INTERIM REPORT JANUARY–JUNE 2012

Cost reductions reach full impact in year's second half

Net sales increased to MSEK 16.5 (0.0), whereof the second quarter increased to MSEK 8.2 (0.0)
Net loss improved to MSEK 76.7 (124.9), whereof the second quarter improved to MSEK 22.6 (77.2)
Loss per share was SEK 0.20 (0.32), whereof the second quarter SEK 0.06 (0.20)
Cash flow from operating activities was MSEK -82.6 (-112.7), whereof the second quarter MSEK -41.0 (-65.2)
Cash and cash equivalents and other short-term investments totaled MSEK 75.4 (245.8) at the end of the period.
Cost reductions and secured revenue are expected to reduce the negative cash flow to MSEK 3-4 per month by year end
Implemented cost reductions and secured income are expected to reduce net cost to MSEK 11-13 per quarter by year end
The Annual General Meeting elected Göran Wessman as Chairman and Per Bengtsson, Christer Fåhraeus, Per-Anders Johansson and Anders Waas as Board members

Conference call/audiocast today at 9.30 CET

CEO Per Bengtsson presents the report today at 9.30 CET in an audiocast, held in Swedish, available via a link on www.karobio.se and telephone: +46 8 505 598 09 or +44 207 750 9950.

For more information, please contact: Per Bengtsson, Chief Executive Officer Telephone:+46 8 608 6020 or +46 734 474 128 E-mail: [email protected]

För ytterligare information, vänligen kontakta:

Karo Bio AB (publ) Novum, 141 57 Huddinge, Sweden Telephone: +46 8 608 60 00 Facsimile: +46 8 774 82 61 Corp. reg. no. 556309-3359 Website: www.karobio.com

The information in this report is such that Karo Bio is required to disclose under the Swedish Securities Market Act. The information was disclosed on July 13, 2012, 08:30 CET.

Summary of key financial information

(MSEK)		April-June	January -June		January-December
	2012	2011	2012	2011	2011
Net sales	8.2	-	16.5	-	-
Operating expenses	-31.3	-78.9	-94.4	-128.4	-231.2
- of which R&D expenses	-23.9	-64.6	-78.6	-105.0	-189.3
Net earnings for the period	-22.6	-77.2	-76.7	-124.9	-226.6
Earnings per share (SEK)	-0.06	-0.20	-0.20	-0.32	-0.59
Cash flow from operating activities	-41.0	-65.2	-82.6	-112.7	-198.3
Cash and cash equivalents and other short term investments at the period end	75.4	245.8	75.4	245.8	158.5

About Karo Bio

Karo Bio is a research and development company focused on innovative drugs for important medical needs. The foundation for operations is a unique knowledge of nuclear receptors as target proteins for the development of novel pharmaceuticals and the related mechanisms of action, as well as experience and expertise in preclinical and clinical development.

Karo Bio is active in preclinical development in the areas of neuropsychiatry, inflammation, autoimmune diseases, cancer and women's health. The company has a number of strategic collaborations with big pharma.

Karo Bio is based in Huddinge, Sweden. The company has around 44 employees and is listed on NASDAQ OMX Stockholm (Reuters: KARO.ST).

CEO COMMENTARY

From having had a very high capital expenditure in 2011, we have in the first half of this year managed to significantly reduce our losses. This is largely due to the fact that we have terminated an expensive project but also because we have carefully reviewed all of our costs. This effort is now entering a second phase where we are consciously working to create more sources of revenue, thereby becoming a self-financed company.

The foundation for the business is and should be the knowledge and skills we have built up over many years in the field of nuclear receptors. This valuable cutting edge expertise can be exploited to develop new drugs in many different areas. As a result of the structural transformation that is taking place in the industry, the big pharmaceutical companies have less niche expertise, making us an attractive partner for them provided that we focus our efforts on areas that they find attractive.

At the same time, the frontier of nuclear receptors is moving forward, paving the way for more drug development projects. The fact that the knowledge in our field is increasing also means that we have a better understanding of the terrain on which we are setting out. With more knowledge we can enhance our competitiveness, but it also has the more tangible consequence of reducing the risk in our portfolio. This is one of the major keys to the transformation of Karo Bio - by reducing the risks in our operations we increase our commercial capability.

