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Orexo

Quarterly Report Feb 17, 2009

3093_10-k_2009-02-17_09c1624e-1803-4e98-b931-40baf1b82be0.pdf

Quarterly Report

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Orexo AB (publ.) – Year-end Report January-December, 2008

Orexo AB, P.O. Box 303, SE-751 05 Uppsala, Sweden Tel: +46 (0) 18-780 88 00, Fax: +46 (0) 18-780 88 88, E-mail: [email protected] Internet: www.orexo.com Corp. reg. no 556500-0600

This text is a translation of the Year-end Report prepared in Swedish. In the event of any discrepancy between the English translation and the official Swedish version, the Swedish version shall prevail.

Uppsala, February 17, 2009

Orexo AB (publ) – Year-end Report January–December, 2008

The year in brief

  • Net revenues increased to MSEK 233.3 (76.8)
  • The loss after tax was MSEK 103.1 (loss: 172.6)
  • Earnings per share amounted to a loss of SEK 4.77 (loss: 11.42)
  • The exclusive global rights to two of Orexo's drugs Sublinox™ and OX-NLA were outlicensed to Meda AB.
  • AbstralTM was approved for registration in Europe by the EMEA's Committee for Medicinal Products for Human Use (CHMP).
  • AbstralTM was approved for marketing in Sweden, Germany and the UK.
  • Orexo announced licensing agreements for AbstralTM with ProStrakan and changed its US partner, from Endo Pharmaceuticals to ProStrakan.
  • The registration application for SublinoxTM was accepted by the US Food and Drug Administration (FDA) after an initial evaluation as complete for substantive review.
  • Orexo initiated the clinical phase II program for OX914 a new product candidate for the treatment of inflammatory respiratory diseases.
  • Orexo and Boehringer Ingelheim extended their research collaboration for OX-MPI.

Fourth quarter, 2008

  • Net revenues rose to MSEK 92.1 (55.1)
  • The after-tax loss was MSEK 14.4 (loss: 44.0)
  • Earnings per share amounted to a loss of SEK 0.67 (loss: 2.47)

Key events after the year-end

  • Orexo signed an exclusive development agreement with a large healthcare company, providing for joint development of Orexo's OX17 program for gastroesophageal reflux disease (GERD).
  • Orexo and the Chinese pharmaceutical company NovaMed Pharmaceuticals signed a distribution agreement that grants NovaMed exclusive rights to market and sell AbstralTM, Orexo's product for the treatment of breakthrough cancer pain, in the People's Republic of China.
MSEK 2008
3 months
Oct-Dec
2007
3 months
Oct-Dec
2008
12 months
Jan-Dec
2007
12 months
Jan-Dec
Net revenues 92.1 55.1 233.3 76.8
Loss after tax -14.4 -44.0 -103.1 -172.6
Earnings per share,
before dilution (SEK)
-0.67 -2.47 -4.77 -11.42
Earnings per share
after dilution (SEK)2
-0.67 -2.47 -4.77 -11.42

Condensed statement of operations 1

Torbjörn Bjerke, President and CEO, comments:

2008 was one of the most active and operationally successful years so far for Orexo. We have confirmed a strategic direction and are on our way to become a profitable pharmaceutical company. A number of factors contributed to Orexo's success, including the approval of AbstralTM in Europe, successful clinical trials, a major deal with Meda covering two of our products, and the change of partner for Rapinyl/AbstralTM in North America, with increased royalty rates.

The year 2009 may be an even more eventful year for Orexo since we, together with our partner Meda, expect a decision from the US Food and Drug Administration (FDA) in respect of SublinoxTM – designed to treat sleep disturbances. We will also submit a registration application for Rapinyl/AbstralTM to the FDA. We expect higher sales of AbstralTM, as the product has now been launched in Sweden, Germany and the UK, with more territories expected in 2009. Also during the current year, the focus will be on identifying new business partners and strict cost control. Orexo has sufficient cash liquidity to permit it to continue pursuing operations on the basis of the same business model up to and including 2010 without additional financing.

1) Refers to the Group, unless stated otherwise in this report. Figures in parentheses are for the corresponding period of the preceding year. Biolipox was consolidated in the Group as of November 23, 2007.

2) Since earnings are negative, the same earnings per share are reported after dilution as before dilution.

2008 in brief

The exclusive global rights to two of Orexo's drugs – Sublinox™ (OX22) and OX-NLA – were outlicensed to Meda AB.

Sublinox™ (OX22) (temporary treatment of insomnia) contains a well-documented active substance zolpidem, one of the world's most commonly used pharmaceuticals for the treatment of sleeping disturbances. Sublinox™ (OX22) uses a unique and patented tablet formulation for fast and reliable onset of action. An application to the FDA for Sublinox™ (OX22) was submitted during the second quarter of 2008.

OX-NLA is a nasal spray formulation containing the substance cetirizine (antihistamine). Liposomes in OX-NLA provide the product with unique features. OX-NLA has been documented for the treatment of allergic and non-allergic rhinitis – one of Meda's key therapy areas. The product is in the initial stages of Phase III. Meda will take over and finance its continuing development. Meda has also acquired the exclusive rights for further combination products based on OX-NLA.

AbstralTM/Rapinyl approved for registration in Europe

AbstralTM/Rapinyl – designed for the treatment of breakthrough pain resulting from cancer – has been approved for registration in Europe by the EMEA's Committee for Medical products for Human Use (CHMP).

Launch of Abstral TM in Sweden

AbstralTM was launched in Sweden during the third quarter of 2008. The product is sold through ProStrakan AB, which is Orexo's joint venture with ProStrakan Group plc.

AbstralTM approved for marketing in the UK and Germany.

Approval in these territories means that ProStrakan will launch AbstralTM in both countries in early 2009.

FDA commenced the final evaluation process for SublinoxTM

The registration application for SublinoxTM was accepted by the Food and Drug Administration (FDA) in the U.S., as complete for substantive review after initial evaluation. SublinoxTM contains the well-known active substance zolpidem and is based on Orexo's sublingual technology, involving a rapidly-dissolving tablet placed under the tongue.

The data supporting the application include a clinical study involving patients with sleep disturbances, which was concluded in October 2007. The study showed that SublinoxTM induced sleep 30% earlier after dosage compared with Ambien/Stilnoct and that patients sleep through the night. The safety profile for Sublinox™ was comparable with that of Ambien/Stilnoct.

