Nuvo Research second-quarter revenue increases 57% to $4.2 million

Nuvo Research Inc. (TSX: NRI), a drug development company focused on the research and development of drug products that are delivered into and through the skin using its topical and transdermal drug delivery technologies, and on the development of its immune modulating drug candidate WF10, today announced its financial and operational results for the quarter ended June 30, 2010.

Key Corporate Developments:

- Announced that Mallinckrodt Inc., a Covidien (NYSE:COV) company ("Covidien"), Nuvo's licensee, began selling Pennsaid, a topical NSAID, in the United States. Nuvo receives royalties at rates consistent with industry standards from Covidien on net U.S. Pennsaid sales. Nuvo is also eligible to receive sales milestone payments totaling up to US$100 million if certain U.S. sales levels are achieved; - Completed enrollment in Nuvo's European Phase 2 trial evaluating WF10 as a treatment for allergic rhinitis. The Company anticipates completing the in-patient portion of the study and receiving topline results in late 2010; - Subsequent to quarter end, Nuvo received its first royalty payment in the amount of CDN$1.2 million from Covidien relating to U.S. sales of Pennsaid; - Subsequent to quarter end, Covidien began recruiting participants in its Phase 2 clinical study of Pennsaid Gel, a follow-on product to Pennsaid with two times per day dosing and anticipated patent protection.

"We are pleased with Covidien's launch of Pennsaid in the United States," said Dan Chicoine, Chairman and Co-Chief Executive Officer of Nuvo Research. "Covidien has indicated that Pennsaid is doing well in the marketplace. While it is early in the process, we are optimistic that Pennsaid will continue its upward sales trend in the U.S. We are also encouraged that it appears that Pennsaid's commercial launch is expanding the overall U.S. topical NSAID market. An expanding market creates heightened awareness and acceptance among physicians and patients about the benefits of this relatively new U.S. drug class, which could result in increased future Pennsaid sales and revenue for Nuvo."

Operating Results

Revenue consisting of product sales, royalties, license fee revenue and research and other contract revenue for the three months ended June 30, 2010 increased 57% to $4.2 million compared to $2.7 million for the three months ended June 30, 2009. The increase was primarily attributable to the launch of Pennsaid in the United States in late April 2010 as the Company recorded $1.3 million in Pennsaid product sales and royalty revenue earned on the net sales of Pennsaid in the U.S. Although early in the launch, management is encouraged by the market data and metrics for prescriptions, average units dispensed per prescription, patient days dispensed and the qualitative feedback received from our U.S. licensee Covidien. Revenue for the six months ended June 30, 2010 increased by 44% to $8.3 million compared to $5.8 million for the six months ended June 30, 2009 primarily due to the U.S. launch.

Gross margin on product sales increased to $1.2 million for the three months ended June 30, 2010 compared to $0.6 million for the three months ended June 30, 2009. The increase in gross margin is primarily attributable to higher Pennsaid sales as a result of the U.S. launch and the negative impact that the planned eight-week shutdown of the Pennsaid manufacturing facility had on the comparative period. For the six months ended June 30, 2010, gross margin on product sales was $2.3 million compared to $1.9 million for the six months ended June 30, 2009. The increase in gross margin is primarily attributable to higher Pennsaid sales, partially offset by the significant weakening of the euro and British pound against the Canadian dollar.

Total operating expenses, excluding foreign currency gains and losses, for the three and six months ended June 30, 2010 were $4.8 million and $9.3 million versus $3.1 million and $7.9 million for the three and six months ended June 30, 2009. The increase in the quarter and six-month period relates primarily to higher selling, general and administrative expenses (SG&A), research and development (R&D) expenses offset by lower net interest expense and amortization.

R&D expenses were $2.2 million and $4.5 million for the three and six months ended June 30, 2010, an increase compared to $0.9 million and $3.8 million for the three and six months ended June 30, 2009. The increase observed this quarter versus a year ago is primarily related to a $0.9 million reimbursement payment received from Covidien in June 2009 for specific R&D costs incurred prior to the Effective Date under the terms of the U.S. Licensing Agreement. The remaining increase in the three and six-month periods primarily related to establishing the Pain Group in the U.S. and conducting the Phase 2 allergic rhinitis trial for WF10, which is partially funded by the SAB, in Leipzig, Germany.

SG&A expenses increased to $2.5 million and $4.5 million for the three and six months ended June 30, 2010 compared to $1.9 million and $3.4 million for the three and six months ended June 30, 2009. The increase in both periods is primarily related to an increase in compensation costs. During the quarter, the Compensation Committee retained the services of Radford, the leading executive compensation consultant to the life sciences industry in North America to help establish an executive and senior management compensation philosophy and to make compensation recommendations. The recommendations were implemented in the quarter. Also contributing to the increase is consulting, professional fees and other fees relating to the Company's business development activities aimed at expanding its drug development pipeline.

Net interest income was $13,000 for the three months ended June 30, 2010 compared to net interest expense of $218,000 for the three months ended June 30, 2009. For the six months ended June 30, 2010, net interest expense was $21,000 compared to $430,000 for the six months ended June 30, 2009. The decrease in both periods is attributable to lower non-cash accretion charges and cash interest payments on the convertible debentures as all outstanding debentures were converted into common shares during 2009 and the first quarter of 2010.

Net loss was $2.9 million and $5.9 million for the three and six months ended June 30, 2010 compared to $1.7 million and $4.5 million for the three months ended June 30, 2009. The larger net loss in both periods is attributable to higher SG&A, R&D expenses and foreign currency losses that were only partially offset by a higher gross margin, U.S. royalty revenue and lower interest expense.

Cash and cash equivalents were $32.9 million as at June 30, 2010, a $9.2 million decrease from $42.1 million as at December 31, 2009, primarily as a result of the $5.9 million loss and a $2.1 million investment in non-cash working capital primarily related to the U.S. launch of Pennsaid.

Cash used in operations was $3.2 million and $6.0 million for the three and six months ended June 30, 2010 compared to $2.0 million and $4.9 million for the three and six months ended June 30, 2009. The increase in cash used in operations is primarily attributable to the higher net loss in both periods.

Net cash used in investing activities totaled $370,000 and $604,000 for the three and six months ended June 30, 2010 compared to $148,000 and $203,000 for the three and six months ended June 30, 2009. The additions in the three and six months ended June 30, 2010 primarily represent the purchase of production automation and laboratory equipment.

Net cash used in financing activities totaled $14,000 and $33,000 for the three and six months ended June 30, 2010 and related primarily to scheduled capital lease payments. For the three and six months ended June 30, 2009, cash provided by financing activities totaled $3.2 million and $5.3 million and was primarily attributed to proceeds received upon the exercise of warrants as part of and subsequent to the early warrant incentive program.