UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

FOR ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 20022003

Commission File No. 0-26770

NOVAVAX, INC.

PART I

Item 1.Business

Overview

     Novavax is a fully-integrated specialty pharmaceuticalbiopharmaceutical company focused on the research, development and commercialization of products utilizing our proprietary drug delivery and vaccine technologies for large and growing markets, concentrating on the areas of women’s health and infectious diseases. OurOn October 9, 2003, our lead product candidate, ESTRASORB™ESTRASORB^®, is the first topical emulsion for estrogen replacement therapy, was approved for which a New Drug Application has been accepted for reviewmarketing by the Food and Drug Administration. The NDA for ESTRASORB was submitted in June 2001 and was accepted for review in August 2001. In April 2002, we were informed by the FDA that the agency had completed their review of the NDA for ESTRASORB. At that time, the agency did not raise any issues regarding the efficacy or safety of ESTRASORB, but did request additional information with respect to the Chemistry, Manufacturing and Controls section of the filing. We determined that the most advantageous approach to resolving the outstanding CMC questions was to voluntarily withdraw the NDA and resubmit it once all of the responses to the CMC questions had been prepared. In September 2002, we resubmitted the New Drug Application, which was accepted for review by the FDA in November 2002. We are seeking FDA approval ofapproved ESTRASORB for the reductiontreatment of hot flushes in menopausal women and, if approved, wemoderate to severe vasomotor symptoms (hot flashes) associated with menopause. We believe ESTRASORB will be competitively positioned to address the estimated $1.8$1.5 billion estrogen replacement therapy market in the United States. In 2002, Novavax reported on itsESTRASORB’s Phase III clinical trial results at two major medical conferences. The study demonstrated that ESTRASORB treatment caused a statistically significant reduction in moderate and severe vasomotor symptoms (hot flushes) at weeks four, eight and twelve of the clinical trial. In addition, a high percentage of women achieved cessation of moderate to severe hot flushes during the twelve-week clinical trial.

     Our micellar nanoparticle technology involves the use of patented oil and water emulsions that we believe can be used as vehicles for the topical delivery of a wide variety of drugs and other therapeutic products, including hormones. We believe that our technology represents the first time that ethanol soluble hormones, such as estrogen and testosterone, have been encapsulated and delivered.delivered systemically. In addition to ESTRASORB, our product candidates using these technologies include ANDROSORB™, a topical testosterone emulsion that has completed two Phase I clinical trials; TESTESTRASORB™, a topical estrogentrials, and testosterone emulsion; PROGESTSORB™ NE, a topical progestin emulsion; and PROESTRASORB™, a topical estrogen and progestin emulsion. Other drug delivery technologies, like our Novasome®Novasome^® and Sterisome®Sterisome^® technologies, are being utilized to develop other products. Novasomes are used as adjuvants to enhance vaccine effectiveness. Sterisomes are beingcan be used as subcutaneous injections that can deliver long-acting drug effects. We also conduct research

     In 2001 and development on preventative vaccines and proteins, for infectious diseases, cancers and immunotherapies.

     Over the past two years2002, we have entered into co-promotion agreements with King Pharmaceuticals, Inc. for the promotion and marketing of ESTRASORB and ANDROSORB within the United States and Puerto Rico, and we have licensed to King the right to sell these products outside the United States. Our relationship with King has the potential to provide us with broader women’s health market coverage for ESTRASORB and ANDROSORB. Under the terms of ourthe co-promotion agreements with King,agreement, we will record all of the product sales, returns and allowances and cost of sales for ESTRASORB and ANDROSORB in the United States and Puerto Rico. The resultant gross margin will be shared equally with King, subject to a 17% limitation on cost of sales, and the payment to King will be recorded as a selling and marketing expense on our statement of operations. In addition, following product approval by the FDA, both parties will also share equally in approved marketing expenses for the products. All direct marketing expenses will be recorded by us, for which King will reimburse us fifty percent. WeIn 2001, 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 review of the ESTRASORB NDA.New Drug Application. We have also received from King $20.0 million in December 2000, $10.0 million in September 2001, and $10.0 million in June 2002, in each instance in the form of convertible note financings.

     We also currently market, sell and distribute a line of prescription pharmaceuticals and prenatal vitamins through our 64 person sales force that has extensive experience selling to obstetricians, gynecologists, managed care organizations, wholesalers and retail pharmacies throughout the United States. In 2002,2003, these products generated revenues of $12.8$10.2 million. If we receive marketing approval from the FDA,In 2004, we expect to sell ESTRASORB through both our sales force and King’s women’s health sales force. We intend toalso plan on expanding our sales force and initiating marketing programs for the commercial introduction of ESTRASORB. We will manufacture ESTRASORB for commercial sale in our dedicated, state-of-the-art, 24,000 square foot facility in Philadelphia, Pennsylvania, which was completed and substantially completedvalidated in December 2002.2003.

     We also conduct research and development on preventative vaccines and proteins for infectious diseases and cancers, and tolerogens to prevent the initiation and progression of stroke and other illness. In September 2003, we were awarded a five-year $19.0 million contract from the National Institute of Allergy and Infectious Diseases, a component of the National Institutes of Health, for the design and development of a new class of human immunodeficiency virus vaccine candidates for preclinical and clinical studies. We will serve as the prime contractor with three other subcontractors participating in the contract and we expect to receive approximately $14.0 million over the five-year period. In August 2003, we were also part of a consortium that received a $5.0 million NIAID project program grant to develop another set of HIV vaccine candidates. We expect to receive approximately $4.0 million over four and a half years for our participation in this grant effort.

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Our Strategy

     The primary elements of our strategy include:

	•		Maximize the commercial impact of ESTRASORB.We are currently developingfinalizing commercialization and manufacturing infrastructures, facilities, programs facilities and systems for the commercial introduction of ESTRASORB in anticipation of approval of our ESTRASORB NDA by the FDA in 2003.2004. We believe that our sales and marketing plan will enable ESTRASORB to capture a meaningful share of the estimated $1.8$1.5 billion estrogen replacement therapy market in the United States. We expect that the introduction of ESTRASORB if approved, will increase our presence in the women’s health market, thereby enabling us to more effectively commercialize future products that we develop, acquire or in-license. Our co-promotion agreement with King should provide us with additional marketing and selling expertise that will assist us in achieving broader market coverage for ESTRASORB.
	•		Leverage our unique drug delivery technology platforms to commercialize additional pharmaceutical products.A key component of our growth strategy is the introduction of new products based on our proprietary drug delivery technologies. In addition to ESTRASORB and ANDROSORB, we have three hormone replacement therapy product candidates in preclinical development.development that utilize our MNP technology. We will continue to focus on developing improvements to existing therapies. Wetherapies and intend to target large markets where our products can be clinically differentiated through increased efficacy and improved delivery technique.technology.
	•		Continue to develop our capabilities as a fully-integrated specialty pharmaceuticalbiopharmaceutical company.We intendexpect to enhance our internal capabilities in the developing,development, testing, manufacturingmanufacture and marketing of our product candidates. We believe that this fully-integrated platform differentiates us from many specialty pharmaceuticalbiopharmaceutical companies and enhances our ability to successfully introduce new products such as ESTRASORB, and to grow our existing line of women’s health products. We plan to continue to focus our research and development efforts on advancing our existing product candidates towards commercialization and on identifying and commercializing new therapies using our unique drug delivery techniques. We have substantially completed the build-out of our ESTRASORB manufacturing facility and we are validating and expanding our manufacturing and marketing capabilities in anticipation offor the commercial launch of ESTRASORB. We currently have a 64 person sales force with experience in the area of women’s health, and intend to continue to build that sales team as we are able to commercialize, acquire and in-license new products.
	•		Continue to expand our product lines through acquisition of new products and technologies.We believe we can continue to grow through the acquisition of product lines, individual products or additional technologies. Numerous opportunities exist to acquire such products and technologies as large pharmaceutical companies seek to divest many non-core product areas. Our fully-integrated capabilities assist us in identifying, acquiring and successfully implementing new product and company acquisitions.
			We have demonstrated our ability to successfully acquire and integrate products and research capabilities. We acquired Fielding Pharmaceutical Company in December 2000, which enabled us to expand our women’s health product line and gave us an established national sales force with experience calling on obstetricians and gynecologists throughout the United States. In order to provide us with additional products to sell through our sales force, in January 2001 we purchased the AVCAVC™ product line from King, and in July 2002 we entered into an agreement with privately-held Ferndale Laboratories, Inc. to co-promote Analpram HC®HC®.
	•		Exploit our expertise inBuild a competitive vaccine technology to develop productsprogram addressing urgent medical needs for a large and underserved market.markets.We currently have several vaccine candidates in clinical and preclinical development. In particular,believe we are pursuinga leader in the use of insect cells for the manufacture of pharmaceutical proteins, which may be the most competitive commercial process for making certain vaccines. Because of this expertise we have collaborative contracts and grants with the National Institutes of Health for the development of a Novasome adjuvanted inactivated smallpoxsecond generation acquired immune deficiency syndrome vaccine, and a new type of flu vaccine using Novasome adjuvants. We are also working with the NIH in the research and development of an E-selectin tolerogen for use in stroke prevention, both of which, if approved,prevention. If successful, we believe these could address large and underserved markets. In orderOur strategy for building a comprehensive vaccine business is to pursueidentify urgent medical needs, assess the scientific and clinical feasibility, identify those opportunities with large and sustainable markets, and insure we have a number of vaccine development programs, we intend to collaborate with private companies, academic institutionscompetitive advantage by securing commercial rights and governmental agencies.patent protection.

