Annual Report 2011

CEO commentary	2
Operations	4
The share	6
Board members, executive management and auditors	8
Five-year overview	10
Administration report	12
Consolidated income statements and income statements for the Parent Company	16
Consolidated statement of comprehensive income and comprehensive income for the Parent Company	16

Consolidated statement of financial position and balance sheets for the Parent Company	17
Consolidated statement of cash flows and cash flow statement for the Parent Company	19
Consolidated statement of changes in equity	20
The Parent Company's statement of changes in equity	20
Accounting and valuation principles	21
Notes	26
Audit report	37
Corporate governance report	38
Definitions	45

This annual report includes statements that are forward looking and future 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 preclinical 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.

Annual general meeting

The annual general meeting of Karo Bio AB (publ) will be held on Tuesday June 12, 2012 at 5.00 pm CET at Klarasalen, Klara Konferens, Vattugatan 6, Stockholm, Sweden. The notice for the annual general meeting is available on Karo Bio's web site at www.karobio.com/agm.

Right to participate and notice

To be entitled to participate in the annual general meeting, shareholders must have their holdings registered in their names at Euroclear Sweden AB by June 5, 2012, and must notify the company of their intention to participate in the meeting by no later than June 5, 2012 at 4.00 pm CET. Notice of intention to participate in the annual general meeting shall be made in writing, including name, personal or corporate identity number (where applicable), address, e-mail address and telephone number, either via mail to Karo Bio AB, attn: Eva Kruse, Novum, 141 57 Huddinge, Sweden or by facsimile to +46 8 774 52 80, e-mail to [email protected] or via Karo Bio's website www.karobio.com/agm.

Share registration

Shareholders whose shares are registered under the name of a nominee through a bank notary department or other nominee must, to be entitled to participate in the annual general meeting, temporarily register their shares in their own names. Such registration must be in effect no later than June 5, 2012, which means that shareholders must notify their nominee well in advance of that date.

Further information

Upcoming report dates:

Interim report January-June	July 13, 2012
Interim report January-September	October 24, 2012
Year-end report for 2012	February 12, 2013

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

Karo Bio uses electronic distribution as the primary means for the distribution of financial reports. The annual report will also be mailed to shareholders and others specifically subscribing to the printed version. Printouts of interim reports are mailed upon request.

For further information, please contact: Per Bengtsson, Chief Executive Officer, tel. +46 8 608 60 20 or Henrik Palm, Chief Financial Officer, tel. +46 8 608 60 76, or e-mail: [email protected]

Progress shadowed by eprotirome

On February 12, 2012 the news that Karo Bio was terminating eprotirome's Phase III program reached the stock market. The reason for closing down the project was a supplementary long-term study in dogs that showed that eprotirome caused cartilage damage making the risk of similar damage in humans unacceptably large.

The dosing of patients in the Phase III trial that had begun in the fall of 2011, was interrupted and no patient received eprotirome for longer than what has previously been shown to be safe.

Agreement with Pfizer

This was of course a heavy blow to Karo Bio. The termination of eprotirome has also overshadowed the success in another project, which is important to highlight. In the fall of 2011 we negotiated an agreement with Pfizer regarding RORgamma, which was signed in December. It was a great success for us, and it is the first agreement of this kind that Karo Bio has entered into in more than a decade.

Under the agreement, which covers a new class of drugs for the treatment of autoimmune diseases, we will until next year receive payments of at least 10 million dollars. Furthermore, it entitles us to potential milestone payments of well over SEK 1 billion as well as royalties on sales. The deal was signed after we had developed the project for a little over a year, during which we had made important progress, particularly in gaining an understanding of the receptors of three-dimensional structure.

The agreement is positive 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 the fact that we can cover our costs and have gained opportunities for significant revenue, it also shows that Karo Bio has knowledge and skills that are attractive to one of the world's largest companies.

The most important conclusion from our strategy review is that our operations must be imbued with a more commercial mindset and that risk must be much more clearly taken into account when projects are prioritized.

Cost savings

In parallel to the negotiations, the Board initiated a review of Karo Bio's strategy and cost situation. Savings totaling SEK 17 million were implemented, including 16 employee redundancies. We continue to adjust our operations to run them it in the most cost effective way. Another cost savings program is being prepared to be presented before the Annual General Meeting.

We are also actively seeking alternative ways to finance our operations. Besides development and licensing agreements, Karo Bio will be much better at utilizing public research and development grants. Our goal is to limit negative cash flow equivalent to an annual rate of SEK 50-60 million.

Other financial opportunities for cancer projects

In line with this, we are examining possibilities to relocate the development of ERbeta in the field of cancer to Texas, USA. The state is investing significant resources to create a life science center in Houston. Houston is already home to one of America's most renowned cancer clusters with MD Anderson Cancer Center and The Methodist Hospital. There are several types of financing on offer here, which would allow us to continue the development of ERbeta in the cancer area. We have a molecule in late preclinical phase, KB9520, which in different models has showed good test results in certain forms of cancer. Through the opportunities available in Houston, we expect to be able to continue the development of KB9520, which is not possible with the existing constraints in Sweden.

MS project could lead to development and licensing agreements

Karo Bio also has other projects in the ERbeta receptor field that are in advanced preclinical phase. This is especially the case for MS, multiple sclerosis, an area to which Karo Bio focused its development efforts in 2011. Studies of ERbeta agonists in preclinical disease models have shown very interesting results. Karo Bio is now conducting supplementary animal studies to confirm these possibilities. Successful results may lead to a development and licensing agreement.

Also our anti-inflammatory project on the glucocorticoid receptor deserves some comment. Since the well-established drug cortisone is the model, the project arguably has lower risk in the clinical phase than the average drug project. In 2011, the project was developed in collaboration with the Indian pharmaceutical company Zydus Cadila. When the joint development expired in early 2012, we chose to follow the development route we believe in the most. In addition to the lower development risks we perceive with this route, it also means that will not have to share future revenue with Zydus Cadila. The project is in its early stages and even if we have not reached that stage yet, we do believe that this is a project that should be licensed out relatively early.

Strategy for commercially viable projects

Finally, I will make some general comments about our operations. The most important conclusion from our strategy review is that our operations must be imbued with a more commercial mindset and that risk must be much more clearly taken into account when projects are prioritized. We have therefore changed the way we organize and conduct our work. The agreement with Pfizer shows that we have the ability to do deals when we make the right priorities. It also shows that we have commercially valuable projects in the field of nuclear receptors. My goal is that we will be able to demonstrate this again as soon as possible.

It is important to note that there are several positive areas in Karo Bio even after the loss of eprotirome. The agreement with Pfizer inspires us and is an indication of our opportunities to do new deals. At the same time we must adapt to new ways of running our operations. We face this situation with openness and an unbiased approach in order to take advantage of all opportunities.

Huddinge in May, 2012

Per Bengtsson President and CEO

From unique knowledge to new pharmaceuticals

Karo Bio develops innovative pharmaceuticals for key medical needs based on its unique knowledge of nuclear receptors. Several of these projects are aimed at developing new treatment principles and innovative compounds that are the first of their kind.

Nuclear Receptors –Regulate key functions

The human body's 48 nuclear receptors regulate many important functions. Some of these receptors have been well documented while others are relatively unexplored. Today, around one in ten drugs act via nuclear receptors. Karo Bio, whose research and development work focuses entirely on nuclear receptors, is one of the pioneers in the field and has been instrumental in the development of knowledge especially around ERbeta.

Nuclear receptors control which genes that the cells express. Gene expression in turn affects the cell's production of proteins and thus its function. Most nuclear receptors can be activated or inhibited by neurotransmitters (natural endogenous ligand), or drug molecules (synthetic ligands) binding into specific binding pockets of the receptor. The endogenous ligand, which is often specific for each receptor can be a hormone, a vitamin, a fatty acid or a bile acid. For some receptors, the natural ligand is still unknown.

The same ligand-receptor complexes may have different effects in different tissues. The hormone cortisol, which is secreted by the adrenal glands and transported via the blood, can for example regulate the gene expression in the inflamed tissue, so that anti-inflammatory proteins are stimulated and inflammation-inducing proteins are inhibited. In the liver, the ligand-receptor can reduce the blood glucose production instead by controlling the amount of key enzymes involved in this process.

By designing drugs that in a specific manner bind to a certain nuclear receptor, gene expression can be effected for the

purpose of treating or preventing various diseases and medical conditions.

PROJECTS

ERbeta selective agonists - a platform with many opportunities

The estrogen receptor (ER) is activated by the hormone estrogen and regulates a number of functions in the body. Estrogen has a number of positive effects, but its use as a medical treatment has been limited by the associated increased risks for uterine and breast cancer as well as an increased risk for thrombosis. These risks are mainly linked to the ERalpha receptor, while ERbeta receptor, which Karo Bio co-discovered in the 1990s, seems to mediate many of the positive effects of estrogen without the side effects.

For substances that act via ERbeta there is clinical potential in areas such as neuropsychiatry, certain forms of cancer, women's health and urology. Several of these options were presented and discussed by researchers from academia and industry in an international scientific symposium that Karo Bio arranged in Stockholm in May 2011.

Karo Bio's efforts to develop ERbeta has resulted in a world-leading position and an exciting platform with several promising ERbeta selective compounds. These compounds have different properties and may therefore be suitable for various indications. The first drug candidate within the program, KB9520, has shown favorable effects in several preclinical models for certain forms of cancer.

Several compounds have been documented for CNS indications.

In 2011, Karo Bio decided to mainly focus on the autoimmune disease multiple sclerosis (MS). ERbeta antagonists in preclinical MS models have shown

favorable effects on repair processes and reconstruction of the myelin sheaths that surround and insulate nerves and are necessary for efficient conduction of nerve impulses. If treatment with ERbeta antagonists prove to be able to repair damaged myelin also in patients it is a significant breakthrough for the treatment of MS, where damaged myelin underlies symptoms of illness and disability.

One of Karo Bio's main priorities is to enter into commercial research collaborations for the company's ERbeta selective agonists. Karo Bio has entered into so-called Material Transfer Agreements (MTA) with a number of international pharmaceutical companies, under which the partner companies evaluate Karo Bio's compounds for several different indications. This has resulted in commercial discussions.

ER Women's health/MK-6913 – cooperation with Merck & Co., Inc.

The collaboration with Merck (MSD) on estrogen receptors (ER) began in 1997. The collaborative phase of research was completed in 2002. In 2010, Merck discontinued the development of MK-6913 for hot flashes in menopausal women due to lack of efficacy. Merck is currently evaluating alternatives for future studies of MK-6913.

GR Inflammation

Glucocorticoids, including cortisone-like drugs have many uses due to their powerful anti-inflammatory effects. Side effects on for example the metabolism and bone, however, limits their use. Being able to separate the good effects of glucocorticoids from their side effects has long been considered medically very important, yet

difficult to achieve. To achieve this would be a real breakthrough in the treatment of inflammatory diseases.

The project aims to develop new compounds that affect glucocorticoid receptors (GR) in a selective manner to create new drugs with equally good antiinflammatory properties as conventional glucocorticoids, but with significantly reduced side effects and thus the opportunity for wider use.

Encouraging - albeit early - results generated by the project indicate that such a breakthrough might be possible. A new unique approach has been developed, creating the possibility to develop a completely new type of selective glucocorticoids with the potential for a much better side effect profile than existing compounds. Preclinical evaluation is underway to identify the compounds which are most suitable for further development as drug candidates.

The project was developed in collaboration with the Indian pharmaceutical company Zydus Cadila under a contract running until the first quarter of 2012. Both parties were responsible for their own costs of the project and share any profits. KaroBio continues to develop the project on its own.

KB3305 – Type 2 diabetes

KB3305 is a liver-selective glucocorticoid receptor (GR) antagonist. The compound has been developed for the treatment of type 2 diabetes and is the first of its kind to have been tested in man.

The resulting data is a positive proof-of-principle for the mechanism of action and effects are of medically relevant magnitude. Would another party show interest in taking over the project for research and development, Karo Bio will consider this in a positive spirit.

LXR inflammation – Collaboration with Wyeth (Pfizer)

The collaboration with Pfizer's subsidiary Wyeth LCC was initiated in 2001 and focuses on the development of new drugs for the treatment of inflammatory diseases with the liver X receptor (LXR) as a target protein. As of 2009, Wyeth took on full responsibility for research and development within the collaboration.

ROR gamma – a new opportunity for the treatment of autoimmune diseases

Recent research reveals that the nuclear receptor RORgamma may play a decisive role in the development of autoimmune disease, such as rheumatoid arthritis, inflammatory bowel disease and psoriasis. In 2010, Karo Bio initiated an early stage research effort to develop and evaluate compounds that inhibit RORgamma activity, which may prove to be a novel concept for a potential new treatment alternative for autoimmune diseases since RORgamma has been shown to control the maturation of, and activity in, a certain type of immune cell, believed to drive inflammatory and debilitating processes in such diseases.

The project has made great progress in a short period of time. Chemical starting points have been identified and of interesting drug-like molecules are being tested. July 2011 was the first time the three dimensional structure of a leading drug-like substance bound to the receptor was determined and mapped. This breakthrough with respect to both the structure data in itself, both in terms of the experimental conditions to produce the information, greatly facilitates the process of finding an optimal drug candidate.

In December 2011 Karo Bio entered into a research collaboration with Pfizer for RORgamma to discover and develop new compounds for the treatment of autoimmune diseases. Pfizer takes on full responsibility for all research costs and will have exclusive rights for products developed as a result of the collaboration, Karo Bio can receive up to USD 217 million (approx. MSEK 1,500) at signing and when specific development and sales

milestones are met as well as royalties on future drug sales.

STRATEGY AND FINANCING

Historically, operations have largely been financed by equity. In the future, Karo Bio intends to fund operations primarily through various collaborations with other companies, but also through private and public research funding. Currently, Karo Bio has traditional license agreements with Pfizer and Merck for the LXR / inflammation and RORgamma respective ER/MK-6913. These agreements provide Karo Bio with compensation for certain work, milestones when pre-determined development goals are reached and royalties on sales of future drugs.

Another type of agreement that Karo Bio uses is so-called risk-sharing, which is research agreements similar to the one for GR inflammation that Karo Bio has with Zydus Cadila. These types of contract specifies how the parties will allocate resources to a joint research project, and then distribute the profits when a product reaches the market or when the project is sold to a third party.

In early stages, Karo Bio has the opportunity to work with both commercial enterprises and academic institutions. These partnerships often relate to very specific areas where one partner wants to use Karo Bio's competence, or vice versa. Such collaborations can be funded through fees, grants or research funding from public funds or private foundations.

The share

SHAREHOLDERS

The number of shareholders was 12 158 at the beginning of the year and 11 588 at the end of 2011. Karo Bio is listed on NASDAQ OMX Stockholm since 1998.

SHARE CAPITAL

Karo Bio's share capital at December 31, 2011 amounted to MSEK 193.5. The number of shares is 387 063 972 with a quota value of SEK 0.50.

WARRANTS

The option program introduced in 2003 expired in 2011 without any excercize taking place. There are warrants representing 7.1 million shares in reference to the decision at the Annual General Meeting in 2010 on the warrant program for executives. The Board decided, however, not to pursue the warrant program so no allocation of these warrants has occurred.

DIVIDEND POLICY

The Board does not intend to propose any dividends until the company generates healthy profits and cash flows. Karo Bio has not paid dividends since the company was founded in 1987.

Principal shareholders at January 31, 2012

Owner	Number of shares	Holding in % of capital and votes
JP Morgan Bank	57,001,316	14.73
Försäkringsaktiebolaget, Avanza Pension	24,584,025	6.35
Farstorps Gård AB	12,924,531	3.34
Nordnet Pensionsförsäkring AB	12,075,196	3.12
Carlbergssjön AB	6,770,000	1.75
Victory Life & Pension	6,400,000	1.65
Goldman Sachs International Ltd, W8IMY	5,995,559	1.55
Banque Carnegie Luxembourg SA	5,751,069	1.49
Banque ÖhmanS.A.	5,508,974	1.42
Lönn, Mikael	5,239,000	1.35
Total 10 largest shareholders in terms of holding	142,249,670	36.75
Total other shareholders	244,814,302	63.25
Total per January 31, 2012	387,063,972	100.00

Holding	Number of share holders	Holding as a % of share holders	Number of shares	Holding as a % of share capital
1 – 500	2,514	21.7	532,368	0.1
501 – 1 000	1,326	11.4	1,112,178	0.3
1 001 – 2 000	1,364	11.8	2,182,451	0.6
2 001 – 5 000	2,285	19.7	8,199,490	2.1
5 001 – 10 000	1,473	12.7	11,751,931	3.0
10 001 – 20 000	1,005	8.7	15,229,991	3.9
20 001 – 50 000	907	7.8	29,681,359	7.7
50 001 – 100 000	349	3.0	26,099,761	6.7
100 001 – 500 000	297	2.6	58,750,904	15.2
500 001 – 1 000 000	25	0.2	17,843,644	4.6
1 000 001 – 5 000 000	32	0.3	68,382,725	17.7
5 000 001 –	11	0.1	147,297,170	38.1
Summa 2012-01-31	11,588	100,0	387,063,972	100.00

Ownership structure at January 31, 2012

Source: Euroclear Sweden AB

Share capital development

Transaction	Increase in no. of shares	Accumulated no. of shares	Total share capital (SEK)	Issue amount (SEK)1)
Capital structure, January 1, 1998	-	3,943,586	39,435,860	-
Stock split 2:1	3,943,586	7,887,172	39,435,860	-
New issue – IPO	1,050,000	8,937,172	44,685,860	96,600,000
New issue – IPO2)	240,000	9,177,172	45,885,860	22,080,000
New issue in kind	2,206,198	11,383,370	56,916,850	699,759,8303)
New issue – private placement	600,000	11,983,370	59,916,850	196,868,448
Exercise of stock options	15,731	11,999,101	59,995,505	78,655
Exercise of stock options	26,970	12,026,071	60,130,355	134,850
Exercise of stock options	26,586	12,052,657	60,263,285	132,930
Rights issue	4,821,850	16,874,507	84,372,535	118,578,253
Exercise of stock options	3,547	16,878,054	84,390,270	17,735
Exercise of stock options	12,011	16,890,065	84,450,325	60,055
Rights issue	11,260,043	28,150,108	140,750,540	90,737,898
Rights issue	2,815,010	30,965,118	154,825,590	22,684,468
Reduction of share capital	-	30,965,118	61,930,236	-
Rights issue	46,447,677	77,412,795	154,825,590	263,413,134
Reduction of share capital	-	77,412,795	38,706,398	-
Rights issue	38,706,397	116,119,192	58,059,596	387,160,784
Rights issue	38,706,397	154,825,589	77,412,794	150,241,238
Rights issue 4)	232,238,383	387,063,972	193,531,986	290,926,058

1) Amount generated by issue after transaction costs

2) Result of over-allotment option

3) A non-cash issue

4) The issued shares were registred in part in December 2010 and in part in January 2011. For further details, please refer to note 18 in the annual report.

