1998 Financial Statements

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

Investment in Vivelle Ventures LLC

Noven contributed $7.5 million in return for a 49% equity interest in the Joint Venture. In return for a 51% equity interest, Novartis granted an exclusive sublicense to the Joint Venture of a license agreement with Noven (see Note 3). This sublicense assigned certain of Novartis’ rights and obligations under a supply agreement with Noven, and granted an exclusive license to the Joint Venture of the Vivelle^® trademark as its contribution of capital to the Joint Venture. Noven shares in the income of the Joint Venture according to an established formula after an annual preferred return of $6.1 million to Novartis. During 1998, the Joint Venture did not produce sufficient income under the established formula for Noven to recognize income from the operations of the Joint Venture. Under the terms of the agreement, however, the Joint Venture did generate sufficient income to meet Novartis’ preferred return.

During the period ended December 31, 1998, Noven sold $4.0 million of products to the Joint Venture, earned $1.6 million in royalties from the Joint Venture and was reimbursed for $6.8 million of sales and marketing expenses incurred on behalf of the Joint Venture. As of December 31, 1998, Noven has a receivable from the Joint Venture of $3.2 million, representing products sold to and marketing expenses reimbursable from the Joint Venture. All intercompany balances are generally paid by the 15th day of the following month.

Under the terms of the Joint Venture agreement, Noven is responsible for the manufacture of the product, retention of samples and regulatory documentation, design and implementation of an overall marketing and sales program in the hospital and retail sales sectors of the market, including the preparation of annual and quarterly marketing plans and sales force staffing, and the procurement of advertising services in connection with the marketing and promotion of the products. All other matters, including inventory control and distribution, management of marketing and sales programs for the managed care sector of the market, customer service support, regulatory affairs support and other administration services are provided by Novartis.

The condensed financial statements of the Joint Venture are as follows:

Condensed Statement of Operations For the period May 1, 1998 (date of inception) through December 31, 1998
(in thousands) Revenues	$16,739
Cost of sales	3,793
Selling, general and administrative expenses	9,900
Income from operations	3,046
Interest income	333
Net income	$ 3,379
Condensed Balance Sheet at December 31, 1998
Total assets (all of which is current)	$17,125
Total liabilities (all of which is current)	$ 6,246
Members’ capital	$10,879

The Joint Venture operating agreement also has a buy/sell provision, effective May 1, 2000, which allows either party to compel either the purchase of the other party's interest in the Joint Venture or the sale of its own interest in the Joint Venture. Either party may dissolve the Joint Venture following the second or third anniversary of the Joint Venture in the event that the Joint Venture does not achieve (i) sales of at least the lesser of $20 million or 90% of the annual budgeted sales or (ii) profits sufficient to pay Novartis the preferred return of $6.1 million in each such year (which Noven has the right to cure). Dissolution can also result from a change in control of Noven within the first 2 years of the Joint Venture, or at any time thereafter if the acquirer is a top ten pharmaceutical company (as measured by annual dollar sales), or if during the first 2 years of the Joint Venture, the president of the Joint Venture (who is also the President and CEO of Noven) is terminated by Noven "without cause" or leaves due to "good reason," as defined in his employment agreement with Noven. Upon dissolution, Novartis would reacquire the rights to market Vivelle^®‚ and Vivelle-Dot™ and the Joint Venture's assets would be liquidated and distributed to the parties in accordance with their equity interests.

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