Bavarian Nordic A/S Interim Report as of 30 June 2003

Key Highlights

• Revenue was DKK 181.6 million (as of 30 June 2002: nil)
• Profit (before interest and tax) was DKK 59.7 million (as of 30 June 2002: loss of DKK 45.7 million)
• Produced and released 5,000 doses of safe, third-generation smallpox vaccine to US government two months ahead of development schedule
• Increased development and production capacity with the acquisition of a manufacturing facility in Berlin, Germany; in advanced discussions to expand production in the US and Europe
• Clinical progress with HIV and smallpox vaccines
• Equity ratio rose to 88% from 69% as of 30 June 2002
• Current contracts will lock in targeted revenues for the year of approximately DKK 500 million (2002: DKK 121.1 million) and income before interest and tax of approximately DKK 250 million.

Commenting on Bavarian Nordic’s interim results, Peter Wulff, CEO, said:

“We are very pleased with our progress over the last six months. Our advanced development of MVA-BN as a safe, third-generation smallpox vaccine has enabled us to meet all the criteria for the US government’s development contract two months ahead of schedule. This significant progress, alongside our plans to further expand production capacity in the US and Europe, ensures that we are well-positioned to win the next development contract from the US government. In addition, revenue from our smallpox vaccine contracts has enabled us to accelerate development of MVA-BN as a vaccine for the treatment of HIV and tropical diseases and further invest in our pipeline. We are clearly demon­strating Bavarian Nordic’s ability to convert cutting-edge science into commercial success”.

Report for the period 1 January 2003 – 30 June 2003

Financial Review
For the interim period, Bavarian Nordic generated revenue of DKK 181.6 million and a profit before interest and tax (EBIT) of DKK 59.7 million. Second-quarter revenue (1 April – 30 June 2003) was DKK 46.9 million and profit before interest and tax was DKK 0.6 million. Revenue and income for the second quarter were in accordance with the budget for the period. In addition, significant production time was spent during the second quarter on manufacturing materials for clinical trials and the establish­ment and up scaling of production of MVA-BN for the US smallpox vaccine develop­ment programme. Accordingly, production for the second half of 2003 will focus on fulfilling orders, which in turn will account for the majority of income and gross profits for the year.

Smallpox Franchise
Over the last six months, Bavarian Nordic has reported a number of positive developments relating to its smallpox franchise and in particular its safe, third-generation smallpox vaccine.

Smallpox vaccine market
The need for a safe, smallpox vaccine with no side effects has been well-established. This need has been recognised in the US market, where there is a heightened awareness of the health risks associated with second-ge­ne­ration smallpox vaccines, particularly for immune-compromised individuals that repre­sent an estimated 25% of the American public. Because of these substantial risks, the US government has implemented an accelerated programme to develop a third-generation smallpox vaccine that does not have side effects, one based on MVA (Modified Vaccinia Ankara).

Due to the demand for a safe, third-generation smallpox vaccine, Bavarian Nordic, the world’s leading developer in this sector of the vaccine market, has taken recent steps to strengthen its market position by expanding its production capacity. Further, as part of the company’s efforts to focus resources on accelerating the development of its safe third-generation MVA-BN vaccine, Bavarian Nordic declined to participate in the recent UK government contract for a second-generation vaccine.

Ahead of US development programme milestone
In February of this year, Bavarian Nordic was awarded a contract by the US National Institute of Allergy and Infectious Diseases (NIAID) to develop a safe smallpox vaccine based on the Modified Vaccinia Ankara virus.

On 16 June, Bavarian Nordic produced and released 5,000 doses of its MVA-BN safe smallpox vaccine to NIAID two months ahead of the US government’s development schedule. This achievement demonstrates once again the company’s expertise in manufacturing MVA-BN and confirms the advanced stage of its smallpox vaccine development programme. Accordingly, Bavarian Nordic is well-placed for the next phase of the US government’s safe smallpox vaccine development pro­gramme, which is expected to be announced in the autumn of this year.