Board of Directors

Göran Wessman Per Bengtsson Christer Fåhraeus Elisabeth Lindner

Jan Sandström Anders Waas

Göran Wessman (1948)

Elected in 2011, Chairman since 2011. Education: Biomedicine and Chemistry at Uppsala and Gothenburg Universities Primary experience: Leading positions in Nobel Pharma, business development consultant. Founder of Protem Wessman Boule Diagnostics and Carmel Pharma. Former CEO of the Holding company at the Gothenburg University, A+ Science Holding and as Chairman of the Board of SCRI and Isconova.

Other assignments: CEO and board member of Mintage Scientific, Chairman of I-Tech, Vicore Pharma and Protem Wessman. Number of shares: 512,500 Number of warrants: 0

Per Bengtsson (1954)

Elected in 2011, President and CEO Education: M.D. Ph.D. (Cell Biology). Primary experience: CEO of Probi AB (publ), R&D Manager Pharmacia/ Pharmacia&Upjohn Plasma Products, Medical Manager and Therapeutic Manager at Ferring and Development Manager at Bionor Immuno A/S. Other assignments: Board member for Pharmavizer AB. Number of shares: 0 Number of warrants: 0

Christer Fåhraeus (1965) Elected in 2011.

Education: M.Sc. Bioengineering (UCSD), B.Sc. Mathematics, Ph.D. (hc) Lund University. Three years of medical studies and four years of Ph.D. studies in Neurophysiology. Primary experience: Innovator and entrepreneur. CEO and Board member in several development and listed companies within medtech, IT and pharmaceuticals. Founder of Anoto Group AB, Precise Biometrics AB, CellaVision AB, Respiratorius AB and

Agellis Group AB. Other assignments: CEO of EQL Pharma AB. Chairman of Agellis Group AB, Respiratorius AB and Flatfrog Laboratories AB. Board member of EQL Pharma AB, Lund University's development company (LUAB), Fårö Capital AB and CellaVision AB. Number of shares: 0

Number of warrants: 0

Elisabeth Lindner (1956) Elected in 2011.

Education: M.Sc., MBA. Primary experience: Senior management positions in the pharmaceutical industry, including CEO of Diamyd Medical AB, Director of Biopharma Process Development at Octapharma AB, Development Director Metcon Medicin AB, Senior Director Global New Product Introduction Pharmacia Corporation. Other Assignments: Chairman and CEO Biosource Europe AB. Board member BioInvent International AB,

IND Technologies, member of the Royal Swedish Academy of Engineering Sciences (IVA). Number of shares: 0 Number of warrants: 0

Jan N. Sandström (1938)

Elected in 2011. Education: Pharmacist, University

studies in business/economics. Primary experience: International marketing, global project management, commercialization and business development within AstraZeneca and Vice President Business Development & Licensing in one of their research companies. Consultant speciliazing in strategy, global business development and recruiting.

Other assignments: Board member in Accelerator AB, GrippingHeart AB, NovaSAID AB, PledPharma AB, TikoMed AB and Chairman of JNS Consulting AB.

Number of shares: 0 Number of warrants: 0

Anders Waas (1957) Elected in 2011. Education: Dentist

Primary experience: CEO in pharmaceutical, medical device and biotech industry as well as senior positions within product development, business development and commercialization at Astra/Astra Zeneca, Ciba Geigy, WL GORE & Associates, CV Therapeutics, and Actogenics.

Other assignments: MIVAC Development AB, Toleranzia AB, Alzinova AB, Anders Waas AB and the Law Agency Louise Katsler Waas AB. Number of shares: 0 Number of warrants: 0

Employee representatives

Bo Carlsson (1958)

Employee representative since 1997 Education: Specialist teacher exam, Uppsala University Primary experience: Employed by Karo Bio since 1989, Project Manager Number of shares: 20,666 Number of warrants: 0

Johnny Sandberg (1967)

Employee representative since 2006 Education: Biomedical analyst, Vårdhögskolan Primary experience: Employed by Karo Bio since 1994, Senior Research Investigator Number of shares: 26,250 Number of warrants: 0

Eva Koch (1966)

Employee representative (Deputy) since 2010 Education: Ph.D. in organic chemistry Primary experience: Employed by Karo Bio since 1999, Senior Research Scientist Number of shares: 6,500

Number of warrants: 0

Executive Managers and Auditors

Henrik Palm Lars Öhman

Per Bengtsson (1954)

Per Bengtsson Maria Öhlander Maria Sjöberg

Maria Öhlander (1968)

Vice President Clinical Development & Regulatory Affairs. Employed since 2007.

Education: M Sc in Biology Primary experience: Clinical Research Manager Pharmacia & Upjohn, Clinical Project Manager and Study Delivery Director AstraZeneca, Director Clinical Operations and Principal Project Manager Karo Bio AB. Chief Scientific Officer, Vice President Preclinical Research & Development. Number of shares: 2,666 Number of warrants: 0

Maria Sjöberg (1964)

Vice President, Chief Scientific Officer, Preclinical R&D. Employed since 2011. Education: Ph.D., Associate Professor Previous experience: R&D/Production Director SentoClone AB, Senior Scientist Astra Zeneca Biotech, Section Head/ Project Leader KaroBio AB, Group Leader Karolinska Institutet. Number of shares: 33,750 Number of warrants: 0

Henrik Palm (1958)

Chief Financial Officer. Employed since 2011

Education: Bachelor of Business Administration, University of Gothenburg

Previous experience: Business controller within the Ericsson group (1982-2000), CFOElektronik Gruppen BK AB (publ) (2000-2009) and CFO Feelgood Svenska AB (publ) (2009-2010).

Other assignments: Chairman Dispio AB

Number of shares: 0 Number ofwarrants: 0

Lars Öhman (1957)

Vice President Business Development. Employed by Karo Bio since 1989 Education: MBA Stockholm School of Economics. Chemical Engineering, Royal Institute of Technology. Previous experience: Project leader and manager within Karo Bio's research- and development organization

Number of shares: 28,660 Number ofwarrants: 4,548

Auditors

Auditors are elected by the Annual General Meeting for a term of one year. The auditors review the company's accounting and management on behalf of the AGM.

PricewaterhouseCoopers AB were elected auditors at the AGM in May 2011 for the period until the end of the AGM in 2012. Auditor-in-charge is since April 2008 authorized public accountant Håkan Malmström.

The board and executive management's shares and options in Karo Bio are listed as per January 31, 2012 and also include family and ownership through companies. The information on stock options provided refers to the number of shares to which

the stock option holdings correspond.

Five-year overview

	P
(Amounts in MSEK unless otherwise stated)	2007	2008	2009	2010	2011
INCOME STATEME NT
Net sales	7.5	10.7	5.9	0.0	0.0
Administrative expenses	–33.3	–28.6	–30.9	–32.8	–40.8
R&D expenses	–190.8	–169.4	–132.4	–129.4	–189.3
Other operating income and expenses	0.8	–3.4	0.3	0.4	–1.0
Operating profit	–215.8	–190.7	–157.1	–161.8	–231.1
Financial net	12.4	15.9	2.6	–1.7	4.5
Results after financial items	–203.4	–174.8	–154.5	–163.5	–226.6
BALANCE SHEE T
Licenses and similar assets	2.8	1.7	0.5	-	-
Equipment	5.9	8.1	5.8	4.6	5.6
Total non-current assets	8.7	9.8	6.3	4.6	5.6
Other current assets	12.2	8.7	10.2	9.9	7.4
Cash ans cash equivalents	432.6	242.7	237.2	395.0	158.5
Total current assets	444.8	251.4	247.4	404.9	165.9
Total assets	453.6	261.2	253.7	409.5	171.5
Equity	394.3	219.5	215.2	342.5	115.9
Long-term liabilities	0.2	2.0	1.2	0.5	-
Short-term liabilities	59.1	39.7	37.3	66.5	55.6
Total equity and liabilities	453.6	261.2	253.7	409.5	171.5
CASH FLOW
Cash flow from operating activities	–178.3	–186.4	–146.9	–158.9	–198.3
Net investments in non-current assets	–6.6	–3.8	–1.2	–2.0	–4.3
Net investments in other short-term placaments	–96.9	88.0	–19.9	82.3	–45.2
Cash flow from investing activities	–103.5	84.2	–21.1	80.3	–49.5
Cash flow from financing activities	387.2	-	150.2	324.9	–33.9
Cash flow for the year	105.4	–102.2	–17.8	246.3	–281.7
Operating cash flow	–184.9	–190.2	–148.1	–160.9	–202.6
KEY FIGURE S
Equity	394.3	219.5	215.2	342.5	115.9
Return on equity %	–67.3	–57.0	–71.1	–58.6	–98.9
Return on capital employed %	–67.0	–56.8	–72.3	–58.0	–100.8
Operating margin %	n.m	n.m	n.m	n.m	n.m
Profit margin %	n.m	n.m	n.m	n.m	n.m
Equity ratio %	86.9	84.0	84.8	83.6	67.6
Interest-bearing assets (net)	432.6	242.7	237.2	395.0	158.5
Investments in licenses and similar assets	3.5	-	-	-	-
Net investments in equipment	3.1	3.8	1.2	2.0	4.3
Average number of employees	71	63	67	68	68
of whom work in R&D	63	54	60	60	60

	P
	2007	2008	2009	2010	2011
Data per sha re (SEK) 1) 2) Earnings per share
-Average number of shares	–1.14	–0.89	–0.78	–0.67	–0.59
-Number of shares at year end	–1.04	–0.89	–0.65	–0.42	–0.59
Operating cash flow per share
-Average number of shares	–1.04	–0.97	–0.75	–0.66	–0.52
-Number of shares at year end	–0.94	–0.97	–0.62	–0.42	–0.52
Equity per share, year end	2.01	1.12	0.90	0.88	0.30
Share price at the year end3)	2.67	4.81	4.58	1.97	1.48
Share price/equity per share at the year end, % 3)	133	429	507	223	494
NUM BER OF SHARE S (MILLIO NS) 1) 2)
Average number of shares	178.5	195.7	197.5	242.3	387.1
Average number of shares including warrants	180.5	196.9	198.3	243.1	387.3
Number of shares at the year end	195.7	195.7	238.2	387.1	387.1
Number of shares at the year end including warrants	197.7	196.5	239.0	387.8	387.1

1) The outstanding warrants have no dilution effect as their conversion to shares would lead to an improvement in earnings and cash flow per share for the ears included.

2) The number of shares for periods prior to rights issues have been adjusted for the bonus element in accordance with IAS 33, Earnings per share.

3) Share price data has been adjusted to reflect later share issues.

Definitions

CASH AND CASH EQUIVALENTS

Cash and bank balances, and short-term investments with maturities of less than 90 days.

OPERATING CASH FLOW

Cash flow from operating activities and cash flow from investments in machines, equipment and licenses.

RETURN ON EQUITY

Results after financial items as a percentage of average equity.

RETURN ON CAPITAL EMPLOYED Operating loss and financial income as a percentage of the average total assets less non interest bearing liabilities.

OPERATING MARGIN Operating loss as a percentage of net sales.

PROFIT MARGIN Results for the year as a percentage of net sales. EQUITY RATIO Equity as a percentage of total assets.

INTEREST BEARING ASSETS (NET) Cash, bank balances and short-term investments.

NET CAPITAL INVESTMENTS Capital investments in equipment net of disposals.

EARNINGS/LOSS PER SHARE Earnings/loss in relation to the number of shares.

OPERATING CASH FLOW PER SHARE Cash flow from operating activities and cash flow from investments in equipment and licenses per share.

EQUITY PER SHARE Shareholders' equity in relation to outstanding shares at year-end.

SHARE PRICE/EQUITY PER SHARE

Share price as a percentage of shareholders' equity per share at year-end.

AVERAGE NUMBER OF SHARES Weighted-average number of shares outstanding during the year.

AVERAGE NUMBER OF SHARES, INCLUDING WARRANTS

Weighted-average number of shares, including warrants, outstanding during the year.

NUMBER OF SHARES AT YEAR-END Number of shares outstanding at the end of the year.

NUMBER OF SHARES AT YEAR-END, INCLUDING WARRANTS Number of shares, including warrants, outstanding at the end of the year.

Administration Report

The Board of Directors and the President of Karo Bio AB (publ), registration number 556309-3359 and domiciled in Huddinge, Sweden, hereby presents its annual report regarding the operations of the Group and the Parent Company for the financial year beginning January 1 and ending December 31, 2011.

OPERATIONS

Karo Bio is an innovative research and development company which since the early 1990s has specialized in nuclear receptors as target proteins for the development of new drugs.

Nuclear receptors may be regarded as on and off switches by which the body's own production of proteins can be regulated with great precision. By targeting nuclear receptors, the body's own control systems can be tuned to treat several illnesses and diseases. Karo Bio develops innovative drugs for key medical needs. Based on this knowledge, Karo Bio runs preclinical drug development projects within the areas of multiple sclerosis (MS), inflammatory conditions, autoimmune diseases, cancer and women's health.

Important processes within the company include research, drug discovery and preclinical and clinical development. Besides these processes, medical and regulatory issues are also covered by the company's competences. Karo Bio has the capacity to process selected compounds for niche indications through the whole development chain, while compounds addressing large patient groups require development collaborations or out-licensing at some stage of the process.

The company currently has seven pharmaceutical development programs. Four of the programs are run in-house by Karo Bio and three are strategic collaborations with international pharmaceutical companies. The programs are run with a varying degree of activity. Karo Bio was founded in 1987 and has been listed on NASDAQ OMX Stockholm since 1998 (Reuters: KARO.ST).

RESEARCH AND DEVELOPMENT – CURRENT STATUS AND SIGNIFICANT EVENTS 2011

Significant events in 2011 and current status for each of Karo Bio's projects are described briefly below.

Eprotirome (KB2115) – Dyslipidemia

The thyroid hormone receptor (TR) plays an important role in the regulation of the body's metabolism, including the control of plasma lipid levels. Karo Bio has synthesized and tested a large number of compounds that act on this receptor and in 2011 eprotirome was the leading compound in this class. Since the compound is liver-selective, which is not the case in natural thyroid hormone, many of the side effects associated with thyroid hormones are hereby avoided. Eprotirome was developed as an innovative new concept for reducing the risk for cardiovascular disease and shows a unique efficacy profile with significant lowering of several risk factors for the development of cardiovascular disease. Eprotirome was expected to be used primarily as add-on to statins and to compete with ezetimibe, nicotinic acid, fibrates, omega-3 fatty acids and possible new specialist products.

In 2011 Karo Bio started a phase III program with the compound and in September started a patient phase III study on patients with the hereditary condition heterozygous familial hypercholesterolemia (HeFH). The purpose of this study was to determine the safety and efficacy of eprotirome in long term treatment. In early 2012 Karo Bio received data from an animal study in the phase III program, which revealed cartilage damage in long-term use, and the development program was cancelled.

Earlier in the year, Karo Bio entered into a cooperation and license agreement with the Indian pharmaceutical company Alkem Laboratories Ltd. (Alkem) for the compound. The agreement gives Alkem exclusive commercialization rights for eprotirome in India and some other countries in Asia and Africa, and gives Karo Bio royalties on Alkem's future sales of eprotirome. Alkem planned to conduct two phase III trials to obtain marketing approval for eprotirome in India. Alkem had, at the time of the completion of this annual report, not announced how they intend to proceed with their studies on this compound. The prospects for continuing development should however be regarded as weak.

ER program - a platform with many opportunities

The estrogen receptor (ER) is activated by the hormone estrogen and regulates a number of functions in the body. Estrogen has a number of positive effects, but its medical use has been limited by an increased risk of developing breast and uterus cancer as well as blood clots. These risks are primarily linked the receptor subtype ERalfa while the ERbeta receptor that Karo Bio was instrumental in discovering in the 1990s, appears to mediate many of the positive effects of estrogen without the side effects and therefore offers many interesting clinical possibilities. The ERbeta receptor appears to play an important role even in men, who under normal circumstances through conversion from the male hormone testosterone can have significant local levels of estrogen, for example in the brain.

Karo Bio's work on the development of ERbeta-selective compounds has resulted in a platform with potential in the many different therapeutic areas. The first drug candidate within the program, KB9520, has shown good effects in several preclinical models for certain cancers. Other compounds have been documented for CNS indications and in 2011 Karo Bio focused its work in this area, primarily for multiple sclerosis (MS).

In the MS-field, ERbeta agonists in preclinical disease models have shown good effects on the repair processes and reconstruction of the myelin sheaths that surround and isolate nerves which are necessary for the efficient conduction of nerve impulses. If treatment with ERbeta agonists proves to repair damaged myelin also in patients, it would represent a significant breakthrough in the care of MS patients, since damaged myelin underlies disease symptoms and disability. The treatment of MS currently consists primarily of anti-inflammatory drugs. There are no approved drugs that directly affect the myelin sheaths.

Karo Bio is evaluating partnerships with a number of industrial partners. Discussions are being conducted on licensing of the project.

ER women's health / MK-6913

Since 1997, Karo Bio has collaboration with Merck ("MSD" outside U.S. and Canada) regarding estrogen receptors to develop drugs in the area of women's health. Merck has since 2002, had the entire responsibility for development within this cooperation. After having terminated a phase II study with the compound MK-6913 in 2012, Merck is evaluating alternatives for future studies of this compound.

GR inflammation - joint project with Zydus Cadila

Glucocorticoids are used to treat a variety of inflammatory conditions such as rheumatoid arthritis, inflammatory bowel disease, psoriasis, and asthma. Glucocorticoids are powerful anti-inflammatory drugs, but side effects tied to metabolism and bone in particular limits their use. Separating the good effects of glucocorticoid from their side effects has long been considered to be medically very important, yet difficult to achieve.

In 2008, Karo Bio and the Indian pharmaceutical company Zydus Cadila entered into a three-year collaboration to develop drugs affecting glucocorticoid receptors (GR) selectively and that therefore have a much better side effect profile than cortisone and other traditional glucocorticoids. In March 2011 the cooperation was extended one year. Promising - albeit early - results generated by the project indicates that a new and unique way to achieve this may have be identified. Preclinical evaluation is in progress to identify compounds that are suitable for further development as drug candidates.

The collaboration with Zydus Cadila ended in the first quarter of 2012, after which KaroBio continues development work under its own management.

GR type 2 diabetes - KB3305

KB3305 is a liver selective antagonist for the glucocorticoid receptor (GR). The substance is the first and only of its kind tested in man and has in phase I / II proven to be both efficient and have an effect on blood sugar levels in patients with type 2 diabetes. Karo Bio does not intend to continue development of the compound on its own. Would another party like to take over the project for further research and development, Karo Bio will consider this in a positive spirit.

LXR inflammation - joint project with Wyeth (Pfizer)

Collaboration with Pfizer's subsidiary Wyeth LCC began 2001 and focuses on developing novel drugs to treat inflammatory conditions of the liver X receptor (LXR) as a target protein. The project is in the preclinical phase. Since 2009, Wyeth has been responsible for all research and development within the project.

