Quarterly report – January-March 2001

QUARTERLY REPORT – JANUARY-MARCH 2001

· Björn Nilsson appointed new President.
· Bristol-Myers Squibb collaboration expanded to include Molecular
Braille® technology for identification of second generation compounds
and development of new indications.
· Major breakthrough achieved through the determination of the three-
dimensional structure of the glucocorticoid receptor.
· The LXR receptor established as an important target for treatment
of atherosclerosis.
· US patent awarded for new treatment of skin disorders by use of
thyroid hormone and thyroid hormone analogs.
· Group net sales decreased to MSEK 23.8 (25.7), and cash used in
operating activities amounted to MSEK -20.5 (5.4).
· The loss after financial items increased to MSEK -80.6 (-8.0),
primarily due to goodwill depreciation regarding Karo Bio USA. Loss
excluding goodwill depreciation amounted to MSEK -20.2 (-6.7).
· Cash and cash equivalents and short-term investments amounted to
MSEK 305.8 (190.5) 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 and maintains collaborations with
leading academic groups and the international pharmaceutical industry.
The Company is engaged in five research programs.

Estrogen Receptor (ER) Program
This program focuses on development of new therapies for diseases,
primarily in the area of women’s health, where the estrogen receptors
play key roles in disease development. The program is a collaboration
with Merck & Co.

Thyroid Hormone Receptor (THR) Program
This program covers indications affected by THR with a major focus on
metabolic diseases with Bristol-Myers Squibb as a collaborator. Internal
projects in the areas of cardiac arrhythmia, skin disorders and glaucoma
are a part of the program.

The Glucocorticoid Receptor (GR) Program
Metabolic diseases and inflammatory disorders are important indications
in this program. Karo Bio collaborates with Abbott Laboratories for
novel treatments of type 2 diabetes whereas the inflammation project is
internal.

Exploratory Program
The nuclear receptor technology and expertise at Karo Bio are applicable
to any nuclear receptor and Karo Bio is currently launching new projects
covering previously known receptors but with a focus on new indications.

Several new projects have been strengthened with access to new
technology, such as Karo Bio USA’s BioKey® probe technology. The program
covers the androgen receptor (AR) with indications such as prostate
cancer and the mineralocorticoid receptor (MR) for heart failure.

Karo Bio is also involved in the identification of new nuclear receptors
and the validation of these receptors as targets for new indications.
The research is conducted in collaboration with academia and as new
receptors and targets are validated, new projects are initiated by Karo
Bio, such as the Liver X Receptor (LXR) project for atherosclerosis.

BioKey® Program
This program is conducted by Karo Bio USA and the targets are various
human genomic-based proteins as well as bacterial and fungal proteins
for development of broad spectrum antibiotics and G-protein coupled
receptors for various indications. The program covers both external
collaborations and internal projects.

Collaborative Projects
Abbott Laboratories
The Abbott collaboration focuses on a novel therapy for type 2 diabetes
that involves development of Glucocorticoid Receptor antagonists. The
project was initiated in January 2000, and lead identification and
optimization are ongoing. In a major scientific breakthrough, the
collaboration recently solved the three-dimensional structure of the
glucocorticoid receptor.

Bristol-Myers Squibb
This collaboration focuses on novel treatments for metabolic disorders
using the thyroid hormone receptor as the target. The primary indication
is obesity, and proof of principle with lead compounds has been obtained
in relevant animal models. Preclinical development is being completed,
and an IND for obesity is currently in the process of being assembled.

On March 12 the three-year collaboration between Karo Bio and Bristol-
Myers Squibb (BMS) was extended for the second time and expanded to
include Karo Bio Molecular Braille® technology. The expansion extended
the term of the collaboration for one year and includes new milestones.
It is also the first agreement that will apply Molecular Braille®
technology. The aim is to accelerate the development of the second
generation products within the BMS collaboration. The technology appears
promising for the characterization and selection of tissue selective
compounds.

Merck & Co.
The collaboration with Merck & Co. includes estrogen receptors alpha and
beta and covers several possible clinical indications, primarily in the
field of women’s health care. The project was initiated in November 1997
and was extended last fall for two more years. Clinical indications have
been prioritized, and the project is advancing as planned through
preclinical testing.

BioKey® Assays Collaborations
Karo Bio has several genomics based drug discovery collaborations with
companies such as Aventis Pharma, Bayer AG, Boeringer Ingelheim
Pharmaceuticals, Inc., GPC Biotech, NovImmune S.A. and Serono
International S.A. In these collaborations, Karo Bio uses its
proprietary BioKey® probe assay technology to establish high throughput
screens for the discovery of novel chemical compounds. These compounds
act via drug targets discovered in Karo Bio’s partner’s genomics
programs. In addition to receiving research support and milestone
payments, Karo Bio is eligible to receive royalty payments upon sales of
therapeutic products resulting from these collaborations.

Internal Projects
Skin Disorders
Karo Bio has developed a product containing a thyroid hormone analog
formulated in an ointment. This product may be of value in a variety of
skin disorders. Karo Bio has chosen steroid induced skin atrophy as the
first indication. Clinical phase II studies were initiated last year and
were recently finalized. The documentation regarding clinical
appearance, skin thickness and collagen content is currently being
prepared. A phase I study on stimulation of collagen production in
healthy volunteers has recently been concluded.