Orexo replaced its license partner for AbstralTM/Rapinyl in North America with ProStrakan

In July, Endo Pharmaceuticals decided to return Rapinyl to Orexo, as a result of the change in Endo's corporate strategy set by the company's new executive management. Up to the return date, Orexo had received a total of MUSD 26.9 in license fees from Endo Pharmaceuticals. Of that, MUSD 0.75 in respect of the termination and MUSD 1.5 for Endo's prior commitment for the ongoing Phase III study was received on October 31.

Orexo extended the licensing agreement with its partner, the international specialty pharma company ProStrakan Group plc so that its agreements with ProStrakan would also include North America. ProStrakan, which was already Orexo's partner for the sale and marketing of

AbstralTM/Rapinyl in Europe, will now also assume responsibility for product sales and marketing in the U.S.

In connection with the transfer of the product from Endo – and pursuant to the new agreement for the North American market – Orexo received MUSD 2 from ProStrakan. Orexo may receive up to an additional MUSD 27 in application- and sales milestones, excluding the MUSD 2 it received upon signing of the agreement.

In conjunction with the signing of the agreement, the current agreement covering Europe was also amended. The milestone compensation linked to approval on the five largest markets was reduced from MEUR 5 to MUSD 5 and the sales level compensation in Europe was raised from MEUR 10 to MEUR 19.9. At the same time, royalty payments were increased by 7 to 9 percentage points. Royalty payments in North America were increased by a similar amount compared with the previous agreement with Endo.

Orexo initiated a clinical Phase II program for OX914 – a product candidate for treatment of inflammatory respiratory diseases

OX914 is a product candidate for treatment of inflammatory respiratory diseases.

OX914 acts by a mechanism called a PDE4 inhibition with an enhanced safety profile over other agents in this class. Orexo is developing OX914 for treatment of asthma, chronic obstructive pulmonary disease (COPD or smoker's disease) and rhinitis (hay fever).

A study has been initiated in which patients will be treated with OX914 using a clinical model for inflammatory respiratory diseases. Some 36 patients with seasonal allergic rhinitis will be treated with a placebo or OX914 in dosages of 15 or 50 mg for two weeks in a double-blind, three-way cross-over study. The effects on nasal symptoms and anti-inflammatory responses, as well as safety and tolerance will be documented.

The global market for respiratory products is about USD 17 billion.

Orexo and Boehringer Ingelheim extended research agreement

The existing three-year research partnership was extended by an additional 12 months as of November 2008. This research is being conducted within the framework of the global rights to develop and market a new and effective pharmaceutical for treatment of pain and inflammation.

The agreement comprises an extension of the original partnership that started in 2005 which has a potential value of MEUR 250, excluding royalties.

The objective of the partnership is to develop a pharmaceutical that selectively inhibits the prostaglandin enzyme (PG) E synthase (mPGES) to reduce the formation of PGE2, a bodily substance that plays a central role in many inflammatory processes. Such a more selectively targeted active mechanism may result in drugs with fewer side effects than existing pain medications, such as the classic NSAID preparations.

Key events after the close of the period

Orexo signed an exclusive development agreement for its OX17 program

Orexo signed an exclusive development agreement with a large healthcare company, providing for joint development within Orexo's OX17 program for gastroesophageal reflux disease (GERD).

During this development work, Orexo will continue negotiations to enter into an appropriate global exclusive license agreement including the whole of Orexo's OX17 program and related intellectual property. This license agreement is anticipated during 2009. The financial terms were not disclosed.

Orexo signed an agreement for Abstral in China

Orexo and the Chinese pharmaceutical company NovaMed Pharmaceuticals have signed an exclusive licensing and distribution agreement that grants NovaMed rights to seek approval for Abstral, Orexo's product for treatment of breakthrough cancer pain, in the People's Republic of China, and if granted, to market and sell the product in that market.

The terms of the agreement include an upfront payment, regulatory milestones and sales milestones. The total value of the upfront payment and milestones is MUSD 4.75. In addition, Orexo will supply NovaMed with Abstral in China and will receive a margin on the sales of the product if approved. NovaMed will be responsible for managing the regulatory approval process including clinical studies, which is a standard requirement in China.

Orexo's product portfolio

Commercialized products

AbstralTM/Rapinyl – for the treatment of acute pain is recommended for approval in Europe and is in clinical Phase III in the US. AbstralTM/Rapinyl was developed for the treatment of cancerrelated breakthrough pain as its primary indication. Orexo's principal technology, the sublingual dosage method whereby a fast-dissolving tablet is placed under the tongue, enables rapid onset and a predictable effect "on-demand". License agreements for AbstralTM/Rapinyl have been signed with ProStrakan Group plc for the European and North American markets and with Kyowa Kirin for the Japanese market. Distribution agreements for the CIS (Russia and other countries in the former Soviet Union), Bulgaria and Romania have been signed with Gedeon Richter, with NovaMed for the Chinese market and with Hospira for Southeast Asia, including Australia and New Zealand.

In December 2005, Phase III studies began on Abstral TM/Rapinyl in the US. Positive results from an interim analysis of the Phase III trials were announced in December 2007. Now, the inclusion of patients in the Phase III studies has been completed and ProStrakan plans to submit a registration application for AbstralTM to the FDA in the US during the course of 2009.

AbstralTM has already been launched in Sweden, UK, and Germany.

Diabact® UBT/Heliprobe™ System – Diabact® UBT is Orexo's first commercialized product. It is based on Orexo's patent-protected fast-dissolving tablet. The tablet contains bodily substances and is swallowed with water, meaning that no solution mixture needs to be prepared. A breath test is performed as early as ten minutes after administration. The result is more cost-

effective medical care, since time-consuming preparatory measures are eliminated. The sample is analyzed in a laboratory, and the result is available within two to three days.

The Heliprobe™ System breath test is also very user-friendly for both patients and medical personnel. The test result is available just 15 to 20 minutes after the patient has swallowed a urea capsule containing a mild radioactive dose, which makes immediate analysis possible.

Distribution and marketing agreements for Diabact® UBT have been signed for markets in the UK, Finland, Denmark, Hong Kong, Ireland, Germany, Austria, Serbia and Sweden. The technology is outlicensed in the Japanese market.