RORgamma - a new opportunity to treat autoimmune disorders New research shows that the nuclear receptor RORgamma may have a crucial role in the development of autoimmune diseases, such as rheumatoid arthritis, inflammatory bowel disease and psoriasis. In 2010, Karo Bio started a research program to develop and evaluate compounds that inhibit RORgamma activity. Such substances are a possible innovative treatment of autoimmune diseases because RORgamma has been shown to control the maturing, and the activity of, a specific type of immune cells which are considered to drive inflammatory and degradative processes in these diseases.

The project has quickly made great progress. Chemical starting points have been identified and interesting drug-like molecules are being tested. In July 2011, the three dimensional structure of a leading drug-like substance bound to the receptor was determined and imaged for the first time. This breakthrough, both with respect to the structure and information itself, as well as the experimental conditions to produce the information, significantly facilitates the process of finding an optimal drug candidate.

In December 2011, Karo Bio entered into a research collaboration with Pfizer for RORgamma to discover and develop new substances for the treatment of autoimmune diseases. Pfizer takes on full responsibility for all research costs and will have exclusive rights for products developed as a result of the collaboration. Karo Bio may receive up to MUSD 217 (approx. MSEK 1,500) at signing and when specific development and sales milestones are met as well as royalties on future drug sales. For the period up until the fourth quarter 2013 the compensation to Karo Bio amounts to MUSD 10-14. Pfizer owns the earliest right to cancel the contract for research funding as of the second quarter of 2013. Pfizer also owns the right to extend the contract for research funding for up to two years until the end of 2015.

KEY EVENTS AFTER THE END OF FISCAL YEAR 2011

In February 2012 Karo Bio discontinued the development program for eprotirome after a study in the phase III program showed unwanted side effects in long term treatment of animals. These findings meant that the long term treatment of humans must be regarded as too risky in relation to the desired effects. Karo Bio estimates that the cost of the eprotirome project in 2012 will amount to approximately MSEK 40, including costs for phasing out the project. All in all, budgeted costs for the eprotirome program decreases by a total of MSEK 160.

As a consequence of the suspended eprotirome program, the Board decided to also cancel a planned realignment of Karo Bio's operations. The streamlining would have created two companies: one focused on eprotirome and one organized around Karo Bio's unique knowledge of nuclear receptors. The preclinical portion would have been sold to new owners and thus strengthened Karo Bio's financial status.

In order to lower costs, 16 employees, primarily from the preclinical part of operations, were made redundant in February. Together with previously announced and performed reductions, cost savings will amount to MSEK 17 annually. The savings will take effect gradually in 2012. In light of the closure of the eprotirome project the Board decided to postpone the AGM to June 12, 2012 to advise the Board and senior management on opportunities for new planning and an updated description of the business.

As announced in the interim report, the equity amounted to less than half of its registered share capital at the end of the first quarter. Since the registered share capital is significantly higher than what is required for the existing operations, scope and risks, the Board proposed that the capital would be reduced to MSEK 7.7 million. Before an extraordinary General Meeting on April 27 a balance sheet for liquidation purposes was presented and the Meeting decided not to put the company into liquidation. The Meeting also decided to reduce the share capital in accordance with the Board's proposal and consequently restore the deficiency.

ORGANIZATION

In addition to the parent company Karo Bio AB, the Group consists of the wholly owned subsidiary Karo Bio Research AB in which is currently not conducting any business. The head

office is located in Huddinge, outside of Stockholm, Sweden, also the site of the company's operations.

The company management consists of five people: the President and CEO, Cheif Financial Officer, Director of Preclinical Development, Director of Clinical Development, and Vice President Business Development. In 2011, Per Bengtsson was appointed new President and CEO and Henrik Palm was appointed as CFO, while Maria Sjöberg and Maria Öhlander were appointed as Directors of Preclinical and Clinical Development. At the end of the year, Karo Bio had 68 (68) permanent employees, of whom 60 (60) engaged in research and development, 3 (3) in business development and patents, and 5 (5) had administrative roles.

RESULTS AND FINANCIAL POSITION Results

Consolidated net sales amounted to MSEK 0.0 (0.0). Operating expenses increased by MSEK 69.4 to MSEK 231.2 (161.8), of which 101.0 (37.3) is directly attributable to eprotirome's phase III program. This year's expenditure on research and development amounted to MSEK 189.3 (129.4).

Administrative expenses amounted to MSEK 40.8 (32.9). The administrative expenses for 2011 included severance cost of MSEK 5.3. Operating loss amounted to MSEK -231.2 (-161.8). Net financial items improved to MSEK 4.5 (-1.7). Net income for the year amounted to MSEK -226.6 (-163.5).

Investments

Capital expenditure amounted to MSEK 3.4 (1.2) and relates primarily to laboratory and IT equipment.

Cash flow and financial position

Cash and cash equivalents amounted to MSEK 43.8 (325.5) at year end. Including the second term investments with a maturity exceeding 90 days, the company's financial assets amounted to MSEK 158.5 (395.0). Cash flow from operating activities amounted to MSEK -198.3 (-158.9).

The rights issue of MSEK 325, which was conducted in the fourth quarter of 2010 brought in MSEK 291 to the company after deducting transaction costs. The share related credit facility that was entered into in connection with the new rights issuewas adjusted during the third quarter of 2011 so that it could be utilized at the current stock price at the time, which no longer prevails , since the stock price according to contract cannot be less than SEK 0.75 for the credit facility to be utilized. The mandate to use the credit facility will be annually subject to the decision of the Annual General Meeting.

Equity and share data

The registered share capital was MSEK 193.5 per December 31, 2011. The total number of shares was 387 063 972 shares.

Karo Bio's stock option plan 2003/2011 expired on May 31, 2011 and no stock options were converted. Total shareholders' equity amounted to MSEK 115.9 (342.5) after accounting for net income. Earnings per share, based on a weighted average of shares outstanding, amounted to SEK -0.59 (0.67). The Group's equity at year end was 67.6 (83.7) per cent and equity per share, based on the fully diluted number of shares at year end, was SEK 0.30 (0.88).

Parent Company

The parent company's reported revenues amounted to MSEK 0.0 (0.0) and income after financial items MSEK -226.6 (-163.5) MSEK. Investments in fixed assets amounted to MSEK 3.4 (1.2). Cash and other short-term investments at year end amounted to MSEK 158.5 (395.0).

GUIDELINES FOR REMUNERATION FOR SENIOR EXECUTIVES

The Board of Karo Bio proposes that the AGM on June 12, 2012 decides on the following guidelines for determining salary and other remuneration to senior executives in Karo Bio, to be applied until the AGM is held in 2013. The proposed guidelines are similar to those adopted by the AGM in 2011.

General information

Karo Bio will apply remuneration levels and terms of employment that are necessary to recruit and retain a competent management with the capacity to achieve established business goals. As a result, competitiveness shall be the overriding principle in relation to the salary and other remuneration of the Karo Bio executive management.

Fixed salary

Fixed salary will be paid for work performed in a satisfactory manner.

Variable remuneration

In addition to the fixed salary, variable remuneration may be offered to reward clearly goal-related achievements by simple and transparent mechanisms. The executive management's remuneration under incentive programs will be based on the extent to which business goals have been achieved.

Karo Bio's commitments under incentive programs shall be limited in relation to the fixed annual salary and shall not exceed 40 per cent of the fixed annual salary, before taking into account social security charges, for each executive during the relevant period, with the requirement on the recipient to invest the net amount after tax of the portion of the remuneration that exceeds 20 per cent of the fixed annual salary in Karo Bio shares in the market. The remuneration under incentive programs will be paid in the form of salary and qualify for pension benefits. The total maximum variable remuneration at current fixed annual salary levels in 2012, including social security charges, would be MSEK 3.6.

Pension benefits

The terms of the executive management's pension benefits shall be competitive taking into account what is generally applicable to equivalent executives on the market and shall be based on defined contribution pension schemes or accede to the Swedish ITP plan. The pension benefits shall be based on a retirement age of 65 years.

Non-monetary benefits

The executive management's non-monetary benefits (such as car and health care benefits) should facilitate the performance of their work and be equivalent to what is considered reasonable in relation to market practice and the benefit for the company.

Dismissal and severance pay

Dismissal and severance pay shall not exceed 12 monthly salaries in total for each executive.

The executives to whom the remuneration guidelines apply

The above guidelines shall apply to the president of Karo Bio AB and executives that report directly to the president as well as presidents of Karo Bio's subsidiaries.

Information on remuneration previously resolved upon that has not fallen due

At present, there is no remuneration that has not fallen due that deviates from guidelines decided at previous AGMs.

Consultancy fee paid to board members

Going market rates may be paid to board members for consultancy work carried out for the company beyond the framework of their commitment to the Board.

Deviation from the guidelines under special circumstances

The Board may deviate from the guidelines in certain cases if there are special reasons for doing so.

INFORMATION REGARDING THE KARO BIO SHARE

At December 31, 2011, there were a total of 387,063,972 shares with a deviate value of SEK 0.50. The shares carry one vote each and are entitled to equal part of the company's distributable earnings. There are no limitations to the transferability of the Karo Bio shares due to legal constraints or by regulations in the company by-laws. To the best of Karo Bio's knowledge, no agreements have been made between any shareholders, which could limit the transferability of the shares. There is no shareholder that alone controls 10 per cent or more of the total number of shares of Karo Bio.

The general meeting's authorization of the Board of Directors to issue new shares

Shareholders at the AGM of Karo Bio in 2011, resolved to authorize the Board of Directors until the 2012 AGM to decide on issuing new shares within the framework of the ECF agreement that gives the company the right, but not an obligation, to issue shares to Azimunth Opportunity Ltd. The agreement was renegotiated this year. The Board is hereby given authorization, proprietary for the period until the next annual general meeting, to issue new shares to Azimuth without limitation in any way other than as is prescribed by the articles of association applicable from time to time concerning limits on the number of shares and share capital. The subscription price shall be determined in accordance with the financing contract between the company and Azimuth.

CONTINUED OPERATIONS

The Group's existing cash and equity, together with previously signed agreements are expected to last for the continuance of planned operations for more than twelve months from December 31, 2011. Karo Bio is currently evaluating a number of alternative strategic approaches, and more information will be released prior to the AGM on June 12. For certain approaches the existing cash resources and capital are expected to be sufficient to continue operations for more than twelve months from today, while other approaches require additional funding and/ or additional agreements.

On December 31, 2011 the registered share capital amounted to MSEK 193.5 and the parent company's total equity to MSEK 116.3. As announced in the interim report, the equity amounted to less than half of its registered share capital at the end of the first quarter. Since the registered share capital is significantly higher than what is required for the existing operations, scope and risks, the Board proposed that the capital would be reduced to MSEK 7.7 million. On April 27, the Annual General Meeting decided to reduce the share capital in accordance with the Board's proposal and consequently restore the deficiency.

CORPORATE GOVERNANCE REPORT

Karo Bio's corporate governance report is available at the company website www.karobio.com and is also included in the printed annual report for 2011.

Systems for internal control and risk management

The Group's systems for internal control and risk management regarding the consolidated financial reports are described in the section internal control and risk management regarding financial reporting in Karo Bio's corporate governance report.

FUTURE DEVELOPMENT

The board and management will strive to eventually reach a point where the Group's revenues significantly better match its costs. Revenues in such a situation could be in the form of payments from partnerships, public and private funding and compensation for certain activities. The operations are considered to be attractive enough for this to be achievable, although it may take years to get there. Before Karo Bio reaches this point, additional capital needs may arise.

Karo Bio is focusing its operations on the projects and activities that are expected to generate the best business opportunities and create the greatest value in the short term, thereby creating the best conditions for its development in the long run. In the long term, the intention is that its activities should generate significant revenues from sales of pharmaceutical products in the market, where Karo Bio receives royalties on partner's product sales.

RISK FACTORS

There is no guarantee that Karo Bio's research and development will result in commercial success. 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 is no guarantee that Karo Bio obtains approvals on its clinical trials applications or 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. It cannot be excluded that the approval process at regulatory level will involve requirements for increased documentation and thereby increased costs and delays in the projects, or even discontinuation of projects. Increased total development costs and development time of a project could result in an increased project risk and reduce the product's potential to successfully reach the commercial stage or reduce the time from product launch to patent expiry.

There may be a need to turn to the capital market for additional funding 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 progress made 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.

PROPOSED APPROPRIATION OF LOSS

The Board of Directors proposes that the year's loss of SEK 226,611,988 is partly covered by allowing the share premium account to be drawn by SEK 11,341,040 and that the current reserve fund is utilized with SEK 138,014,104 SEK. The remaining amount of SEK 77,256,844 SEK is carried forward.

The Company's result for the financial year and financial position per December 31, 2011 is available in the accompanying financial statements with the notes thereto, which form an integral part of this annual report.

Consolidated income statements and income statements for the Parent Company

			GROUP		PARENT COMPANY
KSEK	Note	2011	2010	2009	2011	2010
Net sales	1	-	-	5,891	-	-

Operating expenses	2–5
Administrative expenses		–40,797	–32,869	–30,954	–40,797	–32,869
Research and development expenses		–189,321	–129,382	–132,403	–189,321	–129,368
Other operating income and expenses	6	–1,041	412	343	–1,041	412
		–231,159	–161,839	–163,014	–231,159	–161,825
Operating profit/loss		–231,159	–161,839	–157,123	–231,159	–161,825
Incomes from financial investments
Interest income and other similar income	7	5,921	802	2,691	5,921	802
Interest expenses and other similar expenses	8	–1,388	–2,500	–124	–1,374	–2,443
		4,533	–1,698	2,567	4,547	–1,641
Profit/loss after financial items		–226,626	–163,537	–154,556	–226,612	–163,466
Tax	9	-	-	-	-	-
PROFIT/LOSS FOR THE YEAR	10	–226,626	–163,537	–154,556	–226,612	–163,466
Earnings per share (SEK)	11
– based on weighted-average number of shares outstanding		–0.59	–0.67	–0.78
– based on weighted-average number of shares fully diluted 1)		–0.59	–0.67	–0.78

1) The last day for redemption for the warrants that were issued in the latest program was in April 2011.

No dilutive effect from warrants outstanding is taken into account, as a conversion would lead to a reduced loss per share

Consolidated statement of comprehensive income and comprehensive income for the Parent Company

		GROUP			PARENT COMPAnY
KSEK	Note	2011	2010	2009	2011	2010

Profit/loss for the period		–226,626	–163,537	–154,556	–226,612	–163,466
Other comprehensive income for the year, net of tax		-	-	-	-	-
TOTAL COMPREHENSIVE PROFIT /LOSS FOR THE PERIOD		–226,626	–163,537	–154,556	–226,612	–163,466
Total comprehensive profit /loss attributable to:
Shareholders of the parent company		–226,626	–163,537	–154,556	–226,612	–163,466

Consolidated statement of financial position and balance sheets for the Parent Company

ASSETS (KSEK)			GROUP		PARENT COMPANY
At December 31	Note	2011	2010	2009	2011	2010

NON-CURRENT ASSETS
Intangible assets
Licenses and similar rights	12	-	-	545	-	-

Tangible assets
Equipment	13, 20	5,558	4,585	5,788	5,412	3,565

Financial assets
Participations in group companies	14	-	-	-	100	100
Total non-current assets		5,558	4,585	6,333	5,512	3,665

CURRENT ASSETS
Current receivables
Other receivables		2,945	3,993	5,884	2,945	3,993
Prepaid expenses and accrued income	15	4,464	5,870	4,372	4,464	5,870
		7,409	9,863	10,256	7,409	9,863,
Financial assets at fair value through profit or loss	16, 28	114,780	69,548	158,013	114,780	69,548
Cash and cash equivalents	17	43,753	325,486	79,171	43,743	325,476
Total current assets		165,942	404,897	247,440	165,932	404,887
TOTAL ASSETS		171,500	409,482	253,773	171,444	408,552

SHAREHOLDERS' EQUITY AND LIABILITIES (KSEK)			GROUP		PARENT COMPAnY
At December 31	Note	2011	2010	2009	2011	2010
SHAREHOLDERS' EQUITY	18
Share capital		193,532	191,593	77,412	193,532	191,593
Other contributed capital		980,747	982,686	805,941	-	-
Rights issue of new shares – on-going		-	-	-	-	1,939
Share premium reserve, restricted		-	-	-	138,015	138,015
Total restricted equity (Parent Company)		-	-	-	331,547	331,547
Share premium reserve, non-restricted		-	-	-	11,340	174,806
Accumulated loss (incl. Profit / loss for the year for the Group)		–1,058,357	–831,731	–668,194	-	-
Profit / loss for the year		-	-	-	–226,612	–163,466
Total non-restricted equity (Parent Company)		-	-	-	–215,272	11,340
Total shareholders' equity		115,922	342,548	215,159	116,275	342,887
LIABILITIES
Non-current liabilities
Other non-current liabilities	19, 20	-	470	1,273	-	-
Total non-current liabilities		-	470	1,273	-	-
Current liabilities
Accounts payable – trade		9,952	45,578	17,164	9,952	45,578
Payables to group companies		-	-	-	90	90
Other current liabilities	20	3,159	3,640	3,410	2,660	2,751
Accrued expenses and deferred income	21	42,467	17,246	16,767	42,467	17,246
Total current liabilities		55,578	66,464	37,341	55,169	65,665
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES		171,500	409,482	253,773	171,444	408,552
Pledged assets		-	-	-	-	-
Contingent liabilities	22	-	64,228	60,308	-	64,228

Consolidated statement of cash flows and cash flow statement for the Parent Company

			GROUP		PARENT COMPAnY
KSEK	Note	2011	2010	2009	2011	2010
Operating activities
Operating loss before financial items		–231,159	–161,839	–157,123	–231,159	–161,825
Items not affecting cash flow
Depreciation and amortization	5	2,409	2,930	3,655	1,535	2,055
Other		19	-	82	19	-
		–228,731	–158,909	–153,386	–229,605	–159,770
Financial income received	23	5,938	6,953	10,306	5,938	6,953
Financial items paid	23	–1,388	–2,500	–124	–1,374	–2,442
Cash flow from operating activities before changes in working capital		–224,181	–154,456	–143,204	–225,041	–155,259
Changes in working capital
Changes in current operating receivables		4,552	359	–1,666	4,552	359
Changes in accounts payable		-1,685	–5,527	356	–1,685	–5,527
Changes in other current operating liabilities		23,031	744	–2,410	23,031	744
Cash flow from operating activities		–198,283	–158,880	–146,924	–199,143	–159,683
Investing activities
Investment in equipment		–4,262	–1,985	–1,238	–3,402	–1,182
Investments in other short-term investments		–553,362	–191,399	–271,864	–553,362	–191,399
Sale and redemption of other short-term investments		508,114	273,713	252,008	508,114	273,713
Cash flow from investing activities		–49,510	80,329	–21,094	–48,650	81,132
Financing activities
Proceeds from rights issues		-	325,134	150,241	-	325,134
Transaction costs rights issue (at year end paid part of total KSEK 34,208)		–33,940	–268	-	–33,940	–268
Cash flow from financing activities		–33,940	324,866	150,241	–33,940	324,866
CASH FLOW FOR THE YEAR		–281,733	246,315	–17,777	–281,733	246,315
Cash and cash equivalents at the beginning of the year	17	325,486	79,171	96,948	325,476	79,161
Cash and cash equivalents at the end of the year	17	43,753	325,486	79,171	43,743	325,476

Consolidated statement of changes in equity

GROUP
KSEK	Share capital	Restricted reserves	Accumulated loss	TOTAL
Balance at January 1, 2009	58,059	675,053	–513,638	219,474
Profit / loss for the year	-	-	–154,556	–154,556
Transactions with shareholders
Issuance of new shares (net after deduction of transaction related costs)	19,353	130,888	-	150,241
Total transactions with shareholders	19,353	130,888	0	150,241
Balance at January 1, 2010	77,412	805,941	–668,194	215,159
Profit / loss for the year	-	-	–163,537	–163,537
Transactions with shareholders
Issuance of new shares (net after deduction of transaction related costs)	114,181	176,745	-	290,926
Total transactions with shareholders	114,181	176,745	0	290,926
Balance at January 1, 2011	191,593	982,686	–831,731	342,548
Profit / loss for the year	-	-	–226,626	–226,626
Transactions with shareholders
Issuance of new shares (net after deduction of transaction related costs)	1,939	–1,939	-	0
Total transactions with shareholders	1,939	–1,939	0	0
Balance at December 31, 2011	193,532	980,747	–1,058,357	115,922

The Parent Company's statement of changes in equity

PARENT COMPANY
KSEK	Share capital	Rights issue - on-going	Restricted reserve	Non-restricted reserve	Accumulated loss	Loss for the year	TOTAL
Amount at January 1, 2010	77,412	0	161,687	130,888	0	–154,560	215,427
Profit / loss for the year	-	-	-	-	-	–163,466	–163,466
Transactions with shareholders
Issuance of new shares (net after deduction of transaction related costs)	114,181	1,939	-	174,806	-	-	290,926
Treatment of loss	-	-	–23,672	–130,888	-	154,560	0
AMOUNT AT DECEMBER 31, 2010	191,593	1,939	138,015	174,806	0	–163,466	342,887
Profit / loss for the year	-	-	-	-	-	–226,612	–226,612
Transactions with shareholders
Issuance of new shares (net after deduction of transaction related costs)	1,939	–1,939	-	-	-	-	0
Treatment of loss	-	-	-	–163,466	-	163,466	0
AMOUNT AT DECEMBER 31, 2011	193,532	0	138,015	11,340	0	–226,612	116,275

See note 18 for further information.

