Semi-annual report 1 january 30 june 2000

SEMI-ANNUAL REPORT 1 JANUARY - 30 JUNE 2000 * Karo Bio has completed the acquisition of Novalon Pharmaceutical Corporation (Karo Bio USA Inc.). The acquisition provides the Company with technologies in the field of genomics that make discovery of new drugs possible. * The collaboration agreement with Bristol-Myers Squibb has been extended for one year. Compounds for clinical development have been selected. * Karo Bio has entered into a collaboration with GPC Biotech AG, one of the largest biotechnology companies in Germany. * Net sales for the period increased to SEK 55.0 million (30.6). * The acquisition of Novalon brought acquisition goodwill in the amount of SEK 963 million. Depreciation will be made, according to plan, over three years beginning 1 May 2000. * Cash flow from operating activities for the period increased to SEK -8.0 million (-14.8). However, net results after financial items for the period declined to SEK -71.5 million (-21.1), due to depreciation of goodwill in the amount of SEK 56.1 (2.6) million. * An issue of 600,000 new shares directed at Swedish and international institutional investors brought 196.9 MSEK. Liquid funds and short-term investments amounted to SEK 366.0 million as of 30 June, to be compared with SEK 187.8 million on 31 December 1999. KARO BIO AB NOVUM, HÄLSOVÄGEN 7, SE-141 57 Huddinge, Sweden TELEPHONE: +46 8-608 60 00. FAX: +46 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. The Company's competitive advantage is based on proprietary patented receptors, proprietary three-dimensional receptor structures, receptor structures complexed with pharmaceutical compounds, and response models developed by the company that efficiently measure the properties of pharmaceutical compounds. By virtue of the acquisition of Novalon, the Company now also has technologies making it possible to rapidly identify pharmaceutical compounds that act through new proteins mapped via genomic research (BioKey Assays ), as well as identification of tissue-selective compounds (Molecular Braille ). Consequently, Karo Bio is well positioned to meet the increased interest for new proteins as targets for drug development. The Company conducts operations in its premises at Novum Research Park outside of Stockholm and in Durham, North Carolina, USA. The Company cooperates with international pharmaceutical companies and leading academic institutions in Sweden and abroad. There were 115 employees as of 30 June, to be compared with 84 at year-end 1999 and 80 on 30 June 1999. Thirty-one employees work in the United States and about 100 are directly involved in research. Karo Bio is presently engaged in six research programs: * Estrogen receptors (ER): Women's health problems including menopausal symptoms, osteoporosis, cardiovascular disease and cancer. * Thyroid hormone receptors (THR): Cardiac arrhythmia, metabolic disorders, glaucoma and skin diseases. * 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. * Infectious diseases program: Development of new antibiotics. * Genomics: Identification and development of pharmaceutical compounds that act via new target proteins. COLLABORATIVE PROJECTS Abbott Laboratories - type 2 diabetes (GR) The project with Abbott aims at the development of pharmaceuticals for treatment of type 2 diabetes. The collaboration started in January 2000, and is focused on development of liver selective antagonists targeting the glucocorticoid receptor. The project has followed the plan and a number of new chemical compounds from different lead structures have been identified which currently are being characterized in different animal models. Bristol-Myers Squibb - metabolic disorders (THR) The research collaboration with Bristol-Myers Squibb (BMS) targets the metabolic syndrome which includes obesity and hypercholesterolemia with elevated risks for type 2 diabetes and hypertension. In this field, there is a great need for improved therapies. The project has been very successful in identifying and developing novel agonists for the Thyroid Hormone Receptor (THR) which have the desired properties in various animal models. Lead compounds have been selected for clinical trials and recently BMS and Karo Bio announced an extension of their collaboration for one additional year beyond October 1, 2000. The objective of the extended collaboration is to develop additional pharmaceuticals for the treatment of various metabolic disorders. Merck & Co. - estrogen receptors (ER) The Estrogen Receptors (ER) are important targets for treatment of breast cancer, osteoporosis and a number of postmenopausal symptoms. The discovery and isolation of the new estrogen receptor, ER beta, for which Karo Bio holds a patent, has provided new opportunities for improvements of a number of therapies affecting the estrogen receptors. The collaboration with Merck covers all possible indications and so far a couple of indications have been prioritized. Progress continues to be made as planned on the program. Other collaborative projects