UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2008

Commission file number 0-17254

NOVEN PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

STATE OF DELAWARE		59-2767632
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

11960 S.W. 144th Street, Miami, FL 33186

(Address of principal executive offices)     (Zip Code)

(305) 253-5099

(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o		Accelerated filer x		Non-accelerated filer o		Smaller reporting company o
			(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No x

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at July 31, 2008
Common stock $.0001 par value		24,895,185

 

 

NOVEN PHARMACEUTICALS, INC.

INDEX

		Page No.
PART I — FINANCIAL INFORMATION
Item 1 - Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007			3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007			4
Condensed Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income for the Six Months Ended June 30, 2008			5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007			6
Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3 - Quantitative and Qualitative Disclosures About Market Risk			43
Item 4 - Controls and Procedures			44
PART II — OTHER INFORMATION
Item 1 - Legal Proceedings			45
Item 1A - Risk Factors			45
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 4 - Submission of Matters to a Vote of Security Holders			46
Item 5 - Other Information			47
Item 6 - Exhibits			47
SIGNATURES			48
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 906 Certification of CFO

Cautionary Factors: Statements in this report that are not descriptions of historical facts are “forward-looking statements” provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. Our actual results, performance and achievements may be materially different from those expressed or implied by such statements and readers should consider the risks and uncertainties associated with our business that are discussed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2007 as supplemented by Part II — Item 1A — “Risk Factors” of this quarterly report on Form 10-Q, as well as other reports filed from time to time with the Securities and Exchange Commission.

Trademark Information: Lithobid^® and Pexeva^® are registered trademarks, and Mesafem^™ and Stavzor^™ are trademarks of Noven Therapeutics, LLC; Vivelle^® is a registered trademark of Novartis Pharmaceuticals Corporation; Estradot^® (foreign) and Vivelle-Dot^® are registered trademarks, and Menorest is a trademark, of Novartis AG; CombiPatch^® and Estalis^® (United States) are registered trademarks of Vivelle Ventures LLC; and Daytrana^® is a registered trademark of Shire Pharmaceuticals Ireland Limited.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data) (unaudited)

		June 30,				December 31,
		2008				2007
Assets
Current Assets:
Cash and cash equivalents		$	35,405			$	13,973
Short-term investments available-for-sale, at fair value			—				21,565
Accounts receivable (less allowances of $264 at 2008 and $252 at 2007)			8,302				6,956
Milestone payment receivable — Shire			25,000				—
Accounts receivable — Novogyne, net			6,592				8,683
Inventories			16,278				12,136
Net deferred income tax asset, current portion			8,786				7,614
Prepaid income taxes			3,596				4,925
Prepaid and other current assets			4,358				5,251
			108,317				81,103
Non-current Assets:
Property, plant and equipment, net			35,415				36,213
Investments in auction rate securities			17,510				32,835
Investment in Novogyne			25,959				24,310
Net deferred income tax asset, non-current portion			63,827				58,053
Intangible assets, net			37,190				38,773
Goodwill			14,407				14,734
Deposits and other non-current assets			972				677
			195,280				205,595
		$	303,597			$	286,698
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses		$	6,809			$	8,399
Accrued compensation and related liabilities			5,440				9,801
Other accrued liabilities			17,193				15,270
Current portion of long-term obligations			3,416				3,421
Deferred license and contract revenues, current portion			26,252				20,188
			59,110				57,079
Non-current Liabilities:
Long-term obligations, less current portion			5,095				8,438
Deferred license and contract revenues, non-current portion			94,991				85,056
Other non-current liabilities			1,165				1,831
			101,251				95,325
Total Liabilities			160,361				152,404
Commitments and Contingencies (Note 14)
Stockholders’ Equity:
Preferred stock — authorized 100,000 shares par value $.01 per share; no shares issued or outstanding			—				—
Common stock — authorized 80,000,000 shares, par value $.0001 per share; 25,217,530 and 24,881,867 issued at June 30, 2008 and December 31, 2007			2				2
Additional paid-in capital			120,916				118,561
Retained earnings			27,957				20,855
Accumulated other comprehensive loss			(515	)			—
Treasury stock, at cost - 322,345 shares at June 30, 2008 and December 31, 2007			(5,124	)			(5,124	)
Common stock held in trust			(1,256	)			(950	)
Deferred compensation obligation			1,256				950
			143,236				134,294
		$	303,597			$	286,698

The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Revenues:
Product revenues — Novogyne:
Product sales, net		$	5,553			$	4,804			$	7,984			$	10,173
Royalties			2,349				1,899				4,529				3,664
Total net product revenues — Novogyne			7,902				6,703				12,513				13,837
Product revenues, net — third parties			11,641				8,359				23,226				16,831
Total net product revenues			19,543				15,062				35,739				30,668
License and contract revenues			5,060				3,777				10,346				7,486
Total net revenues			24,603				18,839				46,085				38,154
Costs and Expenses:
Cost of products sold — Novogyne			3,463				3,285				6,789				6,244
Cost of products sold — third parties			9,320				6,029				17,303				11,997
Total cost of products sold			12,783				9,314				24,092				18,241
Research and development			3,293				3,185				6,612				6,651
Selling and marketing			5,336				221				10,159				461
General and administrative			8,906				5,488				15,928				10,669
Total costs and expenses			30,318				18,208				56,791				36,022
Income (loss) from operations			(5,715	)			631				(10,706	)			2,132
Equity in earnings of Novogyne			12,429				9,174				20,696				14,077
Interest income, net			500				1,813				1,122				3,445
Income before income taxes			7,214				11,618				11,112				19,654
Provision for income taxes			2,704				4,042				4,010				7,042
Net income		$	4,510			$	7,576			$	7,102			$	12,612
Basic earnings per share		$	0.18			$	0.31			$	0.29			$	0.51
Diluted earnings per share		$	0.18			$	0.30			$	0.29			$	0.50
Weighted average number of common shares outstanding:
Basic			24,603				24,832				24,582				24,785
Diluted			24,754				25,379				24,710				25,381

The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income
(in thousands)
(unaudited)

																		Accumulated
										Additional								Other
		Common Stock								Paid-in				Retained				Comprehensive				Treasury
		Shares				Amount				Capital				Earnings				Loss				Stock				Other				Total
Balance at December 31, 2007			24,560			$	2			$	118,561			$	20,855			$	—			$	(5,124	)		$	—			$	134,294
Issuance of shares pursuant to employee equity plan			1				—				10				—				—				—				—				10
Stock-based compensation expense and issuance of shares to officers and outside directors			334				—				2,345				—				—				—				—				2,345
Common stock held in trust			(19	)			—				—				—				—				—				(306	)			(306	)
Deferred compensation obligation			19				—				—				—				—				—				306				306
Comprehensive income:
Net income			—				—				—				7,102				—				—				—				7,102
Other comprehensive income:
Unrealized loss on investments in auction rate securities			—				—				—				—				(515	)			—				—				(515	)
Comprehensive income																														$	6,587
Balance at June 30, 2008			24,895			$	2			$	120,916			$	27,957			$	(515	)		$	(5,124	)		$	—			$	143,236

The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

NOVEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

		Six Months ended June 30,
		2008				2007
Cash flows from operating activities:
Net income		$	7,102			$	12,612
Adjustments to reconcile net income to net cash flows (used in) provided by operating activities:
Depreciation, amortization and certain other noncash items			4,568				2,539
Inventory write-offs			3,871				682
Stock-based compensation expense			2,345				1,976
Income tax benefits on exercise of stock options			—				462
Excess tax benefit from exercise of stock options			—				(392	)
Deferred income tax benefit			(6,946	)			(6,661	)
Recognition of deferred license and contract revenues			(10,346	)			(7,486	)
Equity in earnings of Novogyne			(20,696	)			(14,077	)
Distributions from Novogyne			17,247				10,975
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable — trade, net			(1,346	)			1,493
Increase in milestone payment receivable — Shire			(25,000	)			—
Decrease in accounts receivable — Novogyne, net			2,091				1,619
Increase in inventories			(8,013	)			(1,595	)
Decrease in prepaid income taxes			3,129				243
Decrease (increase) in prepaid and other current assets			113				(830	)
Increase in deposits and other assets			(176	)			—
Decrease in accounts payable and accrued expenses			(1,897	)			(494	)
Decrease in accrued compensation and related liabilities			(4,324	)			(932	)
Increase in other accrued liabilities			1,923				2,128
Increase in deferred license and contract revenues			26,345				30,975
Increase in other liabilities			97				342
Cash flows (used in) provided by operating activities			(9,913	)			33,579
Cash flows from investing activities:
Purchases of property, plant and equipment			(1,205	)			(1,421	)
Payments for intangible assets			(152	)			(348	)
Payments for deferred acquisition costs			—				(1,241	)
Purchase of company-owned life insurance			(335	)			(260	)
Purchases of investments			(62,800	)			(767,769	)
Proceeds from sale of investments			99,175				730,864
Cash flows provided by (used in) investing activities			34,683				(40,175	)
Cash flows from financing activities:
Issuance of common stock from exercise of stock options			10				2,521
Excess tax benefit from exercise of stock options			—				392
Payments of long-term obligations			(3,348	)			(58	)
Cash flows (used in) provided by financing activities			(3,338	)			2,855
Net increase in cash and cash equivalents			21,432				(3,741	)
Cash and cash equivalents, beginning of period			13,973				9,144
Cash and cash equivalents, end of period		$	35,405			$	5,403