Accounting and valuation principles

THE GROUP

Statement of compliance

The consolidated financial statements have been prepared in accordance with the Swedish Annual Accounts Act, RFR 1 Supplementary Accounting Regulations for Groups, International Financial Reporting Standards (IFRS) and statements concerning interpretation published by IFRIC as adopted by the European Union. The statements have been prepared on a historical cost basis, except for financial assets available for sale and financial assets at fair value through profit and loss.

CHANGES IN ACCOUNTING PRINCIPLES AND INFORMATION New accounting standards applied to the group

None of the IFRS or IFRIC interpretations, mandatory for the first time in the financial year beginning January 1, 2011 have had a significant impact on the Group.

New standards, amendments and interpretations to existing standards that have not yet entered into force and that have not been previously adopted by the group.

IFRS 9 "Financial instruments" deals with the classification, valuation and reporting of financial liabilities and assets. IFRS 9 replaces those parts of IAS 39, which are related to the classification and valuation of financial instruments. IFRS 9 requires that financial assets are classified into two different categories: valuation at fair value or valuation at amortized cost.

Classification is determined at initial reporting based on the company's business model and characteristics of the contractual cash flows. For financial liabilities there are no large changes compared with IAS 39. The biggest change relates to liabilities that are designated at fair value. For these, a portion of fair value changes that is attributable to their own credit risk is recognized in other comprehensive income instead of the result as long as it does not causes inconsistency in the accounting. The Group intends to apply the new standard by the financial year beginning January 1, 2015 and has not yet evaluated the effects. The standard has yet not been adopted by the EU.

IFRS 10 "Consolidated Financial Statements" is based on existing principles as it identifies control as the decisive factor for determining whether a company is fully consolidated. This standard provides additional guidance to assist in the determination of control when this is difficult to assess. The Group will apply IFRS 10 for the financial year beginning January 1, 2013 and has not yet evaluated the full impact on the financial statements. The standard has not yet been adopted by the EU.

IFRS 12 "Disclosures of interests in other entities" includes disclosure requirements of subsidiaries, joint arrangements, associates and non-consolidated "structured entities". The Group will apply IFRS 12 for the financial year beginning January 1, 2013 and has yet not evaluated the full impact on the financial statements. The standard has not yet been adopted by the EU. The aim of IFRS 13 "Fair value measurement" is that valuation at fair value should be more consistent and less complex by providing a standard that gives a precise definition and a common source of IFRS at fair value valuations and associated information. The requirements do not increase the application scope of when fair value should be applied but provides guidance on how it should be applied where other IFRSs already require or permit valuation at fair value. The Group has not yet evaluated the full impact of IFRS 13 on financial reports. The Group intends to apply the new standard in the year that begins on January 1, 2013. The standard has not yet been adopted by EU.

None of the other IFRS and IFRIC interpretations that have not yet entered into force are expected to have any significant impact on Group.

Basis of preparation

The consolidated financial statements have been prepared on a historical cost basis, except for certain financial instruments that are measured at fair value. 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 2010 and 2009, respectively.

Critical accounting estimates and judgments

The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the company's accounting principles. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements, relate to the valuation of tax losses carried forward, the valuation of stock options issued to employees and the decision regarding expensing or capitalizing development costs. For further information, see accounting and valuation principles below and notes 9 and 27.

Basis of consolidation

The consolidated financial statements comprise the financial statements of Karo Bio AB and its subsidiary at December 31 each year. The financial statements of the subsidiary are prepared for the same reporting year as the Parent Company, using consistent accounting policies. All intra-group transactions, income and expenses, profits and losses and balance sheet items resulting from intra-group transactions are eliminated in full in the consolidated financial statements.

A subsidiary is a company over which the Parent Company has a controlling influence, generally as a consequence of a holding of shares that, directly or indirectly, provides the Parent Company with the control over more than 50 per cent of the voting power. A subsidiary is included in the consolidated financial statements as of the date of the acquisition, being the day on which the Parent

Company acquires a controlling influence, and until the date on which the controlling influence ceases.

Business combinations and goodwill

Business combinations are accounted for using the acquisition accounting method. The acquisition is considered to be a transaction by which the Group indirectly acquires the assets of the subsidiary and assumes its liabilities and other obligations. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. Goodwill is reported as an asset in the balance sheet. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement. The shareholders' equity in the subsidiary is entirely eliminated upon acquisition. The Group's equity comprises the equity in the Parent Company and the equity in the subsidiaries earned after the acquisition.

Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Where the recoverable amount is less than the carrying amount, an impairment loss asset may be impaired. The recoverable amount is defined as the higher of an asset's fair value less costs of disposal and its value in use.

Foreign currency translation

The consolidated financial statements are presented in Swedish Kronor (SEK), which is the functional currency of the company's operations. Transactions in foreign currencies are initially recorded at the functional currency rate ruling on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rate of exchange ruling on the balance sheet date.

Any differences in the rate of exchange arising from the translation are recognized in the income statement. Non-monetary assets and liabilities that are valued at cost are recognized at historical rates of exchange, i.e. at the rates of exchange on the respective transaction dates. Items measured at fair value are translated at the rate of exchange on the valuation date.

Revenue recognition

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured.

Revenue from strategic research collaborations

Karo Bio may receive four types of revenues from its strategic collaborative research projects: upfront payments, research funding, milestone payments and royalties. The specific recognition criteria for the different types of revenue described below must be met before revenue is recognized.

Upfront payments are received at the initiation of collaborations and are non-refundable. Upfront payments are recognized as revenue when no further obligations for receiving the upfront payment rest on Karo Bio.

Research funding is received periodically, often quarterly in advance, as a fixed amount for a defined number of Karo Bio scientists working in the project during the period. Research funding received is allocated over the period to which it refers.

Milestone payments are triggered when a certain result has been achieved or a certain event has occurred, e.g. when compounds enter or pass a major step in the development process, as defined in the research collaboration agreement. These steps are usually linked to significant decision points in the partner's drug development process. A milestone payment is accounted for when all requirements specified in the research collaboration agreement for earning the milestone are met.

Royalty payments are based on the sale of finished partnered pharmaceutical products in the market. Royalty payments are accounted for when they are reported by the partner.

Other revenue

Revenue from out-licensing agreements that are not research and development collaborations can be either in the form of upfront payments or technology access fees which are recognized as revenue when the conditions for receiving them are fulfilled, or as license maintenance fees which are allocated over the duration of a specified license period.

Government grants are recognized as other operating income in the income statement over the period necessary to match the grant to the cost that it is intended to compensate.

Interest income is recognized on a time proportion basis using the effective interest method. Interest income is recognized as a financial item and not included in operating profit and loss.

Taxes

Income tax

Income tax comprises current and deferred taxes. Income tax is recognized in the income statement in respect of items recognized in the income statement, and recognized directly in equity when the tax is related to items recognized directly in equity.

Deferred tax is calculated as the difference between, on the one hand, the tax base of assets and liabilities and, on the other hand, their carrying amounts in the financial statements (temporary differences). Deferred tax is calculated based on the tax rates estimated to apply to settlement of the tax. As required by IAS 12 Income Taxes, deferred tax liabilities are recognized for all taxable temporary differences using the liability method. Deferred tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which unused tax losses and deductible temporary differences can be utilized. As Karo Bio has historically reported losses,

deferred tax assets are recognized only when there is convincing evidence that sufficient taxable profits will be available.

Value added tax (VAT)

Revenues, expenses and assets are recognized net of VAT. The net amount of VAT recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet.

Intangible assets

Acquired intangible assets are recognized as assets in the balance sheet. Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value as at the date of the acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. Internally generated intangible assets are not capitalized and expenditure for these is charged against profits in the year in which the expenditure is incurred, with the exception of capitalized development costs (see below).

The useful lives of all intangible assets of the Group have been assessed to be finite. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and amortization method for an intangible asset is reviewed at least at each financial year-end. Changes in the expected useful lives or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense is recognized in the income statement in the expense category consistent with the function of the intangible asset.

Research and development costs

Costs regarding development activities shall, as stipulated by IAS 38 Intangible Assets, be capitalized and reported in the balance sheet if certain criteria are met, while research costs are expensed as incurred. An intangible asset arising from development expenditure is recognized only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale; its intention to complete and its ability to use or sell the asset; how the asset will generate future economic benefits; the availability of resources to complete; and the ability to measure reliably the expenditure during the development. To date the Group has expensed all development costs as incurred since the recognition criteria for capitalization have not been met.

Property, plant and equipment

Property, plant and equipment are stated at historical cost less accumulated depreciation and any accumulated impairment losses. Historical cost includes, in addition to the purchase price, expenses directly related to bringing the asset into use.

The difference between cost and estimated residual value is depreciated on a straight-line basis over the useful life of the assets.

The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may no longer be recoverable. The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each financial year-end.

Depreciation and amortization of non-current assets

Property, plant and equipment and intangible non-current assets are depreciated and amortized, using a straight-line depreciation and amortization method, over their estimated useful life based on the asset's cost as per the following schedule.

Year
Licenses	3–10
Laboratory equipment	4–7
Leasehold improvements, IT equipment and other equipment	4

Impairment of non-current assets

At each reporting date the Group assesses whether there is an indication that an asset may be impaired. If any such indication exists, the Karo Bio Group makes an estimate of the asset's recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

Impairment losses of continuing operations are recognized in the income statement in the expense categories consistent with the function of the impaired asset.

Investments and other financial assets

Financial investments in the scope of IAS 39 Financial Instruments: Recognition and Measurement are classified as either financial assets at fair value through profit and loss, loans and receivables, held to maturity investments, or available for sale financial assets. When financial assets are recognized initially, they are measured at fair value plus directly attributable transaction costs, except for financial assets at fair value through profit and loss for which attributable transaction costs are included in the income statement. The classification of a financial asset is determined at initial recognition.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortized cost using the effective interest method. Gains and losses are recognized in income when the loans and receivables are derecognized or impaired.

Currency forward contracts

Karo Bio may hedge known future cash flows in foreign currencies from large currency rate fluctuations as provided in the company's financial policy. In this respect, a certain level of assurance must exist in order to consider possible transactions and related cash flows. Currency hedging is accomplished through currency forward contracts. In accordance with IAS 39, all derivatives are to be measured at fair value defined as market value by Karo Bio. The derivatives which can be used by the company do not qualify for hedge accounting in accordance with IAS 39. The classification of these instruments provides for them to be reported in the balance sheet at fair value with changes in fair value included in other operating income and expenses in the income statement.

Short-term investments

Short-term investments consist of investments in money market instruments, highly liquid bonds with maturities of less than five years and investments in highly liquid fixed income mutual funds. Short-term investments are classified as financial assets at fair value through profit or loss (financial assets held for trading purposes). This entails that the assets are stated at fair value in the balance sheet, defined as market value.

Changes in fair value are included in financial items in the income statement. Acquisitions and dispositions of short-term investments are reported as of the transaction day, the day when Karo Bio is committed to buy or sell the asset.

Fair value estimation of financial instruments measured in the balance sheet at fair value

Effective January 1, 2009, the Group adopted the amendment to IFRS 7 for financial instruments that are measured in the balance sheet at fair value. This requires disclosure of fair value according to the following fair value measurement hierarchy:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from process).
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

According to Karo Bio's financial policy, funds shall be invested in financial instruments classified as level 1. The fair value of such financial instruments, traded in active markets, is based on quoted market prices on the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. See also note 28.

Trade and other receivables

Trade receivables, which generally have 30 day terms, are recognized and carried at original invoice amount less an

allowance for any uncollectible amounts. Write-downs are made when there is objective evidence that Karo Bio will not be able to collect the debts.

Cash and cash equivalents

Cash and cash equivalents in the balance sheet comprise cash at banks and in hand and short-term deposits with an original maturity not exceeding 90 days. Other short-term investments are reported as financial assets at fair value through profit and loss. See notes 16 and 28 for further information on the classification of Karo Bio's short-term investments.

For the purpose of the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above. The cash flow statements for each year show direct cash flows from investment and financing activities. The operational cash flow is based on the indirect method.

Interest bearing loans and borrowings

All loans and borrowings are initially recognized at the fair value of the consideration less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are carried at amortized cost using the effective interest method. Gains and losses are recognized in net profit or loss when the liabilities are derecognized. Borrowing cost, including arrangement fees, are recognized as an expense in the income statement in the period to which they relate.

Provisions

Provisions are recognized when the Group has a present obligation (legal or constructive) as a consequence of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expenses relating to any provision is presented in the income statement net of any reimbursement.

Pensions and other post-employment benefits

Employees in Sweden are entitled to retirement and family pension benefits in accordance with the nationwide ITP Plan. Commitments for these pensions are secured through an insurance arrangement with Alecta Pension Insurance (Alecta). In accordance with an announcement (UFR 3) from the Swedish Financial Reporting Council, this arrangement is considered a defined benefit multi-employer plan. Karo Bio has not had access to such information to facilitate reporting of the plan as a defined benefit plan. Consequently, the ITP plan that is secured through an insurance arrangement with Alecta is reported, in accordance with IAS 19 Employee Benefits, as a defined contribution plan. Under a defined contribution plan, fixed payments are made to an unaffiliated entity and thereafter no legal or constructive obligation exists to pay further contributions. Premiums for pension insurance written with Alecta are expensed in the year they relate to.

Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. Karo Bio recognizes termination benefits when it is demonstrably committed to either terminating the employment with current employees according to a detailed formal plan without possibilities of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.

Lease agreements

Karo Bio has entered into lease agreements with third parties in the ordinary course of business. These contracts are for office and laboratory space, laboratory equipment, automobiles and other equipment. Leasing contracts are classified as either financial or operating depending on the terms of the lease. A financial lease transfers substantially all the risks and benefits incidental to ownership of the leased asset to Karo Bio. All other lease contracts are considered operating leases.

Financial leases are capitalized at the inception of the lease at fair value of the leased property or, if lower, at the present value of the minimum lease payments. Thus, the equipment under lease is recorded as an asset and the net present value of future minimum lease payments is recorded as a liability. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income.

Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Karo Bio Group will obtain ownership by the end of the lease term. Property, plant and equipment are depreciated as described under the heading Depreciation and amortization of non-current assets.

Operating lease payments are recognized in the income statement over the lease term in the period they relate to.

Stock option program

According to IFRS 2 Share-based Payments, the cost of equitysettled transactions with employees is measured by reference to the fair value at the date on which they are allocated. The cost is recognized, together with a corresponding increase in equity, over the period in which the performance and service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the vesting date). The cumulative expense recognized at each reporting date until the vesting date reflects the extent to which the vesting period has expired and Karo Bio's best estimate of the number of equity instruments that will ultimately vest.

Karo Bio has outstanding stock options to employees under a stock option program, Program 2003, for which IFRS 2 applies. Program 2003 is a transaction that is settled with equity instruments under IFRS 2, where the fair value of granted stock options are recognized as a personnel expense over the vesting period. The fair value of employee options in Program 2003 per grant date is based on a valuation made by Ernst & Young. Black-Scholes model for option pricing was used for

the valuation. The program's vesting conditions are taken into account in the valuation of the assumptions about the number of stock options that are expected to become exercisable. Karo Bio recognizes the potential impact of the revision of the original estimate in the income statement with a corresponding effect on equity for the remainder of the vesting period. Funds obtained upon exercise of stock options, net of any directly attributable transaction costs, are added to equity.

The potential dilutive effect of outstanding stock options is reflected in the number of fully diluted shares.

Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as Karo Bio's executive management team. Karo Bio's operations entail only one segment; research and development of drugs, and the consolidated income statement, balance sheet, cash flow statement and the associated notes regard this single segment.

THE PARENT COMPANY

The annual report of the Parent Company is prepared in accordance with the Swedish Annual Accounts Act and in compliance with the Swedish Financial Accounting Standards Council's Recommendation RFR 2 Accounting for legal entities. The Parent Company's accounting and valuation principles are the same as the Group's with the exception for leasing. All leasing contracts are reported as operating leases in the Parent Company.

Notes

NOTe 1 NET SALES

No net sales were reported for 2011 or 2010. Net sales in 2009 consist of research payments for collaborations.

NOTe 2 PERSONNEL AND REMUNERATION TO MEMBERS OF THE BOARD AND EXECUTIVE MANAGEMENT

All of the Group's employees are employed by the Parent Company. Consequently, the information provided below is the same for the Parent Company and the Group.

