Karo Pharma AB — Annual Report 2008

Feb 6, 2009

Press release February 6th, 2009

YEAR-END REPORT JANUARY–DECEMBER 2008

The year in brief

• Net sales amounted to MSEK 10.7 (7.5)
• Net loss amounted to MSEK 174.8 (203.4)
• Loss per share amounted to SEK 1.51 (1.92)
• Cash flow from operating activities amounted to MSEK -186.4 (-178.3). Cash and cash equivalents and other short-term investments totaled MSEK 242.7 (432.6) on December 31, 2008
• During the year, two clinical phase IIb studies with eprotirome as add-on to statin treatment and treatment with ezetimibe, respectively, were successfully concluded. Data show that eprotirome gave statistically significant and clinically relevant effects and was safe and well tolerated
• In August, Karo Bio announced that the collaboration with Wyeth Pharmaceuticals was extended for an additional year until August 31, 2009
• In December, Karo Bio announced that a compound within the collaboration with Merck progressed to phase I clinical trials
• Phase I clinical trials with the compound KB3305 in healthy volunteers and type 2 diabetes patients were performed during the year and will be reported in the first quarter of 2009

Significant events after the end of the reporting period

• There are no significant events after the end of the reporting period to report

For further information, please contact:

Per Olof Wallström, President, tel. +46 8 608 60 20 Per Otteskog, Senior Vice President Investor Relations, tel. +46 8 608 60 18 Erika Johnson, Chief Financial Officer, tel. +46 8 608 60 52

Selected financial information in summary

(MSEK)	October-December		January-December
	2008	2007	2008	2007
Net sales	1.8	1.8	10.7	7.5
Operating expenses	-37.9	-61.0	-201.4	-223.4
- whereof of R&D expenses	-31.4	-53.4	-169.4	-190.8
Profit/loss for the period	-31.2	-54.7	-174.8	-203.4
Profit/loss per share (SEK)	-0.27	-0.47	-1.51	-1.92
Cash flow from operating activities	-48.1	-39.1	-186.4	-178.3
Cash and cash equivalents and other short term investments at end of period	242.7	432.6	242.7	432.6
Equity ratio (%)	83.4	86.9	83.4	86.9
Numbers of shares outstanding ('000)
- weighted average during the period	116,119	116,119	116,119	105,897
- at the end of the period, basic	116,119	116,119	116,119	116,119
- at the end of the period, fully diluted	116,594	117,315	116,594	117,315

About Karo Bio

Karo Bio is a drug discovery and development company specializing in targeting nuclear receptors for the development of novel pharmaceuticals.

The company has a project portfolio with innovative molecules that primarily target dyslipidemia, diabetes and inflammation. In these areas, there are significant market opportunities and a need for pharmaceuticals with new mechanisms of action. Karo Bio develops compounds aimed at treatment of broad patient populations up to clinical proof of concept before out-licensing. In therapeutic niche areas, Karo Bio has capacity to bring selected compounds into late stage clinical development and, potentially, to the market. In addition to the proprietary projects, Karo Bio has three strategic collaborations with international pharmaceutical companies for development of innovative therapies for the treatment of common diseases.

Karo Bio is listed on NASDAQ OMX Stockholm since 1998 (Reuters: KARO.ST).

Project portfolio

CEO'S COMMENTS ON 2008

Karo Bio has had a successful year with significant progress in several projects. Eprotirome is our most advanced compound. In clinical phase II studies, eprotirome has shown impressive effects on several risk factors for development of cardiovascular disease. The positive effects in combination with a satisfying safety profile make the compound attractive for further development. It is our intention to develop eprotirome further within the framework of a partnership.

There are several companies who are actively seeking new projects in the dyslipidemia area, and we have received great interest from potential partners. The therapeutic area represents the world's largest market segment and it is undergoing significant change. Many statins have come, or are coming, off patent. There is, however, uncertainty regarding regulatory issues. For example there may be demands for outcomes studies. Some companies have abandoned the area. These circumstances make the process of establishing a new partnership demanding and time-consuming.

Our diabetes compound, KB3305, has advanced through clinical phase I studies during the year. Data from treatment of healthy volunteers and a number of diabetes patients are being evaluated and we look forward to presenting the results in the first quarter of 2009.

