UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

NOVAVAX, INC.

(484) 913-1200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes           o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

þ Yes           o No

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Shares of Common Stock Outstanding at October 30, 2004: 39,553,876

NOVAVAX, INC.
Form 10-Q
For the Quarter Ended September 30, 2004

Table of Contents

2

     Part I. Financial Information
     Item 1. Financial Statements

NOVAVAX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)

The accompanying notes are an integral part of the consolidated financial statements.

3

NOVAVAX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share information)
(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

4

NOVAVAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

5

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

     Novavax, Inc., a Delaware corporation (“Novavax” or “the Company”), was incorporated in 1987, and is a fully integrated specialty biopharmaceutical company engaged in the research, development and commercialization of proprietary products focused on women’s health and infectious diseases. The Company sells, markets, and distributes a line of prescription pharmaceuticals and prenatal vitamins. The Company’s principal technology platform involves the use of patented oil and water emulsions that the Company believes can be used as vehicles for the topical delivery of a wide variety of drugs and other therapeutic products, including hormones. On October 9, 2003, the Company’s lead product candidate, ESTRASORB®, the first topical emulsion for estrogen therapy, was approved for marketing by the Food and Drug Administration. The Food and Drug Administration approved ESTRASORB for the treatment of moderate to severe vasomotor systems (hot flashes) associated with menopausal women. The Company believes ESTRASORB is competitively positioned to address the estimated $1.5 billion estrogen therapy market in the United States. Following the Food and Drug Administration approval, the Company expanded its sales force and manufacturing capabilities and initiated marketing programs for the commercial introduction of ESTRASORB, which began in the second quarter of 2004. In addition, Novavax conducts research and development on preventative vaccines and proteins for infectious diseases.

     The consolidated financial statements of Novavax for the three and nine months ended September 30, 2004 and 2003 are unaudited. These financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature except for the “King Transaction”, a reserve for anticipated returns of vitamins and the facility exit cost adjustment, which are further discussed later in the notes. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2004.

     Certain information in footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes the disclosures are adequate to make the information presented not misleading. We suggest that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

2. Summary of Significant Accounting Policies

Basis of Presentation

     The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant inter-company accounts and transactions have been eliminated in consolidation.

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NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

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

Inventories

     Inventories consist of raw materials, work-in-process and finished goods, are priced at the lower of cost or market, using the first-in-first-out method, and were as follows:

Revenue Recognition

     The Company recognizes revenue in accordance with the provisions of Staff Accounting Bulletin No. 104, Revenue Recognition. For our product sales, revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, shipment of product to our distributor has occurred, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured. The Company recognizes 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. The Company provides rebates to members of certain buying groups who purchase from our distributors, to the distributors that sell to these customers at prices determined under contracts between us and the customer which 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. The Company estimates the amount of the rebate that will be paid, and records 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. The Company regularly analyzes historical rebate trends and makes 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, distributor inventory levels and product prescription data and adjust those reserves as product returns occur. The shipping and handling costs the Company incurs are included in cost of sales in our accompanying statements of operations.

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NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

     A non-recurring reserve of $1,283,000 for anticipated returns of vitamins negatively impacted by generic competition was netted against product sales for the three months ended September 30, 2004 which resulted in net negative product sales for the period. We based this reserve on estimated current wholesaler inventory levels compared to projected demand until product expiration.

     For up-front payments and licensing fees related to our contract research or technology, the Company defers and recognizes 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.

     Revenue earned under current research contracts is recognized per the contracts’ terms and conditions for invoicing of costs incurred and the achievement of defined milestones.

Net Loss per Share

     Basic loss per share is computed by dividing the net loss (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding. The computation of diluted loss per share is similar to the computation of basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued (e.g. upon exercise of stock options). Potentially dilutive common shares are not included in the computation of dilutive earnings per share if they are anti-dilutive. Net loss per share as reported was not adjusted for potential common shares, as they are anti-dilutive.