We are reducing the risks in our operations in several ways. To illustrate this, we can take a look at RORgamma where we take advantage of several factors. One of these factors is that we can work with human cells at an early stage since white blood cells are easily available. Thus we gain an advantage in being able to disregard the risk that studies in animals are not relevant in humans. Another favorable factor for RORgamma is that there are already clinical results with a related treatment (biologics), which means that our project rests on a more reliable foundation. We would love to have more projects with similar conditions as for RORgamma and have found a promising opportunity in NURR-1, where the risk profile, area of expertise and methods are similar. The goal of the project, where we have conducted a preliminary study, is to develop a drug that increases the number of regulatory T cells, thereby improving the health status of patients with autoimmune diseases. Again, it is possible to use human cells in early testing and there is already clinical evidence supporting the treatment principle. Altogether, the project has an attractive risk profile compared to many others.

We believe that the big pharmaceutical companies are attracted to projects with this type of risk profile. And in my opinion the agreement with Pfizer on RORgamma shows this to be the case. Giving priority to projects with this type of risk profile thus strengthens the commercial momentum in our project portfolio.

Karo Bio must now optimize the positioning of the project portfolio with great resolve. The aim is to establish more partnerships and of course it is also important to deliver within the partnerships we already have. As we succeed, we can carry one or more projects with the appropriate profile a little further on our own and thus build shareholder value more quickly.

Alongside the development process, as previously mentioned, much of this first half year has been devoted to making cost-adjustments in the organization. As a result of this process several talented employees have unfortunately had to leave the company. Hopefully, the measures that have been taken will create conditions that will allow us to able to expand our business in the future from a sound financial base. The goal must be for Karo Bio to be able to finance its operations by means other than through new share issues.

As we once again participate in the cancer field with ERbeta, the intention is that this should not primarily be financed by Karo Bio's available liquidity. We are transferring the project to a subsidiary and moving the operations to Texas in order to apply for grants and also attract new investors directly to the subsidiary. This reduces the need for Karo Bio to finance the project independently.

Another approach to secure funding is to seek cooperation for our projects at an early stage. This could be research agreements similar to the one we have with Pfizer for RORgamma where they reimburse us for the research we are conducting with the intention to eventually take over the project on their own. They could also be similar to the agreement we had with Zydus Cadila for GR inflammation where we developed an area together for a period of time.

We have come a long way in creating a sound financial base and we believe that a neutral cash flow is within reach. We will have higher costs for eprotirome for some time to come, but the forecast for the decommissioning costs has been reduced from the initial estimate of 55 million SEK to 35 million SEK. Everything that we have done so far means that by the end of the year, without any further agreements or grants, we anticipate a net cost level of MSEK 11-13 per quarter.

With an additional agreement, we should therefore be getting close to a neutral cash flow. The project that is closest to a possible agreement at this time is our ERbeta project for MS. We will reach a crucial stage this fall when we receive additional results. The goal is to show that our molecules counteract and prevent the destruction of nerve tissue that occurs in the progressive phase of MS, for which there is currently no treatment. The dialogue with interested parties continues.

We also expect to be able to fund our operations to some extent through soft money. We have already received some smaller amounts, and I expect that grant funding from 2012 onwards will gradually grow to a supplementary source of funding for the company.

In the long term, we of course aim much higher than to be able to balance our finances. We want to create substantial value for our shareholders. With the projects we have today and the new approach we are applying for funding and risk management, we have laid a good foundation to achieving this.

Per Bengtsson CEO

KARO BIO'S PROJECT PORTFOLIO

								Clinical Development
Program	Partner	Compound	Indication	Discovery	Preclinical	Phase 1	Phase 2	Phase 3
ER	Merck & Co	MK6913	Womens' health
		KB9520	Cancer
			Multiple sclerosis (MS)
RORgamma	Pfizer		Autoimmune disease
GR			Inflammation
LXR	Pfizer		Inflammation

ERbeta selective compounds – a platform with many opportunities

The estrogen receptor (ER) is activated by estrogen and regulates a number of functions in the body. Estrogen has several 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 thrombosis. These risks are mainly linked to the estrogen receptor's ERalpha subtype, while ERbeta, which Karo Bio was involved in discovering in the 1990's, seems to account for many of the positive effects of estrogen without the side effects. For ERbeta selective compounds there are clinical opportunities within a number of fields, including neuropsychiatry, certain forms of cancer, women's health and urology.

