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Article by DailyStocks_admin    (05-20-08 09:08 AM)

Noven Pharmaceuticals Inc. CEO Peter C.Brandt bought 25000 shares on 5-14-2008 at $9.79

BUSINESS OVERVIEW

General Business & Strategy
Noven Pharmaceuticals, Inc. (“we” or “Noven”) is a specialty pharmaceutical company engaged in the research, development, manufacture, marketing and sale of prescription pharmaceutical products.
Our primary commercialized products include prescription transdermal patches utilizing our 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. Our developmental pipeline includes products in the women’s health and central nervous system (“CNS”) categories.
Our business is focused in three principal areas:
• Noven Transdermals is our transdermal drug delivery unit. Noven Transdermals researches, develops and manufactures transdermal patches, generally for pharmaceutical industry partners pursuant to development, license or other agreements that facilitate the commercialization of new transdermal patches. Commercialized products that have emerged from the Noven Transdermals development pipeline include Vivelle-Dot ® (estradiol transdermal system), the most prescribed transdermal estrogen product in the United States;
CombiPatch ® (estradiol/norethindrone acetate transdermal system), the first two-drug combination patch approved in the United States; and Daytrana ™ (methylphenidate transdermal system), the first and only patch for the treatment of ADHD. Developmental products in the Noven Transdermals pipeline include an amphetamine patch for ADHD and other transdermal product opportunities.

• Novogyne Pharmaceuticals (“Novogyne”) is our women’s health joint venture with Novartis Pharmaceuticals Corporation (“Novartis”). Through Novogyne, we market and sell in the United States HT patches developed and manufactured by Noven. The Novogyne marketing and sales functions, which have been managed by Noven since the joint venture was founded in 1998, have advanced Vivelle-Dot ® to its current leadership position in the transdermal estrogen category.

• Noven Therapeutics, LLC (“Noven Therapeutics”) became a wholly-owned subsidiary of Noven through our August 2007 acquisition of JDS Pharmaceuticals, LLC (“JDS”), a privately-held specialty pharmaceutical company with a targeted sales force, psychiatry and CNS expertise, two marketed products, and a pipeline of products in development. The Noven Therapeutics sales force currently sells the psychiatry products Pexeva ® (paroxetine mesylate) and Lithobid ® (extended release lithium carbonate) in the United States, and is expected to launch Stavzor ™ (delayed release valproic acid softgel) in the United States in the second half of 2008. Noven Therapeutics’ product development pipeline includes Mesafem ™ , a non-hormonal therapy for the treatment of vasomotor symptoms associated with menopause, and other products.
Our long-term strategy for growth is focused on: (i) expanding and diversifying the transdermal product offerings of Noven Transdermals through new transdermal product development activities and new or expanded industry collaborations; (ii) maximizing the opportunities presented at our Novogyne joint venture by continuing effective promotion of Vivelle-Dot ® and seeking to expand the range of products offered by the Novogyne sales force; and (iii) leveraging the sales and marketing infrastructure and industry expertise of Noven Therapeutics through new product development (including transdermal products that may be developed), product acquisitions, and possibly strategic collaborations – all with the goal of establishing Noven as a leading specialty pharmaceutical company with significant growth.
We regularly review our corporate strategies to evaluate their suitability and effectiveness in light of evolving business, industry, market and other conditions. We cannot assure that we will implement all or any part of our business or growth strategies, that our strategies may not change from time to time or that any strategy we adopt will be successful.
With the addition of Noven Therapeutics, Noven’s business is now comprised of two reportable segments: (i) Noven Transdermals, which currently consists of research, development, manufacturing and licensing to partners of transdermal drug delivery technologies and prescription transdermal products; and (ii) Noven Therapeutics, which currently consists of development, marketing, sales and distribution of pharmaceutical products. Prior to the acquisition on August 14, 2007, Noven had one reportable segment. In accordance with Statement of Financial Accounting Standards No. 131 (“SFAS No. 131”), “Disclosures about Segments of an Enterprise and Related Information,” information for earlier periods has been recast. See Note 15 – “Segment and Customer Data” for Noven’s segment financial reporting.

We were incorporated in Delaware in 1987 as Noven Pharmaceuticals, Inc., and our principal executive offices are located at 11960 S.W. 144th Street, Miami, Florida 33186. Our telephone number is (305) 253-5099, and our Internet website address is www.noven.com.
Noven Transdermals
Our Noven Transdermals unit is engaged in the research, development, manufacture and marketing of advanced transdermal patches utilizing our proprietary drug delivery technologies. Our principal commercialized transdermal products are prescription patches for use in the treatment of ADHD and in HT. These products include:
• Daytrana ™ , the first and only transdermal patch approved by the United States Food & Drug Administration (“FDA”) for the treatment of ADHD.

• Vivelle-Dot ® , the most prescribed transdermal estrogen therapy product in the United States and the smallest estrogen patch approved by the FDA. This product is marketed primarily under the brand name Estradot ® outside the United States.

• CombiPatch ® , the first combination estrogen/progestin transdermal patch approved by the FDA. This product is marketed under the brand name Estalis ® outside the United States.
Transdermal patches utilize an adhesive patch containing medication that is administered through the skin and into the bloodstream over an extended period of time. Patches avoid first pass liver metabolism and may offer significant advantages over conventional oral and parenteral dosage forms, including non-invasive administration, controlled delivery, improved patient compliance, flexible dose duration and avoidance of certain side effects.
Our most advanced patches utilize our patented DOT Matrix ® patch technology. DOT Matrix ® is a highly efficient class of diffusion-based drug-in-adhesive patch technology that can often deliver more drug through a smaller patch area than competitive patches without using irritating skin permeation enhancers and without compromising adhesion. We believe that reduced patch size can have a beneficial effect on patient preference and provide a competitive advantage over patches that deliver similar compounds through a larger patch. DOT Matrix ® technology may also permit us to develop patient-friendly patches in cases where, due to the nature of the compound or the size of the required daily dose, competitors’ products would not be able to deliver a therapeutic dose without making the patch objectionably large.
Patches incorporating our DOT Matrix ® technology, such as Daytrana ™ , Vivelle-Dot ® and CombiPatch ® , are diffusion-based patches that use a patented blend of silicone adhesive, acrylic adhesive and drug. This blend causes microscopic pockets of concentrated drug to be formed and uniformly dispersed throughout the patch’s drug/adhesive layer. The resulting high concentration gradient between each drug pocket and the skin works to enhance the diffusion of drug from the patch through the skin and into the bloodstream. This inherent delivery efficiency reduces the need for skin permeation enhancers. Precise ratios of silicone adhesive, acrylic adhesive and drug regulate the rate of drug delivery and help assure therapeutic blood levels over the intended course of therapy. We believe that our technology enables us to develop patient-friendly transdermal systems that can reduce skin irritation sometimes associated with patches, improve adhesion, minimize patch size and improve patch appearance.

