| NOVEN PHARMACEUTICALS INC Item 1A Risk Factors |
| The following section summarizes certain risk factors that may cause our results to differ from the “forward-looking statements” made in this report or otherwise made by or on our behalf |
| The risks and uncertainties described below are not listed in order of priority and are not the only ones we face |
| If any of the following risks actually occurs, our business, financial condition and results of operations would suffer |
| Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operation |
| We do not 21 _________________________________________________________________ [65]Table of Contents undertake to update any of these forward-looking statements or to announce the results of any revisions to these forward-looking statements except as required by law |
| Publication of negative results of studies or clinical trials may adversely impact our products |
| From time to time, studies or clinical trials on various aspects of pharmaceutical products are conducted by academics or others, including government agencies, the results of which, when published, may have dramatic effects on the markets for the pharmaceutical products that are the subject of the study and on other similar or related pharmaceutical products |
| The publication of negative results of studies or clinical trials related to our products or the therapeutic areas in which our products compete could adversely affect our sales, the prescription trends for our products and the reputation of our products and could also cause us to be a target for product liability or other lawsuits |
| Currently, our liquidity, results of operations and business prospects are almost entirely dependent on sales, license royalties and fees associated with transdermal HT products |
| The market for HT products has been negatively affected by the WHI study and other studies that have found that the overall health risks from the use of certain HT products exceed the benefits from the use of those products among healthy postmenopausal women |
| For example, total prescriptions dispensed in the HT market in the United States declined by 53prca from the second quarter of 2002 (the quarter immediately preceding the WHI study) to the fourth quarter of 2005 |
| In addition, a private foundation has commenced a five-year study aimed at determining whether ET use by women aged 40 to 55 reduces the risks of heart disease |
| The study also seeks to determine if transdermal estrogen patches are more or less beneficial than an oral HT product |
| The market for HT products, including ours, both in the United States and abroad, could be further adversely impacted if this or other HT studies find unacceptable risks from HT use |
| Any further adverse change in the market for HT products could have a material adverse impact on our business, financial position and results of operations |
| The FDA’s analysis of potential safety issues associated with certain patch products, including Duragesic^^® and Ortho Evra^^®, and the resulting media coverage of these issues, may adversely affect the public’s and the medical community’s perceptions of other transdermal products, including our products, and could ultimately impair the commercial acceptance of our current and future patch products |
| A 2005 study by researchers at the MD Anderson Cancer Center found adverse chromosomal effects on 12 children treated with oral methylphenidate |
| The FDA has announced that the National Institutes of Health (NIH) and Duke University have or will undertake additional studies designed to examine the chromosomal effects of oral methylphenidate |
| Additionally, as part of an ongoing FDA inquiry into the possible side effects of ADHD medications, the FDA Drug Safety and Risk Management Advisory Committee met on February 9, 2006 to discuss the cardiovascular risks associated with ADHD products and recommended to the FDA that stimulant-based ADHD medications carry a “black-box” warning about possible cardiac events |
| Other related FDA Advisory Committee meetings are scheduled |
| We cannot predict what effect these events, as well as any other studies or FDA actions that may occur as a result of the ongoing public debate in the United States regarding the appropriateness of using methylphenidate and other medications to treat children with ADHD, will have on our partner’s ability to successfully commercialize Daytrana^™ |
| 22 _________________________________________________________________ [66]Table of Contents If we cannot develop, license or acquire new products and commercialize them on a timely basis our financial position and results of operations could be adversely affected and the price of our common stock could decline |
| Our long-term strategy is dependent upon the successful development of new products and their successful commercialization |
| There can be no assurance that we will be able to identify commercially promising products or technologies or additional indications to which our products and technologies may be beneficially applied |
| The length of time necessary to complete clinical trials and obtain marketing approval from regulatory authorities may be considerable |
| No assurance can be given that we will have the financial resources necessary to complete products under development, that those projects to which we dedicate resources will be successfully completed, that we will be able to obtain regulatory approval for any such product, or that any approved product can be produced in commercial quantities, at reasonable costs, and be successfully marketed, either by us or by a licensing partner |
| A project can fail or be delayed at any stage of development, even if each prior stage was completed successfully, which could jeopardize our ability to recover our investment in the product |
| Some of our development projects will not be completed successfully or on schedule |
| Many of the factors which may cause a product in development to fail or be delayed, such as difficulty in enrolling patients in clinical trials, the failure of clinical trials, lack of sufficient supplies or raw materials, inability to supply the subject product or technology on a commercial scale on an economical basis and changes in regulations, are beyond our control |
| From time to time we may need to acquire licenses to patents and other intellectual property of third parties to develop, manufacture and commercialize our products |
| There can be no assurance that we will be able to acquire such licenses on commercially reasonable terms |
| The failure to obtain such a license could negatively affect our ability to develop, manufacture and commercialize certain products |
| In some cases, we have begun and, in the future, may begin developing a product with the expectation that a licensee will be identified to assist in completing development and/or marketing |
| There can be no assurance that we will attract a business partner for any particular product or will be able to negotiate an agreement on commercially reasonable terms |