The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

NOVEN PHARMACEUTICALS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:

     Since its incorporation in Delaware in 1987, Noven Pharmaceuticals, Inc. (“Noven”) has been primarily engaged in the research, development, manufacture and marketing of advanced transdermal drug delivery technologies and prescription transdermal products.

     Noven and Novartis Pharmaceuticals Corporation (“Novartis”) established a joint venture, Vivelle Ventures LLC (d/b/a Novogyne Pharmaceuticals) (“Novogyne”), effective May 1, 1998, to market and sell women’s prescription healthcare products in the United States and Canada. These products include Noven’s transdermal hormone therapy product delivery systems marketed under the brand names Vivelle-Dot^® and CombiPatch^®. Noven accounts for its 49% investment in Novogyne under the equity method and reports its share of Novogyne’s earnings as “Equity in earnings of Novogyne” on its Condensed Consolidated Statements of Operations. Noven defers the recognition of 49% of its profit on products sold to Novogyne until the products are sold by Novogyne to third party customers.

     On August 14, 2007 (the “Closing Date”), Noven acquired JDS Pharmaceuticals, LLC (“JDS”), a privately-held specialty pharmaceutical company that currently markets three branded prescription psychiatry products through a targeted sales force and has additional products in development. Effective January 8, 2008, JDS’s name was changed to Noven Therapeutics, LLC (“Noven Therapeutics”). With the acquisition of Noven Therapeutics, Noven now operates in two segments distinguished along product categories: (i) the “Noven Transdermals” segment, which currently engages in the research, development, manufacturing and licensing to partners of transdermal drug delivery technologies and prescription transdermal products; and (ii) the “Noven Therapeutics” segment, which currently engages in the development, marketing and sales of pharmaceutical products. See Note 15 — “Segment and Customer Data” for Noven’s segment reporting.

     In management’s opinion, the accompanying unaudited condensed consolidated financial statements of Noven contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position of Noven, the results of its operations, and its cash flows for the periods presented. Noven’s business is subject to numerous risks and uncertainties including, but not limited to, those set forth in Part I — Item 1A of Noven’s Annual Report on Form 10-K for the year ended December 31, 2007 (“Form 10-K”), and as supplemented by Part II — Item 1A — “Risk Factors” of this quarterly report on Form 10-Q. Accordingly, the results of operations and cash flows for the periods presented are not, and should not be construed as, necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 2008 or for periods thereafter.

     The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes to the consolidated financial statements included in Noven’s Form
10-K. The accounting policies followed for interim financial reporting are the same as those disclosed in Note 2 of the notes to the consolidated financial statements included in Noven’s Form 10-K.

     Certain reclassifications have been made to the prior period’s statement of operations and statement of cash flows to conform to the current period’s presentation.

2. RECENT ACCOUNTING PRONOUNCEMENTS:

     The following information updates the discussion of recent accounting pronouncements in Note 2 of the consolidated financial statements included in Noven’s Form 10-K.

     In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days following the Securities Exchange and Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Noven does not expect adoption of SFAS No. 162 to have a material impact on its financial statements.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. SFAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. Noven is currently assessing the impact of adopting SFAS No. 161 and the impact it may have on Noven’s consolidated financial condition, results of operations or cash flows.

3. CASH FLOW INFORMATION:

     Income Tax and Interest Payments

     Cash payments for income taxes were $7.5 million and $16.5 million for the six months ended June 30, 2008 and 2007, respectively. In 2002, the State of New Jersey enacted legislation that requires Novogyne to remit estimated state income tax payments on behalf of its owners, Noven and Novartis. For the six months ended June 30, 2008 and 2007, Novogyne paid $1.8 million and $4.4 million, respectively, to the New Jersey Department of Revenue, representing Noven’s portion of Novogyne’s estimated state income tax payment. These payments were deemed distributions to Noven from Novogyne. Noven received tax refunds directly from the State of New Jersey of $2.7 million and $2.4 million during the six months ended June 30, 2008 and 2007, respectively, related to these state income tax payments made on Noven’s behalf. Cash payments for interest were not material for the six months ended June 30, 2008 and 2007.

     Non-cash Operating Activities

     Noven recorded $0.5 million income tax benefit as additional paid-in capital derived from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options for the six months ended June 30, 2007.

     Non-cash Investing Activities

     Noven recorded $0.5 million in unrealized losses on its investments in auction rate securities for the six months ended June 30, 2008. The unrealized losses were recorded as a reduction of stockholders’ equity through other comprehensive income (loss).

4. INVESTMENTS AVAILABLE-FOR-SALE:

     At June 30, 2008, Noven held investments in auction rate securities (classified as available-for-sale) with a par value and fair value of $18.0 and $17.5 million, respectively. Auction rate securities are floating rate debt securities with long-term nominal maturities, the interest rates of which are reset periodically (typically every seven to thirty-five days) through a Dutch auction process. These periodic auctions have historically provided a liquid market for auction rate securities, as this mechanism generally allowed existing investors to rollover their holdings and continue to own their respective securities at then-existing market rates or to liquidate their holdings by selling their securities at par value. Beginning in February 2008, as part of the ongoing credit market crisis, several auction rate securities from various issuers have failed to receive sufficient order interest from potential investors to clear successfully, resulting in auction failures. Historically, when investor demand was insufficient, the banks running the auctions would step in and purchase the remaining securities in order to prevent an auction failure. However, the banks have recently been allowing these auctions to fail. As a result of failed auctions, these investments now pay interest as defined by the governing documents or indenture.

     Noven liquidated $36.9 million of auction rate securities at par value during the six months ended June 30, 2008. During the three months ended March 31, 2008, Noven recorded an unrealized loss of $0.5 million to reduce the investments to fair value. During the three months ended June 30, 2008, Noven determined that no additional loss was required to be recorded. The unrealized loss has been recorded as a reduction of stockholders’ equity through other comprehensive income (loss). Because the investments are tax-exempt, there is no related tax effect.

     Noven’s auction rate security investments are collateralized primarily by tax-exempt municipal bonds and, to a lesser extent, guaranteed student loans. Noven does not hold any auction rate securities collateralized by mortgages or collateralized debt obligations. Noven believes these investments are of high credit quality, as all are investment grade and the majority are rated AA or higher. Furthermore, management currently has the intent and believes it has the ability to hold these investments until the anticipated recovery in fair value occurs. Based on these factors, Noven believes the decline in fair value of these investments is due to general market conditions and is temporary in nature. Noven will continue to monitor the market for its auction rate investments. If management determines in a future period that a decline in fair value is other than temporary, then in accordance with SFAS No. 115, Noven would be required to recognize a realized loss in operations in the period when such determination is made.

5. FAIR VALUE MEASUREMENTS:

     Noven adopted SFAS No. 157, “Fair Value Measurements” in 2008. SFAS No. 157, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. SFAS No. 157 clarifies that fair value is an exit price, representing the amount expected to be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. To increase consistency and comparability in fair value measurements and related disclosures, SFAS No. 157 sets forth a three-tier hierarchy for the inputs used to measure fair value based on the degree to which such inputs are observable in the marketplace, as follows:

	(i)		Level 1 — observable inputs such as quoted prices in active markets;
	(ii)		Level 2 — inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
	(iii)		Level 3 — unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.