AVERAGRE NUMBER OF EMPLOYEES	2011		2010		2009
	Number of employees	Men	Number of employees	Men	Number of employees	Men
Huddinge, Sweden	68	34	68	34	67	33
Total	68	34	68	34	67	33

	2011		2010		2009
WAGES, SALARIES, OTHER REMUNERATION AND SOCIAL SECURITY EXPENSES	Wages, salaries and other remuneration	Social security expenses (of which pension costs)	Wages, salaries and other remuneration	Social security expenses (of which pension costs)	Wages, salaries and other remuneration	Social security expenses (of which pension costs)
Board and President	8 601	3 589	4 715	2 072	4 980	1 908
		(811)		(492)		(380)
Other employees	45 921	23 709	41 229	23 278	41 648	22 897
		(7 364)		(7 869)		(7 872)
Total	54 522	27 298	45 944	25 350	46 628	24 805
		(8 175)		(8 361)		(8 252)

Of wages, salaries and other remuneration, KSEK 4,345 (3,474 and 3,821, respectively) refers to the President. The amount for 2011 consists of KSEK 2,965 regarding the former President Fredrik Lindgren who left the Company on May 23, 2011 and of KSEK 1,380 regarding the current President Per Bengtsson who assumed the position on May 24, 2011.

REMUNERATION TO BOARD MEMBERS

The Board consists of five Board members whereof two women, elected by the annual general meeting and two Board members with one deputy appointed by employee organizations.

The Chairman of the Board receives annual remuneration of KSEK 495. Each Board member who is not paid as an employee or consultant by the company receives KSEK 180 based on the decision at the 2011 annual general meeting. In 2011, a total of KSEK 1,017 (1,215 and 1,080, respectively) was paid in Board members' fees. Board members are reimbursed for direct expenses such as travel costs. The 2011 AGM decided on a sum of KSEK 120 for committee work performed in 2010. After the 2010 AGM, all committee work has been carried out by the Board in its entirety. Consequently, the Board believes that the fee adopted by the 2011 AGM should be divided equally among the board members, with the exception of the chairman, who will not receive any remuneration for committee work.

No other compensation has been expensed or paid to board members or companies owned by them in 2011. Two Board members have performed certain consulting services to Karo Bio in 2010 outside normal board procedures, including data analysis and advice in preclinical projects as well as services provided in connection with recruitment of a new Chief Executive Officer, representing a total billing value of KSEK 320. Because compensation for such consultancy services carried out by Board members is not covered by the guidelines for remuneration of senior executives adopted by the AGM 2010, this was approved at the AGM on April 27, 2011. Total expensed compensation for 2011 for each member of the Board is specified in the table on the next page.

REMUNERATION TO EXECUTIVE MANAGEMENT

The Board of Directors has decided that as of the AGM held on April 24, 2010, the full Board will carry out the tasks that are to be performed by the compensation committee. Thus, since then the Board handles all issues related to remuneration of the executive management.

The guidelines for remuneration of the executive management adopted by the AGM 2011, as well as the Board's proposal for guidelines to be adopted by the AGM 2012, are included in the Administration Report. Below is a description of the application of the guidelines in 2011.

Members of executive management are paid a fixed monthly salary and, except for the CEO, participate in an incentive bonus program. The program is based on achievement of goals set by the compensation committee. Maximum bonus for the individuals covered by the program in 2011 is 40 per cent of their annual base salary, with the requirement on the recipient to invest the net amount after tax of the portion of the bonus payment that exceeds 20 per cent of the annual salary in Karo Bio shares in the market. The monetary information below regarding bonus represents the bonus for 2011, which is paid out in 2012. Other benefits provided to executive management are company cars and health care insurance. Executive management is entitled to pension benefits in accordance with the nationwide ITP Plan as are all other Swedish employees, unless otherwise stated. Pension benefits are based on a retirement age of 65 and paid as long as the retiree lives. Paid salary including bonus qualifies for pension benefits. The ITP Plan provides for no pension benefits for annual salaries currently exceeding KSEK 1,563.

Executive management has also been eligible to participate in companywide share-based incentive programs. At December 31, 2011, the President and CEO Per Bengtsson held no employee stock options in Karo Bio. Other members of executive management held employee stock options representing in total 0 shares (11,768 and 11,768, respectively). No allocation was made during 2011. See Note 27 Stock Option Programs for further information.

At year-end 2011, the executive management consisted of, in addition to the CEO, four (four) persons, whereof two (two) women. The management consists of Maria Sjöberg, Chief Scientific Officer responsible for Preclinical Research and Development, Henrik Palm, Chief Financial Officer and responsible for Human Resources, Maria Öhlander, Head of Clinical Development and Regulatory Affairs, and Lars Öhman, Head of business development.

The previous President and CEO Fredrik Lindgren, Anneli Hällgren (Head of preclinical research), Erika Söderberg Johnson (Chief Financial Officer) and Jens Kristensen (Chief Medical Officer) have left the company in 2011.

AGREEMENTS REGARDING SEVERANCE PAY

The President has a notice period of six months and is entitled to 12 months' salary as severance pay if employment is terminated by the company. Other members of executive management have a notice period of six months and are entitled to severance pay of up to 12 months' salary.

TRANSACTIONS WITH RELATED PARTIES

Karo Bio has not granted any loans, guaranties, or surety to or for the benefit of any of its Board members, executive management or auditors. Apart from the exceptions stated below and under the heading "Remuneration to Board members", none of the company's Board members or executive management has directly or indirectly participated in any business transactions with the company during the current or previous fiscal year. None of the company's auditors have participated in any such transactions.

Professor Jan-Åke Gustafsson, who was a deputy Board member of Karo Bio until and including the 2007 annual general meeting, has previously been active at the department of Biosciences and Nutrition at Karolinska Institutet, with which Karo Bio had a research collaboration. Prof. Gustafsson also provides scientific consulting services for the company. Prof. Gustafsson has received no Board fee, but for his consultancy services Karo Bio has paid a total of KSEK 500 (500 and 500, respectively). Prof. Gustafsson did not participate in Karo Bio's preparations of or decisions regarding financial terms in such collaborations. In 2005, following the receipt of anonymous information, the Public Prosecutors' Authority initiated an investigation into suspected taking of bribes and bribery concerning Prof. Gustafsson and the company. As part of the investigation, information has been obtained from company representatives and through a search of the company's premises in May 2006. Following, amongst other things, consultations with legal expertise, the Board is of the opinion that the service relationship that subsists does not contravene the rules of bribery. The investigation was shut down April 15, 2010.

Remuneration and other benefits
during the year to the board of directors

and executive management KSEK	Board remuneration/ Base salary	Variable salary	Other benefits	Variable salary	Other remuneration	Pension expense	Total
Board of Directors
Göran Wessman (Chairman after the AGM 2011)	371	-	-	-	-	-	371
Per Bengtsson (Board member after the AGM 2011)	19	-	-	-	-	-	19
Christer Fåhraeus (Board member after AGM 2011)	158	-	-	-	-	-	158
Elisabeth Lindner (Board member after AGM 2011)	158	-	-	-	-	-	158
Jan N. Sandström (Board member after AGM 2011)	158	-	-	-	-	-	158
Anders Waas (Board member after AGM 2011)	158	-	-	-	-	-	158

Bo Håkansson (Board member through the AGM 2011)	124	-	-	-	-	-	124
Birgit Stattin Norinder (Board member through the AGM 2011)	52	-	-	-	-	-	52
Johan Kördel (Board member through the AGM 2011)	52	-	-	-	-	-	52
Jon Risfelt (Board member through the AGM 2011)	52	-	-	-	-	-	52
Margaret von Platen (Board member through the AGM 2011)	52	-	-	-	-	-	52

Executive management
Fredrik Lindgren, President until May 23, 2011	2,965	-	35	-	3,120	564	6,684
Per Bengtsson, President from May 24, 2011	1,380	-	-	-	-	247	1,627
Other members of Executive Management (7 persons)*	6,365	279	262	-	3,707	1,842	12,455
Total	12,064	279	297	-	6,827	2,653	22,120

* The number of persons and the amounts include Jens Kristiensen, Anneli Hällgren and Erika Söderberg who left the Company in 2011.

Comments on the table:

When applicable, board remuneration includes expensed remuneration for Audit Committee and Compensation Committee work.
Variable salary was expensed in 2011, but settled in cash in 2012.
Other benefits refer mainly to company car benefits and health care insurance.
Pension expense refers to the expense that affected earnings as recognized in accordance with IAS 19 for the year. See Accounting and valution principles and note 3 for further disclosures concerning the terms and conditions of pension benefits.
Share-based compensation refers to the expense that affected earnings as recognized in accordance with IFRS 2 for the year.
Other benefits consist primarily of severance payments to executives who left the company in 2011.

NOTe 3 PENSION COSTS

Commitments for retirement and family pension under the ITP plan are secured through an insurance arrangement with Alecta Pension Insurance (Alecta). Premiums regarding pension insurance with Alecta total KSEK 2734 (2,101 and 1,032, respectively) for the year and premiums to other pension institutions under the ITP plan total KSEK 5,441 (6,259 and 6,320, respectively).

Alecta's surplus may be allocated to the insurance holders and the insured. At year-end, Alecta's surplus in the form of total consolidation level amounted to 113 per cent (146 and 141, respectively). The total consolidation level is defined as the market value of Alecta's assets as a percentage of the actuarial commitments determined as per Alecta's assumptions, which are different from IAS 19 Employee benefits. Please refer to Accounting and valution principles for additional information on pensions.

NOTe 4 OPERATING EXPENSES BY TYPE

Operating expenses are distributed on expense type as follows.

		Group		Parent company
	2011	2010	2009	2011	2010
Depreciation	–2,409	–2,930	–3,655	–1,535	–2,055
Personnel costs	–82,873	–72,127	–72,664	–82,873	–72,127
Facilities costs	–10,288	–9,997	–10,310	–10,288	–9,997
External costs	–134,548	–77,197	–76,728	–135,422	–78,058
Other operating income and expenses	–1,041	412	343	–1,041	412
	–231,159	–161,839	–163,014	–231,159	–161,825

NOTe 5 DEPRECIATION AND AMORTIZATION

Depreciation and amortization costs are allocated to the company's functions and types of assets as follows.

		Group			Parent company
	Note	2011	2010	2009	2011	2010
Function
Administrative expenses		389	349	344	389	349
Research and development expenses		2,020	2,581	3,311	1,146	1,706
		2,409	2,930	3,655	1,535	2,055

Type of asset
Licenses	12	-	545	1,153	-	545
Equipment	13	2,409	2,385	2,502	1,535	1,510
		2,409	2,930	3,655	1,535	2,055

NOTe 6 OTHER OPERATING INCOME AND EXPENSES

	Group			Parent company
	2011	2010	2009	2011	2010
Exchange gains and losses, net	–1,041	412	334	–1,041	412
Other	-	-	9	-	-
	–1,041	412	343	–1,041	412

NOTe 7 INTEREST INCOME AND OTHER SIMILAR INCOME

		Group		Parent company
	2011	2010	2009	2011	2010
Interest income, capital gains/losses and dividends from short-term investments	5,322	1,098	3,928	5,322	1,098
Fair value gains and losses	599	–296	–1,237	599	–296
	5,921	802	2,691	5,921	802

NOTe 8 INTEREST EXPENSE AND OTHER SIMILAR EXPENSES

Interest expense and other similar expenses amounted to KSEK 1,388 (2 500 and 124, respectively) for the Group. Of the amount, KSEK 1,370 was a cost for the adjustment for the Equity Credit Facility (EFC) agreement that the company entered into in 2010. Of the amount for 2011, KSEK 2,440 was an upfront payment of 1% of the ECF agreement that the Company entered into in 2010. Since the utilization of the ECF is conditional upon future resolutions of general meetings, this upfront payment is accounted for as a financial expense in the income statement. The remaining part of KSEK 18 (60 and 124, respectively) consists of interest charges on banking accounts and financial leasing (see also note 20). Also for the Parent Company KSEK 1,370 (2,440) is an upfront payment of the ECF agreement while the remaining amount of KSEK 4 (3) is interest charges on banking accounts.

NOTe 9 TAXES

Since the company is reporting losses it is currently not paying any income taxes. Karo Bio has not recognized any deferred tax assets in relation to the unutilized tax losses carried forward as there is no convincing evidence, according to the definition in IAS 12, that sufficient future taxable profits will be available. At year-end, the Parent Company's unutilized tax losses carried forward amounted to MSEK 2,136 (1,909 and 1,712, respectively). There is no statutory time limit for Swedish companies to utilize tax losses.

RECONCILIATION BETWEEN ACTUAL AND NOMINAL TAX		Group		Parent company
	2011	2010	2009	2011	2010
Reported loss before tax	–226,626	–163,537	–154,556	–226,612	–163,466
Tax at nominal tax rate 26,3% (26,3% and 28,0%, respectively)	59,603	43,010	40,648	59,599	42,991
Tax effect from deductible items not recorded as expenses	-	8,997	4,260	-	8,997
Tax effect from other non-deductible items	–65	–62	–53	–65	–62
Tax effect of losses for which no deferred tax assets are recognized	–59,538	–51,945	–44,855	–59,534	–51,926
Tax on reported loss	0	0	0	0	0

NOTe 10 LOSS FOR THE YEAR

The entire loss is related to the Parent Company's shareholders, no minority interests exist.

NOTe 11 LOSS PER SHARE

Loss per share is calculated as the loss for the year in relation to the weighted average number of shares outstanding during the year. Warrants are non-dilutive as exercise of warrants would decrease the loss per share reported for 2009–2011. Per share data is calculated based on the following number of shares.

Number of shares outstanding
(000)	2011	2010	2009
Weighted-average during the year	387,064	242,334	197,464
At year-end	387,064	387,064	238,199

The number of shares for periods prior to rights issues has been adjusted for the bonus element in accordance with IAS 33 Earnings per share.

NOTe 12 LICENSES AND SIMILAR RIGHTS

Licenses and similar rights consist of exclusive rights to technologies licensed from Duke University, Durham, North Carolina in 2001 and licenses from University of California, San Francisco for scientific rights that were acquired in 1996. In 2007, a follow-on investment of KSEK 3,460 was made in the license from Duke University, in accordance with the terms of the license agreement.

	Group			Parent company
	2011	2010	2009	2011	2010
Opening balance acquisition cost	33,779	33,779	33,779	74,719	74,719
Acquisitions	-	-	-	-	-
Closing balance acquisition cost	33,779	33,779	33,779	74,719	74,719

Opening balance amortization	–33,779	–33,234	–32,081	–74,719	–74,174
Depreciation for the year	-	–545	–1,153	-	–545
Closing balance accumulated amortization	–33,779	–33,779	–33,234	–74,719	–74,719

Net book value	0	0	545	0	0

NOTe 13 EQUIPMENT

	Group			Parent company
	2011	2010	2009	2011	2010
Opening balance acquisition cost	76,846	75,703	88,497	68,706	67,563
Acquisitions	3,402	1,182	255	3,402	1,182
Sales and discards	–1,742	–39	–13,049	–1,742	–39
Closing balance acquisition cost	78,506	76,846	75,703	70,366	68,706

Opening balance depreciation	–72,261	–69,915	–80,418	–65,142	–63,670,
Sales and discards	1,722	39	13,003	1,723	39
Depreciation for the year	–2,409	–2,385	–2,500	–1,535	–1,511
Closing balance accumulated amortization	–72,948	–72,261	–69,915	–64,954	–65,142

Net book value	5,558	4,585	5,788	5,412	3,564

Laboratory equipment with a carrying value of KSEK 146 (1,020 and 1,894, respectively) in the Group is financed through capital leases.

NOTe 14 PARTICIPATIONS IN GROUP COMPANIES

					Parent company
					2011	2010
Opening balance acquisition cost					4,350	4,350
Closing balance acquisition cost					4,350	4,350

Opening balance depreciation					–4,250	–4,250
Closing balance accumulated amortization					–4,250	–4,250

Net book value					100	100

Subsidiaries	Domicile	Reg.no.	Holding	No. of shares		Book value
Karo Bio Research AB	Huddinge, Sweden	556588-3641	100%	1,000		100

100

NOTe 15 PREPAID EXPENSES AND ACCRUED INCOME

	Group			Parent company
At December 31	2011	2010	2009	2011	2010
Prepaid rent	2,109	1,985	2,041	2,109	1,985
Prepaid insurance	506	641	671	506	641
Prepaid licenses and other IT-related costs	666	1,291	836	666	1,291
Other	1,183	2,295	824	1,183	2,295
	4,464	6,212	4,372	4,464	6,212

NOTe 16 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

Financial assets at fair value through profit or loss was earlier named Other short-term investments and consist of investments in liquid bonds with maturities of more than 90 days but less than five years at the time of acquisition.

NOTe 17 CASH AND CASH EQUIVALENTS

	Group			Parent company
At December 31	2011	2010	2009	2011	2010
Short-term investments with maturities of less than 90 days	9,931	-	49,989	9,931	-
Cash and bank balances	33,822	325,486	29,182	33,812	325,476
Liquid assets	43,753	325,486	79,171	43,743	325,476

NOTe 18 SHAREHOLDERS' EQUITY

Share capital consists of 387,063,972 shares (387,063,972 and 154,825,589, respectively) with a par value of SEK 0.50 (0.50 and 0.50, respectively). In 2010 a new share issue with preferential rights to existing shareholders was carried out, resulting in 232,238,383 new shares and an increase in share capital of KSEK 116,120 (whereof KSEK 114,181 regarding shares registered 2010 and KSEK 1,939 regarding shares registered in January 2011) to KSEK 193,532 (whereof KSEK 191,593 was registered at the end of 2010 and KSEK 1,939 was registered in January 2011). In total, the rights issue generated KSEK 290,926 net of transaction costs amounting to KSEK 34,208. In 2009 a new share issue with preferential rights to existing shareholders was carried out, resulting in 38,706,397 new shares and an increase in share capital of KSEK 19,353 to KSEK 77,413. In total, the rights issue generated KSEK 150,241 net of transaction costs amounting to KSEK 16,196.

At year-end, there were no outstanding warrants. No warrants were exercised during 2009, 2010 or 2011.

In accordance with the Board's policy for dividend, the Board of Directors will propose to the annual general meeting to be held on June 12, 2012, that no dividend shall be paid for the financial year 2011.

NOTe 19 NON-CURRENT LIABILITIES

The balance sheet item non-current liabilities comprises future lease payments on leased equipment only. None of the non-current liabilities falls due more than five years after the balance sheet date. See note 20.

NOTe 20 CAPITAL LEASES

The present value of future minimum lease payments is reported as a liability in the balance sheet. Such payments fall due as outlined below.

		Group
At December 31	2011	2010	2009
Within one year	229	889	889
Later than one but within five years	-	470	1,273
Later than five years	-	-	-
	229	1,359	2,162

Variable fees, which mean the difference between the interest when entering into the agreement and paid interest, are included in operating expenses during the year and amount to KSEK 48 (63 and 57, respectively). Capital lease contracts entered into during the year amounted to KSEK – (– and –, respectively). The capital lease contracts pertain to laboratory equipment with a carrying value of KSEK 146 (1,020 and 1,894, respectively).

The interest rate in the contracts is variable and linked to the Swedish general interest rate. Karo Bio has the right to extend the leasing period or acquire, direct or indirectly via another entity, the equipment at a predetermined price upon expiration of the contract.