Our Products and Product Candidates

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

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placebo-controlled, parallel-group study involvingwith 200 participants. During this study, a 3.0-gram daily dose of either ESTRASORB or placebo emulsion was administered to the thighs and calves of each participant, with 100 participants receiving ESTRASORB and the remainder receiving the placebo emulsion. The study demonstrated that ESTRASORB treatment caused a statistically significant reduction in the frequency and severity of moderate andto severe vasomotor symptoms (hot flushes) at weeks four, eight and twelve of the clinical trial. In addition, a high percentage of women achieved cessation of moderate to severe flushes during the twelve-week clinical trial.twelve. The Phase III study further demonstrated that ESTRASORB had no clinically relevanthas a mild and manageable adverse effect on laboratory safety parameters, vital signs or dermal assessments.event profile. In 2004, we will initiate a study to determine the lowest effective dose of ESTRASORB.

     Marketing of ESTRASORB.The United States marketplace for estrogen replacement therapy is currently estimated to be $1.5 billion and highly competitive. In response, we have prepared ana focused and aggressive sales launch and marketing strategy for launching ESTRASORB. The primary aim of this strategy is to leverage the unique profile of ESTRASORB as the first and only FDA-approved estrogen topical emulsion. Our marketing efforts will target the high-volume prescribershealthcare professionals who prescribe high volumes of estrogen therapy and early adopters of women’s healthwho have demonstrated a propensity to adopt new products, specifically transdermal products. These effortsWe will be further supplemented bydedicate significant resources to create awareness about this unique delivery system. In addition, we believe that post-menopausal women suffering from vasomotor symptoms will embrace ESTRASORB as a publications strategy aimed toward the inclusion in specialty medical publications of in-depth clinical information regarding ESTRASORB.natural and appealing product that offers potential advantages to oral and transdermal products.

     In July 2002, theJournal of the American Medical Associationpublished data from the Women’s Health Initiative, a large-scale study to examine the long-term health effects of hormone replacement therapy in healthy women. PreliminaryPublished results of the trial indicated that the group of women oncombination HRT(inhormone therapy (in this case a single orally-administered product combining conjugated equine estrogens and a synthetic progestin) showeddemonstrated overall health risks that warranted the discontinuation of this group infrom the study. The results have had a negative impact primarily on orally administered,orally-administered, combination HRThormone therapy products although there has also beenand led to uncertainty by women as to whether or not to continue with any formabout the long-term use of HRT therapy.hormone therapy, especially for uses other than the treatment of vasomotor symptoms.

     It is important to keep in mindnote that ESTRASORB is asingle agent HRT estrogen therapy productintended for short-term use indicated for the relieftreatment of moderate to severe vasomotor symptoms.symptoms associated with menopause. This is in marked contrast to the products identifiedcombination product discontinued in the study. Specifically,Women’s Health Initiative. Specific key differences when comparing ESTRASORB differs fromto the products used in the study in the following critical ways: (1) ESTRASORB utilizes a proprietary topical delivery system versus oral administration; (2) ESTRASORB contains 17ß-estradiol, (which is the most naturally occurring estrogen in a woman’s body) versus conjugated equine estrogens combined with a synthetic progestin; and (3) ESTRASORB is being evaluated for short-term use for the relief of vasomotor symptoms associated with menopause versus the long-term administration of HRTcombination products in the study.Women’s Health Initiative include:

•		ESTRASORB utilizes a proprietary topical delivery system that avoids first-pass liver metabolism
•		ESTRASORB contains 17b-estradiol, which is identical to the estrogen produced by a woman’s body and
•		ESTRASORB is approved and will be marketed for the treatment of moderate and severe vasomotor symptoms associated with menopause.

Product Development Candidates

     ANDROSORB.ANDROSORB utilizes our patented micellar nanoparticle technology to deliver testosterone through the skin, when applied topically as an emulsion. Although generally associated with men, testosterone is also a naturally 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 is increasingly prevalent in our aging population.

To date, there have been no approved testosterone therapy products for women in the U.S.United States other than a product that combines estrogen and methyltestosterone. Current testosterone replacement therapy products for men include deep intramuscular injections, transdermal 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. We believe that ANDROSORB may offer several advantages over these current therapies. ANDROSORB is aan emulsion 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. We completed a Phase I study in 2000 and completed a second Phase I study in 2002.

     In addition to other hormone product candidates, our micellar nanoparticle technology has the potential to be used with a wide variety of drug classes including analgesics, central nervous system drugs and anti-inflammatory agents. We have a two-pronged strategy as it relates to our product candidates. We plan to introduce internally developed additional proprietary hormone products that utilize our MNP technology platform and we will also look to partner with other pharmaceutical companies to introduce products that target these other significant market opportunities. We believe that our MNP technology could be particularly attractive to pharmaceutical companies that are looking to extend their patent protection, where the product could be clinically differentiated through improved delivery technology, or where a portion of the patient population is experiencing difficulties associated with oral delivery.

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     Currently Marketed Prescription Products

     Our acquisition of Fielding in 2000 enabled us to expand our women’s health product line and providedprovides us with an established national sales force having extensive experience in selling to currently marketed obstetricians and gynecologists throughout the United States. The acquisition includedOur products include the Nestabs® productNestabs^® line, NovaNatal^®, NovaStart^®, AVC™ cream and Gynodiol™, described below,. As a result, with the approval of ESTRASORB, and ain anticipation of the market launch of ESTRASORB, we are increasing our sales force of 64 people to approximately 80 people. We believe that the expertise gained through the marketing of theseour current products positions us well for a successful launch of ESTRASORB, if approved by the FDA.ESTRASORB. We currently market the following four women’s health prescription products:products.

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     Nestabs®.NovaNatal^®, NovaStart^®& Nestabs is^® product line.We market a completefull line of prenatal multivitaminsmulti-vitamins for use before, during and after pregnancy. Nestabs providesOur newest additions to our family of prenatal vitamins are NovaNatal and NovaStart. NovaNatal is a convenient, once-a-day dosing regimen andprenatal vitamin that is a patient-friendly, small, easy to swallow tablet. The NestabsNovaStart is designed as a preconception vitamin. Our prenatal vitamin product line generated $8.8$5.7 million in sales in 2002.2003, $8.8 million in 2002 and $10.8 million in 2001.

     Gynodiol^TMGynodiol™.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. The total sales for Gynodiol in 2003 were $2.2 million, $1.7 million in 2002 were $1.7 million.and $2.1 million in 2001.

     AVC™ Cream and Suppositories.Cream.AVC is an established line of women’s hygiene productsproduct effective for the treatment of vaginal infection. 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 on the market. The AVC product line generated $2.0$1.8 million in sales in 2002.2003, $1.9 million in 2002 and $3.5 million in 2001.

     Analpram HC®HC^®.Analpram HC is a topical prescription of corticosteroids that are anti-inflammatory and anti-pruritic agents targeted at women suffering from hemorrhoids. We began selling this product in August 2002 after entering into a co-promotion agreement with Ferndale in July 2002. We received $0.5 million in co-promotion revenues from Ferndale in 2003.

     We distribute our women’s health products primarily through three national distributors and a number of regional distributors in the United States, which in turn supply our products to retail pharmacies. In 2003, sales to these three distributors accounted for 74% of the Company’s revenues and 76% of the Company’s accounts receivable. We consider our relationship with these companies, which are the primary distributors for pharmaceutical companies in the United States, to be good. However, in the event that one or more of these distributors terminated their relationship with us, it could have a material, adverse effect on our business.

     Vaccines Infectious Diseases and Tolerogens

     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. In addition, we have one of the few locations in the world that produces experimental live viral vaccines for Phase I clinical trials. We also develop recombinant virus-like particles and sub-unitbiopharmaceutical proteins for use as vaccines against infectious diseases.infections diseases and as tolerogens to prevent inflammatory and immune responses in the initiation and progression of stroke and other illness. We collaborate with governmental, commercial and leading academic institutions in development, safety testing and clinical trials. We also develop virus-like particles which imitate important three dimensional structures of viruses but are composed of recombinant proteins and therefore are incapable of causing infection and disease. Our vaccine and tolerogen product candidates include the following:

     Inactivated SmallpoxHIV Vaccine.Based uponThe human toll of AIDS is staggering and now kills more people worldwide than any other infectious disease. More than 40 million people are infected with HIV and an estimated 5 million people were newly infected with HIV in 2003. Under NIH contracts, we are working with one of the potential threatleading scientific teams in the development of a smallpox outbreak duesecond generation AIDS vaccine. The HIV vaccine candidates will be based on our knowledge and experience in producing VLP vaccines and manufactured using our insect cells technology. Promising HIV virus-like particle vaccine candidates will also be formulated with Novasome^® adjuvants, our proprietary Novavax technology that is designed to terrorist activity, there is an urgent need forboost the body’s immune response to certain vaccine formulations. The HIV vaccine candidates will be used in animal studies and subsequent clinical studies in humans.

     As noted earlier, in 2003 the Company was awarded one contract under which it will act as prime contractor and was selected to participate in another as a safe and effective smallpox vaccine that can be administeredsub-contractor, relating to the entire U.S. population. The current live virus smallpoxdesign and development of a new class of HIV vaccine cannot safely be givencandidates. Both of these contracts were awarded by the National Institute of Allergy and Infectious Diseases, a component of NIH. Like most government contracts, our HIV agreements with the NIAID incorporate federal regulations that permit the government to all persons. There are a significant numberterminate performance of people, up to 20% ofwork under 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,agreement, in whole or in part, at any time, if the elderly, transplant recipients and people on chemotherapy may have compromised immune systems. Novasomes are our non-phospholipid liposome technology used to adjuvant vaccines. We havegovernment determines that termination is in pre-clinical development a Novasome adjuvanted inactivated smallpox vaccine that may have a better safety profile than that of existing live virus vaccines. Initial animal studies indicate that our Novasome adjuvanted, inactivated smallpox vaccine achieved neutralizing antibodies to the virus.government’s best interest.