     During the six months ended June 30, 2008, Noven recorded a $0.5 million unrealized loss on its investments in auction rate securities which are classified as available-for-sale under SFAS No. 115. As of June 30, 2008, the total par value and fair value of Noven’s investments was $18.0 million and $17.5 million, respectively. Due to continuing auction failures beginning in February 2008, Noven utilized valuation models to determine the fair values of its investments in auction rate securities. The fair values of the investments were calculated based on the following: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) consideration of third party credit enhancement. These estimated fair values could change significantly based on future market conditions.

     Changes to investments measured at fair value on a recurring basis using unobservable inputs (Level 3) during the six months ended June 30, 2008 were as follows (in thousands):

Balance at December 31, 2007		$	54,400
Purchases of investments			550
Sales of investments at par			(36,925	)
Unrealized losses recorded as other comprehensive loss			(515	)
Balance at June 30, 2008		$	17,510

6. INVENTORIES:

     The following are the major classes of Noven’s inventories (in thousands):

		June 30,				December 31,
		2008				2007
Finished goods		$	4,105			$	3,171
Work in process			2,903				1,532
Raw materials			9,270				7,433
Total		$	16,278			$	12,136

     During the six months ended June 30, 2008, Noven recorded a $3.9 million charge to cost of products sold related to the write-off of inventories. These write-offs primarily related to an equipment failure in transdermal manufacturing during the three months ended March 31, 2008 which resulted in $1.8 million of Novogyne product write-offs and $1.0 million of third party HT product write-offs, as well as inventory write-offs of approximately $0.8 million during the three months ended June 30, 2008 due primarily to Daytrana^® product that exhibited high peel force characteristics.

     Shire plc (“Shire”) retains title to the active methylphenidate ingredient (“AMI”) in Daytrana^®. The value of the AMI is neither included in Daytrana^® product revenues nor in Noven’s cost of products sold. Noven records AMI maintained at its manufacturing facility as consignment inventory and bears certain manufacturing risks of loss related to the AMI. These risks include the contractual obligation of Noven to reimburse Shire for the cost of AMI if Noven does not meet certain minimum yields of the finished product. Shire has a reciprocal obligation to pay Noven if the yield requirements are exceeded. Noven slightly exceeded the yield requirements for the six months ended June 30, 2008 for product shipped to Shire, resulting in an immaterial payment from Shire to Noven. During the six months ended June 30, 2008, Noven used $2.7 million of AMI in the finished product. Noven had $4.6 million and $2.6 million of consignment AMI inventory on hand at June 30, 2008 and December 31, 2007, respectively, for which Noven owed Shire approximately $0.6 million and $0.5 million as of such respective dates, primarily as a result of product that did not meet the product’s release liner removal specification. AMI is not reflected in the inventory table above.

7. GOODWILL AND INTANGIBLE ASSETS:

     All of Noven’s goodwill arose from the JDS acquisition in August 2007 and, thus, relates to the Noven Therapeutics segment. The carrying amount of goodwill is $14.4 million and $14.7 million at June 30, 2008 and December 31, 2007, respectively. Goodwill is tested for impairment annually in the fourth quarter or more frequently, when events or other changes in circumstances indicate that the carrying value of goodwill may not be recoverable. If after testing the intangible assets and goodwill, Noven determines that these assets are impaired, then Noven would be required to write-down the impaired asset to fair value in the period when the determination is made. Such a write-down could have a material adverse effect on Noven’s results of operations.

      During the six months ended June 30, 2008, Noven took certain actions related to the JDS acquisition, resulting in a $0.3 million net reduction in goodwill as follows:

     All intangible assets above, with the exception of patent development costs with a net carrying amount of approximately $1.9 million and $2.0 million at June 30, 2008 and December 31, 2007, respectively, were acquired on the Closing Date as part of the JDS acquisition. Amortization expense was $1.2 million and $0.1 million for the three months ended June 30, 2008 and 2007, respectively. Amortization expense was $2.3 million and $0.3 million for the six months ended June 30, 2008 and 2007, respectively.

     Noven estimates that the annual amortization expense for intangible assets held at June 30, 2008 for each of the five years through 2013 is as follows (amounts in thousands):

		Remainder				Years Ending December 31,
		of 2008				2009				2010				2011				2012				2013
Cost of goods sold:
Intellectual property		$	2,053			$	4,032			$	3,985			$	3,924			$	3,908			$	3,847
General and administrative:
Non-compete and favorable lease agreements			231				413				237				—				—				—
Total		$	2,284			$	4,445			$	4,222			$	3,924			$	3,908			$	3,847

8. OTHER ACCRUED LIABILITIES:

     Other accrued liabilities consist of the following (amounts in thousands):

		June 30, 2008				December 31, 2007
Income taxes payable		$	5,437			$	2,414
Accrued Medicaid and other rebates			2,834				4,065
Accrued market withdrawal costs			1,950				3,300
Allowance for product returns			2,416				1,875
Other accrued liabilities			4,556				3,616
Total other accrued liabilities		$	17,193			$	15,270

9. EQUITY PLANS:

     Prior to January 1, 2006, all awards granted to employees under Noven’s 1999 Long-Term Incentive Plan (the “1999 Plan”) were stock options. In 2006, Noven began granting stock-settled stock appreciation rights (“SSARs”) and nonvested shares of common stock (“restricted stock”). Noven accounts for these awards in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment”. At June 30, 2008, there were 2,114,197 stock options and 1,543,360 SSARs issued and outstanding under the 1999 Plan.

     Noven has granted a total of 388,780 shares of restricted stock under the 1999 Plan. The following table summarizes the information regarding Noven’s restricted stock at June 30, 2008 (shares in thousands):

						Weighted
						Average
						Grant-Date
		Shares				Fair Value
Nonvested at December 31, 2007			6			$	22.86
Granted			328				9.90
Vested			(76	)			11.15
Nonvested at June 30, 2008			258			$	9.86

     Noven granted 70,847 and 26,244 shares of restricted stock to Noven’s non-employee directors in June 2008 and May 2007, respectively, as compensation for Board services. The shares vest over each director’s one-year service period at the end of each calendar quarter beginning with the end of the second quarter. As the shares vest, those shares that have been deferred by non-employee directors under Noven’s deferred compensation plan are transferred into a rabbi trust maintained by Noven. In accordance with EITF Issue No. 97-14, “Accounting for Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested”, the deferred shares were recorded at their fair value and classified as common stock held in trust. Since the deferral relates to Noven common stock, an offsetting amount was recorded as deferred compensation obligation in the stockholders’ equity section of the consolidated balance sheets. At June 30, 2008 and December 31, 2007 there were a total of 67,515 and 48,300 shares of common stock in the rabbi trust, respectively. Restricted stock grants during the six months ended June 30, 2008 include an aggregate 257,345 shares of restricted stock granted to certain executive officers in 2008.

     Noven has granted a total of 50,000 restricted stock units under the 1999 Plan. These restricted stock units were awarded to Noven’s former Chief Executive Officer in January 2008 as part of a separation agreement. The fair value of this award (approximately $0.7 million) was charged to operations in 2007.

     The assumptions used to value the SSARs for the three months ended June 30, 2008 and 2007 were as follows:

		2008				2007
Volatility			50.5	%			45.8	%
Risk free interest rate			3.22	%			4.59	%
Expected life (years)			4.8				5.0
Dividend yield			0.0	%			0.0	%

     Total stock-based compensation recognized in Noven’s consolidated statements of operations for the three and six months ended June 30, 2008 and 2007 was as follows (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Selling and marketing		$	169			$	111			$	323			$	222
General and administrative			1,159				628				1,627				1,256
Research and development			85				127				176				254
Total cost of products sold			74				122				219				244
		$	1,487			$	988			$	2,345			$	1,976
Tax benefit recognized related to compensation expense		$	511			$	302			$	804			$	661

     Stock-based compensation costs of $0.1 million for the three months ended June 30, 2008 and 2007, respectively, and $0.2 million for the six months ended June 30, 2008 and 2007, respectively, were included in manufacturing expenses, which are included in the determination of inventory costs. In any given period, the amount of stock-based compensation costs included in ending inventory is not material. There were no stock-based compensation costs capitalized as part of fixed assets for the three and six months ended June 30, 2008 or 2007.

