Karo Pharma AB — Interim / Quarterly Report 2009

Jul 14, 2009

Press release July 14, 2009

INTERIM REPORT JANUARY–JUNE 2009

CONTINUED FOCUS ON CORE PROJECTS

The period January-June in brief

• Net sales amounted to MSEK 4.4 (7.2), whereof the second quarter MSEK 2.2 (5.5)
• Net loss decreased to MSEK 82.7 (101.8), whereof the second quarter MSEK 36.8 (49.9)
• Loss per share decreased to SEK 0.71 (0.88), whereof the second quarter SEK 0.32 (0.43)
• Cash flow from operating activities amounted to MSEK -79.6 (-105.7), whereof the second quarter MSEK -38.6 (-49.7)
• Cash and cash equivalents and other short-term investments totaled MSEK 156.3 (329.2) at the end of the period
• At The Annual American College of Cardiology Meeting in Orlando, Florida, March 29, 2009, results from Karo Bio's phase IIb study with eprotirome as add-on to statin treatment were presented
• In March, positive results from the phase I program with KB3305 were reported. In addition to healthy volunteers, a group of type 2 diabetes patients was included in the trials
• The collaborative effort with Zydus Cadila have made several breakthroughs that increase the possibilities of finding suitable substances for further development into candidate drugs

(MSEK)	April‐June			January‐June	January‐December
	2009	2008	2009	2008	2008
Net sales	2.2	5.5	4.4	7.2	10.7
Operating expenses	-38.9	-58.5	-89.2	-116.7	-201.4
- whereof of R&D expenses	-31.9	-46.6	-73.7	-96.8	-169.4
Profit/loss for the period	-36.8	-49.9	-82.7	-101.8	-174.8
Profit/loss per share (SEK)	-0.32	-0.43	-0.71	-0.88	-1.51
Cash flow from operating activities	-38.6	-49.7	-79.6	-105.7	-186.4
Cash and cash equivalents and other short term investments at end of period	156.3	329.2	156.3	329.2	242.7

Selected financial information in summary

For further information, please contact:

Per Olof Wallström, President, tel. +46 8 608 60 20 Erika Söderberg Johnson, Chief Financial Officer, tel. +46 8 608 60 52

About Karo Bio

Karo Bio is a drug discovery and development company specializing in targeting nuclear receptors as target proteins for the development of novel pharmaceuticals. Karo Bio is listed on NASDAQ OMX Stockholm since 1998 (Reuters: KARO.ST).

The company has a project portfolio with innovative molecules that primarily target dyslipidemia, diabetes, inflammation, and women's health. In these areas, there are significant market opportunities and a clear need for pharmaceuticals with new mechanisms of action. Karo Bio develops compounds aimed at treating broad patient populations up to clinical proof of concept before out-licensing. In therapeutic niche areas, Karo Bio has the capacity to bring selected compounds into late stage clinical development and, potentially, to the market.

In addition to the proprietary projects, Karo Bio has three strategic collaborations with international pharmaceutical companies for development of innovative therapies for the treatment of common diseases.

Project portfolio

CEO'S COMMENTS ON THE FIRST SIX MONTHS OF 2009

During the first six months of 2009, we have put a lot of time and effort in continuing the development of our prioritized pharmaceutical projects as well as intensifying our discussions with potential partners - particularly around eprotirome.

In the current economic environment, Karo Bio faces many of the same challenges as other companies in our industry, which is a risky one by definition. We are fortunate in that eprotirome represents an entirely new approach to cardiovascular risk reduction and has a unique profile in producing simultaneous and powerful reductions of several independent risk factors for the development of atherosclerotic cardiovascular disease. It has the potential to become an important new drug for the treatment of dyslipidemia, and the market is big. Here we have a great opportunity to grow shareholder value.

As we have previously announced, it is our intention to conduct clinical Phase III studies with eprotirome within the framework of a partnership. We confirm being in due diligence phase with a number of respected companies. In collaboration with contract organizations and key opinion leaders, we have designed and cost-accounted a full clinical development program of eprotirome all the way to registration. This is now being discussed with potential partner companies in that it provides a better foundation for the financial undertakings that are needed for successful pharmaceutical development.