The Heliprobe™ System has been launched in more than 30 countries, including Eastern Europe, the Middle East and Asia. Thus, Orexo has access to well-established distribution and sales channels in a number of markets with substantial potential.

Prioritized projects for which agreements have been signed

Sublinox™ – for the treatment of sleeping disorders. Sublinox™ is based on Orexo's sublingual tablet technology. In 2006, the US insomnia market was worth USD 3.3 billion (according to IMS sales data).

A licensing agreement with exclusive world rights for Sublinox™ has been signed with Meda.

During October 2007, Orexo completed the clinical Phase III program for Sublinox™. The primary objectives of the trials in terms of effect, local tolerance and safety profile were attained. The efficacy trials confirmed that Sublinox™ renders a 30 percent faster onset of sleep, compared with Ambien™, in patients suffering from sleeping disorders. The phase III trials strengthen evidence that Sublinox™ is a safe and effective treatment for temporary insomnia.

OX-MPI – Selective prostaglandin E2 inhibitor for pain, inflammation and rheumatism. The project is aimed at developing a new, effective drug for pain, inflammation and fever with fewer side-effects than existing drugs such as the classic NSAID preparation (Diclofenac for example) and the more recently developed COX-2 inhibitors (for example, Vioxx and Celebrex). The mechanism is based on the discovery of a specific enzyme, prostaglandin (PG) E2 synthase (mPGES), a bodily substance that plays a central role in many inflammatory processes. The project has been conducted since 2005 with Boehringer Ingelheim GmbH, Germany, which has acquired the global sales rights. Orexo retained co-promotion rights to markets in the Nordic countries and the Baltic States.

OX-NLA – fast-acting effect for treatment of allergic and non-allergic rhinitis. A license agreement covering exclusive global commercialization rights for OX-NLA has been signed with Meda. Under the agreement, Meda is responsible for the project's continued development, including all related costs.

OX-NLA Nasal Spray for the treatment of allergic and non-allergic rhinitis contains the active component cetirizine. Orexo has developed a unique formulation that reduces cetirizine's local irritating properties. Clinical Phase II studies have shown both favorable and fast-acting effects, making NLA suitable for on-demand treatment. Local treatment in the nose reduces the risk for systemic side effects, such as drowsiness.

In a recently completed study of patients with rhinitis, OX-NLA nasal spray showed favorable tolerance without local side effects in the form of stinging and pain. The conclusion is that the liposomes in OX-NLA Nasal Spray appear to mask the irritating effects of cetirizine.

OX17 – for the treatment of GERD (gastroesophageal reflux disease), a disorder that gives the patient recurrent heartburn, involving acidic regurgitation linked to stomach ache, discomfort and sharp pains in the esophagus. OX17 is a patent-pending fixed combination of two well-established active substances that each inhibits acid secretion in the stomach: an H2-receptor blocker and a proton pump inhibitor (PPI). To date, patents have been secured in Europe, China, Australia and New Zealand.

The clinical trial program confirms that effective inhibition of acid secretion is rapidly achieved after taking the first dose. Effective acid inhibition can be maintained as long as the symptoms persist. This is a favorable and unique clinical profile for a drug intended for the treatment of GERD. A pharmacodynamic study has been concluded on patients suffering from GERD and the clinical data confirm that OX17 has a competitive profile for the treatment of GERD.

In February 2009, Orexo signed an exclusive development agreement with a large healthcare company. During this development work, Orexo will continue negotiations to enter into an appropriate global exclusive license agreement including the whole of Orexo's Ox17 program and related intellectual property. This license agreement is anticipated during 2009.

Other prioritized projects

OX914 – for the treatment of COPD and asthma. The aim of this project is to develop an orally active product that blocks the PDE4 enzyme present in many pro-inflammatory cells. In clinical trials of various substances that inhibit PDE4, several companies have demonstrated positive treatment effects for COPD and asthma. However, no substance has reached the market, mainly due to side effects, primarily nausea. OX914 has demonstrated favorable effects in preclinical models of COPD and asthma and clinical studies have not shown increased frequency of nausea compared with placebo. Orexo has initiated a clinical Phase II program for OX914, which is expected to be complete during the first half of 2009.

Prioritized projects for which licensing discussions have begun

OX2477 – an entirely new class of agents with treatment potential for asthma and COPD. Orexo has identified a new group of mediators – eoxins – that are formed primarily in cells in respiratory passages and have shown powerful pro-inflammatory effects. Accordingly, eoxin release in the lungs could play a significant role in the inflammatory process involved in COPD and asthma. The project aims to develop an entirely new class of pharmaceuticals to curtail asthma, COPD and other inflammatory diseases.

OX-CLI – a new generation of agents with treatment potential for asthma, COPD and rhinitis. Orexo is developing an orally administered, dual-acting drug with bronchodilating and antiinflammatory effects. Studies using animals that lack the target protein have shown significantly reduced inflammatory responses in various asthma and COPD models. Orexo has identified molecules that show favorable effects in different pharmacological models. A patent portfolio with potential candidate drugs has been prepared.

The period in figures, January 1 – December 31, 2008

Condensed consolidated statement of operations

2008 2007 2008 2007
3 months 3 months 12 months 12 months
MSEK Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Net revenues 92.1 55.1 233.3 76.8
Cost of goods sold -4.2 -4.2 -17.4 -14.4
Gross profit 87.9 50.9 215.9 62.4
Selling expenses -13.5 -8.5 -38.8 -27.0
Administrative expenses -16.9 -22.1 -55.3 -58.9
Research and development costs -75.6 -65.3 -238.1 -156.0
Other operating income and costs 1.8 -1.0 3.8 -1.1
Operating loss -16.3 -46.1 -112.5 -180.6
Net financial items 1.7 2.0 9.0 7.8
Profit/loss after financial items -14.5 -44.1 -103.5 -172.8
Tax 0.1 0.1 0.4 0.2
Net profit/loss for the period -14.4 -44.0 -103.1 -172.6

Revenues

Net revenues

Consolidated net revenues for the period January-December 2008 amounted to MSEK 233.3 (76.8). The sharp rise for the period compared with a year earlier is related to revenue from Meda of MSEK 88.6 for the outlicensing of SublinoxTM, plus revenue of MSEK 13 from ProStrakan Ltd in connection with the approval of AbstralTM in the UK and Germany, along with revenues from ProStrakan Ltd of MSEK 15.5 in conjunction with the takeover of the rights for Rapinyl in North America. Moreover, revenue from cooperation with Boehringer Ingelheim GmbH in respect of the OX-MPI project and the invoicing of research and development costs, as well revenue as from the joint venture company, ProStrakan AB, contributed to the increase.

