Quarterly Report July-September 2002

QUARTERLY REPORT july-september 2002 · Significant preclinical milestone reached in the collaboration with Merck & Co., Inc. Milestone payment received. · The collaboration with Bristol-Myers Squibb extended for six months. · Significant progress made in exploratory research in the launch of a new project and in successful application of the Molecular Braille® technology. · The loss after financial items decreased to MSEK 37.4 (65.0). Operating result excluding goodwill depreciation improved by MSEK 29.4 to MSEK 21.2 (-8.2). · Group net sales increased to MSEK 76.8 (47.6). · Cash flows from operating activities amounted to MSEK 8.3 (52.8). Cash and cash equivalents and short-term investments amounted to MSEK 235.2 (306.9) 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. Karo Bio has four strategic partnerships with international pharmaceutical companies for development of innovative therapies for the 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 to maintain a strong pipeline. These studies cover new indications for well characterized receptors as well as discovery and characterization of new receptors. Strategic Partnerships Women's Health Care - Merck & Co., Inc. An important pre-clinical milestone in the collaboration with Merck & Co., Inc. was reached in July, which triggered a milestone payment to Karo Bio in the third quarter. Karo Bio may receive additional future milestone payments from Merck & Co., Inc., dependent upon the successful progression of compounds to and through clinical trials and approval as well as royalties on sales of such compounds. In October 1997 Karo Bio and Merck & Co., Inc. initiated a three-year drug discovery collaboration in the field of estrogen receptors. In October 2000 the collaboration was extended for two additional years. The program has successfully reached its primary drug discovery objectives, the identification of estrogen receptor subtype selective compounds with potential for multiple clinical indications. The research collaboration phase is based on estrogen receptors as targets for the discovery of drugs that may be useful for disorders primarily in the field of women's health care. Under the terms of the agreement, which will remain in full force and effect, the research collaboration phase of this program is scheduled to be completed at the end of October 2002. Merck & Co., Inc. has exclusive, worldwide rights for all compounds identified during the collaboration and is responsible for their further pre-clinical and clinical development Atherosclerosis - Wyeth Pharmaceuticals Karo Bio collaborates with Wyeth Pharmaceuticals for development of novel treatments for atherosclerosis with the novel liver X-receptor (LXR) as drug discovery target. Targeting LXR may lead to development of drugs for both prevention and treatment of atherosclerosis. The collaboration was initiated in September 2001 and important progress has been made to date. Diabetes - Abbott Laboratories In the field of type 2 diabetes Karo Bio collaborates with Abbott Laboratories for development of pharmaceuticals that have the capacity to normalize the elevated glucose output from liver, which is associated with type 2 diabetes. A lead compound has been shown to lower blood glucose in animal models of diabetes by lowering liver production of glucose. Pre-clinical studies are continuing to determine if the compound is a clinical candidate. Obesity - Bristol-Myers Squibb In a joint collaboration, Karo Bio and Bristol-Myers Squibb are targeting the thyroid hormone receptor for treatment of obesity. Natural thyroid hormone increases body metabolism and burns calories but cannot be used for treatment of obesity due to cardiac side effects. Karo Bio and Bristol-Myers Squibb have successfully developed technical approaches to identify compounds that avoid the side effects. The first clinical development compound was removed from development in March this year and may be replaced with a back-up compound that is currently progressing to the final stages of pre-clinical evaluation. The drug discovery collaboration has also recently been prolonged for an additional six months. Technology Outlicensing Karo Bio's BioKey® technology is well suited for high throughput screening. The technology has been successfully applied to over 100 molecular targets for Karo Bio's internal programs and for collaborations with several U.S. and European partners, including Aventis Pharma, Bayer AG, GPC Biotech, and Boehringer Ingelheim Pharmaceuticals. During the period, scientific milestones have been reached in the Aventis Pharma collaboration. Internal Projects Male Hormone Replacement Therapy and Prostate Cancer The androgen receptor (AR) is the receptor for the male sex hormone and the receptor has the potential to become a significant drug target for numerous disorders. The key to success in this field is access to know- how and technologies that enable development of receptor and tissue selective drugs for important clinical indications such as prostate cancer, male hormone replacement therapy, acne, alopecia and hirsutism. Karo Bio is uniquely positioned in the field with access to a strong drug discovery technology which has been significantly reinforced during the period with receptor structures, identification of unique BioKeys® and development of Molecular Braille® fingerprints for selection of promising lead compounds. The technology base is perfectly suitable for discovery and selection of specific drugs. In addition, Karo Bio has exclusive European patent protection for AR as a drug discovery