Karo Bio to issue new shares with preferential rights

Karo Bio to issue new shares with preferential rights

· The Board of Directors of Karo Bio AB has on August 12, 2004
decided, subject to the approval by the special general meeting on
August 30, 2004, on a new share issue with preferential right for
existing shareholders. If fully subscribed, the rights issue will raise
approximately MSEK 96.

· A consortium consisting of existing as well as new shareholders
have secured 85 percent of the rights issue through guarantees and
letters of intent to subscribe for shares in the rights issue.

· In order to secure commitments from the consortium, the Board has
determined to offer an opportunity to subscribe for shares without
preferential rights in case of over-subscription and therefore proposes
that the special general meeting authorizes the Board to issue
additional shares equivalent to no more than 10 percent of the
outstanding shares after the rights issue.

· With a cash position calculated to last throughout the first
quarter 2005, the Company has an imminent need to raise capital. The
capital raising is conducted in order to secure continued operations and
development of the project portfolio as well as to provide the Company
with a better position when negotiating future collaboration agreements.

Background and reasons

Karo Bio is an innovative drug discovery company that is focused on
nuclear receptors for the development of novel pharmaceuticals. Nuclear
receptors are one of the most important drug targets for major diseases
and the importance is predicted to continue to increase in the future.
Nuclear receptors are key regulators of a number of biological processes
in the body. Therefore, specific intervention in nuclear receptor
function may allow for the development of novel pharmaceuticals with
improved efficacy and reduced adverse effects. Karo Bio has a strong
project portfolio targeting diseases with some of today’s largest unmet
medical needs, such as diabetes, obesity, atherosclerosis and
dyslipidemia, all with blockbuster potential.

Karo Bio’s business model implies outlicencing of projects, at a
suitable stage, to large pharmaceutical companies. So far, the Company
has limited this model to outlicensing of projects at early research
phases, from concept stage to drug discovery phase.

Today, Karo Bio has internal projects that may be developed further
internally into clinical phase before outlicensing. Such later stage
projects usually generate significantly higher value when outlicensing
compared to projects in preclinical stage as the project risk is lower
and also due to a shortage of high quality clinical stage projects.
Thus, it may be advantageous for Karo Bio to take selected projects into
clinical development in order to achieve higher project value when
outlicensing.

Karo Bio’s portfolio includes projects with compounds at different
stages, from drug discovery to late preclinical phase. The Company may
elect to outlicense these at early stage or to continue internal
development before outlicensing at a potentially higher value. Thus,
Karo Bio has reached a stage where the Company can be more flexible in
its business model and by selective later stage outlicensing increase
future earnings potential from the innovative portfolio. Recently, Karo
Bio has obtained rights to two compounds, KB3305 and KB2115, that have
been developed extensively by prior partners to Karo Bio, and
subsequently returned to the Company. Based on consultation with medical
opinion leaders in each area and experts in regulatory affairs, the
Company believes that these compounds might offer a major future
opportunity.

To secure continued operations and take advantage of the high potential
that lies in Karo Bio’s project portfolio, through internal as well as
external development, and also to strengthen the position of the Company
in ongoing discussions with potential collaboration partners, the Karo
Bio Board of Directors decided on August 12, 2004 to conduct a new share
issue with preferential rights for existing shareholders, subject to the
approval by the shareholders at a special general meeting August 30,
2004. Karo Bio has an imminent need to raise more capital as the cash
position is calculated to last throughout the first quarter 2005, a
situation that will be addressed through the proposed issue.

The issue

The Board of Directors of Karo Bio AB has on August 12, 2004 decided,
subject to the approval by the special general meeting of the
Shareholders on August 30, 2004, on a new share issue of no more than
11,260,043 shares 1) , each with a nominal value of SEK 5, with
preferential rights for existing shareholders. Each three shares held
entitle to subscription of two new shares at a price of SEK 8.50 per
share.

If fully subscribed, the rights issue will raise approximately MSEK 96
excluding transaction costs. Assuming full subscription, the share
capital will increase by no more than SEK 56,300,215.

A consortium consisting of existing as well as new shareholders have
secured 85 percent of the rights issue through guarantees and letters of
intent to subscribe for shares in the rights issue.

In order to secure commitments from the consortium, the Board has
determined that it is imperative to offer an opportunity to subscribe
for shares without preferential rights in case of over-subscription and
therefore proposes that the special general meeting authorizes the Board
to issue additional shares equivalent to no more than 10 percent of the
outstanding shares after the rights issue, 2,815,010 shares, at an issue
price of SEK 8.50 per share.

Provided the authorization is granted, and that the board resolves on a
new issue pursuant thereto, investors who have applied for new shares in
accordance with guarantee undertakings or statements of intent to
subscribe and who have not received shares to the extent applied for in
the rights issue, will be allocated shares. All shareholders will have
the opportunity to subscribe for more shares than entitled by their
shareholding at the record date.

The Board is of the view that the structure with a rights issue followed
by another issue in order to meet potential over-subscription is the
most favorable alternative to meet Karo Bio’s imminent capital need.

Terms in Brief

Stated terms in brief and time schedule for the rights issue are listed
below.
· Each three shares held entitles to subscribe for two new shares
· The subscription price is SEK 8.50 per share
· Last date for trading in the Karo Bio shares including rights to
participate in the issue is September 3, 2004
· Record date for participation in the rights issue is September 8, 2004
· Trading in subscription rights will take place September 13 – 28, 2004
· The subscription period is from September 13 – October 1, 2004
· Prospectus, subscription form and issue statement will be
distributed to Karo Bio’s shareholders beginning around September 10, 2004

Special General Meeting

The Board of Directors’ decision on a rights issue is subject to
approval by the special general meeting on August 30, 2004. Notice for
the special general meeting will be announced Monday August 16 through a
press release as well as on Company’s web site at www.karobio.com/sgm.

ABG Sundal Collier is financial advisor to Karo Bio.

Huddinge, August 13, 2004

The Board of Directors
KARO BIO AB

For further information, please contact

Björn O. Nilsson, President & Chief Executive Officer, phone +46 8 608 60 20

Facts about Karo Bio

Karo Bio has operations in Huddinge, Sweden. The Company has 95
employees.

Karo Bio has been listed on the Stockholm stock exchange (Reuters:
KARO.ST) since 1998 and maintains a leading position in the field of
drug discovery focused on nuclear receptors. Nuclear receptors are
validated drug targets for a number of clinical indications and the
Company uses proprietary technologies for the development of novel and
improved therapies for major markets.

Karo Bio has drug discovery programs in several therapeutic areas
including women’s health care, cancer, cardiovascular disease,
atherosclerosis and diabetes.

Karo Bio collaborates with major pharmaceutical companies for the
development of products and marketing. In these collaborations Karo Bio
receives upfront payments, R&D funding and milestone payments, as well
as royalties on net sales when products reach the market.

Karo Bio has strategic pharmaceutical drug discovery collaborations with
Merck & Co., Inc. and Wyeth Pharmaceuticals.

This press release is also available online at www.karobio.com and at
www.waymaker.net. Prior to exercise of outstanding warrants. Should
new shares be issued before the record date for the rights issue through
the exercise of warrants, such shares will be entitled to participate in
the rights issue whereby the number of new shares will increase.

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