MAIN EVENTS THE COMPANYTHE PEOPLE ANNuAL rEPOrT 2009

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MAIN EVENTS THE COMPANY THE PEOPLE

Karo Bio’s vision:

To become a pharmaceutical company with sustainable profitability

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Karo Bio has a portfolio of drug development projects based on the company’s innovative molecules. The projects target disease areas with significant market opportunity, and where there are medical needs for pharmaceuticals with novel mechanisms of action.

In addition to its internal research and development projects, Karo Bio has strategic collaborations with international pharmaceutical companies for the development of novel treatments of common diseases, as well as a valuable academic network.

Out of Karo Bio’s six drug development projects, three are in clinical development, one in preclinical development, and two are relatively early discovery projects.

Karo Bio’s strategy for creating an attractive, well balanced portfolio of projects in different stages of development is to combine internal research efforts with collaborations, and to actively evaluate in licensing and acquisition opportunities to enrich the project pipeline. Through different types of collaborations,

the company aims to achieve a balanced risk profile.

Karo Bio develops compounds intended for treatment of large patient populations up to clinical proof of concept before outlicensing. Selected compounds within niche therapeutic areas can be taken to late stage clinical development and, potentially, to the market. The business model aims at balancing the risks of the business by creating flexibility in terms of entering partnership agreements and control of the company’s commercial operations and revenue generating over time.

A pipeline of

innovative projects Strategy and business model

ConTEnTs

Karo Bio in brief 1

CEO’s comments on 2009 2

Important events in 2009 and goals for 2010/2011 3

Karo Bio’s projects 4

The Karo Bio team 6

Board of directors, executive management and auditors 8

The Karo Bio share 10

Five year summary 12

Annual report – Administration report, Financial statements, Accounting principles and Notes 14

Audit report 41

Corporate Governance Report 42

Glossary 49

This annual report includes statements that are forward-looking, and actual results may differ materially from those stated. In addition to the factors discussed, among other factors that may affect results, are developments within research programs including development in preclinical and clinical trials, the impact of competing research programs, the effect of economic conditions, the effectiveness of the company’s intellectual property rights and preclusions of any third party’s intellectual property rights, technological development, exchange rate and interest rate fluctuations, regulatory and political risks.

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Karo Bio in brief

Karo Bio is an innovative drug discovery and development company, which since the early 1990s has specialized in endocrinology and nuclear receptors for the development of novel pharmaceuticals. The company’s project portfolio consists of innovative pharmaceutical compounds that primarily address

dyslipidemia, CNS disorders, inflammation and women’s health.

The vision is to become a pharmaceutical company with a sustainable profitability, products on the market and a competitive project portfolio containing a mix of partner projects and internal development.

Karo Bio was listed on NASDAQ OMX Stockholm in 1998. The company was founded in 1987 and has its headquarters and operations at the Southern Campus of the Karolinska Institute in Stockholm, Sweden.

Within the body, numerous signalling systems exist to enable organs, tissues and cells to communicate. One such system is the hormonal system. Hormones are generally produced in one organ and transported via the blood stream to one or several target organs and tissues.

In the target organ, the hormone binds to certain proteins, called receptors. These receptors are located either on the cell surface or within the cell. The intracel- lular receptors are known as nuclear receptors. Nuclear receptors regulate the transcription of genes into proteins. Cortisol is one example of a nuclear receptor binding hormone. It is excreted from the adrenals and acts in a number of target organs and tissues. For instance in an inflamed tissue, cortisol will ease the inflammation by down-regulation of the pro-inflammatory proteins and up-regulation of anti-inflammatory factors. The liver is another example of a target organ for cortisol. Here the hormone regulates the expression of proteins involved in

To date, 48 nuclear receptors relevant to man have been identified. Some of these are activated or inhibited by hormones, others by vitamins, fatty acids or bile acids.

In some cases, the natural signalling molecule, the so- called ligand, has yet to be identified. The nuclear receptors contain binding pockets, where the natural ligands fit. Knowledge about the size and shape of these pockets can be utilized for drug design. Compounds that bind to the nuclear receptor in a similar manner as the natural ligands, and thereby affect gene expression and protein levels, are useful in a number of diseases and medical conditions. One example is the glucocorticoids, a class of compounds acting on the same receptor as cortisol described above. These compounds are much used in inflammatory conditions such as asthma, rheumatoid arthritis and inflammatory bowel disease.

