Semi-annual report 1 january – 30 september, 2000

1 JANUARY – 30 SEPTEMBER, 2000

The preclinical studies in the BMS project have successfully been
completed and an IND (application to start clinical trials) is in
preparation.

Karo Bio has obtained an exclusive European license for the androgen
receptor (receptor for male sex hormone) as a drug discovery target.

Net sales for the period increased to 73.3 (46.0) MSEK

Cash flow from operating activities for the period was -41.1 (-24.8) MSEK.
However, net results after financial items for the period declined to SEK
-172.3 (-32.2), due to depreciation of goodwill in the amount of SEK 133.8
(3.8) million.

Operations

Nuclear receptors are validated drug targets and a number of important
pharmaceuticals act via these receptors. There is however a strong need
for improvements regarding side effects, efficacy and in the possibility
to treat diseases where there today is an unmet clinical need. The
possibility to develop new and superior pharmaceuticals with improved
properties regarding efficacy and side effects is based on access to
advanced technologies. In this field Karo Bio has been an international
leader with access to receptor structures, in house x-ray crystallography,
medicinal chemistry and biochemical and cellular selection systems.

Karo Bio is determined to maintain and strengthen its competitive position
and to expand its operations within the field of nuclear receptors. This
is the background for the acquisition of Novalon Pharmaceuticals and the
establishment of Karo Bio USA. The integrated company is now strengthened
in areas such as screening, compound selection for development and in
pharmacological evaluation of genomics targets. This has led to a
strengthening of the ongoing projects but also to the start of several new
projects focused on new indications and new nuclear receptors. The number
of employees has increased to 120 compared to 80 at year-end 1999 and 81
October 1999.

Karo Bio is presently engaged in six research programs:

Estrogen receptors (ER):
Women’s health problems including menopausal symptoms, osteoporosis,
cardiovascular disease and cancer.
Thyroid hormone receptors (THR):
Cardiac arrhythmia, metabolic disorders, glaucoma and skin diseases.
Glucocorticoid receptor (GR):
Type 2 diabetes.
Exploratory research:
Evaluation of new indications regarding classical nuclear receptors and
discovery and characterization of new receptors.
Infectious diseases program:
Development of new antibiotics.
Genomics:
Identification and development of pharmaceutical compounds that act via
new target proteins.

Collaborative projects

Abbott Laboratories – type 2 diabetes (GR)
The collaboration with Abbott has progressed well since the start of the
program on the first of January this year. The program aims at development

of liver selective antagonists for the glucocorticoid receptor. Karo Bio
has previously demonstrated that liver selective glucocorticoid
antagonists lower glucose levels in diabetic animals. Recently, new
scientific data from different research groups support the rationale for
targeting the liver. For example studies in knock-out mice have provided
new insights for deciphering the mysteries of type 2 diabetes. With such
animals it has been shown that the liver plays a key role in the
development of type 2 diabetes.

Merck & Co. – estrogen receptors (ER)
The project continues to make progress. Recent preclinical studies at
Merck indicate that estrogen receptor subtypes could be important targets
for drug development. In the scientific community the field of female
endocrinology is presently focused on the role of the classical estrogen
receptor and the new and proprietary ER beta receptor. This research has
enhanced our understanding of the role of the receptors in health and
disease conditions.

Bristol-Myers Squibb – thyroid receptor (THR)
This collaboration targets obesity and metabolic disorders by development
of novel and agonists of thyroid hormone receptor activity. Compounds have
been selected for clinical trials, and preparations for the IND filing
have been initiated. The initial target indication is obesity, for which
there is a large unmet medical need. Apart from the success in pre-
clinical product development and demonstration of proof of principle, the
project has also provided important scientific information that may lead
to new marketing opportunities resulting from additional indications. The
objective in the recently announced collaboration extension is the
discovery of new compounds for additional therapeutic indications. This
work will go on in parallel with the clinical development of first
generation compounds.

Other collaborations
The BioKey@ technology of Karo Bio USA is a novel assay technology
utilized in several collaborations for genomics-based drug discovery.
Currently KB USA collaborates with the following companies: Bayer AG,
Millennium Pharmaceuticals Inc., Novartis Research Foundation, Ares
Serono, GPC Biotech AG and Nov Immune.

