UNITED STATES

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)

For the Fiscal Year Ended December 31, 20002001

Commission File No. 0-26770

NOVAVAX, INC.

Registrant’s telephone number, including area code:(301) 854-3900

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

      The aggregate market value of 18,675,54820,973,202 shares of the registrant’s Common Stock, par value $.01 per share, held by non-affiliates of the registrant at March 16, 2001,8, 2002, as computed by reference to the closing price of such stock, was approximately $157,808,381.$221,057,549.

      The number of shares of the registrant’s Common Stock, par value $.01 per share, outstanding at March 16, 20018, 2002 was 22,247,53323,915,343 shares.

Documents Incorporated By Reference

     Portions of the Registrant’s Proxy Statement to be filed not later than 120 days after December 31, 2000,2001, in connection with the Registrant’s 20012002 Annual Meeting of Stockholders, referred to herein as the “Proxy Statement,” are incorporated by reference into Part III of this Form 10-K. Certain exhibits filed with the Registrant’s prior registration statements and periodperiodic reports under the Securities Exchange Act of 1934 are incorporated herein by reference into Part IV of this Report.

PART I

Item 1.  Business

      The discussion of our business contained in this annual report on form 10-K may contain certain projections, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed below at “Risks and Uncertainties.” While this outlook represents management’s current judgment on the future direction of the business, such risks and uncertainties could cause actual results to differ materially from any future performance suggested below. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this annual report.

Overview

      Novavax Inc. (“Novavax”, “we”, “our”, or the “Company”) is a fully-integrated specialty biopharmaceuticalpharmaceutical company engaged infocused on the research, development and commercialization of products utilizing our proprietary products focuseddrug delivery and vaccine technologies for large and growing markets, concentrating on the areas of women’s healthhealthcare and infectious diseases. Our lead product candidate, ESTRASORB™, is the first transdermal lotion for estrogen replacement therapy for which a New Drug Application has been accepted for filing by the Food and Drug Administration. The New Drug Application for ESTRASORB was submitted in June 2001 and was accepted for filing in August 2001. We were incorporatedare seeking FDA approval of ESTRASORB for the reduction of hot flashes in Delawaremenopausal women and, if approved, we believe ESTRASORB will be competitively positioned to address the $1.8 billion estrogen replacement therapy market in 1987. Our principal executive offices are located at 8320 Guilford Road, Columbia, Maryland 21046.the United States. In our Phase II and III clinical trials, women using ESTRASORB experienced a statistically significant reduction in the number of hot flashes, the primary endpoint of our study, with many women reporting a total elimination of hot flashes while using the product. We also believe that ESTRASORB offers additional advantages over other estrogen replacement therapies, including ease of use, more rapid onset of estrogen therapy and a lower incidence of skin irritation and nausea.

      ThroughOur drug delivery technologies involve the use of our patented oil and water emulsions which we believe can be used as vehicles for the transdermal and injectable delivery of a serieswide variety of strategic initiatives, Novavaxdrugs and other therapeutic products, including hormones, anti-bacterial and anti-viral products and vaccine adjuvants, which are substances added to vaccines to enhance their effectiveness. We believe that our technologies represent the first time that alcohol soluble hormones, such as estrogen and testosterone, have been encapsulated and delivered through the skin. In addition to ESTRASORB, our product candidates using these technologies include ANDROSORB™, a transdermal testosterone lotion that is in Phase II clinical trials, ANDRO-JECT™, a long-acting subcutaneous injectable formulation of testosterone that is in preclinical development, and a transdermal progestin lotion that is also in preclinical development. We also conduct research and development on preventative and therapeutic vaccines for a variety of infectious diseases.

      During 2001, we signed a co-promotion agreement with King Pharmaceuticals, Inc. (“King”) for the promotion and marketing of ESTRASORB and ANDROSORB within the United States and licensed to King the right to sell these products outside the United States. This relationship with King has evolvedthe potential to provide us with deeper women’s healthcare market penetration for ESTRASORB and ANDROSORB. We will record all revenues from the sales of ESTRASORB and ANDROSORB in the United States and will pay to King 50% of these revenues less 50% of manufacturing and approved marketing costs, subject to certain modifications. We received licensing fees of $3.0 million and milestone payments totaling $5.0 million from King upon the submission to the FDA and acceptance for filing of the ESTRASORB New Drug Application. We also received from King $20.0 million in December 2000 and $10.0 million in September 2001 in the form of convertible note financings.

      We currently market, sell and distribute a technology-based biotechnology company intoline of prescription pharmaceuticals and prenatal vitamins through our 85 person sales force including national accounts team, which has extensive experience selling to obstetricians, gynecologists, managed care organizations, wholesalers and retail pharmacies throughout the United States. In 2001, these products produced revenues of $17.3 million. If we receive marketing approval from the FDA, we expect to sell ESTRASORB both through our sales force and through King’s salesforce. We intend to manufacture ESTRASORB for commercial sale in a fully integrated pharmaceutical company. These strategic initiatives have included the:dedicated 20,000 square foot facility, which is currently being built to our requirements.

Our Strategy

      The primary elements of our strategy include:

	•	AcquisitionMaximize the commercial impact of a profitableESTRASORB.We are currently developing commercialization and manufacturing infrastructures, programs and systems in anticipation of approval of our ESTRASORB New

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		Drug Application by the FDA in 2002. We believe that our marketing plan, together with the significant expertise of our management team in new product launches, will enable ESTRASORB to rapidly penetrate the $1.8 billion estrogen replacement therapy market in the U.S. We expect that the introduction of ESTRASORB, if approved, will increase our presence in the women’s healthcare pharmaceutical company;market, thereby enabling us to more effectively commercialize future products which we develop or acquire. Our co-promotion agreement with King should provide us with additional marketing and selling expertise which will assist us in achieving deeper market penetration for ESTRASORB.
	•	AcquisitionLeverage our unique drug delivery technology platforms to commercialize additional pharmaceutical products.A key component of a fully staffed vaccine manufacturingour growth strategy is the introduction of new products based on our proprietary drug delivery technologies. In addition to ESTRASORB, we have three hormone replacement therapy candidates in various stages of clinical and development operation;preclinical development. We will continue to focus on developing improvements to existing therapies. We intend to target large markets where our products can be differentiated through increased efficacy and improved delivery technique.
	•	ExpansionContinue to develop our capabilities as a fully-integrated specialty pharmaceutical company.We intend to continue to enhance our internal capabilities in the developing, testing, manufacturing and marketing of our product candidates. We believe that this fully-integrated platform differentiates us from many specialty pharmaceutical companies and enhances our ability to successfully introduce new products such as ESTRASORB and to grow our existing line of women’s healthcare products. We plan to continue to focus our research and development efforts on advancing our existing product lines through product purchasescandidates towards commercialization and co-promotion agreements;on identifying and commercializing new therapies using our unique drug delivery techniques. We perform many components of the ESTRASORB manufacturing process, and we are increasing our manufacturing capabilities in anticipation of the commercial launch of ESTRASORB in 2002. We have an 85 person sales force including national accounts team with experience in the area of women’s health, and intend to continue to build that sales team as we are able to commercialize or acquire new products.
	•	CompletionContinue to expand our product lines through acquisition of a pivotal Phase III clinical trial fornew products and technologies.We believe we can continue to grow through the acquisition of product lines, individual products or additional technologies. We believe numerous opportunities exist to acquire such products and technologies as large pharmaceutical companies seek to divest many non-core product areas. We regularly evaluate opportunities to acquire products in markets we currently serve, as well as potential new markets where our estrogen replacementmanagement team has expertise, such as oncology. Our fully-integrated capabilities assist us in identifying, acquiring and successfully implementing new product ESTRASORB™.and company acquisitions.

      These initiatives were funded through two private placements ofWe have demonstrated our common stock in 1999ability to successfully acquire and 2000integrate products and the issuance of a convertible note in 2000.

Recent Developments

research capabilities. For example, we acquired Fielding Pharmaceutical Company Acquisition

      Inin December 2000, we acquired the privately owned Fielding Pharmaceutical Company (“Fielding”), based in St. Louis, Missouri, which sells, markets and distributes a proprietary line of pharmaceutical products focused on women’s health. Under the terms of the acquisition agreement, we acquired 100% of the outstanding shares of Fielding for $31.5 million, consisting of $13 million in cash and 2,312,501 shares of Novavax common stock, valued at $18.5 million. An additional $5 million in either Novavax common stock or cash will be paidenabled us to former Fielding shareholders in March 2002.

      Fielding was established in 1959 and marketsexpand our women’s healthcare products nationally toproduct line and gave us an established national sales force with experience calling on obstetricians and gynecologists through its sales force of over 60 personnel. Fielding’sthroughout the United States. In January 2001, we purchased the AVC™ Cream product line from King to provide us with additional products included Nestabs®, a complete line of pre-natal vitamins; Gynodiol®, an oral form of estrogen replacement therapy, as well as several other over-the-counter (“OTC”) women’s healthcare products. We intend to use Fielding to sell market and distribute additional future products. Fielding fills, packages and warehouses all of its own products, which are purchased from contract manufacturers.

Biomedical Services Laboratory Acquisition

through our sales force. In August 1999, we acquired substantially all of the assets of the Biomedical Services Laboratory (“BSD”) division of DynCorp of Reston, Virginia. The total consideration and direct costs for the acquisition were $860,000. Thea vaccine research and development activities of BSD are conducted in an approximately 12,000 square foot facility located in Rockville, Maryland. BSD is engaged in contract research, development and pilot manufacturing of human vaccines for government laboratories, principally National Institutes of Health (“NIH”), and othergroup from DynCorp, which has enabled us to develop advanced vaccine companies.product candidates.

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	•	Exploit our expertise in vaccine technology to develop products for a large and underserved market.We currently have several vaccine candidates in clinical and preclinical development. In particular, we are pursuing an inactivated smallpox vaccine and a human papillomavirus vaccine that we believe could address large and underserved markets if approved. In order to pursue a number of vaccine development programs, we intend to collaborate with private companies and governmental agencies, including the National Institutes of Health, with which we have several ongoing projects.

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King Pharmaceuticals, Inc. Transactions

      In December 2000, King Pharmaceuticals, Inc., (“King”) agreed to make a $25 million convertible note investment in Novavax. The note is convertible into Novavax Common Stock at $10.00 per share. The note carries a 4% coupon payable semi-annually in cash and stock. As part of the transaction, we received $20 million in December 2000 and will receive an additional $5 million when we file a New Drug Application (“NDA”) for our topical transdermal estrogen replacement therapy, ESTRASORB™, expected to be filed in the first half of 2001. We used a portion of the funds to complete our acquisition of Fielding and will use the balance for general operating purposes. In January 2001, we also signed a co-promotion agreement with King for ESTRASORB™, in the United States. In addition, we will combine U.S. sales efforts with King to begin co-promoting one of King’s products already on the market, Nordette®, a birth control pill. In another agreement, we also acquired AVC™ Cream and Suppositories from King in January 2001, for $3.3 million, which has been marketed by King for the treatment of vaginal bacterial infections.

Our Products and Product Candidates

      We are focused on the successful introduction of new product candidates and the continued sales growth of the products we currently market. The tablestable below provides a summary of our marketed products and product development candidates, which are discussed elsewhere in further detail herein:

Women’s Health Productsdetail:

     Infectious Disease Vaccines

Our Lead Product Development ProgramsCandidate — ESTRASORB

      Our product development efforts are focused on the research and development of proprietary drug delivery and vaccine technologies and the applications of those technologies. Our technology platforms involve the use of proprietary, microscopic, organized, non-phospholipid structures as vehicles for the delivery of a wide variety of drugs and other therapeutic products, including certain hormones, anti-bacterial and anti-viral products and vaccine adjuvants. These technology platforms support three product development programs: hormone replacement therapies, third party drug delivery and vaccine adjuvant applications. In addition, BSDESTRASORB is engaged in contract research and development and Phase I and Phase II vaccine manufacturing of human vaccines for the Company’s own use, for government laboratories and for other vaccine companies.

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Hormone Replacement Therapies. The Company’s hormone replacement therapy program includes its two lead product candidates: ESTRASORB, topical estrogen cream, and ANDROSORB, a topical testosterone cream. ESTRASORB, a topical lotion for estrogen replacement therapy is the company’sour lead product candidate and employs Novavax’s proprietaryour patented micellar nanoparticle (“MNP”) technology. ESTRASORB’s MNP formulation is designedtechnology to deliver estrogen, in the form of 17ß estradiol, a naturally occurring hormone, through the skin when applied topically in lotion form. The Company has completed various preclinical and human safety studiesthe form of a lotion. We submitted a New Drug Application for both ESTRASORB and ANDROSORB. The Company completed a multi-center Phase III studyESATRASORB to the FDA in June 2001, which was accepted for filing in August 2001. We are seeking FDA approval of ESTRASORB duringfor the first quarterreduction of 2001. The study was designed to measure ESTRASORB’s ability to deliver estradiol through the skin, when applied as a topical lotion. The randomized, double-blind, placebo controlled trial enrolled a total of 200 women either on placebo orhot flashes in menopausal women. In clinical trials, participants using ESTRASORB who underwent a 13 week course of treatment. The study results indicate that there isexperienced a statistically significant difference between ESTRASORB and placebo treatment with respect to the trial’s primary clinical endpoint, a reduction in the number of hot flushes.flashes, the primary endpoint of the studies, with many reporting the complete elimination of hot flashes during the trial period. We intend to file an NDA forbelieve that ESTRASORB offers advantages over competing therapies in the first half of 2001. The Company has also completed Phase I safety study in men of ANDROSORB; Phase II trials in testosterone deficient women were completed$1.8 billion estrogen replacement market in the fourth quarter of 2000. In addition, the CompanyUnited States. ESTRASORB is undergoing preclinical development of ANDRO-JECT, a depot delivery of testosterone for testosterone deficient men. The Investigational New Drug application (“IND”) for ANDRO-JECT is expected to be filed in the first half of 2001.

Third Party Drug Delivery and Vaccine Adjuvant Applications.Formulations of the Company’s lipid technologies are expected to have broad application as vehicles for the encapsulation and delivery of drugs developed by other companies. Moreover, the Company believes that certain of its organized lipid structures may provide effective and safe adjuvant carrier systems for a variety of vaccines. The Company plans to leverage these technologies by licensing its drug delivery, encapsulation and adjuvant technologies to third parties for specific therapeutic indications.