NOTe 21 ACCRUED EXPENSES AND DEFFERED INCOME

		Group			Parent company
At December 31	2011	2010	2009	2011	2010
Accrued employee related expenses	14,499	8,186	9,972	14,499	8,186
Deferred income	20,778	-	-	20,778	-
Accrued research and development expenses	6,707	5,540	4,709	6,707	5,540
Other	483	3,520	2,086	483	3,520
	42,467	17,246	16,767	42,467	17,246

NOTe 22 CONTINGENT LIABILITIES

Between 1995 and 1997, the Swedish Industrial Development Fund "Industrifonden" provided MSEK 24 to co-finance Karo Bio's research and development of pharmaceutical compounds for the treatment of dyslipidemia. The amount received was recorded as revenue during this period. This amount including interest (diskonto plus 6% per annum) is to be repaid by royalties of up to 15 % of Karo Bio's revenues from the thyroid hormone projects (including eprotirome) up to and including 2010. Following full repayment, reduced royalties of 7 % shall be paid on revenues from this area up to and including December 31, 2010. The amount reported as a contingent liability is the amount recorded as revenue plus accrued interest after deduction of royalties expensed. Karo Bio's obligations to pay any amount under this agreement ceased at the end of December 31, 2010, KSEK 0 (64,228).

Despite the absence of active projects, Karo Bio's collaboration agreements with former partners Abbot Laboratories and Bristol-Myers Squibb remain in effect. The agreements have varying terms in the event that one of the parties

wishes to conclude its active participation. Certain situations stipulate mutual rights of participation in the other party's future revenue from the collaboration that has concluded or a compound that has been surrendered. Regarding the agreement with Bristol-Myers Squibb and the compound KB2115 (eprotirome), Karo Bio is obligated to pass on part of its future revenue from the compound to Bristol-Myers Squibb, both in the form of one-time payments from a licensing partner and in the form of royalty payments on future drug sales.

Pursuant to agreements with a handful of external partners, they are entitled to royalty and/or milestone payments attributable to Karo Bio's future revenues. One agreement gives the counterparty the right to receive a milestone payment and royalty payments attributable to Karo Bio's future US-related revenues from the thyroid receptor area. These payments constitute, in full, a limited share of Karo Bio's future revenue in this area. Another agreement gives the counterparty the right to royalty payments of 5% attributable to Karo Bio's future revenue from certain indications within the GR area.

NOTe 23 ADDITIONAL INFORMATION CASH FLOW STATEMENTS

	Group			Parent company
	2011	2010	2009	2011	2010
Interest received	6,410	3,285	7,424	6,410	3,285
Interest paid	–1,374	–2,443	–5	–1,374	–2,443
Income taxes paid	-	-	-	-	-

NOTe 24 OPERATING LEASES

Leasing costs for the year amounted to KSEK 6,827 (7,351 and 8,246, respectively) for the Group and KSEK 7,702 (8,211) for the Parent Company. Future minimum lease payments on non-cancellable lease contracts fall due as follows. Most contracts have lease payments that are either linked to inflation or based on flexible rates. The leasing agreements relate to laboratory and office space, laboratory equipment and cars.

	Group			Parent company
At December 31	2011	2010	2009	2011	2010
Within one year	6,654	6,786	7,182	6,873	7,657
Later than one but within five years	4,991	11,792	19,127	4,991	12,010
Later than five years	-	-	-	-	-
	11,645	18,578	26,309	11,864	19,667

NOTe 25 INTER-COMPANY PURCHASES AND SALES

Karo Bio AB did not purchase any services from subsidiaries in 2011, 2010 or 2009.

NOTe 26 REMUNERATION TO AUDITORS

	Group			Parent company
	2011	2010	2009	2011	2010
PricewaterhouseCoopers
Auditing commission	395	328	365	395	328
Auditing in addition to the audit commission	259	210	200	259	210
Other assignments	19	50	-	19	50
	673	588	565	673	588

NOTe 27 STOCK OPTION PROGRAMS

WARRANT INCENTIVE PROGRAM 2010

The annual general meeting 2010 approved a warrant incentive program for executive management. The Board has since decided not to pursue the program, why no allocation of warrants under the program has been made. The program originally comprised warrants representing 5,000,000 shares, which, following adjustment for effects of the rights issue in 2010 in accordance with the terms and conditions for this program correspond to 7,100,000 shares. The warrants are issued to the wholly-owned subsidiary Karo Bio Research AB.

PROGRAM 2003

On May 31, 2011, all outstanding warrants were cancelled regarding a previous employee stock option program, Program 2003, representing 732,640 shares at year-end 2010.

Allocation of stock options (corresponding number of shares )	2011	2010	2009
Outstanding at January 1	138,427	98,395	99,524
Allocated	-	-	-
Effect from rights issue	-	42,038	8,083
Exercised	-	-	-
Forfeited	–138,427	–2,006	–9,212
Outstanding at December 31	0	138,427	98,395
Whereof vested	0	138,427	98,395

Weighted average exercise price for stock options
SEK	2011	2010	2009
Outstanding at the beginning of the year	13	18	19
Effect from issuance of shares	-	13	18
Forfeited during the year	13	13	18
Exercised during the year	-	-	-
Outstanding at the end of the year	0	13	18
Exercisable at the end of the year	0	13	18

The weighted average remaining period for stock options outstanding at year-end was 0.3 years (0.3 and 1.3, respectively) with exercise prices ranging from SEK 11.00 to SEK 14.40.

NOTe 28 FINANCIAL INSTRUMENTS AND RISKS AND SENSITIVITY ANALYSIS

Financial instruments per category
Group KSEK	Debt and trade assets	Financial assets at fair value throughprofit or loss	Total
December 31, 2011
Financial assets at fair value through profit or loss	-	114,780	114,780
Trade and other receivables (excluding interim receivables)	-	-	0
Cash and cash equivalents	43,753	-	43,753
Total	43,753	114,780	158,533
December 31, 2010
Financial assets at fair value through profit or loss	-	69,548	69,548
Trade and other receivables (excluding interim receivables)	101	-	101
Cash and cash equivalents	325,486	-	325,486
Total	325,587	69,548	395,135
December 31, 2009
Financial assets at fair value through profit or loss	-	158,013	158,013
Trade and other receivables (excluding interim receivables)	70	-	70
Cash and cash equivalents	79,171	-	79,171
Total	79,241	158,013	237,254

Karo Bio, like any other company engaged in business, is exposed to various risks that change over time. The relevant risks for Karo Bio can be broken down into commercial risks and financial risks. Karo Bio's financial policy determines allocation of responsibility for the finance operations, which financial risks the company is willing to assume and guidelines for how such risks are to be reduced and managed. Financial risk management is centralized and is the responsibility of the Chief Financial Officer. The policy, which is reviewed and approved annually by the Karo Bio Board of Directors, is developed to control and manage the following risks:

Foreign currency risk
Funding risk
Liquidity risk
Interest rate risk
Credit risk in investments

FOREIGN CURRENCY RISK

Changes in foreign currency rates have an impact on Karo Bio's earnings and equity in different ways:

Earnings are affected when revenues and expenses are denominated in different currencies – transaction risk.
Earnings are affected when assets and liabilities are denominated in different currencies – translation risk.
Earnings are affected when the income statements of foreign subsidiaries are converted into Swedish kronor – translation risk.
Shareholder's equity is affected when the balance sheets of foreign subsidiaries are converted into Swedish kronor – translation risk.

Operational currency risks

Karo Bio operates in an international industry. Most of the company's revenues have been denominated in US dollars and approximately 58 (78 and 75, respectively) per cent of expenses are incurred in SEK. The remainder of Karo Bio's expenses is mainly denominated in euros, British pounds (GBP) and dollars (USD). This leads to an exposure to currency fluctuations, a combination of both translation and transaction risks. Karo Bio's reporting currency is SEK.

The table on the next page indicates the effect on Karo Bio's revenues and operating result, if the SEK strengthens by 10 per cent. Both translation and transaction risks have been considered. The total effect on the operating result would be MSEK 9.5 (3.5 and 3.4, respectively).

The company's financial policy stipulates that Karo Bio should hedge transaction-related foreign exchange risk such that the net exposure in foreign currency from known (contracted or invoiced) outgoing and incoming payments for the upcoming three to twelve months exceeding MSEK 5 should be hedged by 50–90%, and any gross exposure from known (contracted or invoiced) flows for the upcoming 13–36 months exceeding MSEK 5 should be hedged by 20–50%. Currency hedging is accomplished primarily through currency forward contracts.

There were no currency forward contracts at year-end 2011, 2010 or 2009, and the operating losses for these years have not been affected by any matured currency forward contracts.

Financial risks

Currency risks in financial flows related to liabilities and investments is reduced by making investments in SEK, unless an investment in a foreign currency would serve as a hedge of an existing exposure.

FUNDING RISK

The risk that the company will not have access to necessary financing at all times is defined as funding risk. From time to time, the company has raised

additional funds in the capital market to secure sufficient funds for the operations and stability of the company. The aim is to always have sufficient capital for at least 12 months' of operations. A recurring review of funding needs is carried out in combination with an assessment of capital market developments to evaluate financing strategies.

The share-based credit facility entered into in connection with the new share issue was adjusted during the third quarter of 2011 so that it could be utilized at the then current share price, which is not possible at the prevailing share price. The mandate to utilize the credit facility will be annually submitted to the Annual General Meeting.

LIQUIDITY RISK

Liquidity risk refers to the risk that the company will not have sufficient monetary assets readily available to pay current foreseen or unforeseen expenditures. The risk is associated with the supply and maturity of short-term investments and the risk that there is no market for a specific instrument that the company needs to sell. Liquidity risk is managed by structuring the maturities of investments based on cash flow forecasts and also limiting investments in bonds with low liquidity on the second-hand market. Weighted remaining duration of short-term investments was 3 months (5 respectively) at year-end.

INTEREST RATE RISK

Interest rate risk is the risk that a change in interest rates will cause a negative impact on the value of interest-bearing assets. In accordance with the policy, investments are made with variable terms and maturities. The immediate impact on short-term investments if the interest rate would decrease by one percentage is 0.23 per cent (0.38 and 0.43, respectively) or MSEK 0.3 (0.3 and 0.9, respectively).

CREDIT RISK IN INVESTMENTS

Credit risk refers to the risk that Karo Bio will not receive payment for an investment. The credit risk is divided into issuer's risk and counterpart's risk. Issuer's risk is the risk that the securities, which Karo Bio has in its possession, will lose their value because the issuer cannot meet its commitments in the form of interest payments and payments on the due date. Counterpart's risk is the risk that the party that Karo Bio buys investments from or sells investments to cannot provide securities or make payment in accordance with what has been agreed.

The policy manages credit risk by regulating which parties Karo Bio can do business with and what credit ratings are required for investments. There is no material concentration of credit risks.

FAIR VALUE OF ASSETS AND LIABILITIES

Short-term investments comprise investments in money market instruments, highly liquid bonds with maturities of less than five years and investments in highly liquid fixed income mutual funds. These assets are classified as financial assets at fair value through profit and loss. This entails that the assets are stated at fair value in the balance sheet, defined as market value. Changes in fair value are included in financial items in the income statement.

Karo Bio's financial instruments measured in the balance sheet at fair value are traded in active markets, with readily and regularly available quoted market prices which represent actual and regularly occurring market transactions on an arm's length basis. Thus, these are according to IFRS 7 classified as level 1 in the fair value measurement hierarchy. The fair value of Karo Bio's financial instruments measured at fair value through profit and loss, defined as the quoted price in the market, amounts to MSEK 115 (70 and 158, respectively). Book value corresponds to market value for other assets and liabilities.

Currency effect (MSEK)

Effect on consolidated revenues and operating result before hedging transactions if SEK strengthen by 10 per cent.
Currency	Revenues	Operating result
USD	-	1.5
Euro	-	5.8
GBP	-	2.2
Other	-	-
Total	-	9.5

NOTe 29 SEGMENT INFORMATION

Based on the information reviewed and used by the executive management team as the basis for making strategic decisions, Karo Bio's business comprises one single operational segment, namely drug research and development. When assessing the business operations and in strategic discussions, no further breakdown of the business in segments is made. The development of Karo Bio's drug discovery and development projects is an integrated process coordinated by project managers who report to the executive management.

Various parts of the organization are involved in various degrees in this process at the different stages of the development process. The project managers compile budgets for their respective projects containing direct costs for the project as well as internal resource spending and timelines for the project activities. The executive management team evaluates the project budgets and follows up the expenses and timelines of each budget on a regular basis. The table below shows revenues and non-current assets by geographical area.

		Group
KSEK	2011	2010	2009
Revenues
Sweden	-	-	-
Rest of Europe	-	-	-
USA	-	-	5,891
	-	-	5,891
Non-current assets
Sweden	5,558	4,585	6,332
Rest of Europe	-	-	-
USA	-	-	-
	5,558	4,585	6,332

All reported revenue for 2009 concern research payments from one single collaboration partner.

NOTe 30 TRANSACTIONS WITH RELATED PARTIES

Karo Bio has no transactions with related parties as defined in IAS 24 Related party disclosures to disclose other than those disclosed in note 2 regarding remuneration to members of the Board and executive management.

NOTe 31 EVENTS AFTER THE BALANCE SHEET DATE

In February 2012 it was decided that the development program for eprotirome would be terminated after a study in the Phase III program showed unwanted side effects in long-term treatment of animals. These findings meant that long-term treatment of people must be considered as too risky in relation to the desired effect. Karo Bio expects that the cost of the eprotirome project in 2012 will amount to approximately MSEK 55, including severance costs.

As a consequence of the Board terminating the eprotirome program, a planned realignment of Karo Bio's operations was also cancelled. The streamlining would have created two companies: one focused on eprotirome and one organized around Karo Bio's unique knowledge of nuclear receptors. The preclinical portion was to be sold to new owners and thereby strengthen Karo Bio's financial position.

To reduce costs, 16 employees, primarily in the preclinical part of operations, were made redundant in Februari. Previous staff changes in 2011 and the current

cutbacks mean a total cost savings of approximately MSEK 17 annually. The savings will take effect gradually in 2012.

The Board of Directors and the President declare that the consolidated financial statements have been prepared in accordance with IFRS as adopted by the EU and give a true and fair view of the Group's financial position and results of operations. The financial statements of the Parent Company have been prepared in accordance with generally accepted accounting principles in Sweden and give a true and fair view of the Parent Company's financial position and results of operations.

The statutory Administration Report of the Group and the Parent Company provides a fair review of the development of the Group's and the Parent Company's operations, financial position and results of operations and describes material risks and uncertainties facing the Parent Company and the companies included in the Group.

The income statements and balance sheets will be presented for the annual general meeting on June 12, 2012 for adoption.

Huddinge May 15, 2012

Per Bengtsson President and CEO

Göran Wessman Chairman

Elisabeth Lindner Board member

Christer Fåhraeus Board member

Anders Waas Board member

Bo Carlsson Board member employee representative Jan N. Sandström Board member

Johnny Sandberg Board member employee representative

Our Audit Report was issued May 18, 2012

PricewaterhouseCoopers AB

Håkan Malmström Authorized Public Accountant

Audit Report

TO THE ANNUAL MEETING OF KARO BIO AB (publ) CORPORATE IDENTITY NUMBER 556309-3359

Report on the financial statements

We have audited the financial statements Karo Bio AB (publ) for the year 2011. The company's annual accounts are included in the printed version of this on pages 12-36.

Board of Directors and responsible for annual and the consolidated accounts

The Board and Executive Director are responsible for preparing an annual report which provides a fair representation according to the Annual Accounts Act and consolidated financial statements which give a true and fair representation in accordance with international accounting standards IFRS as adopted by the EU, and the Annual Accounts Act, and for internal control deemed necessary by the Board of Directors and the President to prepare an annual report and consolidated financial statements that do not contain material misstatements, whether due to irregularity or error.

The auditor's responsibility

Our responsibility is to express an opinion on the annual report and financial statements based on our audit. We have conducted the audit in accordance with International Standards on Auditing and accepted auditing standards in Sweden. Those standards require that we comply with ethical requirements and plan and perform the audit to providing reasonable assurance that the annual report and financial statements are free of material misstatement.

An audit includes various measures to obtain audit evidence about the amounts and disclosures in the annual report and financial statements. The auditor chooses which actions are to be performed, including assessing risks of material misstatement in the annual report and consolidated financial statements, whether due to irregularity of error. In this risk assessment the auditor takes into account some of the internal control that is relevant to how the company prepares the annual report and financial statements in order to give a fair representation and to able to design audit procedures that are appropriate for the circumstances, but not for the purpose of expressing an opinion as to the effectiveness of the company's internal controls. An audit also includes an evaluation of the appropriateness of the accounting principles used and the reasonableness of the Board of Directors and Executive Director's estimates in the report, as well as a evaluating the overall presentation of the annual report and financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate as a basis for our statement of opinion.

Statements

In our opinion, the annual report has been prepared in accordance with the Annual Accounts Act and, in all material respects is a true and fair representation of the company's financial position per December 31, 2011 and of its financial performance and cash flows for the year according to the Annual Accounts Act and the consolidated accounts have been prepared in accordance with the Annual Accounts Act and

gives in all material respects an accurate representation of the consolidated financial position at December 31, 2011 and of its results and cash flows in accordance to international accounting standards as adopted by the EU, and the Annual Accounts Act. The administration report is consistent with the annual accounts and consolidated accounts.

We recommend to the annual meeting of shareholders that the income statement and balance sheet of the parent company as well the income statement and the statement of financial position be adopted.

Report on other requirements under laws and regulations

In addition to our audit of the annual report and financial statements we have also revised the proposed disposition of the company's profit or loss and as well as the administration of Karo Bio AB (publ) by the Board of Directors and Executive Director for 2011.

Board and Chief Executive Officer

The board is responsible for the proposed disposition of the profit or loss of the company, and it is the Board of Directors that are responsible for management under the Companies Act.

The auditor's responsibility

Our responsibility is to reasonably express an opinion on the proposed disposition of the profit or loss and the administration based on our audit. We have conducted the audit in accordance with generally accepted auditing standards in Sweden.

As a basis for our opinion on the Board's proposed appropriation of the profit or loss, we have examined whether the proposal complies with the Companies Act.

As a basis for our opinion concerning a discharge from liability we have in addition to our audit of the financial statements, reviewed significant decisions, actions and conditions in the company in order to assess whether any board member or Chief Executive Officer is liable for compensation to the company. We have also examined whether any board member has in any other way acted in contravention of the Annual Accounts Act or Companies Act.

We believe that the audit evidence we have obtained is sufficient and appropriate as a basis for our opinion.

Statements

We recommend that the annual general meeting addresses the loss in accordance with the proposal in the administration report and that the members of the board of directors and the managing director be discharged from liability for the financial year.

Stockholm on May 18 2012 PricewaterhouseCoopers AB

Håkan Malmström Certified Public Accountant

Corporate Governance Report

Introduction

Karo Bio AB was formed in 1987 and has developed from being a research company to its current position of being a pharmaceutical discovery and development company. The Group consists of the Parent Company, Karo Bio AB, and the subsidiary, Karo Bio Research AB. The subsidiary conducts no operations.