Internal projects

Skin Disorders – THR
The phase II clinical study for treatment of skin atrophy is proceeding
according to plan. The remaining patients shall be treated and evaluated
during this fall. This is also the case for the mechanistic phase I study,
which goes on in parallel. The focus in this study is to evaluate how the
product affects the structural proteins in the skin. Those proteins are
important for building up and maintaining a healthy skin composition.

Cardiac arrhythmia – THR
The lead compound KB 130015 is a promising compound for treatment of
cardiac arrhythmia and currently Karo Bio is seeking a partner for the
clinical development. Apart from this compound Karo Bio is engaged in
development of new compounds targeting THR subtypes.

Glaucoma – THR
The animal study in rabbits with different formulations for eye drops has
been finalized. A report shall be available before year-end.

The infectious disease program
The program aims at the development of new broad-spectrum antibiotics.
There is a great need for such products due to development of resistance
to most of the antibiotics in use today. A number of new bacterial targets
have been identified and validated in the program. A massive screening
effort has also led to identification of novel lead structures.
Exploratory research
In close collaboration with its academic network Karo Bio continues to
explore new receptors and projects. A new important contribution is the

acquisition of an exclusive European license for the receptor for the male
sex hormone (AR). This makes it possible for Karo Bio to target areas like
for example prostate cancer, hormone replacement therapy and acne. Other
projects are inflammation targeting GR, heart failure/hypertension
targeting MR and the orphan receptor LXR for metabolic disorders. These
areas have become considerably strengthened through access to the Karo Bio
USA technology.

During the period Karo Bio has also solved a number of new receptor
structures with various compounds, which has significantly enhanced our
possibilities for design of new and selective compounds. This work has
been conducted internally with equipment installed earlier this year.

Karo Bio USA Inc.
The Molecular Braille drug discovery technology is focused on nuclear
receptors. This important technology will be utilized at both company
research locations.

In addition the team in the US continues to perfect the industrial scale
process for high through-put drug screening (HTS) using the company’s
proprietary BioKey assays. At this time, the screening group has completed
11 HTS assays for genomic drug targets for the discovery of broad-spectrum
antibiotics and has developed an equal number of assays for corporate
partners.

INCOME AND PROFIT/LOSS

The acquisition of Novalon Pharmaceutical Corporation (Karo Bio USA Inc.)
was carried out as a non-cash issue. The recorded purchase price,
including transaction expenses, was SEK 971 million. The acquisition
brought goodwill of SEK 963 million that will be depreciated over a three
years period beginning at May 1, 2000, the day the company was
consolidated. Net sales for the Group during the period amounted to SEK
73.3 (46.0) million, with net sales for the Parent Company of SEK 70.4
(46.0) million. Income included a down payment from Abbott in January.
Costs for the Group, including goodwill, rose to SEK 253.1 (84.2) million.
The largest items are attributable to the depreciation of goodwill
relating to the acquisition of Karo Bio USA, the Company’s costs from May
1 – the date the Company was consolidated -, payroll costs due to
increases in the work force since 1999, software for the chemistry
activities and various success fees. The last item was reported under
“other operating expenses.” It should also be mentioned that the Company
took possession of new premises at the beginning of the year and that
heightened research activity has led to increased purchases of chemicals
and consumable material.

The Group’s cash flow from operating activities during the period was SEK
-41.1 (-24.8) million. However, net results for the Group declined to SEK
-172.3 (-32.2) million, as a result of depreciation of goodwill relating
to the acquisition of Novalon in the amount of SEK 133,8 million. The
Parent Company is reporting net results of SEK -17.9 (-28.3) million. The
difference between the Group and the Parent Company consists mainly of the
depreciation of goodwill totaling SEK 137.7 (3.9) million.

Earnings per share for the period were SEK -16:30 (-3:51), computed on the
average number of shares. As a result of the negative result and the
consolidated losses carried forward for the Group of SEK 496 million,
income for the period was not taxable.

LIQUIDITY AND SHAREHOLDERS’ EQUITY

Liquid funds in the Group, including short-term investments, amounted to
SEK 331,4 million as of 30 September 2000 (187.8 as of 31 December 1999).
Shareholders’ equity was SEK 1.186,9 million as of 30 September (SEK 209.2
million as of 31 December 1999).

