Interim report 1 january - 31 march 2000

INTERIM REPORT 1 JANUARY - 31 MARCH 2000 Karo Bio aquires Novalon Pharmaceutical Corporation. The collaboration with Abbott Laboratories in the field of type 2 diabetes began in January. Compounds selected for clinical development in the Bristol-Myers Squibb collaboration. Animal trials for the prioritized indications are in progress for the collaboration with Merck & Co. Compounds for other clinical indications are being optimized. A clinical phase II study has been started in the skin disorders program. Net sales for the period increased to SEK 37.3 million (15.3). Cash flow from operations increased to SEK 2.6 million (-10.8) and net results after financial items improved to SEK 3.2 million (-9.9). Liquid funds and short-term investments as of 31 March amounted to SEK 190.5 million, compared with SEK 187.8 million as of 31 December 1999. KARO BIO AB Novum, Hälsovägen 7, 141 57 Huddinge, Sweden Telephone: +46 (0) 8-608 60 00; Fax: +46 (0) 8-774 82 61; E-mail: info@karobio.se; website: http://www.karobio.se/ OPERATIONS Karo Bio is a drug discovery company working with the development of receptor- and tissue-selective drugs for the treatment of widespread diseases that are responsive to nuclear receptors. Operations are conducted in collaboration with international pharmaceutical companies and leading academic institutions in Sweden and other countries. The Company is engaged in four different research programs: Estrogen receptors (ER): Within the field of women's health care, e.g., menopausal symptoms, osteoporosis, cardiovascular disease and cancer. Thyroid hormone receptors (THR): Cardiac arrhythmia, metabolic disorders, glaucoma and skin disorders. Glucocorticoid receptor (GR): Type 2 diabetes and inflammatory diseases. Orphan receptors: Discovery and characterization of new nuclear receptors as targets for development of new pharmaceuticals. COLLABORATIVE PROJECTS Abbott Laboratories - Type 2 diabetes (GR) The Abbott collaboration began in January and a down payment was received the same month. The objective of the project is to develop pharmaceuticals for the treatment of Type 2 diabetes in accordance with a new method developed by Karo Bio and Karolinska Institutet. Compounds developed by Karo Bio were optimized during the period and new compound classes were designed and synthesized. Bristol-Myers Squibb - Metabolic disorders (THR) The methodology for of designing thyroid hormone agonists that reduce body weight and reduce cholesterol without increasing heart rate was confirmed last year. Compounds with the desired activity profile have been selected for clinical development. Bristol-Myers Squibb and Karo Bio continue to evaluate the mechanism of action of THR-beta agonists for the treatment of metabolic disorders, with the objective of developing second-generation compounds. MERCK & Co. - Estrogen receptors The broad collaboration is aimed at the development of pharmaceuticals that act through the estrogen receptors Alpha and Beta and can result in many products targeting different clinical indications. Animal trials are in progress in relevant disease models with pharmaceutical compounds developed for the prioritized indications. The project has also generated substantial biological information, which has been used to develop compounds for other clinical indications. The compounds are currently being optimized and tested. INTERNAL PROJECTS Skin disorders - THR Skin atrophy is a common side effect for patients undergoing glucocorticoid (steroid) therapy. This can be counteracted with compounds affecting the thyroid hormone receptors according to a method developed by Karo Bio, upon which the company has applied for patent. Karo Bio filed an IND during the period, which was approved by the Swedish Medical Products Agency (Läkemedelsverket) in April. The clinical phase II study has been started and is being conducted at Sahlgrenska Sjukhuset in Göteborg. The study will be concluded in the fall of this year. Cardiac Arrhythmia - THR Karo Bio is seeking a partner for the further development of the pharmaceutical compound KB 130 015 and concentrating in-house development on a new generation of compounds. New compounds with improved properties were developed during the period. Glaucoma - THR Eye drops have been developed and animal trials will start in May. Other research and development Karo Bio's collaborative partnerships with Karolinska Institutet and other academic institutions, the objective of which is to further survey the function of both estrogen