Bavarian Nordic A/S – Interim Report for the period 1 January to 30 September 2007

Commercial organisation strengthened

• Bavarian Nordic has established a new commercial function in order to strengthen the company’s commercial activities and increase the sales promotion for its third generation smallpox vaccine, IMVAMUNE®, and future vaccines including HIV and cancer vaccines. To lead this new commercial function, the company has appointed Nicolai Buhl Andersen as Executive Vice President Commercial Affairs.

IMVAMUNE® third generation smallpox vaccine

• The clinical development is proceeding as planned with Phase III studies expected to be initiated in 2008. Before year-end Bavarian Nordic expects to invoice two additional milestone payments each of USD 25 million as part of the RFP-3 contract. With the already received advance payment, the total to be invoiced amount adds up to USD 100 million in 2007.

Refocused HIV strategy

• Bavarian Nordic announces Phase II data from the MVA HIV nef programme, showing proof of concept for the MVA technology’s ability to control HIV replication.
  
  
• The present data indicate that a broader immune response is desirable in terms of optimizing the control of the HIV replication. 
  
  
• As a result of the recommendations by international Scientific Advisory Boards, the MVA HIV nef data will be incorporated into the MVA-BN® HIV multiantigen approach, as this provides an excellent opportunity to generate a broad immune response. Thus the company will focus on its MVA-BN® HIV multiantigen programme going forward.
  
  
• A Phase I/II trial, investigating the safety and immunogenicity of the MVA-BN®HIV multiantigen in HIV infected patients will be initiated during first half of 2008

Cancer Immunotherapy

• The company’s two programmes in cancer immunotherapy are proceeding as planned. The company expects to report the first clinical safety and immunogenicity data from its breast cancer programme in first half of 2008, where also Phase I studies with the prostate cancer vaccine candidate are expected to be initiated.

Measles vaccine enters clinical phase

• The company has initiated Phase I clinical studies with its vaccine candidate against measles.

Full year results are maintained

• During the first nine months of 2007, Bavarian Nordic realised revenues of DKK 64.0 million and a loss before tax of DKK 218.9 million. Based on the planned clinical activities and related milestone payments, the expectations for the full year 2007 result are as previously stated at a loss before tax of approximately DKK 50 million despite lower revenue of approx. DKK 350 million compared to the previously guided revenue at DKK 380 million. This is due to delays in the RFP-2 contract and the revenue is now expected in 2008.

Commenting on the interim report, Bavarian Nordic’s CEO, Anders Hedegaard said: “Third quarter has been an exciting and very active period for Bavarian Nordic. The positive development in the RFP contracts with the U.S. government creates a solid foundation for the further development of our pipeline. With the initiation of Phase I with our measles vaccine candidate we have taken an important step into the development of childhood vaccines, and furthermore we have taken another important step towards an even more focused strategy for HIV vaccines.”

Key highlights after the close of the fiscal period (1 October – 6 November 2007)

U.S.government extends RFP-2 contract with Bavarian Nordic 

• The U.S. government has extended the RFP-2 contract that was awarded to Bavarian Nordic in 2004. Within the scope of the extension, Bavarian Nordic will initiate a larger Phase II study with IMVAMUNE® in people diagnosed with atopic dermatitis. The contract extension has a value of USD 15 million. The additional clinical studies will be performed within the contract period, which has been extended until 2010. However the main part of the revenue is expected in the end of 2008 and beginning of 2009.

Advance payment of USD 50 million from RFP-3 contract

• Bavarian Nordic has received an advance payment of USD 50 million as allowed under the RFP-3 contract to manufacture and deliver 20 million doses of the company’s, IMVAMUNE® smallpox vaccine. Permission has been granted because the company has fulfilled a number of significant milestones in the contract.

Report for the period (1 January – 30 September 2007, un-audited)

Financial review
Revenue for the period was DKK 64.0 million (as of 30 September 2006: DKK 141.8 million.). The revenue primarily derives from the ongoing contracts with the U.S. government (RFP-1 and RFP-2 contracts). The lower revenue compared to 2006 is due to alignment of clinical trials under the RFP-2 contract in co-operation with the U.S. authorities to the RFP-3 contract, so that the efficiency of the clinical trials is improved in relation to the defined target groups. The majority of the deferred revenue is expected to be realised during 2008.

Income before tax was a loss of DKK 218.9 million for the period (as of 30 September 2006: loss of DKK 145.2 million).

Research and development costs totalled DKK 174.8 million (as of 30 September 2006: DKK 86.8 million). The increase in costs is primarily due to costs regarding optimization and testing of the Kvistgaard production facility.