| If an agreement is not reached, our initial development investment in any such product may not be recovered |
| If we undertake an acquisition of technology, we will incur a variety of costs, and we may never realize the anticipated benefits of the acquisition |
| One of our current growth strategies is to expand our technological base, including through the acquisition of new transdermal technologies that allow for the delivery of additional molecules through the skin |
| We may seek to expand our technological base through the acquisition of other companies or through the license or purchase of rights to these technologies |
| If we undertake an acquisition, the process of integrating the acquired business, technology or product may result in unforeseen operating difficulties and expenditures and may divert significant management attention from our ongoing business operations |
| Moreover, we may fail to realize the anticipated benefits of any acquisition for a variety of reasons, such as an acquired technology proving to not be safe or effective in later clinical trials or if the technology is later found to infringe upon the intellectual property rights of another |
| It is possible that we may fund any future acquisition by issuing equity or debt securities, which could dilute the ownership percentage of current stockholders or limit our financial or operating flexibility as a result of restrictive covenants related to new debt |
| Acquisition efforts can consume significant management attention and require substantial expenditures, which could detract from our other programs |
| In addition, we may devote time and resources to potential acquisitions that are never completed |
| 23 _________________________________________________________________ [67]Table of Contents We depend on partners to obtain regulatory approval for, and to market and sell, certain of our products |
| Our marketing partners sell products that compete with our products |
| We depend upon collaborative agreements with other pharmaceutical companies to obtain regulatory approval for and to market and sell certain of our products |
| To help alleviate the up-front financial burden of seeking product approval and commercializing products we often seek out strategic partners to whom we can license our products |
| Under the terms of the Novogyne joint venture, Novartis is responsible for the distribution of Novogyne’s products, including Vivelle-Dot^™, and for selling Novogyne’s products to its trade customers |
| For Daytrana^™, we have granted the exclusive marketing rights to Shire and we are working jointly with Shire to obtain FDA approval of our methylphenidate patch |
| Failure of Novartis, Shire and our other partners to adequately support our products would cause the quantity of products purchased from us and the amount of fees and royalties ultimately paid to us to be reduced and would therefore have a material adverse effect on our business and operations |
| Our partners may have different and, sometimes, competing priorities from ours |
| Some of our partners, including Novartis and Shire, market and sell products competitive with ours |
| Shire has a portfolio of ADHD products and has licensed an amphetamine pro drug for the treatment of ADHD for which an NDA was filed in December 2005 |
| The marketing organizations of our partners may be unsuccessful, or those partners may assign a lower level of priority to the marketing of our products |
| If one or more partners fails to pursue the marketing of our products as planned, or if marketing of any of those products is otherwise delayed, our business, financial position and results of operations may be negatively affected |
| Absent these marketing partners, we do not presently have a significant direct marketing channel to health care providers for our drug delivery technologies |
| We do not control Novogyne and we may face additional risks because Novartis, our joint venture partner, has significantly greater resources than we do |
| Our equity in earnings of Novogyne contributed substantially all of our income before income taxes in 2005, and Novogyne’s results will likely continue to be material to us in the future |
| Because, among other things, we are vastly different in size from Novartis, and because Novartis and its affiliates sell competing products outside of Novogyne, our interests may not always be aligned |
| This may result in potential conflicts between Novartis and us on matters relating to Novogyne which we may not be able to resolve on favorable terms or at all |
| Under the Novogyne joint venture agreement, Novartis has the right to dissolve Novogyne under certain circumstances |
| Novogyne’s Management Committee is comprised of a majority of representatives from Novartis |
| While certain significant corporate actions require the supermajority vote of the committee members, we do not control Novogyne |
| In addition, the joint venture operating agreement has a buy/sell provision that either Noven or Novartis may trigger by notifying the other party of the price at which the triggering party would be willing to acquire the other party’s entire interest in the joint venture |
| Novartis is a larger company with greater financial resources, and therefore may be in a better position to be the purchaser if the provision is triggered |
| If the provision is triggered and Novartis is the purchaser, there can be no assurance that we would be able to reinvest the proceeds of the sale in a manner that would result in sufficient earnings to offset the loss of earnings from Novogyne |
| If the provision is triggered and we are the purchaser, there can be no assurance that we would not be adversely affected by the changes in capital and/or debt structure that likely would be required to finance the purchase transaction |
| We depend on Novartis to perform all financial, accounting, regulatory, compliance, inventory, sales deductions and other functions for Novogyne |
| Under the Novogyne joint venture, Novartis is responsible for providing Novogyne with all financial, accounting, legal and regulatory services, including monitoring inventory levels and 24 _________________________________________________________________ [68]Table of Contents estimating and recording sales allowances and returns for Novogyne (which include reserves and allowances related to product returns), and is primarily responsible for ensuring compliance with applicable regulations relating to sales and marketing activities |
| Novartis is responsible for internal controls over financial reporting for Novogyne, so our ability to assess their effectiveness at maintaining those internal controls is necessarily limited |
| Failure by Novartis to perform its obligations under the joint venture could negatively affect the financial position and results of operations of Novogyne and us |
| Because Novartis maintains the relevant data, we may have limited ability to accurately forecast the amount of sales allowances in any period |
