Annual Report (ESEF) • Mar 4, 2022
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Download Source FileBAVA - 2021 Bavarian Nordic A/SPhillip Heymans Alle3DK-2900Hellerupwww.bavarian-nordic.com162711872138006JCDVYIN6INP512021-01-012021-12-312020-01-012020-12-31bavarian-nordic.combavarian-nordic.combavarian-nordic.comwww.bavarian-nordic.com/corporategovernanceÅrsrapport16271187Bavarian Nordic A/SPhilip Heymans Alle 32900 HellerupxWizard version 1.1.1099.0, by EasyX Aps. www.easyx.euRevisionspåtegningGrundlag for 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An open world through vaccines Annual Report 2021 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 2 Contents 2 Introduction 67 Consolidated financial statements 3 Forward with purpose and passion 68 Consolidated income statements 5 2021 in numbers 7 An open world through vaccines 9 From research to real-life value 10 A bold ambition supported by multiple value drivers 12 Strong progress on strategic priorities 16 Sales performance and market trends 20 A pivotal year ahead 68 Consolidated statements of comprehensive income 69 Consolidated statements of cash flow 70 Consolidated statements of financial position – Assets 71 Consolidated statements of financial position – Equity and liabilities 72 Consolidated statements of changes in equity 74 Notes 122 Financial statements of the parent company 123 Income statements 124 Statements of financial position – Assets 125 Statements of financial position – Equity and liabilities 126 Statements of changes in equity 127 Notes 23 Outlook for 2022 25 Our commitment to sustainability 28 Our strategy and business 29 Our vaccines 31 A solid foundation provides opportunities for expansion 33 Experienced leadership from global vaccine production 35 A vaccine is still needed against RSV 38 Developing a universal booster for COVID-19 142 Statement by management on the Annual Report 143 Independent auditor’s reports 42 Corporate information 43 The Bavarian Nordic share 45 Corporate governance 53 Financial review 2021 59 Management of Bavarian Nordic Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 3 Letter to our stakeholders Forward with purpose and passion In 2021, we continued to invest into the future growth of Bavarian Nordic. We made significant progress in our pipeline, where two key programs, ABNCoV2 and MVA·BN RSV, have delivered remarkable results and will move into Phase 3 this year. The commercial business delivered on our communicated guidance, however still impacted by the worldwide pandemic. More than 50% of our revenues were attributed to sales of our smallpox and Ebola vaccines that are more robust to the ongoing challenges set by the continued pandemic. Our plans for the integration of two of our life-saving vaccines, Rabipur/RabAvert and Encepur, remain on track, thus demonstrating a robust execution of our commercial strategy to provide a greater focus on supply and service to our customers. With the support of our investors and the endeavor of our employees, we have continued to set the foundations to succeed on our ambition to become one of the largest pure play vaccine companies in the world. President and Chairman of the Board at the Bavarian HQ in January 2022. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 4 In less than a year, we advanced ABNCoV2 from early research through Phase 2 with clinical results confirming the unique profile as a universal COVID-19 booster vaccine. For MVA-BN RSV, we successfully completed a human challenge trial confirming the vaccine’s ability to prevent RSV infections. With strong support from our investors, as well as from the Danish State, we have the funding in place to advance the development of both programs into Phase 3 trials during the first half of 2022. The combined investments represent more than a four-fold increase in our R&D spend, which will create a temporary loss-making situation, but is a strategic investment that could have a significant impact on global health and secure future growth opportunities for Bavarian Nordic. ABNCoV2 will report later this year with a launch expected in 2023, while RSV will report next year with a projected launch in 2025. The vaccines have the potential to fulfil our ambition to achieve annual group sales greater than USD 1 billion and secure Bavarian Nordic as one of the largest pure play vaccine companies. Worldwide, COVID-19 has created a renewed understanding of infectious diseases and how vaccines can contribute to keeping our societies open, and not least help saving lives. The unprecedented demand and the industry’s reaction has created significant awareness of the vaccine business, also for Bavarian Nordic. We have seen a greater interest in our company from stakeholders around the world, with investor numbers doubling over the past year. With a heightened public profile, we also face increased expectations to our performance, as well as good corporate citizenship. Through our commitment to improving and saving lives we wish to make a positive impact on global health but are at the same time aware of our responsibility towards our stakeholders and the society. With a growing demand for transparency, we have set out a new sustainability strategy, which incorporates relevant ESG matters into our operations and into the performance indicators for our company, including the targets for incentive remuneration of our Executive Management. During the year, we successfully completed all market transfers for Encepur and Rabipur/ RabAvert. The transfer of the manufacturing processes for both vaccines is also proceeding according to plan, and once completed, will lead to an improvement in the profitability of the products. Although our integration plans remain on-track, the sales of these products have continued to be impacted by COVID-19 that restricted international travel and access to general practitioners for more routine vaccinations. Although it is difficult to predict the pandemic, with societies opening once again, we expect to see the beginning of the recovering for Encepur and Rabipur/RabAvert sales during 2022. Our achievements in 2021 would not have been possible without support from our shareholders, and we are thankful for their continued trust and commitment to our company and strategy. We would neither be successful without loyal and dedicated employees who share our commitment to protecting lives every day, and we would therefore also like to extend our thanks to all our colleagues for their hard work during 2021. Paul Chaplin Gerard van Odijk President and CEO Chair of the Board of Directors Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 5 2021 in numbers Revenue 2021 1,898 mDKK EBITDA 2021 800 mDKK 75 mDKK funding agreement with the Danish State to advance our Employees globally next-generation COVID-19 vaccine +750 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 6 Group key figures 2017-2021 DKK million 2021 2020 2019 2018 2017 DKK million 2021 2020 2019 2018 2017 Income statement Financial Ratios1) Revenue 1,897.9 1,327.6 191.8 1,852.4 1,195.1 285.8 341.4 278.1 379.6 (97.6) 282.0 277.5 662.5 354.8 500.6 255.1 33.7 1,370.2 290.6 39.9 EBITDA 74.8 (7.4) 104.7 269 739.8 5.1 (271.4) (10.7) 57.6 (312.9) (11.2) 67.5 390.7 5.7 Production costs Earnings (basic) per share of DKK 10 Net asset value per share Sales and distribution costs Research and development costs Administrative costs 53.5 83.7 187 77.7 224 399.2 409.3 386.3 180.0 (354.5) (2.2) 518.4 168.0 353.2 (50.9) 302.3 181.3 Share price at year-end 171 127 292.9 173.4 Share price/Net asset value per share Number of outstanding shares at year-end (thousand units) Equity share 2.6 2.2 3.0 1.9 2.9 Income before interest and tax (EBIT) Financial items, net (313.5) (140.9) (454.4) (464.8) (328.4) (16.3) (344.7) (346.8) 70,468 61% 759 58,450 56% 690 32,389 26% 491 32,311 71% 419 32,245 79% 420 Income before company tax Net profit for the year (356.6) (361.9) Number of employees, converted to full-time, at year-end 1) Earnings per share (EPS) is calculated in accordance with IAS 33 "Earning per share". Other financial ratios have been calculated in accordance with the guidelines from the Danish Society of Financial Analysts. Balance sheet Total non-current assets Total current assets Total assets 7,335.6 4,753.6 12,089.3 7,374.7 2,806.0 1,908.6 6,378.0 2,381.0 8,759.1 4,894.4 2,912.4 952.3 6,392.2 654.9 552.7 2,508.3 3,060.9 2,180.6 397.6 382.2 2,770.5 3,152.7 2,506.3 399.8 Reconciliation of EBITDA Income before interest and tax (EBIT) Depreciation and amortization (note 9) Impairment losses (note 9) EBITDA (313.5) 387.7 0.6 379.6 344.1 16.1 (328.4) 57.0 (354.5) 41.6 353.2 37.5 - 7,047.1 1,865.5 3,134.4 2,047.2 Equity - - Non-current liabilities Current liabilities 74.8 739.8 (271.4) (312.9) 390.7 482.7 246.6 Cash Flow Statement Securities, cash and cash equivalents Cash flow from operating activities Cash flow from investment activities – Investment in intangible assets – Investment in property, plant and equipment – Net investment in securities 3,716.6 (358.5) (2,876.9) (575.3) (483.1) (1,779.5) 3,536.1 1,669.6 571.9 472.4 (275.9) (809.9) (2,310.9) (360.1) 1,861.1 1,114.7 2,317.2 (288.5) 17.1 2,583.7 216.1 (1,911.5) (483.8) (222.9) (1,202.1) 1,334.9 (1,345.2) (22.3) (10.2) (201.8) 229.2 (56.4) (1,266.6) 613.4 Cash flow from financing activities 245.8 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 7 An open world through vaccines Providing us comfort and security Making the world a safer and better place No matter who we are or where we live Vaccines are an integral part of our lives Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 8 The global health system has been under pressure as COVID-19 caught the world off guard and severely impacted our societies. As the immunity in the population is now building up, the world is gradually re-opening, enabling us to live our lives again. The impact of vaccination on the health of the world's peoples is hard to exaggerate. With the exception of safe water, no other intervention, not even antibiotics, has had such a major effect on mortality reduction and population growth. Vaccines have played – and continue to play – a pivotal role in overcoming the pandemic, like they have done also in the past. The global smallpox vaccination campaign during the 20th century not only saved millions of lives, but even contributed to eradication of the disease. However, vaccines are also an integral part of our lives, already from birth, where our immune system has not matured and need help to fight off infections. We continue to get vaccinated throughout our lives, providing us comfort and security, which is a basic prerequisite for us to best take advantage of the opportunities in life, no matter who we are or where we live. Stanley Plotkin, vaccinologist, 1999 Our DNA in Bavarian Nordic “Protecting lives every day” is an essential part of our DNA in Bavarian Nordic, and we aspire to develop vaccines that address unmet medical needs for the greater good of the global society. By improving access to new and better vaccines for the most vulnerable people, we play an important role in the vaccine industry that is transforming the lives of individuals, helping to boost the economies of low- as well as high-income countries, and making the world a safer and better place. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 9 From research to real-life value Pioneering research in life-saving vaccines Innovation for the patient Preclinical and clinical development Two years ago, we embarked on a new journey in Bavarian Nordic. Building on our strengths in vaccine research, development, and manufacturing, we adopted a new strategy with a vision to become one of the largest pure play vaccine companies. The acquisition of two marketed vaccines became the point of departure for our bold ambition and spurred the growth of our organization to include global commercial operations, strengthening of medical, regulatory and pharmacovigilance and a significant expansion of our manufacturing capabilities and capacity. We now span the full value chain from early research and development, manufacturing and supply through marketing and distribution of vaccines globally. End-to-end manufacturing Global commercial presence This has created a strong foundation for bringing more novel products to markets, where vaccines remain an important measure to prevent and control disease throughout our lives. Distribution and warehousing Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 10 License agreements A bold ambition supported by multiple value drivers Product acquisitions 2025 one of the largest pure play vaccine companies Inhouse R&D and manufacturing The transition from biotech to a full-fledged vaccine company has created a strong foundation for utilizing our expertise and capacity in various ways to secure growth and value creation in Bavarian Nordic. Marketing & distribution agreements Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 11 Like most other biotech companies, we started out with a great idea, driven by a passion for science and a pioneering spirit that is still at the core of our employees today. We have worked to refine our own technology: MVA-BN, a live, attenuated vaccine vector, which is the backbone of two approved vaccines and several product candidates in our pipeline, including our late-stage RSV vaccine candidate moving into Phase 3 in 2022. These accom- plishments are a great testament to our inhouse R&D competences. Over time, we have explored other technologies, most recently the virus-like particle (VLP) vaccine against COVID-19, which we have in-licensed and is also advancing into Phase 3 in 2022. Both product candidates represent a significant commercial potential, which, if realized, would help fulfil our ambition to become one of the largest pure play vaccine companies. However, unlocking the value of R&D programs requires significant investments, and we have built a strong financial foundation, supported not only by our shareholders, but increasingly also through our vaccine business, which we have expanded over time through product acquisitions. Thereby, we have not only added to our vaccine portfolio, but are also able to utilize our manufacturing capacity for more efficient operations. Lastly, by leveraging our commercial presence in more than 30 countries, we are able to expand our offering by adding complementary products from other companies with whom we have entered marketing and distribution agreements. By these different approaches, we have established a unique platform for further growth and value creation in Bavarian Nordic. We have more than 25 years of experience in vaccine research. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 12 Strategic focus areas Read about our 2025 strategy on page 21 Strong progress on strategic priorities • Reported strong efficacy of MVA-BN RSV in a Phase 2 human challenge trial. Develop innovative life-saving vaccines • Initiated preparations for a Phase 3 trial of MVA-BN RSV in older adults to be initiated in 2022. • Reported encouraging Phase 2 results for ABNCoV2, a COVID-19 booster vaccine and initiated preparations for Phase 3 trial to be conducted in 2022. • A Phase 1/2 trial of TAEK-VAC, a novel immunotherapy candidate, was initiated. 2021 was an important year for Bavarian Nordic and the accomplishment of several important milestones were pivotal in the continued journey to become one of the world’s largest pure play vaccine companies. • First commercial vaccine doses were produced in the new fill and finish facility. Best in class vaccine manufacturer • Construction work on the expansion of the drug substance facility continued as planned. • Transfer of the manufacturing technology for Rabipur/RabAvert and Encepur progressed according to plan. 2021 developments • Takeover of physical distribution for Rabipur/RabAvert and Encepur was completed in remaining markets. Driven by commercial excellence Focus remained on the execution of our commercial strategy and the integration plan for Rabipur/RabAvert and Encepur. We completed the second major task related to the takeover of the vaccines, as the physical distribution of the products was fully as- sumed during 2021. Further, we advanced our plans to expand our production facility, as part of the ongoing transfer of the manufacturing processes for both vaccines. • Market shares were largely maintained for both products in key markets. • Awareness and image of Bavarian Nordic with key stakeholders was improved. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 13 A significant contribution to our strategic aspiration was the advancement of our pipeline, where we demonstrated positive results for both our COVID-19 and RSV vaccines, which will both enter Phase 3 trials during 2022. Next, we will take over the manufacturing of the vaccines, and we have already come far. In addition to the recent completion of our fill and finish facility, we are currently expand- ing the capacity of the production facility to enable manufacturing of multiple vaccines, including Rabipur/RabAvert and Encepur. This year we will take over the packaging of the products as an important step in transferring the production process to Bavarian Nordic. Running two Phase 3 trials will require a significant increase in our research and develop- ment costs in the coming year, as we invest in the future growth of the company. These investments have been made possible due to strong investor support through two capital increases in 2021, generating proceeds of more than DKK 2.8 billion and the commitment of up to DKK 800 million made by the Danish Ministry of Health to support the development of our COVID-19 booster vaccine. The integration plan for Rabipur/RabAvert and Encepur – high-level overview: 2020 2021 2022 2023 2024 A full commercial infrastructure was established, first market take-overs Transfer of marketing and distribution of the products was completed in all markets Complete construction of manufacturing expansion and assume packaging of the products Assume fill and finish of the two vaccines On track with integration plans of Rabipur/Rabavert and Encepur The five-year integration of Rabipur/RabAvert and Encepur is a process involving all parts of Bavarian Nordic’s organization, gradually transferring the responsibility for the different tasks from GSK to Bavarian Nordic, while also improving the profitability of these products. Until these plans are completed, GSK will supply the products to Bavarian Nordic. Assume drug substance manufacturing Completed Next steps During the first two years, we have completed all tasks related to marketing and distribution of the products, while also initiating processes related to transfer of the manufacturing of both products to our own facility. This work will continue during 2022, as we expect to complete the construction of the facility expansion that will allow us to run different manufacturing campaigns simultaneously and will enable transfer of the drug substance production of Rabipur/RabAvert and Encepur. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 14 Business progress in 2021 While the acquisition of Rabipur/RabAvert and Encepur has significantly increased the revenues and provided the foundation for sustainable profitability, our partnerships with governments and industry still account for sizeable revenues. Smallpox Significant revenues were generated under our contract with the U.S. government, related to the order received in 2020. Part of the order was delivered as final doses of the liquid-frozen version of the vaccine, which was the first commercial doses to be produced at our new fill and finish facility. The remaining part comprised of manufacturing for bulk drug substance, which will be finalized and delivered as freeze-dried vaccines at a later stage. We also entered a new, large contract with the Public Health Agency of Canada for deliveries of smallpox vaccines in 2022 and 2023, thus continuing our long-standing partnership. Finally, in the beginning of 2021, we delivered smallpox vaccines to three EU countries totaling DKK 90 million under contracts entered in 2020. In 2021, we manufactured the first commercial doses of the liquid-frozen version of our smallpox vaccine in the new fill and finish facility. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 15 Ebola Our partner, Johnson & Johnson, continued their strong commitment to the fight against Ebola, specifically by providing vaccines to regions in West Africa, where outbreaks have been common in recent years. Our MVA-BN-based vaccine, Mvabea® is part of Johnson & Johnson’s two-dose vaccine regimen and we have continued to provide manufacturing support to ensure vaccine availability, producing orders received in both 2020 and 2021. New partnership With our commercial infrastructure fully in place, we are now leveraging our presence in various markets by expanding our product portfolio through marketing and distribution agreements with companies whose products complement our own portfolio. Following our agreement with Valneva in 2020 to commercialize Ixiaro and Dukoral in certain countries, we entered an agreement with Dynavax in 2021 to assume commercial responsibility of Heplisav-B, a hepatitis B vaccine in Germany, as part of their launch of the product in Europe. 200,000 doses of the Ebola vaccine regimen from Johnson & Johnson and Bavarian Nordic were donated to affected regions in West Africa during 2021. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 16 Sales performance and market trends 35 260 734 Revenue 2021 363 1,898 mDKK Jynneos/ Imvanex 734 mDKK Rabipur/ RabAvert 506 mDKK Encepur 363 mDKK Mvabea 260 mDKK Contract work Smallpox vaccine sold to government stockpiles, mainly USA. Rabies vaccine for pre- and post-exposure immunization. Marketed in US, EU and selected other countries. Tick-borne encephalitis vaccine. Marketed in EU countries. Ebola vaccine which is licensed to Janssen. Revenue is related to manufacturing of the vaccine. 35 mDKK 506 Comparative figures for 2020 are shown in brackets. Where market shares are mentioned, these are measured by value. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 17 Jynneos/Imvanex For the fourth quarter, revenue amounted to DKK 138 million (DKK 80 million), i.e. a Revenue from the sale of Jynneos/Imvanex for the full year was DKK 734 million (DKK 541 million) and DKK 184 million (DKK 60 million) for the fourth quarter. The revenue includes sales of DKK 644 million invoiced under the US government order awarded in April 2020, involving both bulk and liquid frozen finished products, and sales to several European countries amounting to DKK 90 million. strong increase of 73% primarily driven by the US with a 34% market growth, slightly higher market share and some positive impact from wholesaler inventory build-up. Encepur Encepur revenue amounted to DKK 363 million (DKK 455 million) for the full year, i.e. a decrease of 20% versus prior year. Rabipur/RabAvert Rabipur/RabAvert revenue amounted to DKK 506 million (DKK 628 million) for the full year. The 19% decrease versus prior year was caused by COVID-19. The US and German markets accounted for 83% of the global Rabipur/RabAvert revenue and the market dynamics described below are focused on these key markets. For the full year, the Encepur market share in key markets were largely unchanged and the year-over-year decline in sales was caused by a market decline in key markets and some minor market share loss in smaller markets with low Bavarian Nordic share of voice relative to competition. During 2021, the US rabies market saw some recovery from 2020 and grew by approximately 13% (15% down versus 2019). RabAvert achieved a full year market share of approximately 70%, down from 75% in 2020. The market share loss in 2021 was expected as a competitor re-entered the market after a period of stock-out. RabAvert market share is still above the pre-stock-out level. The German market accounted for 64% of total Encepur revenue for 2021. The German market declined by 13% in 2021 (23% down versus 2019) as physicians were occupied with COVID-19 vaccinations and the Encepur market share remained unchanged at approximately 31%. For the fourth quarter, revenue amounted to DKK 47 million (DKK 49 million) corresponding to a decrease of 4%, close to the 5% market decline seen in the German market. The German market, which is purely a travelers’ vaccine market, continued to be hit hard by COVID-19, but with some early signs of recovery seen in the second half year. The German market declined by approximately 55% in 2021 (85% down versus 2019) and the Rabipur market share remained strong at approximately 94%. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 18 Mvabea Revenues, fourth quarter mDKK Revenue from sale of Mvabea (Ebola vaccine) to Janssen for the full year was DKK 260 million (DKK 0 million). For the fourth quarter, Mvabea revenue was DKK 171 million (DKK 0 million). Q4 2021 184 138 47 Q4 2020 Growth 306% 73% Jynneos/Imvanex Rabipur/RabAvert Encepur 60 80 49 0 -4% Other income Mvabea 171 4 Revenue from milestone payments for the full year was DKK 0 million (DKK 67 million). The income in 2020 was related to the award of the European marketing authorization of the Ebola vaccine in 2020. Contract work 39 -90% 138% Total 544 229 Revenue from contract work was DKK 35 million (DKK 162 million), mainly related to qualification and validation activities relating to the new fill-and-finish plant under contracts with the US government. Contract work revenue for the fourth quarter amounted to DKK 4 million (DKK 39 million). Revenue, full year mDKK FY 2021 734 506 363 260 35 FY 2020 541 628 455 0 Growth 36% Jynneos/Imvanex Rabipur/RabAvert Encepur -19% -20% Mvabea Contract work Milestone payments 162 67 -78% 2% 0 Total 1,898 1,852 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 19 2020 2021 2020 2021 Rabipur/RabAvert sales by quarter Encepur sales by quarter mDKK 250 mDKK 250 200 150 100 50 200 150 100 50 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 20 A pivotal year ahead Our integration activities for Rabipur/RabAvert and Encepur continue into their third year, where focus primarily will be on expanding our manufacturing capacity, transferring the packaging of the products, and continuing the tech transfer activities as we prepare for gradually taking over the full production cycle for both products over the next years. 2022 will be a pivotal year for Bavarian Nordic with significant news flow from our pipeline, as we embark on two global Phase 3 trials (RSV and COVID-19), encompassing more than 24,000 subjects. Commercially, we remain focused on consolidating our position among healthcare professionals, ready to take advantage of this when international travel resumes and demand for our vaccines increases. Integrating sustainability into our targets Driven by our purpose to save and improve lives by unlocking the power of the immune system, our success depends on our ability to grow Bavarian Nordic and keep delivering novel vaccines that truly set a mark on global health. In doing so, we also increase our environmental and social footprint on the surrounding world, among others. Advancing these programs is a significant investment, four-fold the size of our normal R&D budget. It is however an important investment for the future that will help fulfil our ambition to become one of the largest pure play vaccine companies and to potentially transform healthcare for millions of people globally. We have enhanced our commitment to the global sustainability agenda and from 2022 and onwards, we have integrated sustainability targets covering all dimensions of ESG (environment, social and governance) into our overall objectives, as well as in the short- term incentive program for the Executive Management. We are also working to finalize the transfer of the freeze-dried manufacturing process for JYNNEOS that is last activity to support the submission of a supplement to the existing Biologics License Application (BLA) for our smallpox vaccine, which is key to unlocking further value from our contracts with the U.S. government. . Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 21 Advancing our 2025 strategy Best in class vaccine manufacturer Upon the acquisition of two marketed vaccines from GSK in 2019, which marked the beginning of the commercial transformation of Bavarian Nordic, we launched an ambitious five-year strategy, building on our core strengths in vaccine research, development, and manufacturing. Along the acquisition, we further expanded our organization to include a full, global commercial infrastructure to help drive profitable growth, thus becoming a full-fledged vaccine company with an aspiration built on the following pillars: Develop innovative life-saving vaccines Driven by commercial excellence A multi-pronged strategy with several short- and long-term value drivers is the foundation for our bold vision to become one of the largest pure play vaccine companies Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 22 Our 2022 objectives Strategic focus area Key value drivers (medium-term) 2022 objectives RSV • Initiate Phase 3 enrollment in first half of 2022. • Complete enrollment of 20,000 subjects by end of 2022. • Continue manufacturing activities to prepare for commercial launch of the product. Develop innovative life-saving vaccines Launch of vaccine for older adults through partnerships. COVID-19 Launch of COVID-19 booster vaccine. • Initiate enrollment for Phase 3 of ABNCoV2 in the first half of 2022. • Report Phase 3 data in the second half of 2022. • Continue manufacturing activities to prepare for a regulatory submission by end of 2022. Smallpox • Continue transfer of freeze-dried manufacturing process to Bavarian Nordic. Approval of freeze-dried version of smallpox vaccine. Establish capabilities to fill and finish liquid & freeze-dried products. Expand bulk manufacturing to introduce new technologies and manufacture multiple products. Drive profitable growth of commercial business. • Progress the manufacturing technology transfer of Rabipur/RabAvert and Encepur according to plan, including completing the qualification of packaging of both products. Best-in-class vaccine manufacturer • Complete investment in the expansion of the bulk manufacturing facility. • Defend and gain market shares for Rabipur/RabAvert and Encepur in key markets. • Improve awareness of Bavarian Nordic among key stakeholders. Driven by commercial excellence Become a preferred partner for healthcare professionals for marketed products. Add additional marketed products organically, through partnerships or M&A. • Assume marketing and distribution of Valneva’s and Dynavax’ products in certain markets. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 23 Outlook for 2022 2022 financial outlook Key assumptions Revenue The guided interval reflects the uncertain impact of COVID-19 on the TBE and rabies markets in 2022. The mid-point of the guidance assumes a partial return to normality for the TBE market and the US rabies market and a slower return to normality for the European rabies business. Revenue (mDKK) EBITDA (mDKK) 1,100 – 1,400 (1,300) – (1,000) Only confirmed smallpox vaccine orders with BARDA have been included in the guidance and constitute approximately DKK 100 million. Cash and cash equivalents at year-end (mDKK) The previously announced order to Public Health Agency of Canada amounting to DKK 203 million has been included in the guidance. Due to close-down of the existing bulk plant until end of August 2022, only limited capacity will be available for bulk manufacturing of MVA-based products (smallpox and Ebola) and hence no revenue is expected from Ebola in 2022. The close-down is a planned step in the expansion of the bulk facility to enable future manufacturing of Rabipur/ RabAvert and Encepur. 1,000 – 1,200 Due to the continued uncertainty created by COVID-19, the outlook for 2022 will be expressed using intervals. Limited revenue from partner agreements with Valneva and Dynavax is included. No potential income from RSV partnering is included in the guidance. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 24 Research and development costs Mid- to long-term financial goals • Total investments in research and development amount to approximately DKK 1,950 million, including ABNCoV2 capitalized costs of approximately DKK 700 million. • Non-capitalized research and development costs amount to approximately DKK 1,250 million of which the RSV project accounts for approximately DKK 850 million. While the rabies and TBE market was negatively impacted by COVID-19 in 2020 and 2021, we remain confident that these markets will return to normal after which Rabipur/RabAvert and Encepur are expected to deliver at least low- to mid-single-digit annual sales growth and mid- to high-single-digit annual sales growth, respectively. Cash position • Milestone payments to GSK relating to the acquisition of Rabipur/RabAvert and Encepur: approximately DKK 600 million. Bavarian Nordic remains committed to target, on a normalized basis, a strong cash generation and profitability by 2025 at a level in line with the relevant vaccine peer group average. • Capitalization of tech-transfer activities for acquired vaccines: approximately DKK 250 million. • Capitalization of ABNCoV2 development costs: approximately DKK 700 million. • Financial support to ABNCoV2 from the Danish Ministry of Health: approximately DKK 640 million. This represents the full remaining amount under the DKK 800 million funding agreement. • Other tangible investments: approximately DKK 350 million, including finalization of new bulk facility for future manufacturing of Rabipur/RabAvert and Encepur. • Net working capital expected to remain approximately unchanged with inventory increase of approximately DKK 250 million largely off-set by expected increase in accounts payable. • Debt level by year-end of approximately DKK 600 million assumed, excluding repo positions. The outlook is based on the following assumptions on currency exchange rates of DKK 6.50 per 1 USD and DKK 7.45 per 1 EUR. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 25 A stronger foundation for future action Our commitment to sustainability Sustainability Management Strategy, policies and governance Significant progress was made in 2021 to strengthen our overall commitment to sustainability and create the foundation for setting a clearer and more ambitious direction for the future. Board Executive Management Targets and actions A new governance structure was introduced to strengthen the accountability and oversight from the Board to the Executive Management and throughout the entire organization. Reporting and stakeholder management ESG committee This entailed a reinforcement of the ESG Committee with more internal stakeholders to support a broader focus going forward. The Committee has initiated a thorough analysis of the Company’s external stakeholders, which has not only helped to better assess the materiality and impact of our operations, but also driven new activities during the year, complementing the targets set for 2021. Commercial Manufacturing Engagement and commitment Going forward, the strengthened accountability and action will be reflected in the incentive remuneration of the Executive Management, which in part will be linked to short-term ESG goals. The same principle will be extended to all other leaders throughout Bavarian Nordic to facilitate increased awareness and shared accountability for the targets across the organization. Corporate Staff Functions R&D Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 26 With a strengthened commitment and the inclusion of ESG targets in the remuneration principles, we have taken the first steps to build a long-term strategy to support sustainable operations. consider introducing one or more recognized reporting standards in the short- to medium- term. This will also allow us to better demonstrate progress towards our goals. While our long-term ambitions and goals will be subject to further assessment in 2022, we have established our reporting framework and short-term goals based on our initial materiality and impact assessment, which we will conduct annually to ensure our priorities are always aligned. To further unfold our ambitions, and enable ourselves to set long-term targets, we will work to enhance our data platform and broaden the scope our reporting. To facilitate this, we will Sustainability targets Area Focus Target • Employee engagement • Maintain high engagement by completing actions based on the feedback from the engagement survey 2021 • Maintain gender equality among leaders Our people • Diversity and inclusion • Health and safety • Sick leave ≤ 2021 levels • Work-related injuries ≤ 2021 levels • Emissions • Develop baseline for energy consumption in production Environment and climate • Waste • Waste recycling rate ≥ 2021 levels • Governance • Implement enhanced process for third party due diligence process for anti-bribery purposes Business ethics and governance Our progress on sustainability is reported in our Sustainability Report 2021, which covers our reporting obligations cf. sections 99a, 99b, 99d and 107d of the Danish Financial Statements Act and Article 8 of the EU Taxonomy Regulation. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 27 Unit 2021 2020 2019 2018 2017 ESG key figures Environmental data1 CO2e, scope 1 Metric tons Metric tons GJ 1,422 1,085 1,381 1,175 909 1,178 964 1,398 992 1,686 CO2e, scope 2 Key figures for selected environmental social and governance areas are provided in accordance with the recommendations set out in “ESG key figures in the Annual Report” from the Danish Finance Society / CFA Society Denmark, FSR – Danish Auditors, and Nasdaq Copenhagen. Energy Consumption Water Consumption 42,577 17,023 45,110 19,170 34,137 14,770 32,527 11,610 32,099 10,877 m3 Social data1 For the sections regarding environmental and social data in the table below, the data has been subject to an independent auditor’s review in the form of limited assurance. The Independent Auditor’s Assurance Report can be found in our sustainability report. Full-Time Workforce Gender Diversity2 FTE 734 61 56 14 7 607 61 56 9 465 N/A 51 421 N/A 50 439 N/A 49 % Gender Diversity, Management Employee Turnover Ratio Sickness Absence3 % % 10 13 18 Days per FTE 6 6 6 8 Governance data4 Gender Diversity, Board Board Meeting Attendance Rate5 CEO Pay Ratio % % 29 99 16 29 97 15 29 98 15 14 97 14 N/A N/A Times N/A 1 Data derived from the Company’s sustainability reports 2017-2021. 2 Data not collected before 2020. 3 Sickness absence does not include offices in the USA. 4 Data derived from the Company’s annual reports 2017-2021, except for CEO pay ratio, which is presented in the Remuneration Report 2021. 