Bavarian Nordic. Strategic Ebola deal fills 2015 revenue gap. Janssen deal terms: Forging ahead to combat Ebola

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1 Bavarian Nordic Strategic Ebola deal fills 2015 revenue gap Q3 results and J&J deal Pharma & biotech Bavarian Nordic s $187m exclusive global licensing and supply deal for its development Ebola vaccine MVA-BN Filovirus with Janssen (part of J&J) secures its financial position and provides large pharma validation for the core MVA-BN vaccine platform. Deal terms include a $43m (DKK251m) equity investment (giving J&J a 4.9% stake) and various licence/supply payments that will boost FY15 revenues, easing the company through an anticipated gap in US government Imvamune orders. End-FY14 cash preparedness guidance is raised to DKK1,000m from DKK600m: revenue guidance is maintained (recognition will occur in 2015). Factoring deal economics into our company valuation increases it to DKK5.3bn. Year end Revenue (DKKm) PBT* (DKKm) EPS* (DKK) DPS (DKK) 12/12 1,017 (49) (0.9) 0.0 N/A N/A 12/13 1, N/A N/A 12/14e 1, N/A N/A 12/15e 1, N/A N/A Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. P/E (x) Yield (%) Price Market cap Net cash (DKKm) September 2014 and J&J pro forma 4 December 2014 DKK179 DKK4,953m DKK5.97/US$ Shares in issue 27.67m Free float 93% Code Primary exchange Secondary exchange Share price performance BAVA; BVNRY (ADR) NASDAQ OMX Copenhagen OTC Pink (ADR) Janssen deal terms: Forging ahead to combat Ebola The three-part deal includes a $43m (DKK251m) equity investment, an exclusive licensing agreement for MVA-BN Filovirus ($25m upfront, $20m in development and regulatory milestones and undisclosed royalties on ex-africa sales), and a $99.3m supply agreement for up to one million doses of vaccine (covering full development and scale-up funding). These doses will be used for clinical trials of a prime boost vaccine in combination with J&J s AdVac technology (Phase I to start in 2015) and emergency use for the current West Africa Ebola outbreak. In a deal extension, J&J also has an exclusive collaboration option to evaluate MVA-BN for another three undisclosed infectious disease targets. Financials: Deal results in P&L & cash upgrade 9m14 revenue of DKK676m predominantly relates to US Imvamune deliveries. Delivery of the remaining doses under the $118m US Imvamune option exercised in September will be completed in Q414 enabling revenue guidance (DKK1,200m) to be met. The FY14 cash preparedness expectation is increased to DKK1,000m (vs DKK600m) reflecting the impact of the Janssen deal, and including a c DKK150m reduction in debt and credit facilities. Recognition of already received/anticipated cash flows from Janssen substantially upgrades our FY15 P&L forecasts. Valuation: DKK5.3bn or DKK191/share Including deal economics for MVA-BN Filovirus in our sum-of-the parts model increases our valuation to DKK5.3bn or DKK191/share (previously DKK3.5bn or DKK135 per share). We now include receipt of the $25m upfront and impact of the J&J equity investment in our FY14e cash forecasts, as well as un-risk-weighted supply and licensing payments and risk-weighted future milestones in our DCF. % 1m 3m 12m Abs (0.8) Rel (local) (3.5) week high/low DKK194 DKK82 Business description Bavarian Nordic is a Danish biotech focused on developing and manufacturing novel cancer immunotherapies and vaccines for infectious diseases. Its lead products are Prostvac (prostate cancer) and Imvamune (smallpox). Next events CV-301 development plan finalisation Completion of enrolment in Prostvac PROSPECT study Start of Imvamune Phase III noninferiority trial vs ACAM2000 H214 H214 H214 FY14 results 11 March 2015 Analysts Lala Gregorek +44 (0) Dr Philippa Gardner +44 (0) healthcare@edisongroup.com Edison profile page Bavarian Nordic is a research client of Edison Investment Research Limited

