Quarterly Report July-September 2002

QUARTERLY REPORT july-september 2002

· Significant preclinical milestone reached in the collaboration
with Merck & Co., Inc. Milestone payment received.

· The collaboration with Bristol-Myers Squibb extended for six
months.

· Significant progress made in exploratory research in the launch
of a new project and in successful application of the Molecular Braille®
technology.

· The loss after financial items decreased to MSEK 37.4 (65.0).
Operating result excluding goodwill depreciation improved by MSEK 29.4
to MSEK 21.2 (-8.2).

· Group net sales increased to MSEK 76.8 (47.6).

· Cash flows from operating activities amounted to MSEK 8.3
(52.8). Cash and cash equivalents and short-term investments amounted to
MSEK 235.2 (306.9) 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 innovative therapies for the
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 to maintain a strong pipeline. These studies cover new
indications for well characterized receptors as well as discovery and
characterization of new receptors.

Strategic Partnerships

Women’s Health Care – Merck & Co., Inc.
An important pre-clinical milestone in the collaboration with Merck &
Co., Inc. was reached in July, which triggered a milestone payment to
Karo Bio in the third quarter. Karo Bio may receive additional future
milestone payments from Merck & Co., Inc., dependent upon the successful
progression of compounds to and through clinical trials and approval as
well as royalties on sales of such compounds.

In October 1997 Karo Bio and Merck & Co., Inc. initiated a three-year
drug discovery collaboration in the field of estrogen receptors. In
October 2000 the collaboration was extended for two additional years.
The program has successfully reached its primary drug discovery
objectives, the identification of estrogen receptor subtype selective
compounds with potential for multiple clinical indications.

The research collaboration phase is based on estrogen receptors as
targets for the discovery of drugs that may be useful for disorders
primarily in the field of women’s health care. Under the terms of the
agreement, which will remain in full force and effect, the research
collaboration phase of this program is scheduled to be completed at the
end of October 2002. Merck & Co., Inc. has exclusive, worldwide rights
for all compounds identified during the collaboration and is responsible
for their further pre-clinical and clinical development

Atherosclerosis – Wyeth Pharmaceuticals
Karo Bio collaborates with Wyeth Pharmaceuticals for development of
novel treatments for atherosclerosis with the novel liver X-receptor
(LXR) as drug discovery target. Targeting LXR may lead to development of
drugs for both prevention and treatment of atherosclerosis. The
collaboration was initiated in September 2001 and important progress has
been made to date.

Diabetes – Abbott Laboratories
In the field of type 2 diabetes Karo Bio collaborates with Abbott
Laboratories for development of pharmaceuticals that have the capacity
to normalize the elevated glucose output from liver, which is associated
with type 2 diabetes. A lead compound has been shown to lower blood
glucose in animal models of diabetes by lowering liver production of
glucose. Pre-clinical studies are continuing to determine if the
compound is a clinical candidate.

Obesity – Bristol-Myers Squibb
In a joint collaboration, Karo Bio and Bristol-Myers Squibb are
targeting the thyroid hormone receptor for treatment of obesity. Natural
thyroid hormone increases body metabolism and burns calories but cannot
be used for treatment of obesity due to cardiac side effects. Karo Bio
and Bristol-Myers Squibb have successfully developed technical
approaches to identify compounds that avoid the side effects. The first
clinical development compound was removed from development in March this
year and may be replaced with a back-up compound that is currently
progressing to the final stages of pre-clinical evaluation. The drug
discovery collaboration has also recently been prolonged for an
additional six months.

Technology Outlicensing

Karo Bio’s BioKey® technology is well suited for high throughput
screening. The technology has been successfully applied to over 100
molecular targets for Karo Bio’s internal programs and for
collaborations with several U.S. and European partners, including
Aventis Pharma, Bayer AG, GPC Biotech, and Boehringer Ingelheim
Pharmaceuticals. During the period, scientific milestones have been
reached in the Aventis Pharma collaboration.

Internal Projects

Male Hormone Replacement Therapy and Prostate Cancer
The androgen receptor (AR) is the receptor for the male sex hormone and
the receptor has the potential to become a significant drug target for
numerous disorders. The key to success in this field is access to know-
how and technologies that enable development of receptor and tissue
selective drugs for important clinical indications such as prostate
cancer, male hormone replacement therapy, acne, alopecia and hirsutism.
Karo Bio is uniquely positioned in the field with access to a strong
drug discovery technology which has been significantly reinforced during
the period with receptor structures, identification of unique BioKeys®
and development of Molecular Braille® fingerprints for selection of
promising lead compounds. The technology base is perfectly suitable for
discovery and selection of specific drugs. In addition, Karo Bio has
exclusive European patent protection for AR as a drug discovery target.

