Quarterly Report January-March 2002

QUARTERLY REPORT JANUARY-MARCH 2002

Clinical development for the first obesity compound discontinued. The
project continues and a program to replace the compound is in place.

European patent obtained for the LXR beta.

US grant obtained for prostate cancer research.

Group net sales increased to MSEK 37.4 (23.8). Cash flows from operating
activities amounted to MSEK -38.7 (-20.5).

The loss after financial items decreased to MSEK 79.5 (80.6). Operating
loss excluding goodwill depreciation decreased to MSEK 21.4 (23.5).

Cash and cash equivalents and short-term investments amounted to MSEK
241.9 (305.8) 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.

Karo Bio has four strategic partnerships with international
pharmaceutical companies for development of new innovative therapies for
treatment of common diseases. Karo Bio also runs several internal
projects in various clinical areas where the Company has competitive
advantages for discovery of new pharmaceuticals that target nuclear
receptors. Exploratory studies in novel nuclear receptor areas are
conducted in order to maintain a strong pipeline. These studies cover
new indications for classical receptors as well as discovery and
characterization of new receptors.

Strategic Partnerships

Atherosclerosis – Wyeth Pharmaceuticals
The LXR beta is a new and important target for treatment and prevention
of atherosclerosis. There are reasons to believe that the LXR beta is an
important target for other metabolic disorders. Karo Bio has a strong
technology and patent position in the LXR beta field.

The project with Wyeth Pharmaceuticals (previously named American Home
Products) has progressed very well since the initiation in September
2001. New scientific findings further support the importance of LXR beta
as a drug target in development of new treatments for atherosclerosis.
Interesting lead compounds have been identified in the screening process
and significant progress has been made regarding the determination of
the three-dimensional LXR beta structure. Karo Bio has also during the
period received European patent protection for LXR beta as a drug
target.

Diabetes – Abbott Laboratories
Karo Bio collaborates with Abbott Laboratories for research on the
treatment of type 2 diabetes. The aim of the collaboration is to develop
liver-selective antagonists that will normalize the elevated output of
glucose from the liver in type 2 diabetes. The project is progressing
and is currently focused on lead optimization for selection of drug
candidates.

Obesity – Bristol-Myers Squibb
The collaboration with Bristol-Myers Squibb targets the thyroid hormone
receptor for treatment of metabolic disorders. The prioritized
indication is obesity and very promising results have been obtained in
animal models, which includes overweight monkeys. The first candidate
drug entered phase I clinical trials in September 2001 but further
clinical development was discontinued in March 2002. The decision was
based on findings in toxicology studies where metabolites with a
potential toxic effect were discovered. A program to replace this
candidate drug is in place.

Women’s Health Care – Merck & Co., Inc.
Karo Bio has an on-going collaboration with Merck & Co., Inc. in the
field of women’s health care. The targets are estrogen receptors and
important clinical indications have been prioritized. The project is
broad and covers several different indications. Further progress
continues to be made in the characterization of compounds with potential
utility to address unmet medical needs.

Technology Outlicensing

Karo Bio’s BioKey® technology is well suited for high throughput
screening of compound libraries with the aim to find drug candidates for
new genomics targets. Karo Bio takes the opportunity to license the
technology outside the field of nuclear receptors. Numerous assays have
been successfully developed for several companies, which use these
assays internally and when compounds identified in screening are further
developed Karo Bio will receive milestones and royalties. Assay
development is now conducted for Aventis and NovImmune.

Internal Projects

Skin Disorders
Collagen is a protein that is an important structural component in the
skin. Skin collagen content decreases with aging and after topical
steroid treatment of various skin disorders e.g. eczema and psoriasis.
Karo Bio is developing an ointment containing a thyroid hormone analogue
that stimulates collagen production. This product, KB002611, counteracts
negative effects of steroids on collagen production. This effect has
been demonstrated in animals and during fall 2001 this was also the
conclusion from a human clinical study. Studies on humans with already
established skin atrophy were also finalized during fall 2001. This
study aimed to measure effects on both skin thickness and collagen
content. All biopsies have now been analyzed and the results are
inconclusive. No statistically significant changes can be registered due
to the low number of patients that have finalized the study. Karo Bio is
now in the process of seeking a partner for further clinical development
of the product.

