Bavarian Nordic — Update 26 April 2016

Bavarian Nordic has raised DKK665m from new and existing investors in a private offering and, although a future NASDAQ IPO is still a possibility longer term, this private placement leaves the company well funded for an eventful year. In fact, the strategic rationale for a US IPO remains intact as US investors have participated in the follow-on offering. With these funds, Bavarian Nordic plans to expedite the development of two key programmes: MVA-BN RSV and CV-301, along with investment in manufacturing capabilities for clinical studies and commercial-scale production, in particular for future government orders of Imvamune. This is part of the company’s strategy to create long-term value.

As mentioned, proceeds from the offering will be used in the further development of clinical-stage candidates MVA-BN RSV and CV-301. With respect to the RSV (respiratory syncytial virus) programme, results from a Phase I trial in healthy volunteers are expected by mid-2016, with a potential initiation of Phase II testing in the second half of the year. The RSV vaccine represents a significant commercial opportunity as RSV infection causes more than 177,000 hospitalisations in the elderly every year, plus an additional 100,000 in children. Further market information can be found in our update note published in August 2015. The fact that this programme uses the same vector as Imvamune, which has previously reported no safety issues, gives confidence in the successful completion of the Phase I trial and advancement to Phase II studies.

With regard to the CV-301 cancer immunotherapy, Bavarian Nordic will use the funds to study the product in three cancer indications. Non-small cell lung cancer (NSCLC) has been prioritised as the lead indication and a Phase II trial of CV-301 in combination with PD-1 (programmed cell death-1) inhibitor nivolumab will start in H216. Recent advances in immuno-oncology have highlighted the potential to combine CV-301 with a PD-1 checkpoint inhibitor to improve efficacy. There are a large number of lung cancer patients who could benefit from a CV-301/checkpoint inhibitor approach and potential for trials based on shorter endpoints such as overall response rate and progression-free survival to rapidly establish proof-of-concept. Other studies in bladder and colorectal cancer are slated to start in H117, although the design of all three studies is still to be confirmed.

Other recent news includes publication of positive Phase I data of the Ebola vaccine in the Journal of the American Medical Association (JAMA).1 This programme is partnered with Janssen and is part of a global private-public partnership in which Bavarian Nordic’s MVA-BN technology is used as part of a prime boost regimen with Janssen’s AdVac to enhance immune response. In the trial, 21 days after the boost with MVA-BN, 100% of participants (n=87) generated Ebola-specific antibodies with no serious adverse events reported, and at eight-month follow-up, all participants were producing antibodies to Ebola.

However, the main value driver is the prostate cancer vaccine Prostvac. The first interim analysis (at 40% of the number of events for final overall survival analysis, or 214 events) of the three event-driven analyses has already occurred; the second (at 60% or 321 events) is likely to happen in H216 and the final one (at 80% or 427 events) at the end of 2016/early 2017 ahead of final data readout (534 events) in 2017. The programme is partnered with Bristol-Myers Squibb (BMS) in an option deal that could be worth up to $1bn depending on survival data, regulatory milestones and sales performance. In addition, BMS will study Prostvac in two Phase II trials in combination with its own checkpoint inhibitors, ipilimumab and nivolumab.

Prostvac is undergoing several Phase II studies in collaboration with the US National Cancer Institute (NCI), two of which will read out this year: a combination trial with enzalutamide (Xtandi, Medivation/Astellas) in early prostate cancer and a monotherapy trial as neoadjuvant in localised prostate cancer. A comprehensive overview of Bavarian’s clinical cancer programmes will be provided at ASCO 2016 on 4 June at an investor and analyst reception.

Our updated Bavarian Nordic sum-of-the parts valuation stands at DKK12.97bn or DKK421/share (previously DKK12.04bn or DKK430/share). We have rolled our valuation forward in time and updated the number of shares outstanding to 30.8m to include the new shares from the capital increase. Other specific changes to our valuation are the inclusion of two additional indications for CV-301, NSCLC and bladder cancer, in addition to mCRC, now that the company has a clear development path for the product and the funds to execute it. We continue to assume that Bavarian Nordic will out-license this programme for commercialisation. We have updated our end-FY16 forecast cash to include the net proceeds from the private offering and FX rates, which reflect the strengthening of the Danish kroner (now US$/DKK6.56 vs DKK6.62 previously). We summarise the components of our valuation in Exhibit 1. All product valuations represent the present value of future cash flows forecast for each product, risk-adjusted where appropriate, and then taxed.

At this stage, we do not include a contribution for MVA-BN RSV, as it is in Phase I and assessing its potential, in the absence of any clinical data, is challenging. However, as highlighted in our previous update note, there are no approved RSV vaccines and this could be a significant opportunity, hence it represents pure upside potential to our valuation. For a similar reason we do not include MVA-BN Brachyury; Phase I data are available, although this immunotherapy has broad potential and the cancer types in which further development is planned have not yet been disclosed.

Other sources of potential upside come from additional income for MVA-BN Filovirus and MVA-BN HPV from existing deals with J&J; our valuation includes the upfront payment of DKK59m from the HPV deal, but does not capture additional milestones or any future royalty contributions, or the potential for any contract extensions, all of which are possible.

The successful closing of the DKK655m private placement provides greater financial resources to advance the development of MVA-BN RSV and CV-301. We await further disclosures from the company regarding trial design and timelines, which will inform our assumptions for future commercial potential (and future R&D spending), as well as our assessment of the economics of downstream licensing deals. We will update our valuation when this information is forthcoming.

We have updated our model with the FY15 results and 2016 guidance, while we await Q116 results on 13 May. The company has guided that it expects 2016 revenues to be c DKK1bn, most of it in the second half of the year, and break-even EBIT. Most of the revenues (DKK 750m) will come from US government orders of Imvamune, whereas a quarter will come from R&D contracts along with the Ebola/Marburg partnership with Janssen. Bavarian Nordic also expects to incur R&D costs of DKK580m, of which DKK475m will be incurred in the P&L. We have also updated our model to reflect the recent cash raise.

According to FY15 results, Bavarian Nordic had cash and cash equivalents of DKK1bn, which increase to DKK1.5bn with the addition of readily available credit lines. Of the total revenues of DKK1bn, most came from the sale of bulk drug substance for MVA-BN Filo to Janssen, worth DKK762m, and the rest from the sale of Imvamune to the US and Canadian governments (DKK78m) and ongoing research and development contracts (DKK181m).

Bavarian Nordic received DKK631m prepayments from customers in 2015, of which DKK579m was recognised as revenue. These payments included two milestone payments from Janssen from the Eblola programme from 2014 and 2015 and US government orders of Imvamune from 2013 and 2014. Therefore, current deferred revenue on the balance sheet is DKK405m vs DKK375m at end 2014.