Bavarian Nordic A/S – Third Quarterly Report as of 30 September 2004

• The development of the industrial IMVAMUNE™ smallpox manufacturing process has been finalised. Reconstruction of the production plant at Kvistgård is proceeding according to plan. Expected production start is summer 2005.
• Bavarian Nordic was awarded a second contract valued at more than $141 million from the US Government to further develop its patented IMVAMUNE™ as safe smallpox vaccine. The three-year contract came into effect on September 30 2004.
• Revenue for the first three quarters of 2004 is DKK 131.5 million (DKK 424.1 million as of 30 September 2003). Earnings before tax is negative by DKK 32.9 million.
• Bavarian Nordic expects its total revenue for 2004 to be approximately DKK 400 million, of which DKK 31 million is expected to be revenue from RFP I and RFP ll contracts in 2004. The remaining part of the revenue is expected to originate from sale of Elstree-BN to international governments. Earnings before tax is expected to be DKK 60-80 million.
• Global manufacturing and marketing collaboration established with GlaxoSmithKline on IMVAMUNE™.
• The US Patent and Trademark Office (PTO) issued a patent to Bavarian Nordic on MVA-BN®. The patent covers the MVA-BN® virus and derivatives thereof, including its use as a smallpox vaccine (IMVAMUNE™), and vector technology.
• The US Food and Drug Administration (FDA) granted “fast track” status for IMVAMUNE™ (the firstever smallpox vaccine candidate to receive this designation).
• Bavarian Nordic has received all required environmental approvals from the Danish authorities to establish vaccine manufacturing at the company’s Kvistgård facility.

Financial review
The National Institute of Allergy and Infectious Diseases (NIAID), part of the US National Institutes of Health, awarded Bavarian Nordic A/S a three-year contract valued at more than USD 141 million to further develop its patented IMVAMUNE™ as a safe smallpox vaccine. The contract has a base value of more than USD 100 million and an option for the purchase of 2.5 million doses of IMVAMUNE™ at a value of USD 41 million. The contract has been effective as of 30 September 2004.

Government contracts as revenue
Government contracts are now a primary source of income for the company. Therefore revenue from governments will no longer be considered as “other income” but as a part of revenue.

Revenue and Earnings before tax
Revenue for the first three quarters of 2004 is DKK 131.5 million (DKK 424.1 million as of 30 September 2003).

Earnings before tax for the first three quarters of 2004 is negative by DKK 32.9 million.

RFP contracts
Income from the RFP I contract in the third quarter of 2004 was DKK 14.9 million bringing the total year-todate RFP I income to DKK 19.2 million. The income from the RFP ll contract is expected to be DKK 9 million for 2004.

In 2004 the total effect of RFP I and RFP ll is expected to be DKK 31 million in revenue. This change has been made in the enclosed financial statements for the first three quarters of 2004 and for comparative purposes in the figures for 2003.

Cash Position
The cash position as of 30 September 2004 was DKK 249.7 million.

Outlook for 2004
Bavarian Nordic expects its total revenue for 2004 to be approximately DKK 400 million and earnings before tax to be DKK 60-80 million.

Production
The development of the industrial IMVAMUNETM smallpox manufacturing process has been finalised. Construction at the site has been initiated with the installation of technical systems and manufacturing equipment and is proceeding according to plan. Expected production start is summer 2005. Furthermore, Bavarian Nordic received environmental approval from both the Greater Copenhagen Development Council (Hovedstadens Udviklingsråd) and the County of Frederiksborg to establish vaccine manufacturing at the company’s Kvistgård facility.

Technical construction of the quality control laboratories at the Kvistgård site has been finalised. Purchasing and implementation of laboratory equipment according to GMP standards is underway and corresponding work begun.

Smallpox Vaccine Franchise
The three-year NIAID contract awarded to Bavarian Nordic calls for the manufacture of 500,000 doses of IMVAMUNE™ smallpox vaccine within 11 months of the award announcement and outlines an option by the U.S. government to purchase an additional 2.5 million doses of the vaccine during the contract period. The contract also requires further clinical development of IMVAMUNE™ and validation of animal models.

This is the second smallpox vaccine development contract awarded to Bavarian Nordic by the NIAID. The first contract was awarded to the company in February 2003 followed by a supplemental award in September 2003.

On 15 July 2004, Bavarian Nordic announced an international collaboration with GlaxoSmithKline (GSK) for the production and marketing of IMVAMUNE™. In the United States, Bavarian Nordic will continue to take the lead in the development of IMVAMUNE™ under the NIAID programme. Aside from this activity, the two companies will closely collaborate and act as commercial partners in future government programmes, including the forthcoming Request for Proposal lll (RFP lll) which is expected to outline the US government’s purchase of up to 60 million doses of MVA smallpox vaccine. RFP lll is expected to be issued before yearend.