Eprotirome has received a lot of attention within academia and among key opinion leaders. Karo Bio's clinical phase IIb study with eprotirome as add-on to statin treatment was chosen and presented at the Annual American College of Cardiology Meeting in Orlando, Florida, at the end of March. Detailed data from the study has been submitted for publication in a renowned medical journal, and we are now awaiting their decision.

I am aware that many people are impatient and want to see a deal around eprotirome. The potential partners, however, must be allowed to take the time required for their decision processes. I remain steadfast in my conviction that eprotirome is novel, effective, needed – and "partnerable".

We have also had successes with our other projects; among them positive results from the phase I program for the anti-diabetes compound KB3305. We are evaluating all data, and will thereafter decide on the potential need for continued development of the pharmaceutical formulation and further clinical studies. A development program of KB3305 can be initiated when financing through a partnering deal around eprotirome is concluded.

Also, our exciting ER-beta program is making good progress. Here we develop a new platform that opens up for possibilities for treating a number of different diseases, among them diseases within the central nervous system (CNS) and cancer. It is our objective to select a candidate drug and thereafter take it through preclinical development. We have the intention to sign a partnering agreement around ER-beta for the treatment of CNS diseases before the initiation of clinical studies.

At the same time, our partners Merck, Wyeth and Zydus Cadila make progress within each respective project. We are firmly committed to contribute to these projects, each of which - if successful – has great potential impact on Karo Bio. Regarding the collaboration with Zydus Cadila, joint efforts have resulted in very interesting substances. These are now being optimized with respect to the properties needed for a substance to become a candidate drug.

In summary, we continue to see great potential – and great interest - for our prioritized projects.

Per Olof Wallström President and CEO

RESEARCH AND DEVELOPMENT

Eprotirome (KB2115) – dyslipidemia

The thyroid hormone is one of the body's own ways of regulating lipids in the blood. Most of this effect is exercised in the liver. Eprotirome is a novel, liver selective thyroid hormone receptor agonist for the treatment of dyslipidemia. Eprotirome has been well tolerated in the clinical studies that have lasted up to three months and in which eprotirome has been given as monotherapy, as add-on to statins, and as add-on to treatment with ezetimibe.

In clinical phase II studies, eprotirome has shown statistically significant and clinically relevant reductions of LDL-cholesterol, non-HDL cholesterol, apoB, triglycerides and lipoprotein(a). The effects are of the same magnitude whether eprotirome is given as monotherapy or as add-on to statins or ezetimibe, which means that eprotirome is suitable as an add-on for the large number of patients that do not reach their treatment targets with existing therapies. In summary, the data show that eprotirome is unique in producing simultaneous and powerful reductions of several independent risk factors for the development of atherosclerotic cardiovascular diseases. Karo Bio has also generated preclinical data that indicate that eprotirome has positive effects blood glucose. This would be of great value for treatment of type 2 diabetics with elevated blood lipids.

Treatment of dyslipidemia is initiated in order to reduce the risk for heart attack and death. The statins have become the largest pharmaceutical category in the world, and will continuously be the basis treatment of dyslipidemia. Eprotirome will compete with ezetimibe, nicotinic acid, fibrates, and omega-3 fatty acids. The market is expected to be driven primarily by specialist physicians with the purpose to control patient groups with high or very high risk. It is Karo Bio's estimate that the effect profile of eprotirome is very attractive compared to its competitors, and the potential for commercial success is good.

It is Karo Bio's intention to conduct clinical phase III studies within the framework of a partnership, and discussions with potential partners are progressing. As a preparation for clinical phase III studies, Karo Bio has initiated a dialogue with the FDA with the purpose to receive feedback on the accumulated preclinical and clinical documentation. Karo Bio is currently conducting limited and complementing preclinical and clinical phase I studies.

KB3305 – type 2 diabetes

KB3305 is a first in class liver selective glucocorticoid antagonist for treatment of type 2 diabetes, and the first substance of its kind to be tested in man. In preclinical studies, KB3305 has been shown to be both efficacious and safe.

Karo Bio has concluded a clinical phase I program with KB3305 that comprises three parts. The first part, where KB3305 was successfully given as increasing single doses to healthy volunteers, was reported in April 2008. In March 2009, Karo Bio reported top line results from the second and third parts of the clinical phase I program; repeated dosing to healthy volunteers and repeated dosing in a group of type 2 diabetes patients, respectively.