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     E-Selectin Tolerogen.Under a Cooperative Research and Development Agreement (CRADA), Novavax and the National Institute of Neurological Disorders and Stroke have been developing E-selectin-based molecularly derived products for the prevention of strokes. In September 2002, a published report in the professional journalStrokeprovided experimental evidence on prevention of stroke in stroke-prone rats. These results provided supportive evidence that E-selectin tolerization may someday be useful in the prevention of strokes.

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. We have executed a Cooperative Research and Development Agreement with the NIH that is directed towards our work with the Stroke Branch of the National Institute of Neurological Disorders area of the NIH. The principal goal of this agreement is to evaluate the safety of therapeutics (recombinant e-selectin proteins) for the prevention of strokes. Thesestrokes and other collaborative agreements provide us withillness where inflammatory and immune responses are involved in the opportunity to utilize the technical expertiseinitiation and staffprogression of the institutions involved and to gain access to clinical evaluation models, patients and related technologies.disease.

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Our Platform Technologies

Manufacturing

     The development and manufacture of our products are subject to good laboratory practices and current good manufacturing practices prescribed by the FDA and to other standards prescribed by the appropriate regulatory agencies in other countries. We currently utilize third party contract manufacturers to manufactureproduce our existing marketed product line, but we dolines. We have recently completed the ability to produce limited quantitiesbuild-out of products needed to support our current research and development program and clinical trials. For research and clinical trials we have manufactured ESTRASORB in 100 kilo-size batches at a facility owned by Cardinal Health. In February 2002, we entered into an agreement with Cardinal Health to lease a 24,000 square foot manufacturing facility at this same location. We have substantially completed the build-out of thiswithin a Cardinal Health facility in Philadelphia, Pennsylvania to our specifications and requirements, and have installed manufacturing equipment to accommodate commercial production of ESTRASORB. Products at thisWe have substantially completed the validation of the facility will be manufacturedand equipment and we are now manufacturing bulk product and packaging ESTRASORB for commercial distribution using our machinery and employees.

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Cardinal will perform the final fill and packaging of these products on aour dedicated line and we have selected Cord Logistics, Inc., a divisionlogistics company to warehouse, distribute and provide customer service and collection activities for all of Cardinal Health, to distribute theour products. Despite the addition of this new facility, we may also need to rely on collaborators, licensees or direct access to other manufacturing facilities for future later-stage clinical trials and commercial production efforts. There can be no assurance that we will be able to enter into such relationships or obtain needed facilities to manufacture products in a timely manner at acceptable quality and prices, or that we or our suppliers will be able to comply with good laboratory practices or good manufacturing practices, as applicable, or manufacture an adequate supply of product.

     In August and September 2003 we received a grant and a contract from the National Institute of Allergy and Infectious Diseases which could total up to $18 million for the design and development of a new series of human immunodeficiency virus candidates for preclinical and clinical studies. The contract and grant cover four to five year periods. To meet any manufacturing requirements of the contract and grant over their terms, we will need to enhance and expand the capabilities of our current lab facilities.

Competition

     The specialty biopharmaceutical 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 other products that do or could compete with our currently marketed and approved 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 produceThe estrogen therapy market is highly competitive, well-established and sell estrogenincludes many products marketed by major pharmaceutical companies. The oral segment, which accounts for clinical indications identical to those that we seek for ESTRASORB. In the oral product segmentover 75% of the estrogen replacement therapy market, which accounts for approximately 75% of the market,is dominated by Wyeth’s Premarin®. Wyeth commits significant resources to the salepromoting its portfolio of estrogen products and marketing of its product, Premarin®, in orderhas a dominant presence with healthcare professionals that utilize oral estrogen therapy products. We will have to maintain its market leadership position. Warner-Chillcot also competes in the branded oral product segment with its product, Estrace®. ESTRASORB, if approved, will also compete with Wyeth and numerous other companies marketing oral products, produced and sold byincluding manufacturers of generic manufacturers in the oral product segment of the market, such as Watson Pharmaceutical, Inc., with its generic product, Estropipate®.

     In the transdermal patch segment17b-estradiol. Transdermal estrogen therapy products (patches) currently account for approximately 15% of the estrogen replacement therapy market. Patch products are well accepted and many such as Vivelle DOT^® have been marketed for several years. In addition to currently approved and marketed products, several estrogen therapy products are in development. Also, we are aware of companies that market which accounts for approximately 14%estrogen gel topical products outside of the market, several companies sell transdermalUnited States and know of one estrogen patches with which ESTRASORB will compete, if approved. For example, Novartis Pharma AG currently markets and sells its Vivelle® and Estraderm® topical products and Berlex Laboratories, Inc. and Forest Laboratories, Inc. co-promotegel that recently received marketing approval from the Climara® transdermal patch.

     Several companies currently market estrogen gels, which deliver estrogen topically, outside the U.S. We are also aware of at least one U.S. company with a gel-based estrogen replacement product in clinical trials.FDA.

     Our currently marketed products also face significant competition. The prenatal vitamin market, for 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 with Nestabs,our line of prenatal vitamins, including Warner-Chillcot, Solvay Pharmaceuticals, Mead Johnson and many generic manufacturers. The competition to develop new FDA-approved prenatal vitamins is also intense. In addition, Gynodiol, our marketed oral estrogen replacement therapy product, competes within the crowded, competitive oral estrogen replacement therapy products described above.market.

     In general, competition among pharmaceutical products will be based in part on product efficacy, safety, reliability, availability, price and patent position. An important factor will be the relative timing of the market introduction of our products and our competitors’ products. Accordingly, the 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 sale.

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Patents and Proprietary Information

     We currently have 55 U.S.51 United States patents and approximately 150corresponding foreign patents and patent applications covering our technologies. We have 2 pending U.S. patent applications in both the U.S. and worldwide covering the composition, manufacture and use of our organized lipid structures and related technologies. We recently filed 8 new patent applications directed towards innovative discoveries made in the field of human papillomavirus and virus-like particles.

A current U.S. patent issued in 1997 covers our micellar nanoparticles technology and methods of their production. Micellar nanoparticles are the structures that allow for ESTRASORB’s topical delivery of estradiol.

     Consistent with statutory guidelines issued under the Federal Technology Transfer Act of 1986 designed to encourage the dissemination of science and technology innovation and provide sharing of technology that has commercial potential, the Company’s collaborative research efforts with the government or with other private entities receiving federal funding provide that developments

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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. In the United States, the development, manufacturing and marketing of human pharmaceuticals are subject to regulation for safety and efficacy by the FDA in accordance with the Food, Drug and Cosmetic Act.

     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 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 a New Drug Application for a new drug and (v) FDA approval of the New Drug Application or Product License Application prior to any commercial sale or shipment of the product. Preclinical tests include laboratory evaluation of product formulation and animal studies (if an appropriate animal model is available) to assess the potential safety and efficacy of the product. Formulations must be manufactured according to good manufacturing practices and preclinical safety tests must be conducted by laboratories that comply with FDA regulations regarding good laboratory practices.

     The results of the preclinical tests are submitted to the FDA as part of an Investigational 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 Investigational New Drug application will result in FDA authorization to commence clinical trials. The FDA may deny a New Drug Application or Product License Application if applicable regulatory criteria are not satisfied, additional testing or information is required, or post-marketing testing and surveillance to monitor the safety of the applicable products is required.

     In addition to obtaining FDA approval for each Product License Application, an Establishment License Application 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. This regulatory process may take many years and requires the expenditure of substantial resources.

     In addition to regulations enforced by the FDA, weWe 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.

     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 or health care reforms may have on our business, and no assurance can be given that any such reforms will not have a material adverse effect.

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Employees

     We currently have 121117 full-time employees, 28 of whom 31 are employed in research and development. Of those 3128 employees in research and development, seven have earned PhDPh.D. degrees and one is atwo are medical doctor.doctors. We have no collective bargaining agreement with our employees and believe that our employee relations are good.

Risks and Uncertainties

     You should carefully read the following risk factors in evaluating our business. Some of the following risks relate principally to our business and the industry in which we operate. Other risks relate principally to the securities market and ownership of our 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.

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     Our success is heavily dependent on FDA approval andthe market acceptance of ESTRASORBESTRASORB.

     Our New Drug Application for     ESTRASORB was acceptedapproved for reviewcommercial sale by the FDA in November 2002. 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 FDAon October 9, 2003. Even with ESTRASORB’s 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 andin conjunction with King Pharmaceuticals, Inc., our marketing partner for ESTRASORB, we will be able to successfully commercialize ESTRASORB.ESTRASORB, or that ESTRASORB will be a commercial success. Many factors could negatively affect our ability to successfully commercialize ESTRASORB, including:

•		delays in the manufacture and validation of ESTRASORB in commercial quantities
•		a failureour inability to timely and effectively promote and sell ESTRASORB with King in the United States and Puerto Rico or delay inby King outside those regions, so that ESTRASORB gaininggains a meaningful share of the estrogen replacement therapy market, which currently is dominated by Premarin®Premarin®, an oral estrogen tablet sold by Wyeth, and estrogen patches sold by several companies including Novartis Pharma AG, Berlex Laboratories, Inc. and Forest Pharmaceuticals, Inc.;
	•		our inability to effectively promote and sellmanufacture 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;at acceptable gross margins and
	•		theour inability to obtain coverage and favorable reimbursement rates for ESTRASORB from insurers and other third partythird-party payors.