     Cash received from options exercised under all share-based payment arrangements for the six months ended June 30, 2008 and 2007 was $10,000 and $2.5 million, respectively. There was no tax benefit realized on the tax deductions from option exercises under stock-based compensation arrangements for the six months ended June 30, 2008 as an immaterial amount of stock options/SSARs were exercised during this period. The tax benefit realized on the tax deductions from option exercises under stock-based compensation arrangements was $0.5 million for the six months ended June 30, 2007, of which $0.4 million was reported as cash flow from financing activities for the six months ended June 30, 2007.

     Stock option and SSAR transactions related to the 1999 Plan are summarized as follows for the six months ended June 30, 2008 (options/SSARs and aggregate intrinsic value in thousands):

														Weighted
						Weighted								Average
						Average				Aggregate				Remaining
		Options/				Exercise				Intrinsic				Contractual
		SSARs				Price				Value				Term
Outstanding at December 31, 2007			3,511			$	16.83
Granted			476				9.87
Exercised			(1	)			10.89			$	3
Canceled and expired			(329	)			18.73
Outstanding at June 30, 2008			3,657			$	15.94			$	581				4.1
Outstanding and exercisable at end of the period			2,062			$	17.30			$	185				2.7

     As of June 30, 2008, the unamortized compensation expense that Noven expects to record in future periods related to currently outstanding unvested stock options, SSARs and restricted stock is approximately $11.7 million before the effect of income taxes, of which $2.7 million, $4.0 million, $2.9 million, $1.8 million and $0.3 million is expected to be incurred in the remainder of 2008 and in 2009, 2010, 2011 and 2012, respectively. The weighted-average period over which this compensation cost is expected to be recognized is 2.5 years. As of June 30, 2008, approximately 3,368,362 outstanding options/SSARs are vested or expected to vest. Such options have a weighted average exercise price of $16.13, $0.5 million aggregate intrinsic value and a weighted average remaining life of 5.95 years as of June 30, 2008.

10. INCOME TAXES:

     On January 1, 2007, Noven adopted the provisions of, and began accounting for uncertainty in income taxes in accordance with, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109” (“FIN 48”). This interpretation requires companies to determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before recognition in the financial statements. FIN 48 requires a two-step approach when evaluating a tax position based on recognition (Step 1) and measurement (Step 2).

     Upon adoption of FIN 48, and as a result of the recognition and measurement of Noven’s tax positions as of January 1, 2007, Noven recognized a charge of approximately $0.5 million to the January 1, 2007 retained earnings balance. The gross amount of unrecognized tax benefits as of the date of adoption, January 1, 2007, was $0.9 million. If the $0.9 million were ultimately recognized, approximately $0.6 million would affect the effective tax rate due to approximately $0.3 million in related federal tax benefit. As of June 30, 2008 the gross amount of unrecognized tax benefits was approximately $1.3 million. If the $1.3 million is ultimately recognized, approximately $0.9 million would affect the effective tax rate due to approximately $0.4 million in related federal tax benefit. Interest and penalties related to income taxes are classified as a component of income tax expense. Approximately $0.4 million and $0.5 million were accrued for interest and penalties as of June 30, 2008 and December 31, 2007, respectively. Noven does not expect the gross amount of unrecognized tax benefits to significantly increase or decrease within twelve months after June 30, 2008. All of Noven’s unrecognized tax benefits pertain to state tax positions.

     Noven is periodically audited by federal and state taxing authorities. The outcome of these audits may result in Noven being assessed taxes in addition to amounts previously paid. The accruals are determined based upon Noven’s best estimate of possible assessments by the Internal Revenue Service (“IRS”) or other taxing authorities and are adjusted, from time to time, based upon changing facts and circumstances. Federal returns for years 2004 — 2006 remain open and subject to examination by the IRS. Noven files and remits state income taxes in various states where Noven has determined it is required to file state income taxes. Noven’s filings with those states remain open for audit for the years 2003 — 2006. Other than routine state tax inquiries, there are no examinations currently taking place related to income taxes in any jurisdiction. It is possible that examinations may be initiated by any jurisdiction where Noven operates, or where it can be determined that Noven operates, and the results of which can materially change the amount of unrecognized income tax benefits for tax positions taken, which may increase Noven’s income tax liabilities or decrease the amount of deferred tax assets.

     At June 30, 2008 and December 31, 2007, net deferred tax assets were $72.6 million and $65.7 million, respectively. Realization of these deferred tax assets depends upon the generation of sufficient future taxable income. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. Noven Therapeutics files separate state income tax returns in states where Noven Therapeutics has determined that it is required to file state income taxes. As a result, state deferred tax assets relating to Noven Therapeutics are evaluated separately in determining whether the state deferred tax assets are realizable. Noven expects that Noven Therapeutics will incur taxable losses in the next few years due to future expected clinical trial expenditures related to product development and selling and marketing costs required to commercialize its products. These expected taxable losses create negative evidence indicating the need for a valuation allowance at June 30, 2008 and December 31, 2007. Noven’s valuation allowance for state deferred tax assets was $3.3 million and $3.2 million as of June 30, 2008 and December 31, 2007, respectively, due to uncertainties in realizing these state deferred tax assets based on Noven’s projection of future state taxable income relating to Noven Therapeutics. If Noven determines, based on future Noven Therapeutics profitability that these state deferred tax assets will more likely than not be realized, a release of all, or part, of the related valuation allowance could result in an immediate income tax benefit in the period the valuation allowance is released.

11. CONTRACT AND LICENSE AGREEMENTS:

     SHIRE COLLABORATION

     Noven has developed a once-daily transdermal methylphenidate patch for Attention Deficit Hyperactivity Disorder (“ADHD”) called Daytrana^®. In the first quarter of 2003 Noven licensed to Shire the exclusive global rights to market Daytrana^® for payments by Shire of up to $150.0 million. In consideration for this licensing transaction, Shire agreed to pay Noven as follows: (i) $25.0 million was paid upon closing of the transaction in April 2003; (ii) $50.0 million was paid in April 2006 upon receipt of final marketing approval by the United States Food and Drug Administration (“FDA”); and (iii) three installments of $25.0 million each payable upon Shire’s achievement of $25.0 million, $50.0 million and $75.0 million in annual Daytrana^® net sales, respectively. Noven received the first $25.0 million sales milestone in the first quarter of 2007 and the second $25.0 million sales milestone in the third quarter of 2007. Noven has been advised by Shire that Shire’s net sales of Daytrana^® during the 12 months ended June 30, 2008 have triggered the third and final $25.0 million sales milestone due to be paid to Noven during the third quarter of 2008. As a result, Noven’s balance sheet reflects a milestone payment receivable from Shire of $25.0 million as of June 30, 2008. Noven is currently deferring and recognizing approval and sales milestones as license revenues on a straight-line basis, beginning on the date the milestone is achieved through the first quarter of 2013, which is Noven’s current best estimate of the end of the useful economic life of the product.

     SYNTHON PHARMACEUTICALS COLLABORATION

     In November 2005, JDS entered into an asset purchase agreement with Synthon Pharmaceuticals, Inc. (“Synthon”) for the purchase of Pexeva^®. In this transaction, JDS purchased certain assets related to Pexeva^® including the New Drug Application (“NDA”), intellectual property (including patents and trademarks) and certain finished goods inventory. The purchase of Pexeva^® included a cash payment at the time of closing and an obligation to make certain future fixed payments and certain contingent payments.

     Following the JDS acquisition, Noven became responsible for the possible future contingent payments of up to $11.5 million under the asset purchase agreement with Synthon. As of June 30, 2008 and December 31, 2007, $8.2 million and $11.5 million of these milestones were reflected as liabilities on Noven’s consolidated balance sheets. In April 2008, Noven made a milestone payment of $3.3 million to Synthon as a result of Pexeva^® achieving certain sales levels in 2007.

12. INVESTMENT IN VIVELLE VENTURES LLC (d/b/a NOVOGYNE):

     Noven shares in the earnings of Novogyne, after satisfaction of an annual preferred return of $6.1 million to Novartis, according to an established formula. Noven’s share of Novogyne’s earnings increases as Novogyne’s product sales increase, subject to a cap of 49%. Novogyne earned sufficient income in the first quarter of 2008 and 2007 to meet Novartis’ annual preferred return for those years and for Noven to recognize earnings from Novogyne under the formula.