Male Hormone Replacement Therapy and Prostate Cancer
The androgen receptor (AR) is an important target for treatment of
prostate cancer and in male hormone replacement therapy. Karo Bio has a
strong patent position for the androgen receptor and aims to develop new
and improved compounds that target the androgen receptor. The project
has made important progress with establishment of a strong drug
discovery technology base. Screening of compound libraries is also
making progress. Karo Bio has during the period received a grant from
the US Army for prostate cancer research.

Inflammatory Disorders
The glucocorticoid receptor (GR) is the receptor through which anti-
inflammatory steroids work and these are associated with many side
effects. Karo Bio seeks to develop new improved anti-inflammatory
steroids and has established a strong position in the field with access
to a leading technology, including x-ray crystallographic structures of
the receptor, giving Karo Bio unique competitive advantages. Significant
progress continues to be made regarding our understanding of the
relationship between compound structures and their effects on receptor
conformation and biological responses.

Exploratory Studies

Karo Bio conducts exploratory studies regarding several receptors and
numerous different indications. These studies are to a great deal
conducted as collaborations with the scientific network and with
contract research organizations. Explorative activities include
indications such as cardiac arrhythmia, glaucoma and other indications.

Organization

By the end of the period, Karo Bio had 138 employees (119). Of these, 37
(33) are based in the United States and 112 (101) are engaged in
research.

Result, Cash Flow and Financing

Group net sales increased to MSEK 37.4 compared to the same period last
year (23.8). The increase in revenue relates primarily to research
funding and the period’s share of the down payment from the research
collaboration with Wyeth Pharmaceuticals (previously American Home
Products).

Group expenses increased by MSEK 11.5 to MSEK 119.2 (107.8). The
increase is an effect of the increase in the research organization, the
strengthened management team, and depreciation of the license of
technology from Duke University in May 2001, which is not included in
prior period figures.

The operating loss amounted to MSEK 81.9 (84.0). Operating loss
excluding goodwill depreciation amounted to MSEK 21.4 (23.5). Financial
income amounted to MSEK 2. (3.4).

Cash flows from operating activities amounted to MSEK -38.7 (-20.5). The
change in cash flow is primarily an effect from changes in working
capital. Most significant factors leading to the change in working
capital is a payment of research funding for the second quarter that was
not received until after the end of the report period, as opposed to
previous quarter. A reduction in accounts payable lead to increased cash
outflow. The reduction of unearned revenue, primarily from downpayments
received but not yet recorded as revenue, has a significant impact on
the change in working capital.

Capital investments in equipment amounted to MSEK 1.8 (2.7). Capital
investments were mainly laboratory and IT equipment to enhance capacity
and capabilities, such as screening equipment.

Cash and cash equivalents and short-term investments amounted to MSEK
241.9 (305.8) at end of period.

Loss per share for the period amounted to SEK 6.61 (6.71), based on the
weighted average number of shares outstanding. The Group’s equity ratio
as of period-end was 81.5% (93.2%) and equity per share at period-end
was SEK 39.69 (66.72).

Shareholders’ Equity

Shareholders’ equity increased during the period by kSEK 29 from the
exercise of warrants.

At period-end, warrants representing 379 575 shares were outstanding.
The warrants were issued in conjunction with the acquisition of Karo Bio
USA, Inc. in 2000 (39 575 warrants) and the implementation of the
Incentive Program 2001 (340 000 warrants). The outstanding warrants will
lead to no dilution of earnings per share in 2002, as a conversion to
shares would lead to an improvement of earnings per share.

The Company’s share capital amounted to SEK 60 159 295 at the end of the
period representing 12 031 859 shares at a par value of SEK 5. Total
consolidated shareholder’s equity amounted to MSEK 477.6 at the end of
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. The principles applied are unchanged
compared to what was applied in the Annual Report for 2001.

Amounts or figures in parentheses indicate comparative figures for the
corresponding period last year. Amounts are expressed in Swedish Kronor
(SEK) or thousands (kSEK) or millions (MSEK) of Swedish Kronor as
indicated.

Scheduled Releases of Financial Information

Karo Bio intends to distribute financial reports as follows:

Quarterly Report April – June July 16

Quarterly Report July – September October 16

Quarterly Report October – December
and Full Year Report 2002 February 7, 2003

Financial reports, press releases and other information is available on
Karo Bio’s website www.karobio.com

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