The Board of Directors of Karo Bio hereby submits the corporate governance report for 2010, compliant with the Annual Reports Act (ÅRL 6 kap 6 §) and the Swedish Code of Corporate Governance (" the Code") (available at www.corporategovernanceboard.se), which has been applied by Karo Bio since July 1, 2008. No deviation from the Code was made by the company in 2010. The corporate governance report has been examined by the company's auditor, in accordance with the Annual Reports Act. It does not constitute a portion of the formal annual report documentation.

SHAREHOLDERS

Karo Bio AB's shares have been listed on the NASDAQ OMX Stockholm exchange since 1998. Each share carries entitlement to one vote and carries the same right to share in the company's assets and profits.

As per December 31, 2011, the number of shareholders amounted to 11,633 (12,259). According to the shareholder list provided by Euroclear Sweden AB as per December 31, 2011, JP Morgan Bank had accumulated shareholdings of 14.7 per cent,

Avanza Pension 6.0 present, and Farstorp Gård AB 3.3 per cent, respectively. The ten largest shareholders owned 36 (35) per cent of the total number of shares. The proportion of foreign shareholders amounted to 32 (31) per cent. A proportion of 0.4 (0.4) per cent of shareholders held 1,000 shares or fewer.

There are no limitations that apply to the transferability of Karo Bio shares due to either legal restrictions or the Articles of Association. To the best of Karo Bio's knowledge, no agreements exist between any shareholders which could possibly limit the transferability of shares. No single shareholder controls more than 10 per cent of the total number of shares in Karo Bio.

No breaches of the listing agreement or good practice on the stock market according to resolutions from the Exchange's disciplinary committee or the Swedish Securities Council disciplinary committee occurred during the financial year.

INFORMATION REGARDING OUTSTANDING SHARES IN KARO BIO

At December 31, 2011, the company had a total of 387,063,972 shares with a par value of SEK 0.50. Each share carries entitlement to one vote and carries the same right to share in the company's assets and profits.

The 2011 Annual General Meeting authorized the Board until the next AGM, to issue new shares under an agreement for an Equity Credit Facility (ECF), which gives the company a right, but not an obligation, to issue shares to Azimuth Opportunity Ltd.

Karo Bio's corporate governance model

The chart below illustrates Karo Bio's corporate governance model and the manner in which the central bodies interact.

Important external and internal rules, regulations and policies affecting corporate governance:

Important internal rules, regulations and policies:

Articles of Association
The Board of Directors' work procedure
Instructions for the President including instructions regarding financial reporting
Instructions to the respective Board committees
Information policy
Insider policy
Financial policy
Risk management policy
Financial manual
Code of Conduct and provisions regarding business ethics

Important external rules and regulations:

Swedish Companies Act
Swedish Book-keeping Act
Swedish Annual Accounts Act
NASDAQ OMX Stockholm's Rule Book for Issuers
Swedish Code of Corporate Governance

GENERAL MEETING OF THE SHAREHOLDERS

The highest decision-making body is the general meeting of shareholders, where the shareholders exercise their influence in the company. Each share is associated with one vote. Shareholders wishing to participate in the general meeting of shareholders, either in person or via a representative, must have their names entered in the shareholders' register maintained by Euroclear Sweden AB no later than five weekdays before the general meeting and must report their intention to attend to the company in accordance with the notice.

Notice of a general meeting of shareholders is given via notices in the press and via the company website (www.karobio. com). The annual general meeting shall be held within six months from the end of the financial year. At the annual general meeting, the shareholders vote on proposed resolutions regarding such matters as the election of the members of the Board of Directors and, where appropriate, the auditors, the manner of appointment of the Nomination Committee and discharge from responsibility for the members of the Board of Directors and President for the last year. Resolutions are also adopted regarding the preparation of the financial statements, the allocation of profit or treatment of loss, the fees for the Board of Directors and auditors and guidelines for remuneration to the President and other members of executive management.

2011 Annual General Meeting

The Board gave the 2011 Annual General Meeting an account of their work during the year and on corporate governance issues in general. The President informed the AGM about the group's development and position and commented on the results for 2010.

The AGM approved the financial statements for 2010, delivered by the President and Board of Directors, decided on the handling of the Company loss and discharged the members of the Board from liability. The AGM decided that no dividend would be paid.

Further, the Nomination Committee's Chairman informed on the work during the year and reported the reasons for the suggested proposals. The Meeting resolved on remuneration to the Board and auditor in accordance with the proposal.

The Nomination Committee's proposal for the Board was not accepted. Instead, new members were nominated to the Board at the AGM. The AGM appointed Göran Wessman (who was also appointed Chairman), Per Bengtsson, Christer Fåhraeus, Elisabeth Lindner, Jan N. Sandström and Anders Waas to the Board.

The company's auditor since the 2007 AGM, PricewaterhouseCoopers AB, was elected for a term of one year until the 2012 AGM. It was informed that Håkan Malmström is the principal auditor since the 2008 AGM.

Of the outgoing Board of Directors from the 2011 AGM, Members Bo Håkansson, Johan Kördel, Margret von Platen and Birgit Stattin Norinder were in attendance. From the newly elected Board of Directors, Göran Wessman, Per Bengtsson, Elisabeth Lindner, Jan N. Sandström and Anders Waas were in attendance.

The principal auditor and the Nomination Committee's Chairman also attended the meeting. The minutes of the Meeting on April 27 was completed on May 4, and is available at Karo Bio's website (www.karobio.com).

Nomination Committee

The AGM 2011 decided that Johan Claesson, Bo Håkansson, Jan Lundström, Mikael Lönn and Lars Magnusson, together with the Chairman of the Board should be included in the Nomination Committee for the 2012 AGM. The Nomination Committee shall appoint its own Chairman, as the chairman of the Board should not chair the Nomination Committee.

The AGM decided that the principle of the Nomination Committee is that shareholders with significant holdings should be represented in the Nomination Committee and that the Chairman of the Board will be a member. If it is deemed appropriate as a result of ownership changes, the Nomination Committee shall invite additional shareholders a place in the committee, however, as long as the total number of members does not exceed six. If a member leaves the Nomination Committee before the work is completed, the Nomination Committee shall, if it deems it necessary, invite the same shareholder or, if it is no longer one of the major shareholders, the next shareholders in terms of size to appoint a replacement

The Nomination Committee shall prepare proposals to be presented to the AGM for resolution as regards to the election of the chairman at the meeting, the number of board members and deputies, the election of chairman and other board members to the Board of Directors, fees to the Board of Directors, fees and, where appropriate, the choice of auditor, and principles for the Nomination Committee.

The term of office for the Nomination Committee runs until the new committee is appointed pursuant to resolution at the AGM on principles for the Nomination Committee. The Nomination Committee shall, to the extent it considers necessary, have the right to contract other resources such as external consultants as part of their assignment at the company's expense, and to a reasonable extent.

Shareholders may submit proposals to the Nomination Committee on the address Valberedningen, Karo Bio AB, Novum, 141 57 Huddinge, Sweden.

The Nomination Committee's proposals are announced publicly in connection with the notice to the AGM.

The work of the Nomination Committee since the 2011 AGM

Since the appointment of the Nomination Committee in May 2011, it has convened on four occasions. The Chairman of the Board has informed the Nomination Committee on the process followed in the annual assessment of the Board, the Board members and Managing Director as well as, in relevant segments, informed on the outcome of the evaluation, and the company strategy.

For the upcoming AGM, the Nomination Committee shall propose a procedure for the appointment of the next Nomination Committee. The Nomination Committee shall also present

CEO

PER BENGTSSON (1954)

Malmö, Sweden. Elected in 2011, President and CEO.

Education: M.D. Ph.D. (Cell Biology). Primary experience: CEO of Probi AB (publ), R&D Manager Pharmacia/ Pharmacia&Upjohn Plasma Products, Medical Manager and Therapeutic Manager at Ferring and Development Manager at Bionor Immuno A/S.

Other assignments: Board member for Pharmavizer AB.

Number of shares: 0

STYRELSELEDAMÖTER

göran Wessman (1948)

Gothenburg, Sweden.

Elected in 2011, Chairman since 2011.

Education: Biomedicine and Chemistry at Uppsala and Gothenburg Universities.

Primary experience: Leading positions in Nobel Pharma, business development consultant. Founder of Protem Wessman Boule Diagnostics and Carmel Pharma. Former CEO of the Holding company at the Gothenburg University, A+ Science Holding and as Chairman of the Board of SCRI and Isconova.

Other assignments: CEO and board member of Mintage Scientific, Chairman of I-Tech, Vicore Pharma and Protem Wessman.

Number of shares: 512,500

Independent board member.

CHRISTER FÅHRAEUS (1965)

Bjärred, Sweden.

Elected in 2011.

Education: M.Sc. Bioengineering (UCSD), B.Sc. Mathematics, Ph.D. (hc) Lund University. Three years of medical studies and four years of Ph.D. studies in Neurophysiology.

Primary experience: Innovator and entrepreneur. CEO and Board member in several development and listed companies within medtech, IT and pharmaceuticals. Founder of Anoto Group AB, Precise Biometrics AB, CellaVision AB, Respiratorius AB and Agellis Group AB.

Other assignments: CEO of EQL Pharma AB. Chairman of Agellis Group AB, Respiratorius AB and Flatfrog Laboratories AB. Board member of EQL Pharma AB, Lund University's development company (LUAB), Fårö Capital AB and CellaVision AB.

Number of shares: 0

Independent board member.

ELISABETH LINDNER (1956)

Stockholm, Sweden. Elected in 2011. Education: M.Sc., MBA.

Primary experience: Senior

management positions in the pharmaceutical industry, including CEO of Diamyd Medical AB, Director of Biopharma Process Development at Octapharma AB, Development Director Metcon Medicin AB, Senior Director Global New Product Introduction Pharmacia Corporation.

Other Assignments: Chairman and CEO Biosource Europe AB. Board member BioInvent International AB, IND Technologies, member of the Royal Swedish Academy of Engineering Sciences (IVA).

Number of shares: 0

Independent board member.

Jan n. sandström (1938)

Södertälje, Sweden.

Elected in 2011. Education: Pharmacist, University studies in busi-

ness/economics. Primary experience: International marketing, global project management, commercialization and business development within AstraZeneca and Vice President Business Development & Licensing in one of their research companies. Consultant speciliazing in strategy, global business develop-

ment and recruiting. Other assignments: Board member in Accelerator AB, GrippingHeart AB, NovaSAID AB, PledPharma AB, TikoMed AB and Chairman of JNS Consulting AB.

Number of shares: 0

Independent board member.

Anders waas (1957)

Gothernburg, Sweden. Elected in 2011.

Education: Dentist.

Primary experience: CEO in pharmaceutical, medical device and biotech industry as well as senior positions within product development, business development and commercialization at Astra/Astra Zeneca, Ciba Geigy, WL GORE & Associates, CV Therapeutics, and Actogenics.

Other assignments: MIVAC Development AB, Toleranzia AB, Alzinova AB, Anders Waas AB and the Law Agency Louise Katsler Waas AB.

Number of shares: 0

Independent board member.

Employee representatives Bo Carlsson (1958)

Stockholm, Sweden. Employee representative since 1997.

Education: Specialist teacher exam, Uppsala University.

Primary experience: Employed by Karo Bio since 1989, Project Manager. Number of shares: 20,666

Johnny Sandberg (1967)

Danderyd, Sweden.

Employee representative since 2006. Education: Biomedical analyst, Vårdhögskolan. Primary experience: Employed by Karo Bio since

2006, Senior Research Investigator. Number of shares: 26,250

Eva KocH (1966)

Stockholm, Sweden. Employee representative (Deputy) since 2010. Education: Ph.D. in organic chemistry. Primary experience: Employed by Karo Bio since 1999, Senior Research Scientist.

Number of shares: 6,500

proposals for fees for the Board and in order to get an idea of the reasonable fee levels, an analysis and comparison with similar companies has been made. In the development of proposals for election of auditors and remuneration of the auditor's work, the Nomination Committee has been assisted by the Board.

Based on the evaluation of the Board of Directors made and the company's strategy, and based on the current board members availability for re-election, the Nomination Committee makes an assessment on whether the current Board meets the requirements that will placed on the Board as a result of the company's position and future orientation, or whether the composition of skills and experience needs to be changed. The Nomination Committee's proposal for re-election and election of board members, its reasoned opinion concerning the proposal to the Board and other proposals were submitted in connection with the notice to the AGM.

External auditors

According to the Articles of Association, Karo Bio shall engage a registered public accounting firm as external auditor. At the 2011 AGM, the registered public accounting firm PricewaterhouseCoopers AB was re-elected as auditor until the AGM 2012. Since the 2008 annual general meeting, auditor in charge has been Authorized Public Accountant Håkan Malmström, who is also auditor in charge of the companies NCC AB, Gambro AB, and Nordstjernan AB, among others.

The auditors review the accounting records and administration of the Parent Company and the Group on behalf of the annual general meeting. The external audit of the accounting records of the Parent Company and the Group and the administration of the Board of Directors and the President is performed according to generally accepted auditing standards in Sweden.

The Company's auditor in charge participates in some of the Board's Audit Committee meetings. The auditor participates in at least one Board meeting per year to review the year's audit and to have a discussion with the Members of the Board without the presence of the President.

The company has entrusted the auditor to review one of the interim reports for 2011 in accordance with the Code's statues. Information regarding the auditors' fee is included in Note 26 in the 2011 annual report.

Board of Directors

The Board of Directors has the overall task of administering the company's affairs on behalf of the shareholders in the best possible manner. The Board shall continuously assess the Group's operations, development and financial situation, as well as assessing its operative management. Among its other work, the Board determines issues concerning the Group's strategic direction and organization, business plans, financial plans and budget, and also makes decisions regarding important agreements, major investments and commitments, in addition to financial, information and insider and risk management policies.

The Board of Directors works according to a work procedure which is determined annually and which regulates the frequency and agenda of Board meetings, the distribution of material for meetings and matters to be presented to the Board as information or for resolution. The working procedure further regulates the manner in which the tasks of the Board are divided between the members of the Board and any Board committees. The Board has also approved instructions for the President, which regulate the division of duties between the Board of Directors, the Chairman of the Board, and the President, as well as defining the authorities of the President.

			Attendance rate 1)		Independent
Name of Board member	Elected to Board	Total annual fee, SEK	Ordinary Board meetings	Extraordinary Board meetings	In relation to the Company and executive management	In relation to the Company's major shareholders
Elected by the general meeting
Göran Wessman (Chairman) 2)	2011	371	5 (5)	5 (5)	Yes	Yes
Per Bengtsson 2)	2011	19	5 (5)	5 (5)	No	Yes
Christer Fåhreus 2)	2011	158	4 (5)	4 (5)	Yes	Yes
Elisabeth Lindner 2)	2011	158	4 (5)	5 (5)	Yes	Yes
Jan N Sandström 2)	2011	158	5 (5)	4 (5)	Yes	Yes
Anders Wass 2)	2011	158	5 (5)	5 (5)
Bo Håkansson (Chairman) 3)	2009	124	3 (3)	4 (4)	Yes	Yes
Johan Kördel 3)	2009	52	3 (3)	4 (4)	Yes	Yes
Margaret von Platen 3)	2010	52	3 (3)	4 (4)	Yes	Yes
Jon Risfelt 3)	2009	52	2 (3)	4 (4)	Yes	Yes
Birgit Stattin Norinder 3)	2007	52	3 (3)	3 (4)	Yes	Yes

Employee representatives

Bo Carlsson	1997	-	7 (8)	9 (9)	No	Yes
Johnny Sandberg	2006	-	8 (8)	9 (9)	No	Yes
Eva Koch, Deputy	2010	-	7 (8)	8 (9)	No	Yes

1) The figures in parentheses indicate the number of meetings during each member's mandate period.

2) The board member was elected at the annual general meeting 2011.

3) The board member left his assignment in conjunction with the annual general meeting 2011.

The Chairman of the Board plans the Board meetings together with the President. In advance of each Board meeting, the Directors receive a written agenda and adequate supporting documents. At each regular Board meeting, a review of operations is conducted, which includes developments and progress within research and development, business development, the Group's operating results and financial position, financial reporting and forecasts.

The Chairman leads the work of the Board of Directors, represents the company in ownership issues, and is responsible for the assessment of the Board of Directors' work. In addition, the Chairman is responsible for on-going interaction with management and for monitoring that the Board fulfils its duties. According to the Articles of Association, the Board shall consist of a minimum of five and a maximum of nine members, elected by the general meeting of shareholders, with no deputy members. The Board is competent to make decisions when more than half of the total numbers of Directors are present. The members of the Board shall possess broad competence and versatility, as well as have backgrounds suitable for Karo Bio's organisation, industry and operations. New members of the Board undergo introductory training so as to rapidly obtain the knowledge expected to best safeguard the interests of the company and the shareholders.

The work of the Board of Directors in 2011

During 2011, eight regular meetings, at which minutes have been kept, and nine special Board meetings have been held. At all of these meetings, the Board of Directors has been competent to make decisions. Up to and including May 2011, Erika Söderberg Johnson, Chief Financial Officer, has acted as Secretary to the Board, thereafter succeeded by Madeleine Rydberger, solicitor. Resolutions are taken by the Board after an open discussion, led by the Chairman.

Major matters dealt with during 2011 have included the recruitment of a President and Chief Executive Officer, strategic issues dealing with how the business should be conducted from an organizational perspective, clinical projects, research operations, business development and financing. Decisions have been made in important areas such as business and financial plans, strategic issues related to the organization, scientific development, substantial contracts, major capital expenditures, budget, financing and other central company policies. The Board continuously evaluates the company's performance and development.

Board of Directors' fees, independence and attendance rate

The table on the previous page illustrates the independence of the Board as regards to the company, executive management and the company's major shareholders, in addition to attendance rates and expensed fees for 2011, as determined by the annual general meeting.

Board Committees

The Board has, based on its size and composition, resolved that the respective tasks of the Compensation Committee and the Audit Committee are best conducted by the Board in its entirety, and that no preparatory committees should be appointed. The Board in its entirety thus attends to the matters designated for preparatory Compensation and Audit Committees according to the Companies Act and the Code.

Compensation Committee

The Compensation Committee's responsibilities are discharged by the full Board, except CEO Per Bengtsson. The work is governed by instructions determined annually by the Board of Directors, and included in the work procedures for the Board. These include submitting proposals for guidelines for remuneration to senior executives, proposals to the Board on the wages of the Managing Directors and other terms of employment, set wages and employment terms for other members of the executive management and developed proposals for incentive programs and other forms of bonuses or similar compensation to employees.

The CEO may be the rapporteur on issues relating to the compensation committees work but does not participate in determining of his own salary and terms of employment.

At the AGM, the Board proposes guidelines for determining salaries and other compensation for the CEO and other senior executives, for approval by the shareholders. At the 2011 AGM it was decided that the remuneration of CEOs and other senior executives comprises fixed salary, variable remuneration, other benefits and pensions.

