated tax rate for the
estimated amount of annual taxable income in the years that the liability is expected to be settled
or the asset recovered. The effect of adjusting the expected tax rate related to the net deferred
income tax assets is included in the provision for income taxes. As of March 31, 2009 we had a net
deferred tax asset of $72.0 million compared to $72.2 million at December 31, 2008. Realization of
this deferred tax asset depends upon the generation of sufficient future taxable income. A
valuation allowance is established if it is more likely than not that all or a portion of the
deferred tax asset will not be realized. Noven Therapeutics files separate state income tax
returns in states where it has determined that it is required to file state income taxes. As a
result, state deferred tax assets relating to Noven Therapeutics are evaluated separately in
determining whether the state deferred tax assets are realizable. Noven Therapeutics has
historically reported taxable losses in these states and we expect that Noven Therapeutics will
continue to incur state taxable losses in the next few years. These circumstances create negative
evidence indicating the need for a valuation allowance at March 31, 2009. Our valuation allowance
for state deferred tax assets was $3.5 million as of March 31, 2009 and December 31, 2008, due to
uncertainty about our ability to realize these state deferred tax assets based on our projection of
future state taxable income. If we determine, based on estimated future profitability of Noven
Therapeutics, that these state deferred tax assets will more likely than not be realized, then the
release of all, or part, of the related valuation allowance could result in an immediate income tax
benefit in the period the valuation allowance is released.
Equity in Earnings of Novogyne
We share in the earnings of Novogyne according to an established formula after satisfaction of
an annual preferred return of $6.1 million to Novartis. Our share of Novogyne’s earnings (a
non-cash item) increases as Novogyne’s earnings increase, subject to a cap of 49%. Novogyne earned
sufficient income in each of the 2009
Quarter and the 2008 Quarter to meet Novartis’ annual preferred return for those periods and
for us to recognize earnings from Novogyne under the formula. We report our share of Novogyne’s
earnings as “Equity in earnings of Novogyne” in our Condensed Consolidated Statements of
Operations.
32
Novogyne records revenues net of sales allowances for rebates, chargebacks, cash and other
discounts and sales returns allowances. The financial results of Novogyne for the 2009 Quarter and
the 2008 Quarter are summarized as follows (dollar amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
|
% Change |
Gross revenues |
|
$ |
48,230 |
|
|
$ |
45,294 |
|
|
|
6 |
% |
Sales allowances |
|
|
6,666 |
|
|
|
5,853 |
|
|
|
14 |
% |
Sales returns allowances |
|
|
1,373 |
|
|
|
(85 |
) |
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
Sales allowances and returns |
|
|
8,039 |
|
|
|
5,768 |
|
|
|
39 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
40,191 |
|
|
|
39,526 |
|
|
|
2 |
% |
Cost of sales |
|
|
8,077 |
|
|
|
7,808 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses |
|
|
10,711 |
|
|
|
9,012 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
21,403 |
|
|
|
22,706 |
|
|
|
-6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
94 |
|
|
|
267 |
|
|
|
-65 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
21,497 |
|
|
$ |
22,973 |
|
|
|
-6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noven’s equity in earnings of
Novogyne |
|
$ |
7,545 |
|
|
$ |
8,267 |
|
|
|
-9 |
% |
|
|
|
|
|
|
|
|
|
|
|
N/M — Not Meaningful
Novogyne Net Revenues
Novogyne sells its products to trade customers, including wholesalers, distributors and chain
pharmacies. As has historically been the case, the timing of purchases by trade customers is
driven by the inventory needs of each customer and other factors, and does not necessarily track
underlying prescription trends in any given period or coincide with Novogyne’s quarterly financial
reporting periods. As a result, the timing of orders by trade customers is difficult to predict
and can lead to significant variability in Novogyne’s quarterly results.
Novogyne’s gross revenues increased $2.9 million for the 2009 Quarter compared to the 2008
Quarter. By product, Vivelle-Dot® and CombiPatch® increased $2.6 million and
$0.3 million, respectively. The $2.6 million Vivelle-Dot® increase consisted of a $4.0
million increase related to pricing, partially offset by a $1.4 million decrease in unit sales. The
decrease in unit sales of Vivelle-Dot® relates to a reduction of inventory levels in the
distribution channel, as total prescriptions have increased 3% for the 2009 Quarter compared to the 2008
Quarter. The $0.3 million CombiPatch® increase was primarily attributable to pricing.