Sales of AbstralTM totaled MSEK 1.4 during the period (of which 50% is Orexo's share).

During the period October-December 2008, net revenues were MSEK 92.1 (55.1).

MSEK Oct-Dec 2008 Oct-Dec 2007 Jan-Dec 2008 Jan-Dec 2007
Diabact® UBT 2.5 1.5 6.6 5.2
Heliprobe™ System 4.8 5.1 22.0 19.7
ProStrakan AB J/V 50% 2.7 2.0 9.7 2.7
License revenue 57.9 34.0 123.2 34.0
Forwarded invoicing of 24.2 12.5 71.8 15.2
R & D costs
Total 92.1 55.1 233.3 76.8

Net revenues were distributed as follows:

Expenses and earnings

Costs for the entire year totalled MSEK 332.2 (241.9), with the increase from the preceding year relating to the acquisition of Biolipox AB which was completed in the fourth quarter of 2007.

Costs for the period October – December totalled MSEK 106, of which MSEK 24.2 were re-invoiced to partners and suppliers. In addition, MSEK 18 represents provisions for costs connected with registration at the FDA for Rapinyl; these costs will not be invoiced on to our partner ProStrakan. With a reduction of costs in the fourth quarter by the aforementioned amounts, the consolidated operating costs totalled MSEK 63.8 for the period October – December 2008.

The pro forma statement of operations presented below is for Orexo AB, including Biolipox AB, and shows the trend in 2008 compared with 2007. It is important to note that research and development costs in the amount of MSEK 71.8 were re-invoiced in 2008. This means that ongoing costs for research and development will continue to decline in 2009. The table below excludes the 50% jointly owned company, ProStrakan AB, as well as costs related to employee stock options.

CONSOLIDATED STATEMENT OF OPERATIONS – PRO FORMA 2007 – 2008 (Excluding ProStrakan AB and costs of employee stock options)

Pro forma
2007
Jan-Dec
Pro forma
2008
Jan-Dec
Percentage
change
Net revenues 103.1 223.6 117%
Cost of goods sold -13.7 -15.1 10%
Gross profit 89.4 208.5 133%
Selling expenses -23.6 -30.2 28%
Administrative expenses -84.3 -52.8 -37%
Research and development costs -255.5 -237.6 -7%
Other operating income 0.6 3.8 533%
Operating loss -273.4 -109.6 +60%

Selling expenses

Selling expenses for the year totalled MSEK 38.8 (27.0), with the period October-December of 2008 accounting for MSEK 13.5 (8.5).

Selling expenses primarily include expenses associated with business development linked to the outlicensing of Orexo's projects, as well as expenses incurred in Kibion AB and the joint venture company ProStrakan AB. The increase in selling expenses between the corresponding periods in 2007 and 2008 are related to the increased focus on business development, notably for outlicensing, and a greater commitment to the joint venture company, ProStrakan AB.

Administrative expenses

Administrative expenses for 2008 totalled MSEK 55.3 (58.9). For the period October-December 2008, administrative expenses totalled MSEK 16.9 (22.1).

Research and development costs

Research and development costs for 2008 totalled MSEK 238.1 (156,0), with the period October-December 2008 accounting for MSEK 75.6 (65.3). For 2008 as a whole, MSEK 71.8 was re-invoiced, with the period October – December 2008 accounting for MSEK 24.2.

Research and development expenses include expenses for employees, employee stock options, premises, external costs for clinical trials, drug registration and laboratory services, as well as depreciation of equipment and amortization of acquired patents and other intangible assets. Orexo has no capitalized research and development costs.

Expenses for the company's employee stock options program

Overall, the company incurred expenses for its employee stock option program in the amount of MSEK -1.7 (-1.9) for the period October-December 2008. The factor underlying the cost reduction for the quarter was the fall in stock price during the period, resulting in reduced costs, as reflected in a decrease in provisions for estimated social security fees.

For 2008 as a whole, expenses for the employee stock option program totalled MSEK 1.5 (1.4), of which MSEK 1.1 (-0.2) is attributable to administrative personnel, MSEK 0.5 (1.6) to research and developmentrelated personnel and MSEK -0.1 (0.0) to sales-related personnel.

Depreciation/amortization

Depreciation for the period January-December 2008 totalled MSEK 10.7 (5.9).

Tax

Tax assets (deferred tax) for the period January-December 2008 totalled MSEK 0.4 (0.2).

Net result

The operating loss for the year totalled MSEK 112.5 (loss: 180.6). The loss after financial items amounted to MSEK 103.5 (loss: 172.8), with the loss after tax amounting to MSEK 103.1 (loss: 172.6).

The operating loss for the period October-December 2008 was MSEK 16.3 (loss: 46.1). The loss for the period after financial items and tax totalled MSEK 14.4 (loss: 44.0).

Financial position

Group cash and cash equivalents plus current investments amounted to MSEK 188.2 (291.6) at December 31, 2008.

Cash flow from operating activities for 2008 resulted in a deficit of MSEK 101.5 (deficit: 152.8). Cash flow after financing amounted to a deficit of MSEK 103.4 (15.2). Cash flow from operating activities for the period October-December resulted in a deficit of MSEK 7.3 (deficit: 21.0). Cash flow after financing resulted in a deficit of MSEK 7.4 (149.1).

Shareholders' equity at December 31, 2008 totalled MSEK 569.8 (671.3). The equity/assets ratio was 81 percent (84).

Investments

Gross investments in tangible fixed assets during the year totalled MSEK 1.7 (49.3), with the period October-December 2008 accounting for MSEK 0.2 (7.6). The decline compared with corresponding periods in 2007 is attributable to the renovation of new premises conducted in 2007.

Parent Company

Most the Group's business is carried out in the Parent Company, Orexo AB. Net revenues in 2008 totalled MSEK 207.8 (48.4), with the loss after financial items totalling MSEK 54.8 (loss: 159.9). Investments totalled MSEK 1.7 (49.3). Cash and cash equivalents in the Parent Company at December 31, 2008 amounted to MSEK 29.6 (109.5).