The Company’s share capital of SEK 59,931.405 was distributed among
11,986,281 shares with par value of SEK 5 each. In addition, there are
warrants outstanding corresponding to 170,153 shares.

INVESTMENTS

Investments in equipment by the Group and the Parent Company during the
period amounted to SEK 5.2 million (2.1) and SEK 4.4 million (2.1),
respectively. Investments were mainly for X-ray crystallography equipment
and software purchased for chemistry operations. The X-ray crystallography
equipment is now in full operation and will give Karo Bio the opportunity
to rapidly determine receptor structures in-house

Scheduled releases of financial information

Earnings report for 2000 8 February, 2001

The Company’s independent auditor has not reviewed this report.

CONSOLIDATED INCOME STATEMENT (SEK k)
JANUARY – SEPTEMBER WHOLE YEAR
2000 1999 1999
Net sales 73 358 46 038 72 979

Operating expenses
Marketing expenses -7 568 -4 800 -6 614
Administration expenses -14 658 -8 860 -11 721
Research and development -229 130 -70 568 -95 694
expenses
Other costs -1 781 – -1 485
-253 137 -84 228 -115 514

Operating result -179 779 -38 190 -42 535

Financial items 7 472 5 944 7 405

Operating result after financial-172 307 -32 246 -35 130
items

Tax – – –

NET LOSS -172 307 -32 246 -35 130
Depreciation according to plan
included
in operating expenses (of which 143 818 9 357 12 193
depreciation on goodwill 137 658 5156)

CONSOLIDATED BALANCE SHEET (SEK k)
Assets 30 Sept 30 Sept 200031 Dec 1999
2000
Intangible fixed assets 857 115 32 873 31 558
Equipment 23 387 14 761 17 155
Operating receivables 15 726 11 321 8 966
Liquid funds and short-term 331 355 182 297 187 846
investments
TOTAL ASSETS 1 227 583241 252 245 525

Shareholders’ equity and
liabilities
Shareholders’ equity 1 186 872212 039 209 175
Loans and leasing dept 4 374 – –
Operating liabilities 36 337 29 213 36 350

TOTAL EQUITY AND LIABILITIES 1 227 583241 252 245 525
CONSOLIDATED CASH-FLOW STATEMENT (SEK k)

JANUARY – SEPTEMBER WHOLE YEAR

2000 1999 1999
Operating result before -179 779 -38 190 -42 535
financial item
Depreciation 143 818 9 357 12 193
Other items not affecting liquid- – -10
assets
-35 961 -28 833 -30 352
Financial income received 5 605 4 873 11 300
Financial expenses paid -312 -131 -488
5 293 4 742 10 812
Change in operating capital -10 477 -701 4 204
CASH FLOW FROM
OPERATING ACTIVITIES -41 145 -24 792 -15 336

Investments in tangible fixed -5 242 -2 041 -5 948
assets
Investments in subsidiaries -6 972 – –
CASH FLOW FROM
INVESTING ACTIVITIES -12 214 -2 041 -5 948

New share issue 196 868 – –
CASH FLOW FOR THE PERIOD 143 509 -26 833 -21 284

LIQUID FUNDS AT END OF PERIOD 331 355 182 297 187 846

KEY RATIOS
Equity ratio, % 96 88 85
Equity per share, SEK 99:02 23:10 22:79
Earnings (-loss per share),
average number of shares, SEK -16:30 -3:51 -3:83
Earnings (-loss per share),
after exercise of all warrants, -16:18 -3:51 -3:83
SEK
Average number of shares * 10 572 9 177 9 177
Number of shares, end of period 11 986 9 177 9 177
*
Number of shares, average number
after exercise of all warrants *10 652 9 177 9 177
Number of shares, end of period
after
exercise of all warrants * 12 156 9 177 9 177

* 000

Huddinge October 10, 2000

Torben Jørgensen
President

For further information, please contact Torben Jørgensen, phone +46 8 08-
608 60 20, 070-7490811, or Per Otteskog, Senior Vice President Investor
Relations, phone +46 8 608 6018, 070-6327527

Website: https://www.karobio.se

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