The powerful screening technologies BioKey Assays and Molecular Braille have become important elements of Karo Bio's research programs. Most projects have been strengthened considerably through the integration with Karo Bio USA. However, the technologies have a broader field of application why they continue to create new business opportunities. For example, the company recently entered into a cooperation agreement with GPC Biotech AG, one of the leading biotechnology companies in Germany. The alliance is aimed at developing a new generation of broad-spectrum antibiotics. There are also on-going BioKey Assays collaborations with Bayer, Ares-Serono, Novartis and NovImmune. INTERNAL PROJECTS Skin diseases - THR The clinical phase II study for treatment of skin atrophy caused by steroid therapy is proceeding according to plan. The treatment is based on the use of thyroid hormone agonists. Skin atrophy was the first indication selected for the skin program. Karo Bio is also investigating other opportunities. A study of healthy volunteer subjects was recently begun in order to study the causes of the positive effects on the skin of thyroid hormone. Cardiac arrhythmia - THR Thyroid hormone antagonists have the potential to become important drugs to treat cardiac arrhythmia. Karo Bio is holding continued discussions with potential licensees of the pharmaceutical compound KB 130 015 and is concentrating internal resources on the design of a new generation of compounds. Compounds based on various basic structures were developed during the period and animal studies are in progress. Glaucoma - THR Animal studies with eye drops containing various thyroid hormone agonists are in progress and will be concluded this summer. The infectious disease program The objective of the infectious diseases program is to identify new antibacterial compounds that act through novel bacterial proteins. New target proteins have been identified and BioKey Assays developed for about twenty of them. Large-scale screening has led to the identification of many potential lead compounds. Exploratory research The company's exploratory research has significantly facilitated rapid identification of new target proteins. Karo Bio's collaboration with Karolinska Institutet and other international academic institutions continue to be highly significant to ongoing and new projects alike. Applications for patent were submitted during the year concerning new therapies acting through the estrogen receptor Beta. Karo Bio has also begun development of new methods of treating inflammation, hypertension and heart failure using the glucocorticoid and mineralo-corticoid receptors as target proteins. KARO BIO USA INC. The acquisition of Novalon Pharmaceutical Corporation (Karo Bio USA Inc.) was completed on 10 May through a non-cash issue approved by the Annual General Meeting on 26 April. The acquisition was carried out through the issue of 2,206,198 new shares and 88,064 warrants, which corresponded to 20 percent of the outstanding shares in Karo Bio following full dilution. The recorded purchase price, including transaction expenses, was SEK 971 million. The acquisition brought goodwill of SEK 963 million. In light of the rapid pace of development in the pharmaceutical field, Karo Bio intends to depreciate the goodwill over a period of three years beginning 1 May 2000, the date the company was consolidated. The company's two key technologies, BioKey Assays and Molecular Braille , are now being integrated in Karo Bio projects, through which Karo Bio is cementing its leading position in the field of nuclear receptors. INCOME AND PROFIT/LOSS Net sales for the Group during the period amounted to SEK 55.0 (30.6) million, with net sales for the Parent Company of SEK 54.0 (30.6) million. Income included a down payment from Abbott in January. Costs for the Group rose to SEK 130.9 (56.2) million. The largest items are attributable to the depreciation of goodwill relating to the acquisition of Karo Bio USA, the company´s costs from May 1th - the date the company was consolidated - , payroll costs due to increases in the work force since 1999, software for the chemistry activities and various success fees. The last item was reported under "other operating expenses." It should also be mentioned that the Company took possession of new premises at the beginning of the year and that heightened research activity has led to increased purchases of chemicals and consumable material. The Group´s cash flow from operating activities during the period improved to SEK -8.0 (-14.8) million. However, net results for the group declined to SEK -71.5 (-21.1) million, as a result of depreciation of goodwill relating to the acquisition of Novalon in the amount of SEK 53.5 million. The Parent Company is reporting net results of SEK -8.3 (-18.5) million. The difference between the Group and the Parent Company consists mainly of the depreciation of goodwill totaling SEK 56.1 (2.6) million. Earnings per share for the period were SEK -7:30 (-2:30), computed on