5 Data not collected before 2018. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 28 Our strategy and business 29 Our vaccines 31 A solid foundation provides opportunities for expansion 33 Experienced leadership from global vaccine production 35 A vaccine is still needed against RSV 38 Developing a universal booster for COVID-19 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 29 Our vaccines The COVID-19 pandemic is an unfortunate reminder of the vulnerability of the world’s population, despite major scientific and medical advances over the past century. While new treatments have significantly improved our lives, the prevention of infectious diseases remains a complex matter in an ever more globalized society, particularly as the reservoir for many diseases are animals that are difficult to fully control, and the evolution of viruses driven by mutations present continuous challenges in our efforts to minimize the impact of emerging diseases. Selected pipeline projects A detailed description of the programs, including results from clinical trials, are disclosed in company announcements and in the pipeline section on the Company’s website: www.bavarian-nordic.com Indication Status Smallpox As part of our collaboration with the U.S. government, we are developing a freeze-dried version of JYNNEOS® with an improved shelf-life and storage conditions to replace the stockpile of the liquid-frozen version. The vaccine has completed Phase 3 clinical trials and we are working to finalize the transfer of the freeze-dried manufacturing process that is the last activity to support the submission of a supplement BLA to the FDA to extend the current approval of JYNNEOS for the freeze-dried version. Vaccines play an important role to improving public health around the globe. At Bavarian Nordic we are committed to saving and improving lives by unlocking the power of the immune system and our accomplishments clearly demonstrate our ability to transform our knowledge, expertise and capabilities into life-saving vaccines. RSV Our vaccine candidate, MVA-BN RSV has completed Phase 2 development, and follow- ing highly encouraging results from a human challenge trial in 2021, we are advancing the vaccine into Phase 3 in 2022. SARS-CoV-2 We are developing ABNCoV2 as a universal booster vaccine for COVID-19. The vaccine is based on a virus-like particle (VLP) platform and based on encouraging Phase 2 results are planning a Phase 3 clinical trial in 2022. The program has attracted financial support from the Danish Ministry of Health. Immuno- oncology A tumor antibody enhanced therapeutic vaccine; TAEK-VAC is a novel immuno-oncology candidate employing our MVA-BN technology. A Phase 1/2 open label trial of intra- venous administration of the vaccine, was initiated in 2021 in patients with advanced HER2 and brachyury-expressing cancers. The first stage of the trial is investigating the safety and tolerability of escalating doses of the vaccine before advancing into stage 2, expected in 2022. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 30 Marketed vaccines Marketing and distribution agreements Since our first product approval in 2013, we have expanded our portfolio of marketed vaccines through acquisitions of established products with a strategic fit and manufacturing synergies with our existing business. We have entered agreements with Valneva and Dynavax to market and distribute their vaccines in selected markets. With Valneva, we have a mutual agreement, whereby Valneva also markets our rabies and tick-borne encephalitis vaccines in certain markets. Brand name(s) Indication and markets More information Brand name Owned by Indication and markets Jynneos® The only FDA and EC-approved non-rep- licating smallpox vaccine, developed on our MVA-BN platform technology. Indication extended to include monkey- pox and other orthopoxviruses in certain markets. The vaccine is sold directly to governments. IXIARO® Valneva Japanese encephalitis vaccine. Bavarian Nordic markets and distributes the vaccine in Imvamune® Imvanex® (liquid-frozen) Germany and Switzerland DUKORAL® Valneva Dynavax Cholera vaccine. Bavarian Nordic markets and distributes the vaccine in Germany and Switzerland Rabipur® RabAvert® Vaccine for pre- and post-exposure prophylaxis against rabies. Marketed in 20 countries globally. What is rabies and how can it be prevented? Read more on: www.loweringtherisk.com HEPLISAV-B® The only FDA and EC-approved hepatitis-B vaccine with a two- dose schedule for adults that is completed in one month. Encepur® Mvabea® Tick-borne encephalitis (TBE) vaccine. Marketed in 12 EU countries. What is TBE and how can it be prevented? Read more on: www.loweringtherisk.com Ebola vaccine developed on our MVA-BN platform technology. Licensed to Janssen (Johnson & Johnson) in 2014 and now part of their two-dose vaccine regimen (Ad26.ZEBOV + MVA-BN Filo) approved by the EC in 2020. Read more about Johnson & Johnson’s efforts and how our vaccine helps in the fight against Ebola: www.jnj.com/ebola FDA: U.S. Food and Drug Administration EC: European Commission Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 31 Driven by commercial excellence More products will enhance market presence and increase awareness. A solid foundation provides opportunities for expansion The acquisition of two commercial vaccines, Rabipur/RabAvert and Encepur from GSK in 2019 was a defining event for Bavarian Nordic. It propelled our ambition to transform the company into a leading player in vaccines by adding sustained revenues to our existing government contracts, thus creating the foundation for profitable growth. Although markets for the two vaccines have been impacted by the COVID pandemic in both 2020 and 2021, primarily due to travel restrictions, the process of taking over marketing and distribution of the vaccines has helped to fulfil an important milestone for Bavarian Nordic by accelerating the build-up of the infrastructure to manage commercial operations across various customer segments and geographies. We are now leveraging our presence in various markets by expanding our product portfolio through marketing and distribution agreements with companies whose products complement our own portfolio. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 32 Our growing presence in EU and US markets and the general increased attention towards vaccines have helped to strengthen the awareness of Bavarian Nordic among relevant stakeholders and working with our brand reputation remains key to continue building loyalty and driving increased market shares. Our commercial focus in 2022 We wish to be recognized for our commercial excellence and aim to become a preferred partner to healthcare professionals. A key success factor to achieve this is to continue improving the awareness and image of Bavarian Nordic among key stakeholders, which will be supported not only by our growing product portfolio, but also by our presence in the COVID-19 space, as we advance our vaccine candidate into Phase 3. Commercial portfolio growing in key markets in 2022 Germany represents our largest EU market and is also where we have our strongest physical presence. A dedicated sales force, initially contracted via third-party during the build-up of the commercial organization, will gradually transition to Bavarian Nordic during 2022, as commercial activities increase due to expansion of the product portfolio. Importantly, to support the profitable growth of Bavarian Nordic, we maintain a solid focus on retaining and gaining market shares for Rabipur/RabAvert and Encepur in key markets. In early 2022, we assumed marketing and distribution of IXIARO® and DUKORAL®, Valneva’s vaccines for Japanese Encephalitis and cholera in Germany and Switzerland as part of the mutual marketing and distribution agreement entered in 2020. Both are established vaccines that fit well into our travel vaccines portfolio, and while the international travel activity remains impacted by COVID-19, we are focusing our efforts on market positioning and awareness in anticipation of the travel activity returning as the pandemic wanes. Drive profitable growth Defend and gain market shares for Rabipur/RabAvert and Encepur in key markets. Increase awareness Improve awareness of Bavarian Nordic among key stakeholders. Furthermore, later in 2022, we will add HEPLISAV-B®, a novel hepatitis B vaccine from Dynavax, to the commercial portfolio. The vaccine was granted marketing authorization by the EC in February 2021 and is the only approved hepatitis B vaccine with a two-dose schedule for adults that is completed within one month. Dynavax has chosen Bavarian Nordic to launch their product in the first market in Europe, Germany. Expand portfolio Assume marketing and distribution of Valneva’s and Dynavax’ products in certain markets. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 33 Best-in-class vaccine manufacturer Russell Thirsk is our new Chief Operating Officer (COO). Experienced leadership from global vaccine production In April 2022, we will welcome Russell Thirsk as our new Chief Operating Officer (COO) and member of the Executive Management team. Russell brings more than two decades of technical and leadership experience from both GSK and Novartis, where he has led several complex build-up and transformation projects and has had oversight of some of the world's largest commercial vaccine manufacturing operations. Russell has a strong track record as a vaccines operations leader and joins us in an overly exciting and transformative period, where we continue to expand our manufacturing infrastructure to support our ambition to become one of the world's largest pure play vaccine companies. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 34 You are joining Bavarian Nordic at a pivotal stage with two vaccine candidates being advanced into the final development stage and with the potential to significantly impact and transform the company. What do you see as your focus area and main objective as COO in the short and mid-term? Where do you expect to see the largest differences between working in Big Pharma and Bavarian Nordic? Everywhere I have worked in the vaccines industry I have found people who are inspired and energized by the work they do to protect lives, that is the same at Bavarian Nordic. Where I see the difference and the opportunity is the ability to focus efforts on the great opportunity the company has and the agility to react and respond to our quickly evolving environment. It is indeed a privilege to join the company at this pivotal time, the licensure and launch of a new product is the culmination of many years of effort and I am thrilled to be part of it. Initially my focus will be on ensuring a robust and reliable supply chain for these products and ensuring that our supply capabilities match our commercial ambitions. We are facing exciting times ahead, and Russell is joining a team of dedicated and highly qualified people committed to improving and saving lives. What has attracted you to Bavarian Nordic and where do you see the most exciting opportunities? The manufacturing set up plays a key part in reaching our 2025 strategy plan. Where do you see the most urgent challenges facing the company? The biggest attraction for me has been the passion of the people I have met. The passion to bring new products to the market and to build a great company focused on the mission of vaccination, this is an incredibly exciting time to be in an industry undergoing unprecedented change and where technology continues to open up more and more avenues for using vaccination to prevent and cure disease. Manufacturing vaccines is a skill; it requires strong teams and a depth of technical knowledge that is challenging to scale. As we increase our manufacturing output and launch new products on the market, we will need to build the capability quickly. We will be doing that in a period where there is significant disruption in supply chains across the industry which we will need to navigate. What does it take for us in Bavarian Nordic to be successful? Success in my experience has three vital ingredients, passionate people who love what they do, a positive spirit, a culture of curiosity and a bit of resilience to help solve problems and overcome the obstacles and finally focus – on the task at hand and on the end goal of protecting life. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 35 Develop innovative life-saving vaccines RSV represents a large unmet medical need, particularly in older adults. A vaccine is still needed against RSV With no approved vaccines, RSV (respiratory syncytial virus) remains a large unmet medical need. MVA-BN RSV, one of our two late-stage development programs, not only addresses this need, but also represents an important strategic asset with a significant potential to become a key contributor to our vision of becoming a leading pure-play vaccine company by 2025. Following completion of Phase 2 and the encouraging results from a human challenge trial, we are advancing the vaccine into a Phase 3 trial in 2022. A differentiated vaccine candidate with potential for broader protection MVA-BN RSV is being developed for prevention of RSV in older adults. It is the only RSV vaccine candidate that incorporates all five relevant antigens: F, G (a), G (b), N and M2 to stimulate a broad immune response against both RSV subtypes (A and B), thus mimicking and enhancing the immune response observed following a natural response to an RSV infection. The incorporation of five antigens differentiates MVA-BN RSV from other RSV vaccine candidates currently in development that focus only on the F antigen. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 36 What is RSV? Compelling data leads the way RSV is a common virus that usually causes mild, cold-like symptoms, but in serious cases can lead to severe lung infections, including bronchiolitis and pneumonia, which ultimately can lead to death. By the age of 2 years, most infants have experienced their first RSV infection, followed by frequent reinfections throughout life, because RSV infections do not induce a sustainable, long-lasting protective immunity. Vaccination against RSV is relevant in two different target groups with at-risk individuals typically including infants and older adults/immunocompromised individuals. In September 2021, we reported that MVA-BN RSV had met its primary endpoint in a clinical Phase 2 double-blinded, placebo-controlled trial, which enrolled healthy adult volunteers, 18-50 years of age who were randomized to receive either a single vaccination of MVA- BN RSV or placebo. Volunteers were challenged intranasally with an RSV type A strain 28 days after vaccination. A total of 61 subjects were evaluable. The study, demonstrating a statistically significant reduction in viral load in vaccinated versus control (placebo) treated volunteers. Further, the vaccine demonstrated an efficacy of up to 79% in preventing symptomatic RSV infections. Large unmet medical need represents attractive market potential It is estimated that each year RSV-induced infections lead to approximately 177,5251 hospitalizations and 14,0001 deaths in adults aged 65 years and older in the US, comparable to influenza. The total estimated hospitalization costs attributed to RSV in older adults in the United States exceeds USD 1 billion1. Accordingly, preventing RSV-induced infections is a top priority for governments and medical professionals globally. Currently there is no approved vaccine against RSV. As such, RSV constitutes a large and critical unmet medical need. Analysts expects a potential multi-billion-dollar vaccines market size in the range of USD 5-9 billion annually. We have previously reported strong results from a Phase 2 trial of MVA-BN RSV in 421 subjects aged 55 years and older, demonstrating that the vaccine was well-tolerated and induced both broad and durable antibody and T-cell responses against RSV, as well as mucosal immune responses that may be important for protection against RSV. The Phase 2 program in older adults included a revaccination of subjects after one year, following which the immune responses were rapidly and significantly increased, notably in subjects with the weakest immunity prior to the booster vaccination3. Clinical trials to-date have furthermore shown MVA-BN RSV to be safe and well tolerated as previously observed for MVA-BN or other recombinant MVA-BN based vaccines. The competitive landscape is changing The competitive landscape has evolved rapidly over the past few years with several late- stage programs from Pfizer, Janssen, GSK and Moderna. However, we remain confident in our differentiated approach, which allows us to take part of the future RSV market which, like the flu market, is expected to be large enough for several players. 1 Falsey AR, Hennessey PA, Formica MA, Cox C, Walsh EE. Respiratory syncytial virus infection in elderly. and high-risk adults. N Engl J Med. 2005 Apr 28;352(17):1749–59. 2 www.resvinet.org/uploads/2/2/2/7/22271200/abstract_booklet_rsvvw21.pdf. 3 Jordan E. et al. 2010. J. Infect, Dis. 28:223(6). 1062-1072. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 37 Commercial partnering strategy To ensure optimal conditions for global commercialization of the RSV vaccine, it has always been our strategy to seek one or more commercial partners. Given the competitive landscape, a short time-to-market is of the essence, and for that reason we have decided to initiate a self-funded Phase 3 trial. The initial go-alone strategy provides flexibility and accelerates the time to market, but ultimately, we need one or more partners to commercialize the vaccine once approved. Next steps: Phase 3 to start in 2022 We have worked full speed to prepare for initiation of a pivotal Phase 3 trial of MVA-BN RSV in the first half of 2022. Manufacturing of vaccines for the trial has been completed and we have engaged a contract research organization to conduct the trial, which is expected to enroll up to 20,000 subjects and run over the course of one year. The total estimated cost of the global study is approximately USD 250 million, including follow-up phases in 2023 and 2024. Initial Phase 3 results are expected to be available around mid-2023. The primary endpoint of the Phase 3 trial is the occurrence of lower respiratory tract disease (LRTD) events associated with RSV compared to placebo, which is a different endpoint compared to the human challenge study. To meet the endpoint in Phase 3, the presence of a T-cell response is expected to play an essential role for viral clearance, which is one of the differentiating factors. The incorporation of five RSV-specific antigens into MVA-BN-RSV can stimulate a broad antibody and cellular immune response, which includes RSV-specific CD8 T cells and CD4 T helper cells that are believed to help protecting against severe RSV disease. Manufacturing of vaccines for the RSV Phase 3 trial was completed in 2021. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 38 Develop innovative life-saving vaccines Developing a universal booster for COVID-19 When the COVID-19 pandemic ends most experts agree that society will have to learn to live with the disease and vaccines will continue to play an important role. While the currently approved vaccines have taken vaccine sales to their highest levels ever, the future COVID-19 vaccine market could belong to new and improved products, that offer sustained protection and broader efficacy without the need to adapt to new variants. Our vaccine candidate, ABNCoV2, is being developed as a universal booster vaccine, i.e., it is intended for use as a booster to any other type of COVID-19 vaccine. The goal is to create a longer-lasting vaccine protection with broader efficacy that obviates the need for continuously adapting to new variants of the SARS-CoV-2 virus. We have finalized the Phase 2 clinical development and are now looking to initiate a pivotal Phase 3 study later in 2022, which could lead to regulatory approvals in 2023. As a latecomer, we do not expect our vaccine to help fight the current pandemic, but to play an important role in the future prevention of COVID-19, which is predicted to be an annual multi-billion-dollar market. ABNCoV2 – the Bavarian booster A differentiated approach with unique features and potential to address a post-pandemic demand for COVID-19 vaccines. By March 2022, more than ten COVID-19 vaccines have been approved across the globe, and more are still in development. Despite high vaccination rates in many Western countries, the number of COVID-19 cases rose significantly over the winter 2021/2022, also in people who were vaccinated (so-called breakthrough infections). This, together with the emergence of new variants, has highlighted the need for continued improvements in vaccine development. Looks like a virus, but is not Long before COVID-19, scientists at the University of Copenhagen had worked with the VLP-platform (virus-like particle) to develop a novel malaria vaccine. The technology was later transferred to and refined by AdaptVac, a Danish biotech company established as a Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 39 Our goal is to develop a universal booster vaccine against COVID-19 that offers sustained protection and broader efficacy without the need to adapt to new virus variants. joint venture between Expres2ion Biotechnologies and NextGen Vaccines (spin-out from the University of Copenhagen). When the SARS-CoV-2 virus emerged, it was assessed that VLP could be a feasible platform for developing a COVID-19 vaccine and supported by the university and grants from EU and Danish foundations, AdaptVac and Expres2ion immediately started working on the vaccine candidate, now known as ABNCoV2. We licensed the vaccine from AdaptVac in 2020 and have since assumed the responsibility for further clinical development of the vaccine. As the name suggests, VLPs are particles or molecules, which resemble a virus, but are not infectious as they contain no viral genetic material. This is a well-known technology that is used in several approved vaccines, including vaccines for the human papillomavirus (HPV) and hepatitis B. Simply put, ABNCoV2 consists of an empty protein shell (a capsid) which is mounted with numerous proteins (SARS-CoV2 Receptor Binding Domain) on the surface to mimic the density and pattern of that of a real SARS-CoV-2 virus. The combination of a high density of proteins on the surface and the pattern of these will induce a fast and strong immune response in the vaccinated person without the risk of creating an infection. Another great advantage of the VLP technology is its stability at higher temperatures, which could provide significant benefits over current COVID-19 vaccines during transportation and storage. Also, the technology is known for its favorable safety profile, which has also been demonstrated in clinical trials of ABNCoV2 to-date. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 40 Manufacturing During the next months, we were in discussions with Danish authorities about funding to complete the development and manufacturing setup of the vaccine, and in August 2021, we signed an agreement with the Danish Ministry of Health, securing funding to support the development of ABNCoV2 through licensure. The agreement is valued at up to DKK 800 million, with the vast majority being contingent upon reaching a number of predefined milestones including among others completion of the Phase 2 trial, Phase 3 development milestones and milestones related to upscaling of manufacturing for commercial production of the vaccine. Our manufacturing facility has been tailored to production of live viral vaccines, like MVA- BN, and therefore production of the VLP vaccine cannot be transferred directly. A European contract manufacturer will initially be used for producing the active ingredient of the vaccine, while fill and finish will take place at our own facility. A fully funded development program Several funding mechanisms had been put in place by governments and international vaccine initiatives during the first wave of the epidemic in 2020, as it became clear that the high infectivity from the SARS-CoV-2 virus combined with lack of immunity in the general population and severity of disease, particularly in older people and people with weakened immune systems, would require vaccines to help combat the disease. The path towards approval In February 2022, less than a year since initiating the first clinical trial of ABNCoV2, we reported the final results of a Phase 2 trial, enabling us to advance the vaccine into a Phase 3 registration trial later in 2022. However, at the time of entering the license agreement with AdaptVac in July 2020, most of the available funding had already been granted to other and more advanced vaccine programs, and particularly the U.S. government’s “Operation Warp Speed” initiative with more than USD 10 billion in budget for vaccine development had given a handful of companies a head start in the development. The Phase 2 trial was designed to investigate the ability of ABNCoV2 to boost immunity in seropositive subjects, i.e. previously vaccinated with approved mRNA or adenovirus-based vaccines. Subjects were enrolled into two groups who received either a 50μg or a 100μg booster dose of ABNCoV2. The study also included a group of seronegative (non-vaccinated) subjects who received two 100μg doses of ABNCoV2 four weeks apart. AdaptVac and its partners in the PREVENT-nCoV consortium had received a grant from EU under the Horizon 2020 program, but only to advance ABNCoV2 into a Phase 1 clinical trial, which was initiated in March 2021. This coincided with our announcement of additional and very encouraging preclinical results, which led to our decision to invest in a larger Phase 2 clinical trial and scale-up manufacturing in preparation for further clinical development towards licensure. In both groups receiving a booster with ABNCoV2, results showed, that the vaccine boosted the neutralizing antibodies to levels reported to be highly efficacious (>90%) against SARS- CoV-21. A similar fold increase was observed for all SARS-CoV-2 variants of concern tested (Wuhan, Alpha, Beta and Delta) following the booster vaccination with ABNCoV2. 1 P. B. Gilbert et al., Science 10.1126/science.abm3425 (2021). Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 41 Comparing the induced levels of neutralizing titres by also taking into account the starting titre (pre-booster) and/or the time since the last vaccination, it showed a trend for the higher booster dose of ABNCoV2 towards inducing stronger levels of neutralizing titres against SARS-CoV-2. infections have been putting the healthcare systems and society in general under renewed pressure. There is a general perception that booster vaccinations will continue to be required, at least for those at-risk of complications from infections. Also, while more than 10 billion doses have been deployed globally, only around 12%2 of the population in low-income countries have been vaccinated. leaving a huge obligation for the global society to solve. In the third group who received two doses of ABNCoV2, results confirmed the high neutralizing levels previously reported from the Phase 1 clinical trial, two weeks post second dose, with neutralizing antibody levels against the Wuhan variant elevated to levels reported to be highly efficacious (>90%) against SARS-CoV-2. The market is expected to change from a pandemic market to an endemic market. Predictions about the future demand for COVID-19 vaccines are many, and only time will tell how the market evolves, but coming from a record-high year in 2021, where COVID-19 vaccines represented an estimated more than USD 60 billion3 market – the largest market for any drug ever – it is reasonable to believe that this market will continue to dominate for a while. Some analysts believe that the market in 2022 will even continue to grow, driven by an increased demand due to a recurring need for boosters, less-effective vaccines being phased out in favor of improved vaccines, and higher prices, among others. The Phase 3 trial will include approximately 4,000 seropositive subjects who will receive a booster vaccination with 100μg ABNCoV2 or an mRNA-based vaccine, aiming to demonstrate non-inferiority of ABNCoV2 to the licensed mRNA vaccine. An overall agreement has been made with regulatory authorities on the trial design, and manufacturing of vaccine bulk for the trial has been completed, pending filling at the Company’s own manufacturing line in the near future. is planned for initiation during the first half of 2022 and with anticipated completion before year-end. Based on these assumptions, the vaccine could be launched commercially in 2023. More conservative estimates see the market declining from the 2021 level, but still predict a multi-billion-dollar market with room for differentiated vaccines many years ahead. These estimates reflect a shift from mass vaccination of entire populations towards vaccination of vulnerable groups as is the case for example with the flu market, where annual booster vaccinations are given. Hence, if Bavarian Nordic succeeds with the development of ABNCoV2 as a universal booster with a better value proposition compared to the already approved vaccines, the Company eyes an opportunity to take a reasonable share of the future COVID-19 vaccine market, initially targeting governments, but over time moving towards a more traditional market for private vaccinations. A post-pandemic market for COVID-19 vaccines In the winter of 2021/2022, we have seen the highest number of COVID-19 infections since the pandemic started. Combined with the surge of new variants, it is yet uncertain how the pandemic will evolve. It is evident though, that booster vaccinations have been necessary to control the pandemic, as immunity is waning quickly in vaccinated subjects and breakthrough 2 www.ourworldindata.org/covid-vaccinations, checked on February 23, 2022. 3 www.airfinity.com/insights/covid-19-vaccine-market-forecast-to-grow-29-to-usd84-9b-in-2022-according-to. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 42 Corporate information 43 The Bavarian Nordic share 45 Corporate governance 53 Financial review 2021 59 Management of Bavarian Nordic Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 43 The Bavarian Nordic share Bavarian Nordic is listed on the Nasdaq Copenhagen exchange under the symbol BAVA and is included in the OMXC25 index and the Large Cap index (from January 2022). The following shareholder had publicly informed Bavarian Nordic that they own five per cent or more of the Company’s shares: ATP Group, Hillerød, Denmark, 11.46% as of December 31, 2021. Share capital The Company’s share capital was DKK 704,683,930 by year-end 2021, comprising 70,468,393 shares with a nominal value of DKK 10 each. Each share carries one vote. Bavarian Nordic held 111,227 own shares as treasury shares, corresponding to 0.16% of the share capital. The shares have been repurchased to hedge obligations under incentive schemes for the Company's Board and Executive Management. See note 30 in the consolidated financial statements. In March 2021, Bavarian Nordic completed a private placement of 5,150,000 new shares, raising gross proceeds of DKK 1,148 million, and in December 2021, a private placement was completed, comprising the issuance of 6,373,680 new shares, raising gross proceeds of DKK 1,708 million. In addition, 494,601 new shares were issued as a consequence of warrant exercise by employees during the year, raising proceeds of DKK 107 million. Share price development compared to indices Bavarian Nordic OMX Copenhagen C25 NASDAQ BIOTECH 200 190 180 170 160 150 140 130 120 110 100 By December 31, 2021, there were 3,356,484 outstanding warrants, which entitle warrant holders to subscribe for 3,356,484 shares of DKK 10 each. Thus, the fully diluted share capital amounted to DKK 738,248,770 at year-end, comprising 73,824,877 shares. Ownership In recent years, Bavarian has enjoyed a strong increase in the general awareness and interest in the Company's business and pipeline, not least led by the COVID-19 booster vaccine program. In 2021, this has led to a significant increase in the number of investors of more than 60%. As of December 31, 2021, Bavarian Nordic had 112,689 registered shareholders owning 65,691,429 shares. 90 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 44 American Depositary Receipts (ADR) Annual General Meeting Bavarian Nordic has established a sponsored Level 1 American Depositary Receipt (ADR) program with Deutsche Bank Trust Company Americas. An ADR is a receipt issued by a depositary bank representing ownership of a company’s underlying shares. ADR programs are created to enable U.S. investors to hold shares in non-U.S. companies and trade them in the same way as U.S. securities. Bavarian Nordic ADRs are available for trading in the US over-the-counter (OTC) market, where three ADRs represent one Bavarian Nordic share. The Annual General Meeting will be held on Tuesday, April 5, 2022. Additional information will become available on our website no later than 3 weeks before the Annual General Meeting. Shareholders who have requested so will receive a notification via e-mail. Investor relations Bavarian Nordic maintains an active dialogue with shareholders, analysts, prospective investors and other stakeholders by providing relevant, timely and correct communication about relevant strategic, economic, financial, operational and scientific affairs of the Company. Management and Investor Relations are widely available to existing as well as potential shareholders via participation in investor conferences, roadshows, investor meetings and conference calls. A list of the current analysts covering Bavarian Nordic can be found at our website along with financial reports, company announcements, investor presentations, and more. Distribution of share capital Financial calendar 2022 (%) March 4, 2022 Annual Report 7 11 April 5, 2022 13 69 Annual General Meeting Are you a shareholder? Registered shareholders are offered a range of electronic information services through the shareholder portal, which can be accessed from the Company’s website. The portal also offers the opportunity to request admission cards and/or vote by proxy for the General Meetings. Shareholders are encouraged to have their shares registered with the Company; registration must be through the holder’s custodian bank. Shareholders are also encouraged to sign-up for receiving company announcements via e-mail from the Company. May 9, 2022 Three-month interim report (Q1) August 24, 2022 Half-year interim report (Q2) Denmark North America Europe November 9, 2022 Visit www.bavarian-nordic.com/investor for more information. Non-registered Nine-month interim report (Q3) Our investor relations team can be contacted on [email protected] Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 45 Corporate governance Bavarian Nordic remains focused on good corporate governance, having implemented the recommendations from the Committee of Corporate Governance (Komitéen for god selskabsledelse) for companies listed on the Nasdaq Copenhagen exchange. The Board is responsible for the overall strategic management and the financial and managerial supervision of Bavarian Nordic, as well as for regular evaluation of the work of the Corporate Management. In addition, the Board supervises the Company in a general sense and ensures that it is managed in an adequate manner and in accordance with applicable law and the Company’s articles of association. The Board discharges its duties in accordance with the rules of procedure of the Board, which are reviewed and updated by all members of the Board. Management believes that the Company is operated in compliance with guidelines and recommendations that support the Company’s business model and can create value for Bavarian Nordic’s stakeholders. Regularly and at least once a year, Management monitors adherence to the recommendations on corporate governance in order to ensure the best possible utilization of and compliance with the recommendations and legislation. Board committees To support the Board in its duties, the Board has established and appointed three subcommittees that are charged with reviewing issues pertaining to their respective fields that are due to be considered at board meetings. More information about the committees, including the terms of reference which specify the tasks and responsibilities for each of the committees are available on the Company’s website: In accordance with Section 107 b of the Danish Financial Statements Act, Bavarian Nordic has published a statutory report on Corporate Governance for the financial year 2021 on the Company’s website: www.bavarian-nordic.com/corporategovernance The Board of Directors The Board of Directors (“the Board”) consists of eleven members: seven external members and four employee representatives. The external members are elected by the shareholders at the Annual General Meeting for terms of one year; retiring members are eligible for re- election. The Board elects a chair from among its members. The employee representatives are elected by the employees for a four-year term. In 2021, the first election of employee representatives took place, and the members joined the Board with effect from the Annual General Meeting on April 20, 2021. Finance, Risk and Audit Committee Nomination and Compensation Committee Science, Technology and Investment Committee Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 46 Diversity in the Board Tax policy The Board of Directors currently has a representation of two female members elected by the shareholders, thus adhering to the guidelines from the Danish Business Authority on equal gender distribution on the board. In 2020, the Board adopted a Tax Policy describing our governing principles by which we manage our tax affairs. The policy was reviewed and updated in 2021. Remuneration policy and report Evaluation of the Board The remuneration of the Board and the Executive Management is governed by the Company’s Remuneration Policy which was updated in 2021 and subsequently approved by the shareholders at the Annual General Meeting on 20 April 2021. The Board and its subcommittees conduct every year a self-evaluation of the Board's and subcommittee’s work, accomplishments and composition. The Chair heads the annual evaluation, which is conducted at least every third year by an external consultant. The process, whether it is facilitated internally or by external consultants, evaluates topics such as board dynamics, board agenda, quality of the material that is submitted to the Board, discussions at the Board meetings, the chair’s leadership of the Board, strategy, Board composition and Board competencies. Typically, the process is further facilitated by each Board member filling out a detailed questionnaire, and the Board members are asked to score to which extent they agree to the individual questions. The results of the questionnaire are then discussed at a subsequent Board meeting, and the individual comments submitted are used in the planning and handling of future Board meetings. The 2021 self-evaluation was facilitated by an external consultant and followed up by one-on- one interviews by the Chair. Key conclusions were positive with a continued satisfaction with the Board’s work as well as the work in the committees. Organizational development and continued optimization of Board meeting efficiency will also be a focus area in 2022. In accordance with section 139b in the Danish Companies Act, Bavarian Nordic has prepared a Remuneration Report on the remuneration of the individual members of the Board and the Executive Management in 2021. Business ethics In 2021, the Company established a Business Ethics Compliance Committee to ensure a corporate oversight with Bavarian Nordic’s global business ethics compliance risks. The Committee represents the Executive Management and relevant business functions and meets regularly to review and assess risks, training, and the levels of compliance. The Company’s Code of Conduct was updated in 2021 and made available also to external stakeholders via the Company’s website. Likewise, the Company’s Ethics Hotline (whistleblower scheme), which has been accessible to employees since 2014, was amended to also allow the Company’s external stakeholders to report known or suspected violations. For more details on the work and composition of the Board and its committees, reference is made to the statutory report on Corporate Governance on the Company’s website: www.bavarian-nordic.com/corporategovernance Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 47 Data ethics policy The data ethics policy is based on 8 principles: In 2021, the Company carried out a number of initiatives to support our continued commitment to maintain strong data ethics. A number of internal procedures were reviewed and improved, such as data retention policies and deletion procedures to ensure that the Company does not store personal data longer than is strictly necessary, and a series of documented data protection awareness training activities were carried out for all relevant employees. 