Sales allowances consist of chargebacks, Medicaid rebates, managed healthcare rebates, cash
discounts and other allowances, which tend to fluctuate based on changes in gross revenues. For
the 2009 Quarter and the 2008 Quarter, these sales allowances were 14% and 13% of gross revenues,
respectively.
33
Sales returns allowances consist of allowances for returns of expiring product. The activity
in the sales returns allowances for the 2009 Quarter and the 2008 Quarter was as follows (amounts
in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
Sales returns allowances included in net revenues |
|
$ |
1,373 |
|
|
$ |
(85 |
) |
Actual returns primarily for expiring product |
|
|
(1,106 |
) |
|
|
(610 |
) |
|
|
|
|
|
|
|
Change in allowances for returns primarily for
expiring product |
|
$ |
267 |
|
|
$ |
(695 |
) |
|
|
|
|
|
|
|
The increase in sales returns allowances for the 2009 Quarter compared to the 2008 Quarter is
primarily attributable to a revision to the return accrual rate for Vivelle-Dot® in the
fourth quarter of 2008 due to an increase in the rate of actual returns for the product. In
addition, the 2008 Quarter benefited from a reduction in allowance for returns for prior periods
due to lower actual returns at the time.
Novogyne Gross Margin
Gross margin at Novogyne was 80% for both the 2009 Quarter and the 2008 Quarter as price
increases for all products in the 2009 Quarter were offset by higher sales returns allowances.
Novogyne Selling, General and Administrative Expenses
Novogyne’s selling, general and administrative expenses increased $1.7 million for the 2009
Quarter compared to the 2008 Quarter primarily due to a $0.6 million increase in sales force
expenses related to re-alignment to target areas, a $0.5 million increase in market research
expenses due to the timing of projects, a $0.5 million increase in sample expenses due to the
timing of shipments by Noven to Novogyne and a $0.1 million increase in HT litigation expenses.
34
Liquidity and Capital Resources
As of March 31, 2009 and December 31, 2008, we had the following (amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
December 31, |
| |
|
2009 |
|
2008 |
Cash and cash equivalents |
|
$ |
72,174 |
|
|
$ |
62,875 |
|
Short-term investments |
|
|
— |
|
|
|
3,650 |
|
Working capital |
|
|
57,109 |
|
|
|
50,644 |
|
In addition to our cash and working capital, as of March 31, 2009, we owned investments in
auction rate securities with a fair value of $11.8 million. Due to the current illiquid market
conditions and failed auctions for auction rate securities, we continue to classify our investments
in auction rate securities as non-current assets. During the 2009 Quarter, we received proceeds of $3.7 million from the redemption of an auction rate security investment at par value. On a combined basis, our
cash and cash equivalents and investments in auction rate securities were as follows (amounts in
thousands):
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2009 |
|
|
2008 |
|
Cash and cash equivalents |
|
$ |
72,174 |
|
|
$ |
62,875 |
|
Investments in auction rate securities: |
|
|
|
|
|
|
|
|
Current |
|
|
— |
|
|
|
3,650 |
|
Non-current |
|
|
11,810 |
|
|
|
11,810 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents and investments |
|
$ |
83,984 |
|
|
$ |
78,335 |
|
|
|
|
|
|
|
|
Cash provided by (used in) operating, investing and financing activities for the 2009 Quarter
and the 2008 Quarter is summarized as follows (amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
Cash flows: |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
9,954 |
|
|
$ |
(4,076 |
) |
Investing activities |
|
|
2,641 |
|
|
|
17,813 |
|
Financing activities |
|
|
(3,296 |
) |
|
|
(45 |
) |
|
|
|
|
|
|
|
Net Cash Flows |
|
$ |
9,299 |
|
|
$ |
13,692 |
|
|
|
|
|
|
|
|
Operating Activities
Net cash provided by operating activities for the 2009 Quarter reflects the receipt of $12.7
million in distributions from Novogyne. Changes in working capital, including a $2.4 million
decrease in accrued compensation and related liabilities and a $1.7 million increase in
inventories partially offset the net cash provided by operating activities.
Net cash used in operating activities for the 2008 Quarter primarily resulted from the timing
of certain payments, including inventory purchases of $6.2 million, $5.8 million in compensation
and related liabilities and the payment to Shire of $3.3 million related to its 2007 withdrawal of
certain Daytrana® product. The net cash used was partially offset by the receipt of
$10.9 million in distributions from Novogyne.
35
Investing Activities
Noven has invested a portion of its cash in investments, consisting of investment
grade, auction rate securities, which are categorized as available-for-sale under the provisions of
SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”.