Novogyne Pharmaceuticals
Our HT products are marketed and sold in the United States through Novogyne, a joint venture that we formed with Novartis in 1998 to market and sell women’s prescription healthcare products. We own a 49% equity interest in the joint venture company, and Novartis owns the remaining 51% equity interest. The joint venture company is a Delaware limited liability company which is legally known as Vivelle Ventures LLC, but which does business under the Novogyne name. We account for our interest in Novogyne using the equity method. For the past several years, our profitability has been dependent on our equity in earnings of Novogyne, a non-cash item.
Novogyne markets our Vivelle-Dot ® and CombiPatch ® products in the United States. Novogyne’s sales and marketing efforts have helped Vivelle-Dot ® to become the most prescribed product in the transdermal estrogen therapy (“ET”) category, with a 53% share of monthly total prescriptions written in the United States as of December 31, 2007. In connection with a transition to our advanced Vivelle-Dot ® product, we ceased manufacture of our first generation estrogen patch (which was marketed as Vivelle ® , Menorest ® and Femiest ® ) in late 2006.
Under the terms of the joint venture agreements, we manufacture and supply Novogyne with, and perform marketing, sales and promotional activities for, Vivelle-Dot ® and CombiPatch ® . We receive product revenues (with a manufacturing margin) on our sale of Vivelle-Dot ® and CombiPatch ® finished product to Novogyne, and receive royalties from Novogyne based on Novogyne’s sales of Vivelle-Dot ® . We are also reimbursed by Novogyne for costs incurred by us on behalf of Novogyne, including costs associated with the Noven employees who comprise the Novogyne sales force and other Noven personnel who provide services to Novogyne. For its part, Novartis distributes Vivelle-Dot ® and CombiPatch ® and provides certain other services to Novogyne, including contracting with the managed care sector and all regulatory, accounting and legal services.
Novogyne is managed by a committee (the “Management Committee”) of five members, three of whom are appointed by Novartis and two of whom are appointed by Noven. The President of Novogyne is Jeffrey F. Eisenberg, who also serves as Executive Vice President and Interim Chief Executive Officer of Noven. Pursuant to the joint venture agreements, certain significant actions require a supermajority vote of the Management Committee members, including approving or amending the annual operating and capital budgets of Novogyne, incurring debt or guaranties in excess of $1.0 million, entering into new supply or licensing arrangements, marketing new products and acquiring or disposing of material amounts of Novogyne’s assets. The Management Committee has the authority to distribute cash to Novartis and Noven based upon a contractual formula. In the years ended December 31, 2007, 2006 and 2005, Novogyne made cash distributions of $28.8 million, $26.4 million and $26.2 million, respectively, to Noven. The amount of cash we receive from Novogyne in any period may not be the same as the amount of income we recognize from Novogyne for that period.
The joint venture agreements provide for an annual preferred return of $6.1 million to Novartis and then an allocation of income between Novartis and Noven depending upon sales levels attained. Our percentage share of income after Novartis’ preferred return increases as product sales increase, subject to a maximum of 49%. In 2007, 2006 and 2005, our equity in earnings of Novogyne, as reflected in our consolidated statements of operations, was $35.9 million, $28.6 million and $24.7 million, respectively, representing 48.6%, 48.4% and 47.7%, respectively, of Novogyne’s income after Novartis’ preferred returns for each of those years.

Novartis has the right to dissolve the joint venture in the event of a change in control of Noven if the entity which acquires control is one of the ten largest pharmaceutical companies (as measured by annual dollar sales). Upon dissolution, Novartis would reacquire the rights to market Vivelle-Dot ® under the terms of the license agreement in effect prior to the formation of the Novogyne joint venture, and Novogyne’s other assets would be liquidated and distributed to the parties in accordance with their capital account balances as determined pursuant to the operating agreement of the joint venture company.
The operating agreement of the joint venture company includes a buy/sell provision that either Noven or Novartis may trigger by notifying the other party of the price at which the triggering party would be willing to acquire the other party’s entire interest in the joint venture. Upon receipt of this notice, the non-triggering party has the option to either purchase the triggering party’s interest in Novogyne or to sell its own interest in Novogyne to the triggering party at the price established by the triggering party. If we are the purchaser, then we must also pay an additional amount equal to the net present value of Novartis’ preferred return. This amount is calculated by applying a specified discount rate and a period of 10 years to Novartis’ $6.1 million annual preferred return. Novartis is a larger company with greater financial resources than us and therefore may be in a better position to be the purchaser if the buy/sell provision is triggered. In addition, this buy/sell provision may have an anti-takeover effect on Noven since a potential acquirer of Noven will face the possibility that Novartis could trigger this provision at any time and thereby require any acquirer to either purchase Novartis’ entire interest in Novogyne or sell its entire interest in Novogyne to Novartis.
Noven Therapeutics
In August 2007, we acquired JDS, a specialty pharmaceutical company that was privately-held at the time. The total purchase price for this acquisition consisted of $125.0 million cash paid at closing, approximately $5.4 million of transaction costs consisting primarily of fees paid for financial advisory, legal, valuation and accounting due diligence services, and approximately $0.5 million in connection with non-competition agreements entered into with two former executives of JDS. We funded the acquisition from the sale of short-term investments and accounted for the acquisition using the purchase method of accounting. JDS became an indirect, wholly-owned subsidiary of Noven as a result of the acquisition. In January 2008, we changed the name of the entity to Noven Therapeutics, LLC.
Noven Therapeutics currently markets and sells two prescription products:
• Pexeva ® , a selective serotonin re-uptake inhibitor (“SSRI”) antidepressant indicated for major depressive disorder, panic disorder, obsessive compulsive disorder and generalized anxiety disorder. This product is one of only two remaining patented brands without a generic equivalent in the United States SSRI market. Pexeva ® is subject to a composition of matter patent that extends to 2017 and other patents extending to 2022.

• Lithobid ® , an extended release lithium product and the only branded lithium product sold in the United States. Lithobid ® is indicated for the maintenance of bipolar disorder and the treatment of related manic episodes.
In December 2007, the FDA granted tentative approval for our Stavzor ™ product. The tentative approval relates to the use of Stavzor ™ in the treatment of manic episodes associated with bipolar disorder, monotherapy and adjunctive therapy in multiple seizure types (including epilepsy), and prophylaxis of migraine headaches. “Tentative approval” generally means that the FDA has concluded that a drug product has met all required quality, safety and efficacy standards, but because of existing patents and/or exclusivity rights, it cannot yet be marketed in the United States. The New Drug Application (“NDA”) for Stavzor ™ , which was submitted under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act by Banner Pharmacaps (the developer, licensor and manufacturer of the product) references Abbott Laboratories’ Depakote ® product. Based on receipt of tentative approval, we expect to receive FDA final approval of Stavzor ™ during 2008, although we cannot assure that FDA final approval will be granted in this timeframe, if at all. If approved for marketing, Stavzor ™ will be a branded product and it will not be AB-rated to or generically substitutable for Depakote ® , and neither Depakote ® nor any Depakote ® generics will be substitutable for Stavzor ™ . The Noven Therapeutics sales force will promote the Stavzor ™ brand.
In addition, Noven Therapeutics is advancing a pipeline of therapeutic products in development, including Mesafem ™ , a women’s health product for use in the treatment of vasomotor symptoms associated with menopause. Our business strategy includes leveraging Noven Therapeutics’ marketing and sales infrastructure with next-generation psychiatry products and complementary products that we seek to develop or acquire.
Products Overview
Our menopausal HT products consist of:
• Vivelle-Dot ® /Estradot ® — our advanced transdermal estrogen patch; and

