1998 Financial Statements

Notes to Financial Statements
Years Ended December 31, 1998, 1997 and 1996

Summary of Significant Accounting Policies

Noven Pharmaceuticals, Inc. ("Noven") was incorporated in Delaware in January 1987 and is a leader in the development of advanced transdermal and transmucosal drug delivery techniques.

Vivelle Ventures LLC:
Noven and Novartis Pharmaceuticals Corporation ("Novartis") entered into a joint venture, Vivelle Ventures LLC (the "Joint Venture"), effective May 1, 1998, to market and sell women’s healthcare products, including Noven’s first generation transdermal estrogen delivery system marketed under the brand name Vivelle^®. Noven accounts for its 49% investment in the Joint Venture under the equity method. Noven has eliminated 49% of its profit from the sales to the Joint Venture of product that remains in inventory.

Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents:
Cash and cash equivalents include cash and securities with a remaining maturity of three months or less.

Securities Held to Maturity:
Securities held to maturity consist mainly of U.S. Government obligations with maturities no longer than one year. The securities are recorded at cost, which approximates fair value.

Inventories:
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The following are the major classes of inventories as of December 31:

Inventories at December 31, 1998 and 1997 related primarily to Noven’s transdermal and transmucosal delivery systems. To date, Noven has not experienced and does not anticipate any difficulty acquiring materials necessary to manufacture its transdermal and transmucosal delivery systems.

Property, Plant and Equipment:
Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets ranging up to 31 years. Leasehold improvements are amortized over the life of the lease or the service life of the improvements, whichever is shorter. Retired assets are removed from the cost and accumulated depreciation accounts.

Noven, using its best estimates based on reasonable and supportable assumptions and projections, reviews for impairment long-lived assets and certain identifiable intangibles to be held and used whenever events or changes in circumstances indicate that the carrying amount of its assets might not be recoverable.

Patent Development Costs:
Costs related to the development of patents, principally legal fees, are capitalized and amortized over the lesser of their estimated economic useful lives or their remaining legal lives.

Income Taxes:
Noven accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS 109 provides that income taxes are accounted for using an asset and liability method which requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities (see Note 6).

Revenue Recognition:
Revenues from product sales are recognized at the time of shipment. Royalty revenue is recognized when earned and is included in product sales. License revenue is recognized when earned under the terms of the agreements. Substantially all of Noven’s product sales were to its principal licensees (see Note 3).

Cost of Products Sold:
Direct and indirect costs of manufacturing are included in cost of products sold.

Research and Development Costs:
Research and development costs include costs of internally generated research and development activities and costs associated with work performed under license agreements. Research and development costs include direct and allocated expenses and are expensed as incurred.

Fair Value of Financial Instruments:
The carrying amounts of cash and cash equivalents, securities held to maturity, accounts receivable, accounts payable and accrued expenses approximate fair value due to the relatively short maturity of the respective instruments.

Loss Per Share:
Basic loss per share excludes dilution and is computed based on the average number of common shares outstanding, and diluted loss per share is computed based on the average number of common and common equivalent shares outstanding. Under the treasury stock method, common equivalent shares are not included in the per share calculations where the effect of their inclusion would be antidilutive. For purposes of the financial statements herein, net loss per share represents basic and diluted loss per share.

Employee Stock Plans:
In accordance with the provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," Noven may elect to continue to apply the provisions of Accounting Principles Board’s Opinion No. 25 (APB 25, "Accounting for Stock Issued to Employees") and related interpretations in accounting for its employee stock option and stock purchase plans, or adopt the fair value method of accounting prescribed by SFAS 123. Noven has elected to continue to account for its stock plans using APB 25, and therefore is generally not required to recognize compensation expense in connection with these plans. Companies that continue to use APB 25 are required to present, in the notes to the consolidated financial statements, the pro forma effects on reported net income and earnings per share as if compensation expense had been recognized based on the fair value of options granted (see Note 8).

Concentrations of Credit Risk:
Noven’s customers consist of a limited number of large pharmaceutical companies with operations throughout the world. Noven performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral to secure accounts receivable. Noven maintains an allowance for doubtful accounts based on an assessment of the collectibility of such accounts.

Reclassification:
Certain amounts presented in the accompanying financial statements for the prior year have been reclassified to conform to the current year’s presentation.

Recently Adopted Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public companies report selected information about operating segments in annual financial statements and requires that those companies report selected information about segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for the periods beginning after December 15, 1997. Noven has complied with SFAS No. 131 (see Note 10).

Recent Accounting Pronouncements:
In June 1998, the FASB issued SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 1999. This statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 also requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedging accounting criteria are met. Noven does not anticipate any effect on its financial statements or disclosures.

Copyright ©  1999 Noven Pharmaceuticals, Inc. All rights reserved.