The Group’s sales and administrative expenses decreased to DKK 67.1 million (as of 30 September 2006: DKK 97.7 million), which is significantly lower than in the same period in the previous year. This is primarily attributed to lower legal fees in connection to lawsuits and patents.

The Group’s net financial income for the period increased to DKK 8.1 million (as of 30 September 2006: DKK 0.7 million). The increase is due to the improvement of the net liquidity of the Group.

Following the award of the RFP-3 contract, the Group has hedged USD 300 million by Forward Rate Agreements (FRA). As of 30 September 2007 the FRA had a value of DKK 83.2 million, which has been added to the equity of the company.

The net free liquidity of the Group was DKK 492.0 million as of 30 September 2007 (30.09.2006: DKK 267.3 million). The improvement of liquidity derives from the increase of share capital of the company in March 2007 that generated net proceeds of DKK 443.6 million, and the increase of the share capital following the exercise of the warrant programme by the Board, management and employees in May 2007, which generated net proceeds of DKK 47.7 million. At year-end the net free liquidity is expected to amount to approx. DKK 900 million.

The company’s expectations for the full year result are maintained at a loss before tax of approx. DKK 50 million, despite lower revenue of approx. DKK 350 million compared to the previously guided revenue at DKK 380 million. This is due to delays in the RFP-2 contract and the revenue is now expected in 2008. Full year result can be maintained due to non-recurring savings and some activities postponed.

Business development

Strengthening the commercial organisation
During the last few years Bavarian Nordic has focused its resources on obtaining the RFP-3 contract with the U.S. government. The production facility in Kvistgaard is completed, and the company has advanced the clinical development of the IMVAMUNE® smallpox vaccine. With a strong patent position on the company’s MVA technology, Bavarian Nordic is ready to fully exploit the commercial options worldwide. The company sees a great potential in a market for IMVAMUNE® outside the U.S. In order to maximise the potential of these markets, Bavarian Nordic is focusing its efforts on building relationships with potential customers and partners.

As a consequence, Bavarian Nordic has established a new separate commercial function in order to strengthen the company’s commercial activities and increase the sales promotion for its third generation smallpox vaccine, IMVAMUNE® and future vaccines, including HIV and cancer vaccines. Moreover, the commercial function will ensure that the company’s research and development is increasingly commercialised and that necessary market knowledge at an early stage is integrated in the decision-making processes within clinical development.

Nicolai Buhl Andersen has been appointed as Executive Vice President Commercial Affairs to lead the commercial function and will join the company on 16 November 2007. He will be a member of the Corporate Management group and report to Anders Hedegaard, CEO. Furthermore a number of other people will be employed to strengthen the sales and marketing work.

Nicolai Buhl Andersen (born 1969) comes from Coloplast where he currently holds the position as Senior Vice President, Commercial Excellence. He has more than eight years of international experience in leading positions in the field of sales and marketing from Novo Nordisk. He holds a M.Sc. in Economics and Business Administration from Copenhagen Business School.

Research and development

IMVAMUNE®- third generation smallpox vaccine
Clinical studies with IMVAMUNE® are proceeding as planned and will be used to support an Emergency Use Authorization (EUA) in 2008.

The RFP-3 contract
Bavarian Nordic has fulfilled a number of significant milestones and received an advance payment of USD 50 million as allowed under the RFP-3 contract. The income will be recognised as revenue in the financial statements as the vaccines are delivered. The payment is dependent on Bavarian Nordic’s continued fulfilment of the conditions of the contract.

The company expects to receive two additional milestone payments in 2007, each of USD 25 million for the fulfilment of other significant milestones.

The RFP-2 contract
The U.S. government has extended the RFP-2 contract that was awarded to Bavarian Nordic in 2004. The contract extension has a value of USD 15 million that will be used to support a larger Phase II study investigating the safety and immunogenicity of IMVAMUNE® in people diagnosed with atopic dermatitis (AD). This is an important population, because people with a history of or active AD are not allowed to receive traditional smallpox vaccines, due to the problematic safety profile of these vaccines.

The additional clinical studies will be performed within the contract period, which has been extended until 2010. However the main part of the revenue is expected in the end of 2008 and beginning of 2009.

The original RFP-2 contract included a Phase II study with IMVAMUNE® in persons diagnosed with AD. However the need for more clinical safety data in this population has increased due to requirements from the U.S. Food and Drug Administration (FDA) to generate data to support an Emergency Use Authorization (EUA) for IMVAMUNE®.