Karo Bio's efforts in the field have resulted in a world-leading position and a platform of many promising ERbeta selective compounds. These have slightly different properties and may thus be suitable for different indications.

The first drug candidate within the program KB9520 has shown good efficacy in preclinical models for certain forms of cancers. The KB9520 project is being prepared to transfer into a separate subsidiary with its own funding and a focus on cancer. The operations are planned to be placed in Houston, where the state of Texas is investing resources to create a good research environment for new forms of cancer treatment. Karo Bio is working on a grant application to be submitted in August 2012.

In 2011, Karo Bio decided to focus its development efforts primarily on the autoimmune disease multiple sclerosis (MS). In preclinical models, ERbeta agonists have demonstrated high efficacy in the 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 agonists proves capable of repairing damaged myelin also in patients this will represent a significant breakthrough in the treatment of MS patients, where damaged myelin leads to symptoms of the illness and disability. Karo Bio is currently focusing on conducting supplementary animal studies to confirm the opportunity within the MS indication.

One of Karo Bio's main priorities is to enter into commercial research collaborations around the company's ERbeta selective agonists. Karo Bio has entered into Material Transfer Agreements (MTAs) with a number of international pharmaceutical companies under which the partner companies are evaluating substances for several different indications. This has resulted in commercial discussions.

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

A collaboration with Merck (known as MSD outside the US and Canada) regarding estrogen receptors was initiated in 1997 and the joint drug discovery phase was concluded in 2002. In 2010, Merck

terminated the development of MK-6913 for hot flashes in postmenopausal women due to lack of efficacy. Merck is evaluating options for future studies involving MK-6913.

RORgamma – a new opportunity to treat 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 a research program 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.

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 took on the responsibility to fully finance all research and will have exclusive rights for products developed as a result of the collaboration. The agreement can provide Karo Bio with up to USD 217 million (approx. MSEK 1,500) in research funding and milestones, of which USD 10-14 million in 2012 and 2013.

GR inflammation – could be new broad anti-inflammatory drug

Glucocorticoids are used to treat various inflammatory diseases such as rheumatoid arthritis, inflammatory bowel disease, psoriasis and asthma. Glucocorticoids are powerful anti-inflammatory drugs but side effects on for example metabolism and bone have restricted their use. The separation of the beneficial effects from the other side effects of glucocorticoids has long been regarded as medically important but at the same time hard to achieve. Hence there is a large need for safer treatments and a significant commercial market.

Karo Bio's project aims to design novel selective glucocorticoids that have as powerful antiinflammatory properties as conventional glucocorticoid steroids, such as cortisone and other similar substances, but with significantly lower side effects and thereby the potential for broader use. Karo Bio has discovered a previously undescribed mechanism of glucocorticoid regulation. Compounds based on this discovery are expected to have a significantly improved side effect profile compared to conventional steroidal therapy while maintaining the desired anti-inflammatory effect. Preclinical evaluation is ongoing to identify which compounds are best suited for further development as candidate drugs.

Between 2008 and the first quarter 2012, the project was conducted in collaboration with the Indian pharmaceutical company Zydus Cadila, under which the parties assumed their own costs and shared potential revenue. The parties preferred different paths in the continued development and therefore decided to terminate their joint research and development. Karo Bio continues to develop the project on its own.

NURR1 – a new way to treat autoimmune diseases

In the spring of 2012, Karo Bio started preparatory development work on the receptor NURR1. The receptor controls the development of regulatory T cells (Treg) that monitor and control other T-cell activity. A low number of Treg cells has been associated with autoimmune diseases such as multiple sclerosis, rheumatoid arthritis, type 1 diabetes and lupus. The research is still at a very early stage.