2 Update: Strategic Ebola deal secured Bavarian Nordic s exclusive $187m licensing deal with Janssen (part of Johnson & Johnson) for its multivalent MVA-BN Filovirus vaccine (which covers Ebola Zaire, Ebola Sudan and Marburg viruses) provides external large pharma validation for its core proprietary MVA-BN platform and a strategic $43m equity investment. Additionally, the attractive deal economics (summarised in Exhibit 1) ensure that Bavarian Nordic s FY15 financials will be robust in what otherwise would have been a transition year given the anticipated gap in US government Imvamune orders prior to availability of the freeze-dried formulation in Exhibit 1: Janssen MVA-BN Filovirus deal structure Component Value Commentary Licence agreement $45m Janssen has exclusive licence to MVA-BN Filovirus vaccine and will cover development costs. Bavarian Nordic has received a $25m upfront payment (which will be recognised over 18 months) and is eligible for up to $20m in development and regulatory milestones. Also undisclosed royalty on future sales outside of Africa. Supply agreement $99.3m Bavarian Nordic to manufacture and supply >1 million doses (additional doses would cost more). $70.8m upfront (50% received in Q414 and 50% in Q115); with the $28.5m balance to be pro rated with deliveries during Funding also covers full cost of development and manufacturing scale-up. Equity investment $43m Direct placement of 1,331,984 new shares at DKK per share. Gross proceeds raised were DKK251m ($43m). Source: Edison Investment Research; Bavarian Nordic The deal has improved Bavarian Nordic s cash position, with FY14 guidance for cash preparedness of DKK1,000m, which gives the company added flexibility in progressing the rest of its development pipeline. Further guidance on pipeline plans and progress including updates on the potential for combination trials with Prostvac, the start of MVA-BN RSV clinical development and confirmation of the development strategy for CV-301 is expected over the coming months. Exhibit 2 outlines key newsflow for the remainder of 2014 and Exhibit 2: Key anticipated news flow Q414 and 2015 Programme Timing Comment Imvamune Q414 Delivery of second (final) portion ($118m) of contract with US government. End-2014 Initiation of Phase III open-label non-inferiority trial vs ACAM Completion of transfer of validated freeze-dried manufacturing process to commercial scale facility 2015 Completion of Phase II trial of freeze-dried version to support pre-emergency Use Authorisation submission (for stockpiling) Potential orders from European governments. Prostvac End-2014 Completion of enrolment into PROSPECT Phase III study Advance clinical studies in combination with checkpoint inhibitors Finalisation of validation of commercial manufacturing and preparation of launch material Interim analyses of PROSPECT study: no company guidance provided on timing. First analysis not expected until late 2014 at earliest, given recruitment completion by end First analysis a futility check; survival data possible at later analyses. CV-301 Q414 Finalisation of development plan for prioritised indication(s) (colorectal cancer); potential to secure external funding. MVA-BN RSV 2015 Submission of IND application; followed by Phase I initiation. MVA-BN Ebola 2015 Initiation of Phase I study of a prime-boost vaccine regimen (MVA-BN Filo + Janssen s Advac) Manufacturing and delivery of >1 million doses of MVA-BN Filo vaccine to Janssen. Financials 11 March 2015 FY14 annual report Source: Edison Investment Research; Bavarian Nordic MVA-BN Filovirus: Status to date and plans for 2015 Bavarian Nordic has collaborated with the US National Institute of Allergy and Infectious Diseases (NIAID) for the development of a multivalent vaccine against Ebola and Marburg viruses since November 2010, when it was awarded an advanced development contract worth up to $17.9m over five years. As part of this, a prime boost regime of a combination vaccine of MVA-BN Filovirus with Janssen s AdVac technology has shown 100% protection against Ebola Zaire in preclinical studies. In December 2014, it was announced that the first healthy volunteer has been dosed with MVA-BN Filo in a NIADH/GSK Phase I safety/immunogenicity trial for a different heterologous prime-boost Bavarian Nordic 4 December