In the second part of the phase I program, a total of 24 healthy volunteers were treated with KB3305 at doses up to 450 mg per day for a period of five days. The tolerability and safety were satisfactory, and no serious adverse events were recorded. The pharmacokinetic profile of the compound was robust and predictable.

In the third part of the program, 14 patients with type 2 diabetes were treated with up to 450 mg KB3305 per day over a period of 14 days. A control group was given the corresponding placebo, and the allocation to each treatment group was randomized and blinded. Since KB3305 is a first-in-class compound, the purpose of this study was to establish proof of principle by showing that KB3305 has clinically relevant effects on fasting plasma glucose levels in diabetes patients.

The results show a pronounced, clinically relevant and statistically significant lowering of fasting plasma glucose levels compared to baseline as well as placebo, and also a statistically significant improvement in glucose tolerance tests. The side-effect profile was acceptable, and no serious adverse events were recorded. Before initiation of clinical phase II trials, Karo Bio will evaluate all existing data and decide on the potential need for further optimization of the pharmaceutical formulation.

ER-beta selective compounds – depression, women's health, cancer

The estrogen receptor subtype ER-beta offers many clinical possibilities in areas such as depression, inflammatory diseases, and women's health care, as well as certain forms of cancer. In Karo Bio's ERbeta program the project objectives regarding selectivity and bioavailability of lead compounds in the ER-beta program have been reached. The preclinical development of lead compounds is ongoing with the intention to select a candidate drug for CNS disorders. The effort to find a suitable partner within this indication area has begun. Karo Bio is evaluating additional clinical applications for its ER-beta selective ligands, for example in the field of cancer.

Collaboration with Wyeth Pharmaceuticals - Inflammation (LXR)

The collaboration with Wyeth Pharmaceuticals, initiated in 2001, targets the liver X receptor (LXR) for treatment of inflammatory disorders. In 2008, the collaboration was prolonged until August 31, 2009.

Collaboration with Merck & Co., Inc. - Women's Health (ER)

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

Collaboration with Zydus Cadila - Inflammatory diseases (GR)

In 2008, Karo Bio and Zydus Cadila, India, initiated a three-year research collaboration with the purpose to discover and develop novel compounds for treatment of inflammatory diseases. The compounds are designed for a selective activation of glucocorticoid receptors (GR). While conventional steroids are powerful anti-inflammatory agents they are also associated with a number of side effects which limit their use. The collaborative research program, therefore, aims to design novel compounds which maintain the anti-inflammatory effects of conventional steroids but with significantly reduced side effects.

The collaborative effort has generated a series of novel dissociated non-steroidal GR agonist lead compounds with high affinity to the glucocorticoid receptor. The promising in vitro profiles suggest that these compounds are as potent as conventional steroids but with a significantly reduced potential to cause side effects. The leads are currently undergoing various preclinical evaluations for identification of the IND candidate. Both parties share risks and rewards and cover their own costs for the collaboration program.

PROFIT/LOSS AND FINANCIAL POSITION

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

Revenue

Net sales for the six month period decreased to MSEK 4.4 as compared to MSEK 7.2 for the same period last year. The corresponding number for the second quarter was MSEK 2.2 (5.5). The reported net sales for the period consist of research payment from collaborations. The corresponding number for the same period last year includes a license fee of MSEK 3.7 from a non-exclusive license to specific intellectual property rights granted by Karo Bio to an undisclosed company.

Expenses

Operating expenses for the first six months decreased with MSEK 27.5 to MSEK 89.2 (116.7). This decrease is mainly due to reduced research and development expenses of MSEK 23.1 compared to last year. For the six month period, reported research and development expenses totaled MSEK -73.7 (-96.8), whereof the second quarter MSEK -31.9 (-46.6). Administrative expenses for the six month period amounted to MSEK -15.6 (-15.9), whereof the second quarter MSEK -6.8 (-7.9).

Profit/loss

Operating loss for the six month period amounted to MSEK 84.7 (109.5), an improvement of MSEK 24.8. The operating loss for the second quarter was MSEK 36.7 (53.1). Financial net for the six month period amounted to MSEK 2.0 (7.7). The reported loss decreased with MSEK 19.1 to MSEK 82.7 (101.8). The reported loss for the second quarter was MSEK 36.8 (49.9).