LXR inflammation – collaboration with Pfizer

The collaboration with Wyeth LCC, today a wholly owned subsidiary of Pfizer Inc., was initiated in 2001 and targets the liver X receptor (LXR) for the treatment of inflammatory disorders. From September 2009, Wyeth took on full responsibility for all research and development activities under the collaboration.

FINANCIAL REPORT

Consolidated earnings

Net sales for the six month period increased to MSEK 16.5 (0.0), whereof the second quarter increased to MSEK 8.2 (0.0). Operating expenses for the first six months decreased by MSEK 34.0 to MSEK 94.4 (128.4) of which MSEK 33 are directly contributable to the termination of the eprotirome program. Research and development expenses accounted for 83 per cent of the costs for the six month period, after a decrease to MSEK 78.6 (105.0), whereof the second quarter MSEK 23.9 (64.6). Since a large portion of the research and development expenses are external project related expenses, variations between reporting periods may be significant.

Administrative expenses for the six month period decreased to MSEK 15.9 (22.4), whereof the second quarter MSEK 7.4 (13.2). The consolidated operating loss for the six month period decreased to MSEK 78.0 (128.4). The operating loss for the second quarter was MSEK 23.1 (78.9). Financial net for the six month period amounted to MSEK 1.3 (3.5). Net loss for the six month period improved to MSEK 76.7 (124.9), whereof the second quarter improved to MSEK 22.6 (77.2)

Capital investments and consolidated cash flow

Capital investments for the six month period amounted to MSEK 0.5 (1.2) and comprise mainly investments in laboratory and IT equipment.

Cash flow from operating activities for the six month period was MSEK -82.6 (-112.7), whereof the second quarter MSEK -41.0 (-65.2).

Financial position

Consolidated cash and cash equivalents amounted to MSEK 14.4 (40.4) at the end of the period. Including other short-term investments with durations exceeding 90 days, liquid assets amounted to MSEK 75.4 (245.8), which corresponds to a change in total cash position of MSEK -83.1 (-149.2) during the six month period. As stipulated in the company's finance policy, Karo Bio's funds are invested solely in low risk, interest-bearing assets.

The equity credit facility entered into in connection with the rights issue 2010/2011 was adjusted during the third quarter 2011 so that it can be utilized at a lower share price than previously. At current share price, the equity credit facility cannot be utilized. The mandate to use the credit facility will be submitted to the General Meeting for approval on an annual basis.

Total consolidated shareholders' equity amounted to MSEK 39.3 (217.6), taking into account the period's earnings. In light of the current nature, scope and risks of the business, the General Meeting in April 2012 decided to reduce the share capital to MSEK 7.7. In total, there were 387,063,972 shares outstanding, each with a par value of SEK 0.02.

Loss per share amounted to SEK 0.20 (0.32). The Group's equity ratio at the end of the period was 45.4 (84.2) per cent and equity per share, based on fully diluted number of shares at the end of the period, was SEK 0.10 (0.56).

Employees

At the end of the period, Karo Bio had 44 (69) employees, of whom 37 (61) are engaged in research and development, 2 (3) in business development and intellectual property rights and 5 (5) in administrative roles.

CONSOLIDATED INCOME STATEMENT SUMMARY (KSEK)

	April-June			January-June
	2012	2011	2012	2011	2011
Net sales	8,167	-	16,476	-	-
Operating expenses
Administration	-7,420	-13,188	-15,915	-22,401	-40,797
Research and development	-23,934	-64,621	-78,596	-105,041	-189,321
Other operating income/expenses	95	-1,044	78	-993	-1,041
	-31,259	-78,853	-94,433	-128,435	-231,159
Operating profit/loss	-23,092	-78,853	-77,957	-128,435	-231,159
Financial net	474	1,638	1,297	3,523	4,533
Earnings after financial items	-22,618	-77,215	-76,660	-124,912	-226,626
Tax	-	-	-	-	-
NET EARNINGS FOR THE PERIOD	-22,618	-77,215	-76,660	-124,912	-226,626
Net earnings for the period attributable to:
Shareholders of the parent company	-22,618	-77,215	-76,660	-124,912	-226,626
Depreciation included in operating expenses	-413	-614	-970	-1,215	-2,409
Earnings per share (SEK) 1)
- based on weighted average number of shares outstanding, basic and diluted	-0.06	-0.20	-0.20	-0.32	-0.59
Number of shares outstanding (000)
- weighted average during the period	387,064	387,064	387,064	387,064	387,064
- at end of period, basic	387,064	387,064	387,064	387,064	387,064
- at end of period, fully diluted	387,064	387,064	387,064	387,064	387,064