The total remuneration shall be market sound and competitive, as well as related to the officer's responsibility and powers. Any variable remuneration is based on to which extent the set operational goals are reached and will be capped at 40 per cent of the fixed remuneration and shall be eligible for pension benefits. The Board shall have the right to deviate from the guidelines if there are special reasons in an individual case.

For further description of the employment terms for the Board and senior executives, see the administration report and note 2 in the financial statements for 2011.

Audit Committee

The Audit Committee is formed by the Board of Directors in its entirety, except CEO Per Bengtsson. The work of the Audit Committee follows instructions annually determined by the Board of Directors and included in the work procedures for the Board to supervise and ensure the quality of the financial reports and the efficiency of the company's system of internal controls and risk management.

The Committee continuously met with the company auditors, assessed the audit work and the independence of the auditors, and approved the supplementary services that the company may procure from the external auditors.

On the basis of the scope, processes and workflows of the operations, the Board, within the framework of the Audit Committee tasks, together with management, carries out an assessment of the company's risks (business risks and risks of errors in the financial reporting), as well as the processes and procedures established to manage these risks. This evaluation is carried out annually or more frequently when called for by special circumstances. Based on the outcome of this risk assessment, the emphasis and scope of the audit are discussed with the company auditors in order to streamline and improve the quality of the current auditing work. Before each new financial year, the audit plan is discussed with the external auditors, in addition to significant accounting matters affecting the Group. Within the framework of the Audit Committee work, the Board of Directors assists the Nomination Committee in the preparation of proposals for the election of auditors and the fees for the auditors.

Issues dealt with by the Board of Directors during 2011 include the review of the 2010 year-end report and the 2010 annual report, the auditor's report from the 2010 audit, the audit plan for 2011, the mid-year report for January-September 2011, the auditor's interim audit, the structure of internal controls, risk management process and policy, corporate governance, principles for the procurement of other services than auditing services from the auditors, the financial policy, the investment strategy for surplus liquidity, and the strategic financial planning. The Board has also carried out an evaluation of the work of the auditors.

PRESIDENT AND EXECUTIVE MANAGEMENT TEAM

The Board of Directors appoints the President to lead the company. The President is responsible for the current administration of the company in accordance with the directions and guidelines issued by the Board of Directors.

The executive management team consists of four individuals in addition to the President; the Chief Financial Officer, the Vice President Business Development and the Heads of preclinical and clinical development. The executive management team holds monthly meetings to discuss the Group's result of operations and financial position, the status of research and development projects, strategic issues and the monitoring of budget and forecasts. As the Group only has one subsidiary, in which no operations are conducted, the operating results and financial position of the Parent Company and the Group, respectively, are largely the same.

The President leads the work of the executive management team, which together makes decisions for later implementation in the organization, based on the strategy and corporate goals determined by the Board of Directors. Each member of the executive management team ensures that decisions are implemented in his or her respective area of responsibility and follows up this implementation.

The executive management is responsible for formulating proposals regarding the Group's overall strategies and for implementing these, as well as dealing with matters such as acquisitions and divestments. Such matters, as well as investments exceeding MSEK 2, are prepared by the executive management team for resolution by the Board of Directors.

Disclosures regarding the President's age, main education, working experience, significant assignments outside Karo Bio and holdings of shares and other financial instruments in the company (both his own and those of related parties) are disclosed on page 8. The President has no significant shareholdings or partnerships in companies with which Karo Bio has significant business connections.

Internal control and risk management regarding financial reporting

Introduction

The Board of Directors and the President are responsible for internal control, as stipulated in the Swedish Companies Act. The responsibility of the Board is also stipulated in the Code. The Annual Reports Act includes requirements regarding the provision of information to external parties in terms of the manner in which the internal controls regarding financial reporting are organised.

Karo Bio's processes for internal control regarding the financial reporting are designed to provide, with reasonable security, quality and correctness in the reporting. The processes shall ensure that the reporting is prepared in accordance with the applicable laws and regulations, and in agreements with the requirements placed on publicly traded companies in Sweden. One premise that this is achieved is that there is a good control environment, that reliable risk assessments are undertaken, and that there is an established control structure and that control activities and information and communication, as well as followup function in a satisfactory manner.

Internal audit

The Board of Directors has assessed the need for an internal audit function, and concluded that no such function can be justified in Karo Bio at present, with consideration of the scope of operations and the fact that the Board of Directors' follow-up of internal control is deemed to be sufficient to ensure the effectiveness of internal control. The Board of Directors will reassess the need for an internal audit function when any changes arise that may cause reassessment, although at least once per year.

The control environment

The internal control is based on Karo Bio's control environment, which includes the values and the ethics which the Board, the Audit Committee, the President, management and other employees communicate and on which they base their actions. The control environment is also defined by the company's organisational structure, leadership, decision-making process, authorities, responsibilities and employees' competence.

Risk assessment

At least once a year, a review is undertaken to identify and evaluate Karo Bio's risk profile. This work also involves the assessment of the preventive measures which are to be undertaken to reduce and prevent risks in the Group. This work includes ensuring that the Group is sufficiently insured and also includes the preparation of decision-making documentation as regards to any possible changes in policies, guidelines and insurance.

Karo Bio's system for identifying, reporting and addressing risks is an integrated part of the on-going reporting to the management team and the Board of Directors and forms a key foundation for the assessment of risks in terms of errors in the financial reporting. As part of the process, items in the income statement and balance sheet where the risk of significant error is greater are identified.

For Karo Bio, accrued project costs within the company's clinical projects comprise, at various points in time, significant amounts, the size of which is based to a large extent, on management's assessments of the degree of completion. Cash, cash equivalents and other short term investments account for a substantial part of Karo Bio's total assets and are thus a potential source of risk in the financial reporting. Furthermore, the fact that Karo Bio's administration is handled by a small number of individuals has been noted as a risk, as the dependence on a few key individuals is significant and the possibilities of separation between duties and responsibilities are limited. Special importance has, therefore, been placed on designing controls to prevent and identify weaknesses in these areas.

Control structure

A clear specification of roles and responsibilities is stipulated in the Board's work procedures and in the instructions for the President and the Board Committees, respectively. The Board of Directors has the overall responsibility for internal control. When a separate committee, the Audit Committee serves the Board with regard to significant accounting issues and follows up internal control with regard to the financial reporting.

The President is responsible for the system of procedures, processes and controls which have been developed for the ongoing operations. These include guidelines and role descriptions for the various officers of Karo Bio and for the regular reporting to the Board. Policies, processes, procedures, instructions and standard formats for the financial reporting and the on-going work with the financial administration and financial issues are documented in Karo Bio's Finance manual. Procedures and activities have been designed to handle and address significant risks which are related to the financial reporting and which are identified in the risk analysis.

In addition to the Finance manual, the most significant, overall group-wise governance documents are the finance policy, information policy, insider policy, and the risk management policy.

Control activities

The major goal of the control activities is to prevent and, at an early stage, identify errors in the financial reporting so that these can be addressed and corrected. There are control activities both at the overall and more detailed levels and these are both manual and automated in nature. Authorization in the IT system is limited according to the established authorizations and specified responsibilities.

The finance function compiles monthly financial reports in which results and cash flows for the former period are reported and in which budget deviations are analysed and commented upon. These reports are compiled for Karo Bio in its entirety and for the respective departments and projects. Follow-up is conducted via regular meetings which review and analyse these reports, together with the line managers and project managers. In this manner, significant fluctuations and deviations are followed which minimizes the risk of error in the financial reporting.

The closing of the books and annual financial statement work involves processes which add further risks for errors in the financial reporting. This work is of a less repetitive nature and includes a number of instances characterized by assessment. Important control activities includes securing that there is a well-functioning reporting structure in which the line managers and project managers report according to standardized reporting formats, and that important income statement and balance sheet items are specified and commented upon.

Information and communication

The company's information-oriented operations are regulated by an information policy. For external communication, there are guidelines which aim to ensure that live up to the high standards for correct information to the market. Karo Bio's communication should be correct, transparent, timely and on a fair and equal basis with all interested parties. All communication conducted place in accordance with NASDAQ OMX Stockholm's Rule Book for Issuers. The financial information shall provide a comprehensive and clear view of the company, its operations, strategy and financial development.

The Board of Directors adopts the annual reports, financial statements and interim reports. All reports are published on the website (www.karobio.com) after having been submitted

to NASDAQ OMX Stockholm. The printed annual report is distributed to shareholders and other parties who have notified Karo Bio that they wish to receive this document.

In the case of a leaking of information impacting the share price or in the case of special events which may impact the evaluation of the company, NASDAQ OMX Stockholm will be informed, following which a press release with the corresponding information will be issued. The internal distribution of information will not take place until Karo Bio has published the corresponding information.

For internal communication purposes, Karo Bio has established an intranet, where internal information items, policies and guidelines are available for all employees. Every second month, and more often if needed, company-wide information meetings are held.

Follow-up

The Board's review of internal control regarding financial reporting is conducted by, among other things, reviewing the work and reports of the Chief Financial Officer and the external auditors. This work includes ensuring that measures have been taken regarding any deficiencies and also includes presenting proposals for measures which have been produced in the context of the external audit. The review is conducted with a focus on the manner in which Karo Bio complies with its framework and on the basis of the existence of efficient and goal-oriented processes for risk management, operational management and internal control.

The external auditors review, on an annual basis, selected parts of the internal control within the framework of the statutory audit. The auditor's report the outcome to the Board of Directors and the executive management. Significant observations are reported, as applicable, directly to the Board of Directors. During 2011, as part of the audit of accounts, the external auditors have reviewed the internal control of select key processes and have reported on these to the Audit Committee, the Board of Directors and the executive management.

AUDITOR'S OPINION ON THE CORPORATE GOVERNANCE STATEMENT To the annual meeting of the shareholders in Karo Bio AB (publ), corporate identity number 556309-3359

It is the board of directors who is responsible for the corporate governance statement for the year 2011 on pages 38-44 and that it has been prepared in accordance with the Annual Accounts Act.

We have read the Corporate Governance Report and based on our review of the report as well as our knowledge of the company and group it is of our opinion that we have sufficient information for our statements. This means that our statutory review of the Corporate Governance Report has a different aim and a much smaller scope compared to the aim and scope that an audit according to the International Standards on Auditing and good auditing practices in Sweden has.

In our opinion, the corporate governance statement has been prepared and its statutory content is consistent with the Annual Accounts Act and the consolidated account reports.

Stockholm on May 18, 2012 PricewaterhouseCoopers

Håkan Malmström Certified Public Accountant

Glossary

AGONIST A compound that has an activating effect.

ANTAGONIST A compound that has inhibiting/blocking effect, i.e. has a reverse effect compared to the agonist.

ApoB (Apolipoprotein A) a protein which binds to LDL and transports it to the tissues.

ATHEROSCLEROSIS Originates from deposits of fatty substances such as cholesterol and calcium in the walls of the blood vessels. The atherosclerotic process may begin early in life and over time lead to a build-up known as plaque, which hardens as people get older. The consequences are restricted blood flow, especially in arteries and areas where the blood vessels branch. There is also increased risk of blood clot formation. When this occurs in the heart, the result is a heart attack and, in the brain, a stroke. Blood flow in the extremities may also be restricted, which causes pain during exercise.

AXON is a projection from one nerve cell leading electrical impulses to other nerve cells or effector (muscle, glands). Axon ends with a synapse where a neurotransmitter substance is released as a result of the impulse.

CARDIOVASCULAR DISEASE

Examples of diseases that fall within this category include heart attack or stroke. Elevated levels of cholesterol in the blood, hypercholesterolemia, is a risk factor associated with cardiovascular diseases.

CD Candidate Drug. A compound, which has desired effects in relevant animal models and which therefore is further developed towards clinical development.

CLINICAL STUDY Testing and evaluation of pharmaceuticals in humans CNS Central nervous system.

CNS Central nervous system.

DYSLIPIDEMIA Imbalance in lipid/ cholesterol metabolism.

ECF Equity Credit Facility, an opportunity to issue shares to the seller. This can usually be done several times according to predetermined principles for pricing.

EMA (European Medicines Agency), European drug agency.

ER The receptor for estrogen hormone.

ER-BETA A form of the estrogen receptor, the discovery of which can lead to new treatment principles in women's health care, depression, certain forms of cancer with several disease areas.

ESTROGEN Female sex hormone.

EZETIMIBE A drug that inhibits absorption of cholesterol from the intestines to the blood.

FDA (Food and Drug Administration), the U.S. drug authority.

GLUCOCORTICOID The hormone that is the natural ligand to the glucocorticoid receptor and is produced in the adrenal cortex, and thus also referred to as adrenocortical hormone. The hormone regulates the body's use of carbohydrates, fat and protein and is a normal response to stress. Compounds that activate the receptor are called glucocorticoids.

GR The receptor for glucocorticoid.

HeFH Heterozygous familial hypercholesterolemia, is a hereditary condition in which patients suffer from very high blood lipid levels from an early age. Around 1 million patients are afflicted with the condition in the EU alone.

HORMONE Compound secreted from an endocrine gland that is transmitted by the blood to the tissue on which it has a specific effect.

HYPERCHOLESTEROLEMIA

Elevated levels of cholesterol in the blood.

HYPERLIPIDEMIA High levels of blood lipids (including cholesterol).

INDICATION In medical terminology a term for a disease or patient category.

INSULIN Hormone responsible for uptake of blood sugar in tissues

LDL Low Density Lipoprotein the "bad cholesterol".

LIGAND A substance, such a hormone, that binds with a receptor protein

LIPIDS Endogenous fat components.

LIVER SELECTIVE A compound that preferentially acts in the liver

LXR (Liver X Receptor), regulates cholesterol metabolism and is target for new drugs against e.g. atherosclerosis and inflammation.

MAA Market Approval Application, to register a new drug in the EU.

MYELIN Surrounds the outgrowth from nerve cells called axons through which the contact between nerve cells takes place. Myelin has an insulating capability meaning that nerve impulses can propagate faster.

NDA New Drug Application in the US.

NUCLEAR RECEPTORS Receptors inside a cell that bind to ligands (often hormones) and regulate gene expression.

PHARMACOKINETICS Studies of process time for the uptake, distribution and elimination of a drug in the body.

PHASE Ia A first clinical study phase where the compound is given as a single dose to healthy volunteers with the primary objective to study safety and pharmacokinetics on a candidate drug.

PHASE Ib Has the same objective as Phase Ia but with repeated dosing.

PHASE IIa First clinical studies in chosen patient category for which the drug is evaluated.

PHASE IIb Extended trials on patients where the primary objective is to find a dose to secure effect and safety before Phase III studies.

PHASE III Clinical studies conducted with a large patient population for which the drug is developed. The primary objective is to assure safety and confirm effect in a large database of a selected patient category under long time treatment. The aim with this part of clinical development is to assure that the launched product is safe for the chosen patient category in clinical practice.

PRECLINICAL DEVELOPMENT

Development until permission is granted to test a compound on human beings.

PROOF-OF-CONCEPT Proof for intended effect of a drug in patients.

PROOF-OF-PRINCIPLE Proof that a treatment principle has the intended effect on patients.

RECEPTOR A protein on the cell surface or inside the cell (nuclear receptor) that recognizes and binds to ligands such as steroid hormones. Receptors start or stop biological processes when they bind to ligands.

STATIN Drugs used for lowering of elevated levels of blood cholesterol.

SYSTOLIC BLOOD PRESSURE Blood pressure when the heart is contracting.

THERAPY Disease treatment method.

THYROID HORMONE A hormone synthesized and secreted by the thyroid gland, which is essential for normal metabolic processes.

TISSUE A collection of cells specialized to perform a particular function. The cells may be of the same type or of different types. Aggregates of tissue constitute organs.

TR A nuclear receptor that is activated by thyroid hormone.

TRIGLYCERIDES Fat made up of glycerol and fatty acids.

TYPE 2 DIABETES A form of diabetes, which develops in adult and often obese patients.

[email protected] www.karobio.com

Tel: +46 (0)8-608 6000 Fax: +46 (0)8-774 8261

Visiting address Hälsovägen 7

Postal address Karo Bio AB Novum 141 57 Huddinge Sweden

AI assistant

Karo Pharma AB — Annual Report 2011

6166_10-k_2012-05-22_e7e204e8-4edf-461b-adcf-6c8ad14209fa.pdf

Contents

Annual general meeting

Annual general meeting

Right to participate and notice

Share registration

Further information

Upcoming report dates:

Progress shadowed by eprotirome

Agreement with Pfizer

Cost savings

Other financial opportunities for cancer projects

MS project could lead to development and licensing agreements

Strategy for commercially viable projects

From unique knowledge to new pharmaceuticals

Nuclear Receptors –Regulate key functions

PROJECTS

ERbeta selective agonists - a platform with many opportunities

ER Women's health/MK-6913 – cooperation with Merck & Co., Inc.

GR Inflammation

KB3305 – Type 2 diabetes

LXR inflammation – Collaboration with Wyeth (Pfizer)

ROR gamma – a new opportunity for the treatment of autoimmune diseases

STRATEGY AND FINANCING

The share

SHAREHOLDERS

SHARE CAPITAL

WARRANTS

DIVIDEND POLICY

Principal shareholders at January 31, 2012

Share capital development

Board of Directors

Göran Wessman (1948)

Per Bengtsson (1954)

Christer Fåhraeus (1965) Elected in 2011.

Elisabeth Lindner (1956) Elected in 2011.

Jan N. Sandström (1938)

Anders Waas (1957) Elected in 2011. Education: Dentist

Employee representatives

Bo Carlsson (1958)

Johnny Sandberg (1967)

Eva Koch (1966)

Executive Managers and Auditors

Per Bengtsson (1954)

Maria Öhlander (1968)

Maria Sjöberg (1964)

Henrik Palm (1958)

Other assignments: Chairman Dispio AB

Lars Öhman (1957)

Auditors

The board and executive management's shares and options in Karo Bio are listed as per January 31, 2012 and also include family and ownership through companies. The information on stock options provided refers to the number of shares to which

Five-year overview

Definitions

CASH AND CASH EQUIVALENTS

OPERATING CASH FLOW

RETURN ON EQUITY

RETURN ON CAPITAL EMPLOYED Operating loss and financial income as a percentage of the average total assets less non interest bearing liabilities.

SHARE PRICE/EQUITY PER SHARE

Administration Report

OPERATIONS

RESEARCH AND DEVELOPMENT – CURRENT STATUS AND SIGNIFICANT EVENTS 2011

Eprotirome (KB2115) – Dyslipidemia

ER program - a platform with many opportunities

ER women's health / MK-6913

GR inflammation - joint project with Zydus Cadila

GR type 2 diabetes - KB3305

LXR inflammation - joint project with Wyeth (Pfizer)

KEY EVENTS AFTER THE END OF FISCAL YEAR 2011

ORGANIZATION

RESULTS AND FINANCIAL POSITION Results

Investments

Cash flow and financial position

Equity and share data

Parent Company

GUIDELINES FOR REMUNERATION FOR SENIOR EXECUTIVES

General information

Fixed salary

Variable remuneration

Karo Pharma AB Annual Report 2011