Several of the nuclear receptors are suitable as targets for new pharmaceuticals, within a broad spectrum of therapeutic areas. Karo Bio has extensive know-how,

The nucleus of Karo Bio’s research

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In 2009, the focused development of our project portfolio progressed according to plan. Our pharmaceutical compound eprotirome, for the treatment of dyslipidemia, received most attention among shareholders, media representatives and analysts, but also our estrogen receptor (ER) beta platform, which we have developed in-house, received a lot of interest from academia as well as potential future partners.

sTaBlE finanCial plaTform Despite the difficult economic climate, we secured a stable financial platform for the coming 18 months through a rights issue in the fourth quarter. There was a strong interest in this issue, which was heavily oversubscribed. The proceeds help to create the flexibility and sustain- ability needed for us to best defend the interests of the company and its shareholders in the continued development of eprotirome, the ER-beta program and the collaboration with Zydus Cadila.

EproTiromE - rEgulaTory issuEs in foCus

We worked hard during the year to set up eprotirome for clinical phase III studies.

Further supplementary data were generated, including a mass balance study that documented how eprotirome is taken up and excreted in the body, and a bioavail- ability study to bridge the result from the tablet used in the phase II studies and the tablet formulation planned for use in the clinical phase III trials.

During the past year, Karo Bio has been in discussions with a number of major pharmaceutical companies about a partnership around eprotirome. An important matter in these negotiations is what the regulatory authorities are expected to demand to give the drug a market approval. In order to establish a business plan with strategies, costs and timelines for the launch and marketing and the expected revenues of the compound, there must be an agreed development plan that describes what patient groups the compound is developed for,

CEo’s comments on 2009

as well as what effects and safety and tolerability demands made by the authorities for that patient group.

Development plans are being inves- tigated regarding both a broad primary care indication and more niche oriented indications. Depending on the relation between costs, time to market and the size of the targeted market, an attractive business plan can also be based on a more limited indication. An initial niche indication can potentially be extended to broader patient groups when more data is gradually generated. The development plan needs to be discussed with and receive approval from the regulatory authorities, notably in Europe and the US. Depending on the agreements with the authorities, a clinical phase III program can be initiated in either Europe or the US, and at later stage be extended.

For a successful partnership, it is important to define a clear development path that is agreed with the authorities, and for which costs, timelines, risks and possibilities can be estimated.

Er-BETa program of grEaT inTErEsT

During 2009, we also continued the successful work around our ER-beta program. In October we nominated the leading ER-beta compound KB9520 as candidate drug. We have thereafter initiated pre-clinical development where the compound is documented for safety;

a process that is expected to take 12 to 14 months. In parallel, the documentation of other follow-up compounds within the ER-beta program continues. There are many potential clinical treatment areas for ER-beta selective compounds, including CNS-related diseases, certain forms of cancer, pain, inflammation and women’s health. We are already in discussions with a number of potential collaboration partners for projects within our ER-beta program. In August 2009, the healthcare business analyst Windhover together with independent expertise voted Karo

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imporTanT EvEnTs 2009

• A stable financial platform for the coming 18 months secured through a rights issue of MSEK 166

• Two smaller human pharmacologi- cal studies of eprotirome were performed to supplement the clinical documentation

• Within the ER-beta program, the compound KB9520 was nominated as candidate drug and preclinical development was initiated

• Merck initiated clinical phase II studies with MK-6913, the lead investigational drug candidate within the joint collaboration around ER and women’s heath

• From September, Wyeth has taken on all research and development activities under the drug discovery collaboration regarding LXR and inflammation

• Positive proof of principle data for KB3305 in diabetic patients

• Decision taken not to do further in- house development of KB3305

signifiCanT EvEnTs afTEr THE EnD of THE finanCial yEar 2009

• On February 16, 2010, it was announced that Per Olof Wallström, President and CEO of Karo Bio AB for the past five years, has decided to resign. Mr Wallström stays with the company until his successor has been appointed.

goals for 2010/2011

• Define a development plan for eprotirome which is accepted by the relevant regulatory authorities, and prepare for clinical phase III studies of eprotirome within the framework of a partnership

• Generate the preclinical documentation of KB9520, the first candidate drug from Karo Bio’s ER-beta program, and thereafter initiate clinical development within CNS-related diseases under a partner ship agreement

• Develop other compounds from the ER-beta platform as potential drug candidates within other disease areas

• Select a candidate compound within the collaboration with Zydus Cadila

Bio’s ER-beta program one of the top 10 most interesting neuroscience projects available for partnering. This reinforces our opinion of the ER-beta program as one of our most exciting development platforms with great commercial potential.

parTnEr projECTs progrEssing The partner projects with Merck, Wyeth (acquired by Pfizer) and Zydus Cadila continue to develop according to plan and are of long-term importance to Karo Bio.

