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.

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
 

For more information, Karo Bio AB (publ)Novum, 141 57 Huddinge, Sweden
please contact: Telephone: +46 8 608 60 00
Per Bengtsson, Chief Facsimile: +46 8 774 82 61
Executive Officer Corp. reg. no. 556309-3359
Telephone:+46 8 608 6020 Website: www.karobio.com
or +46 734 474 128
E-mail:
per.bengtsson@karobio.se

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.