Karo Pharma AB — Interim / Quarterly Report 2013

May 7, 2013

INTERIM REPORT JANUARY-MARCH 2013

The January–March period 2013 in brief

• Net sales amounted to MSEK 8.1 (8.3)
• Net loss for the group was MSEK 10.7 (54.0)
• Loss per share was SEK 0.02 (0.14)
• Cash flow from operating activities was MSEK -9.9 (-41.6)
• Cash and cash equivalents and other short-term investments totaled MSEK 48.0 (117.0) at the end of the period
• The rights issue conducted in 2012 brought a total of MSEK 28.3 net after transaction costs, whereof MSEK 4.3 in the quarter
• The project portfolio advances according to plan

Conference call / audiocast today at 9.30 a.m. CET

CEO Per Bengtsson will present the report today at 9.30 a.m. in an audiocast, held in Swedish. The audiocast and slides are available via a link onhttp://www.karobio.se/ or by telephone +46850556477 or +442033645372.

For further information, please contact Per Bengtsson, CEO Telephone: +46 8 608 6020 E-mail: per.bengtsson@karobio.se Henrik Palm, CFO Telephone: +46 8 608 6076 or +46 70 540 40 14 E-mail: henrik.palm@karobio.se

Karo Bio AB (publ) Novum 141 57 Huddinge Sweden Telephone: +46 8 608 60 00 Corp.reg.nr. 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 May 7, 2013 at 8.30 a.m. CET.

Summary of key financial data

	January-March		January-December
	2013	2012	2012
Net sales	8.1	8.3	33.2
Operating expenses	-18.8	-63.2	-132.9
- of which R&D expenses	-13.6	-54.7	-107.9
Net earnings/loss for the period	-10.7	-54.0	-98.3
Earnings/loss per share (SEK)	-0.02	-0.14	-0.25
Cash flow from operating activities	-9.9	-41.6	-127.8
Cash and cash equivalents and other short term investments	48.0	117.0	54.1

About Karo Bio

Karo Bio is a research and development company focused on innovative drugs for important medical needs. The world-leading knowledge of nuclear receptors as target proteins for the development of pharmaceuticals and the related mechanisms of action, are utilized for developing novel, more effective and safer pharmaceuticals.

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

Karo Bio is based in Huddinge, Sweden. The company has around 43 employees and is listed on NASDAQ OMX Stockholm.

CEO COMMENTARY

Throughout 2013, I expect our main focus will be on increasing revenue from our projects. We have several opportunities to do so. Closest at hand is an extension of the agreement with Pfizer on RORgamma and a milestone in this project. The work on the project progressed well during the first quarter and the project is advancing at good speed. Because of our confidentiality agreement, regretfully I cannot provide further details than that

I am very pleased with our performance in the project.

Within the field of ERbeta we work in parallel with several revenue opportunities. In oncology, opportunities for private and public grants are more favorable than in many other areas. Here, we work with several different alternatives.

As you know, the second track for ERbeta is MS. Here, we strive to better understand how ERbeta positively impacts the disease. We have previous findings that suggest that the impact consists of protection and repair of the tissue surrounding the nerve fibers in the brain. If this turns out to be the case also in patients, we are close to a completely new type of MS treatment, which is much sought after as current treatments lack efficacy in the progressive phase of the disease that follows the initial inflammatory phase. In the current quarter we will receive preclinical results that are expected to provide important complements to the picture we already have of the mechanism of action. To fund continued preclinical work and advance towards clinical trials, we are looking for an industrial partner. So far, different players active in the MS area have been hesitant to commit, but now we meet an increased interest in the project. By acquiring additional efficacy data and other knowledge we hope to get a partner to invest financially in the project. There are two reasons which warrant us to be positive about our chances. First, we are strengthening our offering by establishing new data. Second is the trend that major players in the MS field are increasingly interested in progressive MS, an interest that also extends to projects in preclinical phase.

Within NURR1 we continue target validation, which in short means that we ensure that we can do certain tests on a molecule of interest. Several factors are driving the interest in NURR1. Firstly, there are several different types of diseases that can be addressed through this receptor. Karo Bio has selected autoimmune disease as its focus for the work on NURR1. This is supported by data suggesting that NURR1 influences the formation of so-called regulatory T cells, and the interesting thing is that it has been shown in clinical trials with antibodies that these cells actually affect the condition of patients with autoimmune disease. One significant difference is that we work with small molecules that have many advantages over biologics. I would also like to touch upon a piece of news; that we since some time are working with Nur77, a receptor similar NURR1. There are significant synergies to take advantage of since the receptors are relatively similar. There is quite a lot that suggest that Nur77 and NURR1 may become commercially viable at an early development stage. Finally, I will also comment on our project GR inflammation, which advanced during the quarter. The nature of the project means that we need to develop it a bit further before we can seek external funding.