Beating the milestone so far ahead of schedule is Bavarian Nordic’s latest achievement in its ongoing worldwide programme to develop MVA-BN as the safest smallpox vaccine. Bavarian Nordic continues to be the only company that has:

• successfully completed small animal studies on MVA
• successfully completed a clinical Phase l trial on MVA
• initiated a Phase ll clinical study investigating the safety and immunogenicity of MVA in healthy volunteers.
• produced and supplied commercial quantities of MVA as a safe smallpox vaccine
• a strong intellectual property position based on a series of patent applications pending with examining authorities

Other smallpox contracts
The first contract with the German government for Elstree-BN smallpox vaccine has been produced and delivered by Bavarian Nordic. The contract with PowderJect (UK) to deliver Elstree-BN smallpox vaccine to the UK government was fulfilled according to plan.

A second contract signed on 7 February with the German government for the purchase of Elstree-BN smallpox vaccine, which is Bavarian Nordic’s largest contract to-date, will enable the company to achieve 2003 sales and profit targets. Deliveries are budgeted for the third and fourth quarters of this year.

Clinical update
In March of this year, Bavarian Nordic commenced a Phase ll dose-study trial in 165 healthy vo­lunteers, which is a major step forward in the development of MVA-BN as a safe, third-generation smallpox vaccine. The commencement of this study follows the results of a Phase I trial, completed in February, which confirmed a high level of safety and efficacy of MVA-BN.

Production expanded
In May 2003, Bavarian Nordic acquired a production facility in Berlin, Germany. The purchase of this facility has secured the company’s production capacity needs for the mid-term. The cGMP facility will manufacture clinical batch materials, which will enable the company to complete up scaling and optimisation of the MVA-BN vaccine production process during the autumn of this year.

Looking beyond 2005, the company continues to pursue opportunities to strengthen and add flexibility to its global manufacturing operations, and is in advanced discussions with potential partners to expand production capabilities in both the USA and Europe. These discussions are expected to conclude by the end of this year.

Strengthening Bavarian Nordic’s international production expertise, Dr. René Djurup joined the company on 1 July as Vice President of Technical Operations & Chief Technical Officer. Dr. Djurup is a member of the company’s management group and is responsible for global production. His main responsibilities include process development, production planning and operations.

Pipeline Update
Development of Bavarian Nordic’s HIV vaccine is progressing well. In March this year, the company announced significant safety and strong immunity results from a Phase l/ll study on its MVA-BN HIV nef vaccine. The study involved immune-compromised individuals and the results demonstrated that after receiving three MVA-BN HIV nef vaccinations, the levels of HIV in 7 out of 14 patients remained below their pre-therapy levels following the interruption of their anti-retroviral therapy. The clinical trial has since been extended to monitor HIV levels in these patients and, after 12-16 months of treatment interruption, 6 patients still remain off anti-retroviral therapy. These patients will continue to be monitored over the next two years. The development of MVA-BN HIV nef vaccine will be continued with high priority.

Following these encouraging results in HIV infected patients, Bavarian Nordic started a Phase l clinical study during February 2003 to evaluate the safety and immunogenicity of MVA-BN HIV nef in 14 healthy volunteers. To date, 7 subjects have received the first two vaccinations, which were well­tolerated, supporting the safety of MVA-BN-based vaccines. This study is due to be completed during the second quarter of 2004. These promising results give a clear indication that an HIV vaccine based on MVA-BN may be used in addition to anti-retroviral therapy to control HIV.

Outlook for Remainder of 2003
Bavarian Nordic maintains its 2003 guidance of revenue of approximately DKK 500 million and in­come before interest and tax of approximately DKK 250 million.

Capital Preparedness and Liquidity
Bavarian Nordic’s liquid reserve as of 30 June 2003 was DKK 117.9 million. Income from the sale of vaccines and needles was sufficient to finance operations, research and investments to expand produc­tion capacity.

Due to the positive net income results, Bavarian Nordic’s equity has increased to DKK 239.7 million from DKK 196.4 million at 31 December 2002. The company’s equity ratio rose to 88%, as of 30 June 2003, from 69% as of 30 June 2002.



Copenhagen, 26 August 2003

Asger Aamund, Chairman of the Board