Vaccine Development. BSD is involved in three areas of vaccine development: virology, tissue culture and molecular virology. BSD’s experimental virology research and development may lead to live virus vaccine production in the embryonated hens’ eggs and in designated tissue culture systems. Tissue culture involves the growth, maintenance and characterization of cell systems as potential substrates for virus growth and vaccine production as well as cell systems for safety testing, plaque-purification and virus titers. BSD’s work in molecular virology involves recombinant DNA cloning of viral and human genes, protein expression of these genes in prokaryotic and eukaryotic systems including baculoviruses, protein purification of the recombinant protein products, and biophysical characterization of recombinant proteins leading to vaccine and related product development.

Anti-Microbial Agents. The Company is also applying its lipid technologies to develop anti-microbial agents that are capable of acting on viruses, bacteria, spores and sperm. Potential product candidates include Helicore®, an oral anti-bacterial preparation for the treatment ofHelicobacter pylori(“H. Pylori”) infection, and two anti-microbial agents targeting biological threat agents such as Bacillus anthracis and influenza A, respectively, as well as a spermicide product candidate.

Product Technology Platforms

      Novavax has developed proprietary topical, oral and injectable drug delivery technologies using microscopic, organized, non-phospholipid structures, including Novasome® non-phospholipid vesicles (“Novasomes”), MNP’s and non-antibiotic, anti-microbial lipid emulsions. The Company believes these structures may be useful for targeted delivery and controlled release of certain drugs, along with inactivation of bacteria, enveloped viruses, spores and sperm. Moreover, the Company believes that certain of its organized lipid structures may provide effective and safe adjuvant carrier systems for a variety of vaccines.

      Although other companies have developed liposome technologies, most commercial liposomes are composed of delicate phospholipids. Due to their inherent lack of stability and carrying capacity, only a limited number of drugs may be used with these phospholipid liposomes. While capable of encapsulating certain (principally water-soluble) drugs, phospholipid liposomes have a number of other significant disadvantages including their expense and the

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      The Company believes its non-phospholipid technologies may allow for a more cost-effective deliveryincidence of a wider variety of drugsskin irritation and stomach upset associated with other therapeutics than commercially available phospholipid liposomes and other delivery vehicles. Its technologies may also be preferred over other available transdermal delivery systems because its technologies may reduce side effects such as skin irritation. Future applications may show advantages over injectable delivery technologies, which are invasive, inconvenient and sometimes painful. In addition, the Company’s anti-microbial lipid emulsions may avoid the problem of pathogen mutation and resistance because of their non-antibioticestrogen replacement products. Our marketing studies indicate that ESTRASORB’s method of action.

Novasome Non-Phospholipid Vesicles.  Novasomes are proprietary structures in which drugs ortopical application will differentiate ESTRASORB from other materials can be encapsulated for delivery into the body topically or orally. Novasomes are made using the Company’s patented manufacturing processes from a variety of readily available chemicals called amphiphiles, which include fatty alcohols and acids, ethoxylated fatty alcohols and acids, glycol esters of fatty acids, glycerol fatty acid mono and diesters, ethoxylated glycerol fatty acid esters, glyceryl ethers, fatty acid diethanolamides and dimethyl amides, fatty acyl sarcosinates, alkyds and phospholipids.

      The Company plans to commercialize its Novasome technology in part through products it develops itself and in part through third party drug delivery application licenses. The Company believes that certain of its organized lipid structures may provide effective and safe adjuvant carrier systems for a variety of vaccines. In addition, the Company has developed structures for delivery of biologically active molecules like antisense, genes and proteins.

Micellar Nanoparticle Emulsion.  MNPs are proprietary, submicron-sized, water miscible, non-phospholipid structures that have different structural characteristics and are generally smaller than Novasome non-phospholipid vesicles. MNP’s, like Novasome non-phospholipid vesicles, are derived from amphiphilic molecules.

      Novavax scientists have demonstrated that MNP’s are able to incorporate alcohol soluble drugs, pesticides, vaccine adjuvants, proteins, whole viruses, flavors, fragrances and colors. MNP’s also have the ability to entrap ethanol or methanol soluble drugs, and to deliver certain of these drugs transdermally through intact skin. The MNP formulations used by Novavax for the transdermal delivery of drugs have cosmetic properties similar to creams and lotions. These transdermal formulations have the advantage over injectable delivery systems of being less invasive and/or inconvenient and the may also cause less skin irritation than patch transdermal delivery systems. MNP’s are the fundamental technology platform for Novavax’s hormoneestrogen replacement therapies.

Vaccine ResearchMarket Overview.As a woman approaches menopause, ovulation becomes less frequent and Development

      BSD is engaged in contract research, development and pilot manufacturing of human vaccines for the Company’s own use and for government laboratories and other vaccine companies. The Director of our vaccine programs is Louis Potash, Ph.D., one of the original scientists to work on both the Salk-type inactivated polio vaccines and inactivated whole influenza virus vaccines during the 1950s. This acquisition significantly expanded Novavax’s internal vaccine developmental capabilities and allows the Company to combine its adjuvant technology with BSD’s 35 years of experience in developing and manufacturing vaccines.

      BSD’s facility is a vaccine research and development laboratory producing Phase I and II clinical materials in accordance with the FDA’s current Good Manufacturing Practice (“cGMP”) regulations. The facility develops and produces live virus suspensions and vaccines and recombinant proteins from baculovirus infected insect cells and E. coli for government, industrial pharmaceutical, biotech and academic clients at lab bench and pilot production scales. Services include experimental vaccine development,in vivoandin vitrovaccine safety testing, large-scale virus seed pool production in tissue culture and embryonated hens’ eggs, the production and testing of tissue culture systems, and final container filling in ampules, in cryules and in aluminum-crimped cap vials. Additionally,

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      BSD is one of the few locations in the world that produces experimental live viral vaccines for Phase I and II clinical trials. Our professional expertise lies in live virus suspensions (both attenuated and wild type), recombinant live virus suspensions, inactivated virus suspensions, recombinant baculovirus expression, recombinant virus-like particles (“VLP”s), recombinant protein purification, and cancer immunotherapeutics. VLP’s are non-infectious, self-assembled macro-molecules comprised of viral capsid proteins that elicit neutralizing antibodies and cellular immune response. Novavax has developed several VLP’s using its proprietary design and manufacturing processes.

      Some of our recent achievements in the vaccine field include:

	•	More than 200 final virus vaccines for clinical studies with no untoward effects, including those for influenza, parainfluenza, rotaviruses and vaccinia recombinants
	•	The development of several Phase I therapeutic cancer vaccines
	•	The development of VLP’s subunit vaccines for human caliciviruses, rotaviruses, human papillomavirus, hepatitis and others

Virology Laboratory

      The virology laboratory, has produced and safety tested experimental live virus vaccines and suspensions propagated in tissue cultures and in embryonated hens’ eggs for the NIH, commercial, and academic clients since 1964. The laboratory, currently staffed by a senior staff scientist/co-Principal investigator and five research technicians, has produced and safety tested over 200 live virus vaccines and suspensions. These vaccines have consisted of wild type parent strains as well as attenuated and/or mutant strains of viruses such as rotaviruses (human, human X bovine, human X rhesus, and human x human reassortants), influenza viruses (human H3N2, H1N1, H2N2 and B; avian and avian X human reassortants), respiratory syncytial viruses (subgroups A and B), parainfluenza viruses (human types 1, 2 and 3; bovine type 3), dengue, cytomegalovirus, and vaccinia virus recombinants. Release/ Manufacturing Protocols, written in a format suitable for submission to the FDA as part of IND applications, are submitted to the Regulatory Affairs Branch of the sponsoring organization. The majority of the virus suspensions and vaccines produced have received FDA approval for use in Phase I and II clinical studies. The rotaviruses have been administered orally, whereas the respiratory viruses (influenza, parainfluenza and respiratory syncytial viruses) have been administered intranasally in newborns as well as in geriatric populations and in-between age groups. Other viruses studied include herpes, hepatitis A, hepatitis B, Coxsackie, polioviruses and bovin virus diarrhea virus (“BVD”).

      The virology laboratory possesses its proprietary characterized and patented African Green monkey kidney cell line used for the production of experimental live virus fluidsestrogen decreases. Eventually, the estrogen produced is insufficient to bring about menstruation. Menopause is typically diagnosed when there has been an absence of menstruation for at least one year accompanied by the presence of hot flashes. Women are entering menopause at the rate of approximately 4,000 per day. An estimated 10.0 million women are currently on estrogen replacement therapy. This number is forecast to increase to 12.8 million in 2004 as diagnosis and vaccines as well as for virus isolation from human specimens such as nasal swabs, throat washesmedication efficacy increase and feces. This serially passaged monkey kidney cell line has a Master Drug Fileside effects associated with the FDA, as does the proprietary characterized Merieux line of Vero cells. In addition, BSD has stocks of other similarly characterized cell lines suitable for virus vaccine production such as FRhL-2 and CV-1 cells as well as many other cell lines suitable for research and development efforts and for diagnostic purposes. BSD has the capability for final container filling in ampules, in cryules, in screw cap vials, and in aluminum crimped-cap vials in its newly renovated and validated filling room.

Molecular Virology Laboratory

therapy decrease. The molecular virology laboratory, under the direction of Dr. Robin Robinson, is staffed by three senior scientists, and four research technicians. The scopedemographic expansion of the laboratory expertise ranges from molecular DNA cloning to protein production and purification from prokaryotic and eukaryotic expression systems to biophysical characterization of protein molecules. These expression systems include numerous plasmids in E. coli, baculovirus in insect cells, and semliki forest virus, adenovirus, and other virus expression in mammalian cells including primate and human cells. Proprietary insect lines for production of clinical materials have been developed and validated.

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      Cloning genes of interest is performed in BSD’s plasmid and viral vectors, which are designed for maximal protein expression and to facilitate protein purification and formulation. Cell fermentation in BSD’s proprietary cell lines ranges from 50 milliliter shaker flasks to 30 liter bioreactors. Protein purification utilizes conventional, expanded bed adsorption, and affinity–TAG chromatographic techniques using FPLC and HPLC systems. Development and production VLPs from multiple virus systems are available for single and chimeric-particles. Available analytical methods for protein characterization include gel electrophoresis, immunodetection by Western blotting and quantitative ELISA, glycosylation analyses by DIG-labeling glycan binding assays, immunoelectro-focusing, quantitative HPLC methods, peptide mapping, automated amino acid sequencing and composition determination, and mass spectroscopy. Other capabilities include virus removal from hybridoma and ascites fluids. These services represent a comprehensive program to deliver genes from the lab bench to vectors compatible for commercial production to express high levels of recombinant proteins as secreted and/or intracellular molecules, and to purify these proteins to homogeneity by technology easily transferred to large-scale commercial production.

Novavax Product Candidates

Hormone Replacement Therapy

      The Company is using its MNP technology“baby boomer” generation will cause an increase in the development of ESTRASORB, a cream designedestrogen replacement therapy market as more women reach the ages associated with menopause and seek medical attention for the delivery of 17b estradiol (estrogen hormone) through the skin.their symptoms.

      Estrogen replacement therapy is currently used worldwide by menopausal women to treat the symptoms of menopause, such as hot flashes, and by post-menopausal women to prevent osteoporosis cardiovascular disease and other menopausal symptoms (such as “hot flushes”). The hormone replacement market in the US is approximately $1.7 billion. This market is believed to represent only 15-20% of the estimated 60.3 million women over 40 years of age in the US who could potentially benefit from hormone replacement therapy.

adverse health conditions. Current estrogen replacement products include oral tablets and, more recently, transdermal patches. OralUsers of oral estrogen tablets however, have been associated withmay sometimes experience the side effects primarily resulting from blood hormone level fluctuations. Becauseeffect of these side effects, transdermalnausea. Transdermal patches for estrogen replacement were developed. While thesedeveloped in large part to eliminate this side effect of nausea and first became commercially available in the mid 1980’s. Patches generally use alcohol to drive the estrogen through the skin to achieve therapeutic blood levels. These patches help reduce blood hormone fluctuations, they may cause skin irritation and the inconvenience to the patient inconvenience associated with wearing and changing an external patch. As shown by the chart below, in the

      The Company believes that ESTRASORB may offer several advantages over existing therapies used for4

Clinical Trials of ESTRASORB.We have completed several preclinical and human safety and efficacy studies for ESTRASORB. A Phase II randomized, double blind, placebo-controlled, dose-ranging study was completed in the first quarter of 1999. This study1999 involved a 35 day35-day dosing protocol and included 120 patients at six clinical sites located in the United States. This study indicated that ESTRASORB, administered daily to menopausal women, significantly reduced the number of hot flushesflashes per day and significantly increased their trough serum estradiol levels.

      Duringday. In the first quarter of 2001, Novavaxwe completed a multi-centerpivotal Phase III study at 21 centers in the U.S. designed to determine the efficacy of ESTRASORB in symptomaticreducing the frequency of hot flashes in menopausal women. The Phase III study involvedwas a randomized, double-blind, placebo-controlled, parallel-group study involving approximately 200 subjectsparticipants. During this study, a 3.0-gram daily dose of either ESTRASORB or placebo lotion was administered to the thigh and calf of each participant, with approximately 100 participants receiving ESTRASORB and the remainder receiving the placebo lotion. The results indicated that at weeks 3 through 12, ESTRASORB was statistically significantly superior to the placebo lotion in 20 centersreducing the mean daily number of hot flashes. The Phase III study further demonstrated that ESTRASORB had no clinically relevant adverse effect on laboratory safety parameters, vital signs or dermal assessments. In June 2001, we submitted a New Drug Application to the FDA, which was accepted for filing in August 2001, for approval to market ESTRASORB for the treatment of hot flashes in menopausal women.

Marketing of ESTRASORB.The U.S. marketplace for estrogen replacement therapy is heavily saturated by competitors. In response, we have prepared an aggressive launch and marketing strategy for ESTRASORB. Our marketing efforts will target the high-volume prescribers and early adopters of women’s healthcare products. Our public relations plan will focus on the ways in which ESTRASORB’s topical method of application will assist in counteracting the poor compliance rate currently associated with estrogen replacement therapy. We have also established a Physician Advisory Board to advise us with respect to our goal of early adoption of ESTRASORB by targeted physicians. These efforts will be further supplemented by a publications strategy aimed toward the inclusion in specialty medical publications of in-depth clinical information regarding ESTRASORB.