Capital investments

Capital investments in equipment for the six month period amounted to MSEK 0.1 (3.8).

Cash flow

Cash flow from operating activities for the first six months amounted to MSEK -79.6 (-105.7), whereof the second quarter MSEK -38.6 (-49.7).

Financial position

Cash and cash equivalents amounted to MSEK 62.3 (97.0) at the end of the period. Including other short-term investments with duration exceeding 90 days, these assets amounted to MSEK 156.3 (329.2), which corresponds to a change in total cash position of MSEK -86.4 during the six month period. The company's currently available financial assets are estimated to sustain operations, in accordance with present plan, to the second half of 2010. As stipulated in the company's finance policy, Karo Bio's funds are invested solely in low risk, interest-bearing assets.

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 136.7 after taking into account the loss for the period.

Loss per share for the six month period, based on the weighted average number of outstanding shares, amounted to SEK 0.71 (0.88), whereof the second quarter SEK 0.32 (0.43). The Group's equity ratio at the end of the period was 80.4 (83.3) percent and equity per share, based on fully diluted number of shares at the end of the period, was SEK 1.17 (2.51).

Organization

At the end of the period, Karo Bio had 68 (63) employees, of which 56 (58) fully employed and 4 substitutes are engaged in research and development.

Risk factors

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

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

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

There may be a need to turn to the capital market 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 possibility of achieving success in research and development projects undertaken. There is a risk that the required funding of the operations will not be available when needed or at a reasonable cost.

CONDENSED CONSOLIDATED INCOME STATEMENTS (KSEK)

	April-June		January-June		January December
	2009	2008	2009	2008	2008
Net sales	2,244	5,458	4,436	7,207	10,689
Operating expenses
Administrative expenses	-6,801	-7,920	-15,601	-15,928	-28,600
Research and development expenses	-31,851	-46,582	-73,730	-96,841	-169,428
Other operating income and expenses	-266	-4,010	159	-3,917	-3,372
	-38,918	-58,512	-89,172	-116,686	-201,400
Operating profit/loss	-36,674	-53,054	-84,736	-109,479	-190,711
Financial net	-155	3,140	2,009	7,720	15,914
Profit/loss after financial items	-36,829	-49,914	-82,727	-101,759	-174,797
Tax	-	-	-	-	-
PROFIT/LOSS FOR THE PERIOD	-36,829	-49,914	-82,727	-101,759	-174,797
Profit/loss for the period attributable to:
Shareholders of the parent company	-36,829	-49,914	-82,727	-101,759	-174,797
Depreciation included in operating expenses	-891	-1,375	-1,915	-2,821	-5,025
Profit/loss per share (SEK) *)
- based on weighted average number of shares outstanding, basic and diluted	-0.32	-0.43	-0.71	-0.88	-1.51
Number of shares outstanding (000)
- weighted average during the period	116,119	116,119	116,119	116,119	116,119
- at end of period, basic	116,119	116,119	116,119	116,119	116,119
- at end of period, fully diluted	116,594	116,594	116,594	116,594	116,594

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (KSEK)

	April-June		January-June		January December
	2009	2008	2009	2008	2008
PROFIT / LOSS FOR THE PERIOD	-36,829	-49,914	-82,727	-101,759	-174,797
Other comprehensive income for the year, net of tax	-	-	-	-	-
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD	-36,829	-49,914	-82,727	-101,759	-174,797
Total comprehensive income attributable to:
Shareholders of the parent company	-36,829	-49,914	-82,727	-101,759	-174,797

STATEMENT OF FINANCIAL POSITION (KSEK)

	June 30		December 31
	2009	2008	2008
Assets
Licenses and similar rights	1,121	2,275	1,698
Equipment	6,818	7,459	8,079
Other current assets	5,886	12,220	10,691
Other short-term investments	94,077	232,223	145,773
Cash and cash equivalents	62,258	96,964	96,948
TOTAL ASSETS	170,160	351,141	263,189
Shareholders' equity and liabilities
Shareholders' equity	136,747	292,512	219,474
Non-current liabilities	1,654	2,455	2,022
Current liabilities	31,759	56,174	41,693
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES	170,160	351,141	263,189