     During the three and six months ended June 30, 2008 and 2007, Noven had the following transactions with Novogyne (in thousands):

		Three Months								Six Months
		2008				2007				2008				2007
Revenues:
Product sales		$	5,553			$	4,804			$	7,984			$	10,173
Royalties			2,349				1,899				4,529				3,664
		$	7,902			$	6,703			$	12,513			$	13,837
Reimbursed expenses		$	7,381			$	7,021			$	14,653			$	14,106

     Reimbursed expenses are primarily comprised of selling and marketing expenses paid by Noven on behalf of Novogyne. As of June 30, 2008 and December 31, 2007, Noven had amounts due from Novogyne of $6.6 million and $8.7 million, respectively.

     The unaudited condensed statements of operations of Novogyne for the three and six months ended June 30, 2008 and 2007 are as follows (in thousands):

		Three Months								Six Months
		2008				2007				2008				2007
Gross revenues		$	50,054			$	42,915			$	95,348			$	80,208
Sales allowances			5,702				6,837				11,555				10,999
Sales return allowances			585				(60	)			500				(9	)
Sales allowances and returns			6,287				6,777				12,055				10,990
Net revenues			43,767				36,138				83,293				69,218
Cost of sales			8,788				7,795				16,596				14,842
Selling, general and administrative expenses			9,798				9,579				18,810				19,712
Income from operations			25,181				18,764				47,887				34,664
Interest income			174				165				441				497
Net income		$	25,355			$	18,929			$	48,328			$	35,161
Noven’s equity in earnings of Novogyne		$	12,429			$	9,174			$	20,696			$	14,077

     The activity in the Investment in Novogyne account for the six months ended June 30, 2008 is as follows (in thousands):

Investment in Novogyne, beginning of period		$	24,310
Equity in earnings of Novogyne			20,696
Cash distributions from Novogyne			(17,247	)
Deemed distribution by Novogyne for state income tax payment			(1,800	)
Investment in Novogyne, end of period		$	25,959

     Subject to the approval of Novogyne’s management committee, Novogyne may, from time to time, distribute cash to Novartis and Noven based upon a contractual formula. For the three and six months ended June 30, 2008, Noven received cash distributions representing return on investment of $6.3 million and $17.2 million, respectively, from Novogyne. For the three and six months ended June 30, 2007, Noven received cash distributions representing return on investment of $1.2 million and $11.0 million, respectively, from Novogyne. In addition, as discussed in Note 3, tax payments of $1.8 million and $4.4 million were made by Novogyne on Noven’s behalf to the New Jersey Department of Revenue during the six months ended June 30, 2008 and 2007, respectively. These amounts were recorded as reductions in the investment in Novogyne when received (or in the case of tax payments, when paid).

13. SHARE REPURCHASE PROGRAM:

     In September 2007, Noven’s Board of Directors authorized a share repurchase program under which Noven may acquire up to $25.0 million of its common stock. As of December 31, 2007, Noven had repurchased 322,345 shares of its common stock at an aggregate price of approximately $5.1 million. These shares remained in treasury as of June 30, 2008 and December 31, 2007. No shares were repurchased under the program during the six months ended June 30, 2008.

14. COMMITMENTS AND CONTINGENCIES:

     HORMONE THERAPY (“HT”) STUDIES:

     Since 2002, several studies, including the Women’s Health Initiative (“WHI”) study performed by the National Institutes of Health (“NIH”) and a study performed by the National Cancer Institute (“NCI”), have identified increased risks from the use of HT, including increased risks of invasive breast cancer, ovarian cancer, stroke, heart attacks and blood clots. As a result of the findings from these and other studies, the FDA has required that “black box” labeling be included on all HT products marketed in the United States to warn, among other things, that these products have been associated with increased risks for heart disease, heart attacks, strokes and breast cancer and that they are not approved for heart disease prevention. Since the July 2002 publication of the WHI and NCI study data, total United States prescriptions have declined for substantially all HT products, including our HT products in the aggregate. Researchers continue to analyze data from the WHI study and other studies. Other studies evaluating HT are currently underway or in the planning stage. In particular, a private foundation has commenced a clinical study aimed at determining whether estrogen therapy (“ET”) use, by women aged 42 to 58, reduces the risk of heart disease. The study also seeks to determine if transdermal estrogen patches are more or less beneficial than an oral HT product. While 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 Noven could be subject to increased product liability risk if HT patch products are found to increase the risk of adverse health consequences. Noven’s products have been named in lawsuits filed against Noven, Novogyne and Novartis.

     SUPPLY AGREEMENTS:

     Noven’s supply agreement with Novogyne for Vivelle^® and Vivelle-Dot^® patches expired in January 2003. While the parties have continued to operate in accordance with certain of the supply agreement’s pricing terms, there is no assurance that the parties will continue to do so. Novogyne’s designation of a new supplier and approval of a new supply agreement would require the affirmative vote of four of the five members of Novogyne’s Management Committee. Since Noven appoints two members of Novogyne’s Management Committee, both Novartis and Noven must agree on Novogyne’s supplier. In connection with a transition to Vivelle-Dot^®, effective December 2006, Noven ceased supplying Vivelle^® product to Novogyne.

     Noven and Shire are parties to a long-term supply agreement under which Noven manufactures and supplies Daytrana^® to Shire at a fixed price. During the three months ended June 30, 2008 and 2007, Noven’s product sales of Daytrana^® to Shire were $2.7 million and $5.2 million, respectively. During the six months ended June 30, 2008 and 2007, Noven’s product sales of Daytrana^® to Shire were $5.7 million and $9.6 million, respectively. The supply agreement gives Shire the right to qualify a second manufacturing source and purchase a portion of its requirements from that source. If Shire were to exercise this right, Noven’s financial results from sales of Daytrana^® would be adversely affected.

     LITIGATION, CLAIMS AND ASSESSMENTS:

     In September 2005, Noven, Novogyne and Novartis were served with a summons and complaint from an individual plaintiff in Superior Court of New Jersey Law Division, Atlantic County in which the plaintiff claims personal injury allegedly arising from the use of HT products, including Vivelle^®. The plaintiff claims compensatory, punitive and other damages in an unspecified amount. Noven does not expect any activity in this case in the near future, as the court has entered an order to stay proceedings in all its pending and future HT cases except for cases where Wyeth Pharmaceuticals and its affiliates and Pfizer Inc. are the defendants.

     In April 2006, an individual plaintiff and her husband filed a complaint in the United States District Court, District of Minnesota against Noven, Novogyne, Novartis, Wyeth Inc. and Wyeth Pharmaceuticals, Inc. alleging liability in connection with personal injury claims allegedly arising from the use of HT products, including Noven’s CombiPatch^® product. The plaintiffs claim compensatory and other damages in an unspecified amount.

     In July 2006, four complaints were filed in the United States District Court, District of Minnesota against Noven and other pharmaceutical companies by four separate individual plaintiffs, each filing alone or with her husband. Three of the complaints also name Novartis as a defendant, and of these, two name Novogyne as a defendant as well. Each complaint alleges liability in connection with personal injury claims allegedly arising from the use of HT products, including Vivelle^® in one case and CombiPatch^® in two of the cases. The plaintiffs in each case claim compensatory and other damages in an unspecified amount. Noven has established an accrual for the expected legal fees related to the cases referenced above, although the amount is not material.

     In July 2008, one additional complaint was filed in the United States District Court, District of Minnesota against Wyeth Inc. and other named pharmaceutical companies, including Noven, Novogyne and Novartis. The complaint alleges liability in connection with personal injury claims allegedly arising from the use of HT products, including Vivelle-Dot^®. The plaintiffs claim compensatory and other damages in an unspecified amount.

     Each of the aforementioned federal court cases has been, or is expected to be, transferred to the federal multi-district litigation proceedings that are pending in the United States District Court, Eastern District of Arkansas.

     Novartis has advised Noven that Novartis is currently named as a defendant in at least 31 additional lawsuits that include approximately 32 plaintiffs that allege liability in connection with personal injury claims allegedly arising from the use of HT patches distributed and sold by Novartis and Novogyne, including Noven’s Vivelle-Dot^®, Vivelle^®, and CombiPatch^® products. Novogyne has been named as a defendant in one lawsuit in addition to the four lawsuits referenced above. Novartis has indicated that it will seek indemnification from Noven and Novogyne to the extent permitted by the agreements between and among Novartis, Novogyne and Noven. Novogyne’s aggregate limit under its claims-made insurance policy as of June 30, 2008 was $10.0 million. Novogyne has established reserves in the amount of $9.1 million with an offsetting insurance recovery of $7.0 million for expected defense and settlement expenses as well as for estimated future cases alleging use of Noven’s HT products. This accrual represents Novartis management’s best estimate as of June 30, 2008.

