Quarterly report april-june 2001

QUARTERLY REPORT APRIL-JUNE 2001 · Björn Nilsson took office as President on July 1. · New technology for lead compound characterization and selection in-licensed from Duke University, North Carolina. · US patent on Estrogen Receptor Beta crystal structures received. · US patent on Thyroid Hormone Receptor crystal structures and drug design principles received. · Group net sales in the second quarter increased to MSEK 27.2 (22.8), and cash flows from operating activities amounted to MSEK -26.3 (1.4). · The loss after financial items increased to MSEK 92.5 (55.6), primarily due to goodwill depreciation regarding Karo Bio USA and increased activities. Operating loss excluding goodwill depreciation amounted to MSEK 33.0 (17.3). · Cash and cash equivalents and short-term investments amounted to MSEK 263.2 (366.0) at the end of the period. · OPERATIONS Karo Bio is a leading drug discovery company in the field of nuclear receptor biology and medicinal chemistry. The Company develops receptor- selective and tissue-selective pharmaceuticals for treatment of major disorders. Karo Bio has operations in Sweden and in North Carolina and California in the United States. The Company maintains collaborations with leading academic groups and leading international pharmaceutical companies. COLLABORATIVE PROJECTS Abbott Laboratories The project aims at development of a novel therapy for treatment of type 2 diabetes. Identification and optimization of lead compounds for clinical trials continue. Bristol-Myers Squibb This project focuses on novel therapies for treatment of metabolic disorders by targeting thyroid hormone receptors. The primary indication is obesity and preparation for clinical trials are ongoing. Merck & Co The Merck project targets estrogen receptors and development of novel therapies in the field of women's health care. Karo Bio's discovery of the new estrogen receptor beta is an important cornerstone in the project. Selection of clinical development candidates is underway. BioKey Assays Collaborations Karo Bio continues to collaborate with several pharmaceutical and biotechnology companies - Aventis Pharma, Bayer AG, Boehringer Ingelheim Pharmaceuticals, Inc., GPC Biotech, NovImmune S.A. and Serono International S.A. - to establish high throughput screening assays for novel drug targets. INTERNAL PROJECTS Skin Disorders Phase II clinical data for the treatment of steroid induced skin atrophy with KB-261 are currently being analyzed. Cardiac Arrhythmia Karo Bio's lead compound KB130015 and second-generation products for the treatment of cardiac arrhythmia are currently the subjects of discussions with pharmaceutical companies. Glaucoma In this project, the thyroid hormone receptor is a novel target for the treatment of glaucoma where the objective is to treat this disorder by lowering intra-ocular pressure. Exploratory Program Karo Bio's exploratory research activities are focused on the mineralocorticoid receptor, the androgen receptor and the orphan receptor LXR. Drugs that act through these receptors may be utilized to treat high blood pressure, prostate cancer and cardiovascular disease. BioKey Assay for Genomics-based Antimicrobials Karo Bio utilizes its proprietary BioKey Assay to discover drugs to treat infectious diseases based on novel bacterial drug targets. Lead compounds for the novel essential gene products DXR and IspB are currently being tested. TECHNOLOGY DEVELOPMENT Karo Bio is focused on the discovery and development of novel therapeutics for which access to leading technology is very important. In May, Karo Bio reached an Agreement with Duke University, Durham, North Carolina, granting Karo Bio the exclusive rights to technologies, including Cellular Brailletm, developed at Duke University Medical Center. The Cellular Braille technology further expands the capabilities of the Karo Bio Molecular Braille® technology that was previously developed by Karo Bio USA in collaboration with scientists at Duke University Medical Center. See below for further information regarding financial effects and accounting treatment. Karo Bio has also received four US patents in the second quarter. The subject of one of these is a novel method to treat certain skin disorders. It provides broad coverage including method of treatment claims as well as claims for skin treatment compositions with thyroid hormones and thyroid hormone analogs. US patents have also been granted that cover structural information related to the estrogen and thyroid hormone receptors. ORGANIZATION Björn Nilsson took office as President on July 1. By the end of the period, Karo Bio had 124 employees (115). Of these, 36 are based in the United States and 102 are engaged in research. RESULTS AND FINANCING Group net sales for the second quarter increased to MSEK 27.2 compared to the same period last year (22.8 after restatement following the change in accounting principle regarding revenues, see Accounting and Valuation Principles below). Group expenses increased by MSEK 39.7 to MSEK 120.6 (80.9), which was primarily due to the acquisition