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NUVO announces third quarter 2008 financial results
Date:10/30/2008

MISSISSAUGA, ON, Oct. 30 /PRNewswire-FirstCall/ - Nuvo Research Inc. (TSX: NRI), a Canadian drug development company focused on the research and development of drug products that are delivered to and through the skin using its topical and transdermal drug delivery technologies, today announced its financial and operational results for the three and nine months ended September 30, 2008.

Key Corporate Developments:

- The Company remains on target to resubmit its Pennsaid application to

the U.S. FDA in early 2009 and to be eligible to receive final U.S.

marketing approval six months later. Nuvo has completed the majority

of the non-clinical studies that it is conducting to respond to

conditions raised in the FDA's Approvable Letter. No major issues

have been identified in the completed studies. The remaining studies

are ongoing and it is anticipated they will be completed by the end

of 2008.

- Revenue for the three months ended September 30, 2008 increased 29%

to $3.3 million compared with $2.6 million for the three months ended

September 30, 2007 primarily due to a $1.2 million increase in

licensing fee revenue. Revenue for the nine months ended

September 30, 2008 increased 53% to $7.6 million compared with

$5.0 million for the nine months ended September 30, 2007.

- The Company further strengthened its financial position by

restructuring its Canadian licensing agreement with Squire

Pharmaceuticals Inc. ("Squire"), a subsidiary of Paladin. On closing,

Nuvo received a $2.5 million payment related to Pennsaid and an

additional $2 million through the issuance of a convertible

debenture.

- Nuvo executed an agreement with convertible debenture holders to

extend the maturity date of certain debentures by one year from

November 16, 2009 to November 16, 2010. The debentures have a total

principal amount outstanding of $4.136 million. The resolution

supports the Company's efforts to conserve its cash resources as it

moves toward Pennsaid's anticipated approval by the FDA, the

consummation of a U.S. licensing agreement and the commercialization

of Pennsaid in the U.S.

- Subsequent to quarter end, Nuvo presented Phase 3 Pennsaid data at

the 2008 American College of Rheumatology Annual Scientific Meeting

in San Francisco showing that Pennsaid is an effective treatment

option for the symptoms of osteoarthritis of the knee, with an

improved safety profile compared to oral diclofenac while providing a

similar degree of symptom relief.

"The third quarter was productive for Nuvo Research in terms of the Company's product development and financial management," said Henrich Guntermann, President and Chief Executive Officer. "We moved closer to the resubmission of Pennsaid's application to the FDA, partnering discussions moved forward, and we made significant strides towards solidifying our financial position, which will help us execute on our milestones in the coming quarters."

Financial Results

Three months Three months Nine months Nine months

ended ended ended ended

(thousands of September 30, September 30, September 30, September 30,

Canadian dollars) 2008 2007 2008 2007

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

Revenue $ 3,289 $ 2,558 $ 7,610 $ 4,971

Net loss $ (3,004) $ (2,523) $ (8,139) $ (9,044)

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Revenue for the three months ended September 30, 2008 increased 29% to $3.3 million compared with $2.6 million for the three months ended September 30, 2007 primarily as a result of a $1.2 million increase in licensing fee revenue. This increase was due to the recognition of additional licensing fee revenue as a result of the agreement reached with Squire to amend and restate the Pennsaid licensing arrangements in Canada. Under the terms of the deal that closed on July 7, 2008, Squire paid Nuvo $2.5 million on account of past obligations and future Canadian sales of Pennsaid a portion of which were recognized during the third quarter. Partially offsetting this increase was a $0.4 million decrease in product sales for the three months ended September 30, 2008 to $1.8 million versus $2.2 million for the three months ended September 30, 2007. This decrease is primarily attributable to lower sales to the Company's Greek distributor, Vianex during the traditionally slower summer months and our agreement to provide a one-time discount of approximately $0.1 million. Revenue for the nine months ended September 30, 2008 increased 53% to $7.6 million compared with $5.0 million for the nine months ended September 30, 2007. The increase is primarily due to significantly higher sales of Pennsaid to our Greek distributor which launched Pennsaid in the first half of 2007 and the increase in licensing fee revenue related to the Squire Deal.

As a result of the decreased product sales and the one-time discount that was given to Vianex, gross margin on product sales declined to $0.5 million for the three months ended September 30, 2008 compared to $0.9 million for the three months ended September 30, 2007. For the nine months ended September 30, 2008, gross margin increased to $2.2 million compared to $1.0 million for the nine months ended September 30, 2007. This increase is primarily due to higher product sales to Vianex.