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Currently Marketed Products

      Our acquisition of Fielding in 2000 enabled us to expand our women’s healthcare product line and provided us with an established national sales force having extensive experience in selling to obstetricians and gynecologists throughout the United States. The acquisition included the Nestabs® product line and Gynodiol™, described below, and a sales force of 59 people. We believe that the expertise gained through the marketing of these products positions us for a successful launch of ESTRASORB, if approved by the FDA. We currently market the following four women’s healthcare prescription products:

Nestabs®. Nestabs is a complete line of prenatal multivitamins for use before, during and after pregnancy. The product line includes Nestabs® Rx, Nestabs® CBF and Nestabs® FA. The Nestabs products are designed to prevent and control iron deficiency through low-dose iron supplementation. Nestabs provides a convenient once-a-day dosing regimen and a patient-friendly small, easy to swallow tablet. The Nestabs product line generated $11.3 million in sales in 2001.

Gynodiol™.Gynodiol is a safe, effective and economical option for women who require an oral estrogen replacement therapy, and is available in four dosage strengths. Gynodiol is indicated for the relief of moderate to severe vasomotor symptoms associated with menopause, the treatment of vulval and vaginal atrophy, the treatment of hypoestrogenism and the prevention of osteoporosis. Gynodiol is the only estradiol product available in a 1.5 mg strength, allowing for more precise titration. The total sales for Gynodiol in 2001 were $2.2 million.

AVC™ Cream and Suppositories.AVC cream and suppositories are an established line of women’s hygiene products effective for the treatment of vaginal bacterial infection. AVC is designed to block certain metabolic processes essential for the growth of susceptible bacteria. We acquired the AVC product line from King for $3.3 million in 2001 and we believe there is opportunity for sales growth because AVC is the only sulfanilamide, in either a cream or suppository, on the market. The AVC product line generated $3.5 million in sales in 2001.

Nordette®. Nordette is an oral contraceptive owned by King. In partnership with King, we co-promote this product to obstetricians and gynecologists nationwide. The study was designedrevenues are booked by King and we receive a payment from King which reflects 50% of these revenues above an established quarterly baseline, less related manufacturing and approved marketing expenses, subject to measure ESTRASORB’s abilitycertain baseline modifications.

Other Hormone Replacement Therapy Product Candidates

      We are using our innovative drug delivery technologies to expand our product pipeline through the development of new product candidates, including a testosterone replacement therapy product for women. Our hormone replacement therapy program includes the following products:

ANDROSORB™.ANDROSORB employs our patented micellar nanoparticle technology to deliver 17b estradioltestosterone through the skin, when applied astopically in lotion form. Although generally associated with men, testosterone is also a topical lotion. The study results indicatenaturally occurring hormone in women. As a woman ages, she may experience a variety of symptoms of testosterone deficiency, including poor libido or sexual responsiveness, depression and cardiovascular, musculoskeletal and urological problems. ANDROSORB may be useful to treat the symptoms of testosterone deficiency, a condition that there is a statistically significant difference between ESTRASORB and placebo treatment with respect to the trial’s primary clinical endpoint, a reductionincreasingly prevalent in the number of hot flushes.our aging population.

      The positive reactions of theTo date, there have been no approved testosterone therapy products for women in the Phase II study coupled with the Company’s positive Phase III clinical results indicate thatU.S. other than a product which combines estrogen replacement therapy is an excellent initial target for the Company’s topical drug delivery system. As the Company begins the final stages of clinical development with ESTRASORB and files for an NDA, the Company will continue to investigate its topical delivery system to other products.

      Testosterone replacement therapy is currently used by males who are testosterone deficient as a result of either primary or secondary hypogonadism. It is believed that testosterone in males is required to maintain sexual function and libido, maintain lean body mass, increase hemoglobin synthesis and maintain bone density. There are estimated

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testosterone. Current testosterone replacement therapy products for men include deep intramuscular injections, or transdermal patches.patches and gels. The injections require frequent visits to a physician and may be associated with pain at the injection site and abscess. The transdermal patches may cause skin irritation and patient inconvenience associated with wearing and changing external patches.

      The Company believes We believe that ANDROSORB (its testosterone hormone replacement therapy product) may offer several advantages over these current testosterone replacement therapies. ANDROSORB is a lotion that may be applied to the skin, thus eliminating the need for intramuscular injections. In addition, ANDROSORB does not contain materials that may cause the skin irritation associated with transdermal patches. The Company completed human safety studies of ANDROSORB involving 10 subjects and submitted the results to the FDA in the third quarter of 1997. A multiple-dose, pharmacokinetic study involving 9 subjects was completed in the fourth quarter of 1997, and a dose-ranging pharmacokinetic study involving 8 subjects was completed in the second quarter of 1998. The Company completed Phase I testing of ANDROSORB in 1999, with results that indicated ANDROSORB did not cause skin irritation in the patients tested. These studies have also all demonstrated delivery of the drug successfully results in elevated blood hormone levels. The CompanyWe completed a Phase II dose ranging study in testosterone deficient women in the fourth quarter of 2000.2000 and expect to begin additional Phase II trials in the first quarter of 2002.

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     ANDRO-JECT™.We also have in preclinical development ANDRO-JECT, isa depot delivery system for testosterone. ANDRO-JECT represents our initial application for our Sterisome technology, a new oil-free, cholesterol-free depot drug delivery system for testosterone, which is in preclinical development.system. ANDRO-JECT is delivered subcutaneously with a small, 25 gauge needle.needle and potentially has long-lasting effects. In animal studies, therapeutic levels of testosterone were maintained for two weeks after one subcutaneous injection. We expect to file an INDInvestigational New Drug application for ANDRO-JECT in the first half of 2001.2002.

Progestin Lotion.We are also currently undertaking preclinical development of a transdermal progestin lotion. We expect to file an Investigational New Drug application for this product in the second half of 2002. The use of progestins in combination with estrogen is becoming standard therapy for menopausal women who take estrogen replacement therapy and have an intact uterus. The use of ESTRASORB in combination with our progestin lotion would compete with estrogen/progestin combination products.

     Infectious DiseasesMicrobicides

      We develop and produce live virus suspensions and vaccines for governmental, commercial and academic clients. Our capabilities include experimental vaccine development, vaccine safety testing, production and testing of tissue culture systems and repository management, including the storage, tracking and shipment of thousands of biological specimens. In addition, we have one of the few locations in the world that produces experimental live viral vaccines for Phase I and II clinical trials. We also develop recombinant virus-like particles for use as vaccines against infectious diseases.

      Our vaccine product candidates include the following:

HPV 16 Vaccine.Our human papillomavirus type 16 virus-like particle vaccine product, a single protein vaccine, is being developed with sponsorship by the National Cancer Institute. Expected to begin lengthy Phase III trials in Costa Rica in 2002, the vaccine is being tested for the prevention of human papillomavirus infection, which has been implicated in a majority of cases of cervical cancer. We are also developing a multi-protein human papillomavirus vaccine which will be tested for the treatment and prevention of human papillomavirus infection. This multi-protein vaccine, which also uses our virus-like particle technology, is currently in pre-clinical development.

Inactivated Smallpox Vaccine.Based upon the potential threat of a smallpox outbreak due to terrorist activity, there is an urgent need for a safe and effective smallpox vaccine which can be administered to the entire U.S. population. The Company has developed proprietary lipid structurescurrent live virus smallpox vaccine cannot safely be given to all persons. There are a significant number of people, up to 20% of the total population by some estimates, who may experience severe reactions to a live vaccine due to weakened immune systems. For example, people with HIV/ AIDS, the elderly, transplant recipients and people on chemotherapy may have compromised immune systems. We have in pre-clinical development an inactivated smallpox vaccine which may have a better safety profile than that it is usingof the existing live virus vaccine. Initial animal studies indicate that our inactivated smallpox vaccine achieved an immune response comparable to that of the live smallpox vaccine. We are currently in discussions with the NIH regarding the further development of this vaccine and we believe that Phase I trials could be initiated in 2002.

Collaborative Agreements

      We have significant involvement in collaborations, sponsored research agreements and preclinical and clinical testing agreements with academic institutions and with U.S. government agencies in connection with the development of our pharmaceutical product candidates and our vaccine adjuvants. For example, we have executed a non-antibiotic, anti-bacterial preparation, Helicore,Cooperative Research and Development Agreement with the NIH under which we are working, in cooperation with the National Institute of Allergy and Infectious Diseases branch of the NIH, to make and evaluate a malaria vaccine candidate. Current efforts under this agreement are focused on producing a vaccine based on an antigen present in the malaria parasite responsible for the treatmentgreatest mortality from this disease worldwide. We have also executed a Cooperative Research and Development Agreement with the NIH which is directed towards our work with the Stroke Branch ofH. pyloriinfection in humans.H. pyloriwas recognized in 1994 by the National InstitutesInstitute of Health as a causative agentNeurological Disorders department of peptic ulcer disease, antral gastritisthe NIH. The principal goal of this agreement is to evaluate the safety of therapeutics for the

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Our Platform Technologies

      Our product development efforts are focused on the research and development ofH. pyloriinclude proprietary transdermal, oral and injectable drug delivery and vaccine technologies and the applications of those technologies. Our technology platforms involve the use of antibiotics alone or antibiotics in combination withproprietary microscopic lipid structures as vehicles for the delivery of a wide variety of drugs that inhibit acid production inand other therapeutic products, including hormones, anti-bacterial and anti-viral products and vaccine adjuvants. In addition, our vaccine technology can be utilized for the stomach. Problems associated with such therapies include, but are not limited to, cost, toxicity, failure to sufficiently eradicate all the bacteria,development of prophylactic and acquired resistance to the antibiotic. In 1995, the Company began to test formulationstherapeutic vaccines. We believe our innovative technologies may allow for a more cost-effective and stable delivery of Helicore in both animal studiesa wider variety of drugs and Phase I human safety studies. Results from clinical studies completed in 1996 were submitted to the FDA. Novavax is not currently conducting preclinical or clinical studies on Helicore.

      The Company has also developed BCTP, a lipid emulsion that acts on various microbials, including enveloped viruses, as well as sporesother therapeutics than commercially available phospholipid liposomes and bacteria. The product has also demonstrated spermicidal action. The Company believes that the emulsion acts on the target by first fusing or merging with the lipid envelope or outer membrane of the target. The Company believes that BCTP has many potential applications. Preclinical studies indicate that viruses and spores vulnerable to BCTP include influenza A and bacillus anthracis, but itother delivery vehicles. Our technologies may also be appropriatepreferred over other available transdermal delivery systems because they are easy to use, provide rapid onset of therapy and may reduce side effects such as skin irritation. In addition, future applications of our transdermal delivery systems may show advantages over injectable delivery technologies, which are invasive, inconvenient and sometimes painful.

Micellar Nanoparticle Emulsions.Micellar nanoparticle emulsions are proprietary, submicron-sized, water miscible, lipid structures derived from amphiphilic molecules. We believe that our micellar nanoparticle emulsions are the first substances able to encapsulate alcohol soluble materials for herpes, measles, mumps, rubelladelivery through the skin. The micellar nanoparticle emulsion formulations we use for the transdermal delivery of drugs have properties similar to creams and manylotions. Micellar nanoparticle emulsions are the fundamental technology platform for our hormone replacement therapies, including our ESTRASORB and ANDROSORB product candidates. We believe that our patent on this technology lasts until 2015.

Novasome Non-Phospholipid Vesicles.In addition to our micellar nanoparticle emulsion technology, we have developed Novasome non-phospholipid liposomes. Novasomes are proprietary liposomes in which drugs or other microbes and pathogens. While influenza vaccinesmaterials can be encapsulated for delivery into the body orally or by injection. They are relatively effective at preventing the flu, BCTP unlike vaccines, does not appear to promote mutation and resistance. Other advantagesmade using our patented manufacturing processes from a variety of BCTP appear to include a low toxicity profile, inexpensive scale-up and manufacturing costs, and a rapid and broad spectrum of killing.

Vaccine Adjuvants

      Adjuvants are substancesreadily available chemicals called amphiphiles. We believe that make vaccines more effective. The Company believes that itsour Novasome lipid vesiclestechnology may provide effective and safe adjuvant carrier systems for a variety of vaccines. Our initial use of this technology will be in the development of vaccines in a variety of circumstances, including: (i) encapsulation and protection from destruction by the body’s normal enzymatic processes of delicate antigenic materials; (ii) encapsulation of toxic materials, such as endotoxinsfor smallpox and other potent toxins,infectious diseases.

Virus-Like Particles.We also develop recombinant virus-like particles for gradual release, thereby providing protectionuse as vaccines against infectious diseases. Virus-like particles are self assembling protein structures which resemble viruses. These are non-infectious particles which can generate immune responses when administered as vaccines. We have several ongoing development programs involving virus-like particles, including human papillomavirus vaccines, melanoma vaccines, malaria vaccines, influenza vaccines and anti-stroke therapeutics.

Sterisomes.Sterisomes are our proprietary drug delivery system comprised of the body from the toxin while generating an immune80% water, 15% drug and 5% lipid. Sterisomes can be used as a depot delivery system for certain steroidal hormones. We currently have

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Vaccine Projects

      The Company’s BSD operation currently has two products in clinical trials with collaborators at NIH. The first, an HPV-16 VLP vaccine is in Phase II clinical trials and is intended to prevent HPV-16 infection. The second product, a Hepatitis E vaccine, willtestosterone utilizing this delivery system. Initial animal studies suggest that therapeutic levels of testosterone can be tested in a Phase II trial in Nepal.

      In October 2000, BSD became a part of a team assembled by Science Applications International Corporation (“SAIC”)maintained for a contract awarded to SAIC for “Malaria Vaccine Production and Support Services”, funded by the National Institute of Allergy and Infectious Diseases (“NIAID”) of the NIH. Under the terms of the agreement, we will work closely with SAIC to evaluate the process of developing malaria protein vaccine candidates using multiple expression systems, as well as bacterial and viral vectors. We will also be responsible for process development and GMP manufacturing and testing of the vaccine candidates. The seven-year subcontract commenced on or about January 1, 2001 and is estimated to be valued at $10.5 million.

      In October 2000, we extended our initial 1999 contract with the NCI, to manufacture recombinant monomeric and chimeric VLP’s against HPV. The novel recombinant VLP’s are non-infectious vaccine candidates designed to either treat or prevent HPV infections that cause genital warts and cervical cancer. The current contract value is approximately $2.0 million. The HPV vaccines were developed by research and development teams lead by Robin Robinson, Ph.D., Associate Director of BSD and Douglas Lowy, M.D. of the Laboratory of Cellular Oncology at NCI. Dr. Robinson will serve as Principal Investigator on this new HPV vaccine project. In January 2001, we also granted King an exclusive license to use our proprietary cell line to develop and potentially commercialize recombinant HPV vaccines. Novavax and King are currently working together on manufacturing HPV-16 VLP vaccines for an NCI Phase II study, expected to commence during the second half of 2001 in Costa Rica.