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

     We compete with numerous other companies worldwide that have developed or are developing products that compete or may compete with ESTRASORB and 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 approximatelyover 75% of the market according to 2003 IMS Health Incorporated data, Wyeth commits significant resources to the sale and marketing of its product, Premarin®Premarin^®, in order to maintain its market leadership position. Warner-Chillcot also competes in the branded oral product segment with its product, Estrace®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’s generic product, Estropipate®Estropipate^®. In the patch segment of the market, which according to IMS accounts for approximately 14%15% of the estrogen replacement therapy market, several companies market transdermal estrogen patches with which ESTRASORB will compete, if approved.compete. For example, Novartis Pharma AG currently markets and sells its Vivelle®Vivelle^® and Estraderm®Estraderm^® patches, and Berlex Laboratories Inc. and Forest Pharmaceuticals Inc. co-promote the Climara®Climara^® transdermal patch. Several companies also currently market ethanol-based estrogen gels and ointments outside the United States. For example, Schering Canada sells its estrogen gel, Estrogel®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 salewill compete in the UntiedUnited 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 mayhave and will continue to 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 investment in ESTRASORB or our product candidates, if approved.

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     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 we do.experience. 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.cost. In addition, many of our competitors have significantly greater experience than we do 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 we will, which may give them an advantage over us in achieving market acceptance of their products.

     We need additional capital to grow and operate our business and we are uncertain about obtainingour ability to obtain future financing and the effects of such financing.

     We estimate that following our $16.6 million financing in February 2003, 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 mayall in an amount sufficient to fund our operations, and we could require additional

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funds to continue our research and development programs, commence future preclinical and clinical trials, seek regulatory approvals, establish commercial-scale manufacturing capabilities, and market our products. We may seek such 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 will be available to us on acceptable terms, if at all. If we cannot raise the additional funds we may need to continuefor 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 willprograms; downsize our selling, marketing, general and administrative infrastructure or programs; or seek other alternativesalternative measures 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. If we raise additional funds through future offerings of shares of our common stock or other securities, such offerings would cause dilution of existing stockholders’ percentage interest in our company. These future offerings also could have a material and adverse effect on the price of our common stock.

     We have a history of losses and our future profitability is uncertainuncertain.

     Our expenses have exceeded our revenues since our formation in 1987, and our accumulated deficit at December 31, 20022003 was $87.5$104.8 million. Our revenues for the last three years were $11.8 million in 2003, $15.0 million in 2002 $24.0and $24.1 million in 2001 and $2.5 million in 2000.2001. Sales of products that we acquired as a result of our acquisition of Fielding Pharmaceutical Company in 2000 have generated modest revenues, but based 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 $17.3 million in 2003, $22.7 million in 2002 and $9.7 million in 2001 and $12.1 million in 2000.2001. Our losses have resulted from research and development expenses, pre-launch sales and marketing expenses in the anticipation of FDA approval for ESTRASORB, protection of our intellectual property, and other general operating expenses.

     Our annual losses may initially increase depending ondue to the timing of the FDA approval and launch of ESTRASORB as we expand our manufacturing capacity, sales and marketing capabilities and conduct additional and larger clinical trials for otherour 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.

     We intend to allocate a significant portion of our sales force’s time to the product launch of ESTRASORB if and, when it is approved by the FDA. Accordingly,consequently, the sales of our other women’s health products could be adversely affected by the efforts we allocate to the ESTRASORB product launch.affected. 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 KingKing.

     We have entered into a co-promotion agreement with King for the marketing and promotion of ESTRASORB in the United States using our salesboth King’s and marketing personnel and King’sour 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. We are entitled to receive additional payments potential future milestone payments,upon the achievement of specified milestones, and licensing fees and royalties on future sales. While our co-

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promotion and licensing agreements with King give us some limited protections with respect to King’s marketing and sales efforts and, we believe, createscreate financial incentives for King consistent with our own, we cannot control the amount and timing of the marketing efforts that King devotes to ESTRASORB, or make any assurances that ourco-promotion efforts by the Company and King’s co-promotionKing of ESTRASORB in the United States, and King’s marketing of ESTRASORB inoutside the restUnited States, will be successful. In addition, we agreed to charge King no greater than 17% for the cost of sales of ESTRASORB when calculating co-promotion payments. We believe this cost of sales percentage will be less than our actual costs during the initial period of the worldproducts introduction into the market and this limitation will be successful.restrict our profitability.

     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 the co-promotion with King in the United States with King of our product candidate ANDROSORB™. If this product is approved for marketing by the FDA, King has an exclusive worldwide license, except in the United States, to market this future product. Under our co-promotion agreement, King also has the right to co-promote certain future hormone replacement therapy products that we may develop in the field of women’s health. 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. AnyAssuming FDA approval, 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 reduce the likelihood that we could be acquired by another companycompany.

     Our co-promotion agreement and license agreement with King for the marketing of ESTRASORB and ANDROSORB contain several provisions that would take effect upon a change of control of the Company. One provision allows King several options in the

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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 (if approved) and certain other hormone therapies for women, or (iii) requiring Novavax to assign and transfer to King all related rights of ownership for ESTRASORB and ANDROSORB and certain other hormone replacement therapies for women and license to King on an exclusive and perpetual basis all intellectual property rights and know how.know-how with respect to such products. If King chooses to exercise its rights under either clause (ii) or (iii) above, King will pay us royalties on the net sales of thesuch 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. In the event of a change in control, King could also require that we redeem the$40.0 million in aggregate principal amount of our outstanding convertible promissory notes that it currently in the amount of $40.0 million,holds, at a redemption price equal to 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 productsproducts.

     We do not have any experience with the large capacity manufacturing required for the 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 programprograms and clinical trials (including utilizing contract manufacturing organizations), 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 have validated our manufacturing methods for ESTRASORB, which has been produced in 100-kilo size batches. Such validation is required under FDA guidelines, and havewe received FDA approval of these methods.methods in connection with the approval of ESTRASORB. We currently manufacture ESTRASORB at a facility of Cardinal Health, Inc. in Philadelphia, Pennsylvania. In February 2002, we entered into an agreement with Cardinal Health to lease approximately 24,000 square feet of space within their facility. Under the terms of this agreement,We expect that Cardinal Health will provide packaging services for the productESTRASORB that we manufacture in their facility. We have substantially completed the build out of the facility to meet our requirements and have installed manufacturing equipment at this facility with the capacity required for commercial production of ESTRASORB. Now that this new equipment is installed, we need to validate 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 Philadelphia facility. IfNow that ESTRASORB ishas been approved by the FDA, we planmay determine to qualify at least onean additional site or sites for the manufacture of ESTRASORB.ESTRASORB as our production requirements increase. If we wereare unable to utilize the Philadelphia 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, thatwhich would cause us to lose sales of ESTRASORB and would adversely affect our business.

     We currently utilize third partythird-party contract manufacturers to manufacture our other products. Any contract manufacturer’s facility that we may use, including the Cardinal Health 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 recordkeepingrecord-keeping requirements. We may notIf compliance issues exist at these facilities, thereby interfering with the manufacture of our products, we would have to seek alternative manufacturing arrangements. There can be no assurance that we would be able to enter into alternative manufacturing

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arrangements at commercially acceptable rates, if at all. Moreover, the manufacturers utilized by uswe use may not provide sufficient 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 herein the United States 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 many of ourother products and we may not succeed in obtaining the FDA approval necessary to sell any additional productsproducts.

     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. Only 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.including ESTRASORB. Our product candidate, ANDROSORB, has completed two Phase I human clinical studies. Our other product candidates are in preclinical laboratory or animal studies. Before applying for FDA approval to market any additional product candidates, we must conduct larger-scale Phase II and III human clinical trials that demonstrate the safety and efficacy of our

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products, including ANDROSORB, to the satisfaction of the FDA or other regulatory authorities. These processes are expensive and can take many years to complete. Wecomplete, and we may not be able to demonstrate the safety and efficacy of our products to the satisfaction of the FDA or other regulatory authorities. We may also be required to demonstrate that our proposed products represent an improved form of treatment over existing therapies and we may be unable to do so without conducting further clinical studies.

     We may fail to obtain regulatory approval for our products on a timely 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:

	•		the 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;
	•		institutional review board approval of the protocol and the informed consent form;
	•		prior regulatory agency review and approval;
	•		analysis of data obtained from preclinical and clinical activities which are susceptible to varying interpretations, which interpretations could delay, limit or prevent regulatory approval;
	•		changes in the policies of regulatory authorities for drug approval during the period of product development; and
	•		the availability of skilled and experienced staff to conduct and monitor clinical studies and to prepare the appropriate regulatory applications.

     We have limited experience in conducting and managing the preclinical and clinical trials necessary to obtain regulatory marketing approvals. We may not be able to obtain the approvals necessary to conduct clinical studies. Also,We also face the risk that the results of our clinical trials may not be consistentinconsistent with the results obtained in preclinical studies or that the results obtained in later phases of clinical trials may not be consistentinconsistent with those obtained in earlier phases. A number of companies in the specialty 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.

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

     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 and other intellectual property protection. We also must operate without infringing the proprietary rights of third parties or letting third parties infringe our rights. We currently have 5551 U.S. patents and approximately 150corresponding foreign patents and patent applications covering our technologies. We recently filed 8 new patent applications in the US and worldwide directed towards innovative discoveries made in the field of human papillomavirus virus-like particles. 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 StatesU. S. Patent and Trademark Office or enforced by the federal courts. Therefore, we do not know whether our patent applications will result in the issuance of patents, or that any patents issued to us will provide us with any competitive advantage. We also cannot be sure that we 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 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 suits or in filing suits against others to have their patents declared invalid or claim infringement. It is also possible that we may be required to obtain licenses from third parties to avoid infringing third-party patents or other proprietary rights. We cannot be assuredsure that such third-party licenses would be available to us on acceptable terms, if at all. If we are unable to obtain required third-party licenses, we may be delayed in or prohibited from developing, manufacturing or selling products requiring such licenses.