HIV vaccines
Bavarian Nordic announces Phase II data from the MVA HIV nef programme showing proof of concept for the MVA technology’s ability to control HIV replication in certain patients, thus confirming previous positive data. The data also indicates that a successful product should consist of more antigens than just Nef in order to generate a broader immune response. As a result of recommendations by several Scientific Advisory Boards after evaluating the data, Bavarian Nordic has refocused its strategy for the development of HIV vaccines. Data from MVA HIV nef will be incorporated into the MVA-BN® HIV multiantigen programme which has the potential to meet the success criteria for an effective HIV vaccine.

MVA HIV nef
Bavarian Nordichas completed the analysis of the Phase II study in 77 HIV infected subjects evaluating the safety and efficacy of MVA HIV nef. This Phase II study evaluated the immune responses induced using two doses of the MVA HIV nef and following the interruption of antiviral therapy (HAART), the control of HIV replication (efficacy) was compared to HIV infected subjects only vaccinated with IMVAMUNE® as a control.

The subjects vaccinated with the higher dose of MVA HIV nef controlled the HIV replication better than those vaccinated with the lower dose or with IMVAMUNE® only. This was demonstrated by a significantly lower level of HIV in the MVA HIV nef vaccinated group. This ability to better control the replication of HIV in the absence of antiviral drugs was associated with the induction of an immune response to Nef in the majority of the subjects (62%), compared to only 44% with the lower dose MVA HIV nef. Interestingly, the immune responses induced by the lower dose of MVA HIV nef were actually stronger, compared to the response induced by the higher dose of the vaccine. However, the lower dose of MVA HIV nef only had a limited effect on controlling HIV replication in the absence of HAART. The better efficacy of the higher dose MVA HIV nef was presumably associated with a broader immune response to Nef i.e. the induced T cell response recognised more regions of the Nef protein.

Data shows proof of concept for the MVA technology regarding control of HIV replication
The data clearly represent a proof of concept for the MVA technology in the treatment of HIV. Two independent HIV studies have clearly demonstrated that the MVA HIV nef is immunogenic and induces an effective T cell response to Nef. Vaccination with MVA HIV nef was shown to be able to control the HIV replication in the majority of the subjects that had stopped antiviral therapy.

Scientific experts assesses the technology
The MVA HIV nef data have been discussed with several International Scientific Boards composed of scientific and regulatory advisors, together with HIV clinicians. These Boards all agreed that the data were promising and provide proof of concept for the MVA-BN® vaccine vector technology.

Broader immune response needed
The present data clearly indicate that a broader immune response may be more important than the magnitude of the response in controlling HIV replication. The members of the Scientific Boards all recommended building upon the promising data generated with MVA HIV nef and to incorporate this into the MVA-BN® HIV multiantigen approach, as this provided an excellent opportunity to utilise the MVA-BN® technology to generate a broad and effective immune response against HIV. As a result the company will focus on its MVA-BN® HIV multiantigen programme going forward.

MVA-BN® HIV multiantigen
MVA-BN® HIV multiantigenis both a prophylactic and therapeutic vaccine candidate expressing eight whole or truncated antigens from the HIV virus (including Nef) with the aim of eliciting a very broad immune response against the HIV virus.

Following successful pre-IND discussions with the FDA, the Investigational New Drug Application(IND) to support clinical development will be filed later this year. A Phase I/II trial, investigating the safety and immunogenicity of the MVA-BN®HIV multiantigenin HIV infected patients will be initiated during first half of 2008. This trial will support a larger Phase II efficacy study, planned for 2009.

MVA-BN® HIV polytope
Three clinical studies investigating the safety and immunogenicity of MVA-BN® HIV polytope in healthy and HIV-infected subjects are ongoing. Once these studies have been finalized, the company will not perform further clinical studies with the current MVA-BN® HIV polytope construct.

Measles vaccine
Measles vaccines currently on the market are not optimal for use in children less than one year of age, during which most infections result in a high morbidity and mortality. Significant reductions in childhood mortality could be achieved if safe and more effective vaccines could be developed for use in this susceptible age group. Preclinical studies have revealed that MVA-BN® is not only safe, but immunogenic in newborn animals. The MVA-BN®measles vaccine will be the first MVA-BN® based childhood vaccine to evaluate the potential of this technology to induce good immune responses in children under the age of 1 year old. This process will start with a Phase I study in adults to demonstrate safety, before evaluating the vaccine in children.

Regulatory approval has been received and the Phase I study has been initiated in South Africa. The study will evaluate the safety and immunogenicity of the vaccine in 30 healthy subjects. A clinical trial to evaluate the safety and efficacy in children is currently in the planning phase.