      The BSD operations also has a contract with NIH for the “Operation of an Experimental Virus Vaccine Production Facility” through November 2002. Current efforts are stressing dengue and parainfluenza virus reassortant vaccines.several weeks.

Manufacturing

      The development and manufacture of the Company’sour products are subject to good laboratory practices (“GLP”) and cGMP requirementsgood manufacturing practices prescribed by the FDA and to other standards prescribed by the appropriate regulatory agencyagencies in the country of use. The Company hasother countries. We currently utilize third party contract manufacturers to manufacture our existing product line, but we do have the ability to produce limited quantities of Novasome lipid vesicles and MNPs sufficientproducts needed to support its needs for early-stageour current research and development program and clinical trials. It does not presently have FDA-certified facilities capableWe currently manufacture ESTRASORB in 100 liter-size vessels at a pilot facility owned by Packaging Coordinators, Inc., a division of producingCardinal Health, Inc. We recently entered into an agreement with Packaging Coordinators to lease a 20,000 square foot facility at this same location and are in the larger quantitiesprocess of pharmaceutical products required for larger scalebuilding out the facility to our requirements and installing manufacturing equipment to accommodate larger-scale clinical trials orand commercial production. The Companyproduction of ESTRASORB. This manufacturing facility may also provide us with sufficient capacity for the commercial production of other new products. Products at this facility will be manufactured using our machinery and employees. Packaging Coordinators will perform the final fill and packaging of these products on a dedicated line and we are in the process of selecting a third party logistics company to distribute the products. In addition, we have entered into an agreement with Parkedale Pharmaceuticals, Inc., a subsidiary of King, which allows us to use manufacturing facilities at Parkedale to manufacture HPV16 vaccines for Phase III clinical trials. Despite the addition of these new facilities, we may also need to rely on collaborators, licensees or contract manufacturers or acquire suchdirect access to other manufacturing facilities for later stagefuture later-stage clinical trials and commercial production of its own pharmaceuticals. Novavax has entered into a supply agreement with PCI, Inc., a division of Cardinal Health, Inc., to produce ESTRASORB. This GMP facility, located in Philadelphia, Pennsylvania, has the capacity to meet Novavax’s current and future production requirements for ESTRASORB. Additionally, Novavax has entered into an agreement with Parkedale, Inc. a subsidiary of King Pharmaceuticals, Inc., whereby Novavax can use manufacturing facilities at Parkedale to manufacture vaccines for Phase III clinical trials.efforts. There can be no assurance that the Companywe will be able to enter into such relationships or obtain suchneeded facilities orto manufacture such products in a timely fashionmanner at acceptable quality and prices, or that itwe or itsour suppliers will be able to comply with GLPgood laboratory practices or GMP,good manufacturing practices, as applicable, or that it or its suppliers will be able to manufacture an adequate supply of product.

MarketingCompetition

      The Company plans to market its current healthcarespecialty pharmaceutical industry is intensely competitive and is characterized by rapid technological progress. We compete with specialized biopharmaceutical firms and large pharmaceutical companies, in the United States, Europe and elsewhere, that are engaged in the discovery, development and marketing of hormone replacement therapies, vaccine products and pharmaceuticalother products that do or could compete with our currently marketed products and our product candidates. These companies, as well as academic institutions, governmental agencies and private research organizations, also compete with us in recruiting and retaining highly qualified scientific personnel and consultants.

      Many large companies currently produce and sell estrogen products for clinical indications identical to those that we seek for ESTRASORB. In the oral product segment of the estrogen replacement therapy market, which it obtains regulatory approvalsaccounts for approximately 78% of the market, the Wyeth-Ayerst division of American Home Products Corporation commits significant resources to the sale and marketing of its product, Premarin®, in order to maintain its market leadership position. Warner-Chillcot also competes in the future either throughbranded oral product segment with its recently acquired marketingproduct, Estrace®. ESTRASORB, if approved, will also compete with products produced and distribution operationssold by generic manufacturers in St. Louis, Missouri, joint ventures or corporate partnering arrangements. The Company expects thatthe oral product segment of the market, such arrangements could include technology licenses, research funding, milestone payments, collaborativeas Watson Pharmaceutical, Inc., with its generic product, development, royaltiesEstropipate®, and equity investments in Novavax. We expectApothecon, Inc., with its generic product, Estradiol.

      In the leveltransdermal patch segment of advertisingthe estrogen replacement therapy market, which accounts for approximately 14% of the market, several companies sell transdermal estrogen patches with which ESTRASORB will compete, if approved. For example, Novartis Pharma AG currently markets and promotional spending to supportsells its Vivelle® and Estraderm® transdermal products and Berlex Laboratories, Inc. and Forest Laboratories, Inc. co-promote the Climara® transdermal patch.

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Competition

      All of the markets in which Novavax competes are intensely competitive. The pre-natal vitamin marketfor example, is very fragmented with many competitors. A number of companies that are larger than us, and have greater resources than we do, sell prenatal vitamins that compete in the market,with Nestabs, including Warner-Chillcot, Solvay Pharmaceuticals, Mead Johnson and many generic and controlled brand manufacturers. The competition to develop FDA approvednew FDA-approved prenatal vitamins is intense and no assurance can be given that our product candidates will continue to be commercially successful products.

      Many large companies, such as American Home Products (“AHP”), Apothecon, Watson Pharmaceutical, Solvay Pharmaceuticals, and a number of generic manufacturers currently produce and sell estrogen products for clinical indications identical to those the Company seeks for its lead product.also intense. In addition, Gynodiol, our oral estrogen replacement therapy product, competes with the Wyeth-Ayerst division of AHP commits significant resources in the sales and marketing of itsestrogen replacement therapy products to maintain its market leadership position. In the transdermal segment of the market, Novartis markets a transdermal estrogen patch and Watson currently markets a transdermal testosterone patch.described above.

      A number of other companies including Merck, Glaxo-SmithKline, Novartis, Pharmacia, and AHP have been working on vaccines and vaccine adjuvants for use as human drug products. TheIn general, competition to develop FDA-approved human vaccines and vaccine adjuvants is intense and no assurance can be given that our vaccine and vaccine adjuvant product candidates will be developed into commercially successful products.

      Primary competitors in the development of lipid structure and vesicle encapsulation technologies are Elan, Alza, Gilead and L’Oreal, as well as otheramong pharmaceutical vaccine and chemical companies. We believe that, except for L’Oreal, these companies have focused their development efforts on pharmaceutical carrier systems for the treatment of infections and certain cancers. To our knowledge, Elan, Alza and Gilead all base their lipid vesicle technologies on phospholipids.

      Most of our competitors are larger than we are and have substantially greater financial, marketing and technical resources. In addition, many of these competitors have substantially greater experience than we have in developing, testing and obtaining FDA and other approvals of pharmaceuticals. Furthermore, when we commence commercial sales of pharmaceuticals, we will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which we have limited or no experience. If any of the competitors develop new encapsulation technologies that are superior to our Novasome and MNP technologies, our ability to expand into the pharmaceutical and vaccine adjuvant markets will be materially and adversely affected.

      Competition among products will be based among other things,in part on product efficacy, safety, reliability, availability, price and patent position. An important factor will be the relative timing of market introduction of our products and our competitors’ products. Accordingly, the relative speed with which we can develop products, complete the clinical trials and approval processes and supply commercial quantities of the products to the market, is expected to be an important competitive factor. Our competitive position will also depend upon our ability to attract and retain qualified personnel, to obtain patent protection or otherwise develop proprietary products or processes and to secure sufficient capital resources for the often substantial period between technological conception and commercial sales.sale.

Research and Development

      Our research is focused principally on the development and commercialization of formulations for topical drug delivery and therapeutic products, including anti-bacterial and anti-viral products and adjuvants for vaccines. We intend to use third party funding when available, through collaborations, joint ventures or strategic alliances with other companies. Because of the substantial funds required for clinical trials, we may have to obtain additional financing for our future human clinical trials. No assurance can be given that such financing will be available on terms attractive to us, if at all.

      We base our development decisions on costs and potential return on investment, regulatory considerations, and the interest, sponsorship and availability of funding from third parties. As of December 31, 2000, our research and

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Patents and Proprietary Information

      Through a wholly-owned subsidiary, we hold 50We currently have 54 U.S. patents and have approximately 125150 foreign patents and patent applications covering our technologies (which include a wide variety of component materials, its continuous flow vesicle production process and its Novamix® production equipment).technologies. We believe that these patents are important for the protection of our technology as well as certain of the development processes that underlie that technology. In addition,have three pending U.S. patent applications are pending covering the composition, manufacture and use of itsour organized lipid structures and related technologies. We recently filed 15 new patent applications directed towards innovative discoveries made in the field of human vaccines.

      We expect to engageA current U.S. patent issued in collaborations, sponsored research agreements1997 covers our micellar nanoparticle technology and preclinical testing agreements in connection with our future pharmaceutical products and vaccine adjuvants, as well as clinical testing agreements with academic and research institutions and U.S. government agencies, such asmethods of their production. Micellar nanoparticles are the NIH, to take advantagestructures which allow for ESTRASORB’s unique transdermal delivery of the technical expertise and staff of these institutions and to gain access to clinical evaluation models, patients and related technologies. Consistent with pharmaceutical industry and academic standards, and the rules and regulations promulgated under the federalestradiol.

      The Federal Technology Transfer Act of 1986 these agreementsis designed to encourage the dissemination of science and technology innovation and provide sharing of technology that has commercial potential. Consistent with statutory guidelines issued under the Act, the Company’s collaborative research efforts with the government or with other private entities receiving federal funding may provide that developments and results will be freely published, that information or materials supplied by us will not be treated as confidential and that we will be required to negotiate a license to any such developments and results in order to commercialize products. There can be no assurance that we will be able to successfully obtain any such license at a reasonable cost or that such developments and results will not be made available to our competitors on an exclusive or nonexclusive basis.

Government Regulation

      Our research and development activities are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. TheIn the United States, the development, manufacturing and marketing of human pharmaceuticals are subject to regulation in the United States for safety and efficacy by the FDA in accordance with the Food, Drug and Cosmetic Act.

      In the United States, human pharmaceuticals are subject to rigorous FDA regulation including preclinical and clinical testing. The process of completing clinical trials and obtaining FDA approvals for a new drug is likely to take a number of years, requires the expenditure of substantial resources and is often subject to unanticipated delays. There can be no assurance that any product will receive such approval on a timely basis, if at all.

      The steps required before new products for use in humans may be marketed in the United States include (i) preclinical tests, (ii) submission to the FDA of an IND,Investigational New Drug application, which must be approved before human clinical trials commence, (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the product, (iv) submission of an NDAa New Drug Application for a new drug or a Product License Application (“PLA”) for a new biologic to the FDA and (v) FDA approval of the NDANew Drug Application or PLAProduct License Application prior to any commercial sale or shipment of the product.

Preclinical tests include laboratory evaluation of product formulation as well asand animal studies (if an appropriate animal model is available) to assess the potential safety and efficacy of the product. Formulations must be

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      The results of the preclinical tests are submitted to the FDA as part of an INDInvestigational New Drug application and are reviewed by the FDA prior to the commencement of human clinical trials. There can be no assurance that submission of an INDInvestigational New Drug application will result in FDA authorization to commence clinical trials. Clinical trials involve the administration of the investigational new drug to healthy volunteers and to patients under the supervision of a qualified principal investigator and are typically conducted in three sequential phases, although the phases may overlap. We or the FDA may suspend clinical trials at any time if the participants are being exposed to an unacceptable health risk. The FDA may deny an NDAa New Drug Application or PLAProduct License Application if applicable regulatory criteria are not satisfied, may require additional testing or information, or may require post marketingpost-marketing testing and surveillance to monitor the safety of ourthe applicable products.

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      In addition to obtaining FDA approval for each PLA,Product License Application, an Establishment License Application (“ELA”) must be filed and approved by the FDA for the manufacturing facilities of a biologic product before commercial marketing of the biologic product is permitted. TheThis regulatory process may take many years and requires the expenditure of substantial resources.

      In addition to regulations enforced by the FDA, we are also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. Our research and development involves the controlled use of hazardous materials, chemicals and viruses. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages that result, and any such liability could exceed our resources.

      In both domestic and foreign markets, our ability to commercialize our product candidates will depend, in part, on the availability of reimbursement from third-party payers, such as government health administration authorities, private health insurers and other organizations. If adequate coverage and reimbursement levels are not provided by government, and third-party payers for uses of our therapeutic products, the market acceptance of these products would be adversely affected.

There have been a number of federal and state proposals during the last few years to subject the pricing of pharmaceuticals to government control and to make other changes to the medical care system of the United States. It is uncertain what legislative proposals will be adopted or what actions federal, state or private payerspayors for medical goods and services may take in response to any medical reform proposals or legislation. We cannot predict the effect medical reforms may have on our business, and no assurance can be given that any such reforms will not have a material adverse effect.

Employees

      The Company had 127We currently have 173 full-time employees, as of December 31, 2000, of whom 3138 are in research and development. Of those 31, 6 are PhD’s38 employees in research and 1development, eight have earned PhD degrees and one is an M.D. The Company hasa medical doctor. We have no collective bargaining agreement with itsour employees and believesbelieve that itsour employee relations are good.

Risks and Uncertainties

     The following is a summary description of some of the many risks we face in our business. You should carefully review these risksread the following risk factors in evaluating our business. Some of the following risks relate principally to our business includingand the businessindustry in which we operate. Other risks relate principally to the securities market and ownership of our subsidiaries.common stock. If any of the following risks occur, our business, financial condition or operating results could be adversely affected. You should also consider the other information described in this report.

