Quarterly report July-September 2001

QUARTERLY REPORT JULY-SEPTEMBER 2001 ·American Home Products becomes 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. ·Interim reporting on clinical studies using KB002611 in the skin area. ·Karo Bio receives US patent for the Liver X Receptor . ·Organization strengthened with key management recruitments. ·Group net sales in the third quarter increased to MSEK 47.6 (23.5), and cash flows from operating activities increased to MSEK 52.8 (-33.1). ·The loss after financial items decreased to MSEK 65.0 (74.7). Operating loss excluding goodwill depreciation amounted to MSEK 4.6 (14.3). ·Cash and cash equivalents and short-term investments amounted to MSEK 306.9 (331.4) 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 USA. The Company maintains collaborations with leading academic groups and major international pharmaceutical companies. COLLABORATIVE PROJECTS American Home Products Karo Bio has entered into a new strategic collaboration with American Home Products. The target is the Liver X Receptor (LXR) and the initial focus is the clinical indication of atherosclerosis. LXR is believed to be a key regulator of cholesterol metabolism. Karo Bio has strong patent protection in the LXR field. Karo Bio has received a down payment at the initiation of the agreement and will receive R&D funding and milestone payments. These may bring Karo Bio MUSD 100 if two products are brought to the market. Karo Bio will also receive royalties on sales revenue and an in-market bonus if certain sales goals are met. Abbott Laboratories The indication in this project is type 2 diabetes and the glucocorticoid receptor (GR) in the liver is the target. Optimization and selection of clinical development candidates continue. Bristol-Myers Squibb The thyroid hormone receptor (THR) is the target in this drug discovery collaboration, whose objective is the development of novel treatment for metabolic disorders. Currently the primary indication is obesity and during the period an Investigational New Drug application (IND) has been filed with the Food and Drug Administration (FDA) and Phase I clinical studies were initiated with a novel TR modulator. Merck & Co. The project targets estrogen receptors (ER). The collaboration aims at development of novel treatments in the field of women's health care. The selection and optimization of clinical development candidates continues. 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 Karo Bio has made an interim report on its Phase I and Phase II studies on KB002611. A positive recovery of healthy skin from steroid treatment was demonstrated after treatment with KB002611 based upon procollagen production. The interim report of results from the study on patients with established skin atrophy do not show increased skin thickness when measured by sonography. Morphological evaluation of skin biopsies is ongoing. Cardiac Arrhythmia A novel mechanism for the Karo Bio lead compound KB130015 has been discovered. Patent applications have been filed. Glaucoma The aim in the project is to develop novel treatments for glaucoma by use of thyroid hormone agonists. Karo Bio is seeking a partner for the project. Exploratory Program Karo Bio continues to pursue the discovery of novel drug compounds targeting the androgen receptor for the treatment of diseases within men's health. In addition, high priority is given to develop tissue- selective compounds targeting the glucocorticoid receptor for the treatment of inflammatory diseases. BioKey Assay for Genomics-based Antimicrobials This project focuses on drug discovery targets that have never been utilized for the discovery of antibacterial compounds. BioKey Assays and several lead series targeting two distinctly different protein targets have been developed. Karo Bio will now seek a licensing partner for the project. Resources that become available will be used to strengthen exploratory nuclear receptor projects. ORGANIZATION Karo Bio's organization has recently been strengthened through three 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. Mats Johnson has an excellent background to continue to develop Karo Bio's marketing strategy. Anders Berkenstam has been recruited as Director of Research for Sweden. Anders Berkenstam's present employment is President and head of research for Gemini, Sweden. Stefan Nilsson, one of Karo Bio's leading scientists, 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 will fill a newly created position as Director of Human Resources. Berit Edlund's previous experience includes leading positions within Pharmacia Corporation, Skandia and Ericsson. She will join the Company on October 24. By the end of the period, Karo Bio had 126 employees (120). Of these, 36 are based in the United States and 104 are engaged in research. RESULTS, CASH FLOW AND FINANCING Group net sales for the third quarter increased to MSEK 47.6 compared to the same period last year (23.5 after restatement following the change in accounting principle regarding revenues, see Accounting and Valuation Principles below). The increase in revenue consists primarily of a milestone payment from Bristol-Myers Squibb, which was recorded fully as revenue in the third quarter. Revenues increased also from research funding and the period's share of the down payment from the new research collaboration with American Home Products. Group expenses increased by MSEK 15.0 to MSEK 116.3 (101.3), which was due to costs in relation to the start-up of the new collaboration agreement, increased activities in other areas, and royalty to the Swedish Industrial Development Fund and success fees to advisors relating to the milestone payment from Bristol-Myers Squibb included in other operating expenses. The operating loss amounted to MSEK 68.6 (77.8). Operating loss excluding goodwill depreciation amounted to MSEK 8.2 (17.3). Financial income amounted to MSEK 3.6 (3.1). Cash flows from operating activities increased to MSEK 52.8 (-33.1) as a result mainly from the cash receipt of research funding and down payment from American Home Products. Capital investments in equipment amounted to MSEK 9.2 (1.5). Capital investments were mainly Nuclear Magnetic Resonance (NMR) spectrometer and other laboratory equipment to enhance capacity and capabilities. As a consequence, cash and cash equivalents and short-term investments amounted to MSEK 306.9 (331.4) at period-end. Loss per share for the period amounted to SEK 5.41 (7.09), based on the weighted average number of shares outstanding. Corresponding fully diluted figures are SEK 5.24 (7.03). The Group's equity/assets ratio as of period-end was 81.3% (94.7%) and equity per share at period-end was SEK 53.55 (79.79). SHAREHOLDERS' EQUITY Shareholders' equity increased by kSEK 21 from the exercise of warrants, leading to 4 186 new shares. Consequently, the Company's share capital of SEK 60 128 385 at the end of the period was divided among 12 025 677 shares at par value of SEK 5. In addition, warrants representing 385 757 shares were outstanding. Total shareholder's equity amounted to MSEK 643.9 after taking into account the 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. The investment in exclusive rights to technologies from Duke University as per the Agreement described in the Quarterly Report for the period April-June 2001 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. Depreciation will be taken over a three-year period, beginning in May 2001. 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: · Full Year Report: February 8, 2002. · Huddinge, October 17, 2001 Björn Nilsson, President For further information, please contact Per Otteskog, Senior Vice President Investor Relations & Communications, tel. +46 8 608 60 18, Bertil Jungmar, Vice President Finance & Administration, tel. +46 8 608 60 52 or Björn Nilsson, President, tel +46 70 218 15 00. 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.waymaker.net/bitonline/2001/10/17/20011017BIT00020/bit0002.doc The full report http://www.waymaker.net/bitonline/2001/10/17/20011017BIT00020/bit0002.pdf The full report