Interim report 1 january – 31 march 2000

INTERIM REPORT 1 JANUARY – 31 MARCH 2000

Karo Bio aquires Novalon Pharmaceutical Corporation.
The collaboration with Abbott Laboratories in the field of type 2 diabetes
began in January.
Compounds selected for clinical development in the Bristol-Myers Squibb
collaboration.
Animal trials for the prioritized indications are in progress for the
collaboration with Merck & Co. Compounds for other clinical indications
are being optimized.
A clinical phase II study has been started in the skin disorders program.
Net sales for the period increased to SEK 37.3 million (15.3).
Cash flow from operations increased to SEK 2.6 million (-10.8) and net
results after financial items improved to SEK 3.2 million (-9.9).
Liquid funds and short-term investments as of 31 March amounted to SEK
190.5 million, compared with SEK 187.8 million as of 31 December 1999.

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 drug discovery company working with the development of
receptor- and tissue-selective drugs for the treatment of widespread
diseases that are responsive to nuclear receptors. Operations are
conducted in collaboration with international pharmaceutical companies and
leading academic institutions in Sweden and other countries.

The Company is engaged in four different research programs:

Estrogen receptors (ER):
Within the field of women’s health care, e.g., menopausal symptoms,
osteoporosis, cardiovascular disease and cancer.
Thyroid hormone receptors (THR):
Cardiac arrhythmia, metabolic disorders, glaucoma and skin disorders.
Glucocorticoid receptor (GR):
Type 2 diabetes and inflammatory diseases.
Orphan receptors:
Discovery and characterization of new nuclear receptors as targets for
development of new pharmaceuticals.

COLLABORATIVE PROJECTS

Abbott Laboratories – Type 2 diabetes (GR)
The Abbott collaboration began in January and a down payment was received
the same month. The objective of the project is to develop pharmaceuticals
for the treatment of Type 2 diabetes in accordance with a new method
developed by Karo Bio and Karolinska Institutet. Compounds developed by
Karo Bio were optimized during the period and new compound classes were
designed and synthesized.

Bristol-Myers Squibb – Metabolic disorders (THR)
The methodology for of designing thyroid hormone agonists that reduce body
weight and reduce cholesterol without increasing heart rate was confirmed
last year. Compounds with the desired activity profile have been selected
for clinical development. Bristol-Myers Squibb and Karo Bio continue to
evaluate the mechanism of action of THR-beta agonists for the treatment of
metabolic disorders, with the objective of developing second-generation
compounds.

MERCK & Co. – Estrogen receptors
The broad collaboration is aimed at the development of pharmaceuticals
that act through the estrogen receptors Alpha and Beta and can result in
many products targeting different clinical indications. Animal trials are
in progress in relevant disease models with pharmaceutical compounds
developed for the prioritized indications.

The project has also generated substantial biological information, which
has been used to develop compounds for other clinical indications. The
compounds are currently being optimized and tested.

INTERNAL PROJECTS

Skin disorders – THR
Skin atrophy is a common side effect for patients undergoing
glucocorticoid (steroid) therapy. This can be counteracted with compounds
affecting the thyroid hormone receptors according to a method developed by
Karo Bio, upon which the company has applied for patent. Karo Bio filed an
IND during the period, which was approved by the Swedish Medical Products
Agency (Läkemedelsverket) in April. The clinical phase II study has been
started and is being conducted at Sahlgrenska Sjukhuset in Göteborg. The
study will be concluded in the fall of this year.

Cardiac Arrhythmia – THR
Karo Bio is seeking a partner for the further development of the
pharmaceutical compound KB 130 015 and concentrating in-house development
on a new generation of compounds. New compounds with improved properties
were developed during the period.

Glaucoma – THR
Eye drops have been developed and animal trials will start in May.

Other research and development
Karo Bio’s collaborative partnerships with Karolinska Institutet and other
academic institutions, the objective of which is to further survey the
function of both estrogen receptors in various tissues, continue to yield
interesting results.