Our success is heavily dependent on FDA approval and market acceptance of ESTRASORB

      Our New Drug Application for ESTRASORB was accepted for filing by the FDA in August 2001. There is no guarantee that the FDA will approve our application and allow us to begin selling ESTRASORB in the United States. If we do not receive FDA approval of our application, our inability to sell ESTRASORB in the United States would have a significant negative effect on our business and results of operations. Even if ESTRASORB is approved by the FDA, there is no guarantee that we and King our marketing partner for ESTRASORB, will be able to successfully commercialize ESTRASORB. Many factors could negatively affect our ability to successfully commercialize ESTRASORB, including:

	•	a failure or delay in ESTRASORB gaining a meaningful share of the estrogen replacement therapy market, which currently is dominated by Premarin®, an oral estrogen tablet, sold by a division of

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		American Home Products Corporation, and estrogen patches sold by several companies including Novartis Pharma AG, Berlex Laboratories, Inc. and Forest Pharmaceuticals, Inc.;
	•	our inability to effectively promote and sell ESTRASORB with King in the United States, or King’s inability to do so in the rest of the world;
	•	delays in the manufacture of ESTRASORB in commercial quantities; and
	•	the inability to obtain coverage and favorable reimbursement rates for ESTRASORB from insurers and other third party payors.

We will face substantial competition in connection with the sale of ESTRASORB and our other product candidates

      We compete with numerous other companies worldwide that have developed or are developing products that compete or may compete with our product candidates. These competitors include both large and small pharmaceutical companies, biotechnology firms, universities and other research institutions. We may not succeed in developing technologies and products that are more effective than those being developed by our competitors.

      Many large companies currently produce and sell estrogen products for clinical indications identical to those that we seek for ESTRASORB. In the oral product segment of the estrogen replacement therapy market, which accounts for approximately 78% of the market, Wyeth-Ayerst Laboratories, a division of American Home Products Corporation, commits significant resources to the sale and marketing of its product, Premarin®, in order to maintain its market leadership position. Warner-Chillcot also competes in the branded oral product segment with its product, Estrace®. In addition, ESTRASORB will also compete with products produced and sold by generic manufacturers in the oral product segment of the market, such as Watson Pharmaceutical, Inc., with its generic product, Estropipate®, and Apothecon, Inc., with its generic product, Estradiol. In the patch segment of the market, which accounts for approximately 14% of the estrogen replacement therapy market, several companies market transdermal estrogen patches with which ESTRASORB will compete, if approved. For example, Novartis Pharma AG currently markets and sells its Vivelle® and Estraderm® patches and Berlex Laboratories, Inc. and Forest Pharmaceuticals Inc. co-promote the Climara® transdermal patch. Several companies also currently market alcohol-based estrogen gels and ointments outside the United States. For example, Schering Canada sells its estrogen gel, Estrogel®, in Canada. These and other products sold by our competitors have all been approved for sale and have achieved some degree of market penetration. If ESTRASORB is approved for sale in the Untied States, it will compete for market share with these products and we cannot guarantee that together with King, we will be able to effectively promote ESTRASORB against these competitive products. In order to effectively compete, we may make substantial investments in sales and marketing. Many of these products are sold by companies with greater resources than we have and there is no assurance that we will be successful in gaining significant market share for ESTRASORB or in earning a return on that investment.

      Our technologies and products may be rendered obsolete or noncompetitive as a result of products introduced by competitors. Most of our competitors have substantially greater financial and technical resources, production and marketing capabilities, and related experience than us. The greater resources, capabilities and experience of our competitors may enable them to develop, manufacture and market their products more successfully and at a lower cost than we can. In addition, many of our competitors have significantly greater experience than us in conducting preclinical testing and clinical trials of human pharmaceuticals and obtaining regulatory approvals to market such products. Accordingly, our competitors may succeed in obtaining FDA approval for products more rapidly than us which may give them an advantage over us in achieving market acceptance of their products.

We may need additional capital to grow and operate our business and we are uncertain about obtaining future financing

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      We estimate that our existing cash resources will be sufficient to finance our operations at current and projected levels of development and general corporate activity for the next 12 to 15 months. We cannot be certain that we will be able to generate sufficient revenues from product sales in the near term or at all. We may require additional funds to continue our research and development, commence future preclinical and clinical trials, seek regulatory approvals, establish commercial-scale manufacturing capabilities and market our products. We may seek additional funds through public or private equity or debt financings, collaborative arrangements with pharmaceutical companies and other sources. We cannot be certain that adequate additional funding or bank financing will be available to us on acceptable terms, if at all. If we cannot raise the additional funds we may need to continue our current and anticipated operations, we may be required to delay significantly, reduce the scope of or eliminate one or more of our research or development programs. If that is the case we will seek other alternatives to avoid insolvency, including arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, product candidates or products.

  We have a history of losses and our future profitability is uncertain

      Our expenses have exceeded our revenues since our formation in 1987, and our accumulated deficit at December 31, 20002001 was $55.1$64.8 million. Our revenues for the last three years were, $681,000 in 1998, $1.2 million in 1999, and $2.5 million in 2000. The Fielding acquisition will generate revenue from commercial sales2000 and $24.0 million in 2001. Sales of products that we acquired as a result of our acquisition of Fielding Pharmaceutical Company have generated modest revenues, but we cannot be certain thatbased on our current business plan these revenues will not be sufficient to offset our expenses in the future. We cannot be certain of when or if we will generate substantial revenues from the sale of ESTRASORB. We have received a very limited amount of product-related revenue from research contracts, licenses and agreements to provide vaccine products, services and adjuvant technologies. We cannot be certain that we will be successful in entering into strategic alliances or collaborative arrangements with other companies that will result in other significant revenues to offset our expenses. Our net losses for the last three years were $4.8 million in 1998, $4.5 million in 1999, and $12.2 million in 2000.2000 and $9.7 million in 2001. Our losses have resulted from research and development expenses, clinical trials, protection of our patents and other intellectual property and other general operating expenses. We expect that our annual losses will continueincrease in the near term as we expand our manufacturing capacity, sales and marketing capabilities and conduct additional and larger clinical trials and seek regulatory approval for advanced stageother product candidates. Therefore, we expect our cumulative operating loss to increase until such time, if ever, as product sales, licensing fees and royalty payments generate sufficient revenue to fund our continuing operations. We cannot predict when, if ever, we might achieve profitability and cannot be certain that we will be able to sustain profitability, if achieved.

12      We intend to allocate a significant portion of our sales personnel’s time to the product launch of ESTRASORB, if and when it is approved by the FDA. Accordingly, the sales of our other women’s health products could be adversely affected by the efforts we allocate to the ESTRASORB product launch. The costs of maintaining our own sales force to market our current products and ESTRASORB, if approved, may in the future exceed product revenues. If we continue to market ESTRASORB or future products directly, significant additional expenditures and management resources may be required to increase the size of our internal sales force.

Our sales and marketing plan for ESTRASORB depends in large part on the success of our relationship with King

      We have entered into a co-promotion agreement with King for the marketing and promotion of ESTRASORB in the United States using our sales and marketing personnel and King’s sales and marketing personnel. We have also granted King exclusive rights to promote, market and distribute ESTRASORB outside the United States. In return, we received certain milestone payments, potential future milestone payments, licensing fees and royalties on future sales. While our agreements with King give us some limited protections with respect to King’s marketing and sales efforts and, we believe, creates financial incentives for King consistent with our own, we cannot control the amount and timing of marketing efforts that King devotes to ESTRASORB or make any assurances that our and King’s co-promotion of ESTRASORB in the United States and King’s marketing of ESTRASORB in the rest of the world will be successful.

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      Our success in marketing other potential future products will also depend in large part on our relationship with King. Our co-promotion agreement with King also provides for co-promotion in the United States with King of our product candidate ANDROSORB™ and our human papillomavirus vaccine, if any of these products are approved for marketing by the FDA, and gives King an exclusive worldwide license, except in the United States, to market these future products. Under our co-promotion agreement, King has the right to co-promote future hormone replacement therapy products in the field of women’s health. If King exercises this right with respect to a particular product candidate, King is obligated to share equally with us in the development costs of such product. In the future, we might enter into other licensing or co-promotion arrangements with King or other third parties for the marketing and sale of other future products. Any revenues we receive from sales of ANDROSORB™ and other future products will depend in large part on the terms of these agreements and the efforts of King and any other third-party marketing partners.

Our agreements with King may reduce the likelihood that we could be acquired by another company

      Our co-promotion agreement and license agreement with King for the marketing of ESTRASORB and ANDROSORB contain several provisions which would take effect upon a change of control of Novavax. One provision allows King several options in the event of a change in control of Novavax including (i) terminating our right to co-promote King products, (ii) terminating our rights to promote ESTRASORB and ANDROSORB and any other hormone therapies for women for which King is paying 50% of the development costs or (iii) requiring us to assign and transfer to King all related rights of ownership for ESTRASORB and ANDROSORB and any such other hormone replacement therapies for women and license to King on an exclusive and perpetual basis all related intellectual property rights and know how. If King chooses to exercise its rights under either clause (ii) or (iii) above, King will pay us royalties on net sales of the products. In addition, King will pay us for the cost of manufacturing, plus a markup consistent with the terms of the license agreement for the handling costs. King could also require that we redeem the outstanding promissory notes, currently in the amount of $30.0 million, at 101% of the outstanding principal and accrued interest. These provisions may have the effect of making us less attractive as an acquisition candidate.

We need additional manufacturing capability to commercialize our products

      We do not have any experience with the large capacity manufacturing required for commercial sale of a product. Although we have had the ability to produce the limited quantities of products needed to support our current research and development program and clinical trials, we will need more production capacity for larger, later-stage clinical studies and commercial sales. Our potential products may be too difficult or costly to manufacture on a large scale, to develop into commercially viable products or to market.

      We are in the process of validating our manufacturing methods for ESTRASORB, which is required under FDA guidelines, and are awaiting FDA approval of these methods. We currently manufacture ESTRASORB at a facility of Packaging Coordinators, Inc., a subsidiary of Cardinal Health, Inc. We recently entered into an agreement with Packaging Coordinators to lease 20,000 square feet of space within their facility. Under the terms of this agreement, Packaging Coordinators will provide packaging services for the product we manufacture in their facility. We are in the process of building out the facility to meet our requirements and installing manufacturing equipment at this facility with the capacity required for commercial production of ESTRASORB. Once this new equipment is installed, we will need to confirm that the ESTRASORB made using this new equipment is identical to that used in our clinical trials. If we are unable to make ESTRASORB on a commercial scale or are delayed in validating the product manufactured with our new equipment, the commercialization of ESTRASORB would be delayed.

      In the near term, we will be manufacturing ESTRASORB only in the Packaging Coordinators facility. If ESTRASORB is approved by the FDA, we plan to qualify at least one additional site for the manufacture of ESTRASORB. If we are unable to utilize the Packaging Coordinators facility to manufacture ESTRASORB prior to our qualification of a second site, however, we would not have immediate access to ESTRASORB and would be required to reestablish our validation process at a different facility which would cause us to lose sales of ESTRASORB and would adversely affect our business.

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      We currently utilize third party contract manufacturers to manufacture our other products. Any contract manufacturer’s facility that we may use, including the Packaging Coordinators facility, must adhere to the FDA’s regulations on current good manufacturing practices, which are enforced by the FDA through its facilities inspection program. These facilities are subject to periodic inspection by the FDA. The manufacture of products at these facilities will be subject to strict quality control testing and recordkeeping requirements. We may not be able to enter into alternative manufacturing arrangements at commercially acceptable rates, if at all. Moreover, the manufacturers utilized by us may not provide quantities of product sufficient to meet our specifications or our delivery, cost and other requirements.

      If we decide to manufacture our own products, we will need to acquire additional manufacturing facilities and to improve our manufacturing technology. Establishing additional manufacturing facilities will require us to spend substantial funds, hire and retain a significant number of additional personnel and comply with extensive regulations applicable to such facilities here and abroad, including the current good laboratory practices and good manufacturing practices required by the FDA. If we elect to or need to manufacture our own products, we risk the possibility that we may not be able to do so in a timely fashion at acceptable quality and prices or in compliance with good laboratory practices and good manufacturing practices.

  We have not completed the development of any product and our ability to do so is uncertain

      Allmany of our potential products are still in various stages of pre-clinical research or clinical trials. Significant further research and development, pre-clinical and clinical testing, regulatory approval and additional financing are all necessary before the commercial sales of any of our products.

      We are not certain whether we will be able to complete the development of and sell any of our products. The development of pharmaceutical products based on new technologies is subject to a variety of inherent risks of failure. These risks include the following:

	•	Our potential products may be found to be unsafe, to have harmful side effects on humans, to be ineffective or may otherwise fail to meet regulatory standards or receive necessary regulatory approvals.
	•	Our potential products may be too difficult or costly to manufacture on a large scale, to develop into commercially viable products or to market.
	•	Our potential products may not be accepted by the medical community.
	•	Other companies may market superior or equivalent products.
	•	Other parties may claim proprietary rights to our product technology that prevent us from marketing our products.
	•	We may be unable to raise enough money to finance our continued product development.

      We have recently completed a Phase III clinical trial for our estrogen replacement therapy product, ESTRASORB and expect to file an NDA in the first half of 2001. Our products are in various phases of testing and we cannot guarantee that these products will successfully pass such testing phases, and if so, will result in commercially successful products. Clinical trial results are frequently susceptible to varying interpretations by scientists, medical personnel, regulatory personnel, statisticians and others which may delay, limit or prevent further clinical development or regulatory approvals of a product candidate. Also, the length of time that it takes for us to complete clinical trials and obtain regulatory approval for product marketing can vary by product and by the indicated use of a product. We are unable to predict the length of time before we complete the necessary clinical trials and obtain regulatory approval.

We may not succeed in obtaining the FDA approval necessary to sell ourany additional products

      The development, manufacture and marketing of our pharmaceutical products are subject to government regulation in the United States and other countries. In the United States and most foreign countries, we must complete rigorous preclinical testing and extensive human clinical trials that demonstrate the safety and efficacy of a product in order to apply for regulatory approval to market the product. OneOnly a few of our products have been approved for sale and our application to sell ESTRASORB in the United States is currently being reviewed by the FDA. Two of our product candidates, ANDROSORB isand our human papillomavirus virus-like particle vaccine, are now in Phase III human clinical studies. ESTRASORB recently completedIn addition, Phase IIII clinical trials for estrogen replacement therapy.our Hepatitis E vaccine are currently being conducted. Our other product candidates are in pre-clinicalpreclinical laboratory or animal studies. Before applying for FDA approval to market any particularadditional product candidate,candidates, we must conduct larger-scale Phase II and III human clinical trials that demonstrate the safety and efficacy of our products to the satisfaction of the FDA or other regulatory authorities. These processes are expensive and can take many years to complete. We may not be able to demonstrate the safety and efficacy of our products to the satisfaction of the FDA or other regulatory authorities. NovavaxWe may also be required to demonstrate that itsour proposed product representsproducts represent an improved form of treatment over existing therapies and we may be unable to do so without conducting further clinical studies, if at all.studies.