Net cash provided by investing activities for the 2009 Quarter was primarily attributable to
$3.7 million from the redemption of an auction rate security investment at par value, partially offset by $0.8 million in
equipment purchases to support operations.
Net cash provided by investing activities for the 2008 Quarter was primarily attributable to
$18.8 million in sales of short-term investments at par value, partially offset by $0.3 million in
equipment purchases to support operations.
Financing Activities
Net cash used in financing activities for the 2009 Quarter was primarily attributable to a
$3.3 million sales milestone payment to Synthon, an obligation we assumed as part of the Noven
Therapeutics acquisition.
Net cash used in financing activities for the 2008 Quarter was primarily attributable to
payments on capital leases of $0.1 million.
Short-Term and Long-Term Liquidity
Our principal sources of short-term liquidity are existing cash and distributions from
Novogyne. Additional sources of short-term liquidity include cash generated from product sales,
license fees and royalties under development and license agreements.
Our short-term cash flow is significantly dependent on distributions from Novogyne and sales,
royalties and license fees associated with our products. Any material decrease in sales of those
products by us or our licensees, a material decline in the HT market, the introduction of a generic
version of Vivelle-Dot®, material increases in operating expenses, or the inability or
failure of Novogyne to pay distributions, would have a material adverse effect on our short-term
cash flow and require us to rely on our existing cash balances, investments, equity or debt
offerings or on borrowings to support our operations and business.
During the 2009 Quarter, our cash and cash equivalents and investments in auction rate
securities increased from $78.3 million to $84.0 million. The increase primarily resulted from the
receipt of $12.7 million of distributions from Novogyne. The increase in cash was partially offset
by certain cash outlays during the 2009 Quarter, including (i) a $3.3 million sales milestone
payment to Synthon; (ii) $1.0 million for insurance premiums; (iii) $0.8 million for equipment
purchases; and (iv) cash used to fund increases in inventory and other working capital items. In
April 2009, we paid $3.2 million for income taxes as our first quarterly installment for 2009. We
believe that our existing cash balances and expected collections of receivables, together with the
available capacity under our credit facility (described below), will be sufficient to meet our
operating needs and short-term capital requirements.
We received the first $25.0 million sales milestone payment from Shire relating to its sales
of Daytrana® in the first quarter of 2007, the second $25.0 million Daytrana®
sales milestone payment in the third quarter of 2007 and the third and final $25.0 million
Daytrana® sales milestone payment in the third quarter of 2008. We expect to pay income
taxes related to the final Daytrana® milestone payment of approximately $8.5 million
during 2009.
As discussed elsewhere herein, we paid Shire $3.7 million related to Shire’s voluntary recalls
of Daytrana® product in 2008. In addition, we established a reserve in 2008 ($3.7
million at March 31, 2009) for certain previously-manufactured Daytrana® lots that would
not meet the new release testing standard and are probable of being voluntarily withdrawn or
recalled from the market prior to expiration of their shelf life, and which therefore would require
additional reimbursements to Shire.
36
In April 2008, we made a $3.3 million milestone payment to Synthon based on our achieving
specified net sales of Pexeva® during 2007. In March 2009, we made a $3.3 million
milestone payment to Synthon based on our achieving specified net sales of Pexeva®
during 2008.
As of March 31, 2009, we owned investments in auction rate securities with a total par value and fair value of $12.3 million and $11.8 million, respectively, which subjects us to the liquidity risk described in Part II — Item 7A “Quantitative
and Qualitative Disclosures About Market Risk” in our Form 10-K. During 2008, we recorded $0.5
million of other-than-temporary impairments on our investments in auction rate securities which are
classified as available-for-sale under SFAS No. 115. We redeemed $3.7 million of our investments in auction rate securities at par value
during the 2009 Quarter. Due to continuing auction failures beginning in February 2008, we
utilized valuation models to determine the fair values of our investments in auction rate
securities. The fair values of our investments were calculated based on the following: (i) the
underlying structure of each security; (ii) the present value of future principal and interest
payments discounted at rates considered to reflect current market conditions; (iii) consideration
of the probabilities of default, auction failure, or repurchase at par for each period; and (iv)
consideration of third party credit enhancement. These estimated fair values could change
significantly based on future market conditions.