     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

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example, our patents do not prohibit third parties from developing and selling products for estrogen replacement therapy that deliver estrogen through a topical emulsion, 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 our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure.

Health care insurers and other payors may not pay for our products or may impose limits on reimbursementreimbursement.

     Our ability to commercialize ESTRASORB and our 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 public and private payors. If we succeed in bringing ESTRASORB or other products in the future to market, we cannot assure yoube assured that third-party payors will pay for ESTRASORB or willsuch products or establish and maintain price levels sufficient for realization of an appropriate return on our investment in product development. For example, ESTRASORB if approved for commercial sale in the United States, wouldwill be sold as an outpatient prescription drug. Medicare does not cover the costs of most outpatient prescription drugs. We expect that ESTRASORB will be treated the same as other estrogen replacement therapy products with respect to government and third-party payor reimbursement. However, we cannotthere can be assureno assurance that ESTRASORB will receive similar reimbursement treatment.

     Many health maintenance organizations and other 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 added 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, sometimesin some cases, the cost of the drug in comparison to alternative products. We cannotThere can be assuredno assurance that ESTRASORB or any of our future products will be added to payor’spayors’ formularies, whetherthat our products will have preferred status to alternative therapies, nor whetheror that the formulary decisions will be conducted in a timely manner. We may also decide to enter into discount or formulary fee arrangements with payors, which could result in us receiving lower or discounted prices for ESTRASORB or future products.

     We may have product liability exposureexposure.

     The administration of drugs to humans, whether in clinical trials or after marketing clearances are obtained, can result in product liability claims. We maintain product liability insurance coverage in the total amount of $18.0$10.0 million for claims arising from the use of our currently marketed products and products in clinical trials prior to FDA approval. Coverage is becoming increasingly expensive, however, and we may not be able to maintain insurance at a reasonable cost. We cannotThere can be assuredno assurance that we will be able

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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 commercially desirable terms, if at all. Even if a claim is not successful, defending such a claim may be time-consuming and expensive, and may damage our reputation in the marketplace.

The price of our common stock has been,marketplace, and may continue to be, volatiledivert management’s attention.

     Historically, the market price of our common stock has fluctuated over a wide range. In fiscal 2002, our common stock traded in a range from a low of $1.59 to a high of $14.00. It is likely that the price of our common stock will fluctuate in the future. The market prices of securities of small capitalization biopharmaceutical companies, including ours, from time to time experience significant price and volume fluctuations unrelated to the operating performance of particular companies. In particular, over the next year, the market price of our common stock may fluctuate significantly due to a variety of factors, including:

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

     In addition, the occurrence of any of the risks described in this “Risks and Uncertainties” section could have a dramatic and adverse impact on the market price of our common stock.

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Our substantial debt could adversely affect our cash flow and prevent us from fulfilling our obligations

     We currently have $41.3 million of outstanding debt. Our substantial amount of debt could have important consequences to you. For example, it:

	•		could increase our vulnerability to general adverse economic and industry conditions;
	•		will require us to dedicate a substantial portion of our cash flow from operations to service payments on our debt, reducing the availability of our cash flow to fund future capital expenditures, working capital, execution of our growth strategy, research and development costs and other general corporate requirements;
	•		could limit our flexibility in planning for, or reacting to, changes in our business and the pharmaceutical industry, which may place us at a competitive disadvantage compared with competitors that have less debt; and
	•		could limit our ability to borrow additional funds, even when necessary to maintain adequate liquidity.

     We may incur additional debt for various reasons, which, if over a certain amount, must be approved by King. Any such additional debt would increase the risks associated with our substantial leverage.

     We have made loans to certain of our directors, and have guaranteed a brokerage margin loan for one of these directors thatwhich could have a negative impact on our stock priceprice.

     In 2002, pursuant to our Stock Option Plan, we approved the payment of the exercise price of options by two of our directors through the delivery of full recourse, interest bearingfull-recourse, interest-bearing promissory notes, in the aggregate principal amount of approximately $1.5 million, secured by a pledge of the underlying shares. In addition, in 2002 we executed a conditional guaranty of a brokerage margin account for a director in the amount of $500,000. Due to heightened sensitivity in the current environment surrounding related party transactions, these transactions could be viewed negatively in the market and our stock price could be negatively affected.

     The Company makesprice of our common stock has been, and may continue to be, volatile.

     Historically, the market price of our common stock has fluctuated over a wide range. In fiscal 2003, our common stock traded in a range from a low of $2.52 to a high of $ 8.62. It is likely that the price of our common stock will fluctuate in the future. The market prices of securities of small-capitalization, specialty biopharmaceutical companies, including ours, from time to time experience significant price and volume fluctuations unrelated to the operating performance of these companies. In particular, the market price of our common stock may fluctuate significantly due to a variety of factors, including:

•		governmental agency actions including the FDA’s determination with respect to NDA’s for the new products
•		our ability to obtain financing
•		our ability to develop additional products and
•		sales of our products, particularly ESTRASORB.

     In addition, the occurrence of any of the risks described in this “Risks and Uncertainties” section could have a material and adverse impact on the market price of our common stock.

Our substantial indebtedness could adversely affect our cash flow and prevent us from fulfilling our obligations.

     We currently have $42.2 million of outstanding indebtedness. Our substantial amount of outstanding indebtedness could have significant consequences. For example, it:

•		could increase our vulnerability to general adverse economic and industry conditions
•		will require us to dedicate a substantial portion of our cash flow from operations to service payments on our indebtedness, reducing the availability of our cash flow to fund future capital expenditures, working capital, execution of our growth strategy, research and development costs and other general corporate requirements
•		could limit our flexibility in planning for, or reacting to, changes in our business and the pharmaceutical industry, which may place us at a competitive disadvantage compared with competitors that have less indebtedness and
•		could limit our ability to borrow additional funds, even when necessary to maintain adequate liquidity.

     We may incur additional indebtedness for various reasons, which, if in excess of a certain amount, must be approved by King. Any such additional indebtedness would increase the risks associated with our substantial leverage.

Our inability to recruit and retain members of our management team and key personnel could have a material adverse effect on our business.

     Our future success will depend in part on our ability to attract and retain highly-skilled employees, particularly those in regulatory, manufacturing and technical positions. The loss of services of members of our management team could adversely affect our business and impede or delay achievement of our corporate mission. Furthermore, recruiting and retaining qualified scientific and other key employees will be critical to our success, and competition for such employees in our targeted industry and in our geographic

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regions is intense. In addition, many of the companies with which we compete for highly qualified personnel have greater financial and other resources. We may be unable to attract and retain key employees on acceptable terms given the level and nature of such competition.

Anti-takeover provisions could make a third-party acquisition of us more difficult.

     In 2002, we adopted a Shareholder Rights Plan that provided for the issuance of rights to purchase shares of Series D Junior Participating Preferred Stock of our company. Under the plan, we distributed one preferred share purchase right for each outstanding share of our common stock. Each purchase right entitles the holder to purchase from our company one one-thousandth (1/1000^th) of a share of Series D Junior Participating Preferred Stock at a price of $40, subject to adjustment. The rights become exercisable, with certain exceptions, 10 business days after any party, without prior approval of our Board of Directors, acquires or announces an offer to acquire beneficial ownership of 15% or more of our common stock. In the event that any party acquires 15% or more of our common stock, we enter into a merger or other business combination, or if a substantial portion of our assets is sold after the time that the rights become exercisable, the holder of a right will receive, upon exercise of the right, shares of the common stock of the surviving or acquiring company, as applicable, having a market value of twice the exercise price of the right. The Shareholder Rights Plan may discourage or prevent certain types of transactions involving an actual or potential change in control of our company, which transactions may be beneficial to our shareholders, by causing substantial dilution to a party that attempts to acquire us on terms not approved by our Board.

Availability of Information

     Novavax was incorporated in 1987 under the laws of the State of Delaware. Our principal executive offices are located at 8320 Guilford Road, Columbia, MD 21046. Our telephone number is (301) 854-3900 and our Internet address iswww.novavax.com.

     We make available, free of charge on itsand through our website, www.novavax.com, copies of its Annual Reportour annual reports on Form 10-K, its Quarterly Reportsquarterly reports on Form 10-Q, its Current Reportscurrent reports on Form 8-K, and allany amendments to thoseany such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such material is electronically filed with or furnished to the Commission.SEC.

Item 2.Properties

     We currently have operations in sixfive facilities. We lease approximately 12,000 square feet of administrative officesoffice space for our corporate headquarters in Columbia, Maryland. We lease two facilities in Rockville, Maryland. One facility is approximately 6,0004,300 square feet and contains our certified animal facility and laboratories for our drug research and biologics development, which includes our vaccine adjuvant product and services group. In the other Rockville facility, in Rockville, we lease approximately 12,00011,700 square feet of space. This facility isspace for contract vaccine research, development and manufacturing of Phase I products. We have another 2,150approximately 2,800 square foot facility in Pacific Grove, California for new product research and development activities. Our Fielding subsidiary leases amanufacturing facility for ESTRASORB is in Maryland Heights, Missouri. This facility is approximately 12,000 square feet and is used for administrative offices, repackaging and warehousing.Philadelphia, Pennsylvania. In addition, in February 2002, we entered into a facilities reservation agreement with Cardinal Health at their facility, through which we lease approximately 24,000 square feet of manufacturing space to meet our current and anticipated future production requirements for ESTRASORB. Recently, we substantiallyWe recently completed the build-out and construction of this manufacturing space.space and are in production. In December 2003, we closed our facility in Maryland Heights, Missouri, which was used for the repackaging of our vitamin lines and warehousing of our products. We have moved those operations to a third-party repackager and a third-party warehouse distribution company. A summary of theseour current facilities is set forth below.

consuming and expensive. In addition, we might not be able to obtain such additional manufacturing space on a timely basis or on terms acceptable to us, if at all.

