Nt4.zacks.com



July 5, 2007

Research Associate: Abhishek Mishra, M.Fin.

Editor: Shilpa Chandak, CA.

Sr. Ed.: Ian Madsen, CFA; imadsen@; 1-800-767-3771, x9417

zackspro.co 111 N. Canal Street. Suite 1101 Chicago, IL 60606

|Noven Pharmaceuticals |(NOVN – NASDAQ) |$23.60 |

Note to Readers: All new or revised material since the last report is highlighted.

Reason for Report: NOVN & Shire to develop new transdermal patch for ADHD Prev. Ed.: May 8, 2007

Recent Events

On June 20, 2007, Shire has exercised its option with NOVN to acquire the development rights to a new transdermal amphetamine patch being developed by NOVN for ADHD.

Overview

Based in Miami, Florida, Noven Pharmaceuticals, Inc. (NOVN) is engaged in the research, development, manufacture, and marketing of advanced transdermal drug delivery technologies and prescription transdermal products primarily in the US. Its principal products include prescription transdermal patches, which is used in menopausal hormone therapy. The company offers an estrogen patch for the treatment of menopausal symptoms marketed under the name, Vivelle in the United States and Canada, and under the name, Menorest in Europe and other markets. Among other products, Novogyne markets and sells Noven’s Vivelle-Dot product – the smallest estrogen patch in the world. Noven’s prescription patches are sold in over 30 countries and a range of new patches are being developed in collaboration with Novartis Pharma AG, Shire Pharmaceuticals Group plc, P&G Pharmaceuticals, Endo Pharmaceuticals Inc. and others. Together with Novartis Pharmaceuticals, Noven owns Novogyne Pharmaceuticals, a profitable women’s health products company. For more information, please visit the company’s website at .

Key investment considerations as identified by analysts are as follows:

|Key Positive Arguments |Key Negative Arguments |

|Strong Pipeline: The healthy and huge pipeline of various disclosed and |International Exposure: With a substantial portion of revenue being derived |

|undisclosed transdermal and transmucosal products should give competitive |from outside the US, the company is exposed to foreign currency exchange |

|advantage, and act as catalysts to growth. |risk, political risk, foreign regulatory issues, and other factors that could|

|Improving Cash Position: With a strong cash position, NOVN’s cash flow |adversely affect its business operations. |

|should continue to improve. |Technological Change: NOVN operates in sectors that are characterized by |

|Major Partnership Support: The goal of the company is to build profitable |rapid technological changes and evolving industry standards. Success in |

|and strategic partnerships to offer leading-edge transdermal therapies to |these areas will require heavy investments in R&D to maintain the pipeline. |

|several countries, including the United States, Canada, Japan, and Europe. |Regulatory Overhang: The company depends on the FDA’s pace of evaluating new |

|Advanced Technology: Noven is built on the science and technology of |drugs and the agency’s willingness to approve new drugs. |

|delivering medications through the skin. It has developed and patented one |Partnership Risk: NOVN has to depend on funding and future commercialization |

|of the most technically advanced transdermal drug delivery platforms in the |efforts from some of its partnerships. If these partnerships are |

|pharmaceutical industry, called the DOT Matrix. |discontinued, the company might face financial and marketing problems. |

Note: NOVN’s fiscal year coincides with the calendar year.

Revenues

Vivelle (estradiol transdermal system)

Indication: Menopausal problems and osteoporosis

Stage of Development: This is NOVN’s first generation transdermal estrogen delivery system that utilizes the company’s advanced transdermal matrix technology. It is available by prescription only.

Importance: Vivelle delivers estradiol, the primary estrogen produced by the ovaries, through a patch that is applied twice weekly. This product has been approved for marketing by the FDA, as well as by regulatory authorities in dozens of foreign countries, for the treatment of menopausal symptoms and the prevention of osteoporosis.

Partners: Marketing rights to this system are licensed to Novogyne in the U.S., and to Novartis in all other territories except Japan. Novartis Pharma AG is selling NOVN’s first generation transdermal estrogen delivery system under the brand name, Menorest in a range of foreign countries, including France, Germany, and the United Kingdom. Novogyne Pharmaceuticals markets the product under the brand name, Vivelle in the U.S. The Canadian affiliate of Novartis markets this product under the same name in Canada.

Vivelle-Dot (estradiol transdermal system)

Indication: Menopausal problems and postmenopausal osteoporosis

Importance: On May 10, 1999, Vivelle-Dot, the world’s smallest transdermal estrogen delivery system, was launched in the U.S. This state-of-the-art patch was approved in January 1999, by the U.S. FDA for the treatment of the symptoms of menopause. Vivelle-Dot is available in five dosage strengths (.025, .0375, .05, .075, and .10 mg/day), with the 0.025 dosage strength indicated for the prevention of postmenopausal osteoporosis only. These five strengths provide prescribing physicians with broad dosing flexibility. In the most commonly prescribed dosage strength (0.05 mg/day), Vivelle-Dot is about the size and thickness of a postage stamp.

