INTERIM REPORT JANUARY - MARCH 2012

The January–March 2012 period in brief

• Net sales amounted to MSEK 8.3 (0.0)
• Net loss was MSEK 54.0 (47.7)
• Loss per share was SEK 0.14 (0.12)
• Cash flow from operating activities was MSEK -41.6 (-47.5)
• Cash and cash equivalents and other short-term investments totaled MSEK 117.0 (312.1) at the end of the period, which is deemed to suffice to finance operations for more than 12 months
• Closure costs for the eprotirome program amounted to MSEK 31.6 in the first quarter
• Operations will be adjusted to shrink negative cash flow to 50-60 MSEK annually
• Discussions on ERbeta and MS indication has continued during the period
• The collaboration with Pfizer on RORgamma and autoimmune diseases commenced
• Karo Bio continues the development program on GR Inflammation on its own

Conference call today at 9.30 CET
CEO Per Bengtsson presents the report today at 9.30 CET in an audiocast, held in Swedish, available via a link on www.karobio.se and telephone: +46 8 505 598 09 or +44 20 153 9156.

CEO COMMENTARY
On February 14, news that Karo Bio terminates the phase III study with eprotirome reached the stock market. The reaction was immediate and the share price fell sharply. The cause was a supplementary pre-clinical long-term study in dogs showing that eprotirome causes cartilage damage, which means that the risk of similar damage in humans is unacceptably large. Dosing of the nearly patients enrolled in the study seized and no patient was given eprotirome for longer than has previously been shown to be safe. The net cost of terminating eprotirome’s phase III program is estimated to about 40 million kronor. The termination of the study means that Karo Bio’s budgeted costs decrease with a total of 160 million kronor.

Even before the termination of the project, the Board had initiated a review of Karo Bio's strategy. Savings totaling 17 million had been implemented, including the redundancy of 16 employees. Together with research funding through the Pfizer agreement, the assessment is that Karo Bio is funded for well over a year. We are not through,  and will continue to adjust operations that operations will be organized in the most cost efficient way. Karo Bio will also make far better use of public research and development grants. The company's objective is to limit the negative cash flow to an annual rate of 50-60 million kronor. To achieve this, we will present a new cost cutting program before the annual general meeting.

The main conclusion from the strategy review is that the business must be imbued with a more commercial mindset and that risk must be taken into account much more clearly when prioritizing projects. To achieve this we have altered the way we organize and conduct the work. The Pfizer agreement shows that we have the ability to do business when we prioritize right. It also shows that we have commercially valuable projects in the field of nuclear receptors.

In order to achieve better resource utilization in our organization, we will openly and without prejudice evaluate opportunities to complement our current operations. This means that we will consider options outside the field of nuclear receptors. Although, to come into effect, such additions must help create value for shareholders.

The agreement with Pfizer on RORgamma concluded in December 2011 is for the development of a new class of drugs for treating autoimmune diseases, such as rheumatoid arthritis and psoriasis. The agreement provides us with at least 10 million dollars during this year and next. The total value of future milestone payments may exceed 1 billion dollars and Karo Bio is also entitled to royalties on future product sales. The agreement is good for Karo Bio in several ways. It allows us to continue to develop our world-leading expertise in the nuclear receptor field RORgamma. Apart from cost cover and opportunities for significant income, it shows that Karo Bio’s skills and knowledge are attractive to one of the world's largest companies.

Karo Bio is now working to conclude similar agreements in other areas. The most current opportunity available is within the ERbeta receptor in the field of multiple sclerosis (MS). With additional animal studies that we are conducting in the near future, a few more pieces in the puzzle may fall into place which confirms the potential in the MS indication. Successful results may lead to another development and license agreement.

Another option we are actively pursuing is the ERbeta project in cancer that we are considering locating to Texas, USA. The state is investing significant resources to create a life science center in Houston, which already has one of America's most renowned cancer clusters centering around the MD Anderson Cancer Center and The Methodist Hospital. There are several opportunities for financing that would allow us to advance ERbeta in the cancer field. Today we have a compound, KB9520, which has showed good preclinical results in some cancers. Our current assessment is that Karo Bio may establish such a cooperation towards the end of the year.

Furthermore, our anti-inflammatory project around the glucocorticoid receptor is worth mentioning. Since it is modeled on the well-established drug class corticosteroids, the project arguably has lower risk in the clinical phase than the average drug development project. When the joint development with Zydus Cadila expired, we chose to follow the development path we consider most attractive. In addition to our assessment that the development risk decreases with the selected route, we do not have to share future revenues with Zydus Cadila. The project is in early stages and it is a challenge for us to finance it until a commercial agreement can be reached. The time has not yet come, but we think this is a project that will be licensed out at a relatively early stage.

All in all, there are several bright spots after eprotirome. The Pfizer deal inspires and indicates opportunities for us to do new business. At the same time, we must adapt to new ways of doing business. We face this situation with an open attitude and an unbiased approach to opportunities.

Per Bengtsson
CEO

For more information, please contact:
Per Bengtsson, Chief Executive Officer
Telephone:+46 8 608 6020 or +46 734 474 128
E-mail: per.bengtsson@karobio.se

The information in this report is such that Karo Bio is required to disclose under the Swedish Securities Market Act. The information was disclosed on April 27, 2012, 08:30 CET.

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