In December, Merck initiated clinical phase II studies of the lead compound within the collaboration around estrogen receptors in the field of women’s health.

In September, the collaboration with Wyeth around the liver X receptor entered a new phase, where our partner takes on all research and development activities within the collaboration.

Together with Zydus Cadila, we have generated a number of new, promising dissociated non-steroidal glucocorticoid receptor agonists. Our data indicate that these compounds are as potent as tradi- tional steroids, but with a significantly lower risk for side effects.

nEw CHallEngEs anD suCCEssEs Karo Bio has both the financial basis and the R&D capabilities for a continued successful development of the company’s projects. It is with great confidence that I hand over the steering wheel to my successor as President and CEO of Karo Bio, when I am stepping down after 38 years in the pharmaceutical industry and five rewarding years at Karo Bio. I am looking forward to follow thecontinued development of Karo Bio, with new challenges and successes.

Huddinge, March 2010

Karo Bio has both the financial basis and the r&D capabilities for a continued successful development

CEO’s comments

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Karo Bio’s scientific and technological lead within the nuclear receptor area has enabled the company to develop new treatment principles and innovative compounds that are first of their kind. In later years, Karo Bio has added compen- tence within preclinical and clinical development, which has made the company capable to take compounds further in the development before outlicensing.

It is Karo Bio’s ambition to develop new, innovative compounds and broaden the project portfolio. This is a challenge for a small company, but is possible through a balanced mix of internal projects and collaborations. Strategic partners can add supplementary resources and competences to the projects, which enhance the possibilities for success.

Going forward, Karo Bio will continue to strive for entering into collaborations with global pharmaceutical companies. In parallel, other forms of collaborations, as well as acquisition and inlicensing possibilities, are being evaluated.

EproTiromE

The thyroid hormone affects the balance of lipids in the body. The natural thyroid hormone can however not be used for the treatment of dyslipidemia due to its side effects on the heart and other organs. Karo Bio’s liver selective thyroid hormone receptor agonist eprotirome has proved to be both efficacious and safe in clinical phase II studies. Eprotirome represents a new concept for reducing the risk of cardiovascular disease, and has a unique profile with a significant lower-

ing of several risk factors. Eprotirome has the potential to become an important new drug for treating dyslipidemic patients that do not reach their treatment goals with existing treatment alterna- tives.

In three clinical phase II trials, it was demonstrated that eprotirome, when given either as monotherapy or on top of ongoing statin and ezetimibe treatments, respectively, to dyslipidemic patients, gave a profound and clinically meaning- ful lowering of several important risk factors for development of cardiovascular disease. The results are very encour- aging since there is a need to combine statins with drugs that have a different mechanism of action in order to reach the desired levels of LDL-cholesterol and other blood lipids.

The results from the clinical phase II study where eprotirome was given as an add-on to statins were published in the New England Journal of Medicine on March 11, 2010.

During 2009, limited preclinical and clinical studies were performed to supplement the documentation for the regulatory approval process.

During the past year, Karo Bio has been in discussions with several major pharmaceutical companies about a partnership around eprotirome. In parallel, Karo Bio has, in cooperation with contract research organizations and key opinion leaders, designed and estimated the costs of a full clinical development program of eprotirome all the way to registration. The company is also inves- tigating alternative, more niche-oriented

ways to take eprotirome to the market. It is important to receive a clarification of what the regulatory authorities, among others the FDA in the US and EMA in Europe, can be expected to require for a marketing approval of the drug. The expected regulatory demands will impact the size and cost of the phase III program, as well as the initial labelling of the drug. All together, these are important parameters for the potential partners.

The process of receiving the regulatory answers is ongoing. The timelines for the dialogue and information exchange with the authorities is dependent on the clarification of all outstanding questions in a way that satisfies both parties. Since Karo Bio at the end of 2009 submitted an IND application to the FDA, a more detailed dialogue with the US authority has been initiated.

