Quarterly report april-june 2001

QUARTERLY REPORT APRIL-JUNE 2001

· Björn Nilsson took office as President on July 1.

· New technology for lead compound characterization and selection
in-licensed from Duke University, North Carolina.

· US patent on Estrogen Receptor Beta crystal structures
received.

· US patent on Thyroid Hormone Receptor crystal structures and
drug design principles received.

· Group net sales in the second quarter increased to MSEK 27.2
(22.8), and cash flows from operating activities amounted to MSEK
-26.3 (1.4).

· The loss after financial items increased to MSEK 92.5 (55.6),
primarily due to goodwill depreciation regarding Karo Bio USA and
increased activities. Operating loss excluding goodwill depreciation
amounted to MSEK 33.0 (17.3).

· Cash and cash equivalents and short-term investments amounted
to MSEK 263.2 (366.0) at the end of the period.
·
OPERATIONS
Karo Bio is a leading drug discovery company in the field of nuclear
receptor biology and medicinal chemistry. The Company develops receptor-
selective and tissue-selective pharmaceuticals for treatment of major
disorders. Karo Bio has operations in Sweden and in North Carolina and
California in the United States. The Company maintains collaborations
with leading academic groups and leading international pharmaceutical
companies.

COLLABORATIVE PROJECTS
Abbott Laboratories
The project aims at development of a novel therapy for treatment of type
2 diabetes. Identification and optimization of lead compounds for
clinical trials continue.

Bristol-Myers Squibb
This project focuses on novel therapies for treatment of metabolic
disorders by targeting thyroid hormone receptors. The primary indication
is obesity and preparation for clinical trials are ongoing.

Merck & Co
The Merck project targets estrogen receptors and development of novel
therapies in the field of women’s health care. Karo Bio’s discovery of
the new estrogen receptor beta is an important cornerstone in the
project. Selection of clinical development candidates is underway.

BioKey Assays Collaborations
Karo Bio continues to collaborate with several pharmaceutical and
biotechnology companies – Aventis Pharma, Bayer AG, Boehringer Ingelheim
Pharmaceuticals, Inc., GPC Biotech, NovImmune S.A. and Serono
International S.A. – to establish high throughput screening assays for
novel drug targets.

INTERNAL PROJECTS
Skin Disorders
Phase II clinical data for the treatment of steroid induced skin atrophy
with KB-261 are currently being analyzed.

Cardiac Arrhythmia
Karo Bio’s lead compound KB130015 and second-generation products for the
treatment of cardiac arrhythmia are currently the subjects of
discussions with pharmaceutical companies.

Glaucoma
In this project, the thyroid hormone receptor is a novel target for the
treatment of glaucoma where the objective is to treat this disorder by
lowering intra-ocular pressure.

Exploratory Program
Karo Bio’s exploratory research activities are focused on the
mineralocorticoid receptor, the androgen receptor and the orphan
receptor LXR. Drugs that act through these receptors may be utilized to
treat high blood pressure, prostate cancer and cardiovascular disease.

BioKey Assay for Genomics-based Antimicrobials
Karo Bio utilizes its proprietary BioKey Assay to discover drugs to
treat infectious diseases based on novel bacterial drug targets. Lead
compounds for the novel essential gene products DXR and IspB are
currently being tested.

TECHNOLOGY DEVELOPMENT
Karo Bio is focused on the discovery and development of novel
therapeutics for which access to leading technology is very important.
In May, Karo Bio reached an Agreement with Duke University, Durham,
North Carolina, granting Karo Bio the exclusive rights to technologies,
including Cellular Brailletm, developed at Duke University Medical
Center. The Cellular Braille technology further expands the capabilities
of the Karo Bio Molecular Braille® technology that was previously
developed by Karo Bio USA in collaboration with scientists at Duke
University Medical Center. See below for further information regarding
financial effects and accounting treatment.

Karo Bio has also received four US patents in the second quarter. The
subject of one of these is a novel method to treat certain skin
disorders. It provides broad coverage including method of treatment
claims as well as claims for skin treatment compositions with thyroid
hormones and thyroid hormone analogs. US patents have also been granted
that cover structural information related to the estrogen and thyroid
hormone receptors.

ORGANIZATION
Björn Nilsson took office as President on July 1.

By the end of the period, Karo Bio had 124 employees (115). Of these, 36
are based in the United States and 102 are engaged in research.