the average number of shares. As a result of the negative result and the consolidated losses carried forward for the Group of SEK 496 million, income for the period was not taxable. LIQUIDITY AND SHAREHOLDERS' EQUITY An issue of 600,000 new shares with no preferential rights for existing shareholders was carried out in May, following authorization by the Annual General Meeting of 26 April. The issue was subscribed on market terms by international and Swedish institutional investors, raising capital of SEK 196.9 million after transaction expenses. The Annual General Meeting also voted in favor of issuing 85,000 warrants as part of an incentive program directed at employees of Karo Bio. Karo Bio Research AB subscribed the warrants on market terms for resale to eligible personnel. Liquid funds in the Group, including short-term investments, amounted to SEK 366.0 million as of 30 June 2000 (187.8 as of 31 December 1999). Shareholders' equity was SEK 1,287.7 million as of 30 June (SEK 209.2 million as of 31 December 1999). The Company's share capital of SEK 59,916,850 was distributed among 11,983,370 shares with par value of SEK 5 each. In addition, there are warrants outstanding corresponding to 173,064 shares. INVESTMENTS Investments in equipment by the Group and the Parent Company during the period amounted to SEK 3.7 million (2.1) and SEK 3.5 million (2.1), respectively. Investments were mainly for X-ray crystallography equipment and software purchased for chemistry operations. The X-ray crystallography equipment is now in full operation and will give Karo Bio the opportunity to rapidly determine receptor structures in-house OTHER INFORMATION In conjunction with the Annual General Meeting of 26 April, Torben Jørgensen was installed as president of Karo Bio. He succeeded Per-Olof Mårtensson who was appointed chairman of the board. SCHEDULED RELEASES OF FINANCIAL INFORMATION Interim report, January-September 2000 17 October 2000 Earnings report for 2000 8 February, 2001 The Company's independent auditor has not reviewed this report. CONSOLIDATED INCOME STATEMENT (SEK k) J A N U A R Y - J U N E WHOLE YEAR 2000 1999 1999 Net sales 54 995 30 645 72 979 Operating expenses Marketing expenses -4 203 -3 009 -6 614 Administration expenses -9 160 -6 162 -11 721 Research and development expenses -115 782 -46 997 -95 694 Other costs -1 781 - -1 485 -130 926 -56 168 -115 514 Operating result -75 931 -25 523 -42 535 Financial items 4 414 4 377 7 405 Operating result after financial -71 517 -21 146 -35 130 items Tax - - - NET LOSS -71 517 -21 146 -35 130 Depreciation according to plan included in operating expenses 59 923 6 086 12 193 (of which depreciation on gooodwill 56 094 2 578 5156) CONSOLIDATED BALANCE SHEET (SEK k) Assets 30 June 30 June 1999 31 Dec 1999 2000 Intangible fixed assets 938 707 34 190 31 558 Equipment 23 724 16 715 17 155 Operating receivables 15 021 11 659 8 966 Liquid funds and short-term 366 017 192 261 187 846 investments TOTAL ASSETS 1 343 469 254 825 245 525 Shareholders' equity and liabilities Shareholders' equity 1 287 737 223 161 209 175 Loans and leasing debt 4 301 - - Operating liabilities 51 431 31 664 36 350 TOTAL EQUITY AND LIABILITIES 1 343 469 254 825 245 525 CONSOLIDATED CASH-FLOW STATEMENT (SEK k) J A N U A R Y - J U N E WHOLE YEAR 2000 1999 1999 Operating result before financial -75 931 -25 523 -42 535 items Depreciation 59 923 6 086 12 193 Other items not affecting liquid -50 - -10 assets -16 058 -19 437 -30 352 Financial income received 2 928 3 212 11 300 Financial expenses paid -545 -113 -488 2 383 3 099 10 812 Change in operating capital 5 647 1 520 4 204 CASH FLOW FROM OPERATING ACTIVITIES -8 028 -14 818 -15 336 Investments in tangible fixed -3 697 -2 051 -5 948 assets Investments in subsidiaries -6 972 - - CASH FLOW FROM INVESTING ACTIVITIES -10 669 -2 051 -5 948 New share issue 196 868 - - CASH FLOW FOR THE PERIOD 178 171 -16 869 -21 284 LIQUID FUNDS AT END OF PERIOD 366 017 192 261 187 846 KEY RATIOS Equity ratio, % 96 88 85 Equity per share, SEK 107:46 24:32 22:79 Earnings (-loss per share), average number of shares, SEK -7:30 -2:30 -3:83 Earnings (-loss per share), after exercise of all warrants, SEK -7:27 -2:30 -3:83 Average number of shares* 9 796 9 177 9 177 Number of shares, end of period* 11 983 9 177 9 177 Number of shares, average number after exercise of all warrants* 9 838 9 177 9 177 Number of shares, end of period after exercise of all warrants* 12 156 9 177 9 177 *000 Huddinge, July 12, 2000 Torben Jørgensen President For further information, please contact Torben Jørgensen, phone +46 8 608 6020, 070-7490811 or Håkan Hallberg, Vice President Finance & Administration, phone +46 8 608 6006, 070-483 38 11 Website: http://www.karobio.se ------------------------------------------------------------ This informatin was brought to you by BIT http://www.bit.se The following files are available for download: http://www.bit.se/bitonline/2000/07/12/20000712BIT00580/bit0001.doc http://www.bit.se/bitonline/2000/07/12/20000712BIT00580/bit0002.pdf