Characterization of various orphan receptors and evaluation of additional
clinical indications are in continuous progress, aimed at starting new
research programs. New programs were started early this year.

Additional key competencies have been recruited during the year. The
company had 88 employees as of 31 March, compared with 84 at year-end 1999
and 78 as of 31 March 1999. Eighty of the Company’s employees are engaged
in research.

NOVALON PHARMACEUTICAL CORPORATION

Karo Bio entered into an agreement in March to acquire the American
biotech company Novalon Pharmaceutical Corporation. The board of directors
has proposed that the acquisition be carried out by means of an issue in
kind of a maximum of 2,294,293 shares and warrants in Karo Bio,
corresponding to 20% of Karo Bio after the new share issue and full
dilution. The proposal shall be considered by the Annual General Meeting
on April 26.

Novalon has 30 employees and operates out of Durham, North Carolina. The
company possesses key technologies, BioKey and Molecular Braille , that
complement Karo Bio’s technologies extremely well. The merger will
solidify Karo Bio’s leading position in the field of nuclear receptors.

REVENUES AND PERFORMANCE

Net sales for the Group and the Parent Company during the period amounted
to SEK 37.3 (15.3) million. The down payment received from Abbott in
January is included in net sales. Group costs increased to SEK 36.2 (27.4)
million. The largest items are salary costs consequent upon new hiring
since the first quarter of 1999, software for medicinal chemistry and
various success fees. The latter item was reported under “other operating
expenses.”

The company expanded into new premises at the beginning of the year.
Purchases of chemicals and consumables have increased due to intensified
research activities.

Group cash flow from operations increased to SEK 2.6 (-10.8) million and
consolidated net results improved to SEK 3.2 (-9.9) million. The Parent
Company is reporting net results of SEK 4.1 (-8.9) million. The difference
between the Group and the Parent Company is mainly made up of depreciation
of goodwill in the amount of SEK 1.3 (1.3) million.

Earnings per share for the period were SEK 0.35 (-1.08), calculated upon
the average number of shares. Owing to the consolidated losses carried
forward of SEK 448 million, income for the period was not taxable.

LIQUIDITY AND SHAREHOLDERS’ EQUITY
Liquid funds for the Group, including short-term investments, amounted to
SEK 190.5 million as of 31 March (187.8 as of 31 December 1999). The group
has no interest-bearing loans. Shareholders’ equity as of 31 March 2000
was SEK 212.3 million (SEK 209.2 million as of 31 December 1999).

The Company’s share capital of SEK 45,885,860 is divided among 9,177,172
shares at par value of SEK 5.

INVESTMENTS
Investments in equipment by the Group and Parent Company during the period
amounted to SEK 2.7 (1.2) million. These investments were primarily in
equipment for x-ray crystallography and computers for the software
purchased for medicinal chemistry operations. The x-ray equipment is now
in full operation and will give Karo Bio the opportunity to rapidly
determine receptor structures in-house.

OTHER INFORMATION

In connection with the Annual General Meeting on 26 April, Torben
Jørgensen will take office as president of the Company.

In addition to the non-cash issue directed at the shareholders of Novalon
and related decisions, the board is proposing the issue of 85,000 warrants
to employees of Karo Bio as a component in an incentive program. The
warrants will be subscribed by the newly acquired subsidiary on market
terms and sold thereafter to designated employees.

The Annual General Meeting will also be asked to authorize the board to
carry out one or more new share issues of up to 600,000 shares, with or
without waiver of the existing shareholders’ preferential rights. The aim
is to give the board the possibility to raise new capital for the company
from institutional investors. The issues will be carried out at market
price levels.

SCHEDULED REPORTS
Semi-Annual Report 12 July 2000
Interim Report, January-September 17 October 2000
Earnings Report for 2000 8 February 2001

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

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