Full Year Report 2001, Quarterly Report October-December 2001

FULL YEAR REPORT 2001 QUARTERLY REPORT OCTOBER-DECEMBER 2001 · American Home Products became strategic partner for atherosclerosis. The agreement may bring Karo Bio MUSD 100 in revenues excluding royalty. Down payment received. · Milestone payment from Karo Bio's partner Bristol-Myers Squibb earned after initiation of phase I clinical trials on jointly discovered compound for treatment of obesity. · New technology for lead compound characterization and selection inlicensed from Duke University, North Carolina. · Karo Bio received US patent for the Liver X receptor beta, the target for the collaboration with American Home Products. · Organization strengthened with key management recruitments. · Group net sales for the full year increased to MSEK 136.9 (100.6) and to MSEK 38.3 (28.5) for the fourth quarter. Cash flows from operating activities for the full year improved to MSEK -11.9 (-20.8) and decreased to MSEK -17.9 (5.6) for the fourth quarter. · The loss after financial items increased for the full year to MSEK 320.9 (213.3) and to MSEK 82.9 (75.0) for the fourth quarter. Operating loss excluding goodwill depreciation amounted to MSEK 92.5 (60.8) for the full year and MSEK 27.8 (17.5) for the fourth quarter. · Cash and cash equivalents and short-term investments amounted to MSEK 282.3 (329.0) at the end of the year. · 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 USA. Karo Bio has four strategic partnerships with international pharmaceutical companies for development of new innovative therapies for treatment of common diseases. Karo Bio also runs several internal projects in various clinical areas where the Company has competitive advantages for discovery of new pharmaceuticals that target nuclear receptors. Exploratory studies in novel nuclear receptor areas are conducted in order to maintain a strong pipeline. These studies cover new indications for classical receptors as well as discovery and characterization of new receptors. STRATEGIC PARTNERSHIPS Atherosclerosis - American Home Products The liver X receptor is a new and important target for treatment and prevention of atherosclerosis. Karo Bio has a strong technology and patent protection around liver X receptor and with this as a basis Karo Bio has during fall 2001 entered into a strategic partnership with American Home Products. Both parties will collaborate during the drug discovery phase. American Home products will be responsible for animal studies and clinical development as well as sales and marketing. The initial focus is on atherosclerosis as the first clinical indication. There are reasons to believe that liver X receptor is an important target for other metabolic disorders and these are also covered by the collaboration agreement. If the partnership results in two distinct globally marketed products, Karo Bio will receive up to MUSD 100, comprising an up-front payment, R&D funding, and milestone payments linked to development and global approvals. Karo Bio will also receive royalties on sales revenue and an in-market bonus if certain sales goals are met. The collaboration has progressed very well during the fall of 2001 and proof of concept for targeting liver X receptor has been obtained in animal models. Diabetes - Abbott Laboratories Karo Bio collaborates with Abbott Laboratories for treatment of type 2 diabetes. The aim of the collaboration is to develop liver-selective antagonists that will normalize the elevated output of glucose from the liver in type 2 diabetics. During the year, progress has been made regarding improvements in liver-selectivity and efforts are now focused onto the most promising compound class. Karo Bio's clinical rationale is also supported by the recent discoveries that stress conditions significantly contribute to risk for development of type 2 diabetes. Karo Bio and Abbott have during the year jointly determined the three dimensional structure of the glucocorticoid receptor. This is a discovery that academia and the pharmaceutical industry have been trying to pursue for more than ten years. For this reason it represents a major achievement. Access to the three-dimensional structure gives us important information for the design and development of potent and selective compounds. Currently the project is focused on selection of drug candidates for clinical development. Obesity - Bristol-Myers Squibb Karo Bio collaborates with Bristol-Myers Squibb for development of novel therapies for metabolic disorders by targeting the thyroid hormone receptor. The collaboration has been very productive, and the parties have jointly demonstrated proof of concept in animal models. The collaboration with Bristol-Myers Squibb was extended for an additional year during fall 2000 and was extended for yet another year in 2001 and also expanded to include the Molecular Brailletm technology developed at Karo Bio USA. In September, the leading compound entered phase I clinical trials for treatment of obesity that resulted in a milestone payment to Karo Bio, recorded as revenue in the same month. In addition to the first generation compound that has entered the clinical development, Karo Bio and Bristol-Myers Squibb continue to collaborate on the discovery and development of second-generation compounds that may expand the possible indications that can be treated with novel selective thyroid hormone receptor modulators. Women's Health Care - Merck & Co. Existing estrogenic drugs for treatment of various disorders associated with the menopause in women have suboptimal selectivity at the receptor level and are associated with certain side effects. The previous discovery of the estrogen receptor beta by Karo Bio and scientific collaborators, and the Karo Bio technologies now offer a unique possibility to develop completely new and safer classes of drugs for improvement of the classical indications but also for new indications. The