STATEMENT OF CASH FLOWS (KSEK)

	April-June			January-June
	2009	2008	2009	2008	2008
Operating activities
Operating profit/loss before financial items	-36,674	-53,054	-84,736	-109,479	-190,711
Depreciation	891	1,375	1,915	2,821	5,025
Other items not affecting cash flows	50	32	78	91	175
	-35,733	-51,647	-82,743	-106,567	-185,511
Financial items received and paid	5,135	2,009	8,012	4,454	15,597
Cash flow from operating activities before changes in working capital	-30,598	-49,638	-74,731	-102,113	-169,914
Changes in working capital	-8,025	-98	-4,895	-3,615	-16,473
Cash flow from operating activities	-38,623	-49,736	-79,626	-105,728	-186,387
Investing activities
Net investment in equipment	-215	-502	-721	-831	-3,798
Net investment in other short-term investments	45,720	61,876	45,657	4,359	87,969
Cash flow from investing activities	45,505	61,374	44,936	3,528	84,171
Financing activities
Cash flow from financing activities	-	-	-	-	-
Cash flow for the period	6,882	11,638	-34,690	-102,200	-102,216
Cash and cash equivalents at the end of the period	62,258	96,964	62,258	96,964	96,948

STATEMENT OF CHANGES IN EQUITY (KSEK)

Attributable to shareholders of the parent company	Share capital	Other contributed capital	Accumulated losses	Total
Amount at January 1, 2008	58,059	675,045	-338,841	394,263
Total comprehensive income for the period	-	-	-101,759	-101,759
Employee stock option program - value of employee services Amount at June 30, 2008	- 58,059	8 675,053	- -440,600	8 292,512
Amount at January 1, 2009	58,059	675,053	-513,638	219,474
Total comprehensive income for the period	-	-	-82,727	-82,727
Amount at June 30, 2009	58,059	675,053	-596,365	136,747

EQUITY DATA

	June 30		December 31
	2009	2008	2008
Equity ratio	80.4%	83.3%	83.4%
Equity per share at the end of period – basic, SEK	1.18	2.52	1.89
Equity per share at the end of period - diluted, SEK	1.17	2.51	1.88

Accounting and valuation principles

This interim report has been prepared in accordance with International Accounting Standards (IAS) 34 for interim reports and International Financial Reporting Standards IFRS as adopted by the EU. The accounting and valuation principles applied are unchanged compared to those applied in the Annual Report for 2008, except for the amended IAS 1 Presentation of financial statements. The revised IAS 1 has been applied by the Group as from January 1, 2009, with additional information regarding comprehensive income specified as a separate statement in conjunction with the consolidated income statement, and the statement of changes in equity containing solely transactions with the equity holders. A number of new or updated accounting standards and interpretations are applicable for financial years beginning January 1, 2009 or later. These accounting standards and interpretations are deemed not to have a significant impact on the consolidated financial statements other than presentational or disclosures presented in the reports. In addition, there are certain accounting standards and interpretations that are not relevant to Karo Bio.

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

Scheduled releases of financial information

• Interim report January-September 2009 October 22, 2009
• Year-end report 2009 February 9, 2010

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

Legal disclaimer

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

The Board of Directors and the President and CEO certify that the Interim Report gives a true and fair overview of the Parent Company's and Group's operations, their financial position and results of operations, and describes significant risks and uncertainties facing the Parent Company and other companies in the Group.

Huddinge, July 14, 2009

Leon E. Rosenberg Chairman	Per Olof Wallström President
Birgit Stattin Norinder	Bo Håkansson	Johan Kördel
Board member	Board member	Board member
Jon Risfelt	Bo Carlsson	Johnny Sandberg
Board member	Board member	Board member

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

Analyst coverage

ABG Sundal Collier, Stockholm Alexander Lindström

Danske Markets, Stockholm Mattias Häggblom

D. Carnegie, Stockholm Camilla Oxhamre

Handelsbanken Capital Markets, Stockholm Erik Hultgård

Nordea Markets, Stockholm Patrik Ling

Redeye, Stockholm Björn Fahlén

Independent analysts Stefan Wikholm Peter Östling

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

The information is of a nature which Karo Bio shall need to disclose according to the Securities Market Act. The information was disclosed July 14, 2009, 08:30 am