     In June 2007, Johnson-Matthey Inc. filed a complaint in the United States District Court, Eastern District of Texas against Noven alleging that Noven was infringing one of its patents through Noven’s manufacture and sale of Daytrana^®. The plaintiff is seeking injunctions from further infringement and claiming compensatory and other damages in an unspecified amount. In July 2007, Johnson-Matthey added Shire as a defendant in this lawsuit.

     Noven intends to vigorously defend all of the foregoing lawsuits, but the outcome of these lawsuits cannot ultimately be predicted.

     Noven is a party to other pending legal proceedings arising in the normal course of business, none of which Noven believes is material to its consolidated financial condition, results of operations or cash flows.

     FDA WARNING LETTER:

     Noven and Shire have received reports from some consumers concerning the difficulty of removing the release liner from Daytrana^® patches. In the first quarter of 2007, Noven, together with Shire, implemented enhancements to the Daytrana^® release liner. While the enhanced release liner has reduced the level of consumer reports, some patients and caregivers continue to have difficulty in removing the release liner from some Daytrana^® patches. Noven and Shire continue to monitor and review release liner complaints and the manufacturing process to determine whether modifications to the product or process can improve the long-term ease of use and address the issues raised by the FDA in the warning letter described below. Daytrana’s^™ market share based on total prescriptions declined in the three months ended June 30, 2008.

     In July 2007, Noven received from the FDA a list of observations on Form 483 following an on-site inspection of its manufacturing facilities. The majority of the observations in the Form 483 related to the Daytrana^® patch and difficulties experienced by some patients in removing the release liner, including certain product lots that utilize the enhanced release liner. In July 2007, Noven submitted to the FDA its response to the Form 483.

     In the third quarter of 2007, Shire initiated two voluntary market withdrawals of a portion of the Daytrana^® product on the market primarily in response to feedback from patients and caregivers who experienced difficulty removing the release liner from some Daytrana^® patches. Noven paid Shire $3.3 million in February 2008 related to the withdrawals. These costs were charged to operations in 2007.

     In January 2008, Noven received a warning letter from the FDA in connection with the FDA’s July 2007 inspection of its manufacturing facilities. In the warning letter, which is posted at the FDA’s website, the FDA cited Current Good Manufacturing Practice deficiencies related to: (i) peel force specifications for removal of Daytrana’s release liner; and (ii) data supporting the peel force characteristics of Daytrana’s enhanced release liner throughout the product’s shelf life. Noven submitted its response to the warning letter on January 30, 2008. In March 2008, the Florida District Office of the FDA indicated that Noven’s response appears to be satisfactory and stated that Noven’s response had been forwarded to the FDA’s Center for Drug Evaluation and Research for further review. In April 2008, a Noven stability protocol identified certain Daytrana^® lots exhibiting high peel force characteristics. In June 2008, Shire initiated the voluntary recall of two lots of Daytrana^® that did not meet the product’s release liner removal specification. Noven has agreed to pay Shire $1.95 million related to this recall, of which $0.25 million and $1.7 million were charged to operations in the first and second quarters of 2008, respectively.

     Noven believes it has identified the root cause and has identified potential solutions related to this issue, although it will take time to test the effectiveness of the potential solutions and to determine whether such solutions satisfactorily resolve the issue. Noven cannot assure that there will be a satisfactory resolution of the peel force issue. Failure to adequately address the issues raised by the FDA in the warning letter as well as the production and other issues involving Daytrana^® could result in additional regulatory action, including fines, recalls of products, injunctions, seizures, suspension of production or withdrawal of the approval of products. Any such regulatory action would be expected to have a material adverse effect on Noven, including the potential for litigation related to this matter, harm to Noven’s reputation and various costs associated with the foregoing.

     CONTRACT AND LICENSE AGREEMENTS:

     Noven is obligated to perform under its contract and license agreements. In certain circumstances, Noven is required to indemnify its licensees from damages caused by the products Noven manufactures as well as claims or losses related to patent infringement.

     NOVEN THERAPEUTICS COMMITMENTS:

     Noven Therapeutics has certain commitments and contingencies related to contractual arrangements, primarily related to milestone payments for development, FDA submission, FDA approval and commercial sales of current and developmental products. As of June 30, 2008 and December 31, 2007, Noven Therapeutics was responsible for up to $20.2 million and $23.5 million in such contingent milestones, respectively. As of June 30, 2008 and December 31, 2007, $8.2 million and $11.5 million of these milestones, respectively, were reflected as liabilities in Noven’s consolidated balance sheets and, as discussed in Note 11, in April 2008, Noven made a milestone payment of $3.3 million to Synthon.

     EMPLOYMENT AGREEMENT AND BONUS PLAN:

     Effective April 29, 2008, Peter Brandt was appointed to the offices of President and Chief Executive Officer and to Noven’s Board of Directors. In connection with Mr. Brandt’s appointment as an executive officer, Noven and Mr. Brandt entered into an employment agreement, dated April 29, 2008 (the “Agreement”). The initial two-year term of the Agreement expires on April 28, 2010 and will continue for consecutive one-year terms unless it is terminated by either party under certain conditions. Mr. Brandt’s base salary under the Agreement is approximately $0.7 million, subject to further increases at the discretion of the Board of Directors. Mr. Brandt’s annual target incentive bonus under Noven’s annual incentive plan during the term will be at least 75% of his base salary.

     In connection with the Agreement, Mr. Brandt was granted the following equity awards under the 1999 Plan: (i) SSARs with an aggregate fair value of $1.3 million to acquire 311,529 shares of Noven’s common stock at an exercise price of $9.10 per share (the market price on the grant date) which vest at a rate of 25% per year on each anniversary of the grant date; and (ii) 250,000 shares of restricted stock. The shares of restricted stock vest as follows: (a) 50,000 shares immediately upon grant; (b) 16,667 shares on the first anniversary of the grant date; (c) 16,666 shares on the second anniversary of the grant date; (d) 16,666 shares on the third anniversary of the grant date; (e) 50,000 shares upon Noven attaining pre-tax income of $50.0 million or more over any four consecutive quarterly periods; (f) 50,000 shares upon Noven attaining pre-tax income of $75.0 million or more over any four consecutive quarterly periods; and (g) 50,000 shares upon Noven attaining pre-tax income of $100.0 million or more over any four consecutive quarterly periods. On the grant date, the restricted shares had an aggregate fair value of $2.3 million, of which $455,000 related to the vested shares was immediately charged to operations and $455,000 pertaining to 50,000 shares is being amortized ratably over the 3-year vesting period. The balance of $1.4 million is and will be amortized over periods which reflect management’s current best estimate of when the specified performance targets will be achieved.

     Noven has a formula bonus plan that includes company and individual performance goals. Under the plan, a fixed percentage of each eligible employee’s base salary is established as a target incentive bonus award for such employee. To the extent that actual company performance is equal to, exceeds or is less than the company performance targets, an employee’s bonus award may be equal to, greater than or less than his or her target award. An employee’s non-financial goals are then considered in determining his or her final bonus award. Management’s estimate of the bonus accrual is expensed over the year in which it is earned.