• CombiPatch ® /Estalis ® — our combination transdermal estrogen/progestin patch.
Our HT products are indicated for menopausal symptoms. Menopause begins when the ovaries cease to produce estrogen or when both ovaries are removed surgically prior to natural menopause. The most common acute physical symptoms of natural or surgical menopause are hot flashes and night sweats, which can occur in a substantial percentage of menopausal women. Another common symptom associated with menopause is vaginal dryness. Moderate-to-severe menopausal symptoms can be treated by replacing the estrogen that the body can no longer produce. Estrogen therapy can effectively relieve hot flashes and night sweats and can prevent drying and shrinking of the reproductive system. Our ET products are also indicated for the prevention of osteoporosis, a progressive deterioration of the skeletal system through the loss of bone mass. There are, however, other approved therapies for the prevention of osteoporosis, and our labeling advises that ET should be used for this condition only by women who have a significant risk of osteoporosis and for whom non-estrogen therapies are inappropriate.
Vivelle-Dot ® /Estradot ®
Utilizing our proprietary DOT Matrix technology, our advanced transdermal estrogen patch (marketed as Vivelle-Dot ® and Estradot ® ) is one-third the surface area of our previous Vivelle ® estrogen patch at any given dosage level, yet provides the same delivery of drug over the same timeframe. This system is more flexible and comfortable to wear than the original product, with a lower potential for skin irritation. Vivelle-Dot ® is the most prescribed transdermal ET product in the United States. This product is currently available in the United States in five dosage strengths. The lowest dosage strength is approved only for prevention of osteoporosis and, in light of the HT studies and labeling requirements discussed below, many physicians may consider alternative treatments for the prevention of osteoporosis, which would adversely affect the market for that dosage strength.
Novogyne markets Vivelle-Dot ® in the United States. In Canada, Vivelle-Dot ® is marketed as Estradot ® by an affiliate of Novartis Pharma AG (“Novartis Pharma”). Sanofi-aventis (“Aventis”) has marketing rights for Vivelle-Dot ® in Japan. For all other countries, Novartis Pharma holds the rights to market this product under the name Estradot ® , as well as any product improvements and future generations of estrogen patches developed by us.
Under the terms of our license to Novartis Pharma, Novartis Pharma is responsible for seeking approval to market Estradot ® in its territories. The product has been approved for marketing in over 30 foreign countries and Novartis Pharma has launched the product in a number of European countries. There can be no assurance that commercialization of the product in these countries will be successful or that Novartis Pharma will successfully launch Estradot ® in other countries. The price of Estradot ® and our other products sold in the European Union may be negatively affected by parallel trade practices whereby a licensed importer may take advantage of a price disparity between markets by purchasing our products in a market with a relatively lower price and then importing them into a country with a relatively higher price.
Pursuant to license and supply agreements with Novartis Pharma and Novogyne, we manufacture the product for these parties and receive fees based on their sales of the product. The supply agreement for the Estradot ® product is a long-term agreement. The supply agreement for Vivelle-Dot ® expired in January 2003. Since the expiration of this agreement, the parties have continued to operate in accordance with certain of the supply agreement’s pricing terms. We cannot assure that we and Novogyne will continue to operate under the supply agreement in accordance with its pricing terms or that we will enter into a new supply agreement on satisfactory terms or at all. A decision to discontinue operating in accordance with the supply agreement’s pricing terms could have a material adverse effect on our business, consolidated results of operations and financial condition. 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. Accordingly, both Novartis and Noven must agree on Novogyne’s supplier. Due to our dependence on Novogyne as well as Novartis’ greater financial and business resources, we may be unable to negotiate favorable business terms with Novartis or resolve any dispute between us and Novartis in a favorable manner.
CombiPatch ® /Estalis ®
We developed the first combination transdermal HT system approved for marketing by the FDA (marketed as CombiPatch ® and Estalis ® ), a combination patch containing estradiol and norethindrone acetate, a progestin. Although benefits of ET include menopausal symptom control and osteoporosis prevention, estrogen-only therapy has been associated with an increased risk of endometrial cancer for women who have an intact uterus (non-hysterectomized). To address this situation, a combination therapy of estrogen and progestin may be prescribed. Using both hormones together has been shown to reduce the risk of endometrial cancer while continuing to produce the menopausal symptom control benefits of ET.
Novogyne acquired marketing rights to the product in 2001 from Aventis (which was then our exclusive worldwide licensee for the product) and markets the product under the brand name CombiPatch ® in two dosage strengths in the United States. Novartis Pharma holds the right to market this product outside of the United States and Japan and is marketing this product under the brand name Estalis ® in a number of foreign countries.
Pursuant to license and long-term supply agreements with Novartis Pharma, we manufacture the combination product for Novartis Pharma and receive fees based on their sales of the product. Sales to Novogyne are at an agreed-upon price pursuant to a supply agreement.
The HT Product Market
We currently derive a significant portion of our revenues from our HT products. Our total HT-related revenues were $45.6 million, $42.7 million and $43.8 million for 2007, 2006 and 2005, respectively, which represented 55%, 70% and 83%, respectively, of our revenues in each of those years.
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. For a discussion of our prescription rates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview of Noven and our Novogyne Joint Venture.” 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 has commenced a five-year study aimed at determining whether 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 our HT products are not being used in the study, the market for our HT products could be adversely affected if this study finds that a transdermal estrogen patch is less beneficial than other dosage forms, and we 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. See “Item 3 – Legal Proceedings.”


CEO BACKGROUND

Mr. Braginsky is President and Chief Executive Officer of Atropos Technology Inc. (consulting and venture capital) and Chairman of Digilab LLC (molecular spectroscopy). From 1970 through 1999, Mr. Braginsky served Olympus America, Inc. in a variety of roles, most recently as President and Chief Operating Officer. Mr. Braginsky serves on the board of directors of Diomed Holdings (laser technology), Geneva Acquisition Corporation (acquisitions) and Electro-Optical Sciences, Inc. (medical instruments for early melanoma detection).

Mr. Brandt was appointed to Noven’s Board and to the offices of President and Chief Executive Officer on April 29, 2008. From 1981 until 2007, Mr. Brandt served in a number of executive positions at Pfizer, Inc. (pharmaceuticals). He served as Pfizer’s President – U.S. Pharmaceuticals Operations from August 2006 until January 2007 and as its Senior Vice President – U.S. Pharmaceuticals Operations from January 2006 to August 2006. From 2004 to 2006, Mr. Brandt served as President – Latin America Operations and as Senior Vice President Worldwide Pharmaceuticals – Finance, IT, Planning and Business Development, Pfizer Health Solutions. From 1998 to 2004, he served as Senior Vice President Worldwide Pharmaceuticals, Finance, Planning and Business Development and Pfizer Health Solutions.