RESULTS AND FINANCING
Group net sales for the second quarter increased to MSEK 27.2 compared
to the same period last year (22.8 after restatement following the
change in accounting principle regarding revenues, see Accounting and
Valuation Principles below). Group expenses increased by MSEK 39.7 to
MSEK 120.6 (80.9), which was primarily due to the acquisition of Karo
Bio USA, increased activities and costs in relation to the change of
president. Goodwill depreciation increased by MSEK 19.7 and operating
expenses increased from the activities in Karo Bio USA, which were not
included in prior period figures for all three months.

The operating loss amounted to MSEK 93.4 (58.1). Operating loss
excluding goodwill depreciation amounted to MSEK 33.0 (17.3). Financial
income amounted to MSEK 0.9 (2.4).

Cash flows from operating activities amounted to MSEK -26.3 (1.4).
Investment in technology resulted in cash flow of -10.7 (-0.0). Capital
investments in equipment amounted to MSEK 5.7 (1.0). Capital investments
were mainly new laboratory equipment to enhance capacity and
capabilities.

As a consequence, cash and cash equivalents and short-term investments
amounted to MSEK 263.2 (366.0) at period-end.

Loss per share for the period amounted to SEK 7.70 (5.28), based on the
weighted average number of shares outstanding. Corresponding fully
diluted figures are SEK 7.52 (5.24). The Group’s equity/assets ratio as
of period-end was 89.2% (93.4%) and equity per share at period-end was
SEK 58.97 (86.03).

INVESTMENT IN TECHNOLOGY
The investment in exclusive rights to technologies from Duke University
as per the Agreement described above was capitalized in May 2001. The
amount capitalized represents the net present value of the determinable
payments according to the Agreement. Payments will be made over a four-
year payment schedule.

Additional payments contingent on patents being received and milestone
payments are provided for in the Agreement. These future payments will
be substantially less than the amount capitalized.

Depreciation will be taken over a three-year period, beginning in May
2001. Due to the rapid development in the biotech area, a longer
depreciation period was not considered appropriate. The milestone
payments will be expensed as incurred in order to match expected
milestone payments received from partners.

SHAREHOLDERS’ EQUITY
Shareholders’ equity increased by MSEK 0.1 from the exercise of
warrants, leading to 10,688 new shares.

The Incentive Program 2001 was introduced in May 2001, following the
decision made at the Shareholders’ Meeting on April 26, 2001. Warrants
representing 340,000 shares were issued. In addition, the 85,000
warrants relating to the Incentive Program 2000 were canceled in May
2001, also following a decision made at the Shareholders’ Meeting.

Consequently, the Company’s share capital of SEK 60,107,455 at the end
of the period was divided among 12,021,491 shares at par value of SEK 5.
In addition, warrants representing 389,943 shares were outstanding.

Total shareholder’s equity amounted to MSEK 708.9 after taking into
account effect of the change in accounting principle and the loss for
the period

ACCOUNTING AND VALUATION PRINCIPLES
This quarterly report has been prepared in accordance with the Swedish
Financial Accounting Standards Council’s (the Council) standard RR 20
for interim reports. The accounting and valuation principles applied are
consistent with provisions of the Swedish Annual Accounts Act and
standards issued by the Council. With exception from the change in
accounting policy described below, the principles are unchanged compared
to what was applied in the Annual Report for 2000.

Karo Bio has decided to change the accounting for down payments from
collaborative research projects. Such down payments are received at the
initiation of collaborations and are non-refundable. In previous
periods, non-refundable down payments were reported as revenue when
received. Beginning January 1, 2001, non-refundable down payments are
reported as revenue over the term of the collaborative research
agreement, which usually is three years. The change is compliant with
the new accounting standard regarding Revenue Recognition RR 11 issued
by the Council, which is effective January 1, 2001. Comparative figures
for prior periods have been restated accordingly.

Amounts or figures in parentheses indicate comparative figures for the
corresponding period last year.

SCHEDULED RELEASES OF FINANCIAL INFORMATION
Karo Bio intends to distribute financial reports as follows:

· Quarterly Report: October 17.
· Full Year Report: February 8, 2002.
·

[REMOVED GRAPHICS]

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Huddinge, July 12, 2001

Björn Nilsson, President

For further information, please contact
Per Otteskog, Senior Vice President Investor Relations & Communications,
tel. +46 8 608 60 18 or Bertil Jungmar, Vice President Finance &
Administration,
tel. +46 8 608 60 52.

This report has not been subject to review by the Company’s independent
auditor.

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