GSK will manufacture and market IMVAMUNE™ to most international markets, including North and South America, Japan, as well as a number of EU markets including Great Britain and France. Bavarian Nordic will continue to manufacture and market IMVAMUNE™ to all German-speaking countries, the Nordic countries, the Baltic States, China, the Middle East and Southeast Asia.

Bavarian Nordic’s advanced clinical development programme already includes a Phase l trial investigating IMVAMUNE™ in persons with atopic disorders. An interim safety report submitted to the FDA has confirmed that it is safe to enrol a population of subjects with atopic disorders in the trial. Final results of the study will be available in mid-2005.

Phase l trial comparing IMVAMUNE™ with DryVax in USA
Enrolment in the Phase l trial is proceeding as planned. The trial will be completed in 2005.

“Fast track”
On 21 July 2004, Bavarian Nordic publicly announced that the US Food and Drug Administration (FDA) granted fast track designation for the development of IMVAMUNE™ as a safe smallpox vaccine, the first-ever smallpox vaccine candidate to receive this designation. Fast track status gives priority review status to a registration application and allows for filing portions of the registration applications ahead of others. Fast track status is intended to facilitate the development and expedite the review of new therapies that are targeted at treating serious and life-threatening conditions.

Patents
On 19 July 2004, Bavarian Nordic publicly announced that it had received a patent from the US Patent Office (USPTO) on the company’s proprietary core technology MVA-BN®. The patent covers the MVA-BN® virus and derivatives thereof, the use of MVA-BN as a smallpox vaccine (IMVAMUNE™ – Bavarian Nordic’s smallpox vaccine) and the use of MVA-BN® as a vector technology for developing recombinant vaccines against infectious diseases such as HIV, Dengue Fever, Japanese Encephalitis, etc.

HIV Vaccine Franchise
At the XV International AIDS Conference in Bangkok, Thailand held in July, data presented by an external investigator on two trials reconfirmed the potential of MVA nef as a both a therapeutic as well as prophylactic vaccine against HIV. The MVA nef vaccine induced an HIV specific immune response against the Nef antigen in a Phase l trial with persons with HIV and a Phase I trial with healthy volunteers.

The first study was a follow-up of a Phase I/II trial with MVA nef in HIV infected individuals. The scope of the trial was to determine if MVA nef vaccination might control HIV replication after interruption of antiretroviral therapy. Previous results showed that 5 out of 14 subjects could control the HIV virus 18 months after treatment interruption, so that no re-initiation of therapy was necessary. The new data confirmed that all of these 5 subjects further remained off antiretroviral therapy 23-27 months after interruption of antiviral treatment.

In a second trial, data on MVA nef in healthy subjects showed that a high dose of MVA nef is safe and immunogenic in healthy volunteers. Induction of HIV-1 specific CD8+ and /or CD4+ T-cells was detected in 8 out of 14 vaccinees. This result demonstrated for the first time that MVA nef was also immunogenic as a prophylactic vaccine in healthy individuals who have never been exposed to the HIV Nef antigen. In addition to the HIV specific immune response, the MVA nef vaccine could induce a humoral and T-cellular immune response against the MVA vector itself in all subjects. More importantly, the trial results showed that the strong immune response seen against the MVA-BN®-vector itself did not interfere with the response against Nef.

A Phase I/II trial to further investigate MVA nef in 50 HIV-infected individuals in a more advanced disease state than in the Phase I trial was initiated in Germany. The results are expected during 2005. The trial also investigates a group of 25 HIV-infected individuals receiving IMVAMUNE™.

Status on MVA-BN® polytope HIV vaccine
Bavarian Nordic has received approval from authorities to initiate two Phase l studies with the MVA-BN® polytope vaccine. One study will be conducted in healthy volunteers and the other study in HIV infected individuals. Enrolment of these two studies will start in Q4 2004 with first results expected in 2005.

Organisational Development
During the reporting period, additional employees were hired in the areas of Immunology Research, Regulatory Affairs, Technical Operations, Quality and other administrative functions.

Other Administrative Matters
As planned the Munich offices relocated in July to larger facilities within the same area of Munich. The offices in Amager, Denmark were vacated with the preclinical department having moved to Munich. Bavarian Nordic has recently purchased property adjacent to the Kvistgård facility. Bavarian Nordic is close to finalising the merger of the company’s two German subsidiaries. The registration of the merger is pending with the German authorities and expected shortly. Once the registration has been accepted, the merger will be finalised. Bavarian Nordic A/S’ subsidiary in Germany will continue to operate under the name “Bavarian Nordic GmbH”, with its registered office in Munich and with a department in Berlin.



Copenhagen, 26 October 2004

Asger Aamund, Chairman of the Board