Property and Equipment

     Property and equipment are recorded at cost. Manufacturing equipment is generally depreciated over 7 to 10 years. Manufacturing leaseholds are amortized over the remaining lease term of our manufacturing facility, under the straight line method. Depreciation of other fixtures and equipment is also provided under the straight line method over the estimated useful lives, generally 3 to 7 years. Amortization of other leasehold improvements is provided over the shorter of the estimated useful lives of the improvements or the term of the respective lease. Repairs and maintenance costs are expensed as incurred.

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NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Property and equipment is comprised of the following:

Accounting for Facility Exit Costs

     In July 2004, the Company entered into a long-term agreement to lease a 33,000 square foot facility in Malvern, Pennsylvania, for the consolidation and expansion of corporate headquarters and product development activities. The lease, with a commencement date of September 15, 2004, has an initial term of ten years with two five year renewal options. Standard annual escalation rental rates are in effect during the initial lease term. With advance notice, the Company also has an option to lease adjoining space of 17,000 square feet, which could be built out for future manufacturing needs.

     The Company applied the principles of FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, in accounting for contract termination costs and associated costs that will continue to be incurred under the operating lease expiring on October 31, 2006 related to the former corporate offices located at Columbia, Maryland. The Company recorded a liability of $252,000 as of September 30, 2004 for the difference between the fair value of the remaining lease payments, reduced by current estimated sublease rentals that could be reasonably obtained and included in facility exit costs the corresponding expense.

     The Company applied the principles of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and APB Opinion No. 20, Accounting Changes, in writing off the remaining useful lives of the leasehold assets relating to the Columbia facility. As of September 30, 2004, $471,000 was included in facility exit costs associated with the moving of corporate offices.

     These expenses are included within the facility exit costs line item in the accompanying Statement of Operations.

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NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and Intangible Assets

     Goodwill principally results from business acquisitions. Assets acquired and liabilities assumed are recorded at their fair values; the excess of the purchase price over the value of the identifiable net assets acquired is recorded as goodwill. Other intangible assets are the result of product acquisitions, non-compete arrangements, and internally-discovered patents. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to impairment tests annually, or more frequently should indicators of impairment arise. The Company utilizes a discounted cash flow analysis that 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. Other intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 5 to 15 years. Amortization expense was $235,000 and $164,000 for the three months ending September 30, 2004 and 2003, respectively, and $562,000 and $492,000 for the nine months ending September 30, 2004 and 2003, respectively.

     As of September 30, 2004 and December 31, 2003, the Company’s intangible assets and related accumulated amortization consisted of the following (in thousands):

Stock-Based Compensation

     The Company applies the principles of APB No. 25, Accounting for Stock Issued to Employees, in accounting for stock options issued to its employees, which generally does not require that options granted to employees be expensed. Had the Company applied the fair value principles of SFAS No. 123, Accounting for Stock-Based Compensation, for its employee options, its net loss for the three months and nine months ending September 30, 2004 and 2003 would have increased as follows:

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NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

     These pro forma amounts are not necessarily indicative of the future effects of applying the fair value-based method due to, among other things, the vesting period of the stock options and the fair value of additional stock options issued in future years. The Financial Accounting Standards Board has indicated it will likely require that companies expense employee options in the future, but it has not yet finalized the timing or methods for such a change.

     In September 2004, the Company granted stock options to purchase 26,450 shares to two consultants as compensation for services through the end of October 2004. For the three months ended September 30, 2004, $25,000 of non-cash stock compensation expense was included in sales and marketing expense, which represents the fair value of the grants as of that date.

Sales and Issuance of Common Stock

     During the nine months ended September 30, 2004, the Company received proceeds of approximately $369,000 related to the exercise of common stock options.

     See Significant Transactions during the Quarter for a discussion of stock issuances.

Segment Information

     The Company currently operates in one business segment, which is the research, development and commercialization of products focused on women’s health and infectious diseases. The Company is managed and operated as one business. A single management team that reports to the Chief Executive Officer comprehensively manages the entire business. The Company does not operate separate lines of business with respect to its products or product candidates. Accordingly, the Company does not have separately reportable segments as defined by FASB Statement No. 131, Disclosure about Segments of an Enterprise and Related Information.