1. Our Executive Management is dedicated to ensuring and maintaining a high standard of data ethics 2. We ensure accountability for data processing 3. We require an appropriate level of data ethics for processing activities carried out by third parties Bavarian Nordic recognizes that it also has an obligation to ensure the protection of the rights and privacy of employees, patients, customers, healthcare professionals and partners when utilizing new technologies for the processing of data. Therefore, the Board adopted a policy on data ethics based on eight concrete principles which supplements the Company’s general procedures and policies for processing of personal data. 4. We ensure that the processing activities carried out provide value to the data subjects, and is transparent and secure 5. We train our employees and monitor processing activities 6. We maintain an Ethics Hotline, where violations of data protection laws can be reported by internal and external stakeholders 7. We identify and monitor the use of new technologies for processing of data 8. We carry out internal controls Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 48 Risk management Bavarian Nordic’s business spans all activities from R&D to production and to commercialization. Our business model covers both partnership business, complex governmental sales and direct sales. By the nature of our business, we are exposed to a variety of risk along our value chain; by our thorough risk process Bavarian Nordic is managing the risks through risk identification, risk monitoring and risk mitigation. The process is an integrated part of the Bavarian Nordic operational procedures and the management processes. The table below summarizes some of the key risks that are important to Bavarian Nordic’s business including examples of mitigating actions. Risk area Risks Mitigating actions Disruptions to the supply chain, as caused by supply chain failures, • Dual sourcing strategies to secure adequate inventory levels. Supply and manufacturing breakdowns in facilities, third party • Adequate inventory for all core The formal process ensures both bottom-up and top-down identification and handling of risks. In this process key risks are first identified through a bottom-up process including description of the risks and mitigating actions taken to reduce either the likelihood of occurrence or the potential impact. Residual risk after agreed mitigating actions is further mitigated by insurance where this is relevant and possible. All risks have assigned Risk owners, normally at the Executive level, and assigned risk responsible employees who monitors and mitigates the risks closely. supply and/or manufacturing issues, COVID-19 related delays or similar, could have a significant impact on components. • Internal quality audits, including mock inspections. the ability to supply products at the • Secure adequate inventory and right time, and could impact both customer relations and financial performance. supply chain strategy including dual sourcing. • Shelf-life extension initiatives. • Disaster recovery plans and back-up strategies. The currently challenging raw The Finance, Risk & Audit Committee (FRAC) is closely monitoring the risks on a quarterly basis, incl. selected deep dives on specific risks. The Board of Directors receives regular risk updates from FRAC which then form part of the Board’s overall decisions about the Company’s strategy. material supply market and the related risks falls under this category. • Integrated sales and operations planning process in the monthly planning cadence. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 49 Risk area Risks Mitigating actions Risk area Risks Mitigating actions Disruptions to IT systems can have significant impact in many ways, including inability to communicate or perform operationally, material financial impact or inability to perform commercial sales or perform R&D. • Focus on staying updated on internal procedures for security monitoring and vulnerability assessment. The further development of products • Close dialogue with authorities Cybersecurity Development in the pipeline incl clinical trials, can be delayed or even abandoned. The product approval phase can be delayed or even fail. (e.g. FDA) to secure optimal path to approval and compliance with GMP etc. • Training and awareness campaigns both inside the IT department and within the business. • Strong quality system in place to ensure compliance with standards agreed with and required by authorities. All clinical material and production facilities require regulatory approval; such approvals can be delayed or even fail. • Continuous development of preventative measures. • Use of adaptive trial designs to minimize financial risk and impact of failure. • Involvement of third-party cyber security specialist to ensure a constant overview of threats and preventative measures available. • Perform annual security penetration tests and audits by third party. All steps in the above approval or clinical phases are associated with risks and can fail. Bavarian Nordic has revenue income • Training of sales reps in Loss of revenue due to COVID-19 from vaccines which are considered travel vaccines and another wave of travel restrictions could impact revenue. virtual selling. • Careful sales and operations planning. • Pursue sales opportunities in markets less exposed to COVID-19 restrictions. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 50 Risk area Risks Mitigating actions Risk area Risks Mitigating actions Lack of funds could eventually make it difficult for the Company to • Optimize timing of income from pursue the strategy involving among partner agreements. others investments in development • Maintain working capital at • Ensure solid financial planning. Not complying with laws and regulations could damage the Company’s reputation, result in significant fines and impede the Company’s ability to operate. • Follow and monitor the established internal compliance structure and governance related to all operations activity. Lack of funding for general Laws and regulations operations or development programs and manufacturing facilities. Some development projects require appropriate levels to free liquidity. • Keep spending and investment level at appropriate levels to stretch liquidity runway. • Internal legal resources available. • Monitor development in relevant laws and regulations. specifically funding from third parties and if this is not available it can result in delays or even termination of the project. • Allocation of internal resources to secure adaptation of new rules and regulations. • Secure constant knowledge about financing options available in the market. • Secure access to bank financing if/ when needed. • Strong relations with key existing or potential investors of development. • For ABNCoV2 largely mitigated through governmental funding. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 51 Risk area Risks Mitigating actions Risk area Risks Mitigating actions Bavarian Nordic is competing in markets where prices may be determined by the local supply/ demand, including products from competitors that are significantly larger in size and resources • Secure a very engaged and competent sales, marketing and medical affairs organization. • Leverage focus rather than size vis- a-vis competition. Partnering with other companies and • Frequent interactions with partners Commerciali- zation and Partnering government bodies in the industry is a central element of the Company’s strategy. Loss of partnerships, e.g. due to collaboration issues, failed projects or similar, could have a significant impact on the Company’s reputation and future performance. to build and maintain common understanding. competition • Processes in place to resolve potential issues. • Look for and leverage available than Bavarian Nordic. If Bavarian Nordic cannot effectively compete in these markets, it will have a negative effect on future revenue and profit. Pressure from local healthcare politics to reduce costs may impact Bavarian Nordic’s pricing or volume. Geopolitical or macroeconomic changes or health crisis, e.g. pandemics, could impact demand, pricing and access to vaccinations. differentiation. • Build strong relations through dedication and focus to achieve preferred supplier status. • Develop early-stage pipeline of new platforms and vaccines to stay competitive. Bavarian Nordic is dependent on the • Perform employer branding. ability to attract and retain talents • Provide training and development. for many functions. In times of high • Offer competitive remuneration Attraction and retention of talent competition for the right talents or adverse impact on Bavarian Nordic’s image, it could impact the Company’s ability to perform at high standards and compete against other companies. package. • Identifying and working with key talents. The validity of patents is crucial for the company to secure future revenues and return on the investments made in development. Patents might be challenged by competitors. • Dedicated and experienced resources involved in the filing of patent applications to minimize vulnerability to future invalidity actions, and with ability to defend patents if such actions are filed. Intellectual property rights (IP) Competitors might develop product candidates with higher potential which could reduce the value of Bavarian Nordic’s pipeline and products. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 52 Risk area Risks Mitigating actions Significant fluctuations in the DKK/USD • Aim to create natural hedges Currency and other currencies which Bavarian Nordic is, or could be exposed to, will impact financial positions. Potential disputes with tax authorities could result in additional tax payments. by matching income and expenses in USD and EUR. exposure and tax disputes • Material net USD exposure is hedged using FX contracts or options. Material net EUR exposure can also be hedged using FX contracts. Currency risks and additional financial risks are further explained in note [24] in the consolidated financial • Frequent monitoring of planned cash flows in other currencies allows for hedging when the risk is identified. • Taxes are paid where the Company operates, and intercompany statements. transactions are priced and governed by agreements in compliance with OECD’s transfer pricing guidelines. • Proactive work with tax authorities to ensure alignment on tax situation and avoidance of negative surprises. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 53 Financial review 2021 Income statement The financial review is based on the Group’s consolidated financial information for the year ended December 31, 2021, with comparative 2020 figures for the Group in brackets. There is no significant difference in the development of the Group and the Parent Company (except if noted specifically below). Revenue Revenue for the year was DKK 1,898 million (DKK 1,852 million). Revenue from Rabipur/ RabAvert and Encepur decreased by DKK 214 million compared to 2020. Sale, especially in Europe, was significantly impacted by COVID-19. In 2021, the Company generated revenues of DKK 1,898 million (DKK 1,852 million) compared to the latest guidance of DKK 1,900 million. The income before interest and taxes (EBIT) was a loss of DKK 314 million (income of DKK 380 million) and EBITDA was an income of DKK 75 million (income of DKK 740 million) compared to latest guided income of DKK 70 million. The guidance used as comparator corresponds to the lower end of the original EBITDA guidance provided for 2021, DKK 100-250 million, due to the COVID-19 impact on the TBE and rabies vaccine markets as well as the effect of the decision to move RSV into Phase 3 in 2022, DKK 30 million. Revenue from sales of goods was DKK 1,863 million (DKK 1,623 million) composed of sale of Rabipur/RabAvert of DKK 506 million (DKK 628 million), Encepur of DKK 363 million (DKK 455 million), sale of smallpox bulk drug substance batches and liquid frozen finished products to the U.S. Government of DKK 644 million (DKK 541 million), DKK 90 million (DKK 0 million) from sales of smallpox vaccines to a few European countries, and DKK 260 million (DKK 0 million) sales of Mvabea (Ebola) to Janssen. Revenue from ongoing contract work amounted to DKK 35 million (DKK 162 million) mostly related to revenue from the U.S. Biomedical Advanced Research and Development Authority (BARDA) to support qualification of the new fill and finish facility. Securities, cash and cash equivalents as of December 31, 2021, amounted to DKK 3,717 million (DKK 1,670 million). The total amount includes a repo loan position of DKK 500 million; The net cash and cash equivalent position is hence 3,217 million compared to a guidance of DKK 1,400 million, which included a EUR 30 million/DKK 223 million undrawn facility from the European Investment Bank (EIB). The year-end cash position has increased due to the capital increase of DKK 1,700 million in December 2021 and by December 31, 2021, the EUR 30 million credit facility from EIB remained undrawn. In the Parent Company revenue was DKK 40 million higher than in the Group due to internal sales related to RabAvert sales in the US and Rabipur and Encepur sales in Switzerland. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 54 Production costs Sales and distribution costs Production costs amounted to DKK 1,328 million (DKK 1,195 million). Costs related directly to revenue amounted to DKK 562 million (DKK 689 million) of which cost of goods sold totaled DKK 540 million (DKK 585 million). The sales and distribution costs amounted to DKK 192 million (DKK 286 million) split between costs for distribution of products of DKK 16 million (DKK 113 million) and costs for running the commercial organization and activities of DKK 176 million (DKK 173 million). In 2020 GSK handled the sale and distribution of Rabipur/RabAvert and Encepur for which the Group paid a distribution fee based on the revenue incurred, leading to much higher distribution costs in 2020 compared to 2021. Other production costs totaled DKK 493 million (DKK 233 million) of which net write- downs of inventory totaled DKK 171.6 million (DKK 25.2 million). The increased inventory write-down is a consequence of the lower Rabipur/RabAvert and Encepur sales due to the COVID-19 impact. For 2020 other production costs also included a write-down of obsolete products related to the distribution switch of Encepur and Rabipur/RabAvert from GlaxoSmithKline. Research and development costs The total research and development spending were DKK 421 million (DKK 446 million). The amount included research and development spend for funded contract costs of DKK 22 million (DKK 105 million). These costs are recognized as production costs in the income statement. The amount shown as research and development costs in the income statement totaled DKK 399 million (DKK 341 million), see note 6. The increase compared to 2020 was driven by manufacturing of RSV Phase 3 material and initial clinical study cost in preparation for the RSV Phase 3 trial commencing in 2022. In Q1 the production plant was utilized for production of RSV Phase 3 clinical trial material, which gave a much lower utilization of the commercial manufacturing capacity leading to low absorption of indirect production costs causing higher other production costs. Since August 2021, the current bulk manufacturing facility has been shut down due to the ongo- ing expansion of the drug substance facility for future production of Rabipur/RabAvert and Encepur, therefore no absorption of indirect production costs for this part of the production facility leading to increased other production costs for 2021. Administrative costs Administrative costs totaled DKK 293 million (DKK 278 million), an increase of DKK 15 million compared to last year. The increase primarily relates to the ongoing transfer project for Rabipur/RabAvert and Encepur and the impact from the extension of the Executive Management during 2020. The product rights to Rabipur/RabAvert and Encepur are amortized over 20 years, on a straight-line basis, with an annual amortization of DKK 273 million and recognized as production costs. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 55 Other operating income Other operating income for 2020 related to the sale of the Priority Review Voucher, DKK 628 million. No other operating income was recognized in 2021. The net value adjustment of deferred consideration to GSK was an expense of DKK 100 million (DKK 65 million), consisting of the three components described above. In the Parent financial statements, the financial income was DKK 82 million (DKK 120 million) and included interests on receivables from subsidiaries of DKK 23 million (DKK 22 million). The financial expenses were DKK 192 million (DKK 198 million). EBIT/EBITDA Income before interest and tax (EBIT) was a loss of DKK 314 million (income of DKK 380 million). Income before company tax was a loss of DKK 454 million (income of DKK 282 million). EBITDA was an income of DKK 75 million (income of DKK 740 million). Amortization of product rights related to Rabipur/RabAvert and Encepur amounted to DKK 273 million (DKK 273 million) whereas depreciation and impairment losses on other fixed assets amounted to DKK 115 million (DKK 87 million). Tax on income for the year Tax on the income for the year was an expense of DKK 10 million (DKK 4 million) and related primarily to taxes paid in Bavarian Nordic GmbH and Bavarian Nordic Inc. The parent company had a net loss for the year of DKK 347 million, but a taxable income of DKK 0 million reached by increasing the tax assets. Since further tax assets have been built up during the year and the decision to start two costly phase 3 studies in 2022 Management assesses that the deferred tax asset should remain at DKK 0 million on the balance sheet. Following the tax position in the parent company the effective tax rate for the Group was negative by 2.3% (positive 1.6%). The Company retains the right to use the tax losses carried forward that was written down in prior years. Financial income and financial expenses Financial income was DKK 50 million (DKK 98 million) and consisted of adjustment of deferred consideration to GlaxoSmithKline due to change in estimated timing of payments, DKK 32 million (DKK 68 million), currency adjustments on deferred consideration due to decreased EUR/DKK rate during 2021, DKK 2 million (DKK 12 million), interest on repo trans- actions DKK 2 million (DKK 0 million), interest income on securities of DKK 11 million (DKK 9 million), and a net foreign exchange gain of DKK 3 million (net loss of DKK 19 million). Net profit Financial expenses were DKK 191 million (DKK 196 million) and consisted of unwinding of the discount related to deferred consideration, DKK 134 million (DKK 145 million), interest expense on debt of DKK 18 million (DKK 32 million), and negative fair value adjustments on securities of DKK 39 million (net gain of DKK 7 million). The Group reported a net loss for the year of DKK 465 million (net profit of DKK 278 million). Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 56 Liquidity and capital resources Cash flow from financing activities was a contribution of DKK 3,536 million (DKK 1,335 million) split between net proceeds from capital increases DKK 2.8 billion, ABNCoV2 funding from Danish Ministry of Health DKK 160 million, proceeds from warrant exercise DKK 107 million and a repo position of DKK 500 million. As of December 31, 2021, the Company had cash and cash equivalents of DKK 592 million (DKK 285 million), held investments in securities of DKK 3,125 million (DKK 1,384 million) and had a repo loan position of DKK 500 million. The net securities and cash position amounted to DKK 3,217 million (DKK 1,670 million). The Company also maintained unutilized credit lines of DKK 243 million (DKK 243 million) as of such date. The net cash flow for 2021 was positive by DKK 301 million (DKK 5 million negative). Cash flows Balance sheet Cash flow from operating activities totaled a net spend of DKK 359 million (net contribution of DKK 572 million, mainly from the sale of the priority review voucher) despite a positive EBITDA of DKK 75 million (DKK 740 million), primarily driven by an increase in trade receivables following substantial revenue recognized in December 2021. The balance sheet total was DKK 12,089 million as of December 31, 2021 (DKK 8,759 million). Assets Cash flow spend on investment activities totaled DKK 2,877 million (DKK 1,912 million) and included DKK 372 million (DKK 394 million) in milestone payments to GlaxoSmithKline and DKK 483 million (DKK 223 million) of investments in property, plant and equipment primarily related to the ongoing expansion of the drug substance facility for future produc- tion of Rabipur/RabAvert and Encepur. Investment in other intangible assets amounted to DKK 203 million (DKK 90 million) and included the ongoing Rabipur/RabAvert and Encepur technology transfer project, DKK 87 million, and capitalized costs related to the ABNCoV2 development asset, DKK 108 million. The net investment in securities amounted to DKK 1,779 million (net investment of DKK 1,202 million) following the completion of two capital increases in 2021 with a combined net proceed of DKK 2.8 billion. Intangible assets stood at DKK 5,804 million (DKK 5,291 million) with the main asset being the product rights to Rabipur/RabAvert and Encepur of DKK 4,913 million (DKK 5,186 million). The product rights are amortized on a straight-line basis over their expected useful lives of 20 years with an annual amortization of DKK 273 million. Acquired rights and development in progress relates to the development of ABNCoV2 stood at DKK 734 million (DKK 30 million). The asset includes the upfront payment to AdaptVac of DKK 30 million, the net present value of probable future sales and development milestones DKK 596 million (further described below under ‘Liabilities’) and capitalization of development costs for running the ongoing Phase 2 study DKK 108 million. For further description of the asset and the accounting policy see note 16. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 57 Property, plant and equipment stood at DKK 1,413 million (DKK 1,011 million) and included asset under construction of DKK 579 million (DKK 213 million). Assets under construction relates mainly to the ongoing expansion of the drug substance facility for future production of Rabipur/RabAvert and Encepur, DKK 479 million. The fill and finish manufacturing facility com- pleted in 2021 and the depreciation of the fill and finish building and equipment commenced. As of December 31, 2021, cash and securities stood at DKK 3,717 million (DKK 1,670 million). The increase follows the two capital increases, the repo position and the funding from the Danish Ministry of Health. The cash and funding position for 2022 is assessed as satisfactory. Bavarian Nordic’s cash and cash equivalents are primarily invested in deposit accounts with highly rated banks and in short-term Danish government and mortgage bonds. Inventories stood at DKK 480 million (DKK 521 million), of which the inventory of Rabipur/ RabAvert and Encepur products amounted to DKK 305 million (DKK 308 million) as per December 31, 2021. As a result of the continuing negative sales impact from the COVID-19 pandemic Management assesses that some products will likely expire in 2022 due to limited remaining shelf life. A write-down of DKK 172 million was recorded during 2021. Equity After the transfer of the result for the year, equity stood at DKK 7,375 million (DKK 4,894 million). Net proceeds from the two capital increases amounted to DKK 2.8 billion and warrant exercise amounted to DKK 107 million. Receivables stood at DKK 557 million (DKK 190 million), of which trade receivables amount- ed to DKK 382 million (DKK 139 million) and prepayments amounted to DKK 109 million (DKK 14 million). The increase in trade receivables compared to year-end 2020 relates to sale of Mvabea (Ebola vaccine) to Janssen and Jynneos to U.S. Government recognized in December 2021. Liabilities The present value of the future milestone payments to GlaxoSmithKline for the acquisition of the product rights has been recognized as deferred consideration. Deferred consider- ation amounted to DKK 2,551 million (DKK 2,823 million), a decrease of DKK 272 million compared to December 31, 2020. Three milestones in a total of DKK 372 million were paid to GlaxoSmithKline during 2021. The adjustment of the net present value of the deferred consideration, both in terms of change in assumed timing of the future milestone payments and unwinding of the discount, amounted to DKK 100 million (DKK 65 million). Prepayments relates mainly to the ABNCoV2 activity. Production of drug substance for clinical trial materials for the planned Phase 3 study for ABNCoV2 is taking place at a CMO. As part of the agreement the Company has prepaid for purchase of materials, DKK 97.4 million as per December 31, 2021. Once the materials have been consumed in the production of the Phase 3 clinical trial materials, the prepayments will be deducted, and the costs capitalized as development costs (see further in note 16). The deferred consideration to GlaxoSmithKline does not include the sales milestone of EUR 25 million included in the asset purchase agreement with GlaxoSmithKline as the Company does not assess the sales milestone to be probable as of December 31, 2021. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 58 Under the terms of the license and collaboration agreement concluded with AdaptVac July 2020, the Company is committed to payment of potential future development and sales milestones and tiered royalties. million and one development milestone of DKK 80 million. The funding has been recognized as prepayment and loan from Government. See further description in note 26. As of December 31, 2021, debt to credit institutions amounted to DKK 893 million (DKK 395 million) and included the European Investment Bank loan of DKK 372 million (DKK 372 million), a repo position of DKK 500 million (DKK 0 million) and a mortgage loan of DKK 21 million (DKK 23 million). Based on the positive data from the ABNVoC2 Phase 1/2 study conducted by AdaptVac and the positive topline results from the Company’s ongoing ABNVoC2 Phase 2 study Manage- ment assesses that the likelihood of future regulatory approval of the ABNVoC2 vaccine is high, hence some of milestone payments to AdaptVac are expected to become payable. The net present value of the probable milestone payments amounts to DKK 596 million and has been recognized as deferred consideration. A corresponding asset is recognized under the ABNCoV2 development project, see description above under ‘Assets’ and note 25. In August 2021, the Company entered a funding agreement with the Danish Ministry of Health to further advance the development of ABNCoV2. The agreement is valued at up to DKK 800 million and aims to support the completion of the development towards licensure of ABNCoV2 as a booster vaccine. Under the agreement, Bavarian Nordic is entitled to an upfront payment of DKK 80 million, in addition to payments of up to DKK 720 million, which are contingent upon reaching a number of predefined milestones. All payments are potentially subject to repayment, however only upon successful approval and achievement of a certain level of commercial success. Half of the repayments shall be paid by delivery of vaccines to the Danish Ministry of Health whereas the remaining part of the repayments can be settled in either royalty payments from the sale of the vaccine to other customers or by delivery of further vaccines. As per December 31, 2021, the Company has received the upfront payment of DKK 80 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 59 Management of Bavarian Nordic Board of Directors Gerard van Odijk, MD, Chair Erik Gregers Hansen, MSc Independent advisor for the pharmaceutical industry and former Professional board member. president and chief executive officer of Teva Pharmaceuticals Europe B.V. Chair of the board of Polaris Management A/S and Sirius Holding ApS. Deputy chair of the board of Lauritzen Fonden, Okono A/S, and Bagger-Sørensen & Co. A/S and four of its five subsidiaries. Member of the board of Saga Private Equity ApS, Lesanco ApS, Ecco Sko A/S, Farumgade 2B Holding ApS and its subsidiary, Wide Invest ApS and Bagger-Sørensen Fonden. Member of the executive board of Rigas Holding ApS and its two subsidiaries, Sirius Holding ApS, Tresor Asset Advisers ApS, Polaris Invest II ApS and EGH Gentofte ApS. Chair of the supervisory board of Hubrecht Organoid Technology. Member of the supervisory board of Centre for Human Drug Research. Special competences: Medical qualifications and extensive executive background within publicly traded and private companies in the international healthcare industry. Special competences: Finance, investment and risk management experience and thorough understanding of managing finance operations. Board experience with publicly traded companies. Anders Gersel Pedersen, MD, PhD, Deputy chair Former Executive Vice President of Research & Development of H. Lundbeck A/S. Peter Kürstein, MBA Former President and Chief Executive Officer and Chair of Radiometer Medical ApS. Member of the board of Genmab A/S, Hansa Biopharma AB and Bond Avillion 2, an entity of Avillion LLP. Chair of the board of Aelis Farma. Chair of the board of Ferrosan Medical Devices Holding A/S. Deputy chair of the board of FOSS A/S, Experimentarium and American Chamber of Commerce. Member of the board of N. Foss & Co. A/S and Den Erhvervsdrivende Fond Gl. Strand, Dansk BørneAstma Center and Art Agenda 2030. Member of the executive board of Mijamax ApS. Mr. Gersel is also the CEO of his private holding company Gerselconsult ApS. Special competences: Scientific knowledge and large drug development experience within neuroscience and oncology. Extensive board and management experience from publicly traded, international pharmaceutical and biotech companies. Special competences: Extensive board and management experience from publicly traded, international healthcare companies. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 60 Board of Directors (continued) Frank Verwiel, MD, MBA Anne Louise Eberhard, MSc. Law, and BSc Informatics and Former President and Chief Executive Officer of Aptalis Pharma, Inc. Management Accounting Former Senior Executive Vice President and Global Head of Corporate & Institutional Banking of Danske Bank A/S, and Chief Commercial Officer at Intrum AB. Chair of the board of ObsEva SA and Intellia Therapeutics, Inc. Special competences: Extensive strategic, operational and international experience within the pharmaceutical industry. Member of the board of FLSmidth & Co. A/S and its subsidiary FLSmidth A/S, Topdanmark A/S and its subsidiary Topdanmark Forsikring A/S, Knud Højgaards Fond and two of its three subsidiaries, VL 52 ApS and Oterra A/S, its holding company Spring TopCo DK ApS, and three other group companies. Chair of the board of Moneyflow Group A/S and its subsidiary Moneyflow 1 A/S. Deputy chair of the board of Finansiel Stabilitet SOE. Member of the executive board of EA Advice ApS. Faculty Member at Copenhagen Business School, Board Educations. Special competences: Extensive finance, risk management and ESG experience as well as board experience from publicly listed companies. Elizabeth McKee Anderson, MBA Former worldwide Vice President, Global Strategic Marketing and Market Access, Infectious Diseases and Vaccines for Johnson & Johnson. Former member of Huntsworth plc, and Context Therapeutics LLC. Member of the board of Revolution Medicines Inc., BioMarin Pharmaceutical Inc., Insmed Inc., Aro Biotherapeutics Company and a member of the advisory Board of NAXION, Inc. Trustee of The Wistar Institute and principal of PureSight Advisory, LLC. Special competences: Extensive strategic, operational and international experience within the pharmaceutical industry. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 61 Board of Directors (continued) Linette Munksgaard Andersen Anja Gjøl Manager, Customer Service, Shipping & Distribution. Scientist. Employee-elected. Employee-elected. Thomas Alex Bennekov Karen Merete Jensen Sr. App. & Integration Analyst. QA Specialist. Employee-elected. Employee-elected. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 62 Board of Directors (continued) First Term Shares held in Board elected expires 2022 2022 2022 2022 2022 2022 2022 2025 2025 2025 2025 Independent Nationality Dutch Year of birth 1957 Bavarian Nordic Gerard van Odijk, Chair Anders Gersel Pedersen, Deputy chair Erik G. Hansen 2008 2010 2010 2012 2016 2017 2019 2021 2021 2021 2021 No1 Yes Yes Yes Yes Yes Yes No2 No2 No2 No2 28,007 14,903 62,801 17,851 1,601 1,601 - Danish Danish Danish Dutch 1951 1952 Peter Kürstein 1956 Frank Verwiel 1962 Elizabeth McKee Anderson Anne Louise Eberhard American Danish Danish Danish Danish Danish 1957 1963 Linette Munksgaard, employee-elected Thomas Bennekov, employee-elected Anja Gjøl, employee-elected Karen M. Jensen, employee-elected 1974 - 1968 1,313 - 1980 1959 139 1 Gerard van Odijk is not considered independent under the Danish corporate governance recommendations due to being a member of the Board for more than 12 years. 2 Employee-elected members are not considered independent under the Danish corporate governance recommendations. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 63 Board of Directors (continued) Meetings in 2021 10 Meeting attendance Number of meetings attended by each Board member out of the total number of meetings within the member’s term Board of Directors Board of Directors Finance, Risk and Audit Committee Nomination and Compensation Committee Science, Technology and Investment Committee Gerard van Odijk C C 5 Peter Kürstein Finance, Risk and Audit Committee Elizabeth McKee Anderson C Anders Gersel Pedersen Erik G. Hansen DC 7 Frank Verwiel Anne Louise Eberhard Karen M. Jensen C Nomination and Compensation Committee Anja Gjøl Thomas Bennekov Linette Munksgaard C: Chair DC: Deputy chair 4 Meeting attended Meeting not attended Not a Board member at the time Science, Technology and Investment Committee Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 64 Management of Bavarian Nordic Executive Management Paul Chaplin, Jean-Christophe May President and Chief Executive Officer. Executive Vice President, Chief Commercial Officer. Paul Chaplin, PhD is a British national, born in 1967. He joined Bavarian Nordic in Jean-Christophe (JC) May, PharmD, MBA is a French national, born in 1967. He joined Bavarian in 2020 from GlaxoSmithKline (GSK), where he served as Vice President and global vaccines commercialization leader and was responsible for global strategic leadership and performance. 1999 as director of immunology. Prior to joining the Company, Mr. Chaplin worked for several years both in the UK and Australia developing vaccines against infectious diseases. He was appointed Vice President in 2004, and President and Chief Executive Officer in 2014. Henrik Juuel Laurence De Moerlooze Executive Vice President, Chief Financial Officer. Executive Vice President, Chief Medical Officer. Laurence De Moerlooze, PhD is a Belgian national, born in 1964. She joined Bavarian in 2020 from Takeda Vaccines, where she served as Vice President and Global Program Lead for vaccines against Zika virus and Norovirus. Prior to Takeda she worked at GSK for more than 15 years, holding various leading roles in medical affairs and vaccine development. Henrik Juuel, MSc is a Danish national, born in 1965. He joined Bavarian Nordic in November 2018 from Orexo AB. Prior to Orexo Mr. Juuel has held senior positions at several large and diverse organizations including Group CFO of Virgin Mobile (Central and Eastern Europe), CFO of GN ReSound and NNE Pharmaplan, as well as several senior finance positions at Novo Nordisk Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 65 Executive Management (continued) Russell Thirsk Anu Helena Kerns Executive Vice President, Chief Operating Officer (appointed as of April 1, 2022). Executive Vice President, People and Organization. Anu Helena Kerns, MSc is a Danish national, born in 1972. She joined Bavarian Nordic in 2020 from Novo Nordisk, where she served for 11 years holding various leadership roles with increasing responsibilities, including 5 years abroad where she was responsible for establishing a new regional organizational structure and driving the HR development and communication strategy. Prior to Novo Nordisk, Ms. Kerns worked for 8 years in the financial sector with employer branding, reputation management and change communication. Russell Thirsk, MSc is a British national, born in 1968. He will join Bavarian Nordic in April 2022, succeeding Henrik Birk. He previously served as Head of Operations at GSK Vaccines in Belgium, a role he assumed after GSK’s acquisition of Novartis’ vaccine business, where he served for more than two decades, holding leadership roles of increasing responsibility in vaccine manufacturing operations across various geographies. Henrik Birk Executive Vice President, Chief Operating Officer (departing). Henrik Birk, MBA is a Danish National, born in 1974. He joined Bavarian Nordic in 2008 from Coloplast and has since served in various management positions of increasing responsibility, most recently as Senior Vice President, Strategy, People and Organization. Mr. Birk was appointed Executive Vice President and Chief Operating Officer in 2017. Member of the board of Kompagniet.nu ApS and VIRKSOMHEDSCENTER-KBH ApS. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 66 Financial statements 67 Consolidated financial statements 122 Financial statements of the parent company Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 67 Contents 67 Financial statements – Group 85 14. Tax for the year 68 Consolidated income statements 68 Consolidated statements of comprehensive income 69 Consolidated statements of cash Flow 87 15. Earnings per share (EPS) 88 16. Intangible assets 92 17. Property, plant and equipment 95 18. Right-of-use-assets 70 Consolidated statements of financial position – Assets 71 Consolidated statements of financial position – Equity and liabilities 72 Consolidated statements of changes in equity 96 19. Inventories 97 20. Trade receivables 98 21. Other receivables 74 Notes 98 22. Prepayments 74 75 76 79 79 80 80 81 82 1. Significant accounting policies 2. Significant accounting estimates and judgments 3. Revenue 99 23. Other liabilities 100 24. Financial risks and financial instruments 106 25. Deferred consideration 107 26. Prepayment and loan from Government 108 27. Debt to credit institutions 109 28. Lease liabilities 110 29. Prepayment from customers 110 30. Related party transactions 111 31. Share-based payment 4. Production costs 5. Sales and distribution costs 6. Research and development costs 7. Adminstrative costs 8. Staff costs 9. Depreciation, amortization and impairment losses 83 10. Fees to auditor appointed at the annual general meeting 83 11. Other operating income 84 12. Financial income 121 32. Contingent liabilities and other contractual obligations 121 33. Significant events after the balance sheet date 121 34. Approval of the consolidated financial statements 84 13. Financial expenses Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 68 Consolidated income statements Consolidated statements of comprehensive income For the years ended December 31, 2021 and 2020 For the years ended December 31, 2021 and 2020 DKK thousand Note 2021 2020 DKK thousand Note 2021 2020 Revenue 3 1,897,875 1,327,560 570,315 1,852,383 1,195,094 657,289 Net profit for the year (464,775) 277,521 Production costs Gross profit 4,8,9 Items that may subsequently be reclassified to the income statement: Exchange rate adjustments on translating foreign operations 10,081 (542) (3,082) (3,096) Sales and distribution costs Research and development costs Administrative costs 5,8 6,8,9 191,783 399,159 292,920 883,862 285,783 341,420 278,145 905,348 Change in fair value of financial instruments entered into to hedge future cash flows 7,8,9,10 Other comprehensive income after tax Total comprehensive income 9,539 (6,178) 271,343 Total operating costs (455,236) Other operating income 11 - 627,647 379,588 Income before interest and tax (EBIT) (313,547) Financial income 12 13 50,233 191,116 97,922 195,534 281,976 Financial expenses Income before company tax (454,430) Tax on income for the year 14 10,345 4,455 Net profit for the year (464,775) 277,521 Earnings per share (EPS) – DKK Basic earnings per share of DKK 10 Diluted earnings per share of DKK 10 15 15 (7.4) (7.4) 5.1 5.1 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 69 Consolidated statements of cash flow For the years ended December 31, 2021 and 2020 DKK thousand Note 2021 2020 DKK thousand Note 2021 2020 Investments in product rights Investments in other intangible assets Investments in property, plant and equipment Investments in financial assets Investments in securities 16, 25 16 (371,849) (203,475) (483,127) (39,041) (393,992) (89,844) (222,874) (2,677) Net profit for the year (464,775) 277,521 Adjustment for non-cash items: Financial income 17 12 13 (50,233) 191,116 10,345 (97,922) 195,534 4,455 Financial expenses (2,115,796) (2,343,828) 336,342 1,141,683 Tax on income for the year Depreciation, amortization and impairment Share-based payment Disposal of securities 9 388,310 56,857 360,147 32,998 31 Cash flow from investment activities (2,876,946) (1,911,532) Changes in inventories Changes in receivables Changes in current liabilities 41,039 (364,393) (146,007) (420,320) (88,094) 345,723 Payment on loans 27 (2,173) (1,375,598) Proceeds from loans 27 28 660,000 (19,507) 107,183 2,856,596 (57,438) - - (17,799) 15,564 Repayment of lease liabilities Proceeds from warrant programs exercised Proceeds from capital increase Costs related to issue of new shares Sale of preemptive rights - treasury shares Purchase of treasury shares Cash flow from operations (operating activities) (337,741) 610,042 2,824,326 (103,184) 2,664 Received financial income Paid financial expenses Paid company taxes 6,198 (24,383) (2,574) 5,847 (40,034) (3,944) (8,581) (11,099) Cash flow from financing activities Cash flow of the year 3,536,080 300,634 1,334,874 (4,747) Cash flow from operating activities (358,500) 571,911 Cash and cash equivalents as of January 1 Currency adjustments 285,487 5,699 297,545 (7,311) Cash and cash equivalents as of December 31 591,820 285,487 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 70 Consolidated statements of financial position – Assets December 31, 2021 and 2020 DKK thousand Note 2021 2020 DKK thousand Note 19 2021 2020 Non-current assets Product rights Current assets Inventories 4,912,830 733,770 5,185,765 29,813 480,043 521,082 Acquired rights and development in progress Software Trade receivables Other receivables Prepayments 20 21 22 381,624 66,517 139,292 37,334 22,985 17,631 Intangible assets in progress Intangible assets 134,371 57,543 108,840 556,981 13,732 16 5,803,956 5,290,752 Receivables 190,358 Land and buildings 345,953 10,011 366,232 3,713 Securities 24 3,124,795 1,384,120 Leasehold improvements Cash and cash equivalents 591,820 285,487 Plant and machinery 254,530 223,467 578,707 1,412,668 204,664 223,238 213,309 1,011,156 Securities, cash and cash equivalents 3,716,615 1,669,607 Fixtures and fittings, other plant and equipment Assets under construction Total current assets Total assets 4,753,639 2,381,047 8,759,064 Property, plant and equipment 17 18 12,089,269 Right-of-use assets 75,843 71,987 Other receivables Prepayments 21 22 4,778 38,385 43,163 4,122 - Financial assets 4,122 Total non-current assets 7,335,630 6,378,017 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 71 Consolidated statements of financial position – Equity and liabilities December 31, 2021 and 2020 DKK thousand Note 2021 2020 Equity Share capital Treasury shares Retained earnings Other reserves 704,684 (1,112) 584,501 (1,077) 6,588,908 82,187 4,246,359 64,570 Equity 7,374,667 4,894,353 Liabilities Deferred consideration Prepayment and loan from Government Debt to credit institutions Lease liabilities 25 26 27 28 2,569,090 160,511 18,896 2,464,932 - 393,268 54,201 57,547 Non-current liabilities 2,806,044 2,912,401 Deferred consideration Debt to credit institutions Lease liabilities 25 27 28 29 577,667 874,373 21,266 357,736 2,174 20,422 74,347 345,320 497 Prepayment from customers Trade payables 16,904 263,611 3,743 Company tax Other liabilities 23 150,994 1,908,558 151,814 952,310 Current liabilities Total liabilities 4,714,602 3,864,711 8,759,064 Total equity and liabilities 12,089,269 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 72 Consolidated statements of changes in equity December 31, 2021 Reserves for Reserves for fair Share capital Treasury shares Retained earnings currency value of financial Share-based payment The share capital comprises a total of 70,468,393 shares of DKK 10 as of December 31, 2021 (58,450,112 shares). The shares are not divided into share classes, and each share carries one vote. DKK thousand adjustment instruments Equity Equity as of January 1, 2021 584,501 (1,077) 4,246,359 (464,775) - (40,640) (809) 106,019 4,894,353 Comprehensive income for the year Net profit for the year - - - - - - - - - (464,775) 10,081 Treasury shares In May 2021, the Board of Directors decided to launch a share buy-back program, under which the Company bought back 31,747 of its own shares (52,397 shares in 2020). The purpose of the share buy-back program was to meet the Company's obligations arising from the share-based incentive program for the Executive Management and the Board of Directors. Under the share-based incentive program, payment of half of the achieved bonus for members of the Executive Management are converted to restricted stock units for a value corresponding to half of the achieved bonus. The restricted stock units will be released to the Executive Management 3 years after grant. This to further increase the long-term shared interests between the Executive Management and the Company's shareholders. The Board of Directors is granted restricted stock units corresponding to 50% of the annual fee (excl. committee fee). The vesting period for those restricted stock units is also 3 years. Other comprehensive income Exchange rate adjustments on translating foreign operations 10,081 Change in fair value of financial instruments entered into to hedge future cash flows - - - - (542) - (542) Total comprehensive income for the year - - (464,775) 10,081 (542) - (455,236) Transactions with owners Share-based payment - - - 126,729 695 - - - - - - - - - - - - - - - - - - 38,584 (24,492) (695) - 38,584 107,183 - Warrant programs exercised 4,946 - Warrant programs expired - - - Capital increase through private placement Costs related to issue of new shares Purchase of treasury shares 115,237 2,741,359 (57,438) (8,264) 4,243 2,856,596 (57,438) (8,581) 1 - - - - (317) 282 - - Transfer regarding restricted stock units Restricted stock units converted to cash bonus at exercise Total transactions with owners - - (4,524) (795) 8,078 - (795) Treasury shares represent 0.16% (0.18%) of the total share capital. 120,183 (35) 2,807,324 2,935,550 Equity as of December 31, 2021 704,684 (1,112) 6,588,908 (30,559) (1,351) 114,097 7,374,667 For further information about share based payment see note 31. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 73 Consolidated statements of changes in equity December 31, 2020 Reserves for Reserves for fair Share capital Treasury shares Retained earnings currency value of financial Share-based payment The share capital comprises a total of 58,450,112 DKK thousand adjustment instruments Equity shares of DKK 10 as of December 31, 2020 (32,389,065 shares). The shares are not divided into share classes, and each share carries one vote. Equity as of January 1, 2020 323,891 (684) 1,460,007 277,521 - (37,558) 2,287 117,512 1,865,455 Comprehensive income for the year Net profit for the year - - - - - - - - - 277,521 (3,082) Other comprehensive income Exchange rate adjustments on translating foreign operations (3,082) Change in fair value of financial instruments entered into to hedge future cash flows - - - - (3,096) - (3,096) Total comprehensive income for the year - - 277,521 (3,082) (3,096) - 271,343 Transactions with owners Share-based payment - - - 17,514 - - - - - - - - - - - - - - - - - - 29,284 29,284 15,564 - Warrant programs exercised 1,498 - (3,448) Warrant programs expired - - 33,563 (33,563) Capital increase through rights issue Costs related to issue of new shares Purchase of treasury shares 259,112 - - 2,565,214 (103,184) (10,575) 3,635 - 2,824,326 (103,184) (11,099) - - - - (524) 131 - - (3,766) - Transfer regarding restricted stock units Sale of preemptive rights - treasury shares Total transactions with owners - - 2,664 2,664 260,610 (393) 2,508,831 (11,493) 2,757,555 Equity as of December 31, 2020 584,501 (1,077) 4,246,359 (40,640) (809) 106,019 4,894,353 Transactions on the share capital DKK thousand Rules on changing Articles of Association Changing the Articles of Association requires that the resolution passes by at least 2/3 of the votes as well as 2/3 of the voting capital represented. 2021 584,501 120,183 704,684 2020 323,891 260,610 584,501 2019 323,106 785 2018 322,451 655 2017 313,539 8,912 Share capital as of January 1 Issue of new shares Share capital as of December 31 323,891 323,106 322,451 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 74 Note 1 Significant accounting policies Basis of preparation The Group has adopted the following revised standards and interpretations: • Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 og IFRS 16, IBOR-reform phase 2 • Amendments to IFRS 4, insurance contracts and postponement of adoption of IFRS 9 • Amendments to IFRS 16, covid-19-related rent concessions The specific disclosures required by IFRS are provided in the Consolidated Financial Statements unless the information is considered immaterial to the users of the financial statements. consolidated financial statements, the book value of shares in subsidiaries held by the parent company is set off against the equity of the subsidiaries. The consolidated financial statements for Bavarian Nordic have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU and Danish disclosure requirements for the consolidated financial statements of listed companies. Danish disclosure requirements for the presentation of consolidated financial statements are imposed by the Statutory Order on Adoption of IFRS issued under the Danish Financial Statements Act. Foreign currency translation Accounting policies On initial recognition, transactions denominated in curren- cies other than the Group’s functional currency are trans- lated at the exchange rate ruling at the transaction date. The accounting policies for specific line items are described in the notes to the financial statements. Set out below is a description of the accounting policies for the basis of consolidation, foreign currency translation and the cash flow statement. The implementation of new or revised standards and interpretations that are effective from 1 January 2021 has not had a material impact on the consolidated financial statements in 2021. Furthermore, Management does not anticipate any significant impact on future periods from the adoption of these new amendments. Receivables, payables and other monetary items denominated in foreign currencies that have not been settled at the balance sheet date are translated at the exchange rates at the balance sheet date. The accounting policies are unchanged from last year except for changes due to implementation of new and revised standards that were effective January 1, 2021. The consolidated financial statements are presented in Danish kroner (DKK), which is the functional currency of the parent company. Recognition and measurement Income is recognized in the income statement when generated. Assets and liabilities are recognized in the balance sheet when it is probable that any future economic benefit will flow to or from the Group and the value can be reliably measured. On initial recognition, assets and liabilities are measured at cost. Subsequently, assets and liabilities are measured as described in the description of the accounting policies in the respective notes to the financial statements. Exchange differences between the exchange rate at the date of the transaction and the exchange rate at the date of payment or the balance sheet date, respectively, are recognized in the income statement under financials. Property, plant and equipment and intangible assets, inventories and other nonmonetary assets acquired in foreign currency and measured based on historical cost are translated at the exchange rates at the transaction date. Standards and interpretations not yet in force At the date of publication of the consolidated financial statements, a number of new and amended standards and interpretations have not yet entered into force or have not yet been adopted by the EU. Therefore, they are not incorporated in the consolidated financial statements. The consolidated financial statements are presented on a historical cost basis, apart from derivative financial instruments, securities and liability relating to phantom shares, which are measured at fair value. The accounting policies have been consistently applied for the financial year and for the comparative figures except for implementation of new standards and amendments, see further below. None of the new or amended standards and interpretations are expected to have a material impact on the consolidated financial statements. Basis of consolidation The consolidated financial statements include Bavarian Nordic A/S and the subsidiaries in which the Group holds more than 50% of the voting rights or otherwise has control. On recognition in the consolidated financial statements of subsidiaries whose financial statements are presented in a functional currency other than Danish kroner (DKK), the income statements are translated at the average exchange rates of the respective months. Applying materiality In the narrative sections of the consolidated financial state- ments comparative figures for 2020 are shown in brackets. The consolidated financial statements are a result of processing large numbers of transactions and aggregating those transactions into classes according to their nature or function. The transactions are presented in classes of similar items in the consolidated financial statements. If a line item is not individually material, it is aggregated with other items of a similar nature in the consolidated financial statements or in the notes. Principles of consolidation The consolidated financial statements are prepared on the basis of the financial statements of the parent company and the individual subsidiaries, and these are prepared in accordance with the Group’s accounting policies and for the same accounting period. Balance sheet items are translated at the exchange rates at the balance sheet date. Exchange differences arising on the translation of foreign subsidiaries’ opening balance sheet items to the exchange rates at the balance sheet date and on the translation of the income statements from average exchange rates of the respective months to exchange rates at the balance sheet date are recognized as other comprehensive income. Implementation of new and revised standards and interpretations The International Accounting Standards Board (IASB) has is- sued new standards and revisions to existing standards (IFRS) and new interpretations (IFRIC) which are mandatory for accounting periods commencing on or after January 1, 2021. Intra-group income and expenses together with all intra-group profits, receivables and payables are eliminated on consolidation. In the preparation of the Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 75 Note 1 Note 2 Significant accounting policies (continued) Significant accounting estimates and judgments Segment reporting Net asset value per share: Significant accounting estimates In the preparation of the consolidated financial statements, Management makes a number of accounting estimates, which form the basis for the presentation, recognition and measurement of the Group's assets and liabilities. the measurement of assets and liabilities in the following The Group does not prepare segment reporting internally and therefore only reports one operating segment externally. Equity reporting period. Management bases its estimates on historical experience and various other assumptions that are held to be reasonable under the circumstances. The estimates and underlying assumptions are reviewed on an ongoing basis. If necessary, changes are recognised in the period in which the estimate is revised. Management considers the key accounting estimates to be reasonable and appropriate based on currently available information. The actual amounts may differ from the amounts estimated as more detailed information becomes available. Number of shares at year-end Share price/Net asset value per share: Market price per share Net asset value per share Geographic spilt of revenue and revenue from major customers is disclosed in note 3 to the consolidated financial statements. Geographic location of noncurrent assets is disclosed in note 16 and 17 to the consolidated financial statements. The recognition and measurement of assets and liabilities often depend on future events that are somewhat uncertain. In that connection, it is necessary to assume a course of events that reflects Management’s assessment of the most probable course of events. Equity share, %: Equity x 100 Total assets Cash flow statement The cash flow statement is prepared in accordance with the indirect method on the basis of the Group’s net profit for the year. The statement shows the Group’s cash flows broken down into operating, investing and financing activi- ties, cash and cash equivalents at year end and the impact of the calculated cash flows on the Group’s cash and cash equivalents. Earnings per share and diluted earnings per share are calculated in accordance with IAS 33 “Earnings per share” and specified in note 15. Management has made the following accounting estimates which significantly affect the amounts recognized in the consolidated financial statements: The key accounting estimates identified are those that have a significant risk of resulting in a material adjustment to Accounting policy Key accounting estimates and judgements Estimate of US sales deductions and provisions for sales rebates Note Cash flows in foreign currencies are translated into Danish kroner (DKK) at the exchange rate on the transaction date. Revenue 3 Intangible assets Estimate regarding impairment of assets; assessment whether development costs should be expensed or capitalized; assessment whether future sales and development milestones have become probably; and judgement of whether a transaction is an asset acquisition or a business combination 16 In the cash flows from operating activities, net profit for the year is adjusted for non-cash operating items and changes in working capital. Inventories Estimate of indirect production costs capitalized and inventory write-down 19 Cash flows from investing activities include cash flows from the purchase and sale of intangible assets, property, plant and equipment, investments and securities. Cash flows from financing activities include cash flows from the raising and payment of loans and capital increases. Additionally, cash flows from assets held under finance leases are recognized by way of lease payments made. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 76 Note 3 Revenue Accounting policies negotiating price concessions with drug manufacturers for the commercial channels, and determine which drugs are offered as preferred options on their drug lists. Sale of services and licenses Significant accounting estimates Furthermore, revenue comprises the fair value of the con- sideration received or receivable for income derived from development services where revenue is measured at the expected net sales price. Sale of goods Provisions for sales deductions Revenue from sale of goods is recognized when Bavarian Nordic has transferred control of products sold to the buyer and it is probable that Bavarian Nordic will collect the consideration to which it is entitled for transferring the products. Control of the products is transferred at a point in time, typically on delivery. The amount of sales to be recognized is based on the consideration Bavarian Nordic expects to receive in exchange for its goods. When sales are recognized, Bavarian Nordic also records estimates for a variety of sales deductions, including product returns as well as rebates and discounts to government agencies, wholesalers, health insurance companies, managed healthcare organisations and retail customers. Revenue is measured net of value added tax, duties, etc. collected on behalf of a third party. Sales discounts and rebates are predominantly issued in the US in connection with the US Federal and State Government Healthcare programs, namely Medicare and Medicaid, and commercial rebates. US wholesaler charge-backs Wholesaler charge-backs relate to contractual arrange- ments between Bavarian Nordic and indirect customers in the US whereby products are sold at contract prices lower than the list price originally charged to wholesalers. A wholesaler charge-back represents the difference between the invoice price to the wholesaler and the indirect customer’s contract price. Accruals are calculated for estimated charge-backs using a combination of factors such as historical experience, current wholesaler inventory levels, contract terms and the value of claims received but not yet processed. Sales of licences that transfer the rights associated with ownership of an intangible asset are recognized at a point in time when control is transferred. Revenue from develop- ment services and licences that do not transfer the right of ownership to an intangible asset are recognized over time in line with the execution and delivery of the work. The estimate of sales discounts and rebates is based on a calculation which includes a combination of historical utilization data, combined with expectations in relation to the development in sales and utilization. Furthermore, specific circumstances regarding the different programs are considered. The obligations concerning sales discounts and rebates are incurred at the time the sale is recorded. However, the actual discount or rebate related to a specific sale may be invoiced later. Agreements with commercial partners generally include non-refundable upfront license and collaboration fees, milestone payments, the receipt of which is dependent upon the achievement of certain clinical, regulatory or commercial milestones, as well as royalties on product sales of licensed products, if and when such product sales occur, and revenue from the supply of products. For these agreements that include multiple elements, total contract consideration is attributed to separately identifiable components on a reliable basis that reasonably reflects the selling prices that might be expected to be achieved in stand-alone transactions provided that each component has value to the partner on a stand-alone basis. The allocated consideration is recognized as revenue in accordance with the principles described above. Further details regard- ing recognition of revenue on the main contracts with Biomedical Advanced Research and Development Authority (BARDA) and Janssen Vaccines & Prevention B.V. are described below. US Medicaid & Medicare rebates Medicaid & Medicare are government insurance pro- grammes. Medicaid and Medicare rebates have been estimated using a combination of historical experience, product and population growth, price increases, and the impact of contracting strategies. The calculation also involves interpretation of relevant regulations that are subject to changes in interpretative guidance from government authorities. Bavarian Nordic adjusts the provision periodically to reflect actual sales performance. Bavarian Nordic considers the provisions established for sales discounts and rebates to be reasonable and appropri- ate based on currently available information. However, the actual amount of discounts and rebates may differ from the amounts estimated as more detailed information becomes available. Where contracts contain customer acceptance criteria, Bavarian Nordic recognizes sales when the acceptance criteria are satisfied. Where absolute amounts are known, the rebates are recognized as other liabilities. Wholesaler charge-backs are netted against trade receivable balances. Partner contracts Whether a component of a multiple element contract has value to the partner on a stand-alone basis is based on an assessment of specific facts and circumstances and is associated with judgement. This applies also to the assess- ment of whether a license transfers rights associated with ownership of an intangible asset. Furthermore, allocation of the total consideration of a contract to separately iden- tifiable components requires considerable estimates and judgement to be made by Management. The pricing mechanisms in the US market and the different kind of rebates are described below. Other US discounts and sales returns Other discounts are provided to wholesalers, hospitals, pharmacies, etc. They are usually linked to sales volume or provided as cash discounts. Accruals are calculated based on historical data and recorded as a reduction in gross sales at the time the related sales are recorded. Sales returns are related to damaged or expired products. Pricing mechanisms in the US market In the US, sales rebates are paid in connection with government and commercial programmes. Key customers in the US include private payers, Group Purchasing Organi- zations (GPOs) and government payers. GPOs play a role in Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 77 Note 3 Revenue (continued) Significant accounting estimates Other product sale for 2021 consist of the Company's sale of Mvabea (Ebola vaccine) to Janssen. DKK thousand 2021 2020 MVA-BN smallpox vaccine sale Rabipur/RabAvert Encepur 733,593 505,769 540,769 627,699 455,012 - At inception and throughout the life of a contract Management is performing an analysis of the agreement with its partners based on available facts and circumstances at each assessment date such as historical experience and knowledge from the market to the extent obtainable. This includes also an understanding of the purpose of the deliverables under the contract and the negotiation taken place prior to concluding the contract. In 2021 revenue achieved on the Danish market amounted to DKK 0 million (DKK 4.4 million). 363,054 Other product sale Sale of goods 260,225 Revenue for the following customer represent more than 10% of total revenue: 1,862,641 1,623,480 Milestone payments Contract work - 35,234 35,234 66,553 162,350 228,903 • Biomedical Advanced Research and Development Authority (BARDA), USA, DKK 675.3 million (DKK 666.8 million). • Janssen Pharmaceuticca NV, Belgium, DKK 260.2 million (DKK 0 million). Sale of services Revenue 1,897,875 1,852,383 Total revenue includes: Fair value adjustment concerning financial instruments entered into to hedge revenue (7,072) 13,146 Geographic split of revenue: USA 1,066,799 264,410 258,288 78,173 1,139,080 4,358 Belgium Germany 356,826 96,029 47,240 31,235 36,138 21,060 23,069 97,348 The Netherlands Sweden 33,475 Austria 28,040 Switzerland 24,142 Japan 24,110 United Kingdom Other geographic markets 16,975 103,463 Revenue 1,897,875 1,852,383 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 78 Note 3 Revenue (continued) Accounting for contract with Biomedical Advanced Research and Development Authority (BARDA) as transfer and validation of the freeze-drying process (contract option valued at USD 33 million). In 2021 the remaining funds were recognized as revenue, DKK 15 million (DKK 76 million). The contract is funded based on cost occurred plus a fixed margin. Recognition of revenue follows the timing of cost incurred. Payment is due within 30 days after invoicing. The award also included USD 11 million for storage of bulk drug substance until filling and future shipments of final products (total award of USD 44 million). DKK 6 million (DKK 9 million) has been recognized in revenue for storage during 2021. The remaining revenue will be recognized over the coming years. to the total transaction price less the sum of the revenue allocated to the development work. When assessing residual value available for allocation to the license grant, expected costs for future development work are taken into consideration to ensure enough revenue is deferred to ensure an appropriate margin on the development work over the period until the next milestone payment event. The residual value is calculated and recognized as revenue for the license grant when a milestone payment is received. Revenue related to the license grant will increase over time if and when the next clinical milestone is reached, reflecting that the value of the license is expected in concurrence with the progress in the clinical development program. In April 2020 BARDA placed a new order for the manufac- turing and supply of JYNNEOS® (Smallpox and Monkeypox Vaccine), at a total value of USD 202 million. The contract expansion covers two years of performance and includes the manufacturing of additional bulk vaccine and the sup- ply of up to 1.4 million doses of liquid frozen JYNNEOS. The first USD 106 million of the award was exercised in April 2020, whereas the second part was exercised in December 2020, where BARDA committed to an additional USD 83 million for the procurement of 35 BDS batches, of which 29 BDS batches were manufactured and invoiced in 2021 in concurrence with release of the batches. The remaining 6 BDS batches will be manufactured and invoiced in 2022. Accounting for license and collaboration agreements with Janssen Vaccines & Prevention B.V. The Company has concluded three license and collaboration agreements with Janssen Vaccines & Prevention B.V. for development of vaccines against cancers induced by hu- man papillomavirus (HPV), hepatitis B virus (HBV) and the human immunodeficiency virus (HIV). All three contracts contains an upfront payment and subsequent milestone payments following the progress in the clinical develop- ment program. Janssen Vaccines & Prevention B.V. obtains control of the development work in concurrence with work performed and therefore the recognition of revenue follows the timing of cost incurred. The BDS products remain in the Company's physical possession as the procurement contract includes filling and freeze-drying of the BDS batches (a bill-and-hold arrangement). The Company is paid for the custodial service as part of the contract. Filling of liquid frozen JYNNEOS commenced in 2021, when the new fill and finish manufacturing facility in Kvistgaard had become operational. Payment is due within 30 days after invoicing. All the initial prepayments under the contracts have been recognized as revenue. Under the HPV contract a new prepayment of USD 2.5 million was recevied in 2020 related to production of a new Master Seed Virus. The full prepayment is recognized in the balance sheet as of December 31, 2021, cf. note 29. Each contract has two performance obligations, both paid for by the upfront and milestone payments in the contracts: 1) Conduct development work according to the development plan and 2) Grant of a license for use of MVA-BN® vector. Revenue for the development work is recognized over time using the “expected cost plus a margin approach”, i.e. recognized over time based on cost incurred plus a margin. Allocation of revenue for the license grant is calculated using the “residual approach” by estimating the stand-alone selling price by reference The Company has also been awarded funding for de- velopment work related to "Clinical activities to support licensure” of the freeze-dried version of smallpox vaccine. The contract is funded based on cost incurred plus a fixed margin. Recognition of revenue follows the timing of cost incurred. Payment is due within 30 days after invoicing. A new award was obtained in January 2019 to cover qualification of the new fill and finish facility, as well Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 79 Note 4 Note 5 Production costs Sales and distribution costs DKK thousand 2021 2020 Accounting policies Sales and distribution costs comprise costs incurred for the sale and distribution of products sold during the year. This includes costs incurred for sales campaigns, training and administration of the sales force and for direct distribution, marketing and promotion. Also included are salaries and other costs for the sales, distribution and mar- keting functions, loss allowance for expected credit losses, amortization, depreciation and other indirect costs. Cost of goods sold 539,789 21,959 584,574 104,409 Contract costs Other production costs Amortization of product rights Production costs 492,877 233,176 272,935 272,935 1,327,560 1,195,094 The clinical activities to support licensure of the freeze- dried version of smallpox vaccine and qualification of the new fill and finish facility including transfer and validation of the freeze-drying process was higher during 2020 com- pared to 2021, therefore the decrease in contract costs. The product rights to Rabipur/RabAvert and Encepur are amortized over 20 years with an annual amortization of DKK 272.9 million. Accounting policies Production costs consist of costs incurred in generat- ing the revenue for the year. Costs for raw materials, con- sumables, production staff and a proportion of production overheads, including maintenance, amortization, depre- ciation and impairment of intangible and tangible assets used in production as well as operation, administration and management of the production facility are recognized as production costs. Amortization of acquired product rights are recognized as production costs. In addition, the costs related to excess capacity and write-down to net realisable value of goods on stock are recognized. Other production costs amounted to DKK 492.9 million (DKK 233.2 million), of which net write-downs of inventory to- taled DKK 171.6 million (DKK 25.2 million). Development in write-downs is further described in note 19. For 2020 other production costs also included a reservation for write-down of obsolete products related to the distribution switch of Encepur Rabipur/RabAvert from GlaxoSmithKline. In Q1 the production plant was utilized for production of RSV Phase 3 clinical trial material, which gave a much lower utilization of the commercial manufacturing capacity leading to low absorption of indirect production costs causing higher other production costs. Since August 2021, the current bulk manufacturing facility has been shut down due to the ongoing expansion of the drug substance facility for future production of Rabipur/RabAvert and Encepur, therefore no absorption of indirect production costs for this part of the production facility leading to increased other production costs for 2021. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 80 Note 6 Note 7 Research and development costs Adminstrative costs DKK thousand 2021 2020 Accounting policies Administrative costs include costs of Group Manage- ment, staff functions, administrative personnel, office costs, rent, short-term lease payments and depreciation not relat- ing specifically to production, research and development or sales and distribution. Research and development costs incurred this year 421,118 445,829 Of which: Contract costs recognized as production costs (note 4) Research and development costs recognized in the income statement (21,959) (104,409) 399,159 341,420 Under the Group’s accounting policies development costs are generally expensed in the year they occur. During the development of ABNCoV2, the Group has, however, started capitalization of directly related development cost at commencement of the phase 2 studies as – unlike most other development candidates - the feasibility of developing a final vaccine and obtain regulatory approval is considered highly likely, because the development of other COVID-19 vaccine candidates based on the same antigen has been successful. Furthermore, the Group has ensured significant finance of the development through the funding obtained from Danish Ministry of Health and a minimum demand agreed in the agreement with the Danish Ministry of Health. See further description in note 16. and depreciation attributable to laboratories, and external scientific consultancy services, are recognized under research and development costs. No indirect or general overhead costs that are not directly attributable to research and development activities are included in the disclosure of research and development expenses recognized in the income statement. Grants that compensate the Group for research and devel- opment expenses incurred, which are recognized directly in the income statement, are set off against the costs of research and development at the time when a final and binding right to the grant has been obtained. Research costs are expensed in the year they occur. Development costs are generally expensed in the year they occur. In line with industry custom, capitalization of development costs does not begin until it is deemed realistic that the product can be completed and marketed and it is highly likely that a marketing authorization will be received. In addition, there must be sufficient certainty that the future earnings to the Group will cover not only produc- tion costs, direct distribution and administrative costs, but also the development costs. Research and development costs include expenses for external clinical research organizations, or CRO's, of DKK 160.5 million (DKK 121.3 million). Accounting policies Contract research and development costs incurred to achieve revenue are included in "Research and develop- ment costs incurred this year" in the below tabel and then transferred under "Contract costs recognized as production costs" to be recognized as production costs. Research and development costs include salaries and costs directly attributable to the Group’s research and development projects, less government grants. Further- more, salaries and costs supporting direct research and development, including costs of patents, rent, leasing Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 81 Note 8 Staff costs DKK thousand 2021 2020 DKK thousand 2021 2020 Wages and salaries 535,670 44,114 434,710 34,993 Staff costs include the following costs: Board of Directors: Contribution based pension Social security expenses 21,431 17,686 Remuneration 5,202 1,950 7,152 3,825 1,350 5,175 Other staff expenses 34,510 31,645 Share-based payment Share-based payment, see specification in note 31 Staff costs 57,652 32,998 Remuneration to Board of Directors 693,377 552,032 Executive Management: Salary Staff expenses are distributed as follows: Production costs 8,661 3,956 678 5,186 2,540 576 259,719 70,727 213,676 51,243 Paid bonus Sales and distribution costs Research and development costs Administrative costs Other employee benefits Contribution based pension Share-based payment Corporate Management 178,439 137,332 47,160 150,675 115,360 21,078 2,048 9,035 24,378 - 4,011 12,313 Capitalized salaries Staff costs 693,377 552,032 Salary 11,630 2,946 13,996 3,359 1,523 1,674 10,591 - Average number of employees converted to full-time 734 759 607 690 Paid bonus Number of employees as of December 31 converted to full-time Other employee benefits Contribution based pension Share-based payment Salary and benefits in notice period Other Executive Management 1,237 1,430 7,193 The Group only has defined contribution plans and pays regular fixed contributions to independent pension funds and insurance companies. 7,378 31,814 31,143 Remuneration to Executive Management Total management remuneration 56,192 63,344 43,456 48,631 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 82 Note 8 Note 9 Staff costs – continued Depreciation, amortization and impairment losses DKK thousand 2021 2020 CEO and President of the Company Paul Chaplin and CFO Henrik Juuel constitute the Corporate Management in the Parent Company. Henrik Juuel became part of Corporate Management in February 2021. Warrants In November 2021 Corporate Management was granted 137,030 warrants (123,645 warrants) with a fair value of DKK 10.4 million (DKK 5.1 million). Other Executive Management was granted 108,788 warrants (318,438 warrants) with a fair value of DKK 8.3 million (DKK 12.1 million). Depreciation and amortization included in: Production costs 348,243 34 311,456 - Sales and distribution costs Research and development costs Administrative costs COO Henrik Birk, CPO Anu Kerns, CCO JC May and CMO Laurence De Moerlooze constitute the Other Executive Management. CBO Tommi Kainu resigned by the end of March 2021. 4,718 2,965 34,697 387,692 29,660 344,081 Fair value calculated based on Black-Scholes, cf. note 31. Depreciation and amortization Restricted stock units Incentive programs for the Executive Management and other employees are disclosed in note 31. Hereof loss from disposed fixed assets 5,259 3,149 In March 2021 Corporate Management was granted 8,833 restricted stock units (excl. matching shares) (0 restricted stock units) at a value of DKK 2.0 million at grant. In 2020 it was agreed with the Board of Directors that the full bonus to Paul Chaplin could be paid out in cash. Other Executive Management was granted 7,580 restricted stock units (excl. matching shares) (8,705 restricted stock units) corre- sponding to a value of DKK 1.7 million (DKK 2.1 million) at grant. Impairment losses included in: Production costs Members of the Executive Management have contracts of employment containing standard terms for members of the Executive Management of Danish listed companies, includ- ing the periods of notice that both parties are required to give and competition clauses. If a contract of employment of a member of the Executive Management is terminated by the Company without misconduct on the part of such member, the member of the Executive Management is entitled to compensation, which, depending on the circumstances, may amount to a maximum of 8-18 months' remuneration. In the event of a change of control the com- pensation can amount to 24 months' remuneration. 618 16,066 Impairment losses 618 16,066 The product rights to Rabipur/RabAvert and Encepur are amortized over 20 years with an annual amortization of DKK 272.9 million. The amortization is recognized as part of cost of goods sold under production costs. Following the current rebuild of the production facility in Kvistgaard to accommodate a new production line for Rabipur/RabAvert and Encepur products, part of the existing building components and equipment have been written-down. In April 2021, the members of the Board of Directors were granted in total 7,127 restricted stock units (7,111 restrict- ed stock units) corresponding to 50% of their fixed fee amounting to DKK 2.0 million (DKK 1.4 million). The product rights was acquired from GlaxoSmithKline as per December 31, 2019. See further description in note 16 For further description of restricted stock units see note 31. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 83 Note 10 Note 11 Fees to auditor appointed at the annual general meeting Other operating income DKK thousand 2021 2020 Sale of the Priority Review Voucher, granted to the Company by the FDA in connection with the approval of JYNNEOS, was announced in December 2019 and final closing of the transaction occurred in January 2020 when the antitrust clearance was received. Upon completion, the Company received a cash consideration of USD 95 million/ DKK 627.6 million. Audit of financials statements Other assurance services Tax advisory 2,173 105 1,500 1,144 411 596 Other services 392 182 Fees 3,266 3,237 The fee for non-audit services provided to the Group by Deloitte Statsautoriseret Revisionspartnerselskab, Denmark, amounted to DKK 0.6 million (DKK 1.4 million) and consisted of assurance work related to the assistance with compliance reviews, and other accounting and tax advisory services. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 84 Note 12 Note 13 Financial income Financial expenses DKK thousand 2021 2020 DKK thousand 2021 2020 Financial income from bank and deposit contracts 1,739 1,739 193 193 Interest expenses on debt 18,487 18,487 31,853 31,853 Interest income from financial assets measured at amortized cost Interest expenses on financial liabilities measured at amortized cost Financial income from securities 11,045 - 8,756 6,783 Fair value adjustments on securities Unwinding of the discount related to deferred consideration Net foreign exchange losses 39,056 133,573 - - 145,149 18,532 Fair value adjustments on securities Adjustment of deferred consideration due to change in estimated timing of payments Currency adjustment deferred consideration Net gains on derivative financial instruments at fair value through the income statement Net foreign exchange gains 32,185 1,677 - 67,719 11,900 2,571 - Financial expenses 191,116 195,534 3,587 50,233 Financial income 97,922 Accounting policies Accounting policies Interest income is recognized in the income state- ment at the amounts relating to the financial year. Financial income also includes net positive value adjustments of financial instruments and securities, adjustment of the net present value of provisions and net currency gains. Interest expenses are recognized in the income statement at the amounts relating to the financial year. Financial expenses also include adjustment of net present value of the deferred consideration, cf. note 25, negative value adjustments of financial instruments and securities and net currency losses. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 85 Note 14 Tax for the year DKK thousand 2021 2020 Tax on income is an expense of DKK 10.3 million (DKK 4.5 million), corresponding to an effective negative tax rate of negative 2.3% (positive 1.6%). The parent company’s tax- able income for 2021 is zero. Tax expensed in 2021 relates mainly to Bavarian Nordic GmbH and Bavarian Nordic, Inc. (state taxes). Deferred tax assets arising from temporary deductible differences and tax losses carried forward are recognized when it is probable that they can be realized by offsetting them against taxable temporary differences or future taxable profits. At each balance sheet date, it is assessed whether it is probable that there will be sufficient future taxable income for the deferred tax asset to be utilized. Tax recognized in the income statement Current tax on profit for the year Adjustments to current tax for previous years Current tax 8,923 1,422 5,217 (762) 10,345 4,455 Accounting policies Income tax for the year comprises current tax and deferred tax for the year. The part relating to the profit for the year is recognized in the income statement, and the part attributable to items in the comprehensive income is recognized in the comprehensive income statement. Deferred income tax is provided on temporary taxable differences arising on investments in subsidiaries, unless the parent company is able to control the timing when the deferred tax is to be realized and it is likely that the deferred tax will not be realized within the foreseeable future. Deferred tax - - Tax for the year recognized in the income statement 10,345 4,455 Tax on income for the year is explained as follows: Income before company tax (454,430) (99,975) 281,976 62,035 The tax effect of costs that have been recognized directly in equity is recognized in equity under the relevant items. Deferred tax is calculated at the tax rates applicable on the balance sheet date for the income years in which the tax asset is expected to be utilized. Calculated tax (22.0%) on income before company tax Tax effect on: Current tax receivable is recognized in the balance sheet under current asset. Different tax percentage in foreign subsidiaries 168 32,072 (14,649) 94,020 (2,713) 1,422 (349) 18,421 (20,412) (54,478) - Non-recognized deferred tax asset on current year losses in foreign subsidiaries Income ()/expenses that are not taxable/deductible for tax purposes Change in non-recognized tax asset Current tax payable is recognized in the balance sheet under current liabilities. Deferred tax is measured using the balance sheet liability method on all temporary differences between accounting values and tax values. Deferred tax liabilities arising from temporary tax differences are recognized in the balance sheet as a liability. Adjustments to previous years non-recognized tax asset Adjustments to current tax for previous years (762) Tax on income for the year 10,345 4,455 Tax recognized in other comprehensive income Tax recognized in equity - - - - Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 86 Note 14 Tax for the year (continued) 2021 2020 Recognized in the income statement Recognized in the income statement January 1, Recognized in equity December 31, 2021 January 1, 2020 Recognized in equity December 31, 2020 DKK thousand 2021 DKK thousand Product rights (94,360) 377 83,939 (377) 22,158 (3) - (10,421) Product rights - 2,040 22,593 55 (94,360) (1,663) 15,749 318 - (94,360) 377 Other intangible assets Property, plant and equipment Right-of-use assets Development projects for sale Accrued project costs Receivables - - 60,500 370 Other intangible assets Property, plant and equipment Right-of-use assets - 38,342 373 - - 38,342 373 - - 32,446 (181) 18 - - 32,446 - Development projects for sale Accrued project costs Receivables 32,446 (790) - - - 32,446 (181) 18 181 - - 609 - 19 37 18 - Provisions 17,930 178 (17,930) - - - Provisions - 17,930 - - 17,930 178 Financial instruments Share-based payment Tax losses carried forward 119 5,871 297 Financial instruments Share-based payment Tax losses carried forward Not recognized tax asset Recognized deferred tax assets (503) 8,573 362,112 (426,526) - 681 15,397 362,209 6,726 (693) (94,020) - 27,994 361,516 (472,739) - 6,824 97 - 15,397 362,209 (372,729) - - (681) - Not recognized tax asset (372,729) (5,990) 54,478 - Recognized deferred tax assets - - Deferred tax Recognized tax losses carried forward relate to Bavarian Nordic A/S and the two Danish subsidiaries Aktieselskabet af 1. juni 2011 I and Aktieselskabet af 1. juni 2011 II. As Bavarian Nordic, Inc. has moved from California to North Carolina the state tax losses and state tax credit carried forward will most likely never be utilized, hence no tax asset has been recognized. Non-recognized deferred tax asset on current year losses in foreign subsidiaries also includes deferred tax on inter- company transactions between Bavarian Nordic A/S and Bavarian Nordic, Inc. and Bavarian Nordic Switzerland AG under the Distribution Agreements for sale of Encepur and Rabipur/RabAvert in US and Switzerland, DKK 30.3 million (DKK 14.6 million). Recognized deferred tax assets relate to temporary differ- ences between the tax base and accounting carrying Deferred tax assets arising from temporary deductible differences and tax losses carried forward are recognized to the extent they are expected to be offset against future taxable income. The tax value of non-recognized tax losses carried forward in Bavarian Nordic A/S and the two Danish subsidiaries amounts to DKK 361.5 million (DKK 362.2 million), whereas the tax value of non-recognized temporary deductible dif- ferences amounts to DKK 101.9 million (DKK 10.5 million). Tax rate used for Danish entities is 22%. Bavarian Nordic GmbH and Bavarian Nordic Switzerland AG have no tax losses carried forward. The Company's right to use the tax losses carried forward is not time-limited. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 87 Note 15 Earnings per share (EPS) DKK thousand 2021 2020 Accounting policies Earnings per share is calculated as the profit or loss for the year compared to the weighted average of the issued shares in the financial year. The basis for the calculation of diluted earnings per share is the weighted- average number of ordinary shares in the financial year adjusted for the dilutive effects of warrants. Net profit for the year (464,775) (7.4) 277,521 5.1 Earnings per share of DKK 10 Diluted earnings per share of DKK 10 (7.4) 5.1 The weighted average number of ordinary shares for the purpose of diluted earning per share reconciles to the weighted average number of ordinary shares used in the calculation of basic earnings per share as follows: Weighted average number of ordinary shares (thousand units) Weighted average number of treasury shares (thousand units) 63,213 (109) 54,122 (76) Weighted average number of outstanding ordinary shares used in the calculation of basic earnings per share (thousand units) 63,104 - 54,046 - Average dilutive effect of outstanding warrants under incentive schemes Weighted average number of outstanding ordinary shares used in the calculation of diluted earnings per share (thousand units) 63,104 54,046 Outstanding warrants that may have an effect on the calculation of diluted earnings per share in the future. 2021-program 2020-programs 2019-program 2018-program 2017-programs 2016-program 706,469 1,207,003 625,984 515,684 223,683 77,661 - 1,310,297 687,467 554,066 396,601 444,558 Outstanding warrants, cf. note 31 3,356,484 3,392,989 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 88 Note 16 Intangible assets Accounting policies Significant accounting estimates Significant accounting judgments to the already approved vaccines, Management expects that the Company can take a reasonable share of the future COVID-19 vaccine market, initially targeting governments, but over time moving towards a more traditional market for private vaccinations. Intangible assets are measured at historic cost less accumulated amortization and impairment losses. Cost of acquired product rights are measured at cash consid- eration and present value of any deferred payments for those rights. Furthermore costs of acquired product rights include transaction costs that are directly attributable to the acqusition. When determining the amortization period for acquired product rights, Management need to make an assessment of expected useful economic life. In the assessment Management take among other things the following components into consideration: The maturity of the products acquired, development in the market the acquired products are targeting, the current competitors, clinical development of new competing products and entry barriers to the market due to advanced production technology. Straight-line amortization reflects the use and impairment of the product rights. Management has made the following accounting judgment which significantly affect the amounts recognized in the consolidated financial statements: Capitalization of the development costs related to ABNCoV2 Acquisition of product rights from GlaxoSmithKline The acquisition of the two product right from GlaxoSmith- Kline did not include any legal entities, and no other tangible asset, no employees and no working capital has been transferred to the Company as part of the transaction. Management assessed that the acquisition constituted an asset deal and not a business combination. In determin- ing the accounting treatment, Management performed judgments and estimates determining the method for determination of the cost price of the acquired products rights including the method and period of amortization and method for recognition of deferred consideration. For further information see note 16 and note 25. Under the Group’s accounting policies and in accordance with common industry practice, development costs are generally expensed in the year they occur. During the development of ABNCoV2, the Group has, however, started capitalization of directly related development cost at com- mencement of the phase 2 studies as – unlike most other development candidates - the feasibility of developing a final vaccine and obtain regulatory approval is considered highly likely, because the development of other COVID-19 vaccine candidates based on the same antigen has been successful. Furthermore, the Group has ensured significant finance of the development through the funding obtained from Danish Ministry of Health and a minimum demand agreed in the agreement with the Danish Ministry of Health. Internal development projects that meet the requirements for recognition as intangible assets are measured at direct cost relating to the development projects. Amortization is provided on a straight-line basis over the useful economic lives of the assets. Management continuously updates the valuation model used when acquiring the product rights from GlaxoSmith- Kline to assess the value creation expected from the ac- quisition. The current COVID-19 pandemic has reduced the earnings from the two products significantly, but the latest update of the valuation model still shows a value above the net present value of the purchase price, hence there is no indications of impairment. The useful lives of acquired product rights are estimated to be 20 years and software is estimated to be 3-5 years. Amortization of acquired product rights is recognized as part of cost of goods sold under production costs. Impairment As per December 31, 2021 Management still judge that the sales milestone of EUR 25 million included in Asset Pur- chase Agreement is not probably and therefore the present value has not been added to the cost of the product rights. The carrying amounts of intangible assets carried at cost or amortized cost are tested at least annually to determine whether there are indications of any impairment in excess of that expressed in normal amortization. If that is the case, the asset is written down to the recoverable amount, which is the higher of its fair value less costs to sell and its value in use. Impairment losses on intangible assets are recognized under the same line item as amortization of the assets. In the winter of 2021/2022, we have seen the high- est number of COVID-19 infections since the pandemic started. Combined with the surge of new variants, it is yet uncertain how the pandemic will evolve. It is evident though, that booster vaccinations have been necessary to control the pandemic. Management assesses that the booster vaccinations will continue to be required, at least for vulnerable groups as is the case for example with the flu market, where annual booster vaccinations are given. Hence, with the development of ABNCoV2 as a universal booster vaccine with a better value proposition compared For development projects in progress, the recoverable amount is assessed annually, regardless of whether any indications of impairment have been found. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 89 Note 16 Intangible assets (continued) 2021 Product rights December 31, 2019 the Company acquired the product rights to two commercial products owned by GlaxoSmith- Kline - Rabipur/RabAvert and Encepur. Acquired rights and development in progress Other intangible assets in progress Product rights DKK thousand Software Total The products have been on the market for more than 20 years. There is no need to further develop the products. Management assesses that it will require up to 10 years of clinical development for competitors to bring a new competing product to the market likewise the produc- tion process required to produce these products is highly complex. Based on these factors Management assesses that the acquired product rights should be amortized over 20 years. Costs as of January 1, 2021 Additions 5,458,700 29,813 87,587 145 57,543 96,160 (18,921) (559) 5,633,643 800,262 - - 703,957 Transfer - - 18,921 - Transfer to/from property, plant and equipment Disposals - - (559) - - - - (6,280) 12 - (6,280) 160 Exchange rate adjustments Cost as of December 31, 2021 148 5,458,700 733,770 100,385 134,371 6,427,226 The acquisition price for the two product rights consists of the upfront payment and the present value of the milestone payments included in the Asset Purchase Agreement with GlaxoSmithKline. The milestone payments relate to transfer and re-registration of marketing authorizations, technology transfer of different steps of the production and packaging activities as well as a milestone payment when all services agreed to be rendered has been completed. The Asset Purchase Agreement specifies the above milestone payments for each product. In total EUR 470 million. The Asset Purchase Agreement also includes a sales milestone of EUR 25 million. The sales milestone is related to the total revenue of the two products. Management deems it unlikely that the sales milestone will be trickered, hence the sales milestone has not been recognized as part of the asset nor the deferred consideration as per December 31, 2021. Amortization as of January 1, 2021 Amortization 272,935 - - - - - 69,956 13,681 (6,257) 20 - - - - - 342,891 286,616 (6,257) 20 272,935 Disposals - - Exchange rate adjustments Amortization as of December 31, 2021 545,870 77,400 623,270 Carrying amount as of December 31, 2021 4,912,830 733,770 22,985 134,371 5,803,956 Geographical split of intangible assets - 2021 Denmark 5,802,332 6 Germany USA 1,618 Total intangible assets 5,803,956 Deferred consideration for the acquired product rights are described in note 25. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 90 Note 16 Intangible assets (continued) Acquired rights and development in progress In July 2020, the Company concluded a license and collab- oration agreement with AdaptVac. The license agreement provides Bavarian Nordic the global commercialization rights to a COVID-19 vaccine candidate based on AdaptVac’s technology. Under the terms of the agreement AdaptVac has been responsible for running a Phase 1/2 open label, dose-escalation trial sponsored by Radhould University Medical Center. The Company has assumed the responsi- bility for the further clinical development and manufac- turing. In July 2021 the Company initiated a Phase 2 trial that completed in December 2021. The Phase 3 trial will be initiated in 2022. At commencement of the Phase 2 trial the Company started capitalization of directly related development cost as the feasibility of developing a final vaccine and obtain regulatory approval is considered highly likely, see further description under "Significant accounting judgements". 2 clinical trial. Based on the positive clinical results Man- agement assesses that the likelihood of future regulatory approval of the Company's COVID-19 vaccine is high, hence milestone payments to AdaptVac are expected to become payable. Based on current regulatory plans and expecta- tions for future revenue from sale of the COVID-vacine all sales milestones and part of the development milestones are assumed probable. The net present value of the prob- able milestone payments, DKK 596 million, has been recog- nized as part of the "Acquired rights and development in progress" and a corresponding liability has been recognized as deferred consideration (note 25). Intangible assets in progress Rabipur/RabAvert and Encepur are currently manufactured by GlaxoSmithKline and the basis of the technology transfer to Bavarian Nordic is an as-is transfer of the current man- ufacturing process. This transfer will be a staged process, starting with packaging then filling and ending with the transfer of bulk manufacturing. The Company will incur ma- terial costs in terms of internal labour and consultancy to handle the technology transfer and gain crucial knowledge about the manufacturing process. These costs will be cap- italized as an intangible asset. As per December 31, 2021 the capitalized costs amounts to DKK 125.2 million (DKK 38.1 million), recognized as intangible assets in progress. Other intable assets in progress relates to IT investments. The Company made an upfront payment of EUR 4 million to AdaptVac in 2020 when the license agreement was signed. The upfront payment was capitalized and recognized as "Acquired rights and development in progress". The Com- pany has also committed to payment of potential future development and sales milestones and tiered royalties. At year-end 2020 Management assessed that those milestone payments were not probable since no in-human studies had completed, hence milestone payments were not recognized as an asset and a liability as per December 31, 2020. During second half of 2021 positive results were reported for the Phase 1/2 study conducted by AdaptVac confirming the vaccine's ability to induce strong and broad antibody levels, superior to those of the current approved COVID-19 vaccines. In December 2021, the Company announced positive topline results from the ongoing Phase Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 91 Note 16 Intangible assets (continued) 2020 Other intangible assets in progress include technology transfer from GlaxoSmithKline, described above, and invest- ments in software. Acquired rights and development in progress Other intangible assets in progress Product rights DKK thousand Software Total Costs as of January 1, 2020 Additions 5,458,700 - 101,041 2,991 3,043 57,040 (2,525) - 5,562,784 89,844 - - 29,813 Transfer - - 2,525 Disposals - - - - (18,962) (8) (18,962) (23) Exchange rate adjustments Cost as of December 31, 2020 (15) 5,458,700 29,813 87,587 57,543 5,633,643 Amortization as of January 1, 2020 Amortization - - - - - - 78,529 9,606 - - - - - 78,529 282,541 (18,166) (13) 272,935 Disposals - - (18,166) (13) Exchange rate adjustments Amortization as of December 31, 2020 272,935 69,956 342,891 Carrying amount as of December 31, 2020 5,185,765 29,813 17,631 57,543 5,290,752 Geographical split of intangible assets - 2020 Denmark 5,288,247 609 Germany USA 1,896 Total intangible assets 5,290,752 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 92 Note 17 Property, plant and equipment Accounting policies Buildings 10–20 years Property, plant and equipment include land and buildings, production equipment, leasehold improvements, office and IT equipment and laboratory equipment and is measured at cost less accumulated depreciation and impairment losses. Installations 5–15 years 5 years 3–5 years 5–10 years 3–15 years Leasehold improvements Office and IT equipment Laboratory equipment Production equipment Cost includes the costs directly attributable to the purchase of the asset, until the asset is ready for use. For assets con- structed by the Group cost includes materials, components, third-party suppliers and labour. Management reviews the estimated useful lives of material property, plant and equipment at the end of each financial year. Impairment Borrowing costs directly attributable to the construction of property, plant and equipment are included in cost. Other borrowing costs are recognized in the income statement. The carrying amounts of property, plant and equipment carried at cost or amortized cost are tested annually to determine whether there are indications of any impairment in excess of that expressed in normal depreciation. If that is the case, the asset is written down to the recoverable amount, which is the higher of its fair value less costs to sell and its value in use. Impairment losses on property, plant and equipment are recognized under the same line item as depreciation of the assets. Depreciation is charged over the expected economic lives of the assets, and the depreciation methods, expected lives and residual values are reassessed individually for the assets at the end of each financial year. Assets are depreciated on a straightline basis over their estimated useful lives as follows: Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 93 Note 17 Property, plant and equipment (continued) 2021 Assets under construction relates mainly the ongoing ex- pansion of the drug substance facility for future production of Rabipur/RabAvert and Encepur (DKK 479 million). Other fixtures and fittings, other plant and The fill and finish manufacturing facility completed in 2021 and the depreciation of the fill and finish building and equipment commenced. Land and Leasehold improvement Plant and machinery Assets under construction DKK thousand buildings equipment Total Costs as of January 1, 2021 Additions 548,291 2,516 6,911 - 14,404 597 485,024 5,717 73,155 - 294,418 11,871 9,148 - 213,309 461,867 (97,025) 559 1,555,446 482,568 - The Company has not incurred any borrowing costs directly attributable to the construction of the fill finish manu- facturing facility, hence no borrowing costs have been capitalized. Transfer 7,811 - Transfer from intangible assets Disposals 559 (10,946) (1) (518) (6) (139,605) - (3,369) 111 - (154,438) 101 Mortgage loans of DKK 21.1 million are secured by mortgages totaling DKK 50.0 million on the property Bøgeskovvej 9/Hejreskovvej 10A, Kvistgaard. In addition, as of December 31, 2021, mortgage deeds for a total of DKK 75.0 million have been issued. The carrying amount of assets mortgaged in security of mortgage loans is DKK 600.5 million (land and buildings: DKK 346.0 million; plant and machinery: DKK 254.5 million). Exchange rate adjustments Cost as of December 31, 2021 (3) 546,771 22,288 424,291 312,179 578,707 1,884,236 Depreciation and impairment losses as of January 1,2021 182,059 25,695 - 10,691 2,104 - 280,360 27,572 278 71,180 20,420 340 - - - - - - 544,290 75,791 618 Depreciation Impairment losses Disposals (6,936) - (518) - (138,449) - (3,300) 72 (149,203) 72 Exchange rate adjustments Depreciation and impairment losses as of December 31, 2021 200,818 12,277 169,761 88,712 471,568 Carrying amount as of December 31, 2021 345,953 10,011 254,530 223,467 578,707 1,412,668 Geographical split of property, plant and equipment – 2021 Denmark 1,369,996 41,775 577 Germany USA Switzerland 320 Total property, plant and equipment 1,412,668 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 94 Note 17 Property, plant and equipment (continued) 2020 Assets under construction relates to the fill and finish manufacturing facility in Kvistgaard. As per December 31, 2020 investments in the building, the installations and the freezedryer, filing and packaging line were transfered to the relevant asset groups, whereas other production equip- ment was still recognized as 'Asset under construction'. Other fixtures and fittings, other plant and Land and Leasehold improvement Plant and machinery Assets under construction DKK thousand buildings equipment Total Mortgage loans of DKK 23.2 million are secured by mortgages totaling DKK 50.0 million on the property Bøgeskovvej 9/Hejreskovvej 10A, Kvistgaard. In addition, as of December 31, 2020, mortgage deeds for a total of DKK 75.0 million have been issued. The carrying amount of assets mortgaged in security of mortgage loans is DKK 570.9 million (land and buildings: DKK 366.2 million; plant and machinery: DKK 204.7 million). Costs as of January 1, 2020 Additions 322,501 26,408 201,776 (2,390) (4) 11,112 1,331 1,995 - 301,174 657 91,072 12,254 618,101 182,224 (587,002) - 1,343,960 222,874 - Transfer 185,345 (2,152) - 197,886 (6,443) (351) Disposals (10,985) (403) Exchange rate adjustments Cost as of December 31, 2020 (34) (14) 548,291 14,404 485,024 294,418 213,309 1,555,446 Depreciation and impairment losses as of January 1,2020 160,174 17,642 5,354 10,269 256,909 14,014 10,712 (1,275) - 70,704 6,969 - - - - - - - 498,056 39,078 16,066 (8,627) (283) Depreciation 453 Impairment losses - - Disposals (1,109) (2) (6,243) (250) 71,180 Exchange rate adjustments (31) Depreciation and impairment losses as of December 31, 2020 182,059 10,691 280,360 544,290 Carrying amount as of December 31, 2020 366,232 3,713 204,664 223,238 213,309 1,011,156 Geographical split of property, plant and equipment – 2020 Denmark 990,423 20,031 Germany USA 702 Total property, plant and equipment 1,011,156 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 95 Note 18 Right-of-use-assets 2021 DKK thousand 2021 2020 Rent facility Amounts included in the income statement Interest expense leases DKK thousand Car leasing Equipment Total 1,976 20,026 427 1,965 19,313 2,050 Depreciation recognized on right-of-use assets Cost recognized for short term leases (less than 12 months) Right-of-use assets as of January 1, 2021 Additions 68,931 - 2,312 902 744 768 71,987 1,670 Modifications 22,036 (18,071) 130 (46) 38 22,028 (20,026) 184 Depreciations (1,480) 54 (475) - Accounting policies Impact from change in lease terms, lease payments or modification of the lease contract is further described in note 28. Exchange rate adjustments Right-of-use assets as of December 31, 2021 The right-of-use assets comprise the initial meas- urement of the corresponding lease liability. Right-of-use assets are subsequently measured at cost less accumulated depreciation and impairment losses. 73,026 1,742 1,075 75,843 Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. The depreciation starts at the commencement date of the lease. IAS 36 is applied to determine whether a right-of- use asset is impaired and any identified impariment losses are accounted for as described in note 16. 