3 regimen with GSK s monovalent cad3-ebo Z vaccine. 30 of the 60-patients being enrolled will receive a dose of MVA-BN Filo. Preliminary results are expected in H115. Janssen is now preparing to initiate a safety and immunogenicity trial of the MVA-BN Filo/AdVac vaccine regimen by early January 2015, which will be followed by three clinical studies (US, Europe and Africa) in the next six months. In parallel, discussions are advancing with the relevant authorities to make this vaccine available for emergency use in West Africa. Bavarian Nordic has one batch of MVA-BN Filo already manufactured to support Phase I trials, and has started process scale-up and development to facilitate the manufacture of additional large-scale batches for Janssen. The full cost is covered by the supply agreement and delivery of one million doses of MVA-BN Filo to Janssen is targeted in These doses will be used in the planned clinical programme and for emergency use post-phase I; 250,000 doses are expected to be released for use in clinical trials by May A Johnson and Johnson testimony to the US Senate Appropriations Committee in November 2014 also indicated that a further two to four million doses of vaccine could be produced by the end of We note that manufacture and supply of these additional doses is not covered under the current contract with Bavarian Nordic, hence, there may be scope for a contract extension in the near term. Sensitivities Bavarian Nordic is subject to the usual biotech risks (clinical, regulatory, partnering, financing, commercialisation), with key stock-specific sensitivities relating to main value drivers Prostvac and Imvamune. An important near-term catalyst is the outcome of the Phase III PROSPECT trial (including the potential of an early stop for efficacy following planned interim analysis); this may provide clarity on the timing and structure of a Prostvac partnership. Potential combination data with other novel approaches such as enzalutamide and checkpoint inhibitors will also assist in assessing Prostvac s overall commercial potential (penetration and pricing) in a dynamic prostate cancer market. Current revenues are generated from US government contracts for Imvamune; hence there is reliance on government spending (allocations to biodefence, availability of future funding). Continued supply is assumed, but timing is unknown. European orders are unlikely to be forthcoming until preparedness programmes (stockpiling) are outlined and finalised. Valuation We have included the Janssen deal economics for MVA-BN Filo in our updated sum-of-the-parts valuation model of Bavarian Nordic, which now stands at DKK5.3bn or DKK191/share (previously DKK3.5bn or DKK135/share). The change reflects the fact that we include the supply agreements and licence agreement (with future milestones being risk weighted) and the impact of the receipt of the $25m upfront and equity investment on FY14e cash forecasts. We have also rolled forward our forecasts to reflect the passage of time, updated the FX rate to DKK5.97/US$ (DKK5.66/US$ previously) and the number of shares outstanding following recent warrant exercise. The components of our valuation are shown in Exhibit 3 overleaf. The main catalysts that could trigger a re-rating of the shares are: partnership deals for Prostvac and CV-301 in CRC; readout of PROSPECT (2016) and results of potential interim analyses (2015); Imvamune/Imvanex: first confirmed European orders; Phase III readout and FDA filing; further US orders (for freeze-dried formulation); and progress of other pipeline assets (in particular, cancer immunotherapy and infectious disease assets or indications, which are currently not included in our valuation). For example, other Bavarian Nordic 4 December

4 Exhibit 3: Valuation of Bavarian Nordic Value driver indications for CV-301, the MVA-BN programmes for RSV and outcome of the evaluation of three assets under the Janssen MVA-BN expanded collaboration. Value (DKKm) Value per share (DKK) Notes Prostvac (CRPC) For CRPC. Launch date: Peak sales: $1.3bn (global, assuming a price of $50,000 pa). Risk 4, adjustment: 60% (reflecting Phase II data and benign safety profile). Effective royalty: 40%. CV-301 (mcrc) For mcrc. Launch date: Peak sales: $865m (global, assuming a price of $50,000 pa). Risk adjustment: 25%. Royalty: 20%. Imvamune US Assumes deliveries under 2013 contract are completed in 2014, and subsequent replacement contract(s) of the freeze-dried formulation up to 20m doses are delivered Risk adjustment for new 1, contracts: 70%. Price per dose: $28.5 (average under 2013 contract). Imvamex Assumes European government contracts of 12m doses secured for delivery in Risk adjustment: 25%. Average price per dose: $25 (discount to US pricing). Imvamune Canada Assumes delivery of 500k doses (total delivery potential if future options exercised under August Canadian government contracts August 2014). Average price per dose: $25 (discount to US pricing). MVA-BN FiloVirus (J&J) Janssen deal: includes recognition of licence and supply payments in 2015, with up to $20m in future risk-adjusted development milestones. R&D (802) (29.0) Admin (660) (23.9) Tax (1,040) (37.6) CAPEX (89) (3.2) Net cash 1, Edison FY14e estimate (includes cash, investments and financial liabilities). Total 5, Source: Edison Investment Research, Bavarian Nordic. Note: DCF out to 2025; WACC of 12.5%; DKK5.97/US$. Financials Bavarian Nordic s Q314 results confirmed 9m14 revenues of DKK676m (9m13: DKK875m) solely related to the infectious disease division (specifically delivery of Imvamune and development and contract work under US government contracts). Year to date, 3.6 million doses of Imvamune have been delivered to the US National Stockpile, with one million of these during Q3. Delivery of the remaining doses under the $118m US Imvamune option exercised in September will be completed in Q414. The contribution margin from Imvamune for FY14 is expected to be in line with FY13. R&D costs (connected to the ongoing Phase III PROSPECT trial of Prostvac and Phase III Imvamune lot consistency study) declined to DKK314m (9m13: DKK385m). This figure excludes capitalised Imvamune development costs of DKK39.4m (9m13: DKK83.7m) and contract expenses of DKK51.4m included within COGS (vs DKK73.6m in 9m13), but does include DKK25.4m (DKK134.2m) of amortisation/expensing of the Imvamune development project in progress. General and administrative costs of DKK154m were up on 9m13 (DKK143m), due to increased commercial activities following Imvamune/Imvanex approval in Canada and Europe. Pre-tax loss for the period was DKK85m (9m13: loss of DKK18m). Bavarian Nordic ended Q314 with cash preparedness of DKK356m, of which DKK303m was gross cash and equivalents, with the remainder attributed to the undrawn DKK120m credit line. Full year FY14 guidance is presented, along with Edison s estimates in Exhibit 4. The only change to financial guidance vs that confirmed at Q214 is an increase in cash preparedness to DKK1,000m vs DKK600m previously. This reflects the impact of the Janssen deal, and also includes a reduction in debt and credit facilities of c DKK150m. Bavarian Nordic 4 December

