The decrease in total revenues for the three months ended March 31, 2003 as compared to the same period in 2002 was primarily attributable to lower sales of Vivelle-Dot^® and CombiPatch^® to Novogyne and, to a lesser extent, lower sales of Menorest^® and Estradot^®, partially offset by higher sales of Estalis^® to Novartis AG. This decline in revenues reflects the impact of inventory reduction initiatives intended to align inventories for our products with current demand and to a lesser extent, a production issue relating to material supplied by one vendor that caused us to suspend shipments of CombiPatch^® to Novogyne. We believe we have resolved this production issue, and have re-commenced shipments of CombiPatch^® in the second quarter of 2003.

          A further decline in prescriptions of Novogyne’s HRT products, whether as a result of the HRT studies, related product label changes, or otherwise, would adversely impact Noven’s future revenues. We are unable to predict the timing or impact of any further decline on future sales and results of operations.

Gross Margin:

          Our gross margin was 53% (or gross profit of $4.9 million) for the three months ended March 31, 2003 versus 51% (or gross profit of $6.1 million) for the three months ended March 31, 2002. The increase in gross margin was primarily due to a decrease in the deferred profit related to sales of product to Novogyne. The decrease in deferred profit on sales to Novogyne resulted from lower inventories at Novogyne as a result of our inventory reduction initiatives and the CombiPatch^® production issue. The increase in gross margin was partially offset by lower overhead absorption due to lower production volumes.

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Operating Expenses:

          Operating expenses for the three months ended March 31, 2003 and 2002 are summarized as follows (dollar amounts in thousands):

Research and Development

          The $0.9 million, or 26%, decrease in research and development expenses for the three months ended March 31, 2003 as compared to the same period in 2002 was primarily attributable to a decrease in clinical study expenses for MethyPatch^® due to the completion of Phase III clinical trials, partially offset by increases in research and development expenditures for our fentanyl transdermal delivery system.

Marketing, General and Administrative

          The $1.2 million, or 43%, increase in marketing, general and administrative expenses for the three months ended March 31, 2003 as compared to the same period in 2002 was primarily attributable to an increase in pre-launch marketing expenses for MethyPatch^®, increased insurance costs, and legal fees incurred in connection with the Shire transaction.

Interest Income:

          Interest income, net, decreased approximately $0.1 million, or 29%, for the three months ended March 31, 2003 as compared to the same period in 2002, primarily due to lower interest rates.

Income Taxes:

          Our effective tax rate increased to 36.0% for the three months ended March 31, 2003 from 35.6% for the three months ended March 31, 2002. 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, 2003, we had a net deferred tax asset of $12.4 million. Realization of this deferred tax asset depends upon the generation of sufficient future taxable income. Although realization is not assured, we believe it is more likely than not that the deferred income tax asset will be realized based upon estimated future taxable income.

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Equity in Earnings of Novogyne:

          We share in the earnings of Novogyne, after satisfaction of an annual preferred return of $6.1 million to Novartis, according to an established formula. Novogyne produced sufficient income in the first quarters of 2003 and 2002 to meet Novartis’ annual preferred return for those years 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” on our Statements of Operations.

          The financial results of Novogyne for the three months ended March 31, 2003 and 2002 are summarized as follows (dollar amounts in thousands):

          Royalties due to us on sales of Vivelle^® and Vivelle-Dot^® for 2002 have been reclassified from selling, general and administrative expenses to cost of sales to conform to the current year’s presentation.

          The decrease in Novogyne’s revenues of $3.0 million, or 11%, for the three months ended March 31, 2003 as compared to the same period in 2002 is primarily attributable to decreased sales of Vivelle^®. Revenues for the first quarter of 2003 reflect the impact of inventory reduction initiatives intended to align inventories for Novogyne’s products with current demand. CombiPatch^® sales also decreased due to the continuing effect of the HRT studies described above and, to a lesser extent, the CombiPatch^® production issue that we believe has been resolved. The decrease in revenues was partially offset by higher sales of Vivelle-Dot^®. Revenues for March 31, 2003 and 2002 are net of sales allowances and returns of $6.1 million and $5.2 million, respectively.

          Novogyne’s gross margin was 76% (or gross profit of $18.7 million) for the three months ended March 31, 2003 versus 76% (or gross profit of $21.0 million) for the three months ended March 31, 2002.

          Novogyne’s selling, general and administrative expenses decreased to $7.9 million for the three months ended March 31, 2003 from $9.9 million in 2002, primarily due to lower expenses relating to the promotion of CombiPatch^® and lower sample expense in 2003.