| If Novartis materially changes the assumptions it uses in determining the reserve, Novogyne may be required to record an additional reserve allowance on its financial statements, which would adversely affect Novogyne’s operating results during the period in which the determination or reserve were made, and would, consequently also reduce our earnings attributable to our investment in Novogyne for that period |
| More generally, any material errors by Novartis in performing its accounting functions for Novogyne could lead to a subsequent restatement of Novogyne’s financial statements and in turn require us to restate our financial statements as well |
| We may be unable to obtain marketing approval for our new products, including Daytrana^™, on a timely basis or at all |
| We are not able to market our products (including generic drug products) in the United States or other jurisdictions without first obtaining marketing approval from the FDA or an equivalent foreign agency |
| The process of obtaining FDA approval for a new product may take several years and is likely to involve the expenditures of substantial resources |
| The process is subject to the broad authority and discretion of the FDA In September 2005, the FDA advised us that it did not expect to approve our ANDA for our fentanyl patch and was consequently ceasing its review of our ANDA, based on the FDA’s assessment of potential safety concerns related to the higher drug content in our generic product versus the branded product |
| Due to the FDA’s determination, Noven and Endo agreed in December 2005 to terminate the fentanyl portion of the 2004 license agreement as well as the fentanyl supply agreement |
| Noven is currently evaluating the feasibility of reformulating the fentanyl patch to address the FDA’s concerns |
| In December 2005, we received an approvable letter from the FDA for Daytrana^™ |
| The approvable letter contains proposed revisions to labeling, as well as requests for data clarification, post-marketing surveillance, and post-marketing studies |
| We cannot assure that the results of any post-marketing studies will be favorable or that the FDA will not take actions that will limit the marketability of Daytrana^™ as a result of these studies |
| We also cannot be certain that the labeling that is ultimately approved for Daytrana^™ will not restrict or otherwise adversely impact the marketability of the product |
| We cannot assure that we will obtain the necessary regulatory approval for our products under development or that any such approval will be free from unduly burdensome conditions or limitations |
| In light of the WHI and other HT studies, it is possible that healthcare regulators could delay the approval of HT products as well as hormonal therapies for HSDD or require that any such new products be subject to more extensive or more rigorous study and testing prior to being approved, or could receive approval subject to more extensive conditions or limitations |
| 25 _________________________________________________________________ [69]Table of Contents As a result of the publicity surrounding COX-2 inhibitors, certain antidepressants, and the publicity surrounding HT products, both citizen’s groups and interests in the United States Congress have called for investigation and possible reform of the FDA approval process |
| In response to these concerns, during 2005, the FDA created an independent Drug Safety Oversight Board comprised of FDA representatives, medical experts and other third parties to oversee the management of drug safety issues, and the FDA may impose more stringent standards in approving or monitoring new products compared to the standards applied in the past |
| We believe these changes will make drug development more lengthy, risky and expensive |
| Due to the diversity of proposals put forth, we cannot predict what effect future changes in regulations or legal interpretations, if, when and as ultimately promulgated may have on our business |
| Our approved products may not achieve the expected level of market acceptance |
| Even if we are able to obtain regulatory approval for our new products, our success will depend on their market acceptance |
| Substantially all of our revenues are generated through sales of transdermal delivery systems, which generally are more expensive than oral formations |
| Our products are marketed primarily to physicians, some of whom are reluctant to prescribe a transdermal delivery system when an alternative delivery system is available |
| We and our licensees must demonstrate to prescribing physicians the benefits of transdermal delivery, especially with respect to products such as our methylphenidate patch for which there is presently no transdermal system on the market |
| The commercial success of our products is also based in part on patient preference, and difficulties in obtaining patient acceptance of our transdermal delivery systems may similarly impact our ability to market our products |
| Even if we obtain FDA approval for Daytrana^™, the market for this product may be negatively affected by the outcome of the FDA’s ongoing inquiry into the possible side effects of ADHD medications, the FDA Drug Safety and Risk Management Advisory Committee’s recent recommendation that ADHD medications carry a “black-box” warning about possible cardiac events, a 2005 study by researchers at the MD Anderson Cancer Center that found adverse chromosomal effects on 12 children treated with oral methylphenidate, as well as ongoing public debate in the United States regarding the appropriateness of using methylphenidate and other medications to treat children with ADHD We expect that this debate will continue for the foreseeable future |
| The outcome of this debate is uncertain, and we cannot predict what impact, if any, the increased public attention will have on the market for products indicated for ADHD or on our methylphenidate patch |
| Because at least part of the stigma results from the fact that most of the current products are Schedule II controlled substances, non-Schedule II products may benefit from this controversy at the expense of the methylphenidate and amphetamine-based products on the market |
| ” Failure to comply with our supply agreements or otherwise adequately supply our products to our licensees could negatively affect our financial position and results of operations |
| Our supply agreements with our licensees impose strict obligations on us with respect to the manufacture and supply of our products |
| Failure to comply with the terms of these supply agreements may result in our being unable to supply product to our licensees, resulting in lost revenues by us and potential responsibility for damages and losses suffered by our licensees |
| Our supply agreement for Vivelle^^® and Vivelle-Dot^™ has expired |
| Since the expiration of that supply agreement, the parties have continued to operate in accordance with the supply agreement’s 26 _________________________________________________________________ [70]Table of Contents commercial terms |
