Karo Pharma AB — Interim / Quarterly Report 2010

Apr 22, 2010

Press release April 22, 2010

INTERIM REPORT JANUARY–MARCH 2010

KARO BIO'S PROJECTS ARE PROGRESSING

The first quarter 2010 in brief

• Net sales for the period amounted to MSEK (2.2)
• Net loss for the period amounted to MSEK 40.5 (45.9)
• Loss per share amounted to SEK 0.26 (0.36)
• Cash flow from operating activities for the period amounted to MSEK -43.0 (-41.0). Cash, cash equivalents and other short-term investments totaled MSEK 192.7 (200.4) at the end of the period
• On March 11, The New England Journal of Medicine published clinical phase II results on eprotirome and its ability to further reduce serum LDL cholesterol levels in statin-treated patients
• Fredrik Lindgren was appointed new President and CEO of Karo Bio and will on April 23 succeed Per Olof Wallström, who has resigned after five years with the company

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

Selected financial information in summary

(MSEK)	January ­ March	January­December
	2010	2009	2009
Net sales	-	2.2	5.9
Operating expenses	-40.7	-50.3	-163.0
- whereof of R&D expenses	-32.6	-41.9	-132.4
Profit/loss for the period	-40.5	-45.9	-154.6
Profit/loss per share (SEK)	-0.26	-0.36	-1.31
Cash flow from operating activities	-43.0	-41.0	-146.9
Cash and cash equivalents and other short term investments	192.7	200.4	237.2

About Karo Bio

Karo Bio is a drug discovery and development company specializing in endocrinology and nuclear receptors as target proteins for the development of novel pharmaceuticals.

The company has a project portfolio with innovative pharmaceutical compounds that primarily target dyslipidemia, CNS disorders, 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 has the capacity to bring selected compounds in therapeutic niche areas into late stage clinical development and, potentially, registration, while the intention is to out-license compounds aimed at treating broad patient populations at the latest when clinical proof of concept has been obtained in clinical phase II-studies.

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

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

Project portfolio

THE CEO'S COMMENTS ON THE FIRST QUARTER OF 2010

During the first months of 2010, Karo Bio's prioritized projects continued to develop according to plan. On March 11, the well-renowned scientific publication New England Journal of Medicine published results from the clinical phase II study, carried out in 2008, of Karo Bio's pharmaceutical compound eprotirome when given as an add-on to statins. This article made great impact in media all over the world.

Regulatory issues are in focus in the preparations of eprotirome for clinical phase III studies. We have an ongoing dialogue with the US regulatory authority FDA, and we have initiated a series of meetings with the regulatory authorities in Europe. An important question for potential partners in the continued development of eprotirome is what the regulatory authorities are expected to demand to give the drug a market approval. To establish a business plan with costs, timelines and expected revenues – parameters needed for an estimation of the value of the project - there must be an agreed development plan that describes what patient groups the compound is developed for, and the effects and safety demands made by the authorities for that patient group. An attractive business plan can also be based on a more limited indication. An initial niche indication can potentially be extended to broader patient groups when more data is gradually generated. Depending on the agreements with the authorities, a clinical phase III program can be initiated in either Europe or the US, and at later stage be extended.

Along with the positive attention for eprotirome, the development program that we have built around the estrogen receptor ER-beta continues to receive much interest from both the research community and potential partners. The preclinical work to document the safety of our candidate drug KB9520 is ongoing. Our ambition is to compile this documentation at the end of 2009 and prepare for initiation of clinical development during the first half of 2011. In parallel, the evaluation of follow-up compounds for new projects within the ER-beta program continues. Since there are many potential clinical applications for ER-beta selective compounds, we see exciting future opportunities to develop drugs in several important disease areas.

In addition to Karo Bio's internal ER-beta program, we have a long estrogen receptor collaboration with Merck, where the compound MK-6913 is in clinical phase II development.

Karo Bio has both the financial basis and the R&D capabilities for a continued successful development of the company's projects. It is therefore with great confidence that I hand over the steering wheel to Karo Bio's incoming President and CEO Fredrik Lindgren when I now step down after 38 years in the pharmaceutical industry, whereof five rewarding years at Karo Bio.