Dr. Clarkson is the Executive Director of the American Board of Ophthalmology and the Dean Emeritus and Professor of Ophthalmology, Miller School of Medicine at the University of Miami. From 1995 to 2006, he served as Professor and Senior Vice President for Medical Affairs and Dean, University of Miami School of Medicine. Dr. Clarkson serves as a director of the American Board of Medical Specialties and as a trustee for the Evelyn F. McKnight Brain Research Foundation.

Mr. Denkhaus has, since January 2004, served as the executive chairman of TM Systems, LLC (international language services). Since 2005, he has also served as President and Chief Executive Officer of Integrity Risk Advisors, Inc. (consulting). Mr. Denkhaus was a partner with Arthur Andersen LLP from 1980 to 2002 and served as Arthur Andersen’s audit practice director responsible for Florida and Puerto Rico from 1999 to 2002. For a one-year period in 2002 and 2003, Mr. Denkhaus was employed as a principal with Ernst & Young LLP where he provided audit services and assisted in the transition of Arthur Andersen audit clients and personnel to Ernst & Young.

Mr. Granadillo was employed by Eli Lilly and Company (pharmaceuticals) from 1970 until 2004. From 1998 to 2004, he served as Eli Lilly’s Senior Vice President overseeing manufacturing, quality and human resources and from 1993 to 1998, he served as Vice President of Human Resources. Mr. Granadillo serves on the board of directors of Nile Therapeutics, Inc. (biopharmaceuticals) and Haemonetics Corporation (medical devices).

Mr. Satow was appointed to Noven’s Board on August 14, 2007 in connection with Noven’s acquisition of JDS Pharmaceuticals, LLC, the specialty pharmaceutical company that he co-founded. Mr. Satow served as Chairman and Chief Executive Officer of JDS Pharmaceuticals since 2004. From 1985 to 1999, he held a variety of executive positions at Forest Laboratories, Inc. (pharmaceuticals), including as its Executive Vice President and as the President of Forest Pharmaceuticals. Prior to joining Forest Laboratories, he served as Vice President and General Manager of the Wallace Laboratories Division of Carter-Wallace, Inc. Previously, Mr. Satow held a variety of executive positions at Pfizer, Inc. over a 14 year period, including Director of Marketing, Pfizer Laboratories, and Vice President, Pfizer Europe. In addition to serving as a director of Noven, Mr. Satow currently serves on the board of directors of Crucell NV (biotechnology).

Mr. Savage has been the President of Strategic Imagery LLC (pharmaceutical consulting) since May 2003. He served as Group Vice President and President – General Therapeutics & Inflammation Business of Pharmacia Corporation from 2002 until its acquisition by Pfizer, Inc. in 2003. From 1996 through 2001, Mr. Savage served Johnson & Johnson in a variety of roles, most recently as Worldwide Chairman of Johnson & Johnson’s Pharmaceutical Group. From 1985 to 1996, he served Roche Holding AG in a variety of marketing, business development and operations positions, most recently as Vice President – Marketing, Hoffmann-La Roche, Inc. Mr. Savage serves as the non-executive chairman of EpiCept Corporation (pharmaceuticals), the presiding director of The Medicines Company, Inc. (pharmaceuticals) and a director of Panacos Pharmaceuticals, Inc. (pharmaceuticals).

Mr. Yetter has been Chief Executive Officer of Verispan LLC (health care information) since September 2005. From November 2004 to September 2005, he served as the Chief Executive Officer of Odyssey Pharmaceuticals, Inc., the specialty pharmaceutical division of Pliva d.d. From 2003 to 2005, he served on the Advisory Board of Alterity Partners (mergers and acquisitions advisory firm). From September 2000 to June 2003, Mr. Yetter served as Chairman and Chief Executive Officer of Synavant Inc. (pharmaceutical marketing/ technology services). From 1999 to 2000, Mr. Yetter served as Chief Operating Officer at IMS Health, Inc. (information services for the health care industry). From 1997 to 1999, he served as President and Chief Executive Officer of Novartis Pharmaceuticals Corporation (pharmaceuticals). From 1994 to 1997, he served as President and Chief Executive Officer of Astra Merck, Inc. (pharmaceuticals). From 1991 to 1994, Mr. Yetter served as General Manager and then President of Astra Merck, a division of Merck & Co. Mr. Yetter serves on the board of directors of Matria Healthcare, Inc. (disease management), EpiCept Corporation (pharmaceuticals), Synvista Therapeutics, Inc. (pharmaceuticals) and InfuSystem Holdings, Inc. (infusion services).

COMPENSATION

Base Salary
Noven targets base salaries for its executive officers based generally on the median base salary of similarly situated officers at the Peer Companies. The Compensation Committee approves each executive officer’s base salary by considering the individual’s responsibility, the individual’s performance and the market data discussed below. Salary levels are typically determined annually at the regularly-scheduled meeting of the Compensation Committee each November, as well as upon appointment, a promotion or other change in job responsibility.
The results of the 2007 benchmarking study indicated that the base salaries of the named executive officers closely matched the median base salary of the Peer Companies, with six of the seven named executive officers’ base salaries falling within a competitive range (90% to 110%) of the Peer Company median. The 2007 base salary of Mr. Strauss, who retired in January 2008, was 115% of the Peer Company median.

In determining 2008 base salaries for the named executive officers, the Compensation Committee reviewed the results of five salary budget surveys conducted by third-party compensation sources which indicated that the surveyed companies on average expected to increase executive salaries by 3.5% to 4.2% in 2008. In November 2007, the Compensation Committee reviewed an assessment by Mr. Strauss of the performance of the named executive officers (other than Mr. Strauss) during 2007.

The amount listed in the table above does not include the additional amount of base salary to be paid to Mr. Eisenberg in connection with his appointment in January 2008 as Noven’s Executive Vice President and Interim Chief Executive Officer under his letter agreement, which is discussed in this section below under the heading “Compensation to Interim Chief Executive Officer”.
Annual Incentive Plan
Noven’s annual incentive plan or AIP is intended to motivate executives by recognizing and rewarding corporate and individual performance. The Compensation Committee believes that performance-based annual incentives, in the form of cash incentives, should represent a meaningful component of Noven’s executive compensation program.
While the basic framework of the AIP has been similar for the past several years, the Compensation Committee annually reevaluates the parameters of the program based on Noven’s then-current circumstances, as well as the performance and/or goals that the Compensation Committee deems critical for the success of the Company.
Determination of Awards under 2007 AIP
The determination of awards under the 2007 AIP for the named executive officers was based on three primary factors:
• Financial Performance . Noven’s 2007 financial performance compared to pre-established financial measures.