Pledged assets and contingent liabilities

In the acquisition of Inflazyme, a supplemental payment was agreed contingent on certain goals being met. Part of the supplemental payment was reported as long-term liabilities and MSEK 34.9 was reported as contingent liabilities since the latter is not assessed as a probable payment based on pharmaceutical development statistics. The supplemental payment was adjusted for changes in exchange rates during the year. As cash-flow hedging for social fees pertaining to the employee stock options issued by Biolipox, warrants were issued to Pyrinox AB. Orexo is committed to cover any deficit greater than the cover provided by the warrants. In addition, the acquisition of Noster System AB involved an agreement on a supplemental purchase price of not more than MSEK 7.2, which would become payable if the growth of Heliprobe™ System achieves pre-determined sales targets by year-end 2009. The amount is reported under contingent liabilities, since Orexo does not deem it as likely. The previous pledged assets related to currency futures and chattel mortgages were terminated and reversed.

Significant risks and uncertainties

Uncertainty regarding success of development efforts

Orexo is a Group in the development stage with three products on the market and a number of other product candidates in various development stages, with some in the late clinical development phase. The research and development of pharmaceuticals are characterized by significant operating risks. Many factors affect the probability that a drug project will result in an approved pharmaceutical. For example, a potential drug candidate that demonstrated favorable effects in animal models may lack any significant effect on humans. Risks for side-effects can also complicate a drug project. However, the risk of not reaching the market diminishes as the project passes through the various phases in the development process. If the Group's clinical trials are not successful, Orexo may lack the potential to license out or commercialize new products.

Competing operations

Orexo's competitors are large pharmaceutical and biotech companies with substantial financial resources and which conduct research in the same areas as Orexo. There is a risk that these competitors develop a pharmaceutical that is better than those developed by Orexo, or that they reach the market faster, whereby the future value of the Group's products will be lower than originally expected.

Partners and the authorities

Orexo is dependent on partners – and is expected to remain so in the future – for development, implementation of clinical trials, approval from regulatory authorities regarding manufacturing, marketing and sales of the Group's product candidates. Orexo's and its partners' facilities and processes require the approval of the regulatory authorities and the manufacture and storage of pharmaceuticals and biological products involve environmental risks and are subject to environmental legislation, which may delay or disrupt operations. Changes to the healthcare system can also impact on Orexo's operations and profitability.

Key personnel

Orexo is dependent on its personnel and certain key individuals. In the event they terminate their employment, this could disrupt and delay development processes. To motivate and retain personnel and key individuals, the company offers such incentives as an options program aimed at all employees.

Financial risk

Orexo's operations entail exposure to risks due to changes in interest rates, exchange rates, and credit and counterparty risks as well as liquidity and financing risks. Orexo has developed guidelines and policies to effectively manage and limit these risks.

Orexo plans to reduce its operating costs during 2009 and the Board concludes that current financing, even without additional licensing agreements, is sufficient to pursue operations without additional financing in 2009. The assessment is that Orexo has the necessary funding also for 2010 given the current business model and the potential for cost cutting.

Group cash and cash equivalents amounted to MSEK 188 at December 31, 2008.

Dividend

The Board does not intend to propose a dividend for the 2008 fiscal year.

Share and market value

Orexo's share traded at SEK 36.30 on December 30, 2008. The company's market capitalization, based on the number of shares outstanding on December 31, 2008, amounted to MSEK 785. At December 31, 2007, the company's market value amounted to MSEK 1,016.

Analysts monitoring Orexo:

ABG Sundal Collier Alexander Lindström
Carnegie Camilla Oxhamre
Handelsbanken Markets Erik Hultgård
Nordea Patrik Ling
Remium Johan Isaksson
Redeye Björn Andersson
SEB Enskilda Gustaf Vahlne

Future information dates:

Annual General Meeting, 2009 April 23, 2009
Interim report, January - March 2009 May 6, 2009
Interim report, January - June 2009 August 21, 2009
Interim report, January - September 2009 November 10, 2009

Annual General Meeting, 2009

The Annual General Meeting will be held in Stockholm, Thursday, April 23, 2009 at 5:00 p.m. at Summit, Grev Turegatan 30. Notice of the Meeting will be released not later than March 26, 2009.

Annual Report

Orexo AB's Annual Report will be presented on the company's website not later than April 9, 2009 and will be sent to the shareholders who so request.

Uppsala February 17, 2009

Orexo AB (publ)

Torbjörn Bjerke, President and CEO

For further information, please contact:

Torbjörn Bjerke, President and CEO, tel: 018-780 88 12, e-mail: [email protected] Claes Wenthzel, Executive Vice-President & CFO, tel: 018-780 88 44, e-mail: [email protected]

Review report

We have reviewed the appended report for the period January 1 to December 31, 2008. The Board of Directors is responsible for the preparation and fair presentation of this interim report in accordance with the Annual Accounts Act. Our responsibility is to express an opinion on this interim report based on our review.

We conducted our review in accordance with the Standard on Review Engagements SÖG 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by FAR. A review consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially more restricted in scope than an audit conducted in accordance with Standards on Auditing in Sweden RS and other generally accepted auditing practices. The procedures performed in a review do not enable us to obtain a level of assurance that would make us aware of all significant matters that might be identified in an audit. Therefore, the conclusion expressed based on a review does not give the same level of assurance as a conclusion expressed based on an audit.

Based on our review, nothing has come to our attention that causes us to believe that the appended yearend report has not in all significant respects been compiled in accordance with the Annual Accounts Act and IAS 34 and for the Parent Company in accordance with the Annual Accounts Act.