| We cannot assure that we will enter into a new supply agreement on satisfactory terms or at all |
| It is not clear that the non-commercial terms of the supply agreement would be enforceable with respect to post-expiration events or occurrences |
| Due to our dependence on Novogyne, we may be unable to negotiate favorable business terms with them or resolve any dispute that we may be involved in with them in a favorable manner |
| Failure to continue operating in accordance with the supply agreement’s commercial terms could have a material adverse effect on our business, results of operations and financial position |
| 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 |
| Accordingly, both Novartis and Noven must agree on Novogyne’s supplier |
| Our products may be recalled |
| Product recalls or product field alerts may be initiated at the discretion of Noven (if we have regulatory authority for the product), our partners (if they have regulatory authority for the product), the FDA, other government agencies, or a combination of these parties |
| Our products may be recalled for various reasons including the failure of our products to maintain their stability through their expiration dates, manufacturing issues, quality claims, safety issues, disputed labeling claims or other reasons |
| We have experienced a number of production issues, some of which have led to recalls in the past |
| Among other risks, the past recalls of our products, or any further impact of the issues causing these recalls, could result in a decision to: recall all or a significant portion of an affected product in distribution until a definitive root cause has been identified and any required corrective action has been completed; cease production or shipment of new product until a definitive root cause has been identified and any required corrective action has been completed; or reduce the shelf-life of the affected product |
| We cannot assure that there will not be recalls of our products in the future |
| We do not carry any insurance to cover the risk of a potential product recall |
| A significant product recall could materially affect our sales, the prescription trends for the products and our reputation and the reputation of the product |
| In these cases, our business, results of operations and financial condition could be materially and adversely affected |
| Failure to comply with applicable regulations may result in product recalls and/or penalties |
| Our operations are subject to extensive regulation by governmental authorities in the United States and other countries with respect to the development, testing, approval, manufacture, labeling, marketing and sale of pharmaceutical products |
| These regulations are wide-ranging and govern, among other things: adverse drug experience reporting, product promotion, product pricing and discounting, drug sample accountability, drug product stability, product manufacturing, including good manufacturing practices, and product changes or modifications |
| In addition, our facilities handle controlled substances, resulting in additional extensive regulatory requirements and oversight |
| Compliance with the extensive government regulations applicable to our business requires the allocation of significant time, effort and expense |
| Even if a product is approved by a regulatory authority, product approvals may be withdrawn after the product reaches the market if compliance with regulatory standards is not maintained or if problems occur regarding the safety or efficacy of the product |
| Failure to comply with governmental regulations may result in fines, warning letters or other negative written observations, unanticipated compliance expenditures, interruptions or suspension of production and resulting loss of sales, product seizures or recalls, injunctions prohibiting further sales, withdrawal of previously approved marketing applications, and criminal prosecution |
| Under the terms of the Novogyne joint venture, Novartis is responsible for providing 27 _________________________________________________________________ [71]Table of Contents regulatory services |
| There can be no assurance that Novartis will comply with these regulations or that any violation by Novartis will not have an adverse effect on us |
| We face scale-up risks in the manufacture of new products in commercial quantities |
| Our developmental methylphenidate patch is a new product that we have never manufactured on a commercial scale |
| Inefficiencies and other scale-up problems may occur in the process of manufacturing new products in commercial quantities |
| If we do not adequately and timely scale-up our manufacturing processes for new products or otherwise meet supply requirements, the success of our new product launches and revenues could be adversely affected |
| It may also result in Shire or, if permitted under our agreements, our other collaboration partners relying more heavily on second manufacturing sources, thus reducing the manufacturing revenues that we would otherwise realize |
| It could also jeopardize our ability to obtain milestone payments under the applicable transaction |
| In addition, the active ingredient in our methylphenidate patch is more expensive than the active ingredients in our HT patch products |
| If we experience manufacturing difficulties such as quality problems, yield deficiencies or similar issues, our overall manufacturing costs may be higher than anticipated |
| We rely on a single supplier or a limited number of suppliers for certain raw materials and compounds used in our products |
| Certain raw materials and components used in the manufacture of our products, including essential polymer adhesives, are available from limited sources, and, in some cases, a single source |
| Our NDA for Daytrana^™ includes only one supplier of the active pharmaceutical compound |
| In addition, regulatory authorities must generally approve raw material sources for transdermal products, and in the case of controlled substances, the DEA sets quotas for controlled substances, including methylphenidate, fentanyl and amphetamine, and we must receive authorization from the DEA to handle these substances |
| We cannot assure that we will be granted sufficient DEA quota to meet production requirements for controlled substances |
| In December 2005, the DEA granted us procurement quota of methylphenidate raw material sufficient to manufacture launch supplies of Daytrana^™ |
| Our application for additional procurement quota is currently pending at the DEA We cannot guarantee the timing or quantity of future DEA awards of methylphenidate procurement quota necessary for the ongoing production of Daytrana^™, and the timing of any future award may impact the success of product launch and market penetration |
| Without adequate approved supplies of raw materials or packaging supplies, our manufacturing operations could be interrupted until another supplier is identified, our products approved and trading terms with this new supplier negotiated |