1) Last day for exercising the stock options from the latest program was in April 2011. Consequently there is no longer any dilution of loss per share.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (KSEK)

	April-June		January-June		January December
	2012	2011	2012	2011	2011
NET EARNINGS FOR THE PERIOD	-22,618	-77,215	-76,660	-124,912	-226,626

Other comprehensive income for the year, net of tax	-	-	-	-	-

TOTAL COMPREHENSIVE INCOME FOR THE PERIOD	-22,618	-77,215	-76,660	-124,912	-226,626

Total comprehensive income attributable to:
Shareholders of the parent company	-22,618	-77,215	-76,660	-124,912	-226,626

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (KSEK)

		June 30	December 31
	2012	2011	2011
Assets
Equipment	4,545	4,528	5,558
Other current assets	6,428	8,015	7,409
Financial assets at fair value through profit or loss	60,975	205,418	114,780
Cash and cash equivalents	14,439	40,387	43,753
TOTAL ASSETS	86,387	258,348	171,500

Shareholders' equity and liabilities
Shareholders' equity	39,262	217,636	115,922
Current liabilities	47,125	40,712	55,578
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES	86,387	258,348	171,500

CONSOLIDATED STATEMENT OF CASH FLOWS (KSEK)

	April-June		January-June		January December
	2012	2011	2012	2011	2011
Operating activities
Operating income/loss before financial items	-23,092	-78,853	-77,957	-128,435	-231,159
Depreciation	413	614	970	1,215	2,409
Other items not affecting cash flows	-	-	-	19	19
	-22,679	-78,239	-76,987	-127,201	-228,731
Financial items received and paid	588	1,811	1,669	4,391	4,550
Cash flow from operating activities before changes in working capital	-22,091	-76,428	-75,318	-122,810	-224,181
Changes in working capital	-18,889	11,211	-7,277	10,128	25,898
Cash flow from operating activities	-40,980	-65,217	-82,595	-112,682	-198,283
Investing activities
Net investment in equipment	-442	-915	-129	-1,601	-4,262
Net investment in other short-term investments	9,510	-3,505	53,410	-136,876	-45,248
Cash flow from investing activities	9,068	-4,420	53,281	-138,477	-49,510
Financing activities
Net proceeds from rights issue	-	-	-	-	-
Transaction costs rights issue 1)	-	-	-	-33,940	-33,940
Cash flow from financing activities	-	-	-	-33,940	-33,940

Cash flow for the period	-31,912	-69,637	-29,314	-285,099	-281,733
Cash and cash equivalents at the beginning of the period	46,351	110,024	43,753	325,486	325,486
Cash and cash equivalents at the end of the period	14,439	40,387	14,439	40,387	43,753

1) Comprises the portion of transaction related costs that have been paid in the period.

CONSOLIDATED 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, 2011	191,593	982,686	-831,731	342,548
Loss for the period	-	-	-124,912	-124,912
Share issue	1,939	-1,939	-	0
Amount at June 30, 2011	193,532	980,747	-956,643	217,636

Amount at January 1, 2012	193,532	980,747	-1,058,357	115,922
Loss for the period	-	-	-76,660	-76,660
Reduction of share capital	-185,791	185,791	-	0
Amount at June 30, 2012	7,741	1,166,538	-1,135,017	39,262

KEY EQUITY DATA

		June 30	December 31
	2012	2011	2011
Equity ratio	45.4%	84.2%	67.6%
Equity per share at the end of period – basic, SEK	0.10	0.56	0.30
Equity per share at the end of period - diluted, SEK	0.10	0.56	0.30

The Parent Company

Net sales for the Parent Company for the six month period amounted to MSEK 16.5 (0.0), whereof the second quarter MSEK 8.2 (0.0). Loss after financial items for the parent company was MSEK 77.0 (124.9) for the six month period, whereof the second quarter MSEK 23.0 (77.2).