Er-BETa

The estrogen receptor (ER) is activated by the female sex hormone estrogen and regulates a number of functions in the body. Estrogen has a number of positive effects, but the use of estrogen as a medical treatment has been limited by the associated increased risk for uterine and breast cancer as well as an increased cardiovascular risk. These risks are mainly mediated by ER-alpha, while ER-beta seems to mediate the positive effects of estrogen.

Karo Bio’s efforts to develop ER-beta selective compounds has resulted in an exciting platform with several clinical possibilities. Besides the CNS area, Karo Bio’s ER-beta program has also Karo Bio’s project portfolio is focused on nuclear receptors as drug targets for

the treatment of primarily dyslipidemia, CNS disorders and inflammatory diseases as well as in women’s health. The portfolio contains three projects in clinical development and three in discovery. Three projects are partnerships and three are in internal development.

Karo Bio’s projects

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program Discovery preclinical

Development Clinical phase i

Clinical phase ii

Clinical phase iii Eprotirome

TR, Dyslipidemia Er-beta agonists

CNS, Cancer, Women’s health lXr, inflammation Partner: Wyeth Er, women’s health Partner: Merck gr, inflammation

the potential within other therapy areas, notably certain forms of cancer, women’s health, pain and inflammation.

In October 2009, the compound KB9520 was nominated as candidate drug, and preclinical development was initiated. This process is expected to last 12-14 months. The goal is to negotiate a partnering deal for ER-beta within the CNS area before clinical trials are started. In parallel, Karo Bio continues to document other follow-up compounds within the ER-beta program.

In August 2009, the healthcare business analyst, together with independent expertise, picked Karo Bio’s ER-beta program as one of the ten most interesting neuroscience projects available for partnering.

KB3305

Type 2 diabetes is characterized by an elevated glucose production in the liver, which is regulated by the glucocorticoid receptor (GR). Karo Bio’s compound KB3305 is a first in class liver selective GR-antagonist, which has been efficacious and safe in preclinical studies. The clinical phase I program performed by Karo Bio generated very positive proof- of-principle data. The competitive situa- tion within this field, the added

require ments imposed by the regulatory authorities and internal resource prioritizations made the company come to the decision not to do any further in- house development of the compound for the treatment of type 2 diabetes. Other potential therapy areas for the use of the compound are being evaluated.

CollaBoraTion wiTH mErCK The collaboration with Merck was initiated in 1997 and targets estrogen receptors. The aim is to develop pharma - ceuticals in the field of women’s health.

The joint drug discovery phase was concluded in 2002. In December 2009, Merck initiated a clinical phase IIa study with MK-6913, the leading candidate drug in development within the collaboration. The study will assess the safety, tolerability, and efficacy of MK-6913 for the treatment of moderate-to- very-severe vasomotor symptoms (hot flashes or hot flushes) in postmenopausal women. Merck is responsible for all preclinical and clinical development, as well as registration. Karo Bio has the rights to milestone payments from Merck based upon the further successful clinical development and final drug approval as well as royalties on future drug sales.

CollaBoraTion wiTH wyETH pHarmaCEuTiCals (pfiZEr) In 2001, Karo Bio and Wyeth entered a drug discovery collaboration with the liver X receptor (LXR) as target. Since 2008, the collaboration is focused on inflammatory disorders. From September 2009, Wyeth takes on full responsibility for all research and development activities within the collaboration.

CollaBoraTion wiTH ZyDus CaDila

In early 2008, Karo Bio initiated a drug discovery collaboration with the Indian pharmaceutical company Zydus Cadila.

The objective is to develop new anti- inflammatory compounds targeting the glucocorticoid receptor. Corticosteroids, such as the anti-inflammatory compound cortisone, target this receptor. The collaboration has generated a series of novel non-steroidal GR agonist lead compounds with high affinity to the glucocorticoid receptor. Data suggest that these compounds are as potent in models of inflammation as conventional steroids, but with a significantly lower probability to cause side effects. Preclinical evalu- ation is ongoing for the identification of a candidate drug. Both parties cover their own costs within the collaboration program and share potential revenues.