Uppsala, February 17, 2009 PricewaterhouseCoopers

Leonard Daun Authorized Public Accountant

CONSOLIDATED BALANCE SHEET

SEK 000s Notes 2008
Dec 31
2007
Dec 31
ASSETS
Fixed assets
Tangible fixed assets 50,317 57,790
Goodwill 16,030 16,030
Other intangible fixed assets 375,941 377,335
Total fixed assets 442,288 451,155
Current assets
Inventories 13,982 13,294
Accounts receivable 57,535 45,826
Cash and bank balances 188,220 291,598
Total current assets 259,737 350,718
Total assets 702,025 801,873
SHAREHOLDERS' EQUITY AND
LIABILITIES
3
Share capital 8,647 8,647
Capital contributions 1,012,964 1,011,380
Accumulated losses -451,828 -348,775
Total shareholders' equity 569,783 671,252
Long-term liabilities
Provisions 490 162
Long-term liabilities 9,510 9,595
Deferred tax liability 415 877
Total long-term liabilities 10,415 10,634
Current liabilities
Current liabilities, non-interest-bearing 121,827 119,987
Total liabilities 132,242 130,621
Total shareholders' equity
and liabilities
702,025 801,873
Pledged assets - 14,500
Contingent liabilities 42,120 43,550

CONSOLIDATED STATEMENT OF OPERATIONS

SEK 000s 3 months 3 months 12 months 12 months
Notes 2008 2007 2008 2007
Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Net revenues 92,135 55,079 233,346 76,757
Cost of goods sold 2 -4,204 -4,195 -17,446 -14,384
Gross profit 87,931 50,884 215,900 62,373
Selling expenses 2 -13,549 -8,469 -38,818 -26,982
Administrative expenses 2 -16,865 -22,148 -55,294 -58,932
Research and development costs 2 -75,552 -65,320 -238,125 -155,972
Other operating income 3,205 183 7,451 9,958
Other operating expenses 2 -1,442 -1,199 -3,611 -11,014
Operating loss -16,272 -46,069 -112,497 -180,569
Earnings from financial
investments
Interest income 1,819 2,433 9,268 8,231
Interest expenses -76 -1 -266 -23
Other financial expenses 0 -473 0 -473
Profit/loss after financial items -14,529 -44,110 -103,495 -172,834
Tax 96 114 441 237
Net profit/loss for the period -14,433 -43,996 -103,054 -172,597
Loss per share, before dilution, SEK -0.67 -2.47 -4.77 -11.42
Loss per share, after dilution, SEK -0.67 -2.47 -4.77 -11.42
Average number of shares, before dilution 21,617,395 17,783,010 21,617,395 15,108,176
Average number of shares, after dilution
Number of shares, before dilution
22,684,988
21,617,395
18,858,697
21,617,395
22,689,035
21,617,395
16,183,863
21,617,395
Number of shares, after dilution 22,684,988 22,693,082 22,684,988 22,693,082

CONSOLIDATED CASH-FLOW STATEMENTS SEK 000s

3 3 12 12
months months months months
Notes 2008 2007 2008 2007
Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Continuing operations
Loss before interest expense and interest income -16,272 -46,069 -112,497 -180,569
Interest income -76 -1 -266 -23
Interest expenses 1,819 2,433 9,268 8,231
Other financial expenses - -473 - -473
Adjustment for items not included in cash flow 4 868 694 12,254 7,461
Cash flow from continuing operations -13,661 -43,416 -91,241 -165,373
before changes in working capital
Change in working capital
Accounts receivable -3,378 -444 -19,172 2,537
Other current receivables 306 -7,896 7,463 -18,266
Inventories -1,210 -2,366 -688 -4,060
Current liabilities 10,237 34,903 1,894 37,069
Provisions -36 -1,746 328 -4,657
Long-term liabilities 410 - -85 -
Cash flow from continuing operations -7,332 -20,965 -101,501 -152,750
Investing activities
Acquisition of machinery and equipment -220 -7,569 -1,671 -49,318
Divestment of machinery and equipment 110 - 121 -
Change in current investments - 9,951 - 56,126
Acquisition of subsidiaries - 167,396 -327 158,151
Cash flow after investments -7,442 148,813 -103,378 12,209
Change in financing
Proceeds from new share issue - 255 - 2,981
Cash flow after financing activities -7,442 149,068 -103,378 15,190
Cash flow for the year
Cash and cash equivalents, beginning of period 195,662 142,530 291,598 276,408
Changes in cash and cash equivalents -7,442 149,068 -103,378 15,190
Cash and cash equivalents, at close of period 188,220 291,598 188,220 291,598

KEY FIGURES

3 months 3 months 12 months 12 months
2008 2007 2008 2007
Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Operating margin, % -18 -84 -48 -235
Profit margin, % -16 -80 -44 -225
Return on total capital, % -2 -8 -14 -45
Return on equity, % -3 -10 -17 -53
Return on capital employed, % -3 -10 -17 -53
Debt/equity ratio, multiple 0 0 0 0
Equity/assets ratio, % 82 84 82 84
Current ratio, % 213 292 213 292
Acid ratio, % 202 281 202 281
Average number of shares, before dilution 21,617,395 17,783,010 21,617,395 15,108,176
Average number of shares, after dilution 22,684,988 18,858,697 22,689,035 16,183,863
Number of shares, after full dilution 23,300,567 23,010,220 23,300,567 23,010,220
Number of shares, before dilution 21,617,395 21,617,395 21,617,395 21,617,395
Number of shares, after dilution 22,684,988 22,693,082 22,684,988 22,693,082
Earnings per share before dilution. SEK -0.67 -2.47 -4.77 -11.42
Earnings per share after dilution. SEK -0.67 -2.47 -4.77 -11.42
Shareholders' equity per share before
dilution. SEK 26.36 31.05 26.36 31.05
Shareholders' equity per share after dilution.
SEK 25.12 29.58 25.12 29.58
Number of employees at close of period 128 129 128 129
Average number of employees 128 102 123 80
Shareholders' equity 569,783 671,252 569,783 671,252
Capital employed 569,783 671,252 569,783 671,252

DEFINITIONS

Operating margin: Operating profit/loss as a percentage of net revenues.

Profit margin: Profit/loss after financial items as a percentage of net revenues.

Return on total capital: Operating profit/loss plus financial income as a percentage of average balance sheet total.

Return on shareholders' equity: Profit/loss of the period as a percentage of average shareholders' equity.

Return on capital employed: Operating profit/loss plus financial income as a percentage of average capital employed.

Capital employed: Interest-bearing liabilities and shareholders' equity.

Debt/equity ratio: Interest-bearing liabilities divided by shareholders' equity.

Equity/assets ratio: Shareholders' equity in relation to total assets.

Current ratio: Current assets as a percentage of current liabilities.

Acid ratio: Current assets excluding e inventories as a percentage of current liabilities.