Per Olof Wallström

President and CEO

SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD

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

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's profile is unique. In one single compound, powerful reductions of several independent risk factors for the development of atherosclerotic cardiovascular diseases are combined.

In the 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. Karo Bio has also generated preclinical data that indicate that eprotirome has positive effects on blood glucose. This would be of additional value when treating type 2 diabetics suffering from elevated blood lipids. Eprotirome has been well tolerated in the clinical studies of up to three months duration.

The treatment of dyslipidemia is initiated to reduce the risk for heart attack and stroke. The efficacy profile of eprotirome suggests that the compound is suitable as an add-on treatment for the large number of patients that do not reach their treatment targets with existing therapies. The statins have become the largest pharmaceutical category in the world and will likely continue to form the first line treatment for dyslipidemia. Eprotirome is expected to be used primarily as add-on to statins and to compete with ezetimibe, nicotinic acid, fibrates, omega-3 fatty acids and new specialist products. The market is projected to be driven primarily by the specialist physicians treating patient groups with high or very high cardiovascular risk. It is Karo Bio's belief that the effect profile of eprotirome is very attractive compared to its competitors, and the potential for commercial success is good.

The compilation and analysis of data from the supplementary preclinical and clinical studies carried out in 2009 is ongoing. The preliminary analysis of data from these studies looks as expected and supports eprotirome's continued development.

Karo Bio continues to have discussions with potential partners for eprotirome. In parallel, regulatory aspects of the continued clinical development are being investigated. It is important to receive a clarification of what the regulatory authorities, primarily the FDA in the US and EMA in Europe, can be expected to require for an eventual marketing approval of the drug. The expected regulatory demands define the size and cost of the phase III program, as well as the initial labeling of the drug. For a successful partnership, it is important to define a clear development path that is agreed with the authorities, and for which costs, timelines, risks and opportunities can be estimated. The timeline for the dialogue and information exchange with the authorities is dependent on the clarification of all outstanding questions in a way that satisfies both parties.

ER-beta selective compounds – a platform with many clinical opportunities

The estrogen receptor (ER) is activated by the female sex 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 risk for uterine and breast cancer as well as an increased cardiovascular risk. These risks are mainly linked to ER-alpha, while ER-beta seems to mediate the positive effects of estrogen without these side effects. Karo Bio's efforts to develop ER-beta selective compounds have resulted in an exciting platform with several clinical opportunities.

Karo Bio has initially chosen to focus on depression. The compound KB9520 was nominated in October 2009 as Karo Bio's first candidate drug within the ER-beta program. The preclinical development process, which is expected to take 12 to 14 months, is expected to be concluded at the end of 2010. The goal is to negotiate a partnering deal for ER-beta within the CNS area before entering into clinical trials.

In parallel, Karo Bio continues to document follow-up compounds within the ER-beta program and to investigate other potential therapy areas. Besides the CNS area, Karo Bio's ER-beta program has the potential within e.g. certain forms of cancer, urology, gynecology, pain and inflammation.

KB3305 – a glucocorticoid receptor antagonist

KB3305 is a first in class liver selective glucocorticoid receptor antagonist for treatment of type 2 diabetes, and the first compound of its kind to be tested in man. In preclinical studies, KB3305 has been shown to be both efficacious and safe. Karo Bio has generated very positive proof-of-principle data from the clinical phase I program. In 2009, the company took the decision not to do further inhouse development of KB3305 for the treatment of type 2 diabetes. The competitive situation within this field, added requirements imposed by the FDA and internal resource prioritizations made the company come to this decision. Other potential therapy areas of use for the compound are being evaluated.

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

The collaboration with Merck regarding estrogen receptors (ER) in the field of women's health was initiated in 1997. The joint drug discovery phase in the collaboration was concluded in 2002. In December 2009, Merck initiated a clinical phase IIa study with MK-6913, the leading candidate drug in development within the collaboration. The study will assess the safety, tolerability, and efficacy of MK-6913 for the treatment of moderate-to-very-severe vasomotor symptoms (hot flashes/hot flushes) in postmenopausal women. Under the terms of the collaboration agreement, Karo Bio has the rights to milestone payments from Merck based upon the further successful clinical development and final drug approval as well as royalties on future drug sales. The initiation of clinical phase II development in December 2009 did not trigger a milestone payment to Karo Bio.