      We may fail to obtain regulatory approval for our products on a timely basis, if at all.basis. Delays in obtaining regulatory approval can be extremely costly in terms of lost sales opportunities and increased clinical trial costs. The speed with which we complete our clinical trials and our applications for marketing approval will depend on several factors, including the following:

	•	Thethe rate of patient enrollment, which is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study and the nature of the protocol;

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	•	Institutionalinstitutional review board approval of the protocol and the informed consent form;
	•	Priorprior regulatory agency review and approval;
	•	Analysisanalysis of data obtained from pre-clinicalpreclinical and clinical activities which are susceptible to varying interpretations, which interpretations could delay, limit or prevent regulatory approval;
	•	Changeschanges in the policies of regulatory authorities for drug approval during the period of product development; and
	•	Thethe availability of skilled and experienced staff to conduct and monitor clinical studies and to prepare the appropriate regulatory applications.

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      We have limited experience in conducting and managing the pre-clinicalpreclinical and clinical trials necessary to obtain regulatory marketing approvals. We may not be able to obtain the approvals necessary to conduct clinical studies. Also, the results of our clinical trials may not be consistent with the results obtained in pre-clinicalpreclinical studies or the results obtained in later phases of clinical trials may not be consistent with those obtained in earlier phases. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after experiencing promising results in early animal and human testing. If regulatory approval of a drug is granted, such approval is likely to limit the indicated uses for which it may be marketed. Furthermore, even if a product of ours gains regulatory approval, the product and the manufacturer of the product will be subject to continuing regulatory review. We may be restricted or prohibited from marketing or manufacturing a product, even after obtaining product approval, if previously unknown problems with the product or its manufacture are subsequently discovered.

  We may need substantial additional capital to grow and operate our business and we are uncertain about obtaining future financing

      We estimate that our existing cash resources will be sufficient to finance our operations at current and projected levels of development and general corporate activity for the next 12 to 18 months. Thereafter, we will require substantial additional funds to continue our research and development, commence future pre-clinical and clinical trials, seek regulatory approvals, establish commercial-scale manufacturing capabilities and market our products. We will seek to obtain additional funds through public or private equity or debt financings, collaborative arrangements with pharmaceutical companies and other sources. We cannot be certain that adequate additional funding or bank financing will be available to us on acceptable terms, if at all. If we cannot raise the additional funds and we need to continue our current and anticipated operations, we may be required to delay significantly, reduce the scope of or eliminate one or more of our research or development programs. If that is the case we will seek other alternatives to avoid insolvency, including arrangements with collaborative partners or others that may require Novavax to relinquish rights to certain of its technologies, product candidates or products.

Our success depends on our ability to maintain the proprietary nature of our technology

      Our success will, in large part, depend on our ability to maintain the proprietary nature of our technology and other trade secrets. To do so, we must prosecute and maintain existing patents, obtain new patents and pursue trade secret protection. We also must operate without infringing the proprietary rights of third parties or letting third parties infringe our rights. Novavax has 50 United StatesWe currently have 54 U.S. patents and approximately 125150 foreign patents and patent applications covering its technologies, including its Novamix™ production equipment.our technologies. We have three pending U.S. patent applications covering the composition, manufacture and use of our organized lipid structures and related technologies. We recently filed 15 new patent applications directed towards innovative discoveries made in the field of human papillomavirus. However, patent issues relating to pharmaceuticals involve complex legal, scientific and factual questions. To date, no consistent policy has emerged regarding the breadth of biotechnology patent claims that are granted by the United States Patent and Trademark Office or enforced by the federal court.courts. Therefore, we do not know whether our applications will result in the issuance of patents, or that any patents issued to Novavaxus will provide us with any competitive advantage. We also cannot be sure that Novavaxwe will develop additional proprietary products that are patentable. Furthermore, there is a risk that others will independently develop or duplicate similar technology or products or circumvent the patents issued to Novavax.us.

      There is a risk that third parties may challenge our existing patents or may claim that we are infringing their patents or proprietary rights. We could incur substantial costs in defending patent infringement suitessuits or in filing

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      Although our patents include claims covering various features of our product candidates, including composition, methods of manufacture and use, our patents do not provide us with complete protection against the development of competing products. For example, our patents do not prohibit third parties from developing and selling products for estrogen replacement therapy that deliver estrogen through a topical lotion, ointment or similar medium.

      Some of our know-how and technology is not patentable. To protect our proprietary rights in unpatentable intellectual property and trade secrets, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for Novavax’sour trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure.

  Other organizations have greater resources to develop, manufactureHealth care insurers and market competitiveother payors may not pay for our products or may impose limits on reimbursement

      We compete with numerous other companies worldwide that have developed or are developing novel drug deliveryOur ability to commercialize ESTRASORB and encapsulation technologies. These competitors include both large and small pharmaceutical companies, biotechnology firms, universitiesour future products will depend, in part, on the extent to which reimbursement for such products will be available from third-party payors, such as Medicare, Medicaid, health maintenance organizations, health insurers and other research institutions. Novavax may notpublic and private payors. If we succeed in developing technologiesbringing ESTRASORB or other products in the future to market, we cannot assure you that third-party payors

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      Many health maintenance organizations and products mayother third-party payors use formularies, or lists of drugs for which coverage is provided under a health care benefit plan, to control the costs of prescription drugs. Each payor that maintains a drug formulary makes its own determination as to whether a new drug will be rendered obsoleteadded to the formulary and whether particular drugs in a therapeutic class will have preferred status over other drugs in the same class. This determination often involves an assessment of the clinical appropriateness of the drug and sometimes the cost of the drug in comparison to alternative products. We cannot assure you that ESTRASORB or noncompetitive as a result of products introduced by competitors. Mostany of our competitorsfuture products will be added to payor’s formularies, whether our products will have substantially greater financial and technical resources, production capabilities and experience of our competitorspreferred status to alternative therapies, nor whether the formulary decisions will be conducted in a timely manner. We may enable themalso decide to develop, manufacture and market their products more successfully and at aenter into discount or formulary fee arrangements with payors, which could result in us receiving lower cost than Novavax. In addition, many of Novavax’s competitors have significantly greater experience than Novavax in conducting preclinical testing and clinical trials of human pharmaceuticals and obtaining regulatory approvals to market such products. Accordingly, Novavax’s competitors may succeed in obtaining FDA approvalor discounted prices for products more rapidly than Novavax which may give them an advantage over Novavax in achieving market acceptance of theirESTRASORB or future products.

  We need marketing and manufacturing partners to commercialize our productsmay have product liability exposure

      We do not have any significant manufacturing capability and our drug development capability is limitedThe administration of drugs to humans, whether in large part by our finances. Although we have the ability to produce the limited quantities of products needed to support our current research and development program and clinical trials we will need more production capacityor after marketing clearances are obtained, can result in product liability claims. We maintain product liability insurance coverage in the total amount of $9.0 million for larger, later-stage clinical studiesclaims arising from the use of our currently marketed products and commercial sales. Therefore, our ability to successfully develop and commercialize our products depends, in large part, on our success in entering into strategic alliances or licensing arrangements with collaborative partners, primarily pharmaceutical companies. We expect that these partners will assume various responsibilities for product commercialization including conducting clinical trials submitting applications for regulatory approvalprior to FDA. Coverage is becoming increasingly expensive, however, and manufacturing product supplies. However, we may not be able to negotiate collaborative arrangementsmaintain insurance at a reasonable cost. We cannot assure you that we will be able to maintain our existing insurance coverage or obtain coverage for the use of our other products in the future. This insurance coverage and our resources may not be sufficient to satisfy liabilities resulting from product liability claims. A successful claim may prevent us from obtaining adequate product liability insurance in the future on acceptablecommercially desirable terms, if at all. Even if a claim is not successful, defending such collaborations are established, they may not be scientifically or commercially successful. There is a risk that our collaborative partners may fail to perform their obligations to develop and manufacture our products in which case our businessclaim may be adversely affected. We also face the risk thattime-consuming and expensive and may damage our collaborative partners may develop competing technologies for treating the diseases and conditions targeted by our products, either on their own or in collaboration with others.

      In certain circumstances, it may be advantageous for us to retain manufacturing rights for some of the products that we license to collaborative partners. However, we cannot be sure that we will be able to retain such rights on acceptable terms, if at all, or that we will have the ability to produce the quantities of product required under the terms of such arrangements. Our reliance on collaborative arrangements for product development and commercialization may result in lower revenues from royalties and other payments than we could have generated had we commercialized and marketed products ourselves.

      If we manufacture our own products, we will need to acquire additional manufacturing facilities and to improve our manufacturing technology. Establishing additional manufacturing facilities will require us to spend substantial funds, hire and retain a significant number of additional personnel and comply with extensive regulations applicable to such facilities here and abroad, including the current good laboratory practices and good manufacturing practices required by the FDA. If we elect to or need to manufacture our own products, we risk the possibility that we may not be able to do so in a timely fashion at acceptable quality and prices or in compliance with good laboratory

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      We arereputation in the process of validating our manufacturing methods for ESTRASORB, which is required under FDA guidelines. We have entered into a supply agreement using one third-party contract manufacturer for our clinical and manufacturing needs. We intend to qualify at least one additional FDA approved manufacturing facility after receiving FDA approval. However, if we are unable to produce ESTRASORB in our current facility, Novavax would not have immediate access to this product. Under such circumstances Novavax would be required to reestablish its validation process at a different third-party contract manufacturer. This would delay the commercialization of ESTRASORB.marketplace.

  The Fielding acquisition may not result in a smooth integrationprice of our future products into Fielding’s current salescommon stock has been, and distribution channelsmay continue to be, volatile

      We cannot be certain whetherHistorically, the acquisition of Fielding will result in a successful integrationmarket price of our future products into Fielding’s salescommon stock has fluctuated over a wide range. In fiscal 2001, our common stock ranged from a low of $6.35 to a high of $15.55. It is likely that the price of our common stock will fluctuate in the future. The market prices of securities of small capitalization Specialty pharmaceutical companies, including ours, from time to time experience significant price and distribution channels. Amongvolume fluctuations unrelated to the reasons we have acquired Fielding are its experienced sales representatives and seasoned management team, its existing product revenues and operating income, which will provide Fielding withperformance of such companies. In particular, over the financial resourcesnext year, the market price of our common stock may fluctuate significantly due to fund the developmenta variety of additional proprietary products, and the synergies which should be created by the merger. In the event that we are unable to integrate successfully, our results of operations and financial condition would be materially adversely affected and we would continue to have limited revenues and large operating losses. factors, including:

	•	sales of our products, particularly ESTRASORB, if it is approved for sale; and
	•	governmental agency actions, including the FDA’s determination with respect to our pending New Drug Application for ESTRASORB.

In addition, our inability to integrate successfully would increase our dependence on other third party collaborations.

Our bylaws contain anti-takeover provisions that may deter an acquisitionthe occurrence of Novavax, a change of management or other events that might benefit stockholders

      Our Amended and Restated Certificate of Incorporation requires that any action required or permitted to be taken by stockholders of Novavax must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing, and will require reasonable advance notice by a stockholder of a proposal or director nomination which such stockholder desires to present at any annual or special meeting of stockholders. Special meetings of stockholders may be called only the Chief Executive Officer or, if none, the President of Novavax or the Board of Directors. The Restated Certificate of Incorporation also provided for a classified Board of Directors and members of the Board of Directors may be removed only for cause uponrisks described in this “Risks and Uncertainties” section could have a dramatic and adverse impact on the affirmative vote of holders of a least two-thirds of the shares of capital stock of Novavax entitled to vote. The Board of Directors also has the authority, without further action by the stockholders, to fix the rights and preferences of, and issue shares of, preferred stock.

      These provisions and other provisionsmarket price of our Restated Certificate of Incorporation and By-Laws may deter hostile takeovers or delay or prevent changes in control or management of Novavax, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they believe to be beneficial.common stock.

Item 2.  Properties

      The Company leasesWe lease approximately 12,000 square feet of administrative offices and laboratory space for itsour corporate headquarters and pharmaceutical product storage at 8320 Guilford Road,in Columbia, Maryland. The Company leases a secondWe lease two facilities in Rockville, Maryland. One facility ofis approximately 6,000 square feet of space located in Rockville, Maryland. This facilityand contains the Company’sour certified animal facility and laboratories for itsour drug research and biologics development, which includes theour vaccine adjuvant product and services group. A thirdIn the other facility leasesin Rockville, we lease approximately 12,000 square feet of space which is also located in Rockville, Maryland.space. This facility is for contract vaccine research, development and manufacturing of Phase I and II products. The Company’sOur Fielding subsidiary leases a facility in

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      The Company believes itsWe believe our facilities are adequate to produce quantitiesaccommodate our current business plan and anticipated short-term needs and that we will be able to lease additional comparable space, if necessary. However, if we choose to expand our manufacturing capacity, the lease or acquisition of, Novasome lipid vesicles, micellar nanoparticles, vaccines and adjuvantsthe receipt of required regulatory approvals for, additional pharmaceutical manufacturing space may be time-consuming and expensive. In addition, we might not be able to support Phase I and Phase II clinical trials. It does not presently have FDA certified facilities capable of producing the larger quantities of pharmaceutical products required for commercial production. The Company presently reliesobtain such additional manufacturing space on collaborators, licenseesa timely basis or contract manufacturers for Phase III clinical trial materials and commercial production of its own pharmaceuticals.on terms acceptable to us, if at all.

Item 3.  Legal Proceedings

      The Company isWe are not a party to any pending legal proceedings.

Item 4.  Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2000.2001.

Executive Officers Of The Registrant

      The Company’sOur executive officers hold office until the first meeting of the Board of Directors following the annual meeting of stockholders and until their successors are duly chosen and qualified, or until they resign or are removed from office in accordance with the Company’sour By-laws.

      The following table provides certain information with respect to the Company’sour executive officers.

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PART II

Item 5.  Market For Registrant’s Common Equity and Related Stockholder Matters

      The Company’s Common StockOur common stock was held by approximately 813770 stockholders of record as of March 9, 2001. The Company has8, 2002. We have never paid cash dividends on its Common Stock. The Companyour common stock. We currently anticipatesanticipate that itwe will retain all of itsour earnings for use in the development of itsour business and doesdo not anticipate payingintend to pay any cash dividends in the foreseeable future.