          Novogyne amortized $1.5 million related to the CombiPatch^® acquisition cost during the three months ended March 31, 2003 and 2002.

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Liquidity and Capital Resources

          As of March 31, 2003 and December 31, 2002, we had $65.4 million and $58.7 million in cash and cash equivalents, and working capital of $65.2 million and $59.3 million, respectively.

          Cash provided by (used in) operating, investing and financing activities for the three months ended March 31, 2003 and 2002 is summarized as follows (amounts in thousands):

Operating Activities:

          Net cash provided by operating activities for the three months ended March 31, 2003 primarily resulted from a $10.6 million distribution from Novogyne, partially offset by changes in working capital due to the timing of product shipments and payments for inventory and income taxes.

          Net cash provided by operating activities for the three months ended March 31, 2002 primarily resulted from changes in working capital due to the timing of product shipments and payments for inventory and income taxes.

Investing Activities:

          Net cash used in investing activities for the three months ended March 31, 2003 and 2002 was primarily attributable to the purchase of fixed assets to expand production capacity and payment of patent development costs.

Financing Activities:

          Net cash used in financing activities for the three months ended March 31, 2003 was primarily attributable to the repurchase of 105,000 shares of our common stock, partially offset by cash received in connection with the issuance of common stock from the exercise of stock options.

          Net cash used in financing activities for the three months ended March 31, 2002 was primarily attributable to the payoff of all borrowings under a master lease facility in March 2002, partially offset by cash received in connection with the issuance of common stock from the exercise of stock options.

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Short-Term and Long-Term Liquidity:

          Our principal sources of short-term liquidity are existing cash, cash generated from product sales, fees and royalties under license agreements and distributions from Novogyne. In April 2003, Shire paid us $25 million upon closing of the MethyPatch^® transaction. For the three months ended March 31, 2003, all of our income before income taxes was comprised of equity in earnings of Novogyne, a non-cash item. Our short-term cash flow is dependent on sales, royalties and license fees associated with transdermal HRT products. Any decrease in sales of those products by us or our licensees or any increase in returns of products to Novogyne (including any such changes resulting from the results of the recent or ongoing HRT studies or the pending product label changes), the failure of the transdermal HRT market to resume its prior growth trends, 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 more heavily on our existing cash reserves or on borrowings to support our operations and business. Although we expect to receive distributions from Novogyne, there can be no assurance that Novogyne will have sufficient profits or cash flow to pay distributions or that Novogyne’s Management Committee will authorize such distributions. We cannot assure that MethyPatch^® will be approved by the FDA, particularly in light of the not approvable letter we received from the FDA in April 2003, or that Shire will generate MethyPatch^® sales at levels that would trigger our milestone payments; therefore, we cannot assure that we will receive any further payments from Shire. Under the agreement, the not approvable letter gives Shire the right to require us to repurchase the rights to MethyPatch^® for $5 million but to date Shire has not exercised that right.

          In the first quarter of 2003, our Board of Directors authorized a share repurchase program under which we may acquire up to $25 million of our common stock. As of March 31, 2003, we had repurchased 105,000 shares of our common stock at an aggregate price of approximately $1.3 million. Any repurchases of common stock under our share repurchase program could adversely affect our short-term liquidity.

          We believe that we will have sufficient cash available to meet our operating needs and anticipated short-term capital requirements. For our long-term operating needs, we intend to utilize funds derived from the above sources, as well as funds generated through sales of products under development or products that we may license or acquire from others. We expect that such funds will be comprised of payments received pursuant to future development and licensing arrangements, as well as direct sales of our own products. We expect that our cash requirements will continue to increase, primarily to fund clinical studies for products under development and for plant and equipment to expand production capacity. 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 may 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 is incurred prior to product launch, if we are unable to launch additional commercially viable products that we develop or that we license or acquire from others, we will have incurred the up-front costs associated with product development or acquisition without the benefit of the liquidity generated by sales of those products, which could adversely affect our long-term liquidity needs.

          We are unable to predict the effect of the results of the discontinued and ongoing HRT studies discussed above on the short and long-term prospects for the HRT market or for the market for our transdermal HRT products. Accordingly, we are not able to predict the effect that those studies may have on our short-term or long-term liquidity, results of operations and business prospects.

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          To the extent that capital requirements exceed available capital, we will seek alternative sources of financing to fund our operations. We did not extend our credit facility, which expired in April 2003. No assurance can be given that alternative financing will be available, if at all, in a timely manner, or on favorable terms. If we are unable to obtain satisfactory alternative financing, we may be required to delay or reduce our proposed expenditures, including expenditures for research and development and plant and equipment, in order to meet our future cash requirements.