global partner that Karo Bio collaborates with is Merck & Co. The collaboration was initiated in 1997. The strategy in the collaboration is to develop a number of different compound classes and to validate the usefulness of these compounds for various clinical indications. Apart from complementing Karo Bio in basic drug discovery Merck is responsible for pre-clinical and clinical development. Good progress has been made during the year towards the optimization of potential pre-clinical development candidates for different clinical indications. Technology Outlicensing In 2001, Karo Bio has actively worked on five BioKey Assay collaborations, Aventis Pharma, Bayer AG, Boehringer Ingelheim Pharmaceuticals Inc., GPC Biotech, NovImmune S.A. and Serono International S.A. The BioKey® technology partners identify target proteins relevant to their strategic drug discovery efforts for the development of BioKey Assaystm. These collaborations utilize targets that are from both prokaryotic and eukaryotic organisms and represent validated targets with known function, and genomics-derived targets of unknown function. All collaborations have had success in the identification of BioKey® probes for the partners' chosen targets. The success rate for the BioKey® technology is high. To date, Karo Bio has identified BioKey® probes with high affinity for approximately 75% of the targets currently included in the collaborations. INTERNAL PROJECTS Skin Disorders Karo Bio has identified a candidate drug for treatment of skin disorders where a thyroid hormone agonist is formulated in an ointment. Currently skin atrophy is the prioritized indication and it results from topical treatment with anti-inflammatory steroids but also occurs naturally as a consequence of ageing. Karo Bio has made an interim report on its phase I and phase II studies. A positive recovery of healthy skin from steroid treatment was demonstrated based upon procollagen production. The study on patients with established skin atrophy does not show increased skin thickness when measured by sonography. However, morphological evaluation of skin biopsies is ongoing. During the year Karo Bio received a US patent for the novel concept of treating skin disorders with thyroid hormone analogs. Male Hormone Replacement Therapy and Prostate Cancer Karo Bio is actively engaged in a drug discovery project aiming at development of new safe androgens to be used in hormone replacement therapy and development of new safe antagonists for treatment of prostate cancer. Karo Bio has exclusive rights to the androgen receptor in Europe and the technology base at Karo Bio is perfectly suitable for discovery of new safe pharmaceuticals in this field where there is a great clinical need and significant commercial opportunities. The project has made good progress during the year and has therefore been upgraded regarding resource commitment. Inflammatory Disorders There is a great need for development of new pharmaceuticals for treatment of inflammatory disorders. Although very potent, the side effects of anti-inflammatory steroids restrict their use. The anti- inflammatory effects of the steroids is mediated by the glucocorticoid receptor which is a receptor for which Karo Bio has a world leading drug discovery technology and unique knowledge. Karo Bio has increased its drug discovery efforts in this area and significant progress has been made during the year. In particular the determination of the three- dimensional structure of the ligand binding domain of the receptor gives Karo Bio a significant competitive advantage. EXPLORATORY STUDIES Cardiac Arrhythmia Karo Bio has discovered a compound that has promising anti-arrhythmic properties in animals. During the year Karo Bio discovered new mechanisms of action for the compound and is evaluating these new opportunities within the field. Glaucoma Karo Bio has data that support the feasibility of treating glaucoma with thyroid hormone agonists. During the fourth quarter Karo Bio signed an agreement with SIFI for further evaluation of the concept. SIFI is an Italian company with an expertise in the field. The agreement gives SIFI an option to evaluate the project during a one-year period. TECHNOLOGY DEVELOPMENT Karo Bio is focused on the discovery and development of novel therapeutics. For such an endeavor 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 technology, 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. ORGANIZATION Björn Nilsson took office as new President for the Company in July. Previously, he was Vice President of Research and Development at Amersham Pharmacia Biotech AB in Uppsala. Karo Bio's organization has also been strengthened through several additional key management recruitments. Mats Johnson has been recruited as Vice President of Marketing and Business Development. He comes from a leading position as Vice President of Proteomics business in Amersham Pharmacia Biotech. Anders Berkenstam has been recruited as Director of Research for Sweden. Anders Berkenstam's previous employment was as President and Head of Research for Gemini, Sweden. Stefan Nilsson has been appointed Director of Exploratory Research. This new position is important for generation of new concepts and projects. Both these positions are reporting directly to the Chief Scientific Officer Dana Fowlkes. Berit Edlund fills a newly created position as Director of Human Resources. Berit Edlund's previous experience includes leading positions within Pharmacia Corporation, Skandia and Ericsson. Bertil Jungmar took the position as Chief Financial Officer effective February 1, 2001. He has a background in accounting and business advisory services with PricewaterhouseCoopers. By the end of the year, Karo Bio had 133 employees (115). Of these, 37 are based in the United States and 109 are engaged in research. Karo Bio introduced an incentive option program in accordance with the decision made at the