In addition to the work in our projects, we have devoted considerable time during the quarter in other future-oriented efforts. We have participated in several conferences and presented our projects to potential partners. It is clear that the name Karo Bio meets with respect for its knowledge in nuclear receptors, which helps to garner interest in our projects. We are also discussing internally how to best develop Karo Bio to create value for shareholders. The most important part in this effort right now is to generate revenue from our current projects. Another area in which we have achieved a great deal is costs where we continue to implement necessary savings and adaptations. Alongside this, we see several other possibilities and combinations of possibilities that can create value for shareholders. I hope to present our thoughts more concretely later on in the year.

CEO Per Bengtsson

PROJECT PORTFOLIO

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 medical use 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 with 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 some forms of cancers. In August 2012, a grant application for the project was submitted in the state of Texas. Since then, the funding agency has initiated a review of its operations and announced that it is not processing any applications while the review is ongoing. Karo Bio is prepared to renew its application, and is also seeking alternative routes to fund the continued development of the project.

Since 2011, Karo Bio has run a development project for ERbeta focused on the autoimmune disease multiple sclerosis (MS). In preclinical models, ERbeta agonists have demonstrated protective effects on nerve cells. 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 are involved in the symptoms of the disease and disability. Karo Bio has conducted animal studies that show that ERbeta has a positive effect in experimental disease models. The results are promising and analysis is therefore under way to confirm the details of ERbeta's therapeutic effect on nerve tissue. Guiding results are expected to be available during the second quarter.

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, and in the fourth quarter of 2012 Merck informed that it does not intend to continue the development of the compound. There have not been any safety related issues reported for the compound. Karo Bio is exploring the possibility to regain the rights to the compound in connection with the termination of the contractual relationship with Merck.

RORgamma – a new opportunity to treat autoimmune diseases

Recent research reveals that the nuclear receptor RORgamma may play a critical 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 for two years and will have exclusive rights for products developed as a result of the collaboration. The development project progressed in a positive direction in the first quarter.

The agreement is expected to provide Karo Bio with 10-12 million USD in 2012 and 2013. In 2012, Karo Bio recognized revenue of 5 million USD from the project. Pfizer has the right to extend the research agreement until 2015, and can also withdraw from the contract.

GR inflammation – potentially a 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 antiinflammatory 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 and the development work is focusing on this discovery. Compounds based on this discovery are expected to have a significantly improved side effect profile compared to conventional steroidal therapy while maintaining the desired antiinflammatory effect. Evaluation is ongoing to identify which compounds are best suited for further development as candidate drugs.

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. A drug that stimulates the NURR1 receptor and therefore also regulatory T cells can be expected to have positive impact on autoimmune diseases. There is a biological drug (antibody) under development in clinical phase II by Biotest AG in collaboration with Abbott that demonstrates the potential of activating regulatory T cells for patients with autoimmune diseases. Initial discussions with large pharmaceutical companies verify that there is a clear commercial interest in NURR1 and Karo Bio's assessment is that it may have potential to develop into a so-called hot spot, creating an opportunity to enter into a license agreement at an early stage. The work on this receptor is at a very early stage.

Nur77

In parallel with NURR1, Karo Bio has also initiated some investigations of Nur77, a similar receptor to NURR1. There are substantial synergies with working in parallel with the mechanisms of these receptors. Collaboration has been initiated with leading scientists in the field. It is estimated that there are good prospects for Nur77 to become a commercially viable area at an early stage of development.

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 quarter were MSEK 8.1 (8.3). Operating expenses for the period decreased by MSEK 44.4 to MSEK 18.8 (63.2). Research and development expenses accounted for 73 per cent of the costs for the period, after a decrease to MSEK 13.6 (54.7). A large portion of the cost reduction is attributable to decreased external project expenses as a result of the termination of the eprotirome program.

Administrative expenses for the quarter decreased to MSEK 5.3 (8.5). The consolidated operating loss for the quarter decreased to MSEK 10.7 (54.9). Financial net for the quarter amounted to MSEK 0.0 (0.8). Net loss for the period improved to MSEK 10.7 (54.0).