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NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Related Party Transactions

     In March 2002, pursuant to our Stock Option Plan, the Company approved the payment of the exercise price of options by two of its directors, through the delivery of full-recourse, interest-bearing promissory notes in the aggregate amount of $1,479,268. The borrowings accrue interest at 5.07% per annum and are secured by an aggregate of 261,667 shares of common stock owned by the directors. The notes are payable upon the earlier to occur of the following: (i) payable in full upon the date on which the director ceases for any reason to be a director of the Company, (ii) payable in part to the extent of net proceeds, upon the date on which the director sells all or any portion of the pledged shares or (iii) payable in full on March 21, 2007.

     In April 2002, we 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, the brokerage firm may demand payment from the Company. As of September 30, 2004 and December 31, 2003, 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.

     In August 2004, the Company approved the payment of $75,000 to one of its directors as compensation for services as an advisor for the King Transaction and related financing (See Significant Transactions during the Quarter).

Significant Transactions during the Quarter

     Cancellation of Agreements with King Pharmaceuticals, Inc — (the King Transaction)

     In July 2004, King Pharmaceuticals, Inc. and the Company mutually agreed to terminate several license agreements and a co-promotion agreement for ESTRASORB. The transaction included the return to Novavax of all rights worldwide for ESTRASORB, as well as all rights to other women’s health products that we may successfully develop utilizing our micellar nanoparticle technology. The transaction also included the redemption of $40,000,000 of the Company’s convertible notes held by King. Additionally, we hired 50 members of King’s women’s health sales force to provide competitive sales force coverage. As part of the transaction we paid King a net of $14,000,000 in cash and issued King 3,775,610 shares of common stock, which at the time of closing were valued at approximately $18,123,000.

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NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

     The King Transaction resulted in a gain on the redemption of convertible notes held by King of $11,162,000. This gain was determined based on the fair value of the convertible notes plus accrued interest as of the transaction date compared to the notes’ total book value. In addition, an intangible asset for ESTRASORB rights of $2,719,000 was recorded, which represents the difference between assets and liabilities acquired or written off, the net cash paid in the transaction, the common stock issued and transaction fees and expenses. The intangible asset for ESTRASORB rights is being amortized using the straight line method over the remaining patent life of nine years and ten months for ESTRASORB. Deferred financing costs of $351,000 relating to these convertible notes held by King and deferred revenue of $2,250,000 relating to previous licensing fees for ESTRASORB, were also written off.

Private Placements of Senior Convertible Notes and Common Stock

     Concurrent with the King Transaction, in July 2004 the Company also entered into definitive agreements for the private placement of $35,000,000 principal amount of senior convertible notes to a group of institutional investors. The notes carry a 4.75% coupon, payable semi-annually, mature in five years and are generally convertible into shares of common stock at $6.15 per share. From the third anniversary of the issue date of the notes, and subject to certain conditions, the Company shall have the right to effect a mandatory conversion of the notes if the weighted average price of shares of common stock exceeds 175% of the conversion price as of the issue date for each of 15 trading days out of any 30 consecutive trading days. Note holders shall have the right to require the Company to redeem all or a portion of the notes if the weighted average price of shares of common stock for each of 30 trading days out of 40 consecutive trading days prior to either the third or fourth anniversary of the issue date of the notes is less than the then applicable conversion price of the Company’s common stock. Provided, however, that a holder’s right to effect this optional redemption will not apply if certain revenue targets for Estrasorb are achieved.. In addition, the Company issued 952,381 shares of common stock at $5.25 per share, for gross proceeds of $5,000,000, to an additional accredited investor. Aggregate gross proceeds of the notes and common stock issuances were $40,000,000.

     As a result of both of these transactions, the Company incurred $3,354,000 of transaction expenses, which increased the intangible asset for ESTRASORB rights by $1,010,000 (included in the total intangible asset for ESTRASORB rights of $2,719,000), decreased additional paid-in capital by $287,000, and increased deferred financing costs by $2,057,000. The deferred financing costs are being amortized over the life of the convertible notes. During the three months ended September 30, 2004, $81,000 amortization was included in interest expense.