Total operating expenses, excluding foreign currency gains and losses, for three and nine months ended September 30, 2008 were $4.5 million and $12.1 million, an increase from $4.3 million and $11.5 million for three and nine months ended September 30, 2007. The increase in the three-month period is due to higher net interest expense, relating to higher debenture accretion charges and lower levels of interest income. The increase in the nine-month period is due to an increase in net interest expense and higher spending on research and development activities, offset partially by lower selling, general and administrative expenses. This highlights the impact of the Company's efforts during the third and fourth quarters of 2007 to focus its resources on research activities rather than administrative costs.

Research and development expenses decreased by 7% to $2.6 million for the three months ended September 30, 2008 compared to $2.7 million for the three months ended September 30, 2007. For the nine months ended September 30, 2008, research and development costs increased 9% to $6.8 million compared to $6.2 million for the nine months ended September 30, 2007. The majority of spending for the current three and nine month periods related to the on-going studies to address the conditions raised by the FDA in the Pennsaid Approvable Letter. During the first three quarters, the Company made excellent progress towards the completion of several of the Short and Long-Term Studies required for the Complete Response.

SG&A expenses increased by 5% to $1.3 million for the three months ended September 30, 2008 compared to $1.2 million for the three months ended September 30, 2007. During the quarter, the impact of lower ongoing personnel costs and the savings associated with closing the Company's international marketing office in Barbados were more than offset by severance costs incurred at the corporate office and increased spending on professional and consulting fees related to the Squire tax reassessment and other matters. For the nine-month period ended September 30, 2008, SG&A costs decreased 11% to $3.6 million compared to $4.0 million for the nine-month period ended September 30, 2007. The decrease is primarily attributable to activities undertaken during the third and fourth quarters of 2007, including the closure of the Company's international marketing office in Barbados and staff reductions at the corporate head office.

For the three months ended September 30, 2008, the net loss increased to $3.0 million from $2.5 million for the three months ended September 30, 2007. Included in the net loss for the third quarter is a non-cash extinguishment loss of $0.3 million related to the accounting treatment of the amendments to the November 2004 debentures which extended their maturity by one year. Included in the net loss for the comparative period is a $0.5 million gain relating to the sale of assets. Excluding the impact of these items, the net loss would have declined to $2.7 million in the current quarter compared to $3.0 million a year ago. For the nine months ended September 30, 2008, the net loss declined by 10% to $8.1 million from $9.0 million for the nine months ended September 30, 2007.

Cash used in operations was $2.2 million for the three months ended September 30, 2008 compared to $3.0 million for the three months ended September 30, 2007. Although the net loss for the quarter ended September 30, 2008 was $0.5 million higher than the comparable period it included several non-cash items including the $0.3 million extinguishment loss on the convertible debentures, higher accretion charges and a $0.3 million foreign exchange loss. In addition, the comparable quarter included a non-cash gain of $0.5 million on the sale of assets and a foreign exchange gain. Overall, cash provided by operating activities was $0.3 million in the quarter versus cash used in operating activities of $3.0 million in the third quarter of 2007. The improvement is due to the $1.4 million recovery of non-cash working capital and the prepayment of future royalties under the new licensing arrangements with Squire. For the nine months ended September 30, 2008 funds used in operating activities decreased to $5.0 million from $9.5 million.

Net cash used in investing activities totaled $36,000 and $92,000 for the three and nine months ended September 30, 2008 compared with $31,000 and $220,000 for the three and nine months ended September 30, 2007. Net cash provided by financing activities totaled $1.4 million for the three months ended September 30, 2008, compared to $18.4 million for the three months ended September 30, 2007. During the quarter, the Company issued a $2 million debenture to Squire and repaid $0.5 million of long-term debt and debentures. In the comparable period last year, net cash used in financing activities related to scheduled debt repayments. Net cash provided by financing activities totaled $2.3 million for the nine months ended September 30, 2008, compared to $23.2 million for the nine months ended September 30, 2007.

Squire Tax Reassessment

On August 16, 2005, the Company sold 100% of the common shares of its subsidiary DHCL (renamed Squire) to Paladin. Under the terms of the share purchase agreement ("SPA") with Paladin, the Company provided representations and warranties with respect to the status of the Company's tax accounts and its tax assets, which consisted of non-capital losses, investment tax credits and undeducted scientific research and experimental development expenditures. If the amounts represented are incorrect then the Company is required to indemnify Paladin for a portion of its losses.

In July and August 2008, Squire received notices of reassessment relating to its taxation years ending August 16, 2005 and July 31, 2006 and 2007 ("the Tax Years") from the Canada Revenue Agency ("CRA") containing adjustments related to certain transactions occurring in the tax year ended August 16, 2005 that impact all of the Tax Years. It is possible that the provincial tax authorities will propose similar adjustments as a result of the CRA reassessments. The notices of reassessment, if they stand, could cause the Company to breach certain representations and warranties in the SPA.