of Karo Bio USA, increased activities and costs in relation to the change of president. Goodwill depreciation increased by MSEK 19.7 and operating expenses increased from the activities in Karo Bio USA, which were not included in prior period figures for all three months. The operating loss amounted to MSEK 93.4 (58.1). Operating loss excluding goodwill depreciation amounted to MSEK 33.0 (17.3). Financial income amounted to MSEK 0.9 (2.4). Cash flows from operating activities amounted to MSEK -26.3 (1.4). Investment in technology resulted in cash flow of -10.7 (-0.0). Capital investments in equipment amounted to MSEK 5.7 (1.0). Capital investments were mainly new laboratory equipment to enhance capacity and capabilities. As a consequence, cash and cash equivalents and short-term investments amounted to MSEK 263.2 (366.0) at period-end. Loss per share for the period amounted to SEK 7.70 (5.28), based on the weighted average number of shares outstanding. Corresponding fully diluted figures are SEK 7.52 (5.24). The Group's equity/assets ratio as of period-end was 89.2% (93.4%) and equity per share at period-end was SEK 58.97 (86.03). INVESTMENT IN TECHNOLOGY The investment in exclusive rights to technologies from Duke University as per the Agreement described above was capitalized in May 2001. The amount capitalized represents the net present value of the determinable payments according to the Agreement. Payments will be made over a four- year payment schedule. Additional payments contingent on patents being received and milestone payments are provided for in the Agreement. These future payments will be substantially less than the amount capitalized. Depreciation will be taken over a three-year period, beginning in May 2001. Due to the rapid development in the biotech area, a longer depreciation period was not considered appropriate. The milestone payments will be expensed as incurred in order to match expected milestone payments received from partners. SHAREHOLDERS' EQUITY Shareholders' equity increased by MSEK 0.1 from the exercise of warrants, leading to 10,688 new shares. The Incentive Program 2001 was introduced in May 2001, following the decision made at the Shareholders' Meeting on April 26, 2001. Warrants representing 340,000 shares were issued. In addition, the 85,000 warrants relating to the Incentive Program 2000 were canceled in May 2001, also following a decision made at the Shareholders' Meeting. Consequently, the Company's share capital of SEK 60,107,455 at the end of the period was divided among 12,021,491 shares at par value of SEK 5. In addition, warrants representing 389,943 shares were outstanding. Total shareholder's equity amounted to MSEK 708.9 after taking into account effect of the change in accounting principle and the loss for the period ACCOUNTING AND VALUATION PRINCIPLES This quarterly report has been prepared in accordance with the Swedish Financial Accounting Standards Council's (the Council) standard RR 20 for interim reports. The accounting and valuation principles applied are consistent with provisions of the Swedish Annual Accounts Act and standards issued by the Council. With exception from the change in accounting policy described below, the principles are unchanged compared to what was applied in the Annual Report for 2000. Karo Bio has decided to change the accounting for down payments from collaborative research projects. Such down payments are received at the initiation of collaborations and are non-refundable. In previous periods, non-refundable down payments were reported as revenue when received. Beginning January 1, 2001, non-refundable down payments are reported as revenue over the term of the collaborative research agreement, which usually is three years. The change is compliant with the new accounting standard regarding Revenue Recognition RR 11 issued by the Council, which is effective January 1, 2001. Comparative figures for prior periods have been restated accordingly. Amounts or figures in parentheses indicate comparative figures for the corresponding period last year. SCHEDULED RELEASES OF FINANCIAL INFORMATION Karo Bio intends to distribute financial reports as follows: · Quarterly Report: October 17. · Full Year Report: February 8, 2002. · [REMOVED GRAPHICS] [REMOVED GRAPHICS] Huddinge, July 12, 2001 Björn Nilsson, President For further information, please contact Per Otteskog, Senior Vice President Investor Relations & Communications, tel. +46 8 608 60 18 or Bertil Jungmar, Vice President Finance & Administration, tel. +46 8 608 60 52. This report has not been subject to review by the Company's independent auditor. ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.bit.se/bitonline/2001/07/12/20010712BIT00040/bit0002.doc http://www.bit.se/bitonline/2001/07/12/20010712BIT00040/bit0002.pdf

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Karo Pharma is a specialty pharma company that develops and markets products to pharmacies and directly to healthcare providers. The share is listed on Nasdaq Stockholm in the Mid Cap segment.

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