5 Exhibit 4: Financial guidance and Edison estimates for 2014 (DKKm) Measure Guidance Edison estimates Notes Revenue 1,200 1,263 Deliver and recognise 6.5m Imvamune doses to US National Stockpile (2013 contract). EBIT Break even (0.5) The infectious diseases division is expected to deliver EBIT of DKK400m, which will be offset by a DKK400m EBIT loss from the cancer immunotherapy division. Cash preparedness 1,000 1,063 Includes cash and equivalents. R&D spend NB: This figure includes the following item (stripped out in our model). Contract expenses Research services under US government Imvamune contracts. Included in COGS. Expensing of Imvamune development project in progress Amortisation of Imvamune intangible (expensed through the P&L) as doses are delivered under the US government contracts. Source: Edison Investment Research, Bavarian Nordic. Note: Estimate changes are largely driven by the updated FX rate of DKK5.97/US$, with the exception of cash preparedness which has been augmented by the Janssen deal. We had previously highlighted that 2015 would be a transition year for Bavarian Nordic given the anticipated gap in US government Imvamune orders before the freeze-dried formulation becomes available in Management remains in discussions about ways to alleviate the financial impact of this and to secure further Imvamune supply contracts. However, with the recognition of already received and anticipated cash flows from Janssen under the MVA-BN Filovirus licence and supply agreement during 2015, we have substantially upgraded our P&L forecasts for FY15. Changes to our FY14 and FY15 numbers are summarised in Exhibit 5, with the full financial summary presented overleaf in Exhibit 6. Exhibit 5: Changes to estimates Revenue (DKKm) PBT (DKKm) EPS (DKK) Old New % chg. Old New % chg. Old New % chg. 2014e 1,233 1, e 645 1, (109) 183 (0.4) 0.6 Source: Edison Investment Research Bavarian Nordic 4 December

6 Exhibit 6: Financial summary DKKm e 2015e Year end 31 December IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 1,017 1,213 1,263 1,052 Cost of Sales (514) (485) (565) (392) Gross Profit EBITDA (32) Operating Profit (before GW and except) (32) Intangible Amortisation 0 (148) (49) (31) Other Exceptionals Operating Profit (32) 33 (0) 143 Net Interest (17) (27) 34 9 Other Profit Before Tax (norm) (49) Profit Before Tax (FRS 3) (49) Tax (191) (53) 7 (11) Deferred tax Profit After Tax (norm) (240) Profit After Tax (FRS 3) (240) (47) Average Number of Shares Outstanding (m) EPS - normalised (ore) (92.0) EPS - (IFRS) (ore) (92.0) (17.9) Dividend per share (ore) Gross Margin (%) EBITDA Margin (%) (3.1) Operating Margin (before GW and except.) (%) (3.1) BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Other Current Assets ,515 1,342 Stocks Cash ,075 1,008 Debtors Other Current Liabilities (485) (389) (459) (300) Creditors (433) (381) (456) (297) Short term borrowings (52) (8) (2) (2) Long Term Liabilities (54) (87) (366) (140) Long term borrowings (37) (72) (15) (15) Other long term liabilities (17) (15) (351) (125) Net Assets 1, ,257 1,398 CASH FLOW Operating Cash Flow (36) Net Interest (9) (11) 0 9 Tax (3) (2) (4) (12) Capex (45) (155) (101) (28) Acquisitions/disposals Financing Dividends Other (1) Net Cash Flow (26) (7) 609 (67) Opening net debt/(cash) (485) (461) (452) (1,058) HP finance leases initiated Exchange rate movements 0 0 (0) 0 Other 1 (2) (2) 0 Closing net debt/(cash) (461) (452) (1,058) (991) Source: Edison Investment Research; company accounts Bavarian Nordic 4 December

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