      The Company’s Common StockOur common stock ($.01 par value) is traded on the Nasdaq National Market under the symbol NVAX. Prior to July 2001, our common stock was traded on the American Stock Exchange under the symbol “NOX”.NOX. The following table sets forth, for the periods presented, the high and low sales prices for our common stock, on the Company’s Common Stock.applicable exchange.

Recent Sales of Unregistered Securities

      In December 2000, Novavax acquired privately owned Fielding Pharmaceutical Company. Under the terms of the acquisition agreement, Novavax acquired 100% of the outstandingJanuary 2002, we issued 362,319 shares of Fielding for $31.5 million, consisting of $13 million in cash and 2,312,501 shares of Novavax common stock, valued at $18.5 million. An additional $5$5.0 million, to the former shareholders of Fielding Pharmaceutical Company pursuant to the terms of an earn-out provision set forth in either Novavax common stock or cash will be paid to formerour merger agreement with Fielding, shareholdersexecuted in March 2002.December 2000. The shares were issued in a private placement in reliance on Section 4(2) of the Securities Act and a resale registration statement was filed with the Commission and has become effective.

Item 6.  Selected Consolidated Financial Data

      The selected consolidated financial data set forth below has been derived from our audited consolidated financial statements. This information should be read in conjunction with the financial statements and the related notes thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and other financial information included elsewhere in this Annual Report on Form 10-K.

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Summarized Quarterly Financial Information for the Years ended December 31, 20002001 and 1999:2000:

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This annual report may contain predictions, estimates and otherForward-Looking Statements:The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and in our reports to stockholders. Generally, the inclusion of the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” and similar expressions identify statements that involve a numberconstitute “forward-looking statements” within the meaning of risksSection 27A of the Securities Act of 1933 and uncertainties, includingSection 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those discussed at “Riskssections. The forward-looking statements are and Uncertainties.”will be based upon management’s then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. This outlook represents our current judgment on the future direction of our business. Forward-looking statements include, but are not limited to, statements regarding future product development and related clinical trials, and statements regarding future research and development.development and statements concerning future results of operations. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: general economic and business conditions; competition; technological advances; ability to obtain rights to technology; ability to obtain and enforce patents; ability to commercialize and manufacture products; results of preclinical studies; results of research and development activities; business abilities and judgment of personnel; availability of qualified personnel; changes in, or failure to comply with, governmental regulations; ability to obtain adequate financing in the future; and other factors referenced herein. See our detailed discussion in “Risks and Uncertainties”. Past results and trends should not be used by investors to anticipate future results or trends. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this annual report

Overview

      The Company has incurred net losses since its inception fromNovavax is a fully-integrated specialty pharmaceutical company focused on the research, development and commercialization of itsproducts utilizing our proprietary drug delivery and vaccine technologies for human pharmaceuticals, vaccineslarge and growing markets, concentrating on the areas of women’s healthcare and infectious diseases. Our lead product candidate, ESTRASORB™, is the first transdermal lotion for estrogen replacement therapy for which a New Drug Application has been accepted for filing by the Food and Drug Administration. The New Drug Application for ESTRASORB was submitted in June 2001 and was accepted for filing in August 2001. We

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      Our drug delivery technologies involve the use of our patented oil and water emulsions which we believe can be used as vehicles for the transdermal and injectable delivery of a wide variety of drugs and other therapeutic products, including hormones, anti-bacterial and anti-viral products and vaccine adjuvants. As of December 31, 2000adjuvants, which are substances added to vaccines to enhance their effectiveness. We believe that our accumulated deficit was $55.1 million. We expecttechnologies represent the lossesfirst time that alcohol soluble hormones, such as estrogen and testosterone, have been encapsulated and delivered through the skin. In addition to continueESTRASORB, our product candidates using these technologies include ANDROSORB™, a transdermal testosterone lotion that is in the near-term, as we conduct additional humanPhase II clinical trials, ANDRO-JECT™, a long-acting subcutaneous injectable formulation of testosterone that is in preclinical development, and seek regulatory approval for our product candidates.a transdermal progestin lotion that is also in preclinical development. We also expect to continue to incur operating losses over the time period required to develop our products, or until such time as revenues, to offset the losses, are sufficient to fund our continuing operations.

      In August 1999, the Company acquired substantially all of the assets (excluding cash and accounts receivable) of the Biomedical Services Laboratory (“BSD”) division of DynCorp of Reston, Virginia. The total consideration and direct costs for the acquisition were $860,000. Theconduct research and development activities of BSD are conducted in an approximately 12,000 square foot facility located in Rockville, Maryland. BSD is engaged in contract research, developmenton preventative and pilot manufacturing of humantherapeutic vaccines for government laboratories and other vaccine companies. The acquisition has been accounted for under the purchase methoda variety of accounting for business combinations.infectious diseases.

      In December 2000, Novavaxwe acquired privately owned Fielding Pharmaceutical Company (“Fielding”), based in St. Louis, Missouri, which sells, markets and distributes a proprietary line of pharmaceutical products focused on

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      In December 2000 we entered into a Note Purchase Agreement with King Pharmaceuticals, Inc., (“King”) whereby we agreed to make a $25 millionissue to King 4% senior convertible note investment in Novavax. The note is convertible into Novavax Common Stock at $10.00 per share which was an 18% premiumpromissory notes up to a 20 day trading average prior to the closing. The note carries$25.0 million. On that same date, we issued a 4% couponsenior convertible promissory note to King for $20.0 million in principal. In September 2001, we issued two additional 4% senior convertible promissory notes for $5.0 million each. All of the notes, totaling $30.0 million (the “Notes”), are due December 19, 2007 with interest payable semi-annuallyin semi-annual installments in cash, andor in certain circumstances, up to 50% in our common stock. As part of the transaction, Novavax received $20 million in December 2000 and will receive an additional $5 million when Novavax files a New Drug Application (“NDA”) for its topical transdermal estrogen replacement therapy, ESTRASORB™, expected to be filed in the first half of 2001. Novavax used a portion of the funds to complete its acquisition of Fielding and will use the balance for general operating purposes.

      In January 2001, we also signedentered into a co-promotion agreement with King for ESTRASORB™,the Company’s topical transdermal estrogen replacement therapy, ESTRASORB in the United States and Puerto Rico (the “Territory”). We also entered into a license agreement with King for many countries outside the United States. In addition,June 2001, we expanded and amended the agreements (the “Amended Agreements”). The Amended Agreements grant King exclusive rights to promote, market and distribute ESTRASORB in Canada, and five additional countries in Europe, and added ANDROSORB, a topical testosterone replacement therapy for testosterone deficient women. We feel this partnership has the potential to provide us with deeper penetration into the women’s healthcare market for ESTRASORB and ANDROSORB. Under the terms of the Amended Agreements we received $3.0 million from King in up-front licensing fees, and we will combinealso receive additional milestone payments of $1.0 million upon ESTRASORB’s approval in Canada and $2.0 million upon the first approval of ESTRASORB in one of the five additional countries in Europe. We will also receive royalties on future sales outside the Territory. Under the Amended Agreements, we also received a milestone payment from King of $2.5 million for our submission of the ESTRASORB New Drug Application, in June 2001, and an additional milestone payment of $2.5 million for the acceptance for filing of our New Drug Application by the FDA in August 2001. In addition, the Amended Agreements also combined U.S. sales efforts with King to begin co-promoting one of King’s products already on the market, Nordette®, a birth control pill. We

      In another agreement in January 2001, we also acquired AVC™Cream and Suppositories (“AVC”) from King in January 2001, for $3.3 million, which had previously been marketed by King for the treatment of vaginal bacterial infections.

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Significant Accounting Policies and Changes to Accounting Policies

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

      We have identified below some of our more significant accounting policies and changes to accounting policies. For further discussion of our accounting policies see Footnote 2“Summary of Significant Accounting Policies”in the Notes to Consolidated Financial Statements.

Revenue Recognition

      We recognize revenue in accordance with the provisions of Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements,whereby revenue is not recognized until it is realized or realizable and earned. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectibility is reasonably assured. Up-front payments and licensing fees are deferred and recognized as earned over the life of the related agreement. Milestone payments are recognized as revenue upon achievement of contract-specified events and when there are no remaining performance obligations. Revenues from product sales are recognized upon shipment, net of allowances for returns, rebates and chargebacks. We are obligated to accept from customers the return of pharmaceuticals, which have reached their expiration date. Revenues from the sale of scientific prototype vaccines and adjuvants are recorded as the products are shipped.

      Revenues earned under research contracts are recognized on the percentage of completion method as described in Statement of Position 81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts. The extent of progress toward completion is measured on the cost-to-cost method. When the current estimates of total contract revenue and contract cost indicate a loss, a provision for the entire loss on the contract is made.

Advertising and Promotion Costs

      All costs associated with advertising and promotion is expensed as incurred. Advertising and promotion expense, including samples, was $1.9 million in 2001. Prior to 2001, we incurred no material advertising or promotional expenses. Our advertising and promotion expenses will substantially increase in 2002 as we prepare for the anticipated approval and subsequent launch of ESTRASORB. If the approval of ESTRASORB is delayed we will be able to defer some, but not all, of the expenses related to this product launch.

Research and Development Costs

      Research and development costs are expensed as incurred. We will continue to incur research and development costs as we continue to expand our product development activities in our women’s healthcare and infectious disease programs. Our research and development costs have, and will continue to include expenses for internal development personnel, supplies and facilities, clinical trials, regulatory compliance and filings, validation of processes and start up costs to establish commercial manufacturing capabilities.

Goodwill and Intangibles Assets

      Goodwill and intangible assets principally result from business acquisitions. Assets acquired and liabilities assumed are recorded at their fair values; the excess of the purchase price over the identifiable net assets acquired is recorded as goodwill. Goodwill and intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 5 to 15 years. The company periodically evaluates the periods of amortization to determine whether later events and circumstances warrant revised estimates of useful lives.

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      In June 2001, the FASB issued SFAS No. 141 “Business Combination,” and SFAS No. 142 “Goodwill and Other Intangible Assets,” effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.

      We will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. We will begin to perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and have not yet determined what the effect these test may have on our earnings and financial position. Amortization of goodwill for the year ended 2001 was approximately $2.5 million and will no longer be recorded subsequent to December 31, 2001.

Future Accounting for Co-promotion Agreement

      In 2002 we anticipate marketing and selling ESTRASORB in the Territory. Under the terms of the co-promotion agreement with King we will record all of the product sales, returns and allowances and cost of sales for ESTRASORB. The resultant gross margin will be shared equally with King and the payment to King will be recorded as a selling and marketing expense on our statement of operations. In the co-promotion agreement both parties will also share equally in committee approved marketing expenses for the products. All direct marketing expenses will be recorded by us, for which King will reimburse us fifty percent.

      The following is a discussion of theour historical consolidated financial condition and results of operations of Novavax and its subsidiaries. The discussion should be read in conjunction with the consolidated financial statements and notes thereto set forth in Item 8 to this Report.

YearResults of Operations for the Years Ended December 31,2001, 2000 (“2000”), asand 1999

Revenues

      Revenues for the year ended 2001 were $24.1 million compared to $2.5 million in 2000 and $1.2 million in 1999. This represents an increase of $21.6 million or 864% from 2000 to 2001, and an increase of $1.3 million or 108% from 1999 to 2000. The increase from 2000 to 2001 relates primarily to $17.3 million from products sales related to our acquisitions of Fielding and the AVC product line, $4.0 million for one-time milestone payments from King for the timely submission and acceptance of our ESTRASORB New Drug Application by the FDA, and $125,000 for license fees. In addition to our new revenue sources, we recorded $2.7 million from research and development contracts, primarily from the National Institutes of Health and other governmental agencies. Revenues for 2000 included $750,000 in license fees from King and $1.7 million from research and development contracts, including $1.4 million for contracts with Year Ended December 31,the NIH and other government agencies. In 1999, (“1999”)our revenues included $250,000 from a license agreement with King and $370,000 from contracts with the NIH and other governmental agencies. A summary of our revenues is set forth below.

Net Losses

      Our netNet loss for 20002001 was $9.7 million or $(0.43) per share, compared to $12.2 million or $(0.64) per share compared tofor 2000 and $4.5 million or $(0.31) per share in 1999. The improvement from 2000 to 2001 of $2.5 million or $0.21 per share relates primarily to gross margin on product sales due to our acquisitions of Fielding and the AVC product line and milestone revenue for payments from King, offset in 2001 by additional selling, general and administrative costs to support those product sales, the initiation of commercialization activities for ESTRASORB

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Cost of Sales

      Cost of sales was $4.1 million in 2001. We had no product sales or cost of sales in 2000 or 1999. The increase relates to the acquisition of products from Fielding and the AVC product line in December 2000 and January 2001, respectively. Our cost of sales, and related investment in inventory, will increase in 2002 as we prepare for the anticipated launch of ESTRASORB.

Research and Development Expenses

      Research and development expenses were recognized during 2000,$10.8 million for 2001, compared to $1.2$9.4 million for 2000 and $3.4 million in 1999. Revenues inThe increase from 2000 included $750,000 from a license agreement entered into in October 1999 with Parkedale Pharmaceuticals, Inc., a wholly-owned subsidiary of King. The license agreement included a non-refundable license payment of $1.0 million. We recognized $250,000 under this agreement in 1999. In addition revenuesto 2001 of $1.4 million or 15% was primarily due to costs associated with the filing of a New Drug Application for ESTRASORB and $370,000 were recognizedfor internal development costs associated with our infectious diseases programs offset by a decrease in clinical trial expenses. The increase from 1999 to 2000 of $6.0 million or 176% was primarily due to costs associated with our clinical trials and manufacturing process validation of our ESTRASORB product candidate, which completed Phase III clinical trials in 2000, and 1999,the full year effect of expenses incurred by our vaccine development group which was acquired in late 1999.

      We generally do not track our historical research and development total costs by project; rather, we track external direct costs incurred by project. Internal direct costs, such as labor in addition to overhead costs are not tracked by project. For this reason, we cannot accurately estimate with any degree of certainty what our historical costs have been for any particular research and development project.

Reconciliation of Significant Research and Development Projects

      The following table reconciles the external direct costs incurred to date for our major projects to our total research and development expense.