Our collaborative projects have developed positively. Merck has initiated phase I clinical studies with a new estrogen receptor activating compound in the field of women's health. The collaboration with Wyeth has been extended for an additional year and redirected to focus on inflammatory disorders. In addition, we initiated a collaboration with the Indian pharmaceutical company Zydus Cadila for development of a new class of anti-inflammatory compounds that function in a similar way as cortisone but with significantly fewer side effects.

In recent years we have strengthened our preclinical and clinical development organization. This has enabled the successful development of eprotirome and KB3305. At the same time, the discovery effort has been run with limited resources. In spite of this, we have made significant progress in our ERbeta program by developing first in class and, to the best of our knowledge, best in class compounds. Historically the discovery engine has been the strength of Karo Bio, and we will continue our discovery efforts in the ER-beta program which is emerging as a new platform for Karo Bio with several clinical and commercial opportunities.

Per Olof Wallström President and CEO

SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD

There are no significant events after the end of the reporting period to report

RESEARCH AND DEVELOPMENT

Eprotirome (KB2115) – dyslipidemia

Karo Bio's compound eprotirome is a novel, liver selective thyroid hormone receptor agonist for treatment of dyslipidemia. In previous phase II clinical studies, eprotirome has shown a broad and unique efficacy profile with statistically significant and clinically relevant reductions of LDLcholesterol, triglycerides and lipoprotein(a). Eprotirome has proven safe and well tolerated in studies of up to three months duration.

During 2008 Karo Bio successfully completed two phase IIb studies with eprotirome given as add on to statins or ezetimibe.

The phase IIb study where eprotirome was given as add on to statin treatment was a 12 week study in 189 dyslipidemia patients. The data show that eprotirome induced a statistically significant and clinically relevant lowering of serum LDL-cholesterol, triglycerides and lipoprotein(a) of the same magnitude as when eprotirome is given alone. Eprotirome was safe and well tolerated in combination with statin treatment.

The additional clinical phase IIb was a placebo controlled 10 week dose ranging study in 111 patients. Eprotirome was given once daily in addition to the cholesterol absorption inhibitor ezetimibe. The data show that eprotirome, when given as add-on to ezetimibe treatment, lowers LDL-cholesterol, triglycerides and lipoprotein(a) in the same magnitude as registered for eprotirome as monotherapy.

In summary, the data show that eprotirome is unique in producing simultaneous and powerful reductions of three independent risk factors for the development of atherosclerotic cardiovascular diseases. This combined effect on LDL-cholesterol, triglycerides and lipoprotein(a) indicates that eprotirome has the potential for being an important new dyslipidemia drug.

During 2008 Karo Bio has generated pre-clinical data which suggest that eprotirome has positive effects blood glucose. This would be of great value for treatment of type 2 diabetics with elevated blood lipids.

As a preparation for phase III clinical studies, Karo Bio has initiated a dialogue with FDA with the purpose to receive feed back to the accumulated pre-clinical and clinical documentation. Karo Bio intends to perform limited preclinical and clinical phase I pharmacokinetic studies in order to document the integrity of the tablet formulation and the absence of formation of a reaction product. Partner discussions are progressing and the intention is to conduct Phase III clinical studies within the framework of a partnership.

KB3305 – type 2 diabetes

KB3305 is a liver selective glucocorticoid antagonist for treatment of type 2 diabetes. In pre-clinical studies, KB3305 was both efficacious and safe. In addition to blood glucose lowering, via a lowering of hepatic glucose production, KB3305 also lowers other important risk factors for cardiovascular disease such as cholesterol, triglycerides and free fatty acid levels in plasma.

A first phase I study was concluded in the second quarter with promising results. In this study, KB3305 was administered in single ascending doses to healthy volunteers. The compound showed robust and predictable pharmacokinetics and the subjects were well exposed. No serious adverse events were recorded.

In the second part of 2008, a multiple dose study in healthy volunteers, including a subset of type 2 diabetes patients, was performed. The results will be reported in the first quarter of 2009.

ER-beta selective compounds – depression, cancer, inflammation

The project objectives regarding selectivity and bioavailability of lead compounds in the ER-beta program have been reached. The pre-clinical development of lead compounds is ongoing with the intention to select a candidate drug for CNS disorders. Lately, the general interest for ER-beta and the research in the field has increased significantly. The receptor has become an attractive target protein for treatment of a number of important diseases, and several companies are involved in development of ER-beta ligands. Karo Bio is evaluating additional clinical applications for its ER-beta selective ligands, for example in the field of cancer.