15. SEGMENT AND CUSTOMER DATA:

     The accounting policies of the segments are the same as those described in Note 2 of the notes to the financial statements included in Noven’s Form 10-K. The table below presents segment information for the periods identified and reconciles segment information to the applicable consolidated amounts. There are no inter-segment revenues. The results of the Noven Therapeutics segment are included in Noven’s consolidated results beginning on the date of acquisition (August 14, 2007). Consequently, Noven’s results for the three and six month period ended June 30, 2007 do not include the results of the Noven Therapeutics segment. Prior year comparative data is provided for the Noven Transdermals segment:

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2008				2007				2008				2007
(in thousands):
Noven Transdermals:
Product revenues		$	12,968			$	15,062			$	23,459			$	30,668
License and contract revenues			5,060				3,777				10,346				7,486
Net revenues			18,028				18,839				33,805				38,154
Cost of products sold			(10,761	)			(9,314	)			(20,034	)			(18,241	)
Research and development			(2,436	)			(3,185	)			(4,814	)			(6,651	)
Selling and marketing			(213	)			(221	)			(407	)			(461	)
Equity in earnings of Novogyne			12,429				9,174				20,696				14,077
Segment contribution			17,047				15,293				29,246				26,878
Noven Therapeutics:
Product revenues			6,575				—				12,280				—
Cost of products sold			(2,022	)			—				(4,058	)			—
Research and development			(857	)			—				(1,798	)			—
Selling and marketing			(5,123	)			—				(9,752	)			—
Segment contribution			(1,427	)			—				(3,328	)			—
Unallocated income (expense):
General and administrative			(8,906	)			(5,488	)			(15,928	)			(10,669	)
Interest income, net			500				1,813				1,122				3,445
Income before income taxes		$	7,214			$	11,618			$	11,112			$	19,654

     Segment assets consisted of the following as of June 30, 2008 and December 31, 2007 (in thousands):

		June 30,				December 31,
		2008				2007
Noven Transdermals		$	113,295			$	83,912
Noven Therapeutics			55,848				57,893
Assets not allocated to segments			134,454				144,893
Total Assets		$	303,597			$	286,698

16. SUBSEQUENT EVENT — NEW CREDIT FACILITY

     In July 2008, Noven entered into an agreement for a $15.0 million credit facility. In connection with the credit facility and in lieu of granting a security interest in Noven’s assets, Noven granted a negative pledge in favor of the lender, whereby Noven agreed not to pledge, grant any security interest in, or allow any lien or encumbrance in or on, certain of Noven’s financial assets. As of the date of this report, no borrowings were outstanding under this facility.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following section addresses material aspects of our consolidated financial condition as of June 30, 2008, and our consolidated results of operations for the three months ended June 30, 2008 (the “2008 Quarter”) and June 30, 2007 (the “2007 Quarter”), and the six months ended June 30, 2008 (the “2008 Period”) and June 30, 2007 (the “2007 Period”). The contents of this section include:

	•		An executive summary of our consolidated results of operations for the 2008 Quarter;
	•		An overview of Noven and our Novogyne joint venture;
	•		An overview of Noven Therapeutics;
	•		A review of certain items that may affect the historical or future comparability of our consolidated results of operations;
	•		An analysis of our consolidated results of operations and our liquidity and capital resources;
	•		An outlook that includes our current financial guidance;
	•		A discussion of how we apply our critical accounting estimates; and
	•		A discussion of recently-issued accounting standards.

     This discussion should be read in conjunction with Noven’s consolidated financial statements for the three and six months ended June 30, 2008 and 2007 and the related notes included elsewhere in this Form 10-Q, as well as the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” from our Form 10-K.

Executive Summary

     The following Executive Summary is qualified in its entirety by the more detailed discussion and analysis of our financial condition and results of operations appearing in this Item 2 as well as in our consolidated financial statements and related notes included in this Form 10-Q.

     Our financial results for the 2008 Quarter include the results of operations of Noven Therapeutics, a specialty pharmaceutical company that we acquired in August 2007. The 2008 Quarter also included a $1.7 million charge related to reimbursements to Shire in connection with the voluntary recall of two lots of Daytrana^® product initiated in the 2008 Quarter (the “Recall Charge”).

     Including the impact of the Recall Charge, we reported net income of $4.5 million ($0.18 diluted earnings per share) for the 2008 Quarter, compared to net income of $7.6 million ($0.30 diluted earnings per share) for the 2007 Quarter.

     Our net revenues in the 2008 Quarter were $24.6 million, 31% higher than the $18.8 million reported in the 2007 Quarter. This increase reflects the recognition of $6.6 million in net revenues associated with Noven Therapeutics’ sales of Pexeva^® and Lithobid^® products and increased license and contract revenues, primarily due to amortization of additional Daytrana^® milestones received in 2007.

     Gross margin, as a percentage of net product revenues, was 35% in the 2008 Quarter compared to 38% in the 2007 Quarter. Gross margin in the 2008 Quarter was adversely affected by increased quality assurance activities and expenses, primarily related to Daytrana^® production. This decrease in gross margin was partially offset by sales of Pexeva^® and Lithobid^® in 2008, which have a higher gross margin than the products that we manufacture and sell to partners.

     Research and development expenses for the 2008 Quarter were $3.3 million, relatively unchanged from the $3.2 million reported in the 2007 Quarter. Selling and marketing expenses for the 2008 Quarter increased to $5.3 million from $0.2 million for the 2007 Quarter due to the addition of Noven Therapeutics. General and administrative expenses increased $3.4 million, or 62%, due to a $1.7 million charge related to reimbursements due to Shire in connection with the voluntary recall of two lots of Daytrana^®, an increase in professional fees and the addition of Noven Therapeutics.

     We recognized $12.4 million in earnings from Novogyne in the 2008 Quarter, an increase of 35% compared to the 2007 Quarter. Net revenues at Novogyne increased 21% to $43.8 million in the 2008 Quarter, primarily due to increased sales of Vivelle-Dot^®. Novogyne’s gross margin percentage for the 2008 Quarter increased slightly to 80%. Novogyne’s selling, general and administrative expenses for the 2008 Quarter were $9.8 million, largely unchanged from the 2007 Quarter. Novogyne’s net income for the 2008 Quarter increased 34% to $25.4 million compared to $18.9 million in the 2007 Quarter.

     At June 30, 2008, Noven had $52.9 million in cash and cash equivalents and other non-current investments ($35.4 million and $17.5 million, respectively). This compares with $68.4 million in cash and cash equivalents, short-term investments and other non-current investments ($14.0 million, $21.6 million and $32.8 million, respectively) at December 31, 2007. Noven’s investments at June 30, 2008 consisted of auction rate securities with a fair value of $17.5 million, all of which have been classified as non-current on Noven’s consolidated balance sheet following failed auctions occurring since February 2008. Noven’s auction rate securities are collateralized primarily by tax-exempt municipal bonds, and to a lesser extent, guaranteed student loans. As of June 30, 2008, Noven had recorded unrealized losses totaling $0.5 million relating to its investments in auction rate securities.

     Total prescriptions for Vivelle-Dot^® increased 6% in the 2008 Quarter compared to the 2007 Quarter, and total prescriptions for Novogyne’s products, taken as a whole, increased 2%. By comparison, the overall U.S. HT market declined 6% for the same period. Total prescriptions for Daytrana^® (launched in June 2006) decreased 11% in the 2008 Quarter compared to the 2007 Quarter, while prescriptions for ADHD stimulant therapies as a class increased 8% over the same period. Total prescriptions for Pexeva^® decreased 6% in the 2008 Quarter compared to the 2007 Quarter, while for the same period prescriptions for the selective serotonin re-uptake inhibitor (“SSRI”) class were largely unchanged. Reflecting ongoing generic substitution, total prescriptions for Lithobid^® decreased 32% in the 2008 Quarter compared to the 2007 Quarter.

     In July 2008, Noven received final FDA approval of Stavzor^™ (valproic acid delayed release capsules) in the treatment of manic episodes associated with bipolar disorder, adjunctive therapy in multiple seizure types (including epilepsy), and prophylaxis of migraine headaches. Stavzor^™ is expected to be launched by the Noven Therapeutics sales force in August 2008. In addition, sales of Daytrana^® by Shire during the 12 months ended June 30, 2008 were sufficient to trigger the third and final $25.0 million sales milestone.

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 $12.4 million and $9.2 million for the 2008 Quarter and the 2007 Quarter, 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. For the 2008 Period and the 2007 Period, we received $17.2 million and $11.0 million, respectively, in distributions from Novogyne, which accounted for a substantial portion of our net operating cash flows 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. 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 three branded prescription psychiatry products (Stavzor^™, Pexeva^® and Lithobid^®) and is advancing developmental products in psychiatry and women’s health including Mesafem, a non-hormonal therapy for the treatment of vasomotor symptoms associated with menopause. 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. To bring Noven Therapeutics’ pipeline of products under development to market, we plan to increase our research and development expenses significantly over the next several years. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Outlook.”

Certain Items that May Affect Historical or Future Comparability

     Set forth below are certain items that may affect the historical or future comparability of our consolidated results of operations and financial condition. Such disclosure is not intended to address every item that may affect the historical or future comparability of our consolidated results of operations or financial condition and such disclosure should be read in conjunction with the discussion and analysis of our consolidated results of operations, liquidity and capital resources and outlook appearing elsewhere in this Item 2.