The Parent Company's capital investments in equipment for the six month period amounted to MSEK 0.5 (1.2). Cash, cash equivalents and other short-term investments for the parent company amounted to MSEK 75.4 (245.8) at the end of the period.

PARENT COMPANY INCOME STATEMENT SUMMARY (KSEK)

	April-June		January-June		January December
	2012	2011	2012	2011	2011
Net sales	8,167	-	16,476	-	-
Operating expenses
Administration	-7,420	-13,188	-15,915	-22,401	-40,797
Research and development	-24,284	-64,621	-78,946	-105,041	-189,321
Other operating income/expenses	95	-1,044	78	-993	-1,041
	-31,609	-78,853	-94,783	-128,435	-231,159
Operating income/loss	-23,442	-78,853	-78,307	-128,435	-231,159
Financial net	479	1,643	1,299	3,537	4,547
Earnings after financial items	-22,963	-77,210	-77,008	-124,898	-226,612
Tax	-	-	-	-	-
NET EARNINGS FOR THE PERIOD	-22,963	-77,210	-77,008	-124,898	-226,612

Depreciation included in operating expenses	-384	-396	-795	-778	-1,535

PARENT COMPANY BALANCE SHEET SUMMARY (KSEK)

		June 30	December 31
	2012	2011	2011
Assets
Equipment	4,224	3,945	5,412
Shares in group companies	150	100	100
Other current assets	6,428	8,015	7,409
Financial assets at fair value through profit or loss	60,975	205,418	114,780
Cash and cash equivalents	14,379	40,377	43,743
TOTAL ASSETS	86,156	257,855	171,444

Shareholders' equity and liabilities
Total restricted equity	116,275	331,547	331,547
Total non-restricted equity	-77,008	-113,558	-215,272
Current liabilities	46,889	39,866	55,169
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES	86,156	257,855	171,444

OTHER INFORMATION

The General Meeting on April 27th

The General Meeting on April 27 decided to reduce the share capital to MSEK 7.7, a level more in line with the nature and risks of the business. The reduction also eliminated the shortage in the company's equity.

Continued optimization if the organization

In connection with the execution of the second phase of the efficiency program, the number of employees was reduced by 9 to 44. The goal is that Karo Bio will be a company that is self-financed with a commercially attractive and broad project portfolio.

The Annual General Meeting on June 12th

The Annual General Meeting re-elected the board members Per Bengtsson, Christer Fåhraeus, Anders Waas, and Göran Wessman. Per-Anders Johansson was elected new board member and Göran Wessman was also elected as Chairman.

Continued operations

The Group's existing cash is deemed sufficient to finance the activities planned in their entirety for more than twelve months. In order to finance its operations in the future, Karo Bio may in the future need to turn to capital markets for fundraising.

Significant events after the end of the reporting period

No significant events have occurred after the end of the reporting period.

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 will obtain 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.

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 2011. A

number of new or updated accounting standards and interpretations are applicable for financial years beginning January 1, 2011 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. Compensation received for research collaborations, and for commitments in the agreement that Karo Bio has not yet carried out, are amortized over the duration, in accordance with the agreement, of which Karo Bio fulfills the commitments. Milestone payments are recognized when all conditions for entitlement to compensation under the agreement are met. Revenues from research funding of RORgamma are accrued from January 1st , 2012.

For the Parent Company this interim report has been prepared in accordance with the Swedish Annual Accounts Act and compliance with RFR 2 Accounting for legal entities. The accounting principles applied for the parent company differ from those applied for the Group only regarding accounting of leasing agreements.

Amounts are expressed in KSEK, an abbreviation for 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.

The auditors' review

This interim report has not been subject to review by Karo Bio's auditors.

Scheduled releases of financial information

Interim report July-September 2012	October 24, 2012
Year-end report 2012	February 12, 2013

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.

Legal disclaimer

This financial report includes statements that are forward looking and actual future 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 13, 2012

Göran Wessman Per Bengtsson

Chairman CEO and Board member

Christer Fåhraeus Per-Anders Johansson Anders Waas Board member Board member Board member

Bo Carlsson Johnny Sandberg Board member Board member

Employee representative Employee representative