Item 3.Legal Proceedings

     We are notNeither the Company nor its subsidiary is a party to any material 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, 2002.2003.

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Executive Officers of the Registrant

     Our 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 our By-laws.

     The following table provides certain information with respect to our executive officers.

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PART II

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

     Our common stock was held by approximately 684649 stockholders of record as of March 14, 2003.February 27, 2004. We have never paid cash dividends on our common stock. We currently anticipate that we will retain all of our earnings for use in the development of our business and do not intend to pay any cash dividends in the foreseeable future.

     Our 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. The following table sets forth, for the periods presented, the high and low sales prices for our common stock, on the applicable exchange.

Recent Sales of Unregistered Securities

     In February 2003, we issued 4,750,000 shares of common stock, for net proceeds of $16.6 million, to SJ Strategic Investments LLC. The shares were issued in a private placement in reliance on Section 4(2) of the Securities Act and a resale registration statement will be filed with the Commission within 60 days of the closing.Act.

Securities Authorized for Issuance Under our Equity Compensation Plans

     See Part III, Item 12 for information regarding securities authorized for issuance under our equity compensation plans.12.

Item 6.Selected Financial Data

     The selected 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, 20022003 and 2001:

     During the fourth quarter of 2002, we reassessed the remaining costs, progress and milestones outstanding on four research contracts. Based on this review we determined that estimated costs to complete had been underestimated throughout the year. We haveyear and we reevaluated the estimated costs to complete on all contracts. The effect of this reevaluation iswas an $800,000 reduction to revenue, $600,000 of which relates to two of the contracts, with no corresponding reduction in expenses. The impact of this adjustment affects previously disclosed revenues in our 2002 quarterly reports.

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

     The following discussion may contain statements that are not purely historical. Certain statements contained herein or as may otherwise be incorporated by reference herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements regarding product sales, future product development and related clinical trials and statements regarding future research and development, including Food and Drug Administration approval. 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; unexpected changes in technologies and technological advances; ability to obtain rights to technology; ability to obtain and enforce patents; ability to commercialize and manufacture products; ability to establish and maintain commercial-scale manufacturing capabilities; ability to enter into future collaboration with industry partners; results of clinical studies; progress 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.

     All forward-looking statements contained in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements, except as specifically required by law. Accordingly, past results and trends should not be used to anticipate future results or trends.

Overview

     Novavax is a fully-integrated specialty pharmaceuticalbiopharmaceutical company focused on the research, development and commercialization of products utilizing our proprietary drug delivery and vaccine technologies for large and growing markets, concentrating on the areas of women’s health and infectious diseases. We currently market, sell and distribute a line of prescription pharmaceutical and prenatal vitamins through our sales force, have recently completed the build-out of a manufacturing facility for our newly approved product, are conducting research and development on preventative vaccines and proteins, are developing new products using our drug delivery technology and are expanding our management team to meet our strategic objectives.

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     Our micellar nanoparticle technology involves the use of patented oil and water emulsions that we believe can be used as vehicles for the topical delivery of a wide variety of drugs and other therapeutic products, including hormones, and vaccine adjuvants, which are substances added to vaccines to enhance their effectiveness.hormones. We believe that our technology represents the first time that ethanol soluble hormones, such as estrogen and testosterone, have been encapsulated and delivered. In addition toOctober 2003, we received our first commercial product approval utilizing our micellar nanoparticle technology. ESTRASORB, our product candidates using these technologies include ANDROSORB™, athe first topical testosterone emulsion that has completed two Phase I clinical trials; TESTESTRASORB™, a topicalfor estrogen therapy, was approved by the Food and testosterone emulsion; PROGESTSORB™ NE, a topical progestin emulsion; and PROESTRASORB™, a topical estrogen and progestin emulsion. Other drug delivery technologies, like our Novasome® and Sterisome® technologies, are being utilized to develop other products. Novasomes are used as adjuvants to enhance vaccine effectiveness. Sterisomes are being used for, among other things, subcutaneous injections that can deliver long-acting drug effects. We also conduct research and development on preventative vaccines and proteins, for infectious diseases, cancers and immunotherapies.

     We are seeking FDA approval of ESTRASORBDrug Administration for the reductiontreatment of hot flushes in menopausal women and, if approved, we believe ESTRASORB will be competitively positionedmoderate to address the estimated $1.8 billion estrogen replacement therapy market in the United States. In 2002, Novavax reported on its Phase III clinical trial results at two major medical conferences. The study demonstrated that ESTRASORB treatment caused a statistically significant reduction in moderate and severe vasomotor symptoms (hot flushes) at weeks four, eightflashes) associated with menopause.

     The approval of ESTRASORB was a major milestone for Novavax that has presented us with numerous current and twelvefuture opportunities and challenges. To successfully launch ESTRASORB and continue to develop future products using our drug delivery vehicle, we will need to focus our efforts and financial resources on:

•		The development of marketing plans and programs to effectively compete in the highly competitive estrogen therapy market
•		The expansion and training of our current sales force
•		The manufacturing of products at commercial quantities and at acceptable gross margins
•		The identification and development of future product candidates, and the
•		The recruitment of management and key personnel

     We believe the approval of ESTRASORB will provide us access to capital and human resources which previously were more difficult to obtain. Following the clinical trial.approval of ESTRASORB we raised approximately $26.0 million in November 2003 through the public offering of 4,500,000 shares of common stock. We may decide, or be required, to obtain additional financing, depending on the initial success of ESTRASORB, our marketing programs and our strategic objectives, and our success in identifying product development candidates. In addition, a high percentageover the past few months we have added key senior management personnel in the areas of women achieved cessation of moderatesales, marketing, human resources and vaccine development and we will continue to severe hot flushes duringexpand our senior management team as well as add key personnel. In preparation for the twelve-week clinical trial.

     A New Drug Application for ESTRASORB was submitted to the U.S. Food and Drug Administration in June 2001 and was accepted for review in August 2001. In April 2002, we were informed by the FDA that the agency had completed their review of the New Drug Application for ESTRASORB. At that time, the agency did not raise any issues regarding the efficacy or safetylaunch of ESTRASORB, but did request additional informationwe have developed the initial marketing strategies and programs with respectKing Pharmaceuticals, Inc., our marketing partner, and we will be expanding our sales force from 64 to approximately 80 employees in the Chemistry, Manufacturingnext few months. We will also be dedicating significant financial and Controls (“CMC”) section of the filing. We determined that the most advantageous approachhuman resources to resolving the outstanding CMC questions was to voluntarily withdraw the New Drug Applicationcreate awareness about ESTRASORB and resubmit it once all of the responses to the CMC questions have been prepared. In September 2002 we resubmitted the New Drug Application, which was accepted for review by the FDA in November 2002.our unique drug delivery system.

     In December 2000, we acquired privately-owned Fielding Pharmaceutical Company, 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 $36.5 million. The acquisition has been accounted for in the accompanying financial statements under the purchase method of accounting for business combinations.

     In December 20002002, we entered into an agreement with Cardinal Health, Inc. to lease a Note Purchase Agreement with King Pharmaceuticals, Inc. whereby we agreed24,000 square foot facility within its existing facility in Philadelphia, PA. We have recently completed the build-out of this facility to issueour specifications and have installed the manufacturing equipment to King 4% senior convertible promissory notes up to $25.0 million. On that same date, we issued a 4% senior convertible promissory note with King for $20.0 million in principal. In September 2001, we issued two additional 4% senior convertible promissory notes for $5.0 million each and in June 2002 we issued another 4% senior convertible promissory note for $10.0 million. Allaccommodate commercial production of ESTRASORB. We have substantially completed the validation of the notes, totaling $40.0 million (the “Notes”),facility and equipment and are due December 19, 2007 with interest payable in semi-annual installments in cash, or in certain circumstances, upmanufacturing bulk product as well as packaging the product. This facility was designed to 50% in stock.

     In January 2001,be able to produce commercial quantities that we entered into a co-promotion agreement with Kingbelieve could meet our marketing requirements for the Company’s topical estrogen replacement therapy,next 2 to 3 years. However, due to the costs associated with maintaining a facility at full capacity, until our production requirements reach a certain level our initial gross margins will be lower than industry averages. We believe we can significantly lower our costs of goods and improve our margins as we increase production quantities. In addition, we have already begun to design alternative packaging solutions to streamline production and lower costs of production.

     While the majority of our efforts will be placed on the successful launch of ESTRASORB inand the United Statesdevelopment of future products, we will continue to support and Puerto Rico (the “Territory”). We also entered into a license agreement with King for many countries outside the United States. In 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 broader penetration into theour existing line of women’s health marketproducts and look for ESTRASORBopportunities to expand our products though the acquisition or further development of our prenatal vitamin line. In August and ANDROSORB. Under the terms of the Amended Agreements, we received $3.0 million from King in up-front licensing fees, and we will also 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 any one of the five additional countries in Europe. We will also receive royalties on future sales outside the Territory. Under the Amended Agreements,September 2003 we also received a milestone paymentgrant and a contract from Kingthe National Institute of $2.5Allergy and Infectious Diseases which could total up to $18 million in revenues for our submissionthe design and development of a new series of human immunodeficiency virus candidates for preclinical and clinical studies. The contract and grant cover four to five year periods and are the largest awards we have received to date. To meet the requirements of the ESTRASORB New Drug Application, in June 2001,contracts over their terms, we will need to enhance and an additional milestone payment of $2.5 million forexpand the acceptance for reviewcapabilities of our New Drug Application bycurrent lab facilities which, when completed, will allow us to qualify for other grants and contracts in the FDA in August 2001. In June 2002, we further amended the co-promotion agreement related to ANDROSORB. We will share equally in approved pre-launch marketing costs for ANDROSORB with King, while we will be solely responsible for the research and development expenses for ANDROSORB. In addition, King will pay us a $1.0 million milestone payment upon the receipt of all approvals necessary for commercialization of ANDROSORB.vaccine area.