Changes to investments measured at fair value on a recurring basis using unobservable inputs
(Level 3) during the 2009 Quarter were as follows (amounts in thousands):
| |
|
|
|
|
Balance at December 31, 2008 |
|
$ |
15,460 |
|
Redemptions of investments at par value |
|
|
(3,650 |
) |
|
|
|
|
Balance at March 31, 2009 |
|
$ |
11,810 |
|
|
|
|
|
As a result of failed auctions, our auction rate securities pay interest at rates as defined
by the governing documents or indenture. Due to uncertainty regarding the timing of our future
investment liquidations, we continue to classify our investments in auction rate securities as
non-current assets as of March 31, 2009. As illiquid conditions persist in the auction market for
these securities, it may become increasingly more likely that we will need to recognize additional
other-than-temporary impairment charges in future periods. Such impairment charges could materially
and adversely affect our consolidated financial condition and results of operations.
In July 2008, we entered into an agreement for a $15.0 million credit facility. In connection
with the credit facility and in lieu of granting a security interest in our assets, we agreed not
to pledge, grant any security interest in, or allow any lien or encumbrance in or on, certain of
our financial assets. The facility expires in July 2009. As of the date of this report, no
borrowings were outstanding under this facility and we have no long-term debt.
To the extent the sources of liquidity described above are insufficient to fund our
operations, we would expect to seek to obtain funds through debt and/or equity financing. We
cannot provide any assurance that such financing will be available, if at all, in a timely manner,
or on favorable terms. If we are unable to obtain satisfactory financing, we may be required to
delay or reduce our proposed expenditures, including plant and equipment purchases, research and
development activities and strategic acquisitions. Furthermore, debt financing would likely
require us to devote funds to service and ultimately repay such debt and could subject us to
financial or operational covenants that could limit or hinder our ability to conduct our business.
Our strategic plan includes the acquisition of one or more products, technologies or
businesses that we believe may be complementary to our business. We expect that we will be
required to seek debt and/or equity financing to complete such an acquisition. Current conditions
in the credit markets and equity markets could make it particularly difficult to raise funds on
attractive terms, if at all. We cannot provide any assurance that such financing will be available,
if at all, in a timely manner, or on favorable terms.
37
Capital expenditures totaled $0.8 million for the 2009 Quarter. We expect to fund our
foreseeable capital expenditures from our operating cash flows, existing cash, short-term
investments and debt.
If our transdermal products under development are successful, we may need to fund plant and
equipment purchases to expand production capacity. For our long-term operating needs, we intend to
utilize funds derived from the sources described above. To the extent available, we may use funds
generated through sales of products under development and payments received pursuant to development
and licensing arrangements. If such funds are insufficient, we may rely on debt and/or equity
financing to fund such expansion. We cannot assure that we will successfully complete the
development of such products, that we will obtain regulatory approval for any such products, that
any approved product will be produced in commercial quantities, at reasonable costs, and be
successfully marketed, or that we will successfully negotiate future licensing or product
acquisition arrangements. Because much of the cost associated with product development and
expansion of manufacturing facilities is incurred prior to product launch, if we are unsuccessful
in out-licensing, or if we are unable to launch additional commercially-viable products that we
develop or that we license or acquire from others, we will have incurred the up-front costs
associated with product development or acquisition without the benefit of the cash generated by
sales of those products, which could adversely affect our long-term liquidity needs. Factors that
could impact our ability to develop or acquire and launch additional commercially-viable products
are discussed in Part I — Item 1A “Risk Factors” of our Form 10-K.
For the 2009 Quarter and the 2008 Quarter, our equity in earnings of Novogyne and the
recognition of deferred license and contract revenues (both of which are non-cash items)
contributed significantly to our income before income taxes. Accordingly, our net income may not
be reflective of our cash flow in any given period.
Aggregate Contractual Obligations
Since December 31, 2008, there have been no material changes outside of the ordinary course of
our business to our aggregate contractual obligations previously disclosed in our Form 10-K.
Critical Accounting Estimates
For a discussion of our critical accounting estimates, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates”, which
is included in our Form 10-K.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2 — “Recent Accounting
Pronouncements” in the Notes to Unaudited Condensed Consolidated Financial Statements.