receptors in various tissues, continue to yield interesting results. Characterization of various orphan receptors and evaluation of additional clinical indications are in continuous progress, aimed at starting new research programs. New programs were started early this year. Additional key competencies have been recruited during the year. The company had 88 employees as of 31 March, compared with 84 at year-end 1999 and 78 as of 31 March 1999. Eighty of the Company's employees are engaged in research. NOVALON PHARMACEUTICAL CORPORATION Karo Bio entered into an agreement in March to acquire the American biotech company Novalon Pharmaceutical Corporation. The board of directors has proposed that the acquisition be carried out by means of an issue in kind of a maximum of 2,294,293 shares and warrants in Karo Bio, corresponding to 20% of Karo Bio after the new share issue and full dilution. The proposal shall be considered by the Annual General Meeting on April 26. Novalon has 30 employees and operates out of Durham, North Carolina. The company possesses key technologies, BioKey and Molecular Braille , that complement Karo Bio's technologies extremely well. The merger will solidify Karo Bio's leading position in the field of nuclear receptors. REVENUES AND PERFORMANCE Net sales for the Group and the Parent Company during the period amounted to SEK 37.3 (15.3) million. The down payment received from Abbott in January is included in net sales. Group costs increased to SEK 36.2 (27.4) million. The largest items are salary costs consequent upon new hiring since the first quarter of 1999, software for medicinal chemistry and various success fees. The latter item was reported under "other operating expenses." The company expanded into new premises at the beginning of the year. Purchases of chemicals and consumables have increased due to intensified research activities. Group cash flow from operations increased to SEK 2.6 (-10.8) million and consolidated net results improved to SEK 3.2 (-9.9) million. The Parent Company is reporting net results of SEK 4.1 (-8.9) million. The difference between the Group and the Parent Company is mainly made up of depreciation of goodwill in the amount of SEK 1.3 (1.3) million. Earnings per share for the period were SEK 0.35 (-1.08), calculated upon the average number of shares. Owing to the consolidated losses carried forward of SEK 448 million, income for the period was not taxable. LIQUIDITY AND SHAREHOLDERS' EQUITY Liquid funds for the Group, including short-term investments, amounted to SEK 190.5 million as of 31 March (187.8 as of 31 December 1999). The group has no interest-bearing loans. Shareholders' equity as of 31 March 2000 was SEK 212.3 million (SEK 209.2 million as of 31 December 1999). The Company's share capital of SEK 45,885,860 is divided among 9,177,172 shares at par value of SEK 5. INVESTMENTS Investments in equipment by the Group and Parent Company during the period amounted to SEK 2.7 (1.2) million. These investments were primarily in equipment for x-ray crystallography and computers for the software purchased for medicinal chemistry operations. The x-ray equipment is now in full operation and will give Karo Bio the opportunity to rapidly determine receptor structures in-house. OTHER INFORMATION In connection with the Annual General Meeting on 26 April, Torben Jørgensen will take office as president of the Company. In addition to the non-cash issue directed at the shareholders of Novalon and related decisions, the board is proposing the issue of 85,000 warrants to employees of Karo Bio as a component in an incentive program. The warrants will be subscribed by the newly acquired subsidiary on market terms and sold thereafter to designated employees. The Annual General Meeting will also be asked to authorize the board to carry out one or more new share issues of up to 600,000 shares, with or without waiver of the existing shareholders' preferential rights. The aim is to give the board the possibility to raise new capital for the company from institutional investors. The issues will be carried out at market price levels. SCHEDULED REPORTS Semi-Annual Report 12 July 2000 Interim Report, January-September 17 October 2000 Earnings Report for 2000 8 February 2001 This report has not been reviewed by the company's independent auditor. ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/2000/04/26/20000426BIT01160/bit0001.doc http://www.bit.se/bitonline/2000/04/26/20000426BIT01160/bit0002.pdf http://www.bit.se/bitonline/2000/04/26/20000426BIT01160/bit0003.xls Appendix