Inflammation (LXR) – Wyeth Pharmaceuticals

The collaboration with Wyeth Pharmaceuticals, initiated in 2001, targets the liver X receptor (LXR). LXR is promising target for treatment of atherosclerosis and inflammatory disorders. In the fourth quarter it was decided that the project should focus on inflammatory diseases. During the year, the collaboration was prolonged until August 31, 2009.

Women's Health (ER) – Merck & Co., Inc.

Estrogen receptors are important targets for several diseases in the field of women's health. The collaboration with Merck was initiated in 1997. The joint drug discovery phase in the collaboration with Merck was concluded in 2002, with Merck responsible for development of selected compounds. In December 2008 it was announced that Merck has entered phase I clinical development with a new collaboration compound.

Inflammatory diseases (GR) - Zydus Cadila

In February, Karo Bio and Zydus Cadila, one of India's leading healthcare companies, initiated a three-year research collaboration with the purpose to discover and develop novel compounds for treatment of inflammatory diseases. The compounds are designed for a selective activation of glucocorticoid receptors (GR). Thereby, some of the side effects of the classical corticosteroids can be avoided while the positive effects can be maintained. Both parties share risks and rewards and cover their own costs for the collaboration program.

RESULT AND FINANCIAL POSITION

The operations of the Group are mainly conducted in the parent company. The parent company holds only one subsidiary with assets of MSEK 0.1 (0.1), liabilities of MSEK 0.0 (0.0) and shareholders' equity of 0.1 (0.1). The assets held by the subsidiary comprise intra-group receivables. The subsidiary has had no revenue or expenses. The accounting principles applied for the parent company differ from those applied for the Group only regarding accounting of leasing agreements. The Group's accounts correspond, in all material respects, to that of the parent company why the latter is not separately disclosed.

Revenue

Net sales for 2008 increased to MSEK 10.7 as compared to MSEK 7.5 2007. The reported net sales for 2008 consist of research payments for collaborations and a license fee of MSEK 3.7 from a nonexclusive license to specific intellectual property rights granted by Karo Bio to an undisclosed company. Net sales for the fourth quarter amounted to MSEK 1.8 (1.8) and consist solely of research payments from collaborations.

Expenses

Operating expenses for the year decreased by MSEK 22.0 to MSEK 201.4 (223.4). This decrease is mainly due to a decrease in research and development expenses of MSEK 21.3 compared to last year. Internal research and development expenses have decreased while expenses related to external studies in clinical projects has continued to increase during 2008, reflecting the projects' advancement in development. For the fourth quarter reported research and development expenses totaled MSEK 31.4 (53.4), which is an decrease of MSEK 22.0 compared to the corresponding period last year.

Administrative expenses for the year amount to MSEK 28.6 (33.3). The cost reduction of MSEK 4.7 is to a large extent an effect of the overall reduction of the company's internal cost base initiated in 2007. Other operating income and expenses of MSEK -3.4 mainly comprise costs incurred in strategy related projects. For the fourth quarter, administrative expenses amounted to MSEK 6.8 (7.5).

Profit/loss

Operating loss for the year amounted to MSEK 190.7 (215.8), which is an improvement of MSEK 25.1. Financial net for the year amounted to MSEK 15.9 (12.4). The reported loss for the year decreased by MSEK 28.6 to MSEK 174.8 (203.4). Operating loss for the fourth quarter amounted to MSEK 36.0 (59.2). The reported loss for the quarter amounted to MSEK 31.2 (54.7).

The relatively large costs for clinical studies conducted by Karo Bio during recent years, and the lack of direct interaction between the lion share of the Company's revenue and expenses during a certain period, may cause the reported profit/loss to fluctuate substantially between the reporting periods.

Capital investments

Capital investments in equipment amounted to MSEK 6.1 (2.4) for the year and to MSEK 1.4 (0.2) for the fourth quarter and comprise mainly laboratory equipment financed with capital leases.

Cash flow

Cash flow from operating activities for the year amounted to MSEK -186.4 (-178.3). The corresponding figure for the fourth quarter amounted to MSEK -48.1 (-39.1).