Regulatory issues: The technology incorporated into Vivelle-Dot is subject to a range of U.S. patents.

Competitors: The product competes against Climara, manufactured by Berlex, and Estraderm, manufactured by Novartis.

Partners: Vivelle-Dot is marketed and sold by Novogyne Pharmaceuticals, a women’s health product company jointly owned by Noven and Novartis.

Others: NOVN’s market research indicated that patients would prefer a smaller, less conspicuous estrogen patch that is well-suited to an active lifestyle. In response, the company engineered a new generation system, by far the smallest available, that is thin, translucent and extremely adherent, permitting patients to exercise, shower, and swim without the need to change patches. Vivelle-Dot covers less skin than other patches, and has a very low incidence of skin irritation, which should enhance overall comfort.

Vivelle-Dot continues to be the market share leader in estrogen patches in the U.S. Vivelle-Dot’s year-over-year adjusted growth is averaging 4.9% over the past 3 months. A recent Wall Street Journal article highlighted the potential benefits of delivering estrogens via patch. However, one firm (FTN Midwest) believes additional longer-term studies are likely to be needed before a sea change in prescribing trends occurs in the hormone replacement therapy market. The firm also believes that the company has the flexibility to acquire additional technologies to complement its core competency in patch delivery.

CombiPatch (estradiol/norethindrone acetate)

Indication: Menopausal problems

Importance: It was the first combination transdermal therapy system approved for marketing by the FDA. It has also been approved for the same indication by regulatory authorities in over a dozen foreign countries. It contains estradiol and a progestogen, norethindrone acetate (NETA). It is made with an innovative technology called DOT Matrix, CombiPatch is the smallest HT patch on the market.

Safety Issues: The most common side effects that can occur with CombiPatch are breast pain, vaginal bleeding, and headache.

Partners: Novogyne Pharmaceuticals presently markets the product under the brand name of CombiPatch in the United States. Novartis markets the product under the name Estalis internationally.

Daytrana (methylphenidate transdermal system)

Indication: Attention deficit hyperactivity disorder (ADHD) in children aged six to twelve years

Stage of Development: On April 6, 2006, Noven Pharmaceuticals announced the U.S. FDA has approved the drug. On June 29, 2006, the company confirmed Shire plc has launched the product.

Safety Issues: Common side effects reported in children who used Daytrana, were decreased appetite, insomnia, nausea, vomiting, weight loss, tic, and mood swings. Daytrana should not be used by children with allergies to methylphenidate or other ingredients in Daytrana. Skin irritation or allergic skin rashes may occur. It should also not be used by children with significant anxiety, tension, or agitation, glaucoma, tics, Tourette's syndrome, or family history of Tourette's syndrome.

Regulatory Issues: The company has already reached its Drug Enforcement Agency (DEA) quota for obtaining active ingredient (methylphenidate) for manufacturing of Daytrana for 2006. Firms in the Digest group felt the company’s inability to obtain more active ingredient for manufacturing could affect Daytrana production in the future. On November 28, 2006, the U.S. Drug Enforcement Administration (DEA) has granted Noven additional methylphenidate quota for 2006 for the production of Daytrana. One firm (FTN Midwest Res.) believes Daytrana manufacturing revenue will increase substantially in 2007.

Importance: Daytrana combines the active ingredient methylphenidate with Noven’s patented DOT Matrix transdermal drug delivery technology. Daytrana and DOT Matrix are trademarks of Shire and Noven, respectively. One firm (Deutsche Bank) feels Daytrana’s sales will be reaching the $50 million and $75 million level in 2Q07 and 3Q07 respectively and end market sales would peak at $110 million for FY07.

Partners: Shire plc is the global licensee of Daytrana. Upon receipt of FDA approval, Noven received a $50-million milestone payment from Shire. Under its agreement with Shire Pharmaceuticals, Noven can earn up to three sales-related milestones, each worth $25 million. Noven earned the first of these milestones in 4Q06. Brokerage firms expect the second milestone to hit in 2Q07 or 3Q07 and the third in late 4Q07 or 1Q08. These milestones are being amortized over the remaining period of Shire agreement (expires 1Q:2013). With regards to product revenues, management's guidance is $16–$20 million, which also looks reasonable given the current prescription trend.

