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Nuvo announces second quarter 2008 financial results
Date:7/31/2008

MISSISSAUGA, ON, July 31 /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 six months ended June 30, 2008.

Key Corporate Developments:

- The Company remains on track 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. It 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;

- Revenue for the three-months ended June 30, 2008 increased 45% to

$2.1 million compared with $1.4 million for the three-months ended

June 30, 2007. The significant increase is due primarily to a

$0.6 million increase in Pennsaid product sales to the Company's Greek

distributor;

- The Company in-licensed from Paladin Labs Inc. (TSX: PLB) ("Paladin")

the exclusive rights to develop and commercialize a novel topical pain

formulation with the potential to treat inflammatory and neuropathic

pain conditions. As part of the transaction, Paladin invested

$1.0 million in Nuvo by way of a private placement for common shares

and warrants; and,

- Subsequent to the end of the fiscal quarter, the Company further

strengthened its cash position by restructuring its Canadian

distribution agreement with Squire Pharmaceuticals Inc. ("Squire"), a

subsidiary of Paladin. The Company received a $2.5 million payment in

lieu of future payments related to Cana

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TOTAL LIABILITIES 11,722 12,783

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SHAREHOLDERS' EQUITY

Common shares 189,147 187,877

Warrants 10,847 11,243

Contributed surplus 6,446 5,670

Accumulated other comprehensive income 114 114

Deficit (194,175) (189,040)

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TOTAL SHAREHOLDERS' EQUITY 12,347 15,864

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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 24,101 28,647

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CONSOLIDATED STATEMENTS OF LOSS, COMPREHENSIVE LOSS AND DEFICIT

Three-months Six-months

Unaudited ended ended

(thousands of Canadian June 30, June 30, June 30, June 30,

dollars except per 2008 2007 2008 2007

share amounts) $ $ $ $

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REVENUE

Product sales 1,795 1,067 3,770 1,769

Cost of goods sold 1,001 921 2,085 1,676

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Gross margin on product

sales 794 146 1,685 93

Other revenue

Licensing fees 250 250 500 500

Research and other contract

revenue 40 118 51 144

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1,084 514 2,236 737

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EXPENSES

Research and development 2,133 1,716 4,237 3,462

Selling, general and

administrative expenses 1,162 1,333 2,286 2,780

Stock-based compensation 216 211 366 374

Amortization of property,

plant, and equipment

and intangibles 207 215 412 426

Foreign currency (gain) loss 36 (91) (243) (81)

Interest expense 325 273 628 539

Interest income (131) (109) (315) (242)

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3,948 3,548 7,371 7,258

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Net Loss for the period and

total comprehensive loss (2,864) (3,034) (5,135) (6,521)

Deficit,

beginning of period (191,311) (180,151) (189,040) (176,664)

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DEFICIT, END OF PERIOD (194,175) (183,185) (194,175) (183,185)

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Average number of basic

and diluted common shares

outstanding for the

period (millions) 303.1 197.1 301.3 194.9

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Net loss per common share

- basic and diluted (0.01) (0.01) (0.02) (0.03)

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Three-months Six-months

ended ended

Unaudited June 30, June 30, June 30, June 30,

(thousands of Canadian 2008 2007 2008 2007

dollars) $ $ $ $

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OPERATING ACTIVITIES

Net loss (2,864) (3,034) (5,135) (6,521)

Items not involving current

cash flows:

Amortization 207 215 412 426

Deferred revenue

recognized (450) (309) (711) (585)

Stock-based compensation

and payments 216 211 366 506

Accretion of interest on

debentures 227 158 434 303

Other 91 (57) (261) (69)

Net change in non-cash

working capital balances 284 (685) (342) (525)

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CASH USED IN OPERATING

ACTIVITIES (2,289) (3,501) (5,237) (6,465)

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INVESTING ACTIVITIES

Acquisition of property,

plant and equipment (57) (189) (84) (189)

Proceeds from sale of assets - - 28 -

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CASH USED IN INVESTING

ACTIVITIES (57) (189) (56) (189)

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FINANCING ACTIVITIES

Issuance of common shares

and warrants, net of

related costs 947 - 947 5,330

Repayments of long term

debt and capital lease

obligations (16) (227) (60) (555)

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CASH PROVIDED BY (USED IN)

FINANCING ACTIVITIES 931 (227) 887 4,775

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Effect of exchange rate

changes on cash and cash

equivalents (298) (71) (37) (76)