A balanced mix of internal projects and collaborations

Karo Bio’s projects

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The Karo Bio team

flEXiBiliTy

Karo Bio has established a project driven research and development organization to conduct the discovery, preclinical and clinical development projects in an efficient and goal-oriented way. Karo Bio’s organization, with 67 employees at the end of 2009, is relatively small in relation to the number of projects and exploratory research activities pursued.

By using external resources, Karo Bio can maintain the flexibility and dynamics of a small organization with key competences, and quickly adapt to any new priorities or development scenarios.

CompETEnCE

Karo Bio has a highly qualified organization. Almost half the staff has a PhD degree. The drug development process is complex and spans many specialized competences.To be successful you need an experienced team that can cooperate and in a good way support each other with complementary skills and knowledge.

HEalTH anD worK EnvironmEnT The health and well-being of the team as well as each individual are important competitive factors. Employees are in- vited to undergo personal health profiles and active rehabilitation is promoted early on in the course of an illness.

Safety-consciousness is an important part of laboratory work. Safety inspec- tions, as well as ongoing monitoring of ventilation systems and other technical equipment are regularly conducted.

EQualiTy

Equality initiatives are a natural part of day-today business. The company has considerable ethnic diversity, which cre- ates a positive, progressive and dynamic environment. Men and women shall have the same opportunities within the organization without discrimination. At the end of 2009, 50 percent of the employees were women and 50 percent were men.

The gender distribution in the executive management team was 57 percent women and 43 percent men.

soCial rEsponsiBiliTy

Being a research and development company with no in-house production, Karo Bio’s consumption of energy and other natural resources and air and water emis- sions are relatively limited.

Karo Bio’s daily activities involving chemical substances and genetically modified cells and microorganisms entail strict requirements in terms of comprehensive environmental and safety efforts to minimize the risk of negative impact on the environment and human health.

Karo Bio’s enviromental program is conducted as an integral part of the operations, and is geared toward preven- tive measures and constant improvment, where the goal is to meet or exceed applicable legal requirements, regulations and international agreements.

of empoyees hold a Ph.D

hold a university degree

^50% ^50%

94%

44%

The joint knowledge and experience of the employees is one of Karo Bio’s most valuable assets.

More than 90 percent of Karo Bio’s employees have a university degree, and nearly half the staff holds a PhD. Karo Bio has over the last few years been building new areas of competence in preclinical and clinical development, partly with externally recruited experts with prior experience in the fields, but also through internal training.

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To be successful you need an experienced team that can

cooperate and in a good way support each other with

complementary skills and knowledge

The Karo Bio team

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Board of Directors

lEon E. rosEnBErg (1933), Princeton, New Jersey, uSA Elected 2000; Chairman from 2007 Education: B.A. and M.D., university of Wisconsin

Title: Professor of Molecular Biology, Princeton university Primary experience: Participant in, leader of, and advocate for health and medical research in govern- ment, academia and industry;

former Chief Scientific Officer, Bristol-Myers Squibb Company;

former Chairman of Dept. of Human Genetics, and Dean, Yale university School of Medicine; Elected member, National Academy of Sciences, uSA

Other engagements: Chairman, Hana Biosciences Company Shares in Karo Bio: 1,754 Independent board member Bo HÅKansson

(1946), Eslöv, Sweden. Elected 2009 Education: Degree in Economics and Business Administration, and Med Dr h.c., Lund university Primary experience: Self employed since 1970. Positions as CEO, board member or chairman in different listed companies since 1986, including Wihlborg Fastigheter AB, Active Biotech AB, Midelfart Soneson AB and ACAP Invest AB. Founder of Hansa Medical AB, Active Biotech AB and ACAP Invest AB.

Other current assignments:

Chairman of Biolin Scientific AB, Exini Diagnostics AB, Farstorp Invest AB, Hansa Medical AB.

Board member of Farstorps Gård AB, POC Sweden AB, Active Capital AB.

Shares in Karo Bio: 4,579,813 Independent board member joHan KÖrDEl

(1962), Malmö, Sweden. Elected 2009

Education: M.Sc., PhD and Associ- ate Professor, Lund university Primary experience: Long experience from leading positions within research and development in several international pharmaceutical companies.

