Karo Pharma AB — Interim / Quarterly Report 2007

Jul 12, 2007

2 Press Release

July 12, 2007

HALF YEAR REPORT JANUARY - JUNE 2007

• A 12 week phase II study with KB2115 in patients with primary hypercholesterolemia has been successfully completed. KB2115 was efficacious in LDL lowering and safe with respect to a broad range of parameters reflecting effects on heart, bone, muscle and thyroid function
• The clinical candidate in the Merck collaboration has been discontinued. A backup compound has been selected for preclinical development
• The initiation of phase I studies with KB5359 will be delayed due to toxicology findings that needs further evaluation
• The research collaboration with Wyeth Pharmaceuticals has been extended with one year until August 31, 2008
• A new share issue with preferential rights has been successfully completed. The rights issue generated MSEK 387.2 to the company after transaction costs
• Net sales for the six month period amounted to MSEK 3.9 (15.2)
• The loss for the six month period amounted to MSEK 118.2 (61.3)
• Cash flow from operating activities for the six month period amounted to MSEK -90.9 (-69.5)
• Liquid assets and other short-term investments amounted to MSEK 520.4 (274.4) at the end of the period
• Loss per share for the six month period amounted to SEK 1.24 (0.67)

Operations

Karo Bio is a drug discovery and development company specializing in nuclear receptors for the development of novel pharmaceuticals with focus on metabolic diseases. Karo Bio has two clinical (one with partners) and five preclinical projects.

The company has expanded from being a drug discovery company by adding in-house preclinical and clinical development resources and competence for development of drugs to treat metabolic diseases. The company has a strong project portfolio with innovative molecules that primarily target diseases such as dyslipidemia, diabetes and atherosclerosis. In all of these areas there are significant market opportunities and a growing need for new pharmaceuticals with new mechanisms of action.

In addition to the proprietary projects Karo Bio has two strategic collaborations with international pharmaceutical companies and one biotech collaboration for development of innovative therapies for the treatment of diseases with great medical need.

Karo Bio is listed on the Stockholm Stock Exchange since 1998 (Reuters: KARO.ST).

Research and Development

KB2115 – Severe Dyslipidemia

The thyroid hormone receptor (TR) is a key regulator of metabolic pathways and holds the promise of a new target for the treatment of dyslipidemia. KB2115 is an innovative and first in class liver selective agonist for the TR. Unlike the natural thyroid hormones, KB2115 is a liver selective TR agonist that can induce pharmacological effects in the liver, while a normal thyroid state is preserved in the rest of the body.

In the period Karo Bio completed a 12 week, placebo controlled, double blind, randomized, clinical phase II study in 99 patients with high cholesterol levels that was designed to explore whether a clinically relevant LDL-cholesterol lowering effect can be achieved without affecting the heart, bone, muscle and thyroid function. The study demonstrated that a pronounced, statistically significant and clinically relevant lowering of LDL-cholesterol can be obtained while preserving the thyroid homeostasis outside the liver and biomarkers for heart, bone, muscle and other organs were kept at normal levels. The mild increase in liver enzymes that has been picked up in a previous 2-week phase I study was observed in this study as well. However, it appeared to be a transient and benign effect.

In addition to the positive results regarding efficacy and safety it was also shown that the enteric coating of KB2115 was effective in protecting the compound from chemical modification in the stomach. Thereby a safety concern for longer exposure in man is removed.

The phase II program for KB2115 will continue with additional studies to prepare for the phase III program.

KB5359 – Dyslipidemia

KB5359 is a liver selective thyroid hormone mimetic that significantly lowers LDL cholesterol in several animal models without any recorded negative effects on the heart. In preclinical models KB5359 has an efficacy and safety profile that may be beneficial for treatment of common forms of dyslipidemia. In addition to the powerful LDL lowering capacity of KB5359 the compound also has positive effects in diabetes and triglyceride animal models. In addition, in animal models KB5359 significantly improves the LDL-lowering in combination with statins compared to the effect obtained with statins alone.

In the period Karo Bio has conducted 28 day toxicology studies in rats and dogs and the data are being compiled. However, some findings have been made that require further evaluation during the third quarter. If this evaluation is positive and, complementary data support further development, it is anticipated that the commencement of clinical trials will be delayed by approximately six months.

KB3305 – Type 2 Diabetes

KB3305 has a favorable pharmacological profile in several different animal diabetes models and acts by selectively antagonizing the action of glucocorticoid hormone in the liver. In animals, KB3305 normalizes the hyperglycemia associated with type 2 diabetes. Preclinical safety and toxicology studies suggest that KB3305 should be a safe and well-tolerated drug with more than a 100-fold safety margin over the expected clinical dose. Karo Bio has improved the quality of the pharmaceutical capsule formulation and the aim is to initiate clinical studies during the second half of this year.