• Individual Performance Objectives . An executive officer’s performance in meeting his or her “individual performance objectives”.

• Management Team Objectives . Noven’s performance in achieving “management team objectives” approved by the Compensation Committee.

Of the CEO’s award under the 2007 AIP, 70% was based on Noven’s financial performance, with the remaining 30% based on the Compensation Committee’s assessment of the CEO’s achievement of individual performance objectives selected by the Compensation Committee, which closely aligned with the management team objectives discussed below. For the other named executive officers, 50% of the award was based on Noven’s financial performance, 30% was based on the Compensation Committee’s assessment of the executive officer’s performance in achieving his or her individual performance objectives, and the remaining 20% was based on Noven’s achievement of management team objectives related to the advancement of Noven’s commercialization strategy and to its product development pipeline. The Compensation Committee approved the management team objectives based on the Compensation Committee’s belief that their achievement should result in the creation of long-term stockholder value.
The Compensation Committee selected target incentive bonus awards as fixed percentages of base salaries for the named executive officers. The 2007 target AIP awards were set at 60% of base salary for the CEO and at 45% of base salary for each of the other named executive officers. These targets were unchanged from 2006. In determining the target AIP awards for the named executive officers, the Compensation Committee considered market data, including the 2007 benchmarking study, which indicated that these target awards approximated the median for similarly situated executives at the Peer Companies.
The financial measures selected by the Compensation Committee for the 2007 AIP were:
• Revenues . Total combined net revenues of Noven and Novogyne adjusted to exclude Noven’s total product revenues from sales to Novogyne.

• Pre-Tax Income . Noven’s pre-tax income adjusted to exclude clinical expenses.
For the revenue measure, the Compensation Committee added Novogyne revenues to the calculation because Noven is responsible for the sales and marketing function of the joint venture. For the pre-tax income measure, the Compensation Committee excluded clinical expenses from the calculation given the uncertainties in forecasting the timing and the magnitude of such expenses. Each measure was weighted equally for the purposes of calculating AIP outcomes.

The Compensation Committee established the performance matrix for the 2007 AIP in the first quarter of 2007 based on its assessment of the expected difficulty of Noven achieving the performance targets in 2007. There was no limit on the maximum percentage payout for either the pre-tax income or revenue measures.
Revenue and pre-tax income in 2007 (as adjusted in the manner discussed above) were $192.1 million and $41.0 million, respectively. These amounts do not include the financial results of Noven Therapeutics, which Noven acquired after the performance targets were established. Due to a change in an accounting assumption used to prepare the 2007 AIP performance matrix, the Compensation Committee reduced the pre-tax income and revenue measures by $1.0 million during 2007.

MANAGEMENT DISCUSSION FROM LATEST 10K

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 7 as well as in our consolidated financial statements and related notes included in this Form 10-K .
Our financial results for 2007 include the results of operations of JDS from the date of acquisition (August 14, 2007) through December 31, 2007. JDS, now known as Noven Therapeutics, is a specialty pharmaceutical company focused in psychiatry and women’s health, with a targeted sales force, psychiatry/CNS expertise, two marketed products, and a pipeline of new products in development. The JDS acquisition was an important part of Noven’s transition from primarily a transdermal drug delivery company to an integrated specialty pharmaceutical company.
Our financial results for 2007 also include: (i) a one-time $100.2 million charge recorded in the 2007 third quarter for the JDS acquisition purchase price allocated to in-process research and development (“IPR&D”); (ii) a $3.3 million charge recorded in the 2007 third quarter related to payments to Shire in connection with the voluntary withdrawal of a portion of Daytrana ™ product in the trade channel; and (iii) an aggregate $3.3 million charge recorded in the 2007 fourth quarter related to separation arrangements associated with the retirement of certain executive officers, including Robert C. Strauss, who retired from the position of President, Chief Executive Officer and Chairman effective January 2, 2008.
Including the impact of these substantial charges, we reported a net loss of $45.4 million ($1.84 loss per share) for 2007, compared to net income of $16.0 million ($0.66 diluted earnings per share) for 2006.
Our net revenues in 2007 were $83.2 million, an increase of 37% compared to $60.7 million reported in 2006. This increase reflects the recognition of $9.2 million in net revenues associated with our sales of Pexeva ® and Lithobid ® products through Noven Therapeutics, a full year of sales of Daytrana ™ product, higher sales of our Vivelle-Dot ® estrogen patch, and higher license revenues due to the amortization of additional Daytrana ™ sales milestones.
Gross margin, as a percentage of product sales, was 37% in 2007 compared to 24% in 2006. Gross margin in 2007 benefited primarily from higher overall product revenues, greater manufacturing facility utilization, and the continuing benefit of cost reductions implemented in the third quarter of 2006. Gross margin in 2007 also benefited from a 66% gross margin percentage on sales of Noven Therapeutics’ products. Daytrana ™ gross margin was negatively affected in 2007 by production and yield issues, a portion of the withdrawal costs referenced above, and increased quality assurance activities and costs.
Research and development expenses for 2007 increased 22% to $14.0 million, primarily due to higher clinical research activities at Noven Transdermals and to $1.5 million in research and development expenses at Noven Therapeutics.
Selling, general and administrative expenses for 2007 increased $17.9 million, or 82%, to $39.6 million, primarily reflecting the addition of $10.2 million in Noven Therapeutics expenses, 79% of which is selling and marketing related, $3.3 million in employee separation charges in the 2007 fourth quarter, $2.2 million in expenses associated with the voluntary market withdrawal of a portion of Daytrana ™ product in the third quarter of 2007, and a $1.6 million increase in professional fees.

We recognized $35.9 million in earnings from Novogyne in 2007, an increase of 25% compared to 2006. Net revenues at Novogyne increased 12% to $148.0 million in 2007, primarily due to increased sales of Vivelle-Dot ® . Novogyne’s gross margin percentage for 2007 increased slightly to 79%. Selling, general and administrative expenses increased 2% due to a $1.2 million increase in sample expenses. Novogyne’s net income for 2007 increased 22% to $79.8 million compared to $65.3 million in the prior year.
At December 31, 2007, Noven had $14.0 million in cash and cash equivalents, $21.6 million in short-term investments, and $32.8 million in other investments (non-current). This compares with $9.1 million in cash and cash equivalents and $144.5 million in short-term investments at December 31, 2006. The net decrease primarily reflects the payment of $130.4 million in the acquisition of JDS Pharmaceuticals, tax payments of $23.7 million, and $5.1 million used in the third quarter to purchase shares under Noven’s share repurchase program, partially offset by the receipt of an aggregate $50.0 million in Daytrana ™ sales milestone payments, $28.8 million in distributions received from Novogyne, and $5.9 million received from Shire in connection with Noven’s amphetamine patch development program. Noven’s investments at December 31, 2007, consisted of $54.4 million in auction rate securities, $32.8 million of which have been classified as non-current on Noven’s consolidated balance sheet following failed auctions occurring since mid-February 2008.
Total prescriptions for Vivelle-Dot ® increased 4% in 2007 compared to 2006, and total prescriptions for Novogyne’s products, taken as a whole, increased 2%. By comparison, the overall U.S. HT market declined 8% for the same period. Total prescriptions for Daytrana ™ (launched in June 2006) increased 165% in 2007 (the first full year of sales) compared to 2006, while prescriptions for ADHD stimulant therapies as a class increased 8% in 2007 compared to 2006. Comparing the 2007 fourth quarter to the 2006 fourth quarter, Daytrana™ prescriptions increased 10%, while prescriptions for the class increased 7% for the same period. The market share of Daytrana ™ remained substantially unchanged during 2007. Reflecting ongoing generic substitution, total prescriptions for Lithobid ® decreased 41% in 2007 compared to 2006. Total prescriptions for Pexeva ® increased 16% in 2007 compared to 2006, while for the same period prescriptions for the selective serotonin re-uptake inhibitor (“SSRI”) class increased 2%.