Outlook
A summary of our current financial guidance is provided below. This financial guidance
supersedes all financial guidance that we may have previously provided. Any financial guidance
previously provided in areas not addressed below, whether in prior filings with the Securities and
Exchange Commission, press releases, public conference calls or otherwise, is no longer current and
is hereby withdrawn. The forward-looking information contained in this section is based on our
current assumptions and expectations, many of which are based upon
matters beyond our control. In particular, for purposes of this guidance we have assumed
that, during the remainder of 2009, there will not be any material:
38
| |
• |
|
acquisitions of products, companies, or technologies or other transactions; |
| |
| |
• |
|
changes in Noven’s or Novogyne’s accounting or accounting principles or any of the
estimates or judgments underlying our critical accounting policies; |
| |
| |
• |
|
regulatory or technological developments; |
| |
| |
• |
|
changes in the supply of, demand for, or distribution of our products (including any
changes resulting from competitive products, product recalls/withdrawals for which we have
not already established a reserve, or new study results); |
| |
| |
• |
|
negative actions with respect to our applications for methylphenidate quota or other
disruptions in supplies of raw materials; |
| |
| |
• |
|
adverse actions by the FDA in connection with the observations on Form 483, the January
2008 warning letter or otherwise; |
| |
| |
• |
|
changes in our business relationships/collaborations; or |
| |
| |
• |
|
changes in the economy, health care reimbursement policies or the health care sector
generally. |
Financial guidance is inherently uncertain. Accordingly, we cannot assure that we will
achieve results consistent with this guidance, and our actual financial results could differ
materially from the expected results discussed below. For a discussion of certain factors that may
impact our actual financial results for the periods referenced, including additional risks and
uncertainties related to Noven Therapeutics, readers should carefully consider the risks,
uncertainties and cautionary factors discussed in Part I — Item 1A “Risk Factors” of our Form
10-K, as supplemented by the other information contained in this Form 10-Q and in other reports
filed from time to time with the Securities and Exchange Commission.
Net revenues, gross margin, expenses, net income and other aspects of our financial results
can vary substantially from quarter-to-quarter based upon a number of factors, including the timing
of product orders by our licensees, the timing of release of manufactured product following quality
control and quality assurance measures undertaken by Noven and/or its customers, the availability
of raw materials, the timing of commencement of clinical studies, and other factors.
Net Revenues. We expect total net revenues for full year 2009 to be in the range of $110
million to $115 million, including license and contract revenues of approximately $26 million.
Gross Margin. We expect our overall gross margin, as a percentage of total net product
revenues, to be in the low 40% range for full year 2009.
Research and Development Expense. We expect our consolidated research and development expense
for full year 2009 to be in the low-to-mid $20 million range, reflecting (among other clinical
projects) the cost of our ongoing Phase 2 study for Mesafem™. Estimates of research and
development expenses for future periods are subject to substantial adjustment as each product
advances through various stages of development.
Selling, General and Administrative Expense. We expect our consolidated selling, general and
administrative expense for full year 2009 to be in the low-to-mid $50 million range.
Noven Therapeutics. We expect to improve the pre-tax contribution from our Noven Therapeutics
segment by approximately $5 million in full year 2009 compared to 2008 levels.
Equity in Earnings of Novogyne. We expect our equity in earnings of Novogyne to be in the
low-to-mid $50 million range for full year 2009.
Interest Income. We expect our interest income to be less than $0.5 million for full year
2009.
Effective Tax Rate. We estimate that our effective tax rate will be in the range of 34% to
36% for full year 2009.
39
Earnings Per Share. For full year 2009, we expect to report diluted earnings per share in the
range of $0.95 to $1.05.
Cash.
We expect to use less than $5 million of cash in 2009,
including capital expenditures, reflecting our continued funding of
products in development intended to drive long-term growth, including
Mesafem™. In 2009, we expect to generate positive cash flow from
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of quantitative and qualitative impact of market risk see Part II — Item 7A
“Quantitative and Qualitative Disclosure About Market Risk” of our Form 10-K, as supplemented by
the discussion of the liquidity and other risks associated with Noven’s investments in auction rate
securities above.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, our management evaluated, with the
participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the
effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under
the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our CEO and
CFO concluded that, as of March 31, 2009, our disclosure controls and procedures were effective in
ensuring that information relating to Noven, including its consolidated subsidiaries, required to
be disclosed in reports that it files or submits under the Exchange Act was: (1) recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms;
and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate
to allow timely decisions regarding required disclosure. However, that conclusion should be
considered in light of the various limitations described below on the effectiveness of those
controls and procedures, some of which pertain to most if not all business enterprises, and some of
which arise as a result of the nature of our business. Our management, including our CEO and CFO,
does not expect that our disclosure controls and procedures will prevent all errors and all
improper conduct. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of improper conduct, if any, have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or by management
override of the control. Further, the design of any system of controls also is based in part upon
assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Furthermore, our level of historical and current equity participation in Novogyne may substantially
impact the effectiveness of our disclosure controls and procedures. Because we do not control
Novogyne, and Novogyne’s financial, accounting, inventory, sales and sales deductions functions are
performed by Novartis, our disclosure controls and procedures with respect to our equity investment
in Novogyne are necessarily more limited than those we maintain with respect to Noven.