Financial position

Cash and cash equivalents amounted to MSEK 96.9 (199.2) at the end of the year. Including other short-term investments with duration exceeding 90 days, these assets amounted to MSEK 242.7 (432.6). At the beginning of the year, cash and cash equivalents including other short-term investments totaled MSEK 432.6, which implies a change in total cash position of MSEK -189.9 during the year. As stipulated in the company's finance policy, Karo Bio's funds are invested solely in low risk, interest bearing assets.

The Company's currently available financial assets are estimated to sustain operations, in accordance with present plan, to the second half of 2010.

Shareholders equity and per share data

The share capital at the end of the period amounted to MSEK 58.1. The total number of shares amounted to 116,119,192 shares with a ratio value of SEK 0.50. Total consolidated shareholders' equity amounted to MSEK 219.5 after taking into account the loss for the period.

Loss per share for the year, based on the weighted average number of shares outstanding, amounted to SEK 1.51 (1.92). The Group's equity ratio at the end of the year was 83.4 per cent (86.9) and equity per share, based on fully diluted number of shares at year end, was SEK 1.88 (3.36).

Organization

At the end of the year, Karo Bio had 66 (62) employees, of which 58 (57) are engaged in research and development.

Risk factors

There is no guarantee that Karo Bio's research and development will result in commercial success.

There is no guarantee that the clinical trials conducted by Karo Bio, whether independently or in collaboration with its partners, can demonstrate sufficient safety and efficacy to obtain the necessary approvals from regulatory authorities, or that they will result in marketable products.

There can be no guarantee that Karo Bio will develop products that can be patented, that granted patents can be retained, that future inventions will lead to patents, or that granted patents will be sufficient to protect Karo Bio's rights.

There may be a need to turn to the capital market in the future. Both the size and the timing of the Company's potential future capital requirements are dependent on a number of factors, including opportunities to enter into collaboration or licensing agreements and the possibility of achieving success in research and development projects undertaken. There is a risk that the required funding of the operations will not be available when needed or at a reasonable cost.

CONDENSED CONSOLIDATED INCOME STATEMENTS (KSEK)

	October-December		January-December
	2008	2007	2008	2007
Net sales	1,825	1,811	10,689	7,534
Operating expenses
Administrative expenses	-6,790	-7,506	-28,600	-33,320
Research and development expenses	-31,420	-53,438	-169,428	-190,754
Other operating income and expenses	358	-38	-3,372	712
	-37,852	-60,982	-201,400	-223,362
Operating loss	-36,027	-59,171	-190,711	-215,828
Financial net	4,839	4,516	15,914	12,393
Loss after financial items	-31,188	-54,655	-174,797	-203,435
Tax	-	-	-	-
LOSS FOR THE PERIOD	-31,188	-54,655	-174,797	-203,435
Depreciation included in operating expenses	-1,080	-1,525	-5,025	-5,531
Loss per share (SEK) *) - based on weighted average number of shares outstanding, basic and diluted	-0.27	-0.47	-1.51	-1.92
Number of shares outstanding (000)
- weighted average during the period	116,119	116,119	116,119	105,897
- at end of period, basic	116,119	116,119	116,119	116,119
- at end of period, fully diluted	116,594	117,315	116,594	117,315

*) The outstanding warrants lead to no dilution of loss per share, as a conversion to shares would lead to a reduced reported loss per share

CONDENSED CONSOLIDATED BALANCE SHEETS (KSEK)

		December 31
	2008	2007
Assets
Licenses and similar rights	1,698	2,851
Equipment	8,079	5,884
Other current assets	10,691	12,248
Other short-term investments	145,773	233,425
Cash and cash equivalents	96,948	199,164
TOTAL ASSETS	263,189	453,572
Shareholders' equity and liabilities
Shareholders' equity	219,474	394,263
Non-current liabilities	2,022	225
Current liabilities	41,693	59,084
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES	263,189	453,572

Karo Bio AB Novum, 141 57 Huddinge, Sweden Telephone +46 8 608 60 00 Facsimile: +46 8 774 82 61 www.karobio.com