Inflammatory Disorders
There is a great need for improvement of treatment of inflammatory
disorders. Anti-inflammatory steroids are the most powerful anti-
inflammatory agents known today but have a number of side effects that
restricts the broad use of these important pharmaceuticals. The
glucocorticoid receptor is the target for the anti-inflammatory
steroids. Karo Bio believes that its leading technology can discover new
and more selective drugs with anti-inflammatory effects but with
significantly reduced side effects. During the period important progress
has been made in identification of active compounds and the company is
working intensely to further optimize these by making chemical analogs.

Skin Disorders
Karo Bio has developed KB002611 which is a product for prevention of
steroid induced skin atrophy and with potential use for other skin
disorders. Karo Bio is marketing this product as an in licensing
opportunity for specialist companies in the field.

Exploratory Studies

Karo Bio continues to strengthen its pipeline of new projects through
internal drug discovery and by collaborations within its scientific
network. A new project has been launched which in the near future will
be marketed as a new partnership opportunity. Progress in compound
characterization and selection has also been made in several projects
through the application of the Molecular Braille® technology and
compound libraries have been expanded significantly.

Organization

By the end of the period, Karo Bio had 135 employees (126). Of these, 37
(36) are based in the United States and 109 (104) are engaged in
research.

Result, Cash Flow and Financing

Group net sales for the third quarter increased by MSEK 29.2 to MSEK
76.8 compared to MSEK 47.6 for the same period last year. The increase
in revenue relates primarily to the significant preclinical milestone
payment received from Merck & Co, Inc. in the third quarter this year,
even though a milestone payment from Bristol-Myers Squibb was recorded
in the corresponding quarter last year. Both milestone payments were
fully recorded as revenue in the respective quarter.

Group expenses decreased by MSEK 0.3 to MSEK 116.0 (116.3). The decrease
is the net effect of the increased activity in the research
organization, and lower cost in non-R&D organization.

The operating loss for the quarter improved to MSEK 39.2 (68.6).
Operating result excluding goodwill depreciation amounted to MSEK 21.2 (-
8.2). Goodwill depreciation amounts to MSEK 60.4 and is included in
reported operating expenses and also operating result.

Financial income for the third quarter amounted to MSEK 1.8 (3.6).
Currency exchange fluctuations pertaining to liabilities in US dollars
are included in financial net, leading to a lower financial net in
combination with the relatively low yield in the interest rate market
compared to previous periods.

Cash flows from operating activities for the third quarter amounted to
MSEK 8.3
(52.8). The strong cash flow in the third quarter 2002 is primarily the
net effect from increase in revenues and changes in working capital. The
very strong cash flow in the third quarter 2001 relates to the receipt
of the down payment from Wyeth Pharmaceuticals, which had a material
effect on changes in working capital. Significant factors affecting
change in working capital 2002 are reduction of unearned revenue,
primarily from down payments received but not yet recorded as revenue,
and reductions of payables to vendors.

Capital investments in equipment amounted to MSEK 0.3 (9.2).

Cash and cash equivalents and short-term investments amounted to MSEK
235.2 (306.9) at end of period, while the corresponding amount for
previous quarter was 227.2.

Loss per share for the third quarter amounted to SEK 3.11 (5.41), based
on the weighted average number of shares outstanding and excluding
dilution. The Group’s equity ratio as of period-end was 79.6% (81.3%)
and equity per share at period-end was SEK 29.70 (53.57).

Shareholders’ Equity

Shareholders’ equity increased during the third quarter by kSEK 12 from
the exercise of warrants.

At period-end, warrants representing 358 777 shares were outstanding.
The warrants were issued in conjunction with the acquisition of Karo Bio
USA, Inc. in 2000 (21 144 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 60 263 285 at the end of the
period representing 12 052 657 shares at a par value of SEK 5. Total
consolidated shareholder’s equity amounted to MSEK 358.0 (643.9) 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 Kronor as indicated.

Scheduled Releases of Financial Information

Karo Bio intends to distribute financial reports as follows:

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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https://www.waymaker.net/bitonline/2002/10/16/20021016BIT00050/wkr0001.doc The Full Report
https://www.waymaker.net/bitonline/2002/10/16/20021016BIT00050/wkr0002.pdf The Full Report