To Our Shareholders

To Our Shareholders:

In 2001, Noven's U.S. hormone replacement therapy (HRT) business posted robust growth. It demonstrated the high level of success that can be achieved when Noven's advanced patches are offered to physicians and patients seeking the best available transdermal therapies. This growth was commercial confirmation of our technological advantage, and good news for everyone with an interest in Noven.

This strong U.S. performance, however, was overshadowed last year by unfavorable developments in other areas of Noven's business. In March 2001, an inconclusive clinical trial delayed development of MethyPatch^®, our unique transdermal methylphenidate system for Attention Deficit Hyperactivity Disorder (ADHD). In August, lower-than-expected international orders called into question the global opportunity for our HRT products.

Now, just three months into 2002, the news on MethyPatch and international sales is once again favorable, and our core U.S. business is even stronger. Our new MethyPatch pivotal study was recently unblinded and demonstrated statistically significant improvement in ADHD, and Novartis has begun initial launches of Estradot^®, the international equivalent of Vivelle-Dot^®, our most successful U.S. patch. In the U.S., our Vivelle^® family of estrogen patches has claimed, for the first time, the number one position in monthly total prescriptions, making it the most prescribed family of transdermal estrogen in a $265 million market.

These developments offer a basis for renewed optimism in MethyPatch and in our international opportunities, and validate our high expectations for the Vivelle family and for our company as a whole. They are among the key Noven business drivers that give us confidence in the prospects for the year ahead and the ones to follow.

The DOT Matrix Advantage
While current developments may offer insight into Noven's near-term prospects, the most enduring basis for long-term optimism in Noven maintains a lower profile. It is not found in the statistical results of a clinical study, or in the current working relationship between two companies an ocean apart, or in a few market share points in a certain month of a given year.

It is found in the common thread that underlies all of Noven's products and prospects: our DOT Matrix™ transdermal patch technology, patented through the year 2014. At the molecular level, DOT Matrix is a proprietary blend of drug, silicone, acrylic and other molecules prepared in a manner that concentrates the drug and optimizes adhesion. In practice, it permits us to develop smaller, more wearable patches without adding irritating en-hancers. The more you know about patches, the more you can appreciate how difficult this is to achieve. DOT Matrix permitted Noven to develop the world's smallest estrogen patch (Vivelle-Dot) and the first two-drug patch in the U.S. (CombiPatch^®), and may permit us to offer the first methylphenidate patch (MethyPatch).

We are unaware of any patch technology in development that approaches DOT Matrix. We do know of very good companies who have tried to do what we have done, and failed. But we are not so naive as to think that DOT Matrix will be the last and best transdermal technology the world will ever see. In that regard, we are spending a significant portion of our research budget to make DOT Matrix obsolete, and to try to make sure that, if anyone surpasses the DOT Matrix standard, it will be Noven.

2001 Financial Results
Given the news events of last year, it was easy to overlook the fact that Noven saw significant financial improvement in 2001. Our pretax income for 2001 increased 57% to $18.8 million, the highest in our history. Unfortunately, our provision for income taxes increased by $14.3 million as we became fully taxable for the first time. Reflecting this tax increase, net income was $12.1 million, or $0.51 per share, compared to $19.6 million, or $0.84 per share, in 2000. Adjusted for taxes and tax benefits, however, 2000 earnings per share would have been substantially lower than 2001.

Revenues in 2001 were $45.9 million, a modest increase over the $42.9 million reported in 2000. Revenues in 2001 were impacted by the abrupt decline in international sales in the second half of the year.

In 2001, we invested $11.0 million (or about 25% of our revenues) in research and development, primarily in MethyPatch clinical trials. Our R&D investment should be even higher in 2002 as we plan to advance as many as three new DOT Matrix patches into clinical trials.

As we have for several consecutive years, Noven generated cash in 2001. Supplemented by a $5.0 million license-related milestone payment in the fourth quarter, cash and cash equivalents increased to $49.4 million from $41.0 million at the end of 2000.

Novogyne Pharmaceuticals
Noven's interest in Novogyne Pharmaceuticals, our U.S.-based women's health company jointly owned with Novartis Pharmaceuticals Corporation, is a valuable asset and one of our most important growth drivers. Our 2001 results reflected a record $14.0 million earnings contribution from Novogyne, which is 51% higher than the prior year, and represented about three quarters of our pretax income.

As that profit contribution would suggest, Novogyne had a great year. Revenues increased 54% to $90.0 million due to higher sales of Vivelle-Dot and the addition of CombiPatch. Novogyne's selling, general and administrative expenses increased over $10 million due to the CombiPatch relaunch and an approximate 20% increase in the size of the Novogyne sales force. Also during the year, Novogyne amortized $4.6 million of CombiPatch acquisition cost. In spite of these expenses, for 2001, Novogyne's net income increased 30% to $37.9 million.

Vivelle-Dot & CombiPatch
Novogyne's success in 2001 was largely due to growth in Vivelle-Dot and the acquisition of CombiPatch, both of which incorporate DOT Matrix technology.