The Company estimates its potential obligation under the indemnification provisions of the SPA as a result of the reassessments is in the range of $6.5 million to $7.5 million, including interest and penalties. In addition, the Company expects the potential obligation under the indemnity to increase as additional interest accrues and penalties are assessed on the reassessed amounts. The SPA also requires the Company to indemnify Paladin for out-of-pocket costs (including attorneys' and experts' fees) incurred by Paladin that are caused by the Company's breach of its representations and warranties contained in the SPA.

The Company disagrees with the position taken by the CRA and believes it is without merit. Squire is contesting the reassessments through the CRA appeals process and has filed a Notice of Objection with the CRA. The Company is participating in this process. An unfavorable resolution could have a material adverse impact on the Company's cash flows.

Squire is a "Large Corporation" under subsection 225.1(8) of the Income Tax Act and as a result the CRA took action to collect 50% of the reassessed amount, $3.7 million, in September 2008. Squire may make a claim against the Company for a portion of the $3.7 million; however, the Company believes that pursuant to the indemnification provisions of the SPA, the Company is not obliged to make any such payment to Squire unless and until there is a final determination after exhausting all avenues of appeal available through the CRA Appeals process and the courts or by agreement between the parties that the Company is in breach of a representation and warranty in the SPA related to its tax accounts or tax assets.

Detailed financial statements and the MD&A are available at http://www.nuvoresearch.com or http://www.sedar.com.

About Pennsaid

Pennsaid(R) is a topical non-steroidal anti-inflammatory drug (NSAID) used for the treatment of osteoarthritis and is currently approved for sale in Canada and several European countries. Pennsaid(R) allows the diclofenac solution to be delivered to a specific site via the surface of the skin and thus limits complications associated with systemic delivery. According to published clinical trials, Pennsaid(R) is as effective as the maximum daily dose of comparable oral medication at relieving pain and stiffness associated with osteoarthritis of the knee, as well as improving overall well-being. There are more than 21 million Americans suffering from osteoarthritis, a very painful and debilitating condition, and the United States market for this condition is estimated at US$4 billion annually In December 2006, the U.S. Food and Drug Administration issued an approvable letter that indicated Pennsaid(R) is approvable subject to Nuvo satisfying certain conditions.

About Nuvo Research Inc.

Nuvo is a Canadian drug development company primarily focused on the research and development of drug products that are delivered to and through the skin. Nuvo is also involved in research and development activities involving WF10, a chlorite-based, immunomodulating drug through its 60% interest in Dimethaid AG.

Nuvo believes it is uniquely positioned to research and develop new drug product candidates for delivery to and through the skin using its multiplexed molecular penetration enhancers ("MMPE(TM)"s), that interact with the skin and enhance its permeability thereby allowing certain drug molecules to pass into and through the skin to proximate tissues and its high throughput experimentation systems that allow its scientists to rapidly screen combinations of existing molecular penetration enhancers ("MPE(TM)s") with large numbers of potential drug formulations to measure their ability to permeabilize and permeate the skin. Nuvo's lead product Pennsaid(R), a topical non-steroidal anti-inflammatory drug (NSAID) utilizes the Company's technology to treat the symptoms of osteoarthritis of the knee locally. Nuvo intends to leverage its technologies to create a portfolio of topical and transdermal products targeting a variety of indications. Nuvo Research Inc. is a publicly traded company headquartered in Mississauga, Ontario, with manufacturing facilities in Varennes, Quebec and Wanzleben, Germany and a research and development facility in San Diego, California. For more information, please visit http://www.nuvoresearch.com.

This release may contain forward-looking statements, subject to risks and uncertainties beyond management's control. Actual results could differ materially from those expressed here. Risk factors are discussed in the Company's annual information form filed with the securities commissions in each of the provinces of Canada. The Company undertakes no obligation to revise forward-looking statements in light of future events.

Summary financial statements attached:

NUVO RESEARCH INC.

CONSOLIDATED BALANCE SHEETS

As at As at

September 30, December 31,

2008 2007

Unaudited Audited

(thousands of Canadian dollars) $ $

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

ASSETS

CURRENT

Cash and cash equivalents 18,902 21,791

Accounts receivable 868 1,802

Other receivable - 579

Inventories 1,514 1,042

Prepaid expenses and other 487 789

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

TOTAL CURRENT ASSETS 21,771 26,003

Restricted cash 82 79

Property, plant and equipment 2,137 2,475

Intangible assets 203 90

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

TOTAL ASSETS 24,193 28,647

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

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LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT

Accounts payable and accrued liabilities 2,383 2,994

Short-term loan 721 587

Deferred revenue 2,320 1,211

Current portion of long-term debt and

capital lease obligations 156 94

Current portion of debentures - 500

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

TOTAL CURRENT LIABILITIES 5,580 5,386

Deferred revenue 3,882 5,169

Long-term debt and capital lease obligations 260 222

Debentures 4,789 2,006

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

TOTAL LIABILITIES 14,511 12,783

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

SHAREHOLDERS' EQUITY

Common shares 189,146 187,877

Warrants 10,847 11,243

Contributed surplus 6,754 5,670

Accumulated other comprehensive income 114 114

Deficit (197,179) (189,040)

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

TOTAL SHAREHOLDERS' EQUITY 9,682 15,864

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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 24,193 28,647

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

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NUVO RESEARCH INC.

