Interim report

INTERIM REPORT
1 JANUARY – 30 SEPTEMBER 1998

* Operating income increased to SEK 46.6 (20.3) million.
* Net loss for the period amounted to SEK -15.7 (-33.2).
* Liquid funds and short-term investments amounted to SEK 209 million,
compared to SEK 127.0 million on 31 December 1997.
* The collaboration projects with Bristol-Myers Squibb (BMS) and Merck & Co
(Merck) are advancing positively and according to plan.
* Important results in the Company’s project for the treatment of type 2
diabetes have been achieved. Additional trials strengthen Karo Bio’s project.

KARO BIO AB
Novum, Hälsovägen 7, 141 57 Huddinge, Sweden
Telephone: +46 (0)8-608 60 00; Fax: +46 (0) 8-774 82 61; E-mail:
info@karobio.se; website: https://www.karobio.se/

OPERATIONS
Karo Bio is a leader in the field of nuclear receptors, aiming at developing
innovative pharmaceutical compounds that interact with the receptors. Research
is conducted in close collaboration with international pharmaceutical
companies and leading academic institutions. At present, the Company is
running four different research programs.

Estrogen receptors
A number of important disease conditions are related to estrogen receptors,
such as osteoporosis, cardiovascular diseases, Alzheimer’s disease, urinary
incontinence and breast cancer. At the beginning of the year, the x-ray
crystal structure of the estrogen receptor Beta was determined, which
strengthened Karo Bio’s leading position in the field. The Beta-structure and
the structure of the estrogen receptor Alpha have shown to be of great
importance in the comprehensive chemical design and synthesis work, and a
number of structures in complex with new pharmaceutical compounds have been
determined.

The Company has initiated a new collaboration with the Karolinska Institute in
Huddinge in order to further elucidate the function of the various estrogen
receptors in different tissues.

Thyroid hormone receptors
The programs are aimed at the development of drugs for treatment of cardiac
arrhythmia, metabolic disorders, skin diseases and glaucoma. The Company has
access to x-ray crystal structures for both the Alpha and Beta thyroid hormone
receptors and has recently determined additional structures of these receptors
complexed to specific pharmaceutical compounds. These accomplishments have
directed the design and characterization of selective compounds with relevant
pharmacologic properties that have been successfully tested in animal models.

There are indications that the compounds could be used also for treatment of
other diseases.

Glucocorticoid receptors
The Glucocorticoid receptor is important for development and treatment of
inflammatory disorders such as asthma and rheumatic diseases and for type 2
diabetes. In collaboration with the Karolinska Institute in Solna, Karo Bio is
developing a new principle for treatment of type 2 diabetes where the liver is
the target. Important results have been achieved through the development of
liver selective compounds. The latest results show that low doses of Karo
Bio’s compounds significantly lower blood glucose levels in animals and that
the compounds are effective both in the fasting and fed states which is of
great importance for their future use.

Orphan receptors
Identification and characterization of new nuclear receptors as drug targets
is an important research activity, which is being conducted in close
collaboration with academic institutions. Interesting discoveries have been
made during the year, primarily in relation to the orphan receptor OR-1.

Two new chemistry laboratories were completed during the year, and additional
chemists have been recruited. The Company had 71 employees at the end of
September 1998, compared to 60 at year-end 1998 and 58 in September 1997.

COLLABORATIVE PROJECTS
Since the autumn of 1997 Karo Bio has been collaborating with Bristol-Myers
Squibb within the field of metabolic disorders and with Merck & Co. within the
estrogen field. Both projects are proceeding positively and according to plan.

Between 1994 and 1997 Karo Bio collaborated with Novo Nordisk A/S within the
field of hormone replacement therapy. The collaboration resulted in the
identification of a preclinical lead candidate NNC 45-0781 with very promising
properties, In addition, Novo Nordisk had a compound – levormeloxifene – in
their possession before the collaboration with Karo Bio started, which has
been subject for clinical trials. In September, Novo Nordisk announced that
further development of levormeloxifene for the treatment of osteoporosis had
been discontinued due to an unfavourable therapeutic index for this
indication. The consequences for the further development of NNC 45-0781 are
being evaluated by Novo Nordisk A/S.

INCOME AND PROFIT / LOSS
Net sales for the Group during the period amounted to SEK 46.6 (20.3) million,
which also applies to the Parent Company. Net sales for the period are made up
of income from Bristol-Myers Squibb and Merck & Co. During the corresponding
period in 1997, income was derived from Novo Nordisk and the Swedish
Industrial Development Fund. The new research collaborations and additional
resources to the internal programs have increased the Group’s costs by SEK
12.0 million compared to the same period last year. Consolidated loss for the
Group during the period improved to SEK -15.7 (-33.2) million, and for the
Parent Company to SEK -12.2 (-29.3) million. The difference is primarily
attributable to depreciation on goodwill in the amount of SEK 3.9 (3.9)
million. Earnings per share were SEK -1:80
(-4:70), calculated on the average number of shares. As a result of the
consolidated loss and the accumulated loss carried forward for the Group, for
a total of SEK 393 million, the effective tax rate was zero.

LIQUIDITY AND EQUITY/ASSETS RATIO
The Company’s shares were listed on the Stockholm Stock Exchange’s O-list on 3
April, 1998, when two new issues of 1,290,000 shares of series B were carried
out at a price of SEK 92 per share. SEK 111 million was raised and share
capital now totals SEK 45,885,860, which corresponds to 9,177,172 shares.

On 30 September 1998, liquid funds for the Group, including short-term
investments, amounted to SEK 209.0 million (SEK 127.0 million on 31 December
1997). There are no interest-bearing loans within the Group. Equity was SEK
252.8 million on 30 September 1998 (SEK 157.8 million on 31 December 1997).
The equity/assets ratio of the Group was 89% on 30 September. Equity per share
was SEK 27.54. The corresponding figures on 31 December 1997 were 84% and SEK
20.

INVESTMENTS
Group investments in machinery and equipment during the period amounted to SEK
9.5 million (4.2). The largest items are a laboratory for combinatorial
chemistry, built within existing facilities, and the new laboratory for
medicinal chemistry built on adjoining premises in Novum.

NEXT REPORT
The unaudited annual figures will be released on 11 February 1999.

This report has not been reviewed by the Company’s auditor.

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