| We may not be able to identify an alternative supplier and any supplier that we do identify may not be able to obtain the requisite regulatory approvals in a timely manner, or at all |
| Furthermore, we may not be able to negotiate favorable terms with an alternative supplier |
| Any disruptions in our manufacturing operations from the loss of an approved supplier may cause us to incur increased costs and lose revenues and may have an adverse effect on our relationships with our partners and customers, any of which could have adverse effects on our business and results of operations |
| Some raw materials used in our products are supplied by companies that restrict certain medical uses of their products |
| While our use is presently acceptable, there can be no assurance that such companies will not expand their restrictions to include our applications |
| Our business also faces the risk that third party suppliers may supply us with raw materials that do not meet required specifications, which, if undetected by us, could cause our products to test out of specification and require us to recall the affected product |
| 28 _________________________________________________________________ [72]Table of Contents We face significant competition, which may result in others discovering, developing or commercializing products before, or more successfully, than we do |
| We face competition from a number of companies in the development of transdermal drug delivery products as well as products using other drug delivery systems, and competition is expected to intensify as more companies enter the field |
| Some of these companies are substantially larger than we are and have greater resources than we do, as well as greater experience in developing and commercializing pharmaceutical products |
| As a result, they may succeed before us in developing competing technologies or obtaining governmental approvals for products |
| Our products compete with other transdermal products as well as alternative dosage forms of the same or comparable chemical entities, as well as non-drug therapies |
| The ADHD market is very competitive and our receipt of the sales-based milestones under the Shire agreement depends on the sales levels achieved by Shire, which already markets non-methylphenidate ADHD products |
| Other competitors marketing or developing ADHD products include Johnson & Johnson, Novartis, Glaxo-Smithkline, Bristol-Myers Squibb, Abbott Laboratories, Celltech, Cephalon and Lilly |
| Johnson & Johnson markets Concerta^^®, the market-leading methylphenidate product, and Novartis and Lilly market competitive ADHD products |
| Strattera^^®, a non-stimulant, non-controlled substance therapy, has gained significant market share since being launched by Lilly in 2003 |
| If Strattera^^® or other therapies in development by other companies become recognized as therapeutically superior to stimulants, or are preferred by physicians, parents and/or patients, the market for Daytrana^™ would be adversely affected |
| Shire has licensed an amphetamine pro drug for the treatment of ADHD which, although a stimulant, may not be designated as a Schedule II controlled substance |
| These competitive products, especially those already marketed by Shire and those not designated as controlled substances, may negatively impact Shire’s ability to gain market share for Daytrana^™ and therefore may decrease the likelihood that we will receive the sales-based milestone payments |
| We cannot assure that our products will compete successfully against competitive products or that developments by others will not render our products obsolete or uncompetitive |
| If we cannot maintain competitive products and technologies, our current and potential strategic partners may choose to adopt the drug delivery technologies of our competitors or their own internally developed technologies |
| Competitors may use legal, regulatory and legislative strategies to prevent or delay our launch of generic products |
| The Hatch-Waxman Act provides for a period of 180 days of generic marketing exclusivity for each ANDA applicant that is first to file an ANDA containing a certification of invalidity, non-infringement or unenforceability related to a patent listed in the FDA “Orange Book” with respect to a reference listed drug product, commonly referred to as a Paragraph IV certification |
| During this exclusivity period, the FDA cannot grant final approval to any other Paragraph IV filer |
| If an ANDA containing a Paragraph IV certification is successful, it generally results in higher market share, net revenues and gross margin for that applicant for a period of time |
| Even if we obtain FDA approval for generic drug products, we may lose significant advantages to a competitor who was first to file an ANDA containing a Paragraph IV certification |
| Competitors may also pursue legislative and other regulatory or litigation strategies to prevent or delay our launch of a generic product |
| These strategies include, but are not limited to: seeking to obtain new patents on drugs for which patent protection is about to expire, changing the 29 _________________________________________________________________ [73]Table of Contents labeling for the branded product, filing a citizen petition with the FDA, pursuing state legislative efforts to limit the substitution of generic versions of brand pharmaceuticals, filing patent infringement lawsuits that automatically delay FDA approval of many generic products, introducing a second generation product prior to the expiration of market exclusivity for the first generation product, which may reduce demand for a generic first generation product, and obtaining market exclusivity extensions by conducting pediatric trials of brand drugs |
| The European market for our products may be limited due to pricing pressures and other matters |
| Pharmaceutical prices, including prices for our products, in Europe and certain other countries are significantly lower than in the United States |
| Because our agreements with Novartis Pharma provide for us to receive a percentage of Novartis Pharma’s net selling price (subject to a minimum price), our gross margins are generally much lower for product sold to Novartis Pharma for resale outside of the United States than for product sold to Novogyne for sale in the United States |
| In addition, the lower prices restrict Novartis Pharma’s gross margin realized from selling our products |
| Because our products compete for sales and marketing resources with other Novartis Pharma products, including competitive HT products, there can be no assurance that the relatively low gross margins generated from selling our products will not cause Novartis Pharma to focus its resources on other products or even not launch our products in certain countries |
| Novartis Pharma has launched Estradot^^® in the United Kingdom, France, Germany, Spain (without the benefit of government reimbursement) and in a number of smaller European countries |