Shareholders' Meeting April 26, 2001. The Program is a stock option program and covers all permanent employees of Karo Bio AB and its subsidiaries. The financial exposure from the stock option program is hedged by 340 000 warrants issued to a wholly-owned subsidiary. RESULT, CASH FLOW AND FINANCING Group net sales for the full year increased to MSEK 136.9 compared to last year (100.6 after restatement following the change in accounting principle regarding revenues, see Accounting and Valuation Principles below). Corresponding figures for the fourth quarter are MSEK 38.3 (28.5). The increase in revenue for the full year consists of a milestone payment from Bristol-Myers Squibb that was recorded fully as revenue in the third quarter. Revenues increased also from research funding for September - December and the year's share of the down payment from the new research collaboration with American Home Products. Group expenses for the full year increased by MSEK 146.9 to MSEK 471.2 (324.3), which was attributed firstly to the full-year effect of goodwill depreciation regarding Karo Bio USA compared to eight months in 2000, and secondly due to costs in relation to the new collaboration agreement and increased activities in other areas. Royalty to the Swedish Industrial Development Fund and success fees relating to the milestone payment from Bristol-Myers Squibb is included in other operating expenses. The increase in the fourth quarter from MSEK 106.4 to 126.5 is primarily due to costs in relation to the new collaboration agreement. The operating loss amounted for the full year to MSEK 334.3 (223.7) and MSEK 88.3 (77.9) for the fourth quarter. Operating loss excluding goodwill depreciation amounted for the full year to MSEK 92.5 (60.8) and MSEK 27.8 (17.5) for the fourth quarter. Financial income for the full year amounted to MSEK 13.4 (10.4). Cash flows from operating activities improved for the full year to MSEK -11.9 (-20.8) as a result mainly from the cash receipt of research funding and down payment from American Home Products. Corresponding figure for the fourth quarter was MSEK -17.9 (5.6). Capital investments in equipment amounted for the full year to MSEK 24.2 (9.0) and to MSEK 6.7 (3.7) for the fourth quarter. Capital investments were mainly laboratory and IT equipment to enhance capacity and capabilities and reconstruction of office space. Cash and cash equivalents and short-term investments amounted to MSEK 282.3 (329.0) at year-end. Loss per share for the year amounted to SEK 26.70 (19.51), based on the weighted average number of shares outstanding. The Group's equity ratio as of year-end was 81.0% (93.2%) and equity per share at year-end was SEK 46.37 (73.47). SHAREHOLDERS' EQUITY Shareholders' equity increased during the year by kSEK 134 from the exercise of warrants. At year-end, warrants representing 385 363 shares were outstanding. The warrants were issued in conjunction with the acquisition of Karo Bio USA, Inc. in 2000 (45 363 warrants) and the implementation of the Incentive Program 2001 (340 000 warrants). During the year, 85 000 warrants relating to the Incentive Program 2000 were canceled in accordance with a decision made at the Shareholders' Meeting 2001. The outstanding warrants will lead to no dilution of earnings per share, as a conversion to shares would lead to an improvement of earnings per share. The Company's share capital amounted to SEK 60 130 355 at the end of the year representing 12 026 071 shares at a par value of SEK 5. Total consolidated shareholder's equity amounted to MSEK 557.7 after taking into account the effect of the change in accounting principle and the loss for the year. PARENT COMPANY The Parent Company is reporting a loss for the year of MSEK 99.4 (22.2). ACCOUNTING AND VALUATION PRINCIPLES This quarterly report and earnings 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 changed 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 years, 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 is usually 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. Beginning in this report, depreciation of goodwill is presented separately in operating expenses and marketing expenses are included in administrative expenses as these do not represent a significant portion of the Company's total expenses. These changes are made to give a better view of the Company's expense structure. Comparative figures for prior periods have been restated accordingly. Amounts or figures in parentheses indicate comparative figures for the corresponding period last year. 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 milestones being achieved 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 rapid development in the biotech area, a longer depreciation period is not considered appropriate. The milestone payments will be expensed as incurred in order to match expected milestone payments received from partners. ANNUAL GENERAL MEETING AND SCHEDULED RELEASES OF FINANCIAL INFORMATION The Board of Directors intends to convene the Annual General Meeting on Thursday April 25 at 4 p.m. Notice for the meeting will be available on Karo Bio's website www.karobio.se from March 26. In accordance with the Board's Policy for Dividend, the Board of Directors and the President will propose that no dividend be paid for the financial year 2001. Karo Bio intends to distribute financial reports as follows: · Annual Report 2001 April 2 · Quarterly Reports April 24, July 16, October 16 Printed reports are distributed by mail to shareholders. Electronic versions of Quarterly Reports and Earnings Report are distributed to them who have so requested. Financial reports, press releases and other information is available on Karo Bio's website www.karobio.se ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2002/02/08/20020208BIT00140/bit0001.doc The Full Year-end Report http://www.waymaker.net/bitonline/2002/02/08/20020208BIT00140/bit0001.pdf The Full Year-end Report