	CONDENSED CONSOLIDATED CASH FLOW STATEMENTS (KSEK)
--	----------------------------------------------------	--	--	--

	October-December		January-December
	2008	2007	2008	2007
Operating activities
Operating loss before financial items	-36,027	-59,171	-190,711	-215,828
Depreciation	1,080	1,525	5,025	5,531
Other items not affecting cash flows	56	46	175	154
	-34,891	-57,600	-185,511	-210,143
Financial items received and paid	2,099	5,930	15,597	16,029
Cash flow from operating activities before changes in working capital	-32,792	-51,670	-169,914	-194,114
Changes in working capital	-15,287	12,532	-16,473	15,818
Cash flow from operating activities	-48,079	-39,138	-186,387	-178,296
Investing activities
Investment in licenses and similar rights	-	-	-	-3,460
Net investment in equipment	-1,759	-230	-3,798	-3,087
Net investment in other short-term investments	36,000	-214,839	87,969	-96,933
Cash flow from investing activities	34,241	-215,069	84,171	-103,480
Financing activities
Proceeds from new share issues	-	-	-	387,161
Cash flow from financing activities	-	-	-	387,161
Cash flow for the period	-13,838	-254,207	-102,216	105,385
Cash and cash equivalents at the end of the period	96,948	199,164	96,948	199,164

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (KSEK)

	October-December		January-December
	2008	2007	2008	2007
Equity at the beginning of the period	250,662	448,909	394,263	210,503
Employee stock option program - value of employee services	-	9	8	34
Share issuances	-	-	-	387,161
Loss for the period	-31,188	-54,655	-174,797	-203,435
Equity at the end of the period	219,474	394,263	219,474	394,263

EQUITY DATA

		December 31
	2008	2007
Equity ratio	83.4%	86.9%
Equity per share at the end of period – basic, SEK	1.89	3.40
Equity per share at the end of period - diluted, SEK	1.88	3.36

Accounting and valuation principles

This interim report has been prepared in accordance with International Accounting Standards 34 for interim reports and International Financial Reporting Standards IFRS as adopted by the EU. The accounting and valuation principles applied are unchanged compared to those applied in the Annual Report for 2007. A number of new or updated accounting standards and interpretations are applicable for financial years beginning January 1, 2008 or later. These accounting standards and interpretations are deemed not to have a significant impact on the consolidated financial statements other than presentational or disclosures presented in the reports. In addition, there are certain accounting standards and interpretations that are not relevant to Karo Bio.

Amounts are expressed in KSEK (thousands of Swedish Kronor) unless otherwise indicated. MSEK is an abbreviation for millions of Swedish Kronor. Amounts or figures in parentheses indicate comparative figures for the corresponding period last year.

Scheduled releases of financial information

•	Annual report 2008	April 3, 2009
•	Interim report January-March 2009	April 22, 2009
•	Annual General Meeting	April 24. 2009
•	Interim report April-June 2009	July 14, 2009
•	Interim report July-September 2009	October 22, 2009
•	Year-end report 2009	February 9, 2010

Financial reports, press releases and other information are available on Karo Bio's web site www.karobio.com. It is also possible to download and subscribe to Karo Bio's financial reports and press releases on the web site at www.karobio.com/finance. Financial reports are available on the web site upon release.

Legal disclaimer

This financial report includes statements that are forward looking and actual results may differ materially from those stated. In addition to the factors discussed, among other factors that may affect results are development within research programs, including development in pre-clinical and clinical trials, the impact of competing research programs, the effect of economic conditions, the effectiveness of the Company's intellectual property rights and preclusions of potential third party's intellectual property rights, technological development, exchange rate and interest rate fluctuations, and political risks.

Huddinge, February 6, 2009

The Board of Directors

This report has not been subject to review by the Company's auditors.

Analyst coverage

ABG Sundal Collier, Stockholm Alexander Lindström

Danske Markets, Stockholm Mattias Häggblom

D. Carnegie, Stockholm Camilla Oxhamre

Handelsbanken Capital Markets, Stockholm Erik Hultgård

Nordea Markets, Stockholm Patrik Ling

Redeye, Stockholm Björn Fahlén

Independent analyst Peter Östling

Independent analyst Stefan Wikholm

Karo Bio AB (publ.), Novum, 141 57 Huddinge, Sweden Telephone: +48 8 608 60 00 Facsimile: +46 8 774 82 61 Corporate registration number 556309-3359 Website: www.karobio.com

The information is of a nature which Karo Bio shall need to disclose according to the Securities Market Act. The information was disclosed February 6, 2009, at 08:30 am.