target. Inflammatory Disorders There is a great need for improvement of treatment of inflammatory disorders. Anti-inflammatory steroids are the most powerful anti- inflammatory agents known today but have a number of side effects that restricts the broad use of these important pharmaceuticals. The glucocorticoid receptor is the target for the anti-inflammatory steroids. Karo Bio believes that its leading technology can discover new and more selective drugs with anti-inflammatory effects but with significantly reduced side effects. During the period important progress has been made in identification of active compounds and the company is working intensely to further optimize these by making chemical analogs. Skin Disorders Karo Bio has developed KB002611 which is a product for prevention of steroid induced skin atrophy and with potential use for other skin disorders. Karo Bio is marketing this product as an in licensing opportunity for specialist companies in the field. Exploratory Studies Karo Bio continues to strengthen its pipeline of new projects through internal drug discovery and by collaborations within its scientific network. A new project has been launched which in the near future will be marketed as a new partnership opportunity. Progress in compound characterization and selection has also been made in several projects through the application of the Molecular Braille® technology and compound libraries have been expanded significantly. Organization By the end of the period, Karo Bio had 135 employees (126). Of these, 37 (36) are based in the United States and 109 (104) are engaged in research. Result, Cash Flow and Financing Group net sales for the third quarter increased by MSEK 29.2 to MSEK 76.8 compared to MSEK 47.6 for the same period last year. The increase in revenue relates primarily to the significant preclinical milestone payment received from Merck & Co, Inc. in the third quarter this year, even though a milestone payment from Bristol-Myers Squibb was recorded in the corresponding quarter last year. Both milestone payments were fully recorded as revenue in the respective quarter. Group expenses decreased by MSEK 0.3 to MSEK 116.0 (116.3). The decrease is the net effect of the increased activity in the research organization, and lower cost in non-R&D organization. The operating loss for the quarter improved to MSEK 39.2 (68.6). Operating result excluding goodwill depreciation amounted to MSEK 21.2 (- 8.2). Goodwill depreciation amounts to MSEK 60.4 and is included in reported operating expenses and also operating result. Financial income for the third quarter amounted to MSEK 1.8 (3.6). Currency exchange fluctuations pertaining to liabilities in US dollars are included in financial net, leading to a lower financial net in combination with the relatively low yield in the interest rate market compared to previous periods. Cash flows from operating activities for the third quarter amounted to MSEK 8.3 (52.8). The strong cash flow in the third quarter 2002 is primarily the net effect from increase in revenues and changes in working capital. The very strong cash flow in the third quarter 2001 relates to the receipt of the down payment from Wyeth Pharmaceuticals, which had a material effect on changes in working capital. Significant factors affecting change in working capital 2002 are reduction of unearned revenue, primarily from down payments received but not yet recorded as revenue, and reductions of payables to vendors. Capital investments in equipment amounted to MSEK 0.3 (9.2). Cash and cash equivalents and short-term investments amounted to MSEK 235.2 (306.9) at end of period, while the corresponding amount for previous quarter was 227.2. Loss per share for the third quarter amounted to SEK 3.11 (5.41), based on the weighted average number of shares outstanding and excluding dilution. The Group's equity ratio as of period-end was 79.6% (81.3%) and equity per share at period-end was SEK 29.70 (53.57). Shareholders' Equity Shareholders' equity increased during the third quarter by kSEK 12 from the exercise of warrants. At period-end, warrants representing 358 777 shares were outstanding. The warrants were issued in conjunction with the acquisition of Karo Bio USA, Inc. in 2000 (21 144 warrants) and the implementation of the Incentive Program 2001 (340 000 warrants). The outstanding warrants will lead to no dilution of earnings per share in 2002, as a conversion to shares would lead to an improvement of earnings per share. The Company's share capital amounted to SEK 60 263 285 at the end of the period representing 12 052 657 shares at a par value of SEK 5. Total consolidated shareholder's equity amounted to MSEK 358.0 (643.9) at the end of 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. The principles applied are unchanged compared to what was applied in the Annual Report for 2001. Amounts or figures in parentheses indicate comparative figures for the corresponding period last year. Amounts are expressed in Swedish Kronor (SEK) or thousands (kSEK) or millions (MSEK) of Kronor as indicated. Scheduled Releases of Financial Information Karo Bio intends to distribute financial reports as follows: Quarterly Report October - December and Full Year Report 2002 February 7, 2003 Financial reports, press releases and other information is available on Karo Bio's website www.karobio.com ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2002/10/16/20021016BIT00050/wkr0001.doc The Full Report http://www.waymaker.net/bitonline/2002/10/16/20021016BIT00050/wkr0002.pdf The Full Report

About Us

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.