2020 All operating leases with a lease term of more than 12 months are recognized on the balance sheet as right-of- use-assets. For leases with a lease term of less than 12 months the lease payments are recognized as an operating expense on a straight-line basis over the term of the lease. Rent DKK thousand facility Car leasing Equipment Total Right-of-use assets as of January 1, 2020 Additions 58,369 26,982 1,336 1,628 1,705 459 593 542 (1) 60,590 29,229 1,794 Modifications The right-of-use-assets are measured at the present value of all future lease payments. When assessing the lease term, any extension or termination options are included in the assessment. The options are included in determining the lease term, if exercise is reasonably certain. When de- termining the discount rates used to calculate the net pres- ent value of future lease payments, an incremental country specific borrowing rate is used, based on a government bond plus the Group’s credit margin, ranging from 2.5% to 3.0%. A single discount rate is used for a portfolio of lease assets with reasonable similar characteristics. Initial direct costs are not included in measurement of the right-of- use-assets. Non-lease components are not separated from lease components. Depreciations (17,437) (319) (1,486) 6 (390) - (19,313) (313) Exchange rate adjustments Right-of-use assets as of December 31, 2020 68,931 2,312 744 71,987 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 96 Note 19 Inventories DKK thousand 2021 2020 The inventory of Encepur and Rabipur/RabAvert products amounted to DKK 305.4 million (DKK 307.5 million) as per December 31, 2021 incl. write-down. Indirect costs of production include indirect materials and labour as well as maintenance of and depreciation on the machinery used in production processes, factory buildings and equipment used and cost of production administration and management. The net realisable value is the estimated sales price in the ordinary course of business less relevant sales costs determined on the basis of marketability, obsolescence and changes in the expected sales price. Raw materials and supply materials Work in progress 80,243 79,904 73,919 201,601 309,099 (63,537) 521,082 Write-down for the year amounted to DKK 171.6 million and mainly relates to Encepur and Rabipur/RabAvert products following the COVID-19 impact on the sales. Stock that is highly likely to expire in 2022 based on current sales forecast has been written down. The write-down also include a 20% write-down of potential stock expiry in 2023 for Rabipur products. Manufactured goods and commodities Write-down on inventory Inventories 492,837 (172,941) 480,043 Write-down on inventory as of January 1 Write-down for the year (63,537) (171,643) 62,239 (104,056) (25,692) 65,672 Significant accounting estimates Production overheads are measured on the basis of actual costs. The basis of the actual costs is reassessed regularly to ensure that they are adjusted for changes in the utilization of production capacity, production changes and other relevant factors. Biological living material is used, and the measurements and assumptions for the estimates made may be incomplete or inaccurate, and unexpected events or circumstances may occur, which may cause the actual outcomes to later deviate from these estimates. It may be necessary to change previous estimates as a result of changes in the assumptions on which the estimates were based or due to new information or subsequent events, for which certainty could not be achieved in the earlier estimates. Use of write-down Use of write-down in 2021 relates to scrap of old PROSTVAC and JYNNEOS batches fully written down prior years. Reversal of write-down - 539 Write-down on inventory as of December 31 (172,941) (63,537) During 2020 a provisional write-down of DKK 21 million was made for batches at risk. Later in the year the final release tests failed and products were scrapped and recognized as 'use of write-down'. Use of write-down also included scrap of old JYNNEOS vials full written down prior years. Cost of goods sold amounts to, cf. note 4 539,789 584,574 Accounting policies Inventories except for raw materials are measured at the lower of cost using the weighted average cost formula method less write-downs for obsolescence and net realis- able value. Raw materials are measured at cost based on the FIFO method. For raw materials, cost is determined as direct acquisition costs incurred. The cost of finished goods produced in-house and work in progress includes raw materials, consumables, filling cost, QC testing and direct payroll costs plus indirect costs of production. Estimates that are material to the financial reporting are made in the determination of any impairment of invento- ries as a result of 'out-of-specification' products, expiry of products and sales risk. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 97 Note 20 Trade receivables DKK thousand 2021 2020 Credit risk Bavarian Nordic recognizes a loss allowance for expected credit losses and writes off trade receivables when there is information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery. Sub- sequent recovery of amounts previously written down is credited against sales and distribution costs. Bavarian Nordic’s customers are predominantly public authorities and renowned pharmaceutical companies and therefore the credit risk is very low. There are overdue receivables as of December 31, 2021 DKK 7 million (DKK 4 million). As of December 31, 2021 a loss allowance of DKK 166 thousand (DKK 80 thousand) has been recognized. Trade receivables from smallpox vaccine sale Trade receivables from Encepur and Rabipur/RabAvert Trade receivables from other product sale Trade receivables from contract work Trade receivables 78,218 - 162,546 137,731 3,129 121,355 - 17,937 139,292 The payment conditions for the customers, including credit periods and any payment of interest in case of non-pay- ment, vary, but are always based on industry practice in the relevant market. The weighted average credit period is approximately 60 days for the sales of Encepur and Rabipur/RabAvert. 381,624 The majority of sales of Encepur and Rabipur/RabAvert are made to wholesalers where the risk of loss is very low and therefore the loss allowance is limited. 2021 Gross carrying amount Net carrying amount The Group has applied the simplified approach to measure the expected credit loss and a lifetime expected loss allow- ance for all trade receivables.The allowance is an estimate based on shared credit risk characteristics and the days past due. At the time of revenue recognition, Bavarian Nordic assesses the full lifetime expected credit losses. In addition, undue and due receivables are analyzed in an ongoing pro- cess. Based on the credit assessment, receivables analysis, historical experience and industry experience, it is estimat- ed whether the receivables are recoverable or write-downs are needed. Bavarian Nordic monitor the credit exposure on all customers, both new and existing. Loss allowance DKK thousand The table details the risk profile for trade receivables. Trade receivables Not past due date Accounting policies 374,583 6,936 - (139) (27) 374,583 6,797 Receivables are measured at initial recognition at fair value and subsequently at amortized value usually equal to the nominal value, net of impairment based on expected credit losses. Overdue by 0-3 months Overdue by 3-6 months Trade receivables 271 244 381,790 (166) 381,624 Write-downs are calculated using the ‘full lifetime expected credit losses’ method, whereby the likelihood of non-fulfilment throughout the lifetime of the financial instrument is taken into consideration. A provision account is used for this purpose. 2020 Gross carrying amount Net carrying amount Loss allowance DKK thousand Trade receivables Not past due date 135,358 4,014 - 135,358 3,934 Overdue by 0-3 months Trade receivables (80) (80) 139,372 139,292 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 98 Note 21 Note 22 Other receivables Prepayments DKK thousand 2021 2020 DKK thousand 2021 2020 Deposits 4,778 4,122 Incurred project costs related to subsequent years Prepayments to CMO's - 135,750 11,475 824 - Receivable VAT and duties Derivative financial instruments at fair value Interest receivables 55,973 191 31,486 606 Other prepayments 12,908 13,732 10,353 - 3,767 1,475 41,456 Prepayments 147,225 Other receivables Classified as: Non-current assets Current assets Other receivables 71,295 38,385 108,840 147,225 - 13,732 13,732 Classified as: Non-current assets Current assets 4,778 66,517 71,295 4,122 37,334 41,456 Prepayments Other receivables Production of drug substance for clinical trial materials for the planned Phase 3 study for ABNCoV2 is taking place at a CMO. As part of the agreement the Company has prepaid for purchase of materials (DKK 97.4 million as per Decem- ber 31, 2021). Once the materials have been consumed in the production of the Phase 3 clinical trial materials, the prepayments will be deducted and the costs be capitalized as development costs (see further in note 16). Costs related to the technology transfer activities are recog- nized as prepayments and will be recognized as inventory in concurrence with future purchase of services from the CMO's. As per December 31, 2021 DKK 16.6 million has been recognized as non-current prepayments. Accounting policies Receivables are measured at initial recognition at fair value and subsequently at amortized value usually equal to the nominal value, net of impairment, to counter the loss after an individual assessment of risk of loss. Accounting policies Prepayments recognized under assets include costs paid in respect of subsequent financial years, including project costs incurred that relate to revenue of subsequent years. Prepayments are measured at cost. This CMO will also be producing drug substance for future commercial ABNCoV2 products and the scale up actitivies has already started. Costs related to the scale up activities are recognized as prepayments and will be recognized as inventory in concurrence with future purchase of products from the CMO. As per December 31, 2021 DKK 21.8 million has been recognized as non-current prepayments. Part of the technology transfer of the production and pack- aging activities for Encepur and Rabipur/RabAvert takes place at CMO's (filing of Encepur, labelling and packing). Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 99 Note 23 Other liabilities DKK thousand 2021 2020 Financial instruments at fair value Liability relating to phantom shares Payable salaries, holiday accrual etc. Gross to net deduction accrual Other accrued costs 1,351 1,414 4,849 23,917 68,491 37,134 101,229 26,355 20,101 17,967 Other liabilities 150,994 151,814 Under the new Danish Holiday Act a transitional arrange- ment exists under which vacation accrued for the period September 1, 2019 to August 31, 2020, has been frozen and will not be paid out before retirement. The Company decided to deposit the accrued amount, DKK 25.1 million, to the Holiday Fund ("Lønmodtagernes Feriemidler") to ensure the asset management of the funds. The deposit was made in February 2021. Accounting policies Derivative financial instruments and liability relating to phantom shares are measured at fair value. For further details regarding measurement of fair value for phantom shares see note 31. Other financial liabilities are measured at initial recognition at fair value less any transaction costs. Subsequent other financial liabilities are measured at amortized cost using the effective interest method, whereby the difference be- tween proceeds and the nominal value is recognized in the income statement as a financial expense over the period. Amortized cost usually equal to the nominal value. For a further description of financial instruments see note 24. The phantom share programs are described in note 31. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 100 Note 24 Financial risks and financial instruments DKK thousand 2021 2020 Accounting policies with the hedged transaction or in respect of a non-financial item as part of the cost of the transactions in question. Categories of financial instruments Derivative financial instruments On initial recognition, derivative financial instruments are measured at the fair value on the settlement date. For derivative financial instruments that do not qualify for hedge accounting, changes in fair value are recognized as financials in the income statement as they occur. Trade receivables 381,624 71,104 139,292 40,850 285,487 - Other receivables Cash and cash equivalents 591,820 191 Directly attributable costs related to the purchase or issuance of the individual financial instruments (transaction costs) are added to the fair value on initial recognition, un- less the financial asset or the financial liability is measured at fair value with recognition of fair value adjustments in the income statement. Subsequently, they are measured at fair value at the balance sheet date based on the official exchange rates, market interest rates and other market data such as volatility adjusted for the special characteris- tics of each instrument. The Company has designated certain derivative financial instruments as cash flow hedges as defined under IFRS 9 "Financial Instruments". Hedge accounting is classified as a cash flow hedge when the hedges of a particular risk is associated with the cash flows of highly probable forecast transactions. Derivative financial instruments at fair value through the income statement (repo transactions) Financial assets measured at amortized cost 1,044,739 465,629 Securities 2,626,261 498,534 1,384,120 - Transferred securities that are not derecognized Financial assets measured at fair value through the income statement 3,124,795 1,384,120 Securities Derivative financial instruments to hedge future cash flows (exchange rate) - 606 Securities consist of listed bonds, which are measured at fair value on initial recognition and as of the balance sheet date. The Group’s portfolio of securities is treated as "financial items at fair value through profit or loss", as the portfolio is accounted for and valued on the basis of the fair value in compliance with the Company's investment policy. Financial assets used as hedging instruments - 606 Changes in the fair value of derivative financial instruments designated as and qualifying for recognition as effective hedges of future transactions (cash flow hedges) are recognized as comprehensive income. The ineffective portion is recognized immediately in the income statement. When the hedged transactions are realized, cumulative changes are recognized in the income statement together Deferred consideration 3,146,757 393,269 500,000 160,511 78,813 2,822,668 395,442 - Debt to credit institutions Security lending (repo transactions) Prepayment and loan from Government Lease liabilities - Both realized and unrealized value adjustments are recog- nized in the income statement under financials. 74,623 345,320 145,551 3,783,604 Trade payables 263,611 125,726 4,668,687 Other liabilities Financial liabilities measured at amortized cost Liability relating to phantom shares 23,917 4,849 Financial liabilities measured at fair value through the income statement 23,917 4,849 Derivative financial instruments to hedge future cash flows (exchange rate) Derivative financial instruments to hedge future cash flows (interest) Financial liabilities used as hedging instruments 646 705 - 1,414 1,414 1,351 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 101 Note 24 Financial risks and financial instruments (continued) Exchange rate risks on recognized financial assets and liabilities Policy for managing financial risks convert floating rate loans to fixed rate loans. Management determines the economic relationship between the hedged item and the hedging instrument to ensure a high hedge effectiveness. The interest rate risk involved in placing cash funds and investing in securities is managed on the basis of duration. Through its operations, investments and financing the Group is exposed to fluctuations in exchange rates and interest rates. These risks are managed centrally in the Parent Company, which manages the Group´s liquidity. The Group pursues a treasury policy approved by the Board of Directors. The policy operates with a low risk profile, so that exchange rate risks, interest rate risks and credit risks arise only in commercial relations. The Group therefore does not undertake any active speculation in financial risk. Cash and cash equivalents, securities DKK thousand Receivables Liabilities Net position 2021 EUR Exchange rate risks 107,199 68,481 2,216 193,837 205,224 1,471 (3,416,438) (319,201) (28,375) (3,115,402) (45,496) The Group’s exchange rate exposure is primarily to USD and EUR. The exchange rate exposure to USD is hedged to the greatest possible extent by matching incoming and outgoing payments denominated in USD, looking at maximum one year ahead. Regular assessments are made of whether the remaining net position should be hedged by currency forward contracts or currency option contracts. USD CHF (24,688) The Group´s capital structure is regularly assessed by the Board of Directors relative to the Group´s cash flow position and cash flow budgets. 2020 EUR 35,364 80,634 572 32,418 111,426 655 (3,005,383) (126,786) (12,916) (2,937,601) 65,274 USD CHF Market risks The pharmaceutical market is characterized by the aim of authorities to reduce or cap healthcare costs in general. Market changes such as price reductions and launch of competing generic products may have a considerable impact on the earnings potential of pharmaceuticals. As a pharmaceutical production company Bavarian Nordic will be exposed to risks from instability in the supply chain, where lack of, or delays in, certain materials may impact the companys ability to deliver and hence the companys profitability. The Company is highly dependent on a stable IT environment and risks, incl. cyberattacks, may impact the profibaility of the Company. The exposure to EUR is not hedged as management believes that fluctuations in EUR are limited due to the Danish fixed-rate policy which is expected to be maintained. Thus the fluctuations in EUR do not have a significant impact on financial performance. (11,689) Sensitivity analysis on exchange rates Likely Hypothetical Hypothetical change in exchange rate change in equity change in profit The table shows the net effect it would have had on equity and profit for the year if the year-end exchange rates of USD, EUR and CHF had been 15%, 1% or 5%, respectively, higher than the actual exchange rates. A corresponding decrease in the actual exchange rates would have had an opposite (positive/negative) effect on profit and equity. DKK thousand 2021 Change if higher USD-rate than actual rate Change if higher EUR-rate than actual rate Change if higher CHF-rate than actual rate 15% 1% (38,968) (28,795) 506 21,921 (30,165) (235) 5% Interest rate risk It is the Group's policy to hedge interest rate risks on loans whenever it is deemed that interest payments can be hedged at a satisfactory level relative to the related costs. Hedging will then consist of interest rate swaps that 2020 Change if higher USD-rate than actual rate Change if higher EUR-rate than actual rate Change if higher CHF-rate than actual rate 15% 1% (46,537) (28,226) (615) 12,469 (29,445) (535) 5% Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 102 Note 24 Financial risks and financial instruments (continued) Derivative financial instruments not designated as hedge accounting Cash flow hedge - forward currency contracts Cash risks The Group´s bank deposits are placed in deposit accounts without restrictions. The Group's cash and cash equivalents totaled DKK 591.8 million as of December 31, 2021 (DKK 285.4 million). Contract amount based on Fair value adjust- Fair ment recognized value as of in other compre- Currency forward contracts and currency option contracts which are not designated as hedge accounting are clas- sified as financial assets/liabilities measured at fair value with value adjustments recognized through the income statement. Forward price DKK thousand agreed rates December 31 hensive income The Group's fixed rate bond portfolio expires as shown below. Amounts are stated excluding interest. 2021 There were no open currency contracts as of December 31, 2021 or as per December 31, 2020 not designated as hedge accounting. Forward currency contracts (USD/DKK) 7,538 (646) (646) (646) (646) 2020 Hedging of expected future cash flows In December 2020 the Company concluded currency for- ward contracts of USD 83 million to hedge the sale of bulk drug substance batches to BARDA following the award of the contract for 2021 deliveries. minimum 5.93 - 6.00 Participating forward currency contracts (USD/DKK) 496,967 606 606 606 606 Cash flow hedge - interest rate swap In 2016 the Company refinanced the old mortgage loans (fixed rate) and obtained a new mortgage loan with float- ing rate. The Company also concluded an interest rate swap to convert the floating rate loan to a fixed rate loan. The interest rate swap has the same maturity date and nominal amount as the mortgage loan to secure high effectiveness of the hedge. Contract amount Fair value adjust- Fair ment recognized based on value as of in other compre- DKK thousand agreed rates December 31 hensive income 2021 Interest rate swap DKK - fixed rate 0.9625% p.a. (expiry 2031) 21,332 23,461 (705) 709 (705) 709 2020 Interest rate swap DKK - fixed rate 0.9625% p.a. (expiry 2031) (1,414) (171) (1,414) (171) Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 103 Note 24 Financial risks and financial instruments (continued) 2021 2020 Fair value as of December 31 Effective interest Fair value as of December 31 Effective interest DKK thousand Bond portfolio Within 0-2 years Within 3-5 years After 5 years Total 1,201,688 1,118,304 804,803 -0.5% -0.1% 1.0% 286,325 467,023 -0.4% -0.4% 0.1% 630,772 3,124,795 0.0% 1,384,120 -0.2% Fluctuations in interest rate levels affect the Group's bond portfolio. An increase in the interest rate level by 1 percentage point relative to the interest rate level on the balance sheet date would have had a negative impact of DKK 46.9 million on the Group´s profit and equity (DKK 23.5 million). A corresponding decrease in the interest rate level would have had a positive impact of DKK 46.9 million on profit and equity (DKK 23.5 million). Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 104 Note 24 Financial risks and financial instruments (continued) With respect to the Group´s debt to credit institutions, an increase in the applicable interest rate by 1 percentage point would have had a negative impact on the Group's profit and equity of DKK 4.0 million (DKK 4.0 million). A corresponding decrease in the interest rate would have had an equivalent positive impact. The Group has a credit facility of DKK 20 million (DKK 20 million) at Nordea. As of December 31, 2021, DKK 0.2 million (DKK 0.1 million) of the credit facility is utilized for bank guarantees. Maturity of financial liabilities (including interest) 2021 Due within 1 year Due between 1 and 5 years Due after 5 years DKK thousand Total Deferred consideration1) Credit institutions Prepayment and loan from Government2) 594,912 887,689 - 2,803,523 9,106 - 3,398,435 907,204 164,184 78,813 Credit risks 10,409 The primary credit risk relates to trade receivables. The Company assesses the expected credit losses also con- sidering changes in the macro environment that might impose an increased risk of losses. This is compared to the previous model where indications of credit losses were needed for the Company to recognize an expected loss. The Group´s customers are predominantly public authorties and renowned pharmaceutical companies and wholesalers, and the credit risk on the Group's receivables is therefore considered to be very low. A loss allowance of DKK 166 thousand (DKK 80 thousand) has been recognized as of December 31, 2021, cf. note 20. In May 2015, the Group secured a loan facility of EUR 50 million from the European Investment Bank (EIB) in support of the Group's research and development of vaccines against Ebola and other infectious diseases as well as cancer immunotherapies. The loan facility, which is unsecured, was fully utilized in October 2017 with a net proceed of DKK 372.2 million. The loan is a five year bullet loan with expiry in 2022 and with a fixed interest of 3.532%. 164,184 57,547 - - Lease liabilities 21,266 - Trade payables 263,611 154,032 1,921,510 - - 263,611 154,032 4,966,279 Other liabilities - Non-derivative financial liabilities 3,034,360 10,409 Derivative financial liabilities 705 - - 705 In August 2018 the Company was granted an unsecured loan facility of EUR 30 million from the European Maturity of financial liabilities (including interest) Due within 2020 Investment Bank to support the Company’s investments in the fill and finish manufacturing facility. The loan facility, which is unsecured, may be utilized in up to three tranches. The repayment period may be up to seven years from disbursement of the tranches. The loan could potentially carry a fixed or variable interest payment. The margin associated with the loan facility is 3.21%. As of December 31, 2021 the balance remains unused. The Company will have to draw down on the loan latest March 2022. The Company has no plans to use the facility. Due between 1 and 5 years Due after 5 years To manage credit risk regarding financial counterparties, Bavarian Nordic only enters into derivative financial contracts and money market deposits with financial counterparties possessing a satisfactory long-term credit rating from at least two out of the three selected ratings agencies: Standard and Poor’s, Moody’s and Fitch. DKK thousand 1 year Total Deferred consideration1) Credit institutions 393,624 15,499 2,753,133 - 3,146,757 422,755 74,623 394,556 12,700 Lease liabilities 20,422 54,201 - Trade payables 345,320 150,897 925,762 - - - - 345,320 150,897 4,140,352 Cash and cash equivalents are not deemed to be subject to any special credit risk as they are deposited with Nordea. The bond portfolio is invested in either Danish government bonds, Danish mortgage bonds or bonds issued by Danish banks with high ratings. Other liabilities Non-derivative financial liabilities 3,201,890 12,700 During 2021 the Company entered into repo loan contracts (security lending) for a total amount of DKK 500 million. Further described below. Derivative financial liabilities 1,414 - - 1,414 1) Further explained in note 25. 2) Further explained in note 26. Debt to credit institutions also include a mortgage loan of DKK 21.1 million (DKK 23.2 million), further described in note 26. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 105 Note 24 Financial risks and financial instruments (continued) Optimization of capital structure Securities (level 1) Transferred financial assets that are not derecognized Management regularly assesses whether the Group´s capital structure best serves the interests of the Group and its shareholders. The overall goal is to ensure that the Group has a capital structure which supports its long-term strategy and growth target. The portfolio of publicly traded government bonds, publicly traded mortgage bonds and bank bonds is valued at listed prices and price quotas. DKK thousand 2021 2020 Carrying amount of transferred securities Carrying amount of associated liabilities (security lending) Net position 498,534 (500,000) (1,466) - - - Derivative financial instruments (level 2) Currency forward contracts, currency option contracts and currency swap contracts are valued according to generally accepted valuation methods based on relevant observable swap curves and exchange rates. Transferred financial assets that are not derecognized In 2021 the Company entered into transactions that transfer ownership of securities to a counterparty, while the Company retains the risks associated with the holding of the securities. As the Company retains all risks, the securities remain in the balance sheet, and the transactions are accounted for as loans received against collateral (repo transactions and security lending). The transactions involve selling the securities to be repurchased at a fixed price at a later date. Counterparties are entitled to sell the securities or deposit them as collateral for loans. Fair value hierarchy for financial instruments measured at fair value 2021 Total DKK thousand Level 1 Level 2 Liability relating to phantom shares is determined using the Black-Scholes. The valuation is based on observable share price, interest rates and volatility rates. Securities 3,124,795 - - 191 191 3,124,795 191 Derivative financial instruments at fair value (repo transactions) Financial assets measured at fair value through the income statement 3,124,795 3,124,986 Derivative financial instruments to hedge future cash flow (currency) Derivative financial instruments to hedge future cash flow (interest) Financial assets/liabilities used as hedging instruments - - - (646) (705) (646) (705) (1,351) (1,351) Liability relating to phantom shares - (23,917) (23,917) Financial liabilities measured at fair value through the income statement - (23,917) (23,917) Fair value hierarchy for financial instruments measured at fair value 2020 Total DKK thousand Level 1 Level 2 Securities 1,384,120 - 1,384,120 Financial assets measured at fair value through the income statement 1,384,120 - 1,384,120 Derivative financial instruments to hedge future cash flow (currency) Derivative financial instruments to hedge future cash flow (interest) Financial assets/liabilities used as hedging instruments - - - 606 (1,414) (808) 606 (1,414) (808) Liability relating to phantom shares - (4,849) (4,849) Financial liabilities measured at fair value through the income statement - (4,849) (4,849) Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 106 Note 25 Deferred consideration License agreement The cash flow from payment of deferred consideration will be recognized as cash flow from investment activities. Due between 1 year 1 and 5 year Under the terms of the license and collaboration agree- ment concluded with AdaptVac July 2020, the Company is committed to payment of potential future development and sales milestones and tiered royalties. Due within Due after 5 years DKK thousand Total Accounting policies Deferred consideration including contingent 2021 milestone payments is recognized when its payment is probable and it can be measured reliably and is at initial recognition measured at fair value which equals present value of future deferred payments. Subsequently, the deferred consideration is measured at amortized cost. This means that the difference between the present value of the consideration and the nominal amounts due is recognized in the income statement as a financial expense over the period until expected payment date using the effective interest method. Deferred consideration, product rights Deferred consideration, license agreement Total 577,667 - 1,972,862 596,228 - - - 2,550,529 596,228 During second half of 2021 positive results were reported for the Phase 1/2 study conducted by AdaptVac confirming the vaccine's ability to induce strong and broad antibody levels, superior to those of the current approved COVID-19 vaccines. In December 2021, the Company announced posi- tive topline results from the ongoing Phase 2 clinical trial. Based on the positive clinical results Management assesses that the likelyhood of future regulatory approval of the Company's COVID-19 vaccine is high, hence milestone payments to AdaptVac are expected to become payable. Based on current regulatory plans and expectations for future revenue from sale of the COVID-vacine all sales milestones and part of the development milestones are as- sumed probable and recognized as deferred consideration. The net present value of the probable milestone payments amounts to DKK 596 million. 577,667 2,569,090 3,146,757 2020 Deferred consideration for product rights 357,736 2,464,932 - 2,822,668 Total 357,736 2,464,932 - 2,822,668 The expected phasing of future payments and the probability of contingent payments are assessed on each reporting date. Product rights December 31, 2021 Management does not judge the sales milestone to be probable and therefore the sales milestone has not been recognized as either part of the product rights (note 16) nor the deferred consideration. The Asset Purchase Agreement with GlaxoSmithKline includes milestone payments relating to transfer and regis- tration of marketing authorizations, technology transfer of different steps of the production and packaging activities as well as a milestone payment when all services agreed to be rendered by GlaxoSmithKline has been completed. In total EUR 470 million. During 2021 three milestone pay- ments of a total of EUR 50 million was paid. The payments are presented as cash flow from investment activities in the cash flow statement. The majority of the remaining milestone payments are expected to be payable in 2022- 2023. The completion milestone is expected to be payable beginning of 2025. The carrying amount are measured using a discount rate of 4% per annum. The discount rate was determined at intial recognition based on an interest rate on a similar loan of the same size and maturity as the contingent milestone payments and the Company's credit rating as of December 31, 2019. The carrying amount are measured using a discount rate of 3.7% per annum. The discount rate has been determined at intial recognition based on an interest rate on a similar loan of the same size and maturity as the contingent milestone payments and the Company's credit rating as of December 31, 2021. The fair value of the deferred consideration as per Decem- ber 31, 2021 amounts to DKK 2,564 million (DKK 2,838 million), measured using the updated discount rate of 3.7% (3.8%). The discount rate has been determined based on the same components as described above. Royalties payable under the license and collaboration agreement with AdaptVac will be expensed in concurrence with future sales, hence not assessed and recognized as a liability as of December 31, 2021. The Asset Purchase Agreement with GlaxoSmithKline also includes a sales milestone of EUR 25 million. As per Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 107 Note 26 Prepayment and loan from Government Due between 1 year 1 and 5 year Accounting policies Subsequent the financial liability part is measured at amortized cost. The prepayment part is accounted for as a prepayment under IFRS 15. The interest rate used that is implicit in the transaction is based on an assessment of the company’s incremental borrowing rate. The amortizations and the implicit interest are presented as amortization expenses under financial expenses. Due within Due after 5 years Prepayment and loan from Government consists of an upfront payment and additional milestone payments from the Danish Ministry of Health to support the completion of the development of ABNCoV2, the Company’s COVID-19 vaccine candidate. The additional payments are contingent upon reaching of a number of predefined development milestones. All payments are potentially subject to repayment, however only upon successful marketing authorization of the vaccine by the European Commission. Half of the repayments shall be paid by delivery of vaccines to the Danish Ministry of Health whereas the remaining part of the repayments can be settled in either royalty payments from the sale of the vaccine to other customers or by delivery of further vaccines. Royalty payments are only triggered upon reaching a certain volume in sales. Upon approval of the vaccine the repayment obligation is adjusted by inflation. The Company considers it probably that approval will be obtained and the received payments will be repaid to the Danish Ministry of Health. DKK thousand Total 2021 Prepayment and loan from Government - 160,511 - 160,511 Total - 160,511 - 160,511 Significant accounting judgments Management has made the following accounting judgment which affect the recognition in the consolidated financial statements: Agreement with Danish Ministry of Health In August 2021, the Company entered a funding agreement with the Danish Ministry of Health to further advance the development of ABNCoV2. development milestone of DKK 80 million. Management expect to have received all remaining milestone payments during 2022. As per December 31, 2021 amortized costs amount to DKK 511 thousand. Management assesses a high likelyhood of regulatory approval of the vaccine, hence assumes that the already received milestone payments and the milestone payments to be received in the coming year will be repaid in either supply of vaccines or royalty payments. The agreement is valued at up to DKK 800 million and aims to support the completion of the development towards licensure of ABNCoV2 as a booster vaccine. The Danish Ministry of Health could be entitled to an additional, capped royalty payment if the sales reach a certain threshold above the sales volume for the ordinary royalty payment. Based on current sales forecasts this additional royalty payment is not deemed likely and therefore not recognized. If the payment becomes current it will be recognized as a financial expense as the additional royalty payment is seen as an extra interest payment. The cap for the additional royalty payment is a fixed amount, calculated as a percentage of the loan amount. Under the agreement, Bavarian Nordic is entitled to an upfront payment of DKK 80 million, in addition to payments of up to DKK 720 million, which are contingent upon reaching a number of predefined milestones including among others completion of the ongoing Phase 2 trial, Phase 3 development milestones and milestones related to upscaling of manufacturing for commercial production of the vaccine. As per December 31, 2021 the Company has received the upfront payment of DKK 80 million and one The repayment obligation is accounted for as a prepayment in respect of the part that shall be repaid by delivery of vaccines whereas the part that can be repaid either by delivery of further vaccines or by royalty payments is accounted for as a financial liability. Initially the payments from the Danish Ministry of Health is measured at the amount received that is considered equal to the fair value of the obligation to repay the amount to the Danish Ministry of Health. Since the split between supply of vaccines and royalty payments is unknown at this stage Management has decided to recognize the received milestone payments under one common line item "Prepayment and loan from Government". Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 108 Note 27 Debt to credit institutions Due Cash flow from financing activities Due within between Due after 5 years January 1, 2021 Cash movement Non-cash movement December 31, 2021 DKK thousand 1 year 1 and 5 year Total DKK thousand 2021 Mortgage1) European Investment Bank (loan in DKK)2) Security lending (repo transactions) Total 2021 2,178 372,195 500,000 874,373 8,673 10,223 21,074 372,195 500,000 893,269 Mortgage 23,247 372,195 - (2,173) - - - 21,074 372,195 500,000 160,511 78,813 - - - - European Investment Bank (loan in DKK) Security lending (repo transactions) Prepayment and loan from Government Lease liabilities 500,000 160,000 (19,507) 638,320 - 8,673 10,223 - 511 74,623 470,065 23,697 24,208 2020 Mortgage1) European Investment Bank (loan in DKK)2) Total liabilities from financing activities 1,132,593 2,174 - 8,670 372,195 380,865 12,403 - 23,247 372,195 395,442 January 1, 2020 Cash movement Non-cash movement December 31, 2020 Total 2,174 12,403 DKK thousand 1) Floating interest - swapped to fixed interest of 0.9625% - expiry 2031 2) Fixed interest of 3.532% - bullet loan with expiry 2022 2020 Bridge loan 1,372,953 25,411 (1,373,434) (2,164) - 481 - 23,247 Mortgage - - The fair value of the debt to credit institutions amounts to DKK 893.5 million (DKK 395.6 million). The fair value of mortgage debt is based on the market value of the un- derlying bonds set by the bank (level 2), whereas the fair value of the European Investment Bank loan and the se- curity lending is based on a discounted cash analysis flow of future payments of interest and principal by applying a market based discount rate (level 2). The following tables detail changes in the Group's liabilities arising from financing activities, both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group's consolidated statement of cash flow as cash flows from financing activities. European Investment Bank (loan in DKK) Lease liabilities 372,195 61,400 372,195 74,623 (17,799) 31,022 31,503 Total liabilities from financing activities 1,831,959 (1,393,397) 470,065 Accounting policies between the proceeds of the loan and the amount to be repaid is recognized in the income statement over the term of the loan as a financial expense using the effective interest method. Loans are measured at the time of borrowing at fair value less any transaction costs. Subsequently, debt is measured at amortized cost. This means that the difference Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 109 Note 28 Lease liabilities Accounting policies • The lease term has changed, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. DKK thousand 2021 2020 The lease liability is initially measured at the present value of the future lease payments (see further in note 18), discounted by using an incremental country specific borrowing rate ranging from 2.5% to 3.0% applying only a single discount rate for a portfolio of lease assets with reasonable similar characteristics. Non-current Current 57,547 21,266 78,813 54,201 20,422 74,623 • The lease payments change due to changes in an index or rate, in which case the lease liability is remeasured by discounting the revised lease payments using an unchanged discount rate. Lease liabilities The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability using the effective interest method and by reducing the carrying amount to reflect the lease payments made. Due between 1 year 1 and 5 year • A lease contract is modified and the lease modification is not accounted for as a seperate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification. Due within Due after 5 years DKK thousand Total 2021 The lease liability is remeasured and corresponding adjustments are made to the related right-of-use-asset whenever: Lease liabilities Total 21,266 57,547 - 78,813 21,266 57,547 - 78,813 2020 Lease liabilities Total 20,422 54,201 - 74,623 20,422 54,201 - 74,623 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 110 Note 29 Note 30 Prepayment from customers Related party transactions DKK thousand 2021 2020 The Group Management and Board of Directors of Bavarian Nordic A/S are considered related parties. Prepayment from customers as of January 1 Prepayments received during the year 74,347 6,631 Besides the remuneration of the Board of Directors and the Executive Management, cf. note 8, and the share-based payments, cf. note 31, there are no transactions with related parties. 33,850 (91,293) 16,904 77,185 (9,469) 74,347 Recognized as revenue during the year Prepayment from customers as of December 31 Transactions with subsidiaries are eliminated in the consolidated financial statements, in accordance with the accounting policies. In July 2021, the Company received an initial and non- refundable upfront payment of DKK 33.9 million (USD 5.5 million) from Janssen Vaccines & Prevention B.V (Janssen) related to purchase of MVA-BN-Filo Drug Substance. The initial payment amounted to 20% of the agreed purchase price. The batches were produced and delivered in 2021 and the prepayment was fully recognized as revenue in 2021. Accounting policies Prepayments are recognized under liabilities and will be recognized in the income statement as the delivery of paid products takes place. In July 2020, the Company recieved an initial and non- refundable upfront payment of DKK 55.1 million (USD 8.3 million) from Janssen Vaccines & Prevention B.V. (Janssen) related to purchase of MVA-BN-Filo Drug Substance. The initial payment amounted to 60% of the agreed purchase price. The batches were delivered in May 2021 and the prepayment was fully recognized as revenue in 2021. Under the HPV license and collaboration agreement Janssen has ordered a new Master Seed Virus and made an upfront payment of DKK 16.9 million (USD 2.5 million) in February 2020. The recognition of revenue will occur once the Mas- ter Seed Virus has been produced and released. The recognition of revenue is described in note 3. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 111 Note 31 Share-based payment Accounting policies Matching shares are measured at the same fair value as the initial restricted stock units and expensed over the three year vesting period. The balancing item is recognized directly in equity. Restricted stock units granted as sign-on bonus for members of the Executive Management and restricted stock units granted to the Board of Directors are expensed at grant date with the balancing item recognized directly in equity. Share-based incentive plans in which employees can only opt to buy shares in the Company (warrants) are measured at the equity instruments’ fair value at the grant date and recognized in the income statement over the vesting period. The balancing item is recognized directly in equity. The fair value on the date of grant is determined using the Black-Scholes model. Cash-based incentive programs in which employees can have the difference between the agreed exercise price and the actual share price settled in cash (phantom shares) are measured at fair value at the date of grant and recognized in the income statement over the period when the final right of cash-settlement is obtained. Granted rights are subsequently re-measured on each balance sheet date and upon final settlement, and any changes in the fair value of the programs are recognized in the income statement. The balancing item is recognized under other liabilities. Incentive plans In order to motivate and retain key employees and en- courage the achievement of common goals for employees, management and shareholders, the Company has estab- lished incentive plans by way of warrant programs and restricted stock units programs, the latter only for members of the Executive Management and Board of Directors. Furthermore, the Company has established three-year phantom share programs for all employees of the Group except for Executive Management and other employees receiving warrants. The fair value of the cash-based incentive programs is determined using the Black-Scholes model. Warrants The warrants are granted in accordance with the authoriza- tions given to the Board of Directors by the shareholders. The Board of Directors has fixed the terms of and the size of the grants of warrants, taking into account authorizations from the shareholders, the Group's guidelines for incentive pay, an assessment of expectations of the recipient´s work efforts and contribution to the Group´s growth, as well as the need to motivate and retain the recipient. Grant takes place on the date of establishment of the program. Exercise of warrants is by default subject to continuing employment with the Group. The warrants granted are subject to the provisions of the Danish Public Companies Act regarding termination of employees prior to their exercise of warrants in the case of recipients who are subject to the act. Restricted stock units are measured at fair value at grant date. Based on the achieved cash bonus for members of the Executive Management, subject to the Board of Direc- tors’ decision on the portion that should be converted to restricted stock units, the number of restricted stock units are calculated by dividing the allocated cash bonus amount by the share price of the Company at grant date. As the cash bonus has already been accrued and expensed in the income statement, the grant of restricted stock units has no additional impact on the income statement. The accrued liability for the converted cash bonus is reclassified to equity. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 112 Note 31 Share-based payment (continued) Outstan- ding as of exercised as of Can be Average exercise Outstanding as Warrant overview – 2021 of January 1 Additions Exercised Annulled Terminated December 31 December 31 price (DKK) December 2016 July 2017 444,558 34,074 - (335,001) (15,696) - (16,200) 77,661 34,074 77,661 206 340 240 142 146 156 207 353 - - - 34,074 November 2017 November 2018 November 2019 January 2020 November 2020 November 2021 Total 362,527 554,066 687,467 30,039 - (159,600) (13,318) (38,382) (61,483) - - 189,609 515,684 625,984 30,039 189,609 - - - - - - - - - - - - - 1,280,258 - - - (103,294) (9,787) (241,960) - - 1,176,964 706,469 3,356,484 - - 716,256 716,256 3,392,989 (494,601) (16,200) 301,344 Outstanding as of January 1 Outstanding as of December 31 Warrant overview – 2021 Additions Exercised Annulled Terminated Transferred Corporate Management Other Executive Management Other employees 439,402 723,326 137,030 108,788 470,438 - - (31,709) - - - 166,914 (382,242) (68,133) 283,461 - 743,346 418,163 - (241,960) - 2,062,360 167,901 (327,617) (135,275) (494,601) (14,725) (1,475) (16,200) 1,880,363 314,612 Resigned employees Total 3,392,989 716,256 (241,960) 3,356,484 Weighted average exercise price (DKK) 188 307 217 327 194 206 - 145 Weighted average share price at exercise (DKK) Number of warrants which can be exercised as of December 31, 2021 at a weighted average exercise price of DKK 301,344 242 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 113 Note 31 Share-based payment (continued) Outstanding as of December 31 Outstand- ing as of Adjustment Warrant overview – 2020 January 1 rights issue Additions Exercised Annulled Terminated Transferred Corporate Management Other Executive Management Other employees 340,791 326,333 90,006 92,460 123,645 318,438 861,938 - (63,205) - (51,835) (13,905) - 439,402 723,326 - (86,590) - - (80,685) - - (39,880) 39,880 - 1,284,437 178,442 329,937 45,931 (206,797) (96,352) 2,062,360 167,901 Resigned employees Total 2,130,003 558,334 1,304,021 (149,795) (80,685) (368,889) 3,392,989 Weighted average exercise price (DKK) 239 207 104 207 187 290 - 188 Weighted average share price at exercise (DKK) Number of warrants which can be exercised as of December 31, 2020 at a weighted average exercise price of DKK 478,632 215 Specification of parameters for Black-Scholes model Dec. 2016 Jul. 2017 Nov. 2017 Nov. 2018 Nov. 2019 Jan. 2020 Nov. 2020 Nov. 2021 Average share price 222.50 260.20 205.80 44.6% 3.0 383.50 430.40 340.40 44.1% 3.0 259.50 303.00 239.60 52.4% 3.0 159.00 179.60 142.00 53.3% 3.0 154.05 185.40 146.60 52.2% 3.0 171.20 197.00 155.80 53.0% 3.0 179.84 206.82 - 307.20 353.06 - Average exercise price at grant Average exercise price determined at date of rights issue March 30, 2020 Applied volatility rate The applied volatility is based on the historical volatility of the Bavarian Nordic share, except for November 2020 and November 2021 programs where the volatility is based on the volatility for a peer group. 39.8% 3.0 41.8% 3.0 Expected life (years) Expected dividend per share Risk-free interest rate p.a. Fair value at grant1) - - - - - - - - -0.48% 54 -0.46% 98 -0.55% 80 -0.43% 52 -0.69% 45 -0.65% 53 -0.66% 41 -0.53% 76 Recognized costs in 2021 DKK 31.3 million compared to DKK 23.3 million in 2020. 1) Fair value of each warrant at grant date applying the Black-Scholes model Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 114 Note 31 Share-based payment (continued) Exercise periods Can be exercised wholly or partly in a period of 14 days commencing from the day of publication of: November 2021 Annual Report 2024 Annual Report 2025 Annual Report 2023 Annual Report 2024 Annual Report 2022 Annual Report 2023 Annual Report 2022 Annual Report 2023 Annual Report 2021 Annual Report 2022 Annual Report 2020 Annual Report 2021 Interim Report Q2 2020 Interim Report Q2 2021 Annual Report 2019 Annual Report 2020 Annual Report 2021 Interim Report Q1 2025 Interim Report Q1 2026 Interim Report Q1 2024 Interim Report Q1 2025 Interim Report Q1 2023 Interim Report Q1 2024 Interim Report Q1 2023 Interim Report Q1 2024 Interim Report Q1 2022 Interim Report Q1 2023 Interim Report Q1 2021 Interim Report Q1 2021 Interim Report Q3 2020 Interim Report Q3 2021 Interim Report Q1 2020 Interim Report Q1 2021 Interim Report Q2 2025 Interim Report Q2 2026 Interim Report Q2 2024 Interim Report Q2 2025 Interim Report Q2 2023 Interim Report Q2 2024 Interim Report Q2 2023 Interim Report Q2 2024 Interim Report Q2 2022 Interim Report Q2 2023 Interim Report Q2 2021 Interim Report Q2 2022 Annual Report 2020 Interim Report Q3 2025 Interim Report Q3 2026 Interim Report Q3 2024 Interim Report Q3 2025 Interim Report Q3 2023 Interim Report Q3 2024 Interim Report Q3 2023 Interim Report Q3 2024 Interim Report Q3 2022 Interim Report Q3 2023 Interim Report Q3 2021 Interim Report Q3 2022 Interim Report Q1 2021 Interim Report Q1 2022 Interim Report Q3 2020 Interim Report Q3 2021 November 2020 January 2020 November 2019 November 2018 November 2017 July 2017 Annual Report 2021 December 2016 Interim Report Q2 2020 Interim Report Q2 2021 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 115 Note 31 Share-based payment (continued) Phantom shares employees receive up to four phantom shares per month free of charge during the period from January 1, 2019 to December 31, 2021. Each employee who is a full-time employee during the entire term of the plan will be eligible to receive a maximum of 144 phantom shares. Following the rights issues in March 2020 the monthly grant increased to five phantom shares for the remaining grant period and the maximum increased to 183 phantom shares. The program will exercise in January 2022. to receive a maximum of 144 phantom shares. Following the rights issues in March 2020 the monthly grant increased to five phantom shares for the remaining grant period and the maximum increased to 183 phantom shares. On expiry of the programs, the employees may exercise the phantom shares granted to them and thus be entitled to a cash bonus calculated on the basis of the increase in the price of the Company´s shares. The exercise is condi- tional on the price of the Company´s shares being at least DKK 5 higher than the exercise price at the time of exercise. In 2017, the Company established a three-year phantom share program for all employees of the Group except for management and other employees receiving warrants. The employees receive up to four phantom shares per month free of charge during the period from January 1, 2018 to December 31, 2020. Each employee who is a full-time employee during the entire term of the plan will be eligible to receive a maximum of 144 phantom shares. Following the rights issues in March 2020 the monthly grant increased to five phantom shares for the remaining grant period and the maximum increased to 182 phantom shares. The program expired without exercise in January 2021. In 2020, the Company established a three-year phantom share program for all employees of the Group except for management and other employees receiving warrants. The employees receive up to five phantom shares per month free of charge during the period from January 1, 2021 to December 31, 2023. Each employee who is a full-time em- ployee during the entire term of the plan will be eligible to receive a maximum of 180 phantom shares. On expiry of the programs, former employees are entitled to settlement of the phantom shares granted during their term of employment. In 2019, the Company established a three-year phantom share program for all employees of the Group except for management and other employees receiving warrants. The employees receive up to four phantom shares per month free of charge during the period from January 1, 2020 to December 31, 2022. Each employee who is a full-time employee during the entire term of the plan will be eligible In 2018, the Company established a three-year phantom share program for all employees of the Group except for management and other employees receiving warrants. The Grants are made on a monthly basis during the life of the programs as long as the employee is employed with the Group. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 116 Note 31 Share-based payment (continued) 2021-2023 phantom share program 2021 2020-2022 phantom share program 2021 2020 Outstanding as of January 1 - Outstanding as of January 1 30,921 37,952 - - 29,554 1,367 Granted during the year 37,996 Granted during the year Outstanding phantom shares as of December 31 37,996 Adjustment following rights issue March 2020 Outstanding phantom shares as of December 31 68,873 30,921 Liability in DKK thousand as of December 31 3,589 Liability in DKK thousand as of December 31 8,604 1,864 Specification of parameters for Black-Scholes model Share price December 31 269 203 Specification of parameters for Black-Scholes model Share price December 31 Average share exercise price Expected volatility rate 269 147 187 147 42% 2.0 Average share exercise price Expected volatility rate Expected life (years) 42% 1.0 40% 2.0 Expected dividend per share Risk-free interest rate p.a. - Expected life (years) 0.11% Expected dividend per share Risk-free interest rate p.a. - - -0.02% -0.17% The expected volatility is based on the volatility for a peer group. The liability is included in other liabilities, cf. note 23. The expected volatility is based on the volatility for a peer group. The liability is included in other liabilities, cf. note 23. The expense in respect of phantom shares granted in 2021 provided a cost of DKK 3.6 million. Phantom shares granted in 2021 provided an expense of DKK 4.7 million, whereas the revaluation of previously granted phantom shares provided an expense of DKK 2.0 million, total net expense of DKK 6.7 million (net expense 2020: DKK 1.9 million). Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 117 Note 31 Share-based payment (continued) 2019-2021 phantom share program 2021 2020 2019 2018-2020 phantom share program 2021 2020 2019 2018 Outstanding as of January 1 55,095 37,436 - 19,213 - Outstanding as of January 1 77,227 36,769 29,376 11,082 - 17,644 - Granted during the year 29,437 6,445 19,213 - Granted during the year - 19,125 17,644 Adjustment following rights issue March 2020 Outstanding phantom shares as of December 31 Adjustment following rights issue March 2020 Expired during the year - (77,227) - - - - - 92,531 55,095 19,213 Outstanding phantom shares as of December 31 77,227 36,769 17,644 Liability in DKK thousand as of December 31 11,724 2,985 864 Liability in DKK thousand as of December 31 - 271 145 Specification of parameters for Black-Scholes model Share price December 31 269 187 142 171 180 Specification of parameters for Black-Scholes model Share price December 31 Average share exercise price Expected volatility rate 142 187 171 303 127 303 42% 40% 1.0 51% 2.0 Average share exercise price Expected volatility rate 240 Expected life (years) - - - 40% 51% 1.0 52% 2.0 Expected dividend per share Risk-free interest rate p.a. - - Expected life (years) - - - -0.15% -0.17% Expected dividend per share Risk-free interest rate p.a. - - -0.21% 0.02% The expected volatility for 2020 and 2021 is based on the volatility for a peer group, whereas the volatility for prior year is based on the historic volatility of the Company. The 2019-2021 program will exercise in January 2022 if the average share price for the period January 3 - January 14, 2022 will exceed the exercise price of DKK 142.10. Other- wise the program will expire without exercise. The expected volatility for 2021 is based on the volatility for a peer group, whereas the volatility for prior years is based on the historic volatility of the Company. Reversal of the phantom share program provided an income of DKK 0.0 million (net income 2020: DKK 0.3 million). Phantom shares granted in 2021 provided an expense of DKK 4.7 million, whereas the revaluation of previously granted phantom shares provided an expense of DKK 4.0 million, total net expense of DKK 8.7 million (net expense 2020: DKK 2.1 million). The 2018-2020 program expired in January 2021 without exercise as the actual share price was below the exercise price of DKK 239.70. The liability is included in other liabilities, cf. note 23. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 118 Note 31 Share-based payment (continued) Outstanding restricted stock units 2021 Restricted stock units In March 2021, the Board of Directors decided to postpone the payment of half of the achieved cash bonus for Granted during the year Released during Outstanding as the year of December 31 Value at grant date (DKK) Outstanding as of January 1 members of the Executive Management for 3 years, converting the postponed bonus of DKK 3.6 million into 16,413 unconditional restricted stock units using the share price of the Company at grant date (DKK 222). The Board of Directors decided to grant additional restricted stock units free of charge on expiry of a 3 years period (so-called "matching shares") upon the recipient still being employed in March 2024. One matching share is granted for each two acquired restricted stock units. The maximum number of matching shares is 8,207. The initial granted restricted stock units and the potential matching shares total 24,620 shares. Vesting date Executive Management: Conversion of cash bonus for 2020 Matching shares - bonus 2020 Conversion of cash bonus for 2019 Matching shares - bonus 2019 Sign-on bonus CMO - - 16,413 - 16,413 8,207 11,003 5,500 8,651 4,325 16,080 8,039 - 222 222 240 240 149 149 144 144 156 156 244 244 Mar. 2024 Mar. 2024 Mar. 2023 Mar. 2023 May 2023 May 2023 Mar. 2022 Mar. 2022 Nov. 2021 Nov. 2021 Mar. 2021 Mar. 2021 8,207 - 11,003 5,500 8,651 4,325 16,080 8,039 8,554 4,277 8,734 4,366 79,529 - - - - - - - Matching shares - sign-on CMO Conversion of cash bonus for 2018 Matching shares - bonus 2018 Sign-on bonus CFO1) Matching shares - sign-on CFO1) Conversion of cash bonus for 2017 Matching shares - bonus 2017 Executive Management - - - At the annual general meeting in April 2021, the Board of Directors were granted a total of 7,127 unconditional restricted stock units corresponding to 50% of the annual fixed fee of DKK 2.0 million (excl. committee fee). The restricted stock units will be delivered after 3 years in April 2024. - - - (8,554) (4,277) (8,734) (4,366) (25,931) - - - - - - 24,620 78,218 Board of Directors: Fee 2021 - 7,111 7,127 - - 7,127 7,111 273 190 138 175 Apr. 2024 Jun. 2023 Apr. 2022 Apr. 2021 Fee 2020 - Fee 2019 12,340 8,666 - - - 12,340 - Fee 2018 (8,666) (8,666) (34,597) Board of Directors Total 28,117 107,646 7,127 31,747 26,578 104,796 1) At vesting 6,400 shares were transferred to CFO Henrik Juuel, the remaining 6,431 restricted stock units were converted to a cash bonus of DKK 2.0 million. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 119 Note 31 Share-based payment (continued) Outstanding restricted stock units 2020 In May/June 2021, the Company bought back 31,747 of its own shares to meet the obligation to deliver up to 31,747 shares to the members of the Executive Management and the Board of Directors in March/April 2024. Granted during the year Released during Outstanding as the year of December 31 Value at grant date Outstanding as of January 1 Adjustment rights issue (DKK) Vesting date The grant of the initial restricted stock units to the Execu- tive Management (16,413 shares) had no impact on the income statement for 2021, as the corresponding cash bonus (DKK 3.6 million) was accrued in 2020, though the amount has been reclassified from "Salary and wages" to "Share-based payment" in the staff cost note (note 8). The obligation related to the matching shares amounts to DKK 1.8 million measured at the same fair value as the initial restricted stock units (DKK 222). The obligation will be expensed over the three year vesting period. During 2021, DKK 5.4 million has been expensed and recognized as share-based payment (incl. grants of matching shares for prior years). The grant of restricted stock units to the Board of Directors (7,127 shares - DKK 2.0 million) were fully expensed at grant. Executive Management: Conversion of cash bonus for 2019 Matching shares - bonus 2019 Sign-on bonus CMO - - 2,298 1,147 - 8,705 - 11,003 5,500 8,651 4,325 16,080 8,039 8,554 4,277 8,734 4,366 - 240 240 149 149 144 144 156 156 244 244 292 292 Mar. 2023 Mar. 2023 May 2023 May 2023 Mar. 2022 Mar. 2022 Nov. 2021 Nov. 2021 Mar. 2021 Mar. 2021 Mar. 2020 Mar. 2020 4,353 - - 8,651 - Matching shares - sign-on CMO Conversion of cash bonus for 2018 Matching shares - bonus 2018 Sign-on bonus CFO - - 4,325 - 12,722 6,362 6,767 3,383 6,910 3,456 5,642 2,821 48,063 3,358 1,677 1,787 894 - - - - - - Matching shares - sign-on CFO Conversion of cash bonus for 2017 Matching shares - bonus 2017 Conversion of cash bonus for 2016 Matching shares - bonus 2016 Executive Management - - - 1,824 910 - - - - - - (5,642) (2,821) (8,463) - - 13,895 26,034 79,529 Board of Directors: Fee 2020 - 9,765 - 2,575 1,809 973 7,111 - - 7,111 12,340 8,666 190 138 175 365 Jun. 2023 Apr. 2022 Apr. 2021 Apr. 2020 Fee 2019 - Fee 2018 6,857 - - - Fee 2017 3,693 (4,666) (4,666) (13,129) - Board of Directors Total 20,315 68,378 5,357 19,252 7,111 33,145 28,117 107,646 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 120 Note 31 Note 32 Share-based payment (continued) Contingent liabilities and other contractual obligations Total share-based payments Below a specification of all share-based payments expensed in 2021 and 2020. The amounts reconcile to note 8. DKK thousand 2021 2020 Collaborative agreements Contractual obligations with research partners for long-term research projects. – Due within 1 year 131,865 45,052 DKK thousand 2021 2020 Other contractual obligations – Due within 1 year Warrants 31,265 7,319 23,336 5,948 17,391 13,600 17,769 12,604 Restricted stock units – Due between 1 and 5 years Share-based payment recognized directly in equity 38,584 29,284 2021-2023 phantom share program 3,589 6,740 8,739 - - 1,864 2,121 (271) 3,714 2020-2022 phantom share program Production of drug substance for clinical trial materials for the planned Phase 3 study for ABNCoV2 is taking place at a CMO and the contractual obligations as per December 31, 2021 amounts to DKK 73.8 million, included under collabo- rative agreements above. tions for future sale of the Company's COVID-19 vaccine all sales milestones and part of the development milestones are deemed probable as per December 31, 2021 and the net present value of those future milestone payments have been recognized as deferrred consideration, see further description in note 25. The remaining developement mile- stones related to filing for approval in further countries are not deemed likely and therefore not recognized. 2019-2021 phantom share program 2018-2020 phantom share program Share-based payment recognized as a liability (change during the year) 19,068 Total share-based payment expensed, cf. note 8 Restricted stock units converted to cash bonus at exercise Non-cash adjustment in cash flow statement 57,652 (795) 32,998 - Sales milestone to GlaxoSmithKline The Asset Purchase Agreement with GlaxoSmithKline regarding the acquisition of the product rights to Rabipur/ RabAvert and Encepur includes a sales milestone of EUR 25 million. As per December 31, 2021 Management does not judge the sales milestone to be probable and therefore the sales milestone has not been recognized as either part of the product rights (note 16) nor the deferred consideration for product rights (note 25). 56,857 32,998 Agreement with Danish Ministry of Health Under the agreement with the Danish Ministry of Health to fund the development of ABNCoV2 the Company has an obligation of payment of an additional, capped royalty payment if the sales reach a certain threshold. Based on current sales forecasts this additional royalty payment is not deemed likely and therefore not recognized. If the pay- ment becomes current it will be recognized as a financial expense as the additional royalty payment is seen as an extra interest payment. The cap for the additional royalty payment is a fixed amount, calculated as a percentage of the loan amount. License and collaboration agreement AdaptVac Under the license and collaboration agreement with Adapt- Vac the Company has an obligation of payment of potential future development and sales milestones and tiered royalties. Based on current regulatory plans and expecta- Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 121 Note 32 Note 33 Contingent liabilities and other contractual obligations Significant events after the balance sheet date License agreements National Cancer Institute The Group has license agreements with the National Cancer Institute (NCI) and Public Health Service (PHS) in the U.S. for PROSTVAC, CV301 and BN-Brachyury, respectively. The agreements include contingent liabilities for the Group to pay performance-based royalties, if and when certain milestone events are achieved. Further, the agreements include potential contingent liabilities for the Group to pay additional sublicensing royalties on the fair market value of consideration received, if and when the Group grants such sublicenses. Payments considered remote are not included in the amounts above. Company mortgage On February 14, 2022, the Company announced that the U.S. Food and Drug Administration (FDA) has granted Breakthrough Therapy Designation for the Company's vaccine candidate, MVA-BN RSV, for active immunization for prevention of lower respiratory tract disease caused by respiratory syncytial virus (RSV) in adults aged 60 years or older. 2022. The trial will include approximately 4,000 subjects The Company has by letter of indemnity granted Nordea a floating charge on unsecured claims arising from the sale of goods and services and stocks of raw materials, interme- diate products and finished products, DKK 150 million (DKK 150 million). The floating charge secures the operating credit line of DKK 20 million and the line for trading in financial instruments, DKK 50 million (DKK 50 million). aiming to demonstrate non-inferiority of ABNCoV2 to the licensed mRNA vaccine. An overall agreement has been made with regulatory authorities on the trial design, and manufacturing of vaccine bulk for the trial has been completed, pending filling at the Company’s own manufacturing line in the near future. On February 28, 2022, the Company announced additional positive results from a Phase 2 clinical trial of its non- adjuvanted COVID-19 vaccine candidate, ABNCoV2, which is being developed as a universal booster vaccine. Based on the encouraging results, the Company continues the preparations to initiate a Phase 3 trial in the first half of Except as noted above, there have been no significant events between December 31, 2021 and the date of approval of these financial statements that would require a change to or additional disclosure in the financial statements. Lawsuits Based on management's assessment the Group is not involved in any lawsuits or arbitration cases which could have a material impact on the Group's financial position or results of operations. Note 34 Approval of the consolidated financial statements The consolidated financial statements were approved by the Board of Directors and Corporate Management and authorized for issue on March 4, 2022. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 122 Contents 122 Financial statements – Parent 123 Income statements 124 Statements of financial position – Assets 125 Statements of financial position – Equity and liabilities 126 Statements of changes in equity 134 10. Property, plant and equipment 135 11. Right-of-use-assets 136 12. Investment in subsidiaries 137 13. Inventories 137 14. Lease liabilities 138 15. Prepayment from customers 138 16. Other liabilities 127 Notes 127 1. Significant accounting policies 139 17. Related party transactions 128 2. Revenue 128 3. Research and development costs 129 4. Staff costs 130 5. Depreciation, amortization and impairment losses 131 6. Financial income 140 18. Contingent liabilities and other contractual obligations 141 19. Mortgages and collateral 141 20. Proposed appropriation of net profit/(loss) 141 21. Significant events after the balance sheet date 131 7. Financial expenses 132 8. Tax for the year 133 9. Intangible assets Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 123 Income statements For the years ended December 31, 2021 and 2020 DKK thousand Note 2021 2020 Note Revenue 2 1,938,362 1,266,481 671,881 1,883,483 1,174,546 708,937 Notes with reference to the consolidated financial statements Production costs Gross profit 4,5 Revenue 3 4 Production costs Sales and distribution costs Administrative costs Other operating income 5 Sales and distribution costs Research and development costs Administrative costs 4 3,4,5 4,5 168,903 405,649 327,031 901,583 267,112 363,459 288,877 919,448 7 11 Total operating costs Other operating income - 627,647 417,136 Income before interest and tax (EBIT) (229,702) Income from investments in subsidiaries Financial income 12 6 (131,075) 82,643 (61,733) 119,665 198,074 276,994 Financial expenses 7 192,014 Income before company tax (470,148) Tax on income for the year 8 - - Net profit for the year 20 (470,148) 276,994 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 124 Statements of financial position – Assets December 31, 2021 and 2020 DKK thousand Note 2021 2020 DKK thousand Note 13 2021 2020 Non-current assets Current assets Inventories Product rights 4,912,830 733,770 5,185,765 29,813 407,632 503,768 Acquired rights and development in progress Software Trade receivables Receivables from subsidiaries Other receivables Prepayments 253,850 154,035 85,239 27,866 104,944 36,441 21,360 17,475 Other intangible assets in progress Intangible assets 134,371 55,194 9 5,802,331 5,288,247 125,411 618,535 12,474 Land and buildings 345,536 1,882 365,704 1,629 Receivables 181,725 Leasehold improvements Securities 3,124,795 573,893 1,384,120 263,686 Plant and machinery 254,530 207,498 560,551 1,369,997 204,665 213,726 204,702 990,426 Cash and cash equivalents Securities, cash and cash equivalents Other fixtures and fittings, other plant and equipment Assets under construction 3,698,688 1,647,806 Property, plant and equipment 10 Total current assets Total assets 4,724,855 2,333,299 8,795,371 Right-of-use assets 11 12 25,871 35,516 12,107,828 Investments in subsidiaries Other receivables 163,970 16,559 144,004 3,879 - Other financial non-current assets Financial assets 4,245 184,774 147,883 Total non-current assets 7,382,973 6,462,072 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 125 Statements of financial position – Equity and liabilities December 31, 2021 and 2020 DKK thousand Note 2021 2020 Notes with reference to the consolidated financial statements Note Equity Trade receivables 20 22 24 25 26 27 29 31 Share capital 704,684 (1,111) 584,501 (1,077) Prepayments Treasury shares Retained earnings Reserve for development costs Other reserves Equity Financial risks and financial instruments Deferred consideration for product rights Prepayment and loan from Government Debt to credit institutions 6,556,902 19,275 4,210,337 13,157 95,455 87,916 7,375,205 4,894,834 Prepayment from customers Share-based payment Liabilities Deferred consideration Prepayment and loan from Government Credit institutions 2,569,090 160,511 18,896 2,464,932 - 393,269 25,858 Lease liabilities 14 16,186 Non-current liabilities 2,764,683 2,884,059 Deferred consideration for product rights Credit institutions 577,667 874,373 11,367 357,736 2,173 Lease liabilities 14 15 11,356 Prepayment from customers Trade payables 16,904 74,347 246,271 157,175 84,183 322,264 137,018 111,584 1,016,478 Payables to subsidiaries Other liabilities 16 Current liabilities 1,967,940 Total liabilities 4,732,623 3,900,537 8,795,371 Total equity and liabilities 12,107,828 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 126 Statements of changes in equity December 31, 2021 Reserve for development costs Share capital Treasury shares Retained earnings Other reserves DKK thousand Equity Equity as of January 1, 2021 584,501 (1,076) 4,210,347 13,157 87,919 4,894,848 Net profit for the year - - - - (470,148) 1,498 - - - - (470,148) 1,498 Exchange rate adjustments Change in fair value of financial instruments entered into to hedge future cash flows - - - - (542) (542) Share-based payment - - - 126,729 13,999 695 - 38,584 38,584 107,183 13,999 - Warrant programs exercised 4,946 - - (24,492) Warrant recharged - - - - Warrant programs expired - - - (695) Capital increase through private placement Costs related to issue of new shares Purchase of treasury shares 115,237 - 2,741,359 (57,438) (8,264) 4,243 - - 2,856,596 (57,438) (8,581) 1 - - - - - - (317) - Transfer regarding restricted stock units Restricted stock units converted to cash bonus at exercise Reserve for development costs Equity as of December 31, 2021 - 282 - - (4,524) (795) - - - - - - (795) (6,118) 6,556,902 6,118 19,275 - 704,684 (1,111) 95,455 7,375,205 Transactions on the share capital and rules on changing Articles of Associations, see statement of changes in Group equity. Other reserves consist of costs for share-based payments and hedging reserves. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 127 Note 1 Significant accounting policies Accounting policies Pursuant to the schedule requirements of the Danish Financial Statements Act, entries recognized in the statement of comprehensive income in the consolidated financial statements are recognized directly in the statement of changes in equity in the Parent Company’s financial statements. The financial statements of the Parent Company Bavarian Nordic A/S have been prepared in accordance with the Danish Financial Statements Act (Class D). The financial statements are presented in Danish kroner (DKK), which also is the functional currency of the Parent Company. The accounting policies are unchanged from previous year. Warrant recharged to subsidiaries is treated as the Parent Company’s issuance of equity in exchange for cash. The recharge is subsequently recognized in the income statement under the cost plus agreements with the subsidiaries. Income tax effects relating to warrant recharged is recognized in the income statement. Changes in accounting policies The accounting policies are unchanged from last year. Supplementary accounting policies for the Parent Company Accounting policies for investments in subsidiaries are described in note 12. As allowed under section 86 (4) of the Danish Financial Statements Act, no cash flow statement has been prepared for the Parent Company, as it is included in the consolidated cash flow statement. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 128 Note 2 Note 3 Revenue Research and development costs DKK thousand ´ 2021 2020 DKK thousand ´ 2021 2020 MVA-BN smallpox vaccine sale Rabipur/RabAvert Encepur 733,593 544,274 540,769 659,022 455,012 - Research and development costs incurred this year 427,527 467,456 Of which: 365,091 Contract costs recognized as production costs Research and development costs recognized in the income statement (21,878) (103,997) Other product sale Sale of goods 260,220 405,649 363,459 1,903,178 1,654,803 Milestone Payments Contract work - 35,184 35,184 66,553 162,127 228,680 Accounting policies See consolidated financial statements note 6. Sale of services Revenue 1,938,362 1,883,483 Total revenue includes: Fair value adjustment concerning financial instruments entered into to hedge revenue (7,072) 13,146 The Group's sale of RabAvert in US is handled and recognized in Bavarian Nordic Inc.. The Group's sale of Encepur and Rabipur in Switzerland is handled and recognized in Bavarian Nordic Switzerland AG. Both Bavarian Nordic Inc. and Bavarian Nordic Switzerland AG operate under a distribution agreement and purchase the products from Bavarian Nordic A/S. The internal sale of products in 2021 exceeded the sale to customers in US and Switzerland, hence the Rabipur/ RabAvert and Encepur revenue recognized in the Parent Company is higher than the Rabipur/RabAvert and Encepur revenue recognized in the Group. Inc., whereas all costs related to the contract are covered by Bavarian Nordic A/S. Bavarian Nordic A/S re-invoice those costs to Bavarian Nordic, Inc. Net Bavarian Nordic, Inc. earns a mark-up, reducing the contract work revenue in the Parent Company compared to the contract work revenue in the Group. For further disclosures see the consolidated financial state- ments note 3. Accounting policies and significant accounting estimates The contract with the United States Department of Defense for the development of a prophylactic vaccine against the equine encephalitis virus is concluded with Bavarian Nordic, See consolidated financial statements note 3. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 129 Note 4 Staff costs DKK thousand 2021 2020 DKK thousand 2021 2020 Wages and salaries 371,127 32,724 3,928 293,496 25,970 2,459 Staff costs include the following costs: Board of Directors: Contribution based pension Social security expenses Other staff expenses Share-based payment Staff costs Remuneration 5,202 1,950 7,152 3,825 1,350 5,175 25,308 53,290 486,377 24,283 32,074 378,282 Share-based payment Remuneration to Board of Directors Executive Management: Salary Staff expenses are distributed as follows: Production costs 8,661 3,956 678 5,186 2,540 576 243,502 21,834 195,337 17,397 Paid bonus Sales and distribution costs Research and development costs Administrative costs Other employee benefits Contribution based pension Share-based payment Corporate Management 65,148 48,272 2,048 9,035 24,378 - 116,609 39,284 98,367 4,011 12,313 Capitalized salaries 18,909 Staff costs 486,377 378,282 Salary 5,981 1,917 207 9,288 2,089 465 Average number of employees converted to full-time 511 533 408 475 Paid bonus Number of employees as of December 31 converted to full-time Other employee benefits Contribution based pension Share-based payment Salary and benefits in notice period Other Executive Management 752 1,114 8,557 - 3,869 7,378 20,104 21,513 Remuneration to Executive Management Total management remuneration 44,482 51,634 33,826 39,001 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 130 Note 4 Note 5 Staff costs – continued Depreciation, amortization and impairment losses DKK thousand 2021 2020 CEO and President of the Company Paul Chaplin and CFO Henrik Juuel constitute the Corporate Management in the Parent Company. Henrik Juuel became part of Corporate Management in February 2021. The CEO's contract of employment contains standard terms for members of the management of Danish listed com- panies, including the extended period of notice that both parties are required to give. For the Company, the notice is maximum 18 months. In the event of a change of control, the term of notice for the Company will be extended to maximum 24 months. Depreciation and amortization included in: Production costs 346,012 2,340 310,784 1,400 Research and development costs Administrative costs COO Henrik Birk and CPO Anu Kerns constitute the Com- pany's member of the Other Executive Management. CBO Tommi Kainu resigned by the end of March 2021. 24,954 20,547 Depreciation and amortization 373,306 332,731 Accounting policies Hereof profit ()/loss from disposed fixed assets 5,259 3,149 Incentive programs for management and other employees are disclosed in the consolidated financial statements note 31. See consolidated financial statements note 8. Impairment losses included in: Production costs 618 16,066 Impairment losses 618 16,066 For further disclosures see the consolidated financial statements note 9. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 131 Note 6 Note 7 Financial income Financial expenses DKK thousand 2021 2020 DKK thousand 2021 2020 Financial income from bank and deposit contracts Financial income from subsidiaries 1,739 193 Interest expenses on debt 17,011 2,374 30,741 2,274 22,875 11,045 - 21,743 8,756 Financial expenses to subsidiaries Fair value adjustments on securities Unwinding of the discount related to deferred consideration Net foreign exchange losses Financial income from securities 39,056 133,573 - - Fair value adjustments on securities 6,783 145,149 19,910 198,074 Adjustment of deferred consideration due to change in estimated timing of payments Currency adjustment deferred consideration 32,185 1,677 - 67,719 11,900 2,571 Financial expenses 192,014 Net gain on derivative financial instruments at fair value in the income statement Net foreign exchange gains 13,122 82,643 - Financial income 119,665 Accounting policies Accounting policies See consolidated financial statements note 12. See consolidated financial statements note 13. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 132 Note 8 Tax for the year Recognized in the income statement DKK thousand 2021 2020 January 1, 2021 Recognized in equity December 31, 2021 Tax recognized in the income statement Tax for the year recognized in the income statement DKK thousand - - Product rights (94,360) 377 83,939 (377) 22,158 (3) - (10,421) Other intangible assets Property, plant and equipment Right-of-use-asset - - 60,500 370 Tax on income for the year is explained as follows: Income before company tax - - 38,342 373 - (470,148) (103,432) 276,994 60,939 - Calculated tax (22.0%) on income before company tax Development projects for sale Accrued project costs Receivables 32,446 (181) 18 - - 32,446 - Tax effect on: 181 - Income from investments in subsidiaries 28,837 - (3,352) 7,551 19 - 37 Write-down of receivables from subsidiaries - not deductable for tax purposes Income()/expenses that are not taxable/deductible for tax purposes Change in non-recognized tax asset Provisions 17,930 178 (17,930) - - 119 5,871 - - (16,699) 94,007 (2,713) - (10,648) (54,490) (54,490) - Financial instruments Share-based payment Tax losses carried forward Not recognized tax asset Recognized deferred tax assets 297 15,397 362,121 (372,641) - 6,726 (706) (94,007) - 27,994 361,415 (472,638) - Adjustment to previous years non-recognized tax asset Tax on income for the year (5,990) - Tax recognized in equity Tax for the year recognized in equity - - Accounting policies See consolidated financial statements note 14. Deferred tax For further disclosures see the consolidated financial statements note 14. Recognized deferred tax assets relate to temporary dif- ferences between valuations for accounting and taxation purposes and tax losses carried forward. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 133 Note 9 Intangible assets 2021 Acquired rights and Product development Other intangible assets in progress DKK thousand rights in progress Software Total Costs as of January 1, 2021 Additions 5,458,700 29,813 85,081 145 55,194 96,161 (16,984) - 5,628,788 800,263 - - 703,957 Transfer - - - - 16,984 (6,280) 95,930 Disposal (6,280) 6,422,771 Cost as of December 31, 2021 5,458,700 733,770 134,371 Amortization as of January 1, 2021 Amortization 272,935 272,935 - - - - - 67,606 13,221 (6,257) 74,570 - - - - 340,541 286,156 (6,257) Disposals Amortization as of December 31, 2021 545,870 620,440 Carrying amount as of December 31, 2021 Carrying amount as of December 31, 2020 4,912,830 5,185,765 733,770 29,813 21,360 17,475 134,371 55,194 5,802,331 5,288,247 Accounting policies See consolidated financial statements note 16. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 134 Note 10 Property, plant and equipment 2021 Other fixtures and fittings, other plant and Leasehold improve- ment Land and buildings Plant and machinery Assets under construction DKK thousand equipment Total Costs as of January 1, 2021 Additions 547,111 2,516 4,376 598 485,024 5,715 242,859 8,184 204,702 439,093 (83,244) - 1,484,072 456,106 - Transfer 6,911 - 73,155 3,178 Disposals (10,946) 545,592 (518) 4,456 (139,605) 424,289 (3,369) 250,852 (154,438) 1,785,740 Cost as of December 31, 2021 560,551 Depreciation and impairment losses as of January 1, 2021 181,407 25,585 - 2,747 345 280,359 27,571 29,133 17,180 340 - - - - - 493,646 70,681 Depreciation Impairment losses - 278 618 Disposals (6,936) 200,056 (518) 2,574 (138,449) 169,759 (3,299) 43,354 (149,202) 415,743 Depreciation and impairment losses as of December 31, 2021 Carrying amount as of December 31, 2021 Carrying amount as of December 31, 2020 345,536 365,704 1,882 1,629 254,530 204,665 207,498 213,726 560,551 204,702 1,369,997 990,426 For collateral see the consolidated financial statements note 17. Accounting policies See consolidated financial statements note 17. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 135 Note 11 Right-of-use-assets 2021 Amounts included in the income statement DKK thousand 2021 2020 Rent DKK thousand facility Car leasing Equipment Total Interest expense leases 685 11,210 293 875 10,845 1,865 Depreciation recognized on right-of-use assets Cost recognized for short term leases (less than 12 months) Right-of-use assets as of January 1, 2021 33,717 - 1,284 287 515 768 38 35,516 1,055 Additions Modifications 518 (46) 510 Depreciations (9,807) 24,428 (989) 536 (414) 907 (11,210) 25,871 Accounting policies See consolidated financial statements note 18. Right-of-use assets as of December 31, 2021 2020 Rent DKK thousand facility Car leasing Equipment Total Impact from applying IFRS 16 as of January 1, 2020 17,531 24,215 1,303 1,417 619 303 542 19,251 25,376 1,734 Additions Modifications 432 (1) Depreciations (9,332) 33,717 (1,184) 1,284 (329) 515 (10,845) 35,516 Right-of-use assets as of December 31, 2020 Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 136 Note 12 Investment in subsidiaries DKK thousand 2021 Non-current receivables from Bavarian Nordic, Inc. is recog- nized as part of "Investments in subsidiaries". During 2021 the receivables increased by DKK 27.4 million, shown as an addition in the table. equity if it is deemed irrecoverable. If the negative equity exceeds the amount receivable, the remaining amount is recognized under provisions if the Company has a legal or constructive obligation to cover the liabilities of the relevant subsidiary. Costs as of January 1, 2021 Additions 663,826 27,428 Cost as of December 31, 2021 691,254 In April 2021, the Company established a company in Sweden for hiring of commercial employees. Upon distribution of profit or loss, net revaluation of invest- ments in subsidiaries is transferred to the net revaluation reserve according to the equity method under equity, if the net revaluation is positive. If the net revaluation is negative, it is recognized in retained earnings in equity. Net revaluation as of January 1, 2021 Net share of profit/loss for the year Change in unrealized intra-group profits Exchange rate adjustments (519,822) 7,155 The carrying amount of investments in subsidiaries mainly relates to Bavarian Nordic GmbH (DKK 152.6 million) and the net share of profit from this subsidiary amounts to DKK 15.5 million. (138,230) 1,498 Net revaluation as of December 31, 2021 (649,399) Goodwill is calculated as the difference between cost of the investments and the fair value of the assets and liabilities acquired which have been measured at fair value at the date of acquisition. The amortization period for goodwill is usually five years. Accounting policies Carrying amount before offset of subsidiaries with negative equity Offset in receivables from subsidiaries with negative equity Carrying amount as of December 31, 2021 41,855 122,115 163,970 Investments in subsidiaries are recognized and measured under the equity method. This means that, in the balance sheet, investments are measured at the pro rata share of the subsidiaries' equity plus or less unamortized positive, or negative, goodwill and plus or less unrealized intra-group profits or losses. Investments in subsidiaries are written down to the lower of recoverable amount and carrying amount. Carrying amount as of December 31, 2020 144,004 Subsidiaries with a negative equity value are measured at zero value, and any receivables from these subsidiaries are written down by the Company’s share of such negative Income from investments in subsidiaries' contains pro rata share of subsidiaries profits or losses after elimination of unrealized intra-group profits and losses. Company summary Domicile Ownership Voting rights Subsidiaries Bavarian Nordic GmbH Germany USA 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Bavarian Nordic, Inc. Bavarian Nordic Switzerland AG Bavarian Nordic Sweden AB Aktieselskabet af 1. juni 2011 I Aktieselskabet af 1. juni 2011 II Switzerland Sweden Denmark Denmark Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 137 Note 13 Note 14 Inventories Lease liabilities DKK thousand 2021 2020 DKK thousand 2021 2020 Raw materials and supply materials Work in progress 79,068 79,904 73,037 201,601 292,667 (63,537) 503,768 Non-current Current 16,186 11,367 27,553 25,858 11,356 37,214 Manufactured goods and commodities Write-down on inventory Inventories 421,601 (172,941) 407,632 Lease liabilities Due between 1 year 1 and 5 year Write-down on inventory as of January 1 Write-down for the year (63,537) (171,643) 62,239 (104,056) (25,692) 65,672 Due within Due after 5 years DKK thousand Total 27,553 37,214 Use of write-down 2021 Reversal of write-down - 539 Lease liabilities 11,367 11,356 16,186 25,858 - - Write-down on inventory as of December 31 (172,941) (63,537) 2020 Cost of goods sold amounts to 481,916 566,116 Lease liabilities Accounting policies See consolidated financial statements note 28. For further details regarding development in inventory values see consolidated financial statements note 19. Accounting policies and significant accounting estimates See consolidated financial statements note 19. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 138 Note 15 Note 16 Prepayment from customers Other liabilities DKK thousand 2021 2020 DKK thousand 2021 2020 Prepayment from customers as of January 1 Prepayments received during the year 74,347 6,631 Derivative financial instruments at fair value in the income statement Liability relating to phantom shares Payable salaries, holiday accrual etc. Gross to net deduction accrual 1,351 23,917 49,165 5,017 1,414 4,849 33,850 (91,293) 16,904 77,185 (9,469) 74,347 Recognized as income during the year 84,026 2,502 Prepayment from customers as of December 31 Other accrued costs 4,733 18,793 111,584 Other liabilities 84,183 For further details of prepayment from customers, see consolidated financial statements note 29. Accounting policies See consolidated financial statements note 29. For further details of derivative financial instruments, see consolidated financial statements note 24. The phantom share programs are disclosed in the consolidated financial statements note 31. Accounting policies See consolidated financial statements note 23. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 139 Note 17 Related party transactions The Corporate Management and Board of Directors of Bavarian Nordic A/S are considered related parties as they have significant influence over the Company. Bavarian Nordic Switzerland AG distributes and sells Encepur and Rabipur in Switzerland on behalf of Bavarian Nordic A/S. This is done under a Distribution Agreement. Main intercompany transactions: Bavarian Nordic GmbH provides research and development services to Bavarian Nordic A/S. Bavarian Nordic Switzerland AG provides global commercial services to Bavarian Nordic A/S. All services except for the distribution agreements are delivered under cost plus agreements and on arms length conditions. Bavarian Nordic, Inc. distributes and sells RabAvert in the US on behalf of Bavarian Nordic A/S. This is done under a Distribution Agreement. The distribution agreements are honored according to OECD's guidelines for a Limited Risk Distributor. Bavarian Nordic, Inc. provides research and development services to Bavarian Nordic A/S.Bavarian Nordic, Inc. also provides services to Bavarian Nordic A/S in terms of commercial affair work towards the U.S. Government, with the purpose of ensuring an efficient communication and service to U.S. authorities, in order to maintain existing contracts and explore new product/contract opportunities on the U.S. market. Apart from intra-group transactions mentioned above and the remuneration of the Board of Directors and Corporate Management, cf. note 8 and note 31 in the consolidated financial statements, there are no transactions with related parties. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 140 Note 18 Contingent liabilities and other contractual obligations 2021 2020 Production of drug substance for clinical trial materials for the planned Phase 3 study for ABNCoV2 is taking place at a CMO and the contractual obligations as per December 31, 2021 amounts to DKK 73.8 million, included under collabo- rative agreements above. financial statements. The remaining developement milestones related to filing for approval in further countries are not deemed likely and therefore not recognized. Collaborative agreements Contractual obligations with research partners for long-term research projects. Agreement with Danish Ministry of Health – Due within 1 year 127,300 42,227 Under the agreement with the Danish Ministry of Health to fund the development of ABNCoV2 the Company has an obligation of payment of an additional, capped royalty payment if the sales reach a certain threshold. Based on current sales forecasts this additional royalty payment is not deemed likely and therefore not recognized. If the pay- ment becomes current it will be recognized as a financial expense as the additional royalty payment is seen as an extra interest payment. The cap for the additional royalty payment is a fixed amount, calculated as a percentage of the loan amount. Repayment obligation Repayment obligation regarding received prepayments see the consolidated financial statements note 29. Other contractual obligations – Due within 1 year 17,391 13,600 17,738 12,604 – Due between 1 and 5 years Sales milestone to GlaxoSmithKline The Asset Purchase Agreement with GlaxoSmithKline regarding the acquisition of the product rights to Rabipur/ RabAvert and Encepur includes a sales milestone of EUR 25 million. As per December 31, 2021 Management does not judge the sales milestone to be probable and therefore the sales milestone has not been recognized as either part of the product rights nor the deferred consideration for product rights. Joint taxation The Company is jointly taxed with all Danish subsidiaries. As the administration company the Company stands surety with the other companies in the joint taxation of Danish corporate taxes and also withholding taxes on dividends, interest and royalties. Corporation taxes and withholding taxes payable in the joint taxation pool was DKK 0 as of December 31, 2021. Any adjustments of the taxable joint taxation income or taxes withheld at source may have the effect that the Company's liability increases. License and collaboration agreement AdaptVac Under the license and collaboration agreement with AdaptVac the Company has an obligation of payment of potential future development and sales milestones and tiered royalties. Based on current regulatory plans and expectations for future sale of the Company's COVID-19 vaccine all sales milestones and part of the development milestones are deemed probable as per December 31, 2021 and the net present value of those future milestone payments have been recognized as deferrred consideration, see further description in note 25 in the consolidated Incentive agreements, company mortgage and lawsuits See the consolidated financial statements note 32. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 141 Note 19 Note 20 Mortgages and collateral Proposed appropriation of net profit/(loss) DKK thousand 2021 2020 DKK thousand 2021 2020 Guarantees for subsidiaries Retained earnings (470,148) 276,994 The Parent Company stands surety for a credit facility to a subsidiary of a maximum of The Parent Company stands surety for letter of credit to subsidiaries of a maximum of 3,435 2,335 3,330 2,200 Total (470,148) 276,994 Bavarian Nordic A/S has signed a guarantee in favor of Bavarian Nordic, Inc.'s landlord in North Carolina. As guarantor Bavarian Nordic A/S guarantees the full and complete payment by Bavarian Nordic, Inc. of the rent and all other sums payable under the lease contract. The rent for the lease period (until August 2022) amounts to DKK 0.9 million (DKK 2.0 million). Mortgages Note 21 See description regarding property, plant and equipment in note 17 in the consolidated financial statements. Significant events after the balance sheet date See description in note 33 in the consolidated financial statements. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 142 Statement by management on the Annual Report The Board of Directors and the Corporate Management have today considered and approved the Annual Report of Bavarian Nordic A/S for the financial year January 1 - December 31, 2021. Hellerup, March 4, 2022 Corporate Management The consolidated financial statements are presented in accordance with International Financial Reporting Standards as adopted by the EU. The parent financial statements are presented in accordance with the Danish Financial Statements Act. Further, the Annual Report is prepared in accordance with Danish disclosure requirements for listed companies. Paul John Chaplin President and Chief Executive Officer Henrik Juuel Executive Vice President and Chief Financial Officer In our opinion, the consolidated financial statements and the parent financial statements give a true and fair view of the Group’s and the Parent’s financial position at December 31, 2021 as well as of the results of their operations and the Group’s cash flows for the financial year January 1 - December 31, 2021. Board of Directors Gerard W.M. van Odijk Anders Gersel Pedersen Erik Gregers Hansen Chair of the Board Deputy chair In our opinion, the management commentary contains a fair review of the development of the Group's and the Parent’s business and financial matters, the results for the year and of the Parent’s financial position and the financial position as a whole of the entities included in the consolidated financial statements, together with a description of the principal risks and uncertainties that the Group and the Parent face. Frank A.G.M. Verwiel Elizabeth McKee Anderson Peter H. Kürstein-Jensen Anne Louise Eberhard Thomas Alex Bennekov Anja Gjøl Employee-elected Employee-elected In our opinion, the Annual Report with the file name bava-2021-12-31-en.zip is prepared, in all material respects, in accordance with the ESEF Regulation. Karen Merete Jensen Employee-elected Linette Munksgaard Andersen Employee-elected We recommend the Annual Report for adoption at the Annual General Meeting. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 143 Independent auditor's report To the shareholders of Bavarian Nordic A/S Opinion Our opinion is consistent with our audit book comments issued to the Audit Committee and the Board of Directors. We have audited the consolidated financial statements and the parent financial statements of Bavarian Nordic A/S for the financial year January 1 – December 31, 2021, which comprise the income statement, balance sheet, statement of changes in equity and notes, including a summary of significant accounting policies, for the Group as well as the Parent, and the statement of comprehensive income and the cash flow statement of the Group. The consolidated financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the EU and additional requirements of the Danish Financial Statements Act, and the parent financial statements are prepared in accordance with the Danish Financial Statements Act. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) and the additional requirements applicable in Denmark. Our responsibilities under those standards and requirements are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements and the parent financial statements section of this auditor’s report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (IESBA Code) and the additional ethical requirements applicable in Denmark, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the Group’s financial position at December 31, 2021 and of the results of its operations and cash flows for the financial year January 1 – December 31, 2021 in accordance with International Financial Reporting Standards as adopted by the EU and additional requirements under the Danish Financial Statements Act. To the best of our knowledge and belief, we have not provided any prohibited non-audit services as referred to in Article 5(1) of Regulation (EU) No 537/2014. Further, in our opinion, the parent financial statements give a true and fair view of the Parent’s financial position at December 31, 2021 and of the results of its operations for the financial year January 1 – December 31, 2021 in accordance with the Danish Financial Statements Act. After Bavarian Nordic A/S was listed on Nasdaq OMX Copenhagen in 1998, we were ap- pointed auditors at the Annual General Meeting held on May 27, 1999 for the 1999 finan- cial year. We have been reappointed annually at the Annual General Meeting for a total consecutive engagement period of 23 years up to and including the 2021 financial year. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 144 Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements and the parent financial statements for the financial year January 1 – December 31, 2021. These matters were addressed in the context of our audit of the consolidated financial statements and the parent financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter Revenue under the BARDA contracts for JYNNEOS Revenue recognized under the Biomedical Advanced Research and Development Authority (BARDA) contracts with the U.S. Government related to JYNNEOS amounted to DKK 672 million in 2021 (DKK 667 million in 2020). Based on our risk assessment procedures on the Group’s business process and internal controls for revenue under the BARDA contracts, we tested the appropriateness of the Group’s revenue recognition. Contracts with BARDA include multiple elements, and recognition of revenue is significant and requires subjective evaluations. Management therefore exercises judgement in determining whether the Group has fulfilled all of its performance obligations. We read the BARDA contracts, discussed them with Management and evaluated the related accounting treatment. During the audit, we tested whether the performance obligations for revenue recognized and measured under the BARDA contracts were met in 2021. Management’s assessment includes whether it is probable that future economic benefits from the sale of JYNNEOS bulk drug substance will flow to the Group, the benefits can be measured reliably, ownership of the goods and services is transferred to BARDA, and the Group no longer retains managerial responsibility for, or control of, the goods sold and services delivered to BARDA. We also evaluated the financial statements disclosures related to revenue. Refer to notes 2 and 3 in the consolidated financial statements. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 145 Statement on the management commentary Management is responsible for the management commentary. Management's responsibilities for the consolidated financial statements and the parent financial statements Management is responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the EU and additional requirements of the Danish Financial Statements Act as well as the preparation of parent financial statements that give a true and fair view in accordance with the Danish Financial Statements Act, and for such internal control as Management determines is necessary to enable the preparation of consolidated financial statements and parent financial statements that are free from material misstatement, whether due to fraud or error. Our opinion on the consolidated financial statements and the parent financial statements does not cover the management commentary, and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements and the parent financial statements, our responsibility is to read the management commentary and, in doing so, consider whether the management commentary is materially inconsistent with the consolidated financial statements and the parent financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. In preparing the consolidated financial statements and the parent financial statements, Management is responsible for assessing the Group’s and the Parent’s ability to continue as a going concern, for disclosing, as applicable, matters related to going concern, and for using the going concern basis of accounting in preparing the consolidated financial statements and the parent financial statements unless Management either intends to liquidate the Group or the Entity or to cease operations, or has no realistic alternative but to do so. Moreover, it is our responsibility to consider whether the management commentary provides the information required under the Danish Financial Statements Act. Based on the work we have performed, we conclude that the management commentary is in accordance with the consolidated financial statements and the parent financial statements and has been prepared in accordance with the requirements of the Danish Financial Statements Act. We did not identify any material misstatement of the management commentary. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 146 Auditor's responsibilities for the audit of the consolidated financial statements and the parent financial statements expressing an opinion on the effectiveness of the Group’s and the Parent’s internal control. Our objectives are to obtain reasonable assurance about whether the consolidated financial statements and the parent financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and the additional requirements applicable in Denmark will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements and these parent financial statements. • • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management. Conclude on the appropriateness of Management’s use of the going concern basis of accounting in preparing the consolidated financial statements and the parent financial statements, and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's and the Parent’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements and the parent financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group and the Entity to cease to continue as a going concern. As part of an audit conducted in accordance with ISAs and the additional requirements applicable in Denmark, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • • Evaluate the overall presentation, structure and content of the consolidated financial statements and the parent financial statements, including the disclosures in the notes, and whether the consolidated financial statements and the parent financial statements represent the underlying transactions and events in a manner that gives a true and fair view. • Identify and assess the risks of material misstatement of the consolidated financial statements and the parent financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 147 We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Report on compliance with the ESEF Regulation As part of our audit of the consolidated financial statements and the parent financial statements of Bavarian Nordic A/S we performed procedures to express an opinion on whether the Annual Report of Bavarian Nordic A/S for the financial year January 1 - December 31, 2021 with the file name bava-2021-12-31-en.zip is prepared, in all material respects, in compliance with the Commission Delegated Regulation (EU) 2019/815 on the European Single Electronic Format (ESEF Regulation) which includes requirements related to the preparation of the annual report in XHTML format and iXBRL tagging of the consolidated financial statements. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and, where applicable, safeguards put in place and measures taken to eliminate threats. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements and the parent financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Management is responsible for preparing an annual report that complies with the ESEF Regulation. This responsibility includes: • • The preparing of the annual report in XHTML format; The selection and application of appropriate iXBRL tags, including extensions to the ESEF taxonomy and the anchoring thereof to elements in the taxonomy, for financial information required to be tagged using judgement where necessary; Ensuring consistency between iXBRL tagged data and the Consolidated Financial Statements presented in human readable format; and • • For such internal control as Management determines necessary to enable the preparation of an annual report that is compliant with the ESEF Regulation. Introduction Our strategy and business Corporate information Financial statements Bavarian Nordic Annual Report 2021 148 Our responsibility is to obtain reasonable assurance on whether the annual report is prepared, in all material respects, in compliance with the ESEF Regulation based on the evidence we have obtained, and to issue a report that includes our opinion. The nature, timing and extent of procedures selected depend on the auditor’s judgement, including the assessment of the risks of material departures from the requirements set out in the ESEF Regulation, whether due to fraud or error. The procedures include: In our opinion, the Annual Report of Bavarian Nordic A/S for the financial year January 1 - December 31, 2021 with the file name bava-2021-12-31-en.zip is prepared, in all material respects, in compliance with the ESEF Regulation. Copenhagen, March 4, 2022 Deloitte • • Testing whether the annual report is prepared in XHTML format; Obtaining an understanding of the company’s iXBRL tagging process and of internal control over the tagging process; Statsautoriseret Revisionspartnerselskab Business Registration No 33 96 35 56 • • Evaluating the completeness of the iXBRL tagging of the Consolidated Financial Statements; Evaluating the appropriateness of the company’s use of iXBRL elements selected from the ESEF taxonomy and the creation of extension elements where no suitable element in the ESEF taxonomy has been identified; Kirsten Aaskov Mikkelsen Eskild Nørregaard Jakobsen State-Authorised Public Accountant Identification No (MNE) no 11681 State-Authorised Public Accountant Identification No (MNE) no 21358 • • Evaluating the use of anchoring of extension elements to elements in the ESEF taxonomy; and Reconciling the iXBRL tagged data with the audited Consolidated Financial Statements. Introduction Our strategy and business Corporate information Financial statements Forward-looking Statement Design and layout This annual report contains forward looking statements. The words “believe”, “expect”, “anticipate”, “intend” and “plan” and similar expressions identify forward looking statements. Actual results or performance may differ materially from any future results or performance expressed or implied by such statements. The impor- tant factors that could cause our actual results or performance to differ materially include, among others, risks associated with product discovery and development, uncertainties related to the outcome and conduct of clinical trials including unforeseen safety issues, uncertainties related to product manufacturing, the lack of market acceptance of our products, our inability to manage growth, the competitive environment in relation to our business area and markets, our inability to attract and retain suitably qualified personnel, the unenforceability or lack of protection of our patents and proprietary rights, our relationships with affiliated entities, changes and developments in technology which may render our products obsolete, and other factors. For a further discussion of these risks, please refer to the section “Risk Management” in this Annual Report. Bavarian Nordic does not undertake any obligation to update or revise forward looking statements in this Annual Report nor to confirm such statements in relation to actual results, unless required by law. Kontrapunkt Photos Carsten Andersen Maria Dønvang Phillippe Wiget Print Dystan & Rosenberg Bavarian Nordic A/S Philip Heymans Alle 3 DK-2900 Hellerup Denmark CVR no: 16 27 11 87 RabAvert®, Rabipur®, Encepur®, JYNNEOS®, IMVANEX®, IMVAMUNE® and MVA-BN® are registered trademarks owned by Bavarian Nordic.
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