Number of shares after full dilution: Total number of shares plus the maximum number of shares that can be subscribed for through options outstanding.

Number of shares after dilution: Calculation of the dilution from options issued by the company up to 2005 has been carried out in accordance with IAS 33.

Earnings per share before dilution: Profit/loss divided by average number of shares outstanding before dilution.

Earnings per share after dilution: Profit/loss divided by average number of shares outstanding after dilution. Shareholders' equity per shares before dilution: Shareholders' equity divided by the number of shares before dilution at the close of the period.

Shareholders' equity per share after dilution: Shareholders' equity divided by the number of shares after dilution at the close of the period.

PARENT COMPANY BALANCE SHEET

SEK 000s Notes 2008
Dec 31
2007
Dec 31
ASSETS
Fixed assets
Tangible fixed assets 49,985 50,903
Intangible fixed assets 509 566
Shares in subsidiaries /joint ventures 524,169 523,842
Total fixed assets 574,663 575,311
Current assets
Inventories 5,233 4,362
Accounts receivable 63,812 40
Current receivables 41,969 53,030
Current investments - -
Cash and bank balances 29,608 109,511
Total current assets 140,622 166,943
Total assets 715,285 742,254
SHAREHOLDERS' EQUITY,
PROVISIONS AND LIABILITIES
6
Share capital 8,647 8,647
Restricted equity 290,750 290,750
Non-restricted equity 309,797 366,535
Total shareholders' equity 609,194 665,932
Long-term liabilities
Provisions 490 162
Total long-term liabilities 490 162
Current liabilities, non-interest
bearing
105,601 76,160
Total liabilities 106,091 76,322
Total shareholders' equity and
liabilities
715,285 742,254
Pledged assets - 2,500
Contingent liabilities 11,050 11,050

PARENT COMPANY STATEMENT OF OPERATIONS

SEK 000s 3 months
2008
3 months
2007
12 months
2008
12 months
2007
Notes Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Net revenues 117,349 42,506 207,757 48,389
Cost of goods sold 5 - - - -2,409
Gross profit 117,349 42,506 207,757 45,980
Selling expenses 5 -8,044 -3,365 -19,041 -15,408
Administrative expenses 5 -16,799 -18,187 -52,085 -54,327
Research and development costs 5 -71,346 -52,114 -197,689 -143,225
Other operating income 1,901 71 4,514 9,674
Other operating expenses 5 -604 -777 -1,779 -10,413
Operating profit/loss 22,457 -31,866 -58,323 -167,719
Earnings from financial
investments
Interest income 532 1,228 3,733 7,832
Interest expenses -72 -1 -215 -11
Profit/loss after financial
items 22,917 -30,639 -54,805 -159,898
Net profit/loss for the period 22,917 -30,639 -54,805 -159,898

Notes

1. Accounting principles

This Year-End Report was prepared pursuant to IAS 34, Interim Financial Reporting, which complies with the requirements of the Swedish Financial Accounting Standards Council's recommendation RFR 1.1, Interim Financial Reporting for Groups. As of 2005, Orexo applies IFRS as approved by the EU. The accounting principles and calculation methods comply with those applied in preparing the 2007 Annual Report.

Since the interim report of 31 March 2008, the classification between selling costs and administrative expenses has been changed. Business development is now classified as a selling expense and not as an administrative expense. Historical figures were recalculated according to the new classification. With effect from the fourth quarter, an adjustment has been made in the consolidated financial statements in the form of a reclassification among "Other capital contributions" and "Accumulated loss". The adjustments have also led to a recalculation of the comparative data. Total shareholders' equity remains unchanged. The change for 2007 is that MSEK 176.2 has been transferred to the "Accumulated loss", which subsequently amounts to MSEK 348.8

The Parent Company's accounting was prepared in accordance with RFR 2.1.

The amounts below are in SEK 000s, unless otherwise indicated.

2. Costs distributed by type of cost

2008 2007 2008 2007
Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Raw materials and supplies 8,228 13,326 32,444 26,835
Other external costs 63,257 51,181 181,642 132,307
Personnel costs 37,528 34,456 128,475 92,967
Depreciation and impairment 2,600 2,368 10,734 5,875
Re-invoicing of rebuilding costs - - - 9,300
TOTAL 111,613 101,331 353,295 267,284

3. Shareholders' equity

Changes in Group equity

2008 2007 2008 2007
Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Shareholders' equity brought forward,
according to balance sheet 585,645 202,553 671,252 324,350
Profit/loss for the period -14,433 -43,996 -103,054 -172,597
Subscription of shares through the
exercise of warrants - 255 - 2,981
New share issues - 438,775 - 438,775
New issue of stock options - 52,875 - 52,875
Employee stock options, value of
employees' service -1,429 1,911 1,585 5,989
Acquired value of employee stock
options - 18,879 - 18,879
Amount at close of period 569,783 671,252 569,783 671,252

Shares outstanding

The number of shares outstanding at December 31, 2008, was 21,617,395 all of which were common shares. All shares carry entitlement to one vote each.

Outstanding shares at January 1, 2008 21,617,395
Share subscription through exercise of employee stock options
Share subscription through exercise of warrants
New issue of shares in conjunction with the acquisition of Biolipox AB
Number of shares outstanding at December 31, 2008 21,617,395

Options

At December 31, there was a total of 2,577,897 options outstanding that carry rights corresponding to 2,112,672 shares in Orexo and the exercise of 465 225 options for shares in Orexo3. Each option written by Biolipox AB provides entitlement for exchange for one share in Orexo AB, and a corresponding number of shares is held by the independent company Pyrinox AB.

The list below shows the change in the number of options during the period January 1, 2008 to December 31, 2008 distributed among each category.

Under the period October - December 2008, 8,489 of Biolipox' employee stock options were exercised, entailing that the holders exchanged their options for 8,489 Orexo shares, which were held by the independent company, Pyrinox AB. However, such exercise does not require Orexo to issue more shares. During under the period January-December, Pyrinox sold 5,000 warrants to hedge cash flow-related social security fees. During the period October – December, 19,889 options were cancelled. These were related to unearned options for employees who had terminated their employment and, thus, could not exercise them.