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Item 2.

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 those 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 collaborations 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 quarterly report 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.

Recent Developments

     In July 2004, we announced that we had agreed with King Pharmaceuticals, Inc. to terminate several license agreements and our co-promotion agreement for ESTRASORB (the “King Transaction”), which enabled us to obtain all rights worldwide for the product, as well as all rights to other women’s health products that we may successfully develop utilizing our micellar nanoparticle technology. As part of the transaction, we issued common shares to King and redeemed all of the $40.0 million of convertible notes held by King.

     Additionally, we originally hired 50 members of King’s women’s health sales force and have a current sales force of approximately 120 to provide competitive sales force coverage for ESTRASORB, as well as our other women’s health products. In return for the redemption of the notes and the termination of the license and co-promotion agreements, we paid King a net of $14.0 million in cash and issued King 3,775,610 shares of our common stock.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The King Transaction resulted in a gain on the redemption of debt of $11.2 million. This gain was determined based on the fair value of the convertible notes plus accrued interest as of the transaction date compared to the notes’ total book value. In addition, an intangible asset for ESTRASORB rights of $2.7 million was recorded, which represents the difference between assets and liabilities acquired or written off, the net cash paid in the transaction, the common stock issued and transaction fees and expenses. The intangible asset for ESTRASORB rights is being amortized over the patent life for ESTRASORB.

     Concurrent with the King Transaction, in July 2004 the Company also entered into definitive agreements for the private placement of $35,000,000 principal amount of senior convertible notes to a group of institutional investors. The notes carry a 4.75% coupon, payable semi-annually, mature in five years and are generally convertible into shares of common stock at $6.15 per share. From the third anniversary of the issue date of the notes, and subject to certain conditions, the Company shall have the right to effect a mandatory conversion of the notes if the weighted average price of shares of common stock exceeds 175% of the conversion price as of the issue date for each of 15 trading days out of any 30 consecutive trading days. Note holders shall have the right to require the Company to redeem all or a portion of the notes if the weighted average price of shares of common stock for each of 30 trading days out of 40 consecutive trading days prior to either the third or fourth anniversary of the issue date of the notes is less than the then applicable conversion price of the Company’s common stock. Provided, however, that a holder’s right to effect this optional redemption will not apply if certain revenue targets for Estrasorb are achieved. In addition, the Company issued 952,381 shares of common stock at $5.25 per share, for gross proceeds of $5,000,000, to an additional accredited investor. Aggregate gross proceeds of the notes and common stock issuances were $40,000,000.

     As a result of both of these transactions, we incurred $3.4 million of transaction expenses, which increased the intangible asset for ESTRASORB rights by $1.0 million (included in the total intangible asset of ESTRASORB rights of $2.7 million) decreased additional paid in capital by $0.3 million, and increased deferred financing costs by $2.1 million. The deferred financing costs will be amortized to interest expense over the life of the convertible notes.

     In July 2004, we also entered into an agreement to lease a 33,000 square foot facility in Malvern, Pennsylvania, for the consolidation and expansion of corporate headquarters and to address the need for additional product development facilities. We moved out of our facility in Columbia, Maryland and into this new facility in September 2004. This facility move follows other facility consolidation efforts which began at the end of last year. By the end of this year, we plan to have consolidated from six to four facilities, with our manufacturing in Philadelphia, PA, vaccine development in Rockville, MD, corporate headquarters and product development in Malvern, PA, and a research lab in Pacific Grove, CA.

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MANAGEMENT‘S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     In July 2004, we announced that the National Institute of Allergy and Infectious Diseases, a component of the National Institutes of Health, had cancelled its five-year contract with the Company for the development of human immunodeficiency virus (HIV) vaccine candidates due to programmatic considerations for “the government’s convenience.” We had been the prime contractor, with Emory University, Tulane University, and the University of Pittsburgh as subcontractors. The cancellation is not expected to have a material financial impact and we expect to recover costs incurred to date in association with this contract. We also have a second HIV vaccine program funded by the NIH which was not impacted by this event.