Acquisition of JDS Pharmaceuticals, LLC in 2007

     We acquired JDS (now Noven Therapeutics) on August 14, 2007. We accounted for the acquisition of JDS using the purchase method of accounting. The purchase price exceeded the amounts allocated to the tangible and intangible assets acquired and liabilities assumed by approximately $14.4 million, which has been recorded as goodwill, all of which is deductible for tax purposes.

     We acquired $39.1 million in identifiable intangible assets in the JDS acquisition, which relate to: (i) intellectual property rights associated with Noven Therapeutics’ products approved by the FDA; (ii) a favorable lease intangible asset; and (iii) non-competition agreements with two former executives of JDS. At June 30, 2008, the carrying amount of Noven’s intangible assets (excluding goodwill, but including certain patent development costs unrelated to the JDS acquisition) totaled $37.2 million. Noven estimates that the annual amortization expense for intangible assets held at June 30, 2008 for each of the five years through 2013 will be as follows (amounts in thousands):

		Remainder				Years Ending December 31,
		of 2008				2009				2010				2011				2012				2013
Cost of goods sold:
Intellectual property		$	2,053			$	4,032			$	3,985			$	3,924			$	3,908			$	3,847
General and administrative:
Non-compete and favorable lease agreements			231				413				237				—				—				—
Total		$	2,284			$	4,445			$	4,222			$	3,924			$	3,908			$	3,847

     We are required to test our intangible assets with indefinite lives, which currently include only the goodwill acquired as a result of the JDS acquisition, for impairment on an annual basis or more frequently if indicators of impairment arise. Goodwill is tested for impairment annually in the fourth quarter. Although we have not experienced any indicators which would call for an earlier impairment test, we cannot assure that goodwill will not be impaired when we perform our annual test in the fourth quarter. We are required to test our intangible assets with finite lives if events or changes in circumstances indicate that the asset might be impaired. If after testing the intangible assets and goodwill, we determine that these assets are impaired, then we would be required to write-down the impaired asset to fair value in the period when the determination is made. Such a write-down could have a material adverse effect on our results of operations.

Daytrana^®

     Daytrana^® is Noven’s transdermal methylphenidate system for the treatment of ADHD, which we have licensed globally to Shire. Noven and Shire have received reports from some consumers concerning the difficulty of removing the release liner from certain Daytrana^® patches. In the first quarter of 2007, Noven, together with Shire, implemented enhancements to the Daytrana^® release liner. While the enhanced release liner has reduced the level of consumer reports, some patients and caregivers continue to have difficulty in removing the release liner from some Daytrana^® patches. Noven and Shire continue to monitor and review release liner complaints and the manufacturing process to determine whether modifications to the product or process can improve the long-term ease of use and address the issues raised by the FDA in the warning letter described below. Daytrana’s^® market share based on total prescriptions declined in the 2008 Quarter.

     In July 2007, Noven received from the FDA a list of observations on Form 483 following an on-site inspection of our manufacturing facilities. The majority of the observations in the Form 483 related to the Daytrana^® patch and difficulties experienced by some patients in removing the release liner, including certain product lots that utilize the enhanced release liner. In July 2007, Noven submitted to the FDA its response to the Form 483.

     In the third quarter of 2007, Shire initiated two voluntary market withdrawals of a portion of the Daytrana^® product on the market primarily in response to feedback from patients and caregivers who experienced difficulty removing the release liner from some Daytrana^® patches. Noven paid Shire $3.3 million in February 2008 related to the withdrawals. This payment was charged to operations in 2007.

     In January 2008, Noven received a warning letter from the FDA in connection with the FDA’s July 2007 inspection of its manufacturing facilities. In the warning letter, which is posted at the FDA’s website, the FDA cited Current Good Manufacturing Practice deficiencies related to: (i) peel force specifications for removal of Daytrana’s release liner; and (ii) data supporting the peel force characteristics of Daytrana’s enhanced release liner throughout the product’s shelf life. We submitted our response to the warning letter on January 30, 2008. In March 2008, the Florida District Office of the FDA indicated that our response appears to be satisfactory and stated that our response had been forwarded to the FDA’s Center for Drug Evaluation and Research for further review. In April 2008, a Noven stability protocol identified certain Daytrana^® lots exhibiting high peel force characteristics. In June 2008, Shire initiated the voluntary recall of two lots of Daytrana^® that did not meet the product’s release liner removal specification. We have agreed to pay Shire $1.95 million related to this recall, of which $0.25 million and $1.7 million was charged to operations in the first and second quarters of 2008, respectively.

     We believe we have identified the root cause and have identified potential solutions related to this issue, although it will take time to test the effectiveness of the potential solutions and to determine whether such solutions satisfactorily resolve the issue. We cannot assure that there will be a satisfactory resolution of the peel force issue. Failure to adequately address the issues raised by the FDA in the warning letter as well as the production and other issues involving Daytrana^® could result in additional regulatory action, including fines, recalls of products, injunctions, seizures, suspension of production or withdrawal of the approval of products. Any such regulatory action would be expected to have a material adverse effect on us, including the potential for litigation related to this matter, harm to our reputation and various costs associated with the foregoing.

Results of Operations

     Our business is 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. The contribution of our Noven Transdermals segment includes $12.4 million and $20.7 million of equity in earnings of Novogyne recognized in the 2008 Quarter and Period, respectively. 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 or Period. The negative contribution of our Noven Therapeutics segment in the 2008 Quarter and Period reflects the impact of $5.1 million and $9.8 million, respectively, in selling and marketing expenses in support of Noven Therapeutics’ currently marketed products, including approximately $0.9 million in the 2008 Period of expenses in connection with the Stavzor^™ launch.

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2008				2007				2008				2007
(in thousands):
Noven Transdermals:
Product revenues		$	12,968			$	15,062			$	23,459			$	30,668
License and contract revenues			5,060				3,777				10,346				7,486
Net revenues			18,028				18,839				33,805				38,154
Cost of products sold			(10,761	)			(9,314	)			(20,034	)			(18,241	)
Research and development			(2,436	)			(3,185	)			(4,814	)			(6,651	)
Selling and marketing			(213	)			(221	)			(407	)			(461	)
Equity in earnings of Novogyne			12,429				9,174				20,696				14,077
Segment contribution			17,047				15,293				29,246				26,878
Noven Therapeutics:
Product revenues			6,575				—				12,280				—
Cost of products sold			(2,022	)			—				(4,058	)			—
Research and development			(857	)			—				(1,798	)			—
Selling and marketing			(5,123	)			—				(9,752	)			—
Segment contribution			(1,427	)			—				(3,328	)			—
Unallocated income (expense):
General and administrative			(8,906	)			(5,488	)			(15,928	)			(10,669	)
Interest income, net			500				1,813				1,122				3,445
Income before income taxes		$	7,214			$	11,618			$	11,112			$	19,654

Three and Six months ended June 30, 2008 compared to the Three and Six months ended June 30, 2007

Revenues

     Total revenues for the three and six months ended June 30, 2008 and 2007 are summarized as follows (dollar amounts in thousands):

		Three Months												Six Months
		Ended June 30,												Ended June 30,
		2008				2007				% Change				2008				2007				% Change
Noven Transdermals
Novogyne:
Product sales		$	5,553			$	4,804				16	%		$	7,984			$	10,173				-22	%
Royalties			2,349				1,899				24	%			4,529				3,664				24	%
Product revenues — Novogyne			7,902				6,703				18	%			12,513				13,837				-10	%
Third Parties:
Product sales			4,978				8,271				-40	%			10,779				16,684				-35	%
Royalties			88				88				0	%			167				147				14	%
Product revenues — third parties			5,066				8,359				-39	%			10,946				16,831				-35	%
Total product revenues			12,968				15,062				-14	%			23,459				30,668				-24	%
License and contract revenues			5,060				3,777				34	%			10,346				7,486				38	%
Total Transdermals			18,028				18,839				-4	%			33,805				38,154				-11	%
Noven Therapeutics
Third Parties:
Product sales			6,575				—				N/A				12,280				—				N/A
Net Revenues		$	24,603			$	18,839				31	%		$	46,085			$	38,154				21	%