Changes in Internal Control over Financial Reporting
No changes were made in our internal control over financial reporting during our last fiscal
quarter that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
40
Certifications
Provided with this quarterly report on Form 10-Q are certifications of our CEO and CFO. We
are required to provide those certifications by Section 302 of the Sarbanes-Oxley Act of 2002 and
the SEC’s implementing regulations. This Item 4 of Part I of this quarterly report is the
information concerning the evaluation referred to in those certifications, and you should read this
information in conjunction with those certifications for a more complete understanding of the
topics presented.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Certain lawsuits and legal proceedings in which we are involved are described in Part I, Item
3 “Legal Proceedings” of our Form 10-K for the year ended December 31, 2008. Except as described
below, there have been no material developments related to the legal proceedings described in our
Form 10-K during the period covered by this Form 10-Q, and through the filing of this Form 10-Q.
All proceedings described in our Form 10-K remain outstanding.
In March 2009, a complaint was filed in the United States District Court, Southern District of
Illinois against Wyeth Inc. and other named pharmaceutical companies, including Noven, Novogyne and
Novartis. The complaint alleges liability in connection with personal injury claims allegedly
arising from the use of HT products, including CombiPatch®. The plaintiff claims
compensatory and other damages in an unspecified amount. Noven has not yet been served with the
complaint.
See Note 14 — “Commitments and Contingencies — Litigation, Claims and Assessments,” in the
Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding
legal proceedings.
Item 1A. Risk Factors
There have been no material changes or additions to the risk factors previously disclosed in
our Form 10-K. Readers are urged to carefully review our risk factors because they may cause our
results to differ from the “forward-looking statements” made in this report or otherwise made by us
or on our behalf. The risk factors are not necessarily listed in order of priority or probability
and are not the only ones we face. If any of these risks actually occurs, our business, financial
condition and results of operations could suffer. Additional risks not presently known to us or
other factors not perceived by us to present significant risks to our business at this time also
may impair our business, financial condition and results of operations. We do not undertake to
update any of these forward-looking statements or to announce the results of any revisions to these
forward-looking statements except as required by law.
41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to our stock repurchases during the
first quarter of 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
| |
|
|
|
|
|
|
|
|
|
Shares |
|
Approximate |
| |
|
|
|
|
|
|
|
|
|
Purchased as |
|
Dollar Value |
| |
|
|
|
|
|
|
|
|
|
Part of |
|
That May Yet |
| |
|
Total Number of |
|
Average Price |
|
Publicly |
|
be Purchased |
| |
|
Shares |
|
Paid |
|
Announced |
|
under the |
| |
|
Purchased |
|
Per Share |
|
Program |
|
Program1 |
January 1, 2009 to January 31, 2009 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
19,876,238 |
|
February 1, 2009 to February 28, 2009 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,876,238 |
|
March 1, 2009 to March 31, 2009 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,876,238 |
|
| |
|
|
|
|
|
|
Totals |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
19,876,238 |
|
|
|
|
| 1 |
|
In September 2007, we established a stock repurchase program authorizing the repurchase
of up to $25.0 million of our common stock. During the third quarter of 2007, Noven
repurchased 322,345 shares of its common stock at an aggregate price of approximately $5.1
million. There is no expiration date specified for this program. |
Item 5. Other Information
From time to time, Noven’s directors, executive officers and employees may adopt trading plans
intended to comply with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act
of 1934. As of the date hereof, no Noven directors or executive officers have a Rule 10b5-1
trading plan in place.
Item 6. Exhibits
| |
31.1 |
|
Certification of Peter Brandt, President and Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
| |
| |
31.2 |
|
Certification of Michael D. Price, Vice President and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
| |
| |
32.1 |
|
Certification of Peter Brandt, President and Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
| |
| |
32.2 |
|
Certification of Michael D. Price, Vice President and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.* |
|
|
|
| * |
|
Pursuant to Item 601(b)(32) of Regulation S-K, this exhibit is furnished rather than filed with
this Form 10-Q. |
42
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
| |
NOVEN PHARMACEUTICALS, INC.
|
|
| Date: May 11, 2009 |
By: |
/s/ Michael D. Price
|
|
| |
|
Michael D. Price |
|
| |
|
Vice President and
Chief Financial Officer |
|
| |
43