Overview of Noven and our Novogyne Joint Venture
Our transdermal business is focused on developing advanced transdermal patches. We presently derive the majority of our transdermal revenues from sales of transdermal patches for use in menopausal HT. In the United States, our HT products are marketed and sold by Novogyne Pharmaceuticals, the joint venture that we formed with Novartis in 1998. Our business, financial condition and results of operations are significantly dependent upon Novogyne and its marketing of our HT products in the United States. A discussion of Novogyne’s results of operations and their impact on our results can be found under the caption “—Results of Operations—Equity in Earnings of Novogyne.” In all countries other than the United States, Canada and Japan, we have licensed the marketing rights to these products to Novartis Pharma, which is an affiliate of Novartis.
We hold a 49% equity interest in Novogyne, and Novartis holds the remaining 51% equity interest. Under the terms of the joint venture agreements, we manufacture and supply our HT products to Novogyne, perform marketing, sales and promotional activities, and receive royalties from Novogyne based on Novogyne’s sales of the estrogen therapy (“ET”) products. Novartis distributes Vivelle-Dot ® and CombiPatch ® and provides certain other services to Novogyne, including financial and accounting functions.
Novartis is entitled to an annual $6.1 million preferred return from Novogyne, which has the effect of reducing our share of Novogyne’s income in the first quarter of each year. After the annual preferred return to Novartis, our share of Novogyne’s income increases as product sales increase, subject to a maximum of 49%. Our share of Novogyne’s income was $35.9 million, $28.6 million and $24.7 million in 2007, 2006, and 2005, respectively. The income we recognize from Novogyne is a non-cash item. Any cash we receive from Novogyne is in the form of cash distributions declared by Novogyne’s Management Committee. Accordingly, the amount of cash that we receive from Novogyne in any period is typically not the same as the amount of income we recognize from Novogyne for that period. In 2007, 2006 and 2005, we received $28.8 million, $26.4 million and $26.2 million, respectively, in distributions from Novogyne, which, in addition to the Daytrana ™ milestone payments received from Shire, accounted for a substantial portion of our net cash flows generated by operating activities for these periods. We expect that for the next several years a substantial portion of our earnings will be generated through our interest in Novogyne and a substantial portion of our cash flow will also be generated through our interest in Novogyne (in addition to any milestone payments we may receive from Shire). Any failure by Novogyne to remain profitable or to continue to make distributions would have a material adverse effect on our consolidated results of operations and financial condition.
Overview of Noven Therapeutics
Noven Therapeutics is a specialty pharmaceutical company that currently markets two branded prescription psychiatry products and is advancing several developmental products in psychiatry and women’s health. We will seek to leverage Noven Therapeutics’ marketing and sales infrastructure with next-generation psychiatry/CNS products, and with complementary products that we will seek to develop and/or acquire. Noven Therapeutics’ currently marketed products consist of:
• Pexeva ® , an SSRI antidepressant indicated for major depressive disorder, panic disorder, obsessive compulsive disorder and generalized anxiety disorder.

• Lithobid ® , an extended release lithium product, is the only branded lithium product sold in the United States. Lithobid ® is indicated for the maintenance of bipolar disorder and the treatment of related manic episodes.
In addition to marketing and selling these branded products, Noven Therapeutics is advancing a pipeline of therapeutic products in development, including Stavzor ™ , a proprietary enteric-coated soft gelatin capsule delivery system for use in the treatment of bipolar disorder and epilepsy and in migraine therapy that we expect to launch in the second half of 2008, Lithium QD, a once-daily lithium product under development and Mesafem, a non-hormonal therapy for the treatment of vasomotor symptoms associated with menopause that is under development. To bring Noven Therapeutics’ pipeline of products under development to market, we plan to increase our research and development expenses significantly beginning in 2008. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook.”

Results of Operations
With the addition of Noven Therapeutics, our business is now comprised of two reportable segments distinguished along product categories: (i) Noven Transdermals, which currently engages in the research, development, manufacturing and licensing to partners of transdermal drug delivery technologies and prescription transdermal products, including product sales to Shire and Novogyne as well as our equity in earnings of Novogyne; and (ii) Noven Therapeutics, which currently engages in the development, marketing, sales and distribution of pharmaceutical products.
Prior to the acquisition of JDS on August 14, 2007, we operated exclusively in the Transdermals segment. Following the acquisition, in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” we began to separately report information for the Therapeutics segment. We currently evaluate segment performance based on segment contribution, which consists of segment gross margin less direct research and development expenses and direct selling expenses, plus (in the case of Transdermals) our equity in earnings of Novogyne. Corporate general and administrative expenses, interest income and the immediate expensing of acquired IPR&D have not been allocated to our operating segments. Our results by segment are presented in the table below for the year ended December 31, 2007. The contribution of our Transdermals segment includes the impact of $35.9 million recognized as equity in earnings of Novogyne. The results of our Therapeutics segment are from the Closing Date through December 31, 2007. The negative contribution of our Therapeutics segment reflects the impact of significant selling and marketing expenses in support of Noven Therapeutics’ products and sales and marketing infrastructure, which infrastructure we expect to leverage in future periods through the commercialization of additional products.

Net Revenues
As described in more detail below, the 37% increase in net revenues for 2007 as compared to 2006 was primarily attributable to full year sales of Daytrana ™ and an increase in license revenue associated with that product. Aggregate sales to Novogyne increased primarily due to increased sales of Vivelle-Dot ® . In addition, revenues in 2007 benefited from the inclusion of $9.2 million in Pexeva ® and Lithobid ® sales since August 14, 2007, the date of our acquisition of JDS.
As described in more detail below, the 16% increase in 2006 net revenues as compared to 2005 was primarily attributable to the June 2006 launch of Daytrana ™ , which contributed $8.6 million to our product revenues and $5.9 million to our license revenues in 2006.
Product Revenues – Novogyne
Product revenues – Novogyne consists of our sales of Vivelle-Dot ® , Vivelle ® , Estradot ® for Canada and CombiPatch ® to Novogyne at a fixed price for product sampling and resale by Novogyne primarily in the United States, as well as the royalties we receive as a result of Novogyne’s sales of Vivelle-Dot ® and Vivelle ® . For additional information on the components of product revenues – Novogyne as well as our other sources of revenues, see “–Critical Accounting Estimates – Revenue Recognition.”