Collaboration with Wyeth Pharmaceuticals - Inflammation (LXR)

The collaboration with Wyeth (now acquired by Pfizer) was initiated in 2001 and targets the liver X receptor (LXR) for the treatment of inflammatory disorders. From September 2009, Wyeth takes on full responsibility for all research and development activities under the drug discovery collaboration.

Collaboration with Zydus Cadila - Inflammatory diseases (GR)

In early 2008, Karo Bio and the Indian pharmaceutical company Zydus Cadila initiated a three-year research collaboration to develop novel compounds for the treatment of inflammatory diseases. The compounds are designed for the activation of glucocorticoid receptors (GR) in a selective manner. While conventional steroids are powerful anti-inflammatory agents, they are also associated with a number of side effects that limit their use. The aim is to design novel compounds that maintain the anti-inflammatory effects of conventional steroids but with significantly reduced side effects.

The collaboration has generated a series of novel anti-inflammatory GR agonist lead compounds with high affinity to GR. Promising in vitro data suggest that these compounds are as potent in models of inflammation as conventional steroids, but with a significantly lower probability to cause side effects. Preclinical evaluation is ongoing for the identification of a candidate drug. Both parties share risks and rewards and cover their own costs within 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 quarter was MSEK - (2.2). The reported net sales for the same period last year consist of research payment from collaborations.

Expenses

Operating expenses for the quarter decreased by MSEK 9.6 to MSEK 40.7 (50.3). This decrease is mainly due to reduced research and development expenses of MSEK 9.3 compared to last year. For the quarter, reported research and development expenses totaled MSEK 32.6 (41.9). Administrative expenses for the period amounted to MSEK 8.2 (8.8).

Profit/loss

Operating loss for the quarter amounted to MSEK 40.7 (48.1), which is an improvement of MSEK 7.4. Financial net for the quarter amounted to MSEK 0.2 (2.2). The reported loss for the quarter decreased with MSEK 5.4 to MSEK 40.5 (45.9).

Capital investments

Capital investments in equipment for the quarter amounted to MSEK 0.1 (0.9).

Cash flow

Cash flow from operating activities for the quarter amounted to MSEK -43.0 (-41.0).

Financial position

Cash and cash equivalents amounted to MSEK 71.9 (55.4) at the end of the period. Including other short-term investments with duration exceeding 90 days, these assets amounted to MSEK 192.7 (200.4). At the beginning of the year, cash and cash equivalents including other short-term investments totaled MSEK 237.2, which implies a change in total cash position of MSEK -44.5 during the period. The company's currently available financial assets are estimated to sustain operations, in accordance with present plan, to the second half of 2011. 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 77.4. The total number of shares amounted to 154,825,589 shares with a ratio value of SEK 0.50. Total consolidated shareholders' equity amounted to MSEK 174.7 after taking into account the loss for the period.

Loss per share for the quarter, based on the weighted average number of outstanding shares, amounted to SEK 0.26 (0.36). The Group's equity ratio at the end of the period was 85.9 (80.9) percent and equity per share, based on fully diluted number of shares at the end of the period, was SEK 1.12 (1.36).

Organization

At the end of the period, Karo Bio had 67 (67) employees, of whom 58 (58) are engaged in research and development, 4 (3) in business development and intellectual property rights and 5 (6) in administrative roles.

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 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 can not 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 that planned studies are not approved. 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 and/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 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)

	January-March		January-December
	2010	2009	2009
Net sales	-	2,192	5,891
Operating expenses
Administrative expenses	-8,241	-8,800	-30,954
Research and development expenses	-32,581	-41,879	-132,403
Other operating income and expenses	128	425	343
	-40,694	-50,254	-163,014
Operating profit / loss	-40,694	-48,062	-157,123
Financial net	230	2,164	2,567
Profit / loss after financial items	-40,464	-45,898	-154,556
Tax	-	-	-
PROFIT / LOSS FOR THE PERIOD	-40,464	-45,898	-154,556
Profit / Loss for the period attributable to:
Equity holders of the parent	-40,464	-45,898	-154,556
Depreciation included in operating expenses	-881	-1,024	-3,655
Profit / loss per share attributable to equity holders of the parent during the period (SEK) *)
- based on weighted average number of shares outstanding, basic and diluted	-0,26	-0.36	-1.31
Number of shares outstanding (000)
- weighted average during the period	154,826	127,197	117,932
- at end of period, basic	154,826	127,197	154,826
- at end of period, fully diluted	155,339	127,717	155,339