| We cannot assure that Novartis Pharma will be successful in launching Estradot^^® in other countries |
| The profitability of sales in Europe may be negatively affected by parallel trade practices in the European Union whereby a licensed importer may take advantage of price disparity between markets by purchasing our products in a market with a relatively lower price and then importing them into a country with relatively higher price |
| Lack of government reimbursement for Estradot^^® could also negatively impact the product’s profitability |
| In addition, Novartis Pharma has advised us that they plan to seek marketing approval and commercialization of a lower dosage strength when and if a next generation combination product is developed |
| No assurance can be given that we will complete development of a next generation combination estrogen/progestin patch or that approval will be obtained, and the timing of any launch of a next generation combination estrogen/progestin patch product cannot be predicted |
| We expect that growth in this market will be limited unless and until a next generation combination estrogen/progestin patch product is developed, approved and launched |
| Our quarterly operating results are subject to significant fluctuations |
| In 2005, we experienced significant fluctuations in our quarterly operating results and we expect that revenues from product sales to our licensees as well as our research and development expenditures will continue to fluctuate from quarter-to-quarter and year-to-year depending upon various factors not in our control, including the purchasing patterns of wholesale drug distributors, marketing efforts of each licensee, fluctuations in sales and returns allowances, including those related to allowances for expiring product as well as product recalls, the inventory requirements of each licensee, the impact of competitive products, the timing and scope of Estradot^^® launches and commercialization efforts by Novartis Pharma, the impact of the HT studies on prescriptions for our HT products, the product pricing of each licensee, the timing of certain royalty reconciliations and payments under our license agreements, the timing of FDA approval, including for Daytrana^™, and any subsequent launch of new products, and the success of Shire’s commercialization efforts |
| Our earnings may fluctuate because of, among other things, fluctuations in research and development 30 _________________________________________________________________ [74]Table of Contents spending resulting from the timing of clinical trials |
| In addition, Novartis is entitled to an annual dlra6dtta1 million preferred return, which has the effect of reducing our share of Novogyne’s income in the first quarter of each year |
| Our results of operations will be adversely affected if we or Novogyne fail to realize the full value of our intangible assets |
| Accounting principles generally accepted in the United States require Novogyne and us to test the recoverability of our respective long-lived assets and certain identifiable intangible assets whenever events or changes in circumstances indicate that those assets’ carrying amount may not be recoverable |
| Novogyne recorded the acquisition of the CombiPatch^^® product marketing rights at cost and tests this asset for impairment on a periodic basis |
| Any further adverse change in the market for HT products or a recall of CombiPatch^^® could have a material adverse impact on the ability of Novogyne to recover its investment in its CombiPatch^^® marketing rights, which could require Novogyne to revalue that asset |
| Impairment of that asset would adversely affect Novogyne’s, and consequently our, operating results |
| We cannot be certain of the protection or confidentiality of our patents and proprietary rights |
| Our success will depend, in part, on our ability to obtain or license patents for our products, processes and technologies |
| If we do not do so, our competitors may exploit our innovations and deprive us of the ability to realize revenues from those innovations |
| There is no assurance that we will be issued patents for any of our patent applications, that any existing or future patents that we receive or license will provide competitive advantages for our products, or that we will be able to enforce successfully our patent rights |
| Additionally, there can be no assurance that our patents or any future patents will prevent other companies from developing similar or functionally equivalent products, or challenging, invalidating or avoiding our patent applications or any existing or future patents that we receive or license |
| Many of our patents are formulation patents and would not preclude others from developing and marketing products that deliver drugs transdermally or otherwise through non-infringing formulations |
| Furthermore, there is no assurance that any of our future processes or products will be patentable, that any pending or additional patents will be issued in any or all appropriate jurisdictions or that our processes or products will not infringe upon the patents of third parties |
| We also rely on trade secrets, unpatented proprietary know-how and continuing technological innovation |
| We use confidentiality agreements with licensees, suppliers, employees and consultants to protect our trade secrets, unpatented proprietary know-how and continuing technological innovation, but there can be no assurance that these parties will not breach their agreements with us or that we will be able to effectively enforce our rights under those agreements |
| We also cannot be certain that we will have adequate remedies for any breach |
| Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements |
| Furthermore, we cannot be sure that our trade secrets and proprietary technology will not otherwise become known or that our competitors will not independently develop our trade secrets and proprietary technology |
| 31 _________________________________________________________________ [75]Table of Contents Third parties may claim that we infringe their proprietary rights, forcing us to expend substantial resources in resulting litigation, the outcome of which is uncertain |
| Any unfavorable outcome could negatively affect our financial position and results of operations |
| Our success depends, in part, on our ability to operate without infringing the proprietary rights of others, and there can be no assurance that our products and processes will not infringe upon the patents of others |
| Third parties may also institute patent litigation against us for competitive reasons unrelated to any infringement by us |
| If a third party asserts a claim of infringement, we may have to seek licenses, defend infringement actions or challenge the validity of those third-party patents in court |
| If we cannot obtain the required licenses, or are found liable for infringement or are not able to have these patents declared invalid, we may be liable for significant monetary damages, encounter significant delays in bringing products to market or be precluded from participating in the manufacture, use or sale of products or methods of drug delivery covered by the patents of others |