The $3.3 million increase in product revenues from Novogyne for 2007 as compared to 2006 primarily related to a $3.9 million increase in sales of Vivelle-Dot ® , of which $1.9 million related to trade product sales due to increased prescription trends, $0.9 million related to the timing of orders from Novogyne for samples of Vivelle-Dot ® and $1.1 million related to a price increase. Royalties increased $0.6 million due to increased sales by Novogyne for 2007. Revenues from Novogyne in 2006 were relatively consistent with 2005.
As noted below under “Novogyne Net Revenues”, Novogyne sells its products to trade customers, including wholesalers, distributors and chain pharmacies and the timing of orders by these customers is difficult to predict and can lead to significant variability in trade customers’ ordering patterns. As a result, there may be significant period-to-period variability in Novogyne’s ordering patterns from Noven.
Product Revenues – Third Parties
Product revenues – third parties consists of: (i) sales of Estradot ® , Estalis ® and Menorest hormone therapy patches to Novartis Pharma at a price based on a percentage of Novartis Pharma’s net selling price (subject to certain minima) for resale primarily outside the United States and Japan, together with royalties generated from Novartis Pharma’s sales of Vivelle ® and Estradot ® in Canada; (ii) sales of Daytrana ™ to Shire for commercial resale in the United States; and (iii) beginning on August 14, 2007, Noven’s commercial sales of Pexeva ® and Lithobid ® to trade customers, including wholesalers, distributors and chain pharmacies.
The $13.8 million increase in product revenues – third parties for 2007 as compared to 2006 primarily related to $4.7 million increase in volume sales of Daytrana ™ , the addition of $9.2 million in Pexeva ® and Lithobid ® revenues and a $1.3 million increase related to HT product pricing with Novartis Pharma. Daytrana ™ product sales in 2007 were $13.4 million compared to $8.6 million in 2006. Sales of Daytrana ™ commenced in the second quarter of 2006. The increase related to HT product pricing was primarily due to the recognition of a higher price reconciliation payment received from Novartis Pharma in 2007 as compared to 2006. Noven records 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. These increases were partially offset by declines of $0.7 million and $0.5 million in sales volume of Menorest and Femiest ® , respectively. The decline in Menorest is attributable to the continued transition from Menorest to Estradot ® , while we believe the decline in Femiest ® is due to the timing of orders.
The $7.7 million increase in product revenues from third parties for 2006 as compared to 2005 was primarily related to $8.6 million in sales of Daytrana ™ , reflecting the initial product launch during 2006. This increase was partially offset by a $0.9 million decline in the recognition of the price reconciliation payments received from Novartis Pharma. Volume increases of $0.9 million and $0.2 million for Estradot ® and Femiest, respectively, were offset by volume declines of $0.7 million and $0.4 million for Estalis ® and Menorest, respectively. We believe the volume increases and declines were all related to the timing of orders, except for the decline in Menorest, which was attributable to the continued transition from Menorest to Estradot
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.
License revenues increased $6.9 million for 2007 as compared to 2006, mostly attributable to an increase of $8.1 million in amortization of milestone payments received from Shire related to the license of Daytrana. The $8.1 million increase reflects full-year amortization of the $50.0 million approval milestone compared to two quarters in 2006, full-year amortization of the $25.0 million sales milestone received in the first quarter of 2007 as well as six-months amortization of the $25.0 million sales milestone received in the third quarter of 2007. In 2006, we benefited from the recognition of $1.0 million in deferred license revenues related to a one-time non-refundable payment from a third party. Contract revenues declined $1.5 million for 2007 as compared to 2006, primarily reflecting a decline in contract work performed.
License revenues increased $0.8 million for 2006 as compared to 2005 primarily due to the recognition of $5.9 million in amortization of milestone payments related to our Daytrana ™ license to Shire and the recognition of a $1.0 million one-time non-refundable payment from a third party for a license to certain of our patents, partially offset by $6.0 million in license revenues recognized in 2005 related to our fentanyl agreement with Endo Pharmaceuticals, Inc. (“Endo”), the majority of which was recognized in the fourth quarter of 2005 due to the termination of the agreement with Endo upon the FDA’s decision to cease review of our fentanyl patch application. Contract revenues declined $0.6 million for 2006 as compared to 2005 due to a decline in contract work performed.

Gross to Net Revenues
We record revenues net of sales allowances for rebates, chargebacks, cash and other discounts, as well as sales returns allowances.

Sales returns allowances consist of changes in allowances for returns for product recalls and/or products voluntarily withdrawn from the market for Noven Transdermals and changes in allowances for returns of expiring product for Noven Therapeutics. During 2007, sales returns allowances for Noven Transdermals increased $0.7 million, primarily due to Shire’s voluntary market withdrawals of certain Daytrana ™ 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 Transdermals product revenues from Novogyne (“Gross Margin — Novogyne”), which for accounting purposes is considered a related party; (iii) on our Transdermals product revenues from third parties (“Gross Margin – Third Parties”); and (iv) on our Therapeutics products. Product revenues from third parties include HT product sales to Novartis Pharma for resale primarily outside the United States and Japan, as well as Daytrana ™ product sales to Shire. Therapeutics’ product revenues include sales of Pexeva ® and Lithobid ® to trade customers starting on August 14, 2007.
The allocation of overhead costs impacts our determination of gross margins for each of our products. Overhead costs, which were in excess of $24.0 million in 2007, include salaries 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 overhead among our various products requires us to make significant estimates that involve subjective and often complex judgments. Using different estimates would likely result in materially different results for Gross Margin – Novogyne and Gross Margin – Third Parties than are presented in the gross margin table below.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations
With the acquisition of Noven Therapeutics, our business is now comprised of two reportable segments distinguished along product categories: (i) Noven Transdermals, which currently engages in the research, development, manufacturing and licensing to partners of transdermal drug delivery technologies and prescription transdermal products, including product sales to Shire, Novartis Pharma and Novogyne as well as our equity in earnings of Novogyne; and (ii) Noven Therapeutics, which currently engages in the development, marketing, sales and distribution of pharmaceutical products.
We evaluate segment performance based on segment contribution, which consists of segment gross margin less direct research and development expenses and direct selling and marketing expenses, plus (in the case of Noven Transdermals) our equity in earnings of Novogyne. Shared corporate general and administrative expenses and interest income are not allocated to our operating segments. Our operating results for the 2008 Quarter are summarized by segment in the table that follows. The contribution of our Noven Transdermals Segment includes $8.3 million of equity in earnings of Novogyne recognized in the 2008 Quarter. We acquired the Noven Therapeutics business on August 14, 2007. Consequently, the results of the Noven Therapeutics Segment are not included in the 2007 Quarter. The negative contribution of our Noven Therapeutics Segment in the 2008 Quarter reflects the impact of significant selling and marketing expenses in support of Noven Therapeutics’ currently marketed products, pre-launch expenses in anticipation of the Stavzor ™ launch and expenditures for the sales and marketing infrastructure for Stavzor ™ .