ER beta selective compounds – Depression

ER beta selective compounds have potential for a number of important diseases such as inflammatory diseases, cancer and depression. Karo Bio is currently prioritizing development of CNS-active compounds for treatment of depression and proof of principle in animal models for the use of ER beta selective agonists in depression has been obtained. The lead compounds have a high selectivity for ER beta and thereby adverse effects like a stimulation of uterine growth will be minimized. The program is now focusing on improvement of the bioavailability of the lead compounds.

Karo Bio Partner Projects

Atherosclerosis – Wyeth Pharmaceuticals

The collaboration with Wyeth Pharmaceuticals is aimed at new treatments of atherosclerosis with the liver X receptor (LXR) as a target. Preclinical studies have shown that compounds which stimulate LXR have anti-atherogenic effects. Evaluation of a compound in phase I studies is ongoing and the research collaboration has recently been extended for one year until August 31, 2008.

Estrogen Receptors – Merck & Co., Inc.

Merck and Karo Bio have a collaboration in the field of estrogen receptors. Estrogen receptors are important targets for several diseases in the field of women's health. The joint drug discovery phase concluded in 2002, with Merck responsible for development of selected compounds. The candidate compound from the collaboration that entered Phase I clinical development in 2006 has been discontinued. A backup compound has been selected for preclinical development.

Osteoporosis – Radius Health, Inc.

Karo Bio announced a licensing agreement with Radius, a private US based company, in 2006. Under the terms of the agreement Radius acquired the exclusive worldwide rights, excluding the Nordic and Baltic countries, to a new class of Selective Androgen Receptor Modulators (SARMs) discovered by Karo Bio. Radius is advancing these SARM compounds in preclinical studies for the treatment of osteoporosis and frailty associated with loss of muscle mass.

The Swedish Financial Supervisory Authority has issued new guidelines for public communication. The guidelines are valid from July 1, 2007 and in line with these Karo Bio highlights risk factors that are associated with pharmaceutical development.

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

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

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

There may be a need to turn to the capital market in the future. Both the size and the timing of the Company's potential future capital requirements are dependent on a number of factors, including opportunities to enter into collaboration or licensing agreements and the possibility of achieving success in research and development projects undertaken.

Organization

By the end of the period, Karo Bio had 74 (75) employees, of which 68 (66) are engaged in research and development.

New Share Issue

Karo Bio´s new share issue was completed in June. The rights issue of 38,706,397 shares generated MSEK 387.2 after transaction costs amounting to MSEK 19.3.

Result and Financial Position

Result

Net sales for the quarter amounted to MSEK 1.9 as compared to MSEK 13.2 for the same period last year.

Expenses for the quarter increased by MSEK 31.0 to MSEK 70.8 (39.8) which mainly is attributable to higher external costs in toxicological studies and clinical trials.

Operating loss for the quarter amounted to MSEK 68.9 (26.7). Financial net for the quarter amounted to MSEK 2.2 (1.5). The reported loss for the quarter amounted to MSEK 66.7 (25.1).

Cash Flow

Cash flows from operating activities for the quarter amounted to MSEK -34.5 (-28.5).

Liquid assets amounted to MSEK 451.9 (53.0) at the end of the period. Including other short-term investments, with duration exceeding 90 days, the assets amounted to MSEK 520.4 (274.4).

Capital Investments

Capital investments in equipment for the quarter amounted to MSEK 1.5 (0.4).

Shareholders' Equity and Per Share Data

The share capital at the end of the period amounted to MSEK 58.1. The total number of shares amounted to 116,119,192 shares with a ratio value of SEK 0.50. Total consolidated shareholders' equity amounted to MSEK 479.5 after taking into account the loss for the period.

Loss per share for the quarter, based on the weighted average number of shares outstanding, amounted to SEK 0.67 (0.27). The Group's equity ratio at the end of the period was 87.8 percent (91.5) and equity per share was SEK 4.13 (3.01).

	April-June		January-June		Jan-Dec
	2007	2006	2007	2006	2006
Net sales	1,899	13,168	3,873	15,150	44,021
Operating expenses
Administrative expenses	-10,221	-7,474	-19,607	-15,879	-31,828
Research and development expenses	-61,239	-31,996	-106,735	-64,704	-144,969
Other operating income and expenses	633	-368	559	999	782
	-70,827	-39,838	-125,783	-79,584	-176,015
Operating loss	-68,928	-26,670	-121,910	-64,434	-131,994
Financial net	2,178	1,523	3,721	3,133	5,878
Loss after financial items	-66,750	-25,147	-118,189	-61,301	-126,116
Tax	-	-	-	-	-
LOSS FOR THE PERIOD	-66,750	-25,147	-118,189	-61,301	-126,116
Depreciation included in operating expenses	-1,236	-1,434	-2,456	-2,911	-5,559
*) Loss per share (SEK) - weighted average number of shares
outstanding – basic and diluted	-0.67	-0.27	-1.24	-0.67	-1.38
Number of shares outstanding (000) - weighted average during period – basic and
diluted	99,764	91,587	95,676	91,587	91,587
- at end of period – basic and diluted	116,119	91,587	116,119	91,587	91,587

CONDENSED CONSOLIDATED INCOME STATEMENTS (kSEK)

*) The outstanding warrants lead to no dilution of earnings per share, as a conversion to shares would lead to an improvement of earnings per share.