Cancer Immunotherapy
Bavarian Nordic’s U.S. based subsidiary, BN ImmunoTherapeutics, is developing vaccines against cancer. The company’s two ongoing programmes are proceeding as planned.

Breast cancer
MVA-BN®-HER2 is a therapeutic vaccine for treatment of patients with breast cancer. Currently patients with Her-2 positive, metastatic breast cancer are being enrolled in two clinical Phase I/II studies performed in three countries. The first study is ongoing in California, USA. The second study is enrolling patients in multiple centers in Serbia and Poland. This study is accessing patient populations that have not received other treatment for metastatic breast cancer, e.g. Herceptin®. The first patients have been vaccinated with no significant adverse events reported. Initial immunogenicity data are expected in first half of 2008.

Prostate cancer
BN ImmunoTherapeutics is also developing a therapeutic vaccine for treatment of patients with prostate cancer. Preclinical studies have yielded results that are supportive to proceeding to clinical studies. A pre-IND meeting was held with the FDA to discuss the planned content of the IND application for the initiation of clinical studies in USA. The company expects to receive approval of the IND before year-end and clinical studies in patients with refractory prostate cancer are planned for first half of 2008.

Development pipeline

* Sold to governments as a vaccine under development

Bavarian Nordic’s two projects in tropical diseases, dengue fever and Japanese encephalitis, have been temporarily discontinued pending discussions with a potential external partner on clinical development and funding.

Organisational development

New CEO joined Bavarian Nordic in August
Anders Hedegaard took up the position as CEO on 1 August 2007. He comes from a position as member of ALK-Abelló’s Corporate Management in charge of Business Operations. Anders Hedegaard holds a M.Sc. degree in chemical engineering specialising in molecular biology. His management career includes executive positions with Aga, Foss and Novo Nordisk.

Bavarian Nordic has appointed Nicolai Buhl Andersen as Executive Vice President Commercial Affairs. He will join the company on 16 November 2007 as member of the Corporate Management group.

Legal matters

Award of warrants to the company’s management and certain employees
In accordance with the Board’s decision of 8 August the company has awarded warrants to management, certain members of management in the company and in subsidiaries and the Board of Directors.

The Board decision is made in accordance with the shareholder authorisation for the Board of Directors adopted as Article 5b of the Articles of Association. The award is made by the Board of Directors and exercise is limited by and governed by the Danish Act on Options for Employees (the Stock Option Act/aktieoptionsloven) regarding termination of employment prior to exercise of warrants. A total of 190,000 warrants are awarded for subscription of up to 190,000 shares of a nominal value of DKK 10 at a price of DKK 549. The exercise price is established as the average share price for the company’s share in July 2007 added a 15% premium. The warrants can be exercised wholly or partly in a period of 14 days commencing from the day of publication of the company’s quarterly report for the third quarter in the year of 2010 and/or in a period of 14 days commencing from the day of publication of the company’s annual results for 2010 (spring 2011).

Furthermore, the Board of Directors has decided to award warrants to Nicolai Buhl Andersen, a new member of Corporate Management as per 16 November 2007. The Board decision is made in accordance with the shareholder authorisation for the Board of Directors adopted as Article 5b of the Articles of Association. The award is part of the terms of employment for Nicolai Buhl Andersen. The award is subject to Nicolai Buhl Andersen taking up his position and exercise is limited by and governed by the Danish Act on Options for Employees regarding termination of employment prior to exercise of warrants.

A total of 10,000 warrants are awarded for subscription of up to 10,000 shares of a nominal value of DKK 10 at a price of DKK 505. The exercise price is established as the closing price of the Bavarian Nordic share on the day of execution of the employment agreement between Nicolai Buhl Andersen and Bavarian Nordic added a 15% premium. The warrants can be exercised wholly or partly in a period of 14 days commencing from the day of publication of the company’s quarterly report for the third quarter in the year of 2010 and/or in a period of 14 days commencing from the day of publication of the company’s annual results for 2010 (spring 2011).

The value of each warrant equals DKK 97 and is calculated on the Black-Scholes model with a risk-free interest rate of 4.5 per cent and on the historical volatility of the shares. The calculation is based on a market value of the share of DKK 410 per share.

The award of warrants will incur consequential amendments to the Articles of Association.

Nicolai Buhl is obliged to notify the company of transactions involving Bavarian Nordic securities in accordance with the Danish Securities Act, Section 28a.

The number of outstanding warrants in the company amount to (as of 6 November 2007):