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Net decrease in cash and

cash equivalents during

the period (1,713) (3,988) (4,443) (1,955)

Cash and cash equivalents,

beginning of period 19,061 13,246 21,791 11,213

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CASH AND CASH EQUIVALENTS,

END OF PERIOD 17,348 9,258 17,348 9,258

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Interest paid 128 121 154 164

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dian Pennsaid sales and an

additional $2.0 million through the issuance of a convertible

debenture. These transactions extend the Company's cash financial

runway beyond mid 2009 when it expects to receive U.S. FDA approval of

Pennsaid, a topical non-steroidal anti-inflammatory drug (NSAID) used

to treat the pain and stiffness associated with knee osteoarthritis.

"Quarter by quarter, we are steadily moving closer to our goal of achieving Pennsaid's approval in the U.S., while ensuring we have suitable cash resources beyond this milestone," said Henrich Guntermann, President and Chief Executive Officer, "At the same time, we are excited about our expanding pipeline, which we strengthened in the second quarter through internal research and development activities and by our agreement to in-license the exclusive rights to develop and commercialize a novel, early stage topical pain formulation."

Financial Results

(thousands of Three months Three months Six months Six months

Canadian dollars) ended ended ended ended

June 30, June 30, June 30, June 30,

2008 2007 2008 2007

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Revenue $ 2,085 $ 1,435 $ 4,321 $ 2,413

Net loss $ (2,864) $ (3,034) $ (5,135) $ (6,521)

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Revenue for the three-months ended June 30, 2008 increased 45% to $2.1 million compared with $1.4 million for the three-months ended June 30, 2007. The significant increase is due primarily to a $0.6 million increase in Pennsaid product sales to the Company's Greek distributor and an increase in sales of WF10 based products. Revenue for the six-months ended June 30, 2008 increased 79% to $4.3 million compared with $2.4 million for the six-months ended June 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 higher sales to our Canadian distributor.

As a result of the increased sales volumes, gross margin on product sales improved significantly to $0.8 million and $1.7 million for the three and six-months ended June 30, 2008 compared to $0.1 million in both the three and six-month periods ended June 30, 2007.

Total operating expenses, excluding foreign currency gains and losses, for three and six-months ended June 30, 2008 were $3.9 million and $7.6 million, an increase from $3.6 million and $7.3 million for three and six-months ended June 30, 2007. The increase in the three and six-month periods is due to higher spending on research and development activities. 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. For the six-month period, research and development expenditures represented 56% of operating expenses (before currency gains and losses) versus 47% in the comparative six-month period of 2007.

Research and development expenses were $2.1 million and $4.2 million for the three and six-months ended June 30, 2008 an increase of 24% and 22% compared with $1.7 million and $3.5 million for the three and six-months ended June 30, 2007. The majority of spending for the current three and six-month periods is related to the on-going studies to address the conditions raised by the FDA in the Pennsaid Approvable Letter. During the first two 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 decreased to $1.2 million and $2.3 million for the three and six-months ended June 30, 2008, compared to $1.3 million and $2.8 million for the three and six-months ended June 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 June 30, 2008 the net loss declined slightly to $2.9 million from $3.0 million for the three-months ended June 30, 2007. The Company was able to reduce the net loss as higher research and development expenditures and foreign exchange losses were more than offset by the increased gross margin generated from higher product sales and a reduction in SG&A costs. For the six-months ended June 30, 2008 the net loss declined by 21% to $5.1 million from $6.5 million for the six-months ended June 30, 2007.

Cash used in operations was $2.6 million for the three-months ended June 30, 2008 compared to $2.8 million for the three-months ended June 30, 2007. The decrease of 9% was primarily the result of the reduced net loss during the quarter. Overall, cash used in operating activities decreased to $2.3 million for the three-months ended June 30, 2008 versus $3.5 million for the three-months ended June 30, 2007 as the Company's investment in non-cash working capital improved significantly. For the six-month period ended June 30, 2008 funds used in operating activities decreased to $5.2 million from $6.5 million for the six-month period ended June 30, 2007 primarily due to the smaller loss in the period.

Net cash used in investing activities totaled $57,000 and $56,000 for the three and six-months ended June 30, 2008 compared with $189,000 for both the three and six-months ended June 30, 2007. The investment in the quarter relates to the acquisition of a new data management and biostatistics computer system. The Company also invested $191,000 in new laboratory equipment during the quarter at its San Diego research facility that was financed through the use of capital leases and acquired a sublicense to a patent related to its topical and transdermal drug delivery pipeline in exchange for 961,538 common shares of the Company having a value of $125,000.