Capital investments and consolidated cash flow

Capital investments for the period amounted to MSEK 0.4 (0.1) and comprise mainly investments in laboratory and IT equipment.

Cash flow from operating activities for the period amounted to MSEK -9.9 (-41.6).

Financial position

Consolidated cash and cash equivalents amounted to MSEK 22.1 (46.4) at the end of the period. Including other short-term investments with durations exceeding 90 days, liquid assets amounted to MSEK 48.0 (117.0), which corresponds to a change in total cash position and other short-term investments of MSEK -6.1 (-41.5) in the year. As stipulated in the company's finance policy, Karo Bio's funds are invested solely in low risk, interest-bearing assets.

The company's equity credit facility can be utilized when the share price amounts to or exceeds SEK 0.75, a condition which was not fulfilled at the time of the report. The mandate to use the credit facility will be submitted to the General Meeting for approval on an annual basis.

Total shareholders' equity amounted to MSEK 35.2 (61.9) taking into account the period's earnings. In total, there were 495,947,369 shares outstanding, each with a pair value of SEK 0.02. In the fourth quarter of 2012, a rights issue was conducted with preferential rights for existing shareholders. A total of 108,883,397 shares were issued, which after transaction costs provided the company with MSEK 28.3. whereof MSEK 23.9 had affected the cash balance for 2012. The remainder of the issued amount of MSEK 7.7 and transaction cost of MSEK 3.2 were settled in January 2013. All new shares were however registered with the Companies Registration Office in January 2013.

Loss per share amounted to SEK 0.02 (0.14). The Group's equity ratio at the end of the period was 59.1 (46.0) per cent and equity per share, based on fully diluted number of shares at the end of the period, was SEK 0.07 (0.16).

Employees

At the end of the period, Karo Bio had 43 (54) employees, of whom 37 (44) are engaged in research and development, 1 (3) in business development and intellectual property rights and 5 (7) in administrative roles.

		January-March
	2013	2012	2012
Net sales	8,099	8,309	33,173
Operating expenses
Administration	-5,254	-8,495	-25,116
Research and development	-13,641	-54,662	-107,857
Other operating income/expenses	114	-17	51

CONSOLIDATED INCOME STATEMENT SUMMARY (KSEK)

Number of shares outstanding (000)	495,947	389,812	389,812
Earnings per share (SEK)	-0,02	-0.14	-0.25
Depreciation included in operating expenses	-330	-557	-1,748
Shareholders of the parent company	-10,669	-54,042	-98,254
Net earnings for the period attributable to:
NET EARNINGS FOR THE PERIOD	-10,669	-54,042	-98,254
Tax	-	-	-
Earnings after financial items	-10,669	-54,042	-98,254
Financial net	13	823	1,495

Operating profit/loss -10,682 -54,865 -99,749

-18,781 -63,174 -132,922

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (KSEK)

		January-March
	2013	2012	2012
NET EARNINGS FOR THE PERIOD	-10,669	-54,042	-98,254
Other comprehensive income for the period, net after tax	-	-	-
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD	-10,669	-54,042	-98,254
Total comprehensive income attributable to:
Shareholders of the parent company	-10,669	-54,042	-98,254

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (KSEK)

	March 31		December 31
	2013	2012	2012
Assets
Equipment	3,843	4,539	3,771
Other current assets	7,789	13,066	19,893
Financial assets at fair value through profit or loss	25,929	70,610	26,049
Cash and cash equivalents	22,095	46,351	28,024
TOTAL ASSETS	59,656	134,566	77,737
Shareholders' equity and liabilities
Shareholders' equity	35,248	61,880	45,917
Current liabilities	24,408	72,686	31,820
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES	59,656	134,566	77,737

CONSOLIDATED STATEMENT OF CASH FLOWS (KSEK)

		January-March	January-December
	2013	2012	2012
Operating activities
Operating profit/loss before financial items	-10,682	-54,865	-99,749
Depreciation	330	557	1,748
	-10,352	-54,308	-98,001
Financial items received and paid	33	1,081	1,907
Cash flow from operating activities before changes in working capital	-10,319	-53,227	-96,094
Changes in working capital	399	11,612	-31,706
Cash flow from operating activities	-9,920	-41,615	-127,800
Investing activities
Net investment in equipment	-419	313	-184
Net investment in other short-term investments	97	43,900	88,319
Cash flow from investing activities	-322	44,213	88,135
Financing activities
Net proceeds from rights issue	7,665	-	25,000
Transaction costs rights issue 1)	-3,352	-	-1,064
Cash flow from financing activities	4,313	-	23,936
Cash flow for the period	-5,929	2,598	-15,729
Cash and cash equivalents at the beginning of the period	28,024	43,753	43,753
Cash and cash equivalents at the end of the period	22,095	46,351	28,024