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     We entered into two product agreements in 2001 and 2002. In January 2001, we acquired AVC Cream and Suppositories from King for $3.3 million, which had previously been marketed by King for the treatment of vaginal bacterial infections. In July, 2002, we entered into agreement with privately-held Ferndale Laboratories, Inc. of Ferndale, Michigan. Under the agreement, we will co-promote Analpram HC®, a prescription corticosteroid and anti-pruritic product targeted at women suffering from hemorrhoids.

     Subsequent to year-end, in February 2003, we announced that we had completed a private placement of 4,750,000 common shares at $3.50 per share to SJ Strategic Investments LLC, for total proceeds of $16.6 million. We believe this recent equity infusion will provide us with the necessary financial resources to launch ESTRASORB, if approved by the FDA later this year, as well as to continue to pursue our other corporate activities.

Critical 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. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results couldthat differ from those estimates.

our estimates could have a significant adverse effect on our operating results and financial position. We have identified below some of our more criticalbelieve that the following significant accounting policies and changes to accounting policies.assumptions may involve a higher degree of judgment and complexity than others.

     For further discussion of our accounting policies see Footnote 2 “Summary of Significant Accounting Policies”in the Notes to Consolidated Financial Statements.Statements attached as an Exhibit to this Annual Report on Form 10-K.

Revenue Recognition

     We recognize revenue in accordance with the provisions of Staff Accounting Bulletin No. 101.104. For our product sales, 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,to our distributor, the seller’s price to the buyer is fixed or determinable and collectibility is reasonably assured. We recognize these sales net of allowances for returns, rebates and chargebacks. A large part of our product sales are to distributors who resell the products to their customers. We provide rebates to members of certain buying groups who purchase from our distributors, to distributors that sell to their customers at prices determined under a contract between us and the customer or to state agencies, whichthat administer various programs such as the federal Medicaid and Medicare programs. Rebate amounts are usually based upon the volume of purchases or by reference to a specific price for a product. We estimate the amount of the rebate that will be paid, and record the liability as a reduction of revenue when we record our sale of the products. Settlement of the rebate generally occurs from three to 12 months after sale. We regularly analyze the historical rebate trends and make adjustments to recorded reserves for changes in trends and terms of rebate programs. In a similar manner, we estimate amounts for returns based on historical trends and adjust those reserves as product returns occur. The shipping and handling costs we incur are included in cost of sales in the accompanying statements of operations.

     For up-front payments and licensing fees related to our contract research or technology, we defer and recognize revenue 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.

     RevenueRevenues earned under certaincurrent research contracts isare recognized per the contracts’ terms and conditions for invoicing of costs incurred and defined milestones. In 2002, revenue earned under research contracts was recognized on the percentage of completion method. The extent of progress toward contract completion is measured onmethod whereby revenue was recognized in proportion to the cost-to-cost method that also included an assessment of the remaining costs requiredestimated percentage to complete the contract or reach particular milestones. Revenues from contracts with acceptance terms are recognized when the customer has received and approved the services.contract. During the fourth quarter of 2002, we reassessed the remaining costs progress and milestones outstandingprogress on four contracts. Based on this review we determined that estimated costs to complete had been underestimated throughout the year. We have reevaluated the estimated costs to complete on all contracts. Thecontracts and the effect of this reevaluation iswas an $800,000 reduction to revenue, $600,000 of which relatesrelated to two of the contracts, with no corresponding reduction in expenses. The impact of this adjustment affects previously disclosed revenues in our 2002 quarterly reports. We have shown the 2002 quarterly effects of these adjustments in Item 6 herein.

Research and Development Costs

     Research and development costs are expensed as incurred. We will continue to incur research and development costs as we expand our product development activities in our women’s health and infectious diseasevaccine programs. Our research and development costs have included, and will continue to include, expenses for internal development personnel, supplies and facilities, clinical trials, regulatory compliance and reviews, validation of processes and start upstart-up costs to establish commercial manufacturing capabilities. At the time our new product candidates are approved by the FDA and we begin commercial manufacturing, we will no longer expensebe allocating costs at our manufacturing location to inventory or as research and development costs.costs, depending on whether we are operating at or near our potential capacity. In 2004, we will be allocating our costs to manufacture ESTRASORB to inventory. As a result, our research and development costs will decrease and our inventory and cost of sales will increase.

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Depreciation and Amortization

     Depreciation of furniture, fixtures and equipment is provided under the straight-line method over the estimated useful lives, generally 3 to 7 years. Amortization of leasehold improvements is provided over the estimated useful lives of the improvements or the term of the lease, which everwhichever is shorter.

     In December 20022003 we substantially completed the build-out and validation of our new manufacturing facility in Philadelphia at a cost of approximately $7.0 million.Philadelphia. In addition, we have purchased, validated and installed approximately $3.0 million of manufacturing equipment in preparation of anticipated FDA approvalfor the commercial launch of ESTRASROB in 2003.2004. The total investment in the facility and equipment is approximately $12.0 million. We do not plan towill begin recognizing amortization or depreciation on these assets untilwhen manufacturing for commercialization begins.begins in early 2004. At that time, the yearly amortization and depreciation expense willis estimated to be from $1.0$1.5 to $1.5$2.0 million per year.

Goodwill and Intangibles Assets

     Goodwill and intangible assets principally result from business acquisitions, such as the $35.5 million of goodwill we recognized for our acquisition of Fielding Pharmaceuticals in December 2000. 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. Intangible assets other than goodwill 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.

     In June 2001, the FASBFinancial Accounting Standards Board issued SFAS No. 142 “GoodwillGoodwill and Other Intangible Assets,” which is effective for fiscal years beginning after December 15, 2001. Under these rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but will beare subject to annual impairment tests annually or more frequently should indicators of impairment arise. Other intangible assets will continuecontinued to be amortized over their useful life beginning in the first quarter of 2002. The Company utilizes a discounted cash flow analysis, which includes profitability information, estimated future operating results, trends and other information in assessing whether the value of indefinite-lived intangible assets can be recovered. Under SFAS No. 142, goodwill impairment is deemed to exist if the carrying value of a reporting unit exceeds its estimated fair value. In accordance with the requirements of SFAS No. 142, the Company tested its goodwill for impairment as of January 1, 2002 and determined that no impairment was present. In the fourth quarterquarters of 2002 and 2003, the Company performed the required annual impairment test on the carrying amount of its goodwill, which indicated the Company’s estimated fair value of goodwill exceeded it carrying value,value; therefore, no impairment was identified at December 31, 2002.2002 or 2003. If the appraisal had determined that the goodwill was impaired, the write down would have increased our net loss by a comparable amount.

Future Accounting for Co-promotion Agreement

     Under the terms of our co-promotion agreement with King Pharmaceuticals, Inc. we will be responsible for manufacturing, receiving orders, invoicing and distribution thus,of ESTRASORB. Thus, 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, subject to a 17% limitation on cost of goods sold, and the payment to King will be recorded as a selling and marketing expense on our statement of operations. Under the co-promotion agreement, following product approval by the FDA, both parties will also share equally in approved marketing expenses for the products.product. All direct marketing expenses will be recorded by us, net of King’s fifty percent reimbursement.

Stock Options

     We apply the principles of APB No. 25, Accounting for Stock Issued to Employees, in accounting for stock options issued to our employees which Kinggenerally does not require that options granted to employees be expensed.

     Had we applied the fair value principles of SFAS No. 123, Accounting for Stock-Based Compensation, for our employee options, our net loss for the years ended December 31, 2003, 2002 and 2001 would have increased to approximately $23.5 million, $25.9 million and $15.5 million, respectively, as compared to approximately $17.3 million, 22.7 million and 9.7 million, respectively. The Financial Accounting Standards Board has indicated it will reimburse us fifty percent.likely require that companies expense employee options in the future, but it has not yet finalized the timing or methods for such a change.

Off Balance Sheet Financing ArrangementGuarantee

     In April 2002, the Companywe executed a conditional guaranty of a brokerage margin account for a director, in the amount of $500,000. Prior to demanding payment from the Company, the brokerage firm must first make demand for payment to the director and then liquidate the account. Thereafter, if there remains a shortfall, they may demand payment from the Company. As of December 1, 2003 and 2002, the Company has not recorded any liability on its balance sheet related to this guarantee as we believe the possibility of required payment by the Company to be unlikely.

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Results of Operations for theFiscal Years Ended2003, 2002 2001 and 20002001

RevenuesRevenues:

     Revenues for the fiscal year ended 2002December 31, 2003 were $15.0$11.8 million compared to $15.0 million in 2002 and $24.0 million in 2001 and $2.5 million in 2000.2001. This represents a year-to-year decrease of $9.0$3.2 million, or 21%, and $9.1 million, or 38%, for the years ending December 31, 2003 and 2002, respectively. Of the $3.2 million total revenue decrease from 20012002 to 2003, a decline in product sales accounted for $2.6 million of that shortage. The product sales decrease was attributable to an overall decline in our prenatal vitamin lines due to generic competition offset by slightly higher sales from the Gynodiol product line and the fourth quarter introduction of our new prenatal vitamins, NovaNatal and NovaStart. Milestone revenue decreased by approximately $1.0 million, primarily due to a one-time recognition of $0.8 million on a milestone payment in 2002. Contract research revenue increased $0.3 million from $1.0 million in 2002 and an increase of $21.6to $1.3 million or 864%, from 2000 to 2001.in 2003.