*) 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)

	January-March		January-December
	2010	2009	2009
PROFIT / LOSS FOR THE PERIOD	-40,464	-45,898	-154,556
Other comprehensive income for the year, net of tax	-	-	-
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD	-40,464	-45,898	-154,556
Total comprehensive income attributable to:
Owners of the parent company	-40,464	-45,898	-154,556

STATEMENT OF FINANCIAL POSITION (KSEK)

	March 31		December 31
	2010	2009	2009
Assets
Licenses and similar rights	256	1,409	545
Equipment	5,312	7,434	5,788
Other current assets	5,111	5,400	12,320
Other short-term investments	120,786	145,038	158,013
Cash and cash equivalents	71,896	55,376	79,171
TOTAL ASSETS	203,361	214,657	255,837
Shareholders' equity and liabilities
Shareholders' equity	174,695	173,576	215,159
Non-current liabilities	1,078	1,840	1,273
Current liabilities	27,588	39,241	39,405
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES	203,361	214,657	255,837

STATEMENT OF CASH FLOWS (KSEK)

		January-March	January-December
	2010	2009	2009
Operating activities
Operating profit / loss before financial items	-40,694	-48,062	-157,123
Depreciation	881	1,024	3,655
Other items not affecting cash flows	-	28	82
	-39,813	-47,010	-153,386
Financial items received and paid	1,459	2,877	10,182
Cash flow from operating activities before changes in working capital	-38,354	-44,133	-143,204
Changes in working capital	-4,608	3,130	-3,720
Cash flow from operating activities	-42,962	-41,003	-146,924
Investing activities
Net investment in equipment	-313	-506	-1,238
Net investment in other short-term investments	36,000	-63	-19,856
Cash flow from investing activities	35,687	-569	-21,094
Financing activities
Share Issue	-	-	150,241
Cash flow from financing activities	-	-	150,241
Cash flow for the period	-7,275	-41,572	-17,777
Cash and cash equivalents at the end of the period	71,896	55,376	79,171

STATEMENT OF CHANGES IN EQUITY (KSEK)

Attributable to owners of the parent company	Share capital	Other contributed capital	Accumulated losses	Total
Balance at January 1, 2009	58,059	675,053	-513,638	219,474
Loss for the period	-	-	-45,898	-45,898
Balance at March 31, 2009	58,059	675,053	-559,536	173,576
Balance at January 1, 2010	77,412	805,941	-668,194	215,159
Loss for the period	-	-	-40,464	-40,464
Balance at March 31, 2010	77,412	805,941	-708,658	174,695

EQUITY DATA

	March 31		December 31
	2010	2009	2009
Equity ratio	85.9%	80.9%	84.1%
Equity per share at the end of period – basic, SEK	1.13	1.36	1.39
Equity per share at the end of period - diluted, SEK	1.12	1.36	1.39

Accounting and valuation principles

This interim report has been prepared in accordance with International Accounting Standards 34 for interim reports and International Financial Reporting Standards IFRS as adopted by the EU. The accounting and valuation principles applied are unchanged compared to those applied in the Annual Report for 2009. A number of new or updated accounting standards and interpretations are applicable for financial years beginning January 1, 2010 or later. These accounting standards and interpretations are deemed not to have a significant impact on the consolidated financial statements other than, potentially, presentational or on the disclosures presented in the reports. In addition, there are certain accounting standards and interpretations that are currently 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 April-June 2010	July 13, 2010
	Interim report July-September 2010	October 21, 2010

Year-end report 2010 February 9, 2011

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, regulatory and political risks.

Huddinge, April 22, 2010

Per Olof Wallström President and CEO

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

Pharmium Securities Frédéric Gomez

Redeye, Stockholm Klas Palin

Independent analyst Stefan Wikholm

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

The information is of a nature that Karo Bio shall need to disclose according to the Securities Market Act. The information was disclosed on April 22, 2010, 08:30 am