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, 2012	193,532	980,747	-1,058,357	115,922
Loss for the period	-	-	-54,042	-54,042
Amount at March 31, 2012	193,532	980,747	-1,112,399	61,880
Amount at January 1, 2013	7,741	1,008,996	-970,820	45,917
Loss for the period	-	-	-10,669	-10,669
Current rights issue	2,178	-2,178	-	0
Amount at March 31, 2013	9,919	1,006,818	-981,489	35,248

KEY EQUITY DATA

	March 31		December 31
	2013	2012	2012
Equity ratio	59,1%	46.0%	59.1%
Equity per share at the end of period – basic, SEK	0.07	0.16	0.12
Equity per share at the end of period - diluted, SEK	0.07	0.16	0.12

The Parent Company

Net sales for the Parent Company for the quarter amounted to MSEK 8.1 (8.3). Loss after financial items for the parent company was MSEK 10.7 (54.0).

The Parent Company's capital investments in equipment for the quarter amounted to MSEK 0.4 (0.1). Cash, cash equivalents and other short term investments for the parent company amounted to MSEK 48.0 (116.9) at the end of the period.

PARENT COMPANY INCOME STATEMENT SUMMARY (KSEK)

		January-March	January-December
	2013	2012	2012
Net sales	8,099	8,309	33,173
Operating expenses
Administration	-5,254	-8,495	-25,116
research and development	-13,642	-54,662	-108,207
Other operating income/expenses	114	-17	51
	-18,782	-63,174	-133,272
Operating income/loss	-10,683	-54,865	-100,099
Financial net	17	820	1,507
Earnings after financial items	-10,666	-54,045	-98,592
Tax	-	-	-
NET EARNINGS FOR THE PERIOD	-10,666	-54,045	-98,592
Depreciation included in operating expenses	-310	-411	-1,515

PARENT COMPANY BALANCE SHEET SUMMARY (KSEK)

	March 31		December 31
	2013	2012	2012
Assets
Equipment	3,601	4,539	3,509
Shares in group companies	150	150	150
Other current assets	7,789	13,066	19,893
Financial assets at fair value through profit or loss	25,929	70,610	26,049
Cash and cash equivalents	22,035	46,291	27,964
TOTAL ASSETS	59,504	134,656	77,565
Shareholders' equity and liabilities
Total restricted equity	9,919	193,532	9,919
Total non-restricted equity	25,347	-131,302	36,013
Current liabilities	24,238	72,426	31,633
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES	59,504	134,656	77,565

Karo Bio AB Novum, 141 57 Huddinge, Sweden Telephone +46 8 608 60 00 www.karobio.com

OTHER INFORMATION

Continued operations

The company believes that there is potential for continued operations for 12 months from the closing date. Without additional funding or revenue, existing cash and cash equivalents and financial investments are expected to finance the current scope of operations until soon after the coming yearend. Under these same conditions, the equity at the end of the fourth quarter may be less than 50 per cent of the registered share capital.

However, the company also assess that there are opportunities for additional revenue in the coming year and should these not be realized or be postponed, the company is planning for necessary cost adjustments. It is also assessed that conditions are in place for such revenue, mainly in the form of a milestone from and in an extension of the existing agreement with Pfizer. Together with further cost adjustments this is assessed to finance operations for a further approximately three months, which is to the end of the first quarter 2014. It cannot be excluded that operations may require additional injection of capital during the current financial year.

Significant events after the end of the reporting period

There have been no significant events to report on 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 2012. A number of new or updated accounting standards and interpretations are applicable for financial years beginning January 1, 2013 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.

Scheduled releases of financial information

Interim report April-June 2013	July 12, 2013
Interim report July-September 2013	October 25, 2013
Year-end report 2013	February 13, 2014

Financial reports, press releases and other financial 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.

Auditor's review

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

Huddinge, May 7, 2013

Göran Wessman Chairman	Per Bengtsson CEO and Board member
Christer Fåhraeus Board member	Per-Anders Johansson Board member	Anders Waas Board member
Bo Carlsson Board member Employee representative	Johnny Sandberg Board member Employee representative

Karo Bio AB Novum, 141 57 Huddinge, Sweden Telephone +46 8 608 60 00 www.karobio.com