Competitors: Currently, the most commonly prescribed treatments are Johnson & Johnson’s Concerta and Shire’s Adderall XR (once-daily amphetamine tablets which also lasts up to 12 hours).

One firm (FTN Midwest Res.) feels the Daytrana patch could be beneficial to those patients who do not require a 12 hours of coverage. It also feels efficacy and side effects of Daytrana are comparable to oral treatments.

NRP 104 (Shire) is another product, which could provide potential competition in the future. One brokerage firm (Oppenheimer) has shown concerns regarding Shire's ability to maintain its focus on marketing Daytrana after the launch of its competitive drug NRP 104 (has received an approvable letter from FDA).

Pipeline Products

The company has several other transdermal products in the pipeline:

|Product |Indication |Regulatory Status |Marketing Rights |

|Transdermals | | | |

|Methylphenidate |ADHD |FDA-approved |Shire Pharmaceuticals |

|Amphetamine |ADHD |Phase I |Shire Pharmaceuticals |

|Intrinsa |Hypoactive Sexual Desire Disorder |Recommended approval by the European |P&G Pharmaceuticals |

| | |regulatory Agency. Program is on hold| |

| | |in the U.S. | |

|Undisclosed compounds |Undisclosed |Expected FDA filing in 2H07. |Endo Pharmaceuticals |

|Transmucosal | | | |

|Lidocaine/DentiPatch |Dental pain associated with |FDA-approved |Noven |

| |certain dental procedures | | |

Three undisclosed projects remain in NOVN's pipeline, and the company indicates the first has the potential to hit the market in early 2008, slightly later than previously indicated as late 2007. However, constraints put upon them by their pharmaceutical partners, NOVN unable to provide much visibility on the three undisclosed partnered products. One firm (Deutsche Bank) believes that two of the three products are OTC transdermal patches, and the third one being a prescription product.

NOVN has completed a human trial, Phase I study with its amphetamine patch for ADHD, which has been described as successful. On June 20, 2007, NOVN announced that Shire plc has exercised its option under agreements with Noven to acquire the exclusive development rights to its amphetamine patch for ADHD to be formulated by Noven. In connection with this exercise, Noven received a $5.9 million milestone payment from Shire. Shire has requested modifications to the original patch formulation in order to align amphetamine transdermal system (ATS) with its future direction in ADHD. In addition to the milestone payment received, Noven will also be compensated by Shire for its continuing development efforts. One firm (Pacific Growth) views the partnership between NOVN and Shire as a positive development for the company; however, it believes that this deal will not be able to match the size of the Daytrana partnership.

NOVN's received a positive response from FDA regarding its generic fentanyl patch in January 2007 after submitting questions to the agency regarding the product's shortcomings, following a Not Approvable letter in September 2005. The company has developed a new formulation, and is taking it into Phase I pharmacokinetic studies. Pivotal studies could possibly follow in mid 2007, as long as its commercial potential remains attractive.

The company has reformulated its generic Duragesic patch with nearly identical drug load to the original version, and PK testing is underway. Endo Pharmaceuticals has the right-of-first-refusal for marketing rights to the product.

Noven has also announced plans to re-kindle its fentanyl transdermal development program this year, after finally getting comments from the FDA regarding its earlier unsuccessful Phase III trials. While Endo has rights of first negotiation to re-partner this product, Noven will go alone on the initial pharmacokinetic study this year, and re-evaluate the size of the now-generic market as well as potential new partners.

Total Revenue

Noven's net revenue in 1Q07 increased 90% to $19.3 million versus 10.2 million in 1Q06, reflecting $4.4 million in Daytrana product sales to Shire, and $3.0 million in Daytrana license revenues.

In 1Q07, Noven recognized a record $4.9 million in earnings from Novogyne Pharmaceuticals, the women's health product company owned jointly by Noven and Novartis Pharmaceuticals Corporation, representing a 13% increase over the $4.3 million reported in 1Q06. Novogyne's net income in 1Q07 was $16.2 million, an 8% increase over the 1Q06 quarter. Novogyne's net revenue in 1Q07 was $33.1 million, up 5% from 1Q06, reflecting lower sales and returns allowances and increased sales of Vivelle-Dot.

For full year 2007, management also provided sales guidance of $16–$20 million in Daytrana product sales to Noven. Management projects end-market sales will attain the next milestone target of $50 million and possibly even the final target of $75 million in 2007. Management expects a 5% increase in Novogyne revenues, leading to a 10% increase in profit contribution to Noven from the joint venture.