Opening
1/1 2008
- + Closing
31/12 2008
Personnel-related options
Of which:
Decided and allotted employee stock options
Decided and allotted employee Board options
373,525
-
-134,950
-
412,500
12,847
651,075
12,847
Decided and allotted warrants 15,250 - - 15,250
Decided but not allotted employee stock
options, 2008
372,000 -372,000 429,500 429,500
Warrants held by subsidiary for cash-flow
hedging of social security fees
78,000 - - 78,000
Total decided options 838,775 -506,950 854,847 1,186,672
Employee stock options taken over from
Biolipox AB (no dilution effect, included in
newly issued shares in conjunction with
acquisition of Biolipox)
399,167 -64,316 - 334,851
Warrants taken over from Biolipox AB
subsidiary for cash-flow hedging of social
security fees (no dilution effect)
135,374 -5,000 - 130,374
Total options from Biolipox 534,541 -69,316 - 465,225
Total options to employees 1,373,316 -576,266 854,847 1,651,897
Other options
Warrants related to supplemental payment in
conjunction with acquisition of Biolipox AB
926,000 - - 926,000
Total options outstanding 2,299,316 -576,266 854,847 2,577,897

3) All data regarding options written by Orexo AB is adjusted for the 1:250 share split in November 2005. As shown in the 2005 Annual Report, each old option carries rights to subscribe for 250 shares after the split. Reported figures regarding options issued by Orexo AB pertain to the number of shares for which each option entitles the holder to subscribe after the split. All figures relating to options issued by Biolipox AB were translated using a factor of 0.45854, which corresponded to the estimated value of the options in relation to the Orexo share price on the acquisition date. Reported figures regarding options issued by Biolipox relate to the number of shares for which each option may be exchanged after translation.

Allotment in February 2008

During February 2008, new employee stock options were allotted entitling the holders to subscribe for 372,000 new shares. The distribution among employees is as follows:

  • CEO: 50,000 shares
  • Other senior executives: 85,000 shares
  • Other employees: 237,000 shares

The exercise price was SEK 44 per share and the lifetime of the options extends through December 31, 2017. One third of the total employee options are vested on each of the three annual dates immediately following February 21, 2008. The market value, as calculated using the Black & Scholes method, amounted to SEK 11.50 per option at the date of allotment.

New program decided at the Annual General Meeting

At Orexo's Annual General Meeting on April 3, 2008, it was resolved to adopt a new employee stock option program, which included the issuance of subscription warrants and approval of the utilization of subscription warrants within the framework of the employee stock option program. The employee stock option program consists of 470,000 employee stock options. Each employee stock option may be exercised to acquire one share in Orexo in exchange for payment of an exercise price set as 110 percent of the market value of the Orexo share on the date of allotment. A total of 470,000 subscription warrants were issued to the wholly owned subsidiary Pharmacall AB as a hedge for the program. Full exercise of the warrants will result in a dilution of about 2% of the share capital and votes in Orexo. Of these employee stock options, 40,500 were allotted without charge to employees of December 31, 2008. The distribution among employees was as follows:

Other senior executives: 30,000 options Other employees: 10,500 options

The subscription price for the options is SEK 56 per share, and the option lifetime extends up to December 31, 2018. The market value, as calculated by the Black & Scholes method, amounted to SEK 15.38 per option on the allotment date.

The Meeting also resolved to adopt a Board Member Shareholder Plan including the issuance of 27,500 warrants and approval of disposal of the warrants issued under the Board Member Shareholder Plan. Board members participating in Orexo's Board Member Shareholder Program will receive 50% of their Board fee and any fee for committee work in cash and will be allotted a number of Board Member shares, whose value at the time of allotment shall correspond to 50% of the Board fee and any fee for committee work. The right to acquire new shares by using the Board shares is contingent on whether the Board member remains a Board member during the whole or only part of his/her period of office. Each Board Member share can be exercised to acquire one share in Orexo against payment of an exercise price determined as the par value of the Orexo share. During May 2008, 16,388 options were allotted from the Board Member Shareholder Program to Board members, and the options may be exercised up until December 31, 2015. Entitlement is earned with one fourth after the publication of Orexo's first quarter report and with one fourth following the publication of the interim reports for each of the quarters two to four during the term of office for the fiscal year in which the option holder was elected or re-elected. The market value, as calculated by the Black & Scholes method, amounted to SEK 55.15 per option on the allotment date.

During the January-December period, the Board of Directors resolved to cancel option certificates with entitlement to subscription for 134,950 shares. The cancelled options relate to earned options for employees who have terminated their employment and are therefore will unable to exercise them.

4. Consolidated cash flow

Adjustment for items not included in cash flow

2008
Oct-Dec
2007
Oct-Dec
2008
Jan-Dec
2007
Jan-Dec
Depreciation/amortization and
impairments 2,600 2,368 10,734 5,875
Calculated costs for employee
stock option program -1,718 -1,885 1,531 1,381
Other -14 211 -11 205
Total 868 694 12,254 7,461

5. The Parent Company's costs distributed by type of cost

2008 2007 2008 2007
Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Raw materials and supplies 3,671 3,435 11,784 9,162
Other external costs 57,233 45,546 142,142 125,146
Personnel costs 34,093 23,932 109,522 77,603
Depreciation and impairment 1,797 1,530 7,147 4,571
Invoicing of rebuilding costs - - - 9,300
TOTAL 96,794 74,443 270,595 225,782

6. Shareholders' equity

Changes in the Parent Company's shareholders' equity

2008
Oct-Dec
2007
Oct-Dec
2008
Jan-Dec
2007
Jan-Dec
Shareholders' equity brought forward
according to balance sheet
588,620 205,951 665,932 328,406
Net profit/loss for the period 22,917 -30,639 -54,805 -159,898
Disposal of hedge options - - - -
Subscription of shares through the
exercise of warrants - 255 - 2,981
New share issues - 438,776 - 438,776
New issue of subscription warrants
Employee stock options, value of
- 52,875 - 52,875
employees' service -1,343 1,314 -933 5,392
Group contribution -1,000 -2,600 -1,000 -2,600
Amount at the close of the period 609,194 665,932 609,194 665,932

Note

Orexo AB Publ. discloses the information provided herein pursuant to the Securities Markets Act. The information was provided for public release on February 17, 2009 at 08:00 a.m. CET. This report has been prepared in both Swedish and English. In case of variation in the content of the two versions, the Swedish version shall take precedence.

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