DOT Matrix gives Vivelle-Dot the small size, comfort and other favorable wear characteristics that have caused it to be one of the fastest growing HRT products on the market. The Vivelle family (Vivelle-Dot and original Vivelle) has increased its share of the transdermal estrogen market every month since the launch of Vivelle-Dot in May 1999. As of February 2002, the family held a market-leading 33.7% share of the U.S. transdermal estrogen market.

In March 2001, Novogyne acquired CombiPatch from a prior Noven licensee. The acquisition made Novogyne the only company in the U.S. offering transdermal systems for both the estrogen-only and combination estrogen/progestin markets. Novogyne now has a complete, compelling story for doctors who are just now discovering the benefits of patch therapy, and can serve as the primary source of information for those who already view patches as first line therapy.

Since Novogyne relaunched CombiPatch in May 2001, prescriptions have stabilized, but have not yet increased. Novogyne is currently implementing supplemental sales and marketing programs intended to increase the existing CombiPatch physician base. Even without prescription growth, however, CombiPatch made important contributions in 2001. It contributed several million dollars to Novogyne's income, rounded out the joint venture's product line, and helped fund a 20% increase in the Novogyne sales force. This broader sales reach should continue to help the Vivelle family grow market share.

Estradot & Estalis
There are significant non-U.S. opportunities for our lead patch products. Over the last few years, Novartis Pharma AG, the world leader in transdermal HRT sales, licensed Estradot (the equivalent of Vivelle-Dot) and Estalis^® (the equivalent of CombiPatch) to form the core of their next-generation transdermal HRT franchise.

Estradot is now approved in several countries and is pending approval in about 50 more. Product launches began in March 2002 and should continue over the next two years. Focus groups held in Europe suggest there is a high level of enthusiasm for the product, and we are hopeful that physicians abroad will be as receptive to the world's smallest patch as they have been in the U.S.

Noven's other international opportunity – Estalis – was at the heart of a significant setback last year. Novartis licensed Estalis in late 1999, and started launching the product in 2000. In mid-2001, however, we learned that Novartis' strategy of launching with one Estalis dosage strength was not working as planned. They determined that they needed two strengths, like the product has in the U.S., to be successful. Estalis orders, which had been considerable in the first half of 2001, dropped sharply in the second half. Novartis is now doing clinical studies to obtain marketing approval of that additional strength, and we do not expect growth in Estalis for several years until that strength is commercialized.

We remain confident that Novartis is committed to the Estalis brand. Last year, they engaged us to develop product enhancements to help keep Estalis at the forefront of transdermal combination therapy, so the longer-term international prospects for that product appear excellent.

Once-Daily MethyPatch
MethyPatch is Noven's once-daily methylphenidate patch for ADHD. It is the linchpin of our strategy to enter large non-HRT markets with products that we market ourselves.

In March of last year, a clinical study design issue in our first Phase III trial led to inconclusive study results. We were confident the product worked, and wasted no time in getting the program back on course. We redesigned the study, reinitiated Phase III in the fourth quarter of 2001, and concluded the study in March 2002.

The study results, unblinded just a few days ago, demonstrate statistically significant improvement in patient behavior with MethyPatch as compared to placebo in children with ADHD. This success has lifted the veil of uncertainty that hung over this prospective growth driver for almost a year, and has brought the commercialization of MethyPatch much closer to reality.

We are now preparing our MethyPatch New Drug Application, which we expect to submit to the FDA this summer. If approved, we plan to begin marketing MethyPatch with a targeted U.S. sales force in the latter half of 2003. At peak sales, we believe MethyPatch has the potential to be a $50-$100 million product, and make significant therapeutic and societal contributions in the process.

2002 & Beyond
As we look to the balance of 2002, we see a year of improvement and preparation for our expected return to high growth in 2003 and beyond. We are building momentum towards a confluence of at least five revenue contributors: growth in Vivelle-Dot and CombiPatch in the U.S.; global roll-outs of Estradot and, in time, Estalis; and the U.S. introduction of MethyPatch. Adding to this scenario is the good possibility of significant contributions from our other pipeline products and industry collaborations.

Underlying these drivers is DOT Matrix, our competitive edge, the patented, distinguishing factor that makes us better than the rest. It is the reason why doctors and patients embrace our tiny estrogen patch; why the world's largest HRT patch company has chosen us as their technology partner; and why physicians may soon have one of the most flexible therapies ever offered for the treatment of ADHD. It is also the reason why we believe Noven shareholders and everyone with an interest in the company should share our high confidence about Noven's future.

Of course, behind the technology and products are the hard work, dedication, ingenuity and talents of our employees, and I extend my sincerest thanks and appreciation to each of them for their invaluable contributions. And on behalf of everyone at the company, I thank you, our shareholders, for your loyalty, support and investment in Noven.

Sincerely,

Robert C. Strauss
President, Chief Executive Officer
& Chairman of the Board

Copyright © 2003 Noven Pharmaceuticals, Inc. All rights reserved.