Hormone replacement therapy (HRT) product revenue will remain flat in 2007 versus 2006, reflecting moderate growth in US sales offset by a continuing decline in international growth.

|Total Revenue |

|Positive |22.2%↑ |

|Neutral |77.8%↓ |

|Negative |0.0% |

|Avg. Target Price |$25.20↓ |

Risks to the achievement of the target price include clinical risk, regulatory risk, inability to attract a marketing partner to assist in funding development projects, manufacturing risk, commercialization risk, partner performance risk, intellectual property and litigation risk, national health care policy risk, risk of dilution, sector, and overall market volatility risks.

Please refer to NOVN Zacks Research Digest Spreadsheet for further details on valuation.

Long-Term Growth

Of nine firms currently covering the stock, 3 have given long-term growh (LTG) estimates. The Digest LTG average is 33.5%.

The company states its goal is to build profitable partnerships. Over the past decade, Noven’s technological advantages have attracted strategic partners who seek to offer leading-edge transdermal therapies, including Novogyne Pharmaceuticals (a joint venture between Noven and Novartis Pharmaceuticals Corporation), Novartis Pharma AG (whereby NOVN markets Estradot, the international version of Vivelle-Dot, in European markets), Aventis S.A. (Noven has licensed its HT patches to Aventis for marketing in Japan.), Shire Pharmaceuticals Group plc (Noven has licensed global rights to its developmental transdermal methylphenidate system to Shire and also entered into a development collaboration for an amphetamine patch), and P&G Pharmaceuticals, Inc. (Noven is developing new prescription patches for Procter & Gamble). Noven is committed to expand the universe of available transdermal therapies for the benefit of patients, partners and shareholders.

One analyst (Oppenheimer) believes the company’s pipeline products could become commercially viable in the 2007–2009 timeframe, providing competitive edge to the company, thereby driving growth in the long term. Another firm (FTN Midwest Res.) believes Noven’s prospects for growth remain solid, based on a strong Daytrana launch and the continued steady growth of its Novogyne JV.

The company’s DOT Matrix technology, patented through 2014, represents the latest generation drug-in-adhesive platform for transdermal drug delivery. This technology is a valuable life-cycle management asset for line-extensions of existing products, as well as for transdermal delivery of new drugs. DOT Matrix technology can increase the value of product portfolios of NOVN’s partners through development collaborations and licensing arrangements for a fee or on a risk-sharing basis.

One firm (Deutsche Bank) believes new products will be critical for both the earnings outlook post-2007 (when Daytrana creates ‘breakout’ earnings) as well as any potential multiple expansion. However, due to constraints put upon it by its pharmaceutical partners, Noven management has not been able to provide much visibility on these potentially near-term opportunities.

Capital Structure/Solvency/Cash Flow/Governance/Other

On March 31, 2007, Noven had an aggregate $184.5 million in cash and cash equivalents and short-term investments, which it intends to use to fund and acquisition of a company with sales/marketing ability and products. This increase reflected receipt of a $25.0 million milestone payment following approval of Daytrana, $9.8 million in distributions from Novogyne. In the first quarter of 2007, Noven received from Shire the first of three potential $25.0 million milestone payments related to 2006 sales of Daytrana. This payment contributed to the increase in working capital as it was included in current receivables and deferred license revenues on Noven.

Potentially Severe Problems

There are none other than those discussed in other sections of this report.

Individual Analyst Opinions

POSITIVE RATINGS

R W. Baird – Outperform ($30) – June 20, 2007. INVESTMENT SUMMARY: The firm believes that NOVN has become more acquisitive, which could become an important part of the story in 2007. If executed successfully, it could diversify revenue, add to commercialization capability, and bolster growth.

NEUTRAL RATINGS

Pacific Growth – Neutral – June 20, 2007. INVESTMENT SUMMARY: The firm maintains a Neutral rating, and believes that the stock is close to being fairly valued at the current level.

Deutsche Bank – Hold ($24) – April 30, 2007. INVESTMENT SUMMARY: The firm does not believe NOVN shares will outperform over the next 12 months, as a result the firm maintains the Hold rating.

Jefferies – Hold ($26) – May 1, 2007. investment summary: The firm has low visibility on the therapeutic categories, potential market size, or financial terms of the collaboration.

Oppenheimer – Neutral – April 30, 2007. INVESTMENT SUMMARY: The firm states that NOVN continues to execute its business plan and generate sufficient cash, so wait for a better share price entry point.

Raymond James – Market perform – May 1, 2007. INVESTMENT SUMMARY: The firm reiterates a Market perform rating, based on earnings surge on Daytrana sales.

NEGATIVE RATINGS

None

Research Associate: Abhishek Mishra

Reviewed By:

Copy Editor: Sudeshna S.

Content Ed.: Shilpa Chandak, CA

-----------------------

Zacks Research Digest

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download