CONSOLIDATED STATEMENTS OF LOSS, COMPREHENSIVE LOSS AND DEFICIT

Unaudited Three-months Nine-months

(thousands of ended ended

Canadian dollars September 30, September 30, September 30, September 30,

except per share 2008 2007 2008 2007

amounts) $ $ $ $

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

REVENUE

Product sales 1,808 2,233 5,578 4,002

Cost of goods sold 1,281 1,374 3,366 3,050

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

Gross margin on

product sales 527 859 2,212 952

Other revenue

Licensing fees 1,453 250 1,953 750

Research and other

contract revenue 28 75 79 219

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

2,008 1,184 4,244 1,921

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

EXPENSES

Research and

development 2,556 2,743 6,793 6,205

Selling, general

and administrative

expenses 1,278 1,220 3,564 4,000

Stock-based

compensation 131 94 497 468

Amortization of

property, plant,

and equipment

and intangibles 221 230 633 656

Foreign currency

(gain) loss 255 (39) 12 (120)

Interest expense 418 273 1,046 812

Interest income (146) (306) (461) (548)

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

4,713 4,215 12,084 11,473

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

Loss from operations (2,705) (3,031) (7,840) (9,552)

Loss on extinguishment

of convertible

debenture (299) - (299) -

Gain on sale of assets - 508 - 508

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

NET LOSS AND TOTAL

COMPREHENSIVE LOSS (3,004) (2,523) (8,139) (9,044)

Deficit, beginning

of period (194,175) (183,185) (189,040) (176,664)

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

DEFICIT, END

OF PERIOD (197,179) (185,708)) (197,179) (185,708)

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

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

Average number of

basic and diluted

common shares

outstanding for

the period

(millions) 310.1 283.1 304.2 224.6

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

Net loss per

common share

- basic and

diluted (0.01) (0.01) (0.03) (0.04)

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

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

NUVO RESEARCH INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three-months Nine-months

Unaudited ended ended

(thousands of September 30, September 30, September 30, September 30,

Canadian dollars) 2008 2007 2008 2007

$ $ $ $

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

OPERATING

ACTIVITIES

Net loss (3,004) (2,523) (8,139) (9,044)

Items not involving

current cash flows:

Amortization 221 230 633 656

Deferred revenue

recognized (560) (448) (1,271) (1,031)

Stock-based

compensation

and payments 131 94 497 600

Accretion of

interest on

debentures 295 173 729 476

Loss on

extinguishment

of convertible

debenture 299 - 299 -

Gain on sale of

assets - (508) - (508)

Other 408 - 147 (69)

Net change in

non-cash working

capital balances 1,400 (71) 1,058 (598)

Proceeds from

licensing

arrangements and

advances on

research contracts 1,093 40 1,093 40

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

CASH PROVIDED BY

(USED IN) OPERATING

ACTIVITIES 283 (3,013) (4,954) (9,478)

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

INVESTING ACTIVITIES

Acquisition of

property, plant and

equipment (36) (31) (120) (220)

Proceeds from sale

of assets - - 28 -

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

CASH USED IN

INVESTING ACTIVITIES (36) (31) (92) (220)

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

FINANCING ACTIVITIES

Issuance of common

shares and warrants,

net of related costs (1) 18,493 946 23,823

Issuance of debentures,

net of related costs 1,932 - 1,932 -

Repayments of

debentures, long-term

debt and capital lease

obligations (548) (113) (608) (668)

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

CASH PROVIDED BY

FINANCING ACTIVITIES 1,383 18,380 2,270 23,155

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

Effect of exchange

rate changes on cash

and cash equivalents (76) (49) (113) (125)

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

Net change in cash and

cash equivalents

during the period 1,554 15,287 (2,889) 13,332

Cash and cash

equivalents,

beginning of period 17,348 9,258 21,791 11,213

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

CASH AND CASH

EQUIVALENTS,

END OF PERIOD 18,902 24,545 18,902 24,545

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

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

Interest paid 6 24 160 188

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


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SOURCE Nuvo Research Inc.
Copyright©2008 PR Newswire.
All rights reserved


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