Critical Accounting Policies

          For a discussion of our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies”, which is included in Noven’s Form 10-K for the year ended December 31, 2002.

Outlook

          A discussion of the factors that could impact our 2003 financial results is provided below, elsewhere in this Form 10-Q, and under the caption “Cautionary Factors that May Have an Impact on Future Results” included in Item 7 of our Form 10-K. Other factors, trends, risks and uncertainties unknown to us could also influence our financial results.

U.S. HRT

          We have inventory management initiatives underway intended to align U.S. HRT inventory with the reduced demand that followed the early termination of the WHI study. We now believe that inventories at Novogyne have been reduced to acceptable levels, and that Vivelle inventories at the trade level remain modestly higher than desired. We expect to conclude our inventory reduction initiatives in the 2003 second quarter.

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International HRT

          We do not expect international sales to contribute to our growth in 2003 unless Novartis AG launches Estradot^® in additional major markets. Estradot^® has been launched in Germany and in several other countries, but, according to Novartis AG, significant pricing and reimbursement issues in the remaining major markets, including the United Kingdom, France, Spain and Italy, have to date prevented Novartis AG from launching in those countries. Because of these significant reimbursement and pricing issues and Novartis’ lack of success to date in securing a marketing partner in the United Kingdom and France for Estradot^®, we do not expect any additional major market launches of Estradot^® in the remainder of 2003.

MethyPatch^®

          In light of our receipt of the FDA not approvable letter for MethyPatch^®, we are unable to assure or predict the timing of either product approval or launch, nor can we predict when, if ever, we will receive additional milestone payments or manufacturing revenues from Shire. In addition, we may be required or elect to undertake additional clinical studies or other initiatives, the cost of which could have a material adverse impact on our results of operations.

Summary

          For the second quarter of 2003, we expect to report revenues in the $12.0 million range and earnings per share of $0.13 to $0.16, subject to any material changes to our results associated with receipt of the FDA not approvable letter and our response to it.

          For the full year, we expect Novogyne’s revenues, selling, general and administrative expense and net income to approximate 2002 levels.

          We expect Noven’s overall HRT business to decline significantly compared to 2002, reflecting (i) the impact of WHI; (ii) our inventory reduction initiatives, which did not affect Noven until 2003; (iii) strong U.S. HRT sales in the first half of 2002, and (iv) lower international sales in 2003 due to launch delays for Estradot^® and declines in volume of our other products. We believe Noven’s revenues in the second half of 2003 may be lower than the 2003 first half, principally due to expected lower sales of our international products and CombiPatch^®.

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

          Noven had no variable rate debt outstanding during the three months ended March 31, 2003. Therefore, changes in interest rates did not affect interest expense, earnings or cash flows in 2003. We cannot predict market fluctuations in interest rates and their impact on any variable rate debt that we may have outstanding from time to time, nor can there be any assurance that fixed rate long-term debt will be available at favorable rates, if at all.

Item 4. Controls and Procedures

          Within ninety days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to Noven required to be included in our periodic Securities and Exchange Commission filings. However, that conclusion should be considered in light of the various limitations described below on the effectiveness of those controls and procedures, some of which pertain to most if not all business enterprises, and some of which arise as a result of the nature of our business. Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all error and all improper conduct. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of improper conduct, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Further, the design of any system of controls also is based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Furthermore, our level of historical and current equity participation in Novogyne may substantially impact the effectiveness of our disclosure controls and procedures. Because we do not control Novogyne, and Novogyne’s financial, accounting, inventory and sales deductions functions are performed by Novartis, our disclosure controls and procedures with respect to Novogyne are necessarily more limited than those we maintain with respect to ourselves. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the Chief Executive Officer’s and Chief Financial Officer’s evaluation.

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PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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Certifications

Certification of Principal Executive Officer

I, Robert C. Strauss, President, Chief Executive Officer and Chairman of the Board of Noven Pharmaceuticals, Inc., certify that:

1) I have reviewed this quarterly report on Form 10-Q of Noven Pharmaceuticals, Inc.;

2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6) The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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Certifications

Certification of Principal Financial Officer

I, James B. Messiry, Vice President and Chief Financial Officer of Noven Pharmaceuticals, Inc., certify that:

1) I have reviewed this quarterly report on Form 10-Q of Noven Pharmaceuticals, Inc.;

2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6) The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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