     The revenue decrease from 2001 to 2002 relates to a decline in product sales from $17.3 million in 2001 to $12.8 million in 2002, a decrease of $4.5 million, a decline in contract research revenue from $2.7 million in 2001 to $1.0 million in 2002, a decreasedecline of $1.7 million, and a decline in milestone and license fee revenue from $4.1 million in 2001 to $1.2 million in 2002, a decrease of $2.92.9 million. Product sales were negatively impacted in 2002 primarily due to an approximately 20%18% decline in sales for our prenatal vitamin line as a result of increasing competitive pressure from generic alternatives, as well as declines in AVC cream and Gynodiol sales in 2002 due to effectivefirst year sales promotions following theour acquisition of these products in 2001. The reduction in contract research is primarilyrevenues was due to a year-end reversal of $800,000 of revenue recognizedone time payment for a contract in 2001 and a change in accounting for contract research revenues in 2002 as previously described in “Summaryfrom the percentage of Significant Accounting Policies

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—Revenue Recognition”.completion method to recognition upon completion of all contract terms. The reduction in milestone and license fee revenues was primarily due to the one time recognition of a $2.5 million milestone received from King in 2001 for the timely filing of the NDA for ESTRASORB.

     The increase from 2000 to 2001 related primarily to $17.3 million from products sales in 2001 related to our acquisitions of Fielding and the AVC product line, $4.0 million for revenue recognized for milestone payments from King for the timely submission and subsequent acceptance of our ESTRASORB New Drug Application by the FDA in 2001, 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 the NIH and other government agencies.

Net LossesLosses:

     Net loss for 20022003 was $17.3 million, or $(0.58) per share, compared to $22.7 million, or $(0.93) per share compared tofor 2002, and $9.7 million, or $(0.43) per share in 2001. The decreased loss of $5.4 million from 2002 to 2003 related primarily to the $5.1 million reduction of sales and marketing expenses that was incurred in 2002 principally for 2001,the anticipated product launch of ESTRASORB,

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$.7 million reductions in general and $12.2administrative expenses for similar reasons, $1.4 million or $(0.64) per sharereductions in 2000.research and development, as described below, offset by revenue reductions of $3.2 million, as previously discussed. The increased loss of $13.0 million from 2001 to 2002 related primarily to reduced product sales of $4.5 million, a reduction in contract research revenues of $1.7 million, a decrease in milestone revenues of $2.9 million as previously described, increases in selling and marketing expenses of $4.3 million in preparation of the anticipated approval and product launch of ESTRASORB, and an increase of $0.7 million in research and development expenses for manufacturing start upstart-up activities. The improvement from 2000 to 2001 of $2.5 million or $.21 per share related primarily to the gross margin on product sales due to our acquisitions of Fielding

Operating Costs and the AVC product line and milestone revenue for payments from King, offset in 2001 by additional selling, general and administrative to support those product sales, the initiation of commercialization activities for ESTRASORB and additional research and development costs.Expenses:

Cost of Sales

     Cost of sales was $2.1 million in 2003, compared to $3.6 million in 2002 compared toand $4.1 million in 2001. We had no product sales or cost of salesThe year-to-year decreases, in 2000. The decrease inboth 2003 and 2002, waswere primarily due to related decreases in product sales.sales for the same periods. As a percentage of product sales, the cost of sales decreased to 20% in 2003 from 28% and increased to 28% from 23% in 20012002, due to 28% in 2002.product mix and sampling protocols which changed per the product mix year to year.

Research and Development Expenses

     Research and development expenses were $10.1 million in 2003, compared to $11.5 million for 2002, compared toand $10.8 million for 2001 and $9.42001. The decrease of $1.4 million, or 13%, from 2002 to 2003 was primarily attributable to decreased spending in 2000.our vaccines programs, offset slightly by increased spending on manufacturing start-up costs related to preparing our manufacturing facility for commercial production of ESTRASORB. The increase from 2001 to 2002 of $0.7 million, or 6%, was primarily due to increases in manufacturing start-up costs related to preparing ouras we prepared for the manufacturing facility for commercial production of ESTRASORB, offset by decreases in 2002 for clinical trial and NDA preparation costs when compared to 2001. The manufacturing start-up costs relate primarily to facility lease expenses, validation services, product stability testing and personnel costs. The increase from 2000 to 2001 of $1.4 million or 15% was primarily due to costs associated with the preparation of the NDA for ESTRASORB and also for internal development costs associated with our infectious diseases programs, offset by a decrease in clinical trial expenses.

     Prior to 2000, we did not track all of our research and development total costs by project. We have, however, tracked all of our external direct costs incurred for all projects, as well as our internal direct labor for our vaccine projects. Overhead and indirect costs have been allocated to our vaccine projects based on direct labor hours incurred and we will be expanding that policy to our other projects in 2003. In 2001, we began tracking costs for each project.

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     Reconciliation of Significant Research and Development Projects

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

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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, 2002, several of2003, our proprietary product candidates were in variousearly stages of development. Due to the inherent nature of ourproduct 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 believe that the duration and estimated cost to complete is reasonably predictable. We have included that information in the following table.

     Last year we estimated the 2002 cost to complete the ESTRASORB project to be from $1 to $3 million. We based those projections on the anticipation that the ESTRASORB NDA would be approved by mid-2002. As previously discussed, we did not receive approval at that time and we resubmitted the NDA in September 2002. Our additional costs in 2002 and our estimate for the completion of ESTRASORB in 2003, above, include costs for manufacturing start-up, regulatory issues, clinical studies, and re-filing expenses due to the new timeline.

     In addition to the project listed above we are currently developing other product candidates such as, ANDROSORB, but do not believe that it is possible to estimate the completion date or cost to complete.candidates. 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 preclinical 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 abilityinability 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”.

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Selling and Marketing Expenses

     Selling and marketing expenses were $7.8 million in 2003, $12.8 million forin 2002 compared toand $8.5 million in 2001. Prior to our acquisitionThe costs variances on a year-to-year basis are primarily the result of Fielding and the AVC product linevariations in December 2000 and January 2001, respectively, andmarketing expenses associated with the anticipated approval of ESTRASORB, we had no sales orproduct launch for ESTRASORB. Of these total selling and marketing expense. In 2002 and 2001, we incurred $8.5costs, marketing costs represented $0.2 million, and $6.5 million, respectively, of selling expenses, and $4.3 million and $2.0 million for the years ending 2003, 2002, and 2001, respectively, which accounts for the yearly fluctuations. In anticipation of FDA approval for ESTRASORB occurring in 2002, the Company began incurring costs associated with actively developing marketing costs,materials and programs for the product launch. Later, the Company withdrew its application. This decision, and the related decision to supportdefer marketing ESTRASORB until we received approval, resulted in the variances in marketing costs. Since receiving approval in October 2003, we have accelerated our current product sales, as well as pre-launch sellingmarketing programs and marketing expenseswe expect to incur increasing costs for our anticipated2004 launch of ESTRASORB. Selling and marketing costs both increased in 2002 with the anticipated commercialization of ESTRASORB. When the launch was delayed, we took steps to reduce or defer previous levels of selling and marketing expenses. We expect selling and marketing costs to increase substantially with the anticipated FDA approval and commercialization of ESTRASORB. In addition, all payments made to King in connection with the co-promotion of ESTRASORB will be recorded as selling and marketing expenses in our statement of operations.

General and Administrative

     General and administrative expenses were $8.6$7.9 million is 2003, compared to $8.7 million in 2002 compared toand $10.0 million in 2001 and $5.92001. The reduction of $0.8 million in 2000.2003 over 2002 was due to major reductions in administrative and executive personnel and other expenses in the second half of 2002, resulting from the delay in the approval of ESTRASORB. These reductions continued through the third quarter of 2003, at which time we began rehiring in anticipation of the ESTRASORB approval. The decreasereduction from 2001 to 2002 of $1.4$1.3 million iswas primarily due to the accounting change for goodwill amortization, as described above in “Goodwill and Intangible Assets,” offset by increases in administrative and executive personnel over the past year to support our growth for the anticipated initiation of commercialization activities for ESTRASORB and increases in legal costs related to patent filings and research contract reviews. 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.

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Interest Income/(Expense):

Net interest expense was $1.2 million in 2003, $1.1 million in 2002, comparedand $0.5 million in 2001. Our interest expenses relate primarily to $490,000the promissory notes with King, which increased from $30.0 million in 2001 andto $40.0 million in 2002. Net interest income of $551,000 in 2000.expenses remained relatively unchanged from 2002 to 2003. The increase in interest expense from 2001 to 2002 of $0.6 million iswas due to the issuance of an additional $10.0 million of Notesnote to King, and to a lesser extent overall lower cash balances duringin 2002. The $1.0 million increase in the interest expense in 2001 related to the issuance of $30.0 million of the Notes from King, offset by additional interest income from higher cash balances during 2001 compared to 2000.

Liquidity and Capital ResourcesResources:

     Our capital requirements depend on numerous factors, including but not limited to the marketing and manufacturing costs related to the launch of ESTRASORB, the commitments and 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 plan to have multiple products in 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, the expansion of commercial-scale manufacturing capabilities and clinical development, are subject to our ability to raise funds through debt or equity financing, or collaborative arrangements with industry partners. From 2000

     In addition to product and contract research revenues of $45.2 million from 2001 through December 31, 20022003, we have financed our operations primarily from:

	•		the private placement of 2,813,850 shares of common stock in 2000 with net proceeds of approximately $10.5 million;
	•		proceeds of approximately $40.0 million from 2000 to 2002 from the Notes with King (for details on this transaction, refer to our discussion in the Overview section above);
	•		proceeds of $8.0 million from King in 2001 licensing fees and milestone payments (for details on these transactions refer to our discussion in the Overview section above); and
	•		and net proceeds of $15.4 million from 2000 through 2002 for the exercise of stock options and warrants.