Quarterly report July-September 2001

QUARTERLY REPORT JULY-SEPTEMBER 2001

·American Home Products becomes strategic partner for
atherosclerosis. The agreement may bring Karo Bio MUSD 100 in revenues
excluding royalty. Down payment received.

·Milestone payment from Karo Bio’s partner Bristol-Myers Squibb
earned after initiation of Phase I clinical trials on jointly discovered
compound for treatment of obesity.

·Interim reporting on clinical studies using KB002611 in the skin area.

·Karo Bio receives US patent for the Liver X Receptor .

·Organization strengthened with key management recruitments.

·Group net sales in the third quarter increased to MSEK 47.6
(23.5), and cash flows from operating activities increased to MSEK 52.8 (-33.1).

·The loss after financial items decreased to MSEK 65.0 (74.7).
Operating loss excluding goodwill depreciation amounted to MSEK 4.6 (14.3).

·Cash and cash equivalents and short-term investments amounted
to MSEK 306.9 (331.4) 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 USA. The Company
maintains collaborations with leading academic groups and major
international pharmaceutical companies.

COLLABORATIVE PROJECTS
American Home Products
Karo Bio has entered into a new strategic collaboration with American
Home Products. The target is the Liver X Receptor (LXR) and the initial
focus is the clinical indication of atherosclerosis. LXR is believed to
be a key regulator of cholesterol metabolism. Karo Bio has strong patent
protection in the LXR field.

Karo Bio has received a down payment at the initiation of the agreement
and will receive R&D funding and milestone payments. These may bring
Karo Bio MUSD 100 if two products are brought to the market. Karo Bio
will also receive royalties on sales revenue and an in-market bonus if
certain sales goals are met.

Abbott Laboratories
The indication in this project is type 2 diabetes and the glucocorticoid
receptor (GR) in the liver is the target. Optimization and selection of
clinical development candidates continue.

Bristol-Myers Squibb
The thyroid hormone receptor (THR) is the target in this drug discovery
collaboration, whose objective is the development of novel treatment for
metabolic disorders. Currently the primary indication is obesity and
during the period an Investigational New Drug application (IND) has been
filed with the Food and Drug Administration (FDA) and Phase I clinical
studies were initiated with a novel TR modulator.

Merck & Co.
The project targets estrogen receptors (ER). The collaboration aims at
development of novel treatments in the field of women’s health care. The
selection and optimization of clinical development candidates continues.

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
Karo Bio has made an interim report on its Phase I and Phase II studies
on KB002611. A positive recovery of healthy skin from steroid treatment
was demonstrated after treatment with KB002611 based upon procollagen
production. The interim report of results from the study on patients
with established skin atrophy do not show increased skin thickness when
measured by sonography. Morphological evaluation of skin biopsies is
ongoing.

Cardiac Arrhythmia
A novel mechanism for the Karo Bio lead compound KB130015 has been
discovered. Patent applications have been filed.

Glaucoma
The aim in the project is to develop novel treatments for glaucoma by
use of thyroid hormone agonists. Karo Bio is seeking a partner for the
project.

Exploratory Program
Karo Bio continues to pursue the discovery of novel drug compounds
targeting the androgen receptor for the treatment of diseases within
men’s health. In addition, high priority is given to develop tissue-
selective compounds targeting the glucocorticoid receptor for the
treatment of inflammatory diseases.

BioKey Assay for Genomics-based Antimicrobials
This project focuses on drug discovery targets that have never been
utilized for the discovery of antibacterial compounds. BioKey Assays and
several lead series targeting two distinctly different protein targets
have been developed. Karo Bio will now seek a licensing partner for the
project. Resources that become available will be used to strengthen
exploratory nuclear receptor projects.

ORGANIZATION
Karo Bio’s organization has recently been strengthened through three key
management recruitments.

Mats Johnson has been recruited as Vice President of Marketing and
Business Development. He comes from a leading position as Vice President
of Proteomics business in Amersham Pharmacia Biotech. Mats Johnson has
an excellent background to continue to develop Karo Bio’s marketing
strategy.

Anders Berkenstam has been recruited as Director of Research for Sweden.
Anders Berkenstam’s present employment is President and head of research
for Gemini, Sweden. Stefan Nilsson, one of Karo Bio’s leading
scientists, has been appointed Director of Exploratory Research. This
new position is important for generation of new concepts and projects.
Both these positions are reporting directly to the Chief Scientific
Officer Dana Fowlkes.

Berit Edlund will fill a newly created position as Director of Human
Resources. Berit Edlund’s previous experience includes leading positions
within Pharmacia Corporation, Skandia and Ericsson. She will join the
Company on October 24.

By the end of the period, Karo Bio had 126 employees (120). Of these, 36
are based in the United States and 104 are engaged in research.

RESULTS, CASH FLOW AND FINANCING
Group net sales for the third quarter increased to MSEK 47.6 compared to
the same period last year (23.5 after restatement following the change
in accounting principle regarding revenues, see Accounting and Valuation
Principles below). The increase in revenue consists primarily of a
milestone payment from Bristol-Myers Squibb, which was recorded fully as
revenue in the third quarter. Revenues increased also from research
funding and the period’s share of the down payment from the new research
collaboration with American Home Products.

Group expenses increased by MSEK 15.0 to MSEK 116.3 (101.3), which was
due to costs in relation to the start-up of the new collaboration
agreement, increased activities in other areas, and royalty to the
Swedish Industrial Development Fund and success fees to advisors
relating to the milestone payment from Bristol-Myers Squibb included in
other operating expenses.

The operating loss amounted to MSEK 68.6 (77.8). Operating loss
excluding goodwill depreciation amounted to MSEK 8.2 (17.3). Financial
income amounted to MSEK 3.6 (3.1).

Cash flows from operating activities increased to MSEK 52.8 (-33.1) as a
result mainly from the cash receipt of research funding and down payment
from American Home Products. Capital investments in equipment amounted
to MSEK 9.2 (1.5). Capital investments were mainly Nuclear Magnetic
Resonance (NMR) spectrometer and other laboratory equipment to enhance
capacity and capabilities.

As a consequence, cash and cash equivalents and short-term investments
amounted to MSEK 306.9 (331.4) at period-end.

Loss per share for the period amounted to SEK 5.41 (7.09), based on the
weighted average number of shares outstanding. Corresponding fully
diluted figures are SEK 5.24 (7.03). The Group’s equity/assets ratio as
of period-end was 81.3% (94.7%) and equity per share at period-end was
SEK 53.55 (79.79).

SHAREHOLDERS’ EQUITY
Shareholders’ equity increased by kSEK 21 from the exercise of warrants,
leading to 4 186 new shares.

Consequently, the Company’s share capital of SEK 60 128 385 at the end
of the period was divided among 12 025 677 shares at par value of SEK 5.
In addition, warrants representing 385 757 shares were outstanding.

Total shareholder’s equity amounted to MSEK 643.9 after taking into
account the 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.

The investment in exclusive rights to technologies from Duke University
as per the Agreement described in the Quarterly Report for the period
April-June 2001 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. Depreciation will be taken over a three-year period, beginning
in May 2001.

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:

· Full Year Report: February 8, 2002.
·
Huddinge, October 17, 2001

Björn Nilsson, President

For further information, please contact
Per Otteskog, Senior Vice President Investor Relations & Communications,
tel. +46 8 608 60 18, Bertil Jungmar, Vice President Finance & Administration,
tel. +46 8 608 60 52 or Björn Nilsson, President, tel +46 70 218 15 00.

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

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