Cardiac Arrhythmia
There is a great need for novel anti-arrhythmic pharmaceuticals. Karo
Bio has developed KB 130015, which in animals has shown promising
properties. The compound is now being evaluated by potential industrial
partners. Karo Bio has also developed second-generation compounds, which
are currently being evaluated in animals.

Glaucoma
Animal studies with various thyroid hormone analogs have recently been
finalized. Compounds given as eye drops were well taken up and caused no
irritation. Karo Bio is now seeking a partner for the project for
further evaluation in preclinical and clinical studies.

Exploratory Program
The prioritized receptors and indications in this program are MR for
heart failure, AR for male hormone replacement therapy, GR for
inflammatory disorders and LXR for atherosclerosis. All projects are in
the early stages of drug discovery. However the breakthrough in the
solving of the three-dimensional structure for GR is very significant
for the GR inflammation project. In relation to inflammatory disorders,
GR is one of the most important pharmaceutical targets and the three
dimensional structure gives Karo Bio an important competitive advantage
especially for the design of novel compounds. Recently, the concept of
treating and preventing atherosclerosis by targeting LXR has received
strong academic and industrial support. In this field, Karo Bio has a
strong patent position and an excellent academic network.

BioKey® Assay
Karo Bio continues to utilize its proprietary BioKey® assay technology
to screen for compounds targeting gene products known to be essential
for bacterial growth. Recently the Company has initiated lead
optimization for one compound series.

Organization
By the end of the period, there were 119 employees (88). Of these, 33
are based in the United States and 101 are engaged in research.

Results and Financing
Net sales for the period for the Group decreased to MSEK 23.8 (25.7 in
January-March 2000 after restatement following the change in accounting
principle regarding revenues, see Accounting and Valuation Principles
below), made up of research funding and down payments from the Group’s
partners. Group expenses increased by MSEK 72.1 to MSEK 107.8 (35.7),
which is primarily due to the acquisition of Karo Bio USA. Goodwill
depreciation increased by MSEK 59.2 and operating expenses increased by
MSEK 12.7 from the activities in Karo Bio USA, which are not included in
prior period figures. In addition, marketing expenses increased due to
increased focus on business development in relation to both existing
projects and exploratory programs, and increased activity regarding
intellectual property.

The operating loss increased to MSEK -84.0 (-10.0). Financial income
increased to MSEK 3.4 (2.0).

Cash used in operating activities amounted to MSEK -20.5 (5.4) primarily
due to the absence of down payments and milestone payments in 2001.
Capital investments in equipment amounted to MSEK 2.7 (2.7). Capital
investments were mainly laboratory equipment for high throughput
screening.

As a consequence, cash and cash equivalents and short-term investments
amounted to MSEK 305.8 (190.5) at period-end.

Loss per share for the period amounted to SEK -6.71 (-0.87), based on
the weighted average number of shares outstanding. Corresponding fully
diluted figures are SEK -6.63 (-0.87). The Group’s equity/assets ratio
as of period-end was 93% (75%) and equity per share at period-end was
SEK 66.72 (20.70).

Shareholders’ Equity
Shareholder’s equity increased by MSEK 58.5 from the exercise of
warrants, leading to 11,702 new shares.

Consequently, the Company’s share capital of SEK 60,054,015 is now
divided among 12,010,803 shares at par value of SEK 5. In addition,
there are warrants outstanding representing 145,631 shares.

Total shareholder’s equity amounts to MSEK 801.3 after the effect from
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 the collaboration 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 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 have been
restated accordingly.

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

Events After the End of the Report Period
New President
Karo Bio’s Board of Directors has recruited Björn O. Nilsson to become
the new President for the company succeeding Torben Jørgensen who left
the company on April 23, 2001. Until now Björn Nilsson has been Head of
Research at Amersham Pharmacia Biotech AB in Uppsala. The Board has also
appointed Per Otteskog, Senior Vice President Investor Relations, as
acting President. The exact time for Björn Nilsson’s start at Karo Bio
has not been determined but it will take place within three months.

US Patent for New Treatment of Skin Disorders
Karo Bio announced in a press release April 25 that the company has
received a US patent for methods to treat certain skin disorders. This
patent provides broad coverage including method-of-treatment claims as
well as claims for skin treatment compositions with thyroid hormone as
well as analogs of thyroid hormone.

Previously, Karo Bio has carried out animal studies that demonstrated
desirable effects of thyroid hormone and thyroid hormone analogs upon
the composition of treated skin. These studies also demonstrated that
these compounds blocked the negative effects of anti-inflammatory
steroids upon skin composition. The Company believes that the treatment
of certain skin diseases with thyroid hormone analogs has considerable
advantages over other treatments such as those with vitamin A analogs.

Scheduled releases of financial information
Financial Reports Karo Bio intends to distribute financial reports as
follows:

· Quarterly Reports: July 12, October 17.
· Full Year Report: February 8, 2002.

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