CONDENSED CONSOLIDATED BALANCE SHEETS (kSEK)

		June 30
	2007	2006	Dec 31 2006
Assets
Licences and similar rights	3,428	-	-
Equipment	8,108	10,814	8,632
Other current assets	13,872	15,483	12,291
Other short-term investments	68,587	221,435	137,270
Liquid assets	451,864	52,982	93,779
TOTAL ASSETS	545,859	300,714	251,972
Shareholders' equity and liabilities
Shareholders' equity	479,492	275,283	210,503
Non-current liabilities	471	1,204	712
Current liabilities	65,896	24,227	40,757
TOTAL SHAREHOLDERS' EQUITY
AND LIABILITIES	545,859	300,714	251,972

	April-June		January-June		Jan-Dec
	2007	2006	2007	2006	2006
Operating activities
Operating loss before financial items	-68,928	-26,670	-121,910	-64,434	-131,994
Depreciation	1,236	1,434	2,456	2,911	5,559
Other items not affecting cash flows	37	17	72	62	180
	-67,655	-25,219	-119,382	-61,461	-126,255
Financial items received and paid Cash flow from operating activities	3,145	1,113	3,940	2,107	7,686
before changes in working capital	-64,510	-24,106	-115,442	-59,354	-118,569
Changes in working capital	29,986	-4,438	24,551	-10,160	8,210
Cash flow from operating activities	-34,524	-28,544	-90,891	-69,514	-110,359
Investing activities
Investment in licenses and similar rights	-3,460	-	-3,460	-	-
Net investment in equipment Net investment in other short-term	-1,533	-408	-2,361	-1,083	-2,043
investments	43,000	59,665	67,636	-183,691	-101,089
Cash flow from investing activities	38,007	59,257	61,815	-184,774	-103,132
Financing activities
Proceeds from new share issues	387,161	-	387,161	-	-
Cash flow from financing activities	387,161	-	387,161	-	-
Cash flow for the period	390,644	30,713	358,085	-254,288	-213,491
Liquid assets at the end of the period	451,864	52,982	451,864	52,982	93,779

CONDENSED CONSOLIDATED CASH FLOW STATEMENTS (kSEK)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (kSEK)

		April-June	January-June		Jan-Dec
	2007	2006	2007	2006	2006
Amount at beginning of period	159,072	300,411	210,503	336,548	336,548
Effect from changes in accounting
principles	-	-	-	-	-
Currency translation difference	-	2	-	1	1
Employee stock option program - value
of employee services	9	17	17	35	70
New issues of shares	387,161	-	387,161	-	-
Loss for the period	-66,750	-25,147	-118,189	-61,301	-126,116
Amount at end of period	479,492	275,283	479,492	275,283	210,503

EQUITY DATA

	June 30		Dec 31
	2007	2006	2006
Equity ratio	87.8%	91.5%	83.5 %
Equity per share at the end of period, SEK
– basic and diluted	4.13	3.01	2.30

Accounting and Valuation Principles

This quarterly report has been prepared in accordance with International Accounting Standards 34 for interim reports and international financial reporting standards IFRS as adopted by the EU. The accounting and valuation principles applied are unchanged compared with what was applied in the Annual Report for 2006. A number of new or updated accounting standards and interpretations are applicable for financial years beginning January 1, 2007 or later. These accounting standards and interpretations are deemed not to have a significant impact on the consolidated financial statements other than presentational or disclosures presented in the reports. In addition, there are certain accounting standards and interpretations that are not relevant to Karo Bio.

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

Scheduled Releases of Financial Information

Karo Bio intends to distribute financial reports as follows:

• Quarterly Report July September October 16, 2007
• Earnings Report 2007 February 7, 2008

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

The half year financial report gives, as far as is known, a true and fair view of the Company's and the Group's operations, position and results, and describes the principal risks and uncertainties that the Company and the Group face.

Huddinge, July12, 2007

Per Olof Mårtensson Chairman of the Board

Dana M. Fowlkes Lars Ingelmark Laurent Leksell Board Member Board Member Board Member

Ulla Litzén Birgit Stattin Norinder Leon E. Rosenberg Board Member Board Member Board Member

Bo Carlsson Johnny Sandberg Board Member Board Member

Per Olof Wallström CEO/Board Member

Employee Representative/ Employee Representative/

For further information, please contact

Per Olof Wallström, President, tel. +46 8 608 60 20, Per Otteskog, Senior Vice President Investor Relations, tel. +46 8 608 61 37, or Leif Carlsson, Chief Financial Officer, tel. +46 8 608 60 73.

Legal disclaimer

This financial report includes statements that are forward looking and actual results may differ materially from those stated. In addition to the factors discussed, among other factors that may affect results are developments 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.

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

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

The information is of a nature which Karo Bio shall need to disclose according to the Exchange and Clearings Operations Act and/or the law covering trade with financial instruments. The information was disclosed July 12 2007, 08.30