Estimated Cost and Time to Complete Major Projects

      The amounts of the expenditures that will be necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. As of December 31, 2001, several of our proprietary product candidates were in various stages of development. Due to the inherent nature of our development, future market demand for products and factors outside of our control, such as clinical results and regulatory approvals, we are unable to estimate the completion dates and the estimated total costs for several of our products. However, due to the late stage status of our ESTRASORB project we

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      In addition to the project listed above we are currently developing other product candidates, but do not believe that it is possible to estimate the completion date or cost to complete. The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical trial protocol, including, among others, the following:

	•	number of patients that ultimately participate in the trial;
	•	duration of the patient follow-up that seems appropriate in view of the results;
	•	number of clinical sites included in the trials; and
	•	length of time required to enroll suitable patient subjects.

      In addition, we test our potential products in numerous pre-clinical studies to identify among other things the daily dosage amounts. We may conduct multiple clinical trials to cover a variety of indications for each product candidate. As we obtain results for our trials we may elect to discontinue clinical trials for certain product candidates or indications. We further believe that it is not possible to predict the length of regulatory approval time. Factors that are outside our control could significantly delay the approval and marketability of our product candidates.

      As a result of the uncertainties discussed above, among others, the duration and completion costs of our research and development projects are difficult to estimate and are subject to numerous variations. Our inability to complete our research and development projects in a timely manner could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. For more discussion of the risk and uncertainties and our liquidity, see “Risks and Uncertainties” and “Liquidity and Capital Resources”.

Selling and Marketing Expenses

      Selling and marketing expenses were $8.5 million for 2001. Prior to our acquisition of Fielding and the AVC product line in 2000 and 2001, respectively, under contractsand the anticipated approval of ESTRASORB we had no sales or marketing expense. In 2001, we incurred $4.1 million of selling expenses and $4.4 million of marketing costs to support our current product sales, as well as pre-launch marketing expense for our anticipated launch of ESTRASORB. We expect selling and marketing costs to increase substantially with the National Institutescommercialization of Health (“NIH”)ESTRASORB in 2002. In addition, all payments made to King in connection with the co-promotion of ESTRASORB will be recorded as selling and other government agencies.marketing expenses in our statement of operations.

General and Administrative

      General and administrative expenses were $10.0 million in 2001, compared to $5.9 million forin 2000 compared toand $2.4 million incurred in 1999. The increase from 2000 to 2001 of $4.1 million or 69% was due to a number of factors, including approximately $2.8 million of goodwill and intangible asset amortization related to our acquisitions of Fielding and the AVC product line, the increase in personnel from the Fielding acquisition, and the full effect of increases in administrative and executive employees hired during 2000 to support our growth. The increase from 1999 which is an increaseto 2000 of $3.5 million or 145%. The increase was due primarily to costs incurred for financing and acquisition activities and the hiring of additional senior management and personnel to support our growth. Research and development expenses were $9.4 million and $3.4 million for 2000 and 1999, respectively. This $6.0 million, or 176% increase in research and development expenses is primarily due to costs associated with our clinical trials and manufacturing process validation activities related to our ESTRASORB product, which completed Phase III clinical trials. Additional increases in 2000 are due to the effect of a full year of expenses incurred by BSD. Novavax expects costs related to its NDA submission, manufacturing process validation and BSD programs to continue to increase during 2001.

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Interest Income/(Expense)

      Net interest expense was $490,000 in 2001 compared to interest income was $551,000 in 2000 compared toand $60,000 in 1999. The increase in the interest expense relates to the issuance of the Notes, totaling $30.0 million to King, offset by additional interest income from higher cash balances during 2001 compared to 2000. The increase in the interest income in 2000 relates to higher average cash balances from financing activities during 2000 compared to 1999.

Year Ended December 31, 1999 (“1999”), as compared with Year Ended December 31, 1998 (“1998”)

      Our net loss available to common stockholders for 1999 was $4.5 million or $(0.31) per share, compared to $7.0 million or $(0.57) per share for 1998, which was a decrease of $2.5 million, or $(0.26) per share. In 1998, charges for a dividend, a deemed dividend and offering costs, together totaling $2.2 million, relating to mandatory — redeemable convertible preferred stock resulted in the increased loss in 1998 when compared to 1999. There were no similar charges for 1999.

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      Revenues of $1.2 million were received in 1999, compared to $.7 million in 1998. The $500,000 increase relates to payments under license and research contracts from BSD which was acquired in August 1999. In October 1999, the Company also entered into a licensing agreement with Parkedale Pharmaceuticals, Inc. a wholly owned subsidiary of King. The license agreement included a non-refundable license payment of $1.0 million. We recognized $250,000 under this agreement in 1999.

      General and administrative expenses were $2.4 million for both 1999 and 1998. Research and development expenses were $3.4 million for both 1999 and 1998. Increases in research costs for the newly acquired BSD operation and personnel in 1999 were offset by reductions in the number of products in clinical development programs. As expected costs related to our clinical trials, manufacturing process validation and BSD programs increased during 2000.

      Net interest income was $60,000 in 1999 compared to $335,000 in 1998. The decrease in the interest income relates to lower average cash balances during 1999 compared to 1998.

Liquidity and Capital Resources

      Our capital requirements depend on numerous factors, including but not limited to the progress of our research and development programs, the progress of preclinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the commercialization of our product candidates, the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, and changes in our development of commercialization activities and arrangements. We currentlyplan to have twomultiple products in clinical trials.various stages of product development and we believe our research and development as well as selling, marketing and general administrative expenses and capital requirements will continue to increase. Future activities including clinical development, the establishment of commercial-scale manufacturing capabilities and the development of sales and marketing programs are subject to our ability to raise funds through debt or equity financing, or collaborative arrangements with industry partners. From 1999 through December 31, 2001 we have financed our operations primarily from:

	•	the private placement of 1,651,000 shares of common stock in 1999 with net proceeds of approximately $4.0 million;
	•	the private placement of 2,813,850 shares of common stock in 2000 with net proceeds of approximately $10.5 million;
	•	proceeds of approximately $30.0 million in 2000 and 2001 from issuance of the Notes to King (for details on these transactions, refer to our discussion in the Overview section above);
	•	proceeds of $8.0 million from King in 2001 from licensing fees and milestone payments (for details on these transactions, refer to our discussion in the Overview section above);
	•	and net proceeds of $12.9 million from 1999 through 2001 from the exercise of stock options and warrants.

      In January 1998, the Company entered into Subscription AgreementsAt December 31, 2001 we had cash and cash equivalents of $20.0 million, compared to effectuate the private placement of 6,500 shares of Series A Custom Convertible Preferred Stock, $1,000 par value (the “Preferred Stock”).$14.9 million at December 31, 2000. We invest our cash and cash equivalents in highly liquid, interest bearing, investment grade and government securities in order to preserve principal. The closing occurred on January 28, 1998 (the “Issuance Date”) at an aggregate purchase price of $6.5 million.

      Prior$5.1 million increase in 2001 was due to the subsequent repurchase of all the outstanding Preferred Stock, $1.5$15.4 million of the original issue had been converted into 1,043,956 shares of Common Stock, pursuant to the terms and conditions of the Preferred Stock. In October 1998, we entered into agreements to repurchase the remaining Preferred Stock. We repurchased the remaining outstanding $5.0 million of Preferred Stock plus accrued dividends at the annual rate of five percent. The terms of the Preferred Stock also required us to pay the holders of the Preferred Stock $225,000 in dividends. This amount was paid in cash of $179,000 and throughfinancing activities from the issuance of 32,492 shares$10.0 million of convertible notes and the Company’s Common Stock. The Company incurred transaction fees associated with the placement, conversionexercise of $5.4 million in options and repurchasewarrants, offset by our investments in capital equipment of the Preferred Stock of $502,000 which are included$2.4 million and in the accompanying financial statements as accretionAVC product line of Preferred Stock.

      In April 1999,$3.3 million and cash used in operations of $4.6 million. Of the net $4.6 million used in operations, we entered into Stock and Warrant Purchase Agreements for the private placement of 1,651,100 shares of our Common Stock to accredited investors (the “Private Placement”). One of the principals of one of the investors is also a director of the Company. The issuance price of the Common Stock was $2.50 per share. Each share was sold together with a non-transferable warrant for the purchase of .25 additional shares at an exercise price of $3.75. The warrants have a three-year term. Net proceeds from the Private Placement were approximately $4.0 million. Placement agents fees of $215,000 were paid in cash and shares of common stock. Non-transferable warrants for the purchase of 143,000 shares of our Common Stock, with an exercise price of $3.00 per share and a three-year term, were also issued to the placement agents.

      In January 2000, we closed a private placement of 2,813,850 shares of our Common Stock to accredited investors (the “2000 Private Placement”). The issuance price of the Common Stock was $4.00 per share. Each share was sold together with a non-transferable warrant for the purchase of .25 additional shares at an exercise price of $6.75. The warrants have a three-year term. Placement agent fees were approximately $675,000, which was paid in cash. Additionally, non-transferable warrants for the purchase of 281,385 shares of the Company’s Common Stock, with an exercise price of $6.75 per share and a three-year term, were issued to the placement agent. Net proceeds to the Company from the 2000 Private Placement were approximately $10.5 million.

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      In December 2000, we acquired Fielding and also received $20 million from a convertible note from King. For details on these transactions, refer to our discussion in the Overview section above.

      The Company used approximately $9.4$10.8 million during the year ended December 31, 2000 to fund the activities of itsour research and development programs and costs associated with obtaining regulatory approvals, clinical testing and manufacturing process validation. Cash balances available to the Company, including the financings described above, funded these expenditures.

      Cash and cash equivalents on December 31, 2000, totaled $14.9Working capital was $18.0 million compared to $732,000 at December 31, 1999.2001 compared to $12.3 million at December 31, 2000. The $14.1 million increase in working capital was attributableprimarily due to the financingcash flow activities above and Fielding acquisition previously discussed.the increase in accounts receivable of $2.9 million, offset by an increase in current liabilities of $2.3 million.

      We estimate that based on historical and projected levels of spending and revenues, giving effect to the recent Fielding acquisition noted above, and without giving effect to any future equity financing, existing cash resources will be sufficient to finance our operationsoperating activities for approximately 12 to 1815 months. Past spending levels arewill not necessarilybe indicative of future spending. Futurespending as we are currently incurring increased expenses for selling, marketing and start-up manufacturing costs in anticipation of the approval and subsequent launch of ESTRASORB. In addition, we have recently entered into a long term lease agreement for a 20,000 square foot manufacturing facility for ESTRASORB. The leased area is currently being built out to meet our requirements and is expected to be available in the second quarter of 2002. We have also placed orders for the equipment required to manufacture ESTRASORB at projected

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      We may seek to establish additional collaborations with industry partners to defray the costs of clinical trials and other related activities. We will also consider sources of additional funds through public or private equity or debt financing, collaborative arrangements with pharmaceutical companies, government agency contracts or from other sources. There can be no assurance that additional funding or bank financing will be available at all or on acceptable terms to permit successful commercialization of all our technologies and products. If adequate funds are not available, we may be required to significantly delay, reduce the scope of or eliminate one or more of itsour research or development programs, or seek alternative measures including arrangements with collaborative partners or others that may require us to relinquish rights to certain of itsour technologies, product candidates or products.

Contractual Obligations and Commitments

      The following table summarizes our current obligations and commitments:

Item 7A.  Quantitative and Qualitative Disclosures about Market Risks

      Not applicable.Information required under this section is contained in Part I, Item I of this report under the caption “Risk and Uncertainties” and in Item 8 of this report, and is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data

      The financial statements and notes thereto listed in the accompanying index to financial statements (Item 14) are filed as part of this Annual Report on Form 10-K and are incorporated herein by this reference.

Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

      None.Not applicable.

2328

PART III

Item 10.  Directors and Executive Officers of the Registrant

      The information required by this item is contained in part under the caption “Executive Officers of the Registrant” in Part I hereof, and the remainder is contained in the Company’sour Proxy Statement for the Company’sour Annual Meeting of Stockholders to be held on May 9, 20018, 2002 (the “2001“2002 Proxy Statement”) under the captions “Proposal 1 — Election of Directors” and “Beneficial Ownership of Common Stock” and is incorporated herein by this reference. The Company expectsWe expect to file the 20012002 Proxy Statement within 120 days after the close of the fiscal year ended December 31, 2000.2001.

Item 11.  Executive Compensation

      The information required by this item is contained in the Company’s 20012002 Proxy Statement under the captions “Executive Compensation” and “Director Compensation” and is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

      The information required by this item is contained in the Company’s 20012002 Proxy Statement under the caption “Beneficial Ownership of Common Stock” and is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions

      The information required by this item is contained in the Company’s 20012002 Proxy Statement under the caption “Certain Relationships and Related Transactions” and is incorporated herein by reference.

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PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

30

25

31

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2732

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 29, 200115, 2002

	NOVAVAX, INC.

	By:      /s/ JOHN A. SPEARS
	By:	/s/ JOHN A. SPEARS

	John A. Spears, President and Chief Executive Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacity and on the date indicated.

2833

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2001, 2000 and 1999

Contents

F-1

REPORT OF INDEPENDENT ACCOUNTANTSAUDITORS

Board of Directors

      We have audited the accompanying consolidated balance sheet of Novavax, Inc. as of December 31, 2001 and 2000 and the related consolidated statements of operations, stockholders’ equity and cash flows for the yearyears then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.audit, the consolidated financial statements of Novavax, Inc. for the year ended December 31, 1999 were audited by other auditors, whose report dated February 26, 2000, expressed an unqualified opinion on those statements.

      We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, the 2000consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Novavax, Inc. at December 31, 2001 and 2000 and the consolidated results of its operations and itsit cash flows for the yearyears then ended, in conformity with accounting principles generally accepted in the United States.

/s/ Ernst and Young LLP

McLean, Virginia

F-2

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Novavax, Inc.

      In our opinion, the accompanying consolidated balance sheet and related consolidated statementsstatement of operations, of cash flows and of stockholders’ equity, present fairly, in all material respects, the consolidated financial positionresults of operations of Novavax, Inc. and subsidiaries at December 31, 1999, and the consolidated results of their operations and their cash flows for each of the two years in the periodyear ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits.audit. We conducted our auditsaudit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provideaudit provides a reasonable basis for our opinion. We have not audited the consolidated financial statements of Novavax, Inc. for any period subsequent to December 31, 1999.

/s/ PRICEWATERHOUSECOOPERS LLP

McLean, Virginia

F-3

NOVAVAX, INC.

See accompanying notes.

F-4

NOVAVAX, INC.