2008 Quarter compared to the 2007 Quarter
Revenues

Net Revenues
As described in more detail below, our net revenues in the 2008 Quarter were $21.5 million, an increase of 11% compared to $19.3 million reported in the 2007 Quarter. This increase reflects the addition of $5.7 million in net revenues associated with our sales of Pexeva ® and Lithobid ® products through Noven Therapeutics, which was acquired in August 2007. We also realized a $1.6 million, or 43%, increase in license and contract revenues as compared to the 2007 Quarter. These increases were offset by a $5.1 million decrease in product revenues from our Noven Transdermals segment.
Product Revenues – Novogyne
Product revenues – Novogyne consists of our sales of Vivelle-Dot ® /Estradot ® and CombiPatch ® to Novogyne at a fixed price for product sampling and resale by Novogyne primarily in the United States as well as the royalties we receive as a result of Novogyne’s sales of Vivelle-Dot ® .
The $2.5 million decrease in Novogyne product revenues for the 2008 Quarter primarily resulted from timing of shipments. During the 2008 Quarter, production issues (discussed further below under “Gross Margin”) primarily related to an equipment failure in transdermal manufacturing resulted in write-offs of inventory representing approximately $1.6 million of potential revenue, thus creating a backlog of unfilled orders as of quarter end. We expect to fill the orders during 2008. Royalties increased $0.4 million due to increased sales by Novogyne for the 2008 Quarter.

Product Revenues – Third Parties
Product revenues – third parties consists of: (i) sales of Estradot ® , Estalis ® and Menorest hormone therapy patches to Novartis Pharma at a price based on a percentage of Novartis Pharma’s net selling price (subject to certain minima) for resale primarily outside the United States and Japan, together with royalties generated from Novartis Pharma’s sales of Estradot ® in Canada; (ii) sales of Daytrana ™ to Shire for commercial resale in the United States; and (iii) beginning on August 14, 2007, Noven’s commercial sales of Pexeva ® and Lithobid ® to trade customers, including wholesalers, distributors and chain pharmacies.
The $2.6 million decrease in product revenues – third parties in our Transdermals segment for the 2008 Quarter as compared to the 2007 Quarter consisted of a $1.2 million decrease in third-party revenues from our HT products and a $1.4 million decrease in sales of Daytrana ™ . The decrease in HT product revenue was largely attributable to the production issues mentioned above that also affected sales to Novogyne for the 2008 Quarter. We recognize the benefit from price increases for our third party HT product through periodic price reconciliation payments received from Novartis. 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 $1.2 million and $1.3 million of such payments in the 2008 Quarter and 2007 Quarter, respectively. The decreases in Daytrana ™ product revenues were primarily attributable to the timing of orders.
Our Noven Therapeutics Segment, which was acquired in August 2007, generated $5.7 million of net revenues in the 2008 Quarter from sales of Pexeva ® and Lithobid ® .
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.
License and contract revenues increased $1.6 million for the 2008 Quarter as compared to the 2007 Quarter, primarily attributable to a $1.0 million increase in license revenues due to an increase in amortization of milestone payments received from Shire related to the license of Daytrana ™ . In addition, contract revenues increased $0.6 million due to $0.3 million additional work performed on developmental products and a $0.3 million reversal in the 2007 Quarter of contract revenues resulting from a change in estimate of work to be completed on a contract.

Gross to Net Revenues
We record revenues net of sales allowances for rebates, chargebacks, cash and other discounts, as well as sales returns allowances. Sales returns allowances for Noven Transdermals consist of changes in allowances for returns for product recalls and/or products voluntarily withdrawn from the market; and, for Noven Therapeutics, consist of changes in allowances for returns.

Gross Margin:
This section discusses gross margins relating to our product revenues: (i) across all of our products (“Overall Gross Margin”); (ii) on our Transdermals product revenues from Novogyne (“Gross Margin — Novogyne”), which for accounting purposes is considered a related party; (iii) on our Transdermals product revenues from third parties (“Gross Margin – Third Parties”); and (iv) on our Therapeutics products. Product revenues from third parties include HT product sales to Novartis Pharma for resale primarily outside the United States and Japan, as well as Daytrana ™ product sales to Shire. Therapeutics’ product revenues include sales of Pexeva ® and Lithobid ® to trade customers for the 2008 Quarter.
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, totaling approximately $7.9 million and $6.6 million in the 2008 Quarter and 2007 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.

In general, Noven Therapeutics’ products have higher gross margins than our other products because we sell these 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 a lower gross margin than sales of HT products sold to Novogyne due to, among other things, unfavorable pricing environments in foreign markets, and smaller production orders. Our gross margin on product sales of Daytrana™ to Shire has been negatively affected by the factors described below.

As noted in the tables above, Overall Gross Margin declined in the 2008 Quarter compared to the 2007 Quarter. Overall Gross Margin in the 2008 Quarter was negatively affected by: (i) inventory write-offs of $2.8 million, primarily related to an equipment failure in transdermal manufacturing ($1.8 million of Novogyne product write-offs and $1.0 million of third party HT product write-offs); (ii) the addition of approximately $1.3 million in manufacturing expenses over the 2007 Quarter, primarily in the quality assurance area; and (iii) significantly lower product revenues in our Noven Transdermals Segment, primarily related to the timing of shipments and the production issues for our HT product. Overall Gross Margin in the 2008 Quarter benefited from the addition of our Pexeva ® and Lithobid ® products, which had net sales of $5.7 million and related cost of products sold of $2.0 million, resulting in a gross margin of 64% for those products and a decrease in our deferred inter-company profit on sales to Novogyne of approximately $0.7 million (decreases in our deferred inter-company profit benefit gross margin and increases negatively affect gross margin).
We sell Daytrana ™ finished product to Shire at a fixed cost, so our profit on product sales of Daytrana ™ depends on our ability to manufacture the product efficiently and to fully utilize our facilities. For the 2008 Quarter, Daytrana ™ product revenues were $3.0 million and cost of products sold related to Daytrana ™ was $3.3 million, resulting in negative gross margin for the product. This compares with a gross profit and margin of $0.9 million, or 20%, for the 2007 Quarter. Daytrana ™ gross margin was negatively affected in the 2008 Quarter by increased quality assurance related expenditures.
For the remainder of 2008, we expect to continue to incur increased quality assurance costs related to our continued efforts to address the issues raised by the FDA in the July 2007 Form 483 and January 2008 warning letter, and a significant portion of these continuing costs will be allocated to Daytrana ™ , which will negatively affect the gross margin on sales of this product in the remainder of 2008.
Our expectations for gross margins in future periods are addressed under “Outlook” below.

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