| There can be no assurance that we have identified, or that in the future we will be able to identify, all US and foreign patents that may pose a risk of potential infringement claims |
| We may experience reductions in the levels of reimbursement for our products by governmental authorities, private health insurers and managed care organizations |
| Our ability and our marketing partners’ ability to commercialize our products, including Daytrana^™, is dependent in part on obtaining reimbursement from government health authorities, private health insurers and managed care organizations |
| The trend toward managed healthcare in the United States and the prominence of health maintenance organizations (HMOs) and similar entities could significantly influence the purchase of our products, resulting in lower prices and lower demand |
| This is particularly true in a market that includes generic alternatives, such as the ADHD market |
| There can be no assurance that Shire will obtain acceptable reimbursement status for Daytrana^™ |
| There can also be no assurance that managed care agreements established by Novartis will not adversely affect Novogyne’s financial results |
| Health care reform or other changes in government regulation could harm our business |
| The federal and state governments in the United States, as well as many foreign governments, from time to time explore ways to reduce medical care costs through health care reform |
| In the United States, some parties have advocated for the re-importation of prescription drugs from Canada and other countries for re-sale in the United States at a discount to United States prices |
| Due to the diverse range of proposals put forth from country to country and the uncertainty of any proposal’s adoption, we cannot predict what impact any reform proposal ultimately adopted may have on the pharmaceutical industry or on our business, financial position or results of operations |
| We may be exposed to product liability claims and there can be no assurance of adequate insurance |
| Like all pharmaceutical companies, the testing, manufacturing and marketing of our products may expose us to potential product liability and other claims resulting from their use |
| We have been named as a defendant in one case in which a plaintiff alleges personal injury from the use of HT products, including Vivelle^^®, which we manufacture and Novogyne distributes |
| In addition, Novartis has advised us that Novartis has been named as a defendant in at least 16 additional lawsuits involving approximately 21 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 our products, Vivelle-Dot^™, Vivelle^^® and CombiPatch^^® |
| If any such claims against us are successful, we may be required to make significant compensation payments and suffer the associated adverse publicity |
| Even unsuccessful claims could result in the expenditure of funds in litigation and the diversion of management time and resources |
| We maintain product liability insurance, but there 32 _________________________________________________________________ [76]Table of Contents can be no assurance that our insurance will cover all future claims or that we will be able to maintain existing coverage or obtain additional coverage at reasonable rates |
| Over the past few years, the cost of our product liability insurance policy has increased while providing significantly less coverage and higher deductibles than in the past |
| If a claim is not covered or if our coverage is insufficient, we may incur significant liability payments that would negatively affect our business, financial position or results of operations |
| All of our products are manufactured at one location |
| An interruption of production at this facility could negatively affect our business, financial position and results of operations |
| All of our products are manufactured at a single facility in Miami, Florida |
| An interruption of manufacturing resulting from regulatory issues, technical problems, casualty loss (including hurricane) or other factors could result in our inability to meet production requirements, which may cause us to lose revenues and which could have an adverse effect on our relationships with our partners and customers, any of which could have a material adverse effect on our business, financial position or results of operations |
| Without our existing production facility, we would have no other means of manufacturing our products until we were able to restore the manufacturing capability at our facility or develop an alternative manufacturing facility |
| Although we carry business interruption insurance to cover lost revenues and profits resulting from casualty losses, this insurance does not cover all possible situations and cannot cover all potential exposure and there can be no assurance that any event of casualty to our facility would be covered by such insurance |
| In addition, our business interruption insurance would not compensate us for the loss of opportunity and potential adverse impact on relations with our existing partners and customers resulting from our inability to produce products for them |
| We use hazardous chemicals in our business |
| Potential claims relating to improper handling, storage or disposal of these chemicals could be time consuming and costly |
| Our research and development processes involve the controlled use of hazardous chemicals |
| These hazardous chemicals are reagents and solvents typically found in a chemistry laboratory |
| Our operations also produce hazardous waste products |
| Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials |
| We cannot eliminate all risk of accidental contamination from or discharge of hazardous materials and any resultant injury |
| Compliance with environmental laws and regulations may be expensive |
| We might have to pay civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials |
| We are not insured against these environmental risks |
| Our operations could be disrupted if our information systems fail or if we are unsuccessful in implementing necessary upgrades |
| Our business depends on the efficient and uninterrupted operation of our computer and communications software and hardware systems, and our other information technology |
| In the coming years, we may have to implement significant upgrades to our information systems, including the implementation and qualification of an upgrade to our business applications software |
| If our systems were to fail or we are unable to successfully expand the capacity of these systems or to integrate new technologies into our existing systems, our operations and financial results could suffer |
| 33 _________________________________________________________________ [77]Table of Contents Our insurance coverage may not be adequate and rising insurance premiums could negatively affect our profitability |