Net cash provided by financing activities totaled $0.9 million for the three-months ended June 30, 2008, compared to net cash used in financing activities of $0.2 million for the three-months ended June 30, 2007. During the quarter, the Company closed a private placement equity financing. At closing, a total of 7.7 million shares and 769,230 common share purchase warrants of the Company, each whole warrant entitling the holder thereof to acquire one common share at a price of $0.169 per share until May 29, 2010 were issued for gross proceeds of $1 million. Once expenses associated with the financing were deducted, net cash proceeds were $947,000. These proceeds were partially offset by scheduled long term debt and capital lease payments. In the comparable period last year, net cash used in financing activities related to scheduled debt repayments.

Net cash provided by financing activities totaled $0.9 million for the six-months ended June 30, 2008, compared to $4.8 million for the six-months ended June 30, 2007. For the current period, the net cash provided by financing activities relates to the financing discussed above and scheduled debt repayments. In the comparable period last year, net cash provided by financing activities totaled $5.0 million and consisted of $5.3 million in proceeds from the exercise of warrants offset by $328,000 in debt repayments.

Subsequent Events

On July 7, 2008 Paladin demanded repayment of the December 2006 Convertible debenture in the amount of $500,000 as per its rights under the terms of the debenture and the Company paid the amount in full. In addition, the Company repaid the $250,000 upfront payment for Pennsaid Plus received from Paladin as per the terms of the Pennsaid Plus License Agreement as it did not reach a required milestone by May 21, 2008.

Additionally, the Company and its Canadian distributor, Paladin, reached an agreement to amend the Pennsaid and Pennsaid Plus licensing arrangements. Under the terms of the new arrangements Paladin's wholly owned subsidiary, Squire, agreed to make payments totaling $2.5 million to the Company in lieu of future payments relating to Canadian sales of Pennsaid prior to January 1, 2011 and to repay certain receivables. Subsequent to January 1, 2011, Squire will pay the Company a royalty on all Canadian sales of Pennsaid. Squire also invested $2.0 million in the Company by way of a two-year convertible debenture. This debenture bears interest at 8% per annum and is convertible into Nuvo common shares at a price of $0.138.

On July 29, 2008, Paladin informed the Company that it had received notices of reassessment from the Canada Revenue Agency related to Squire (formerly Dimethaid Health Care Ltd. ("DHCL")) for the 2005 and 2006 tax years (the "Tax Years"). These reassessments contained adjustments relating to transactions occurring in 2005. Under the terms of the August 2005 agreement (the "Sale Agreement") whereby the Company sold DHCL to Paladin, the Company provided certain indemnities (the "Indemnities") related to DHCL's tax assets. The Company disagrees with the position taken by the CRA, believes it is without merit and intends to contest the reassessment. The Company estimates its obligations under the Indemnities to be in the range of $3.5 million to $4.5 million, plus interest and penalties of approximately $1.7 million related to the Tax Years. In addition, the Company expects the obligation under the Indemnities to increase once interest and penalties are assessed on Squire's 2007 tax filings. The CRA may take action to immediately collect 50% of the reassessed amount from Squire for the Tax Years as it is permitted to do. As a result, Squire may make a claim of approximately $1.5 million under the Indemnities.

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:

CONSOLIDATED BALANCE SHEETS

As at As at

June 30, December 31,

2008 2007

Unaudited Audited

(thousands of Canadian dollars) $ $

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ASSETS

CURRENT

Cash and cash equivalents 17,348 21,791

Accounts receivable 1,375 1,802

Other receivable 579 579

Inventories 1,523 1,042

Prepaid expenses and other 663 789

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TOTAL CURRENT ASSETS 21,488 26,003

Restricted cash 88 79

Property, plant and equipment 2,317 2,475

Intangible assets 208 90

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TOTAL ASSETS 24,101 28,647

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LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT

Accounts payable and accrued liabilities 1,972 2,994

Short term loan 662 587

Deferred revenue 1,000 1,211

Current portion of long term debt and

capital lease obligations 159 94

Current portion of debentures 500 500

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TOTAL CURRENT LIABILITIES 4,293 5,386

Deferred revenue 4,669 5,169

Long term debt and capital lease obligations 320 222

Debentures 2,440 2,006
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SOURCE Nuvo Research Inc.
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