| We rely on insurance to protect us from many business risks, including product liability, business interruption, property and casualty loss, employment practices liability and directors’ and officers’ liability |
| The cost of insurance has risen significantly in the last few years |
| There can be no assurance that the insurance that we maintain and intend to maintain will be adequate, or that the cost of insurance and limitations in coverage will not adversely affect our business, financial position or results of operations |
| Furthermore, it is possible that, in some cases, coverage may not be available at any price |
| Our financial position and results of operations could be harmed if we are required to perform under existing or future contractual indemnification provisions |
| In the normal course of business, we enter into development, license, supply, employment and other agreements that include indemnification provisions |
| The Novogyne joint venture operating agreement contains an indemnification provision as do certain supply and license agreements between and among Noven, Novartis and Novogyne |
| The various indemnification provisions in these agreements are not uniform and, depending on the circumstances, may be subject to differing legal interpretations |
| As a consequence, it may be difficult in certain circumstances for us to determine or predict in advance what indemnification obligations Noven may owe to Novogyne or Novartis under these provisions or, alternatively, what obligations may be owed to Noven by these parties, including as they relate to potential damages, settlement amounts and defense costs associated with the product liability lawsuits that claim the use of products we manufacture and Novogyne distributes |
| While insurance coverage may mitigate the costs of some of our obligations under our indemnification provisions, our business, financial position and results of operations could be harmed if we are required to perform under these indemnification provisions and there is no or insufficient insurance coverage |
| Our success depends on attracting and retaining our key employees |
| Our success depends on our ability to attract and retain qualified, experienced personnel |
| We face significant competition in recruiting talented personnel |
| In the past, our location in an area with relatively few pharmaceutical companies has made recruitment more difficult, as many candidates prefer to work in places with a broad pharmaceutical industry presence |
| The loss of key personnel, or the inability to attract and retain additional, competent employees, could adversely affect our business, financial position or results of operations |
| Our stockholders’ rights plan, our charter documents, Delaware law and our joint venture with Novartis may have an anti-takeover effect |
| Our stockholders’ rights plan, our corporate charter documents, Delaware law and our joint venture operating agreement with Novartis each include provisions that may discourage or prevent parties from attempting to acquire us |
| These provisions may have the effect of depriving our stockholders of the opportunity to sell their stock at a price in excess of prevailing market prices in an acquisition of us |
| We have a stockholders’ rights plan, commonly referred to as a “poison pill,” which is intended to cause substantial dilution to a person or group who attempts to acquire us on terms that our Board of Directors has not approved |
| The existence of the stockholders’ rights plan could make it more difficult for a third party to acquire a majority of our common stock without the consent of our Board of Directors |
| Certain provisions of our certificate of incorporation and bylaws could have the effect of making it 34 _________________________________________________________________ [78]Table of Contents more difficult for a third party to acquire a majority of our outstanding voting common stock |
| These include provisions that limit the ability of stockholders to bring matters before an annual meeting of stockholders, call special meetings or nominate candidates to serve on our Board of Directors |
| We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner |
| For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, either alone or together with affiliates and associates, owns (or within the past three years, did own) 15prca or more of the corporation’s voting stock |
| The operating agreement for our joint venture with Novartis has a buy/sell provision that either party may trigger by notifying the other party of the price at which the triggering party would be willing to acquire the other party’s interest in the joint venture |
| As a result of the buy/sell provision, any potential acquirer of us faces the possibility that Novartis could trigger this provision at any time and thereby require the acquirer to either purchase for cash Novartis’ interest in Novogyne (which would include the net present value of Novartis’ dlra6dtta1 million annual preferred return) or to sell its interest in Novogyne to Novartis |
| The existence of the buy/sell provision and the uncertainty it may create could discourage an acquisition of us by a third party, which could have an adverse effect on the market price for our common stock |
| In addition, the operating agreement gives Novartis the right to dissolve the joint venture in the event of a change in control of Noven if the acquirer is one of the ten largest pharmaceutical companies (as measured by annual dollar sales) |
| Upon dissolution, Novartis would reacquire the rights to market Vivelle-Dot^™ and Vivelle^^® subject to the terms of Novartis’ prior arrangement with us, and Novogyne’s other assets would be liquidated and distributed to the parties in accordance with their capital account balances as determined pursuant to the joint venture operating agreement |
| This dissolution provision could have an anti-takeover effect with respect to a top ten pharmaceutical company |
| The market price for our common stock is volatile |
| The market price of our common stock is volatile |
| Any number of factors, including some over which we have no control and some unrelated to our business or financial results, may have a significant impact on the market price of our common stock, including: announcements by us or our competitors of technological innovations or new commercial products, changes in governmental regulation, receipt by us or one of our competitors of regulatory approvals or adverse regulatory determinations, developments relating to our patents or proprietary rights of one of our competitors, publicity regarding actual or potential medical results or risks for products that we or one of our competitors market or has under development, and period-to-period changes in financial results and the economy generally |
| We, like any other company with a volatile stock price, may be subject to further securities litigation, which could have a material adverse effect on our business and financial results |