Other current assignments: Chair- man and CEO of Chori Pars AB, Board member of respiratorius AB, InDex Pharma ceuticals AB and EQL Pharma AB

Shares in Karo Bio: 13,334 Independent board member

jon risfElT

(1961), Täby. Sweden. Elected 2009 Education: M.Sc. Chemical Techno- logy, royal Institute of Technology, Stockholm

Primary experience: Prior employers and positions include Ericsson, SAS, American Express, Nyman &

Schultz (CEO), Europolitan (CEO) and Gambro renal (CEO) Other current assignments: Chair- man of Ortivus AB, C3 Technologies AB, Mawell Oy. Board member of TeliaSonera AB, Bilia AB, ÅF AB, Enea AB.

Shares in Karo Bio: 4,666 Independent board member BirgiT sTaTTin norinDEr (1948), London, united Kingdom Elected 2007

Education: M.Sc.Pharm., uppsala university

Primary experience: Long experience from leading positions within research and development in several international pharmaceutical companies. Former CEO and chairman of Prolifix Ltd.

Other engagements: Chairman of InDex Pharmaceuticals AB and P.u.L.S. AB. Board member of Anti- soma plc.

Shares in Karo Bio: none Independent board member

Bo Carlsson (1958), Stockholm, Sweden Employee representative, appointed 1997

Education: Specialist teacher exam, uppsala university

Primary experience: Employed by Karo Bio since 1989, Project Manager

Shares in Karo Bio: 10,666 Employee stock options: 1,789 joHnny sanDBErg (1967), Danderyd, Sweden Employee representative, appointed 2006

Education: Biomedical analyst, Vårdhögskolan

Primary experience: Employed by Karo Bio since 1994, Senior research Investigator Shares in Karo Bio: 10,500 Employee stock options: 1,874 HEnriK jErnsTEDT (1974), uppsala, Sweden Employee representative (deputy), appointed 2005

Education: M.A. in chemistry, Linköping university

Primary experience: Employed by Karo Bio since 2002, research Scientist

Shares in Karo Bio: none Employee stock options: 1,406

Leon E. Rosenberg Bo Håkansson Johan Kördel Jon Risfelt

Birgit Stattin Norinder Bo Carlsson Johnny Sandberg Henrik Jernstedt

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Executive management and auditors

pEr olof wallsTrÖm (1949) President and Chief Executive Officer

Employed by Karo Bio since 2005.

Will leave Karo Bio during 2010, when his successor has been appointed.

Education: M.Sc. Pharm.

Primary experience: Long experience from international pharmaceutical industry and biotechnology.

Former employers include Merck, Astra, Pharmacia, Bristol-Myers Squibb, Q-Med AB and Melacure Therapeutics AB.

Other engagements: Chairman of ArosGruppen Holding AB. Board member of Aggal Invest AB.

Shares in Karo Bio: 283,333 Employee stock options : none BEriT EDlunD

(1948) Director Human resources Employed by Karo Bio since 2001 Education: B.A. in social work Previous assignments: Long Hr experience within a number of different sectors, including the public sec- tor, IT, telecom and pharmaceuticals.

Previous employers include Skandia,

annEli HÄllgrEn (1965) Chief Scientific Officer, VP Preclinical research and Development

Employed by Karo Bio since 2006 Education: Ph.D., M.Sc.Pharm Previous assignments: Head of preclinical development, Biolipox AB (2003–2006), Head of In vivo phar- macology, Melacure Therapeutics AB (2001–2003), senior researcher and preclinical project leader, AstraZen- eca (1997–2001).

Shares in Karo Bio: 23,400 Employee stock options: none jEns KrisTEnsEn (1958) Chief Medical Officer, VP Clinical Development and regulatory Affairs

Employed by Karo Bio since 2005 Education: Ph.D., M.D.

Previous assignments: Worked as a physician for 16 years, and thereafter eleven years within the pharmaceutical industry. Previous employers include AstraZeneca (2004–2005 och 1998–2001) and Melacure Therapeutics AB (2002–2004).

EriKa sÖDErBErg joHnson (1970) Chief Financial Officer, VP Finance and Investor relations Employed by Karo Bio since 2007 Education: M.Sc. Business Admin- istration, Stockholm School of Economics

Previous assignments: Chief Financial Officer, Affibody AB (2005–2007) and Global Genomics AB (2002–2005). Nine years experience from investment banking within SEB Enskilda Securities Corporate Finance (1993-2002).

Other current assignments: Board member of Sectra AB since 2007 Shares in Karo Bio: 11,000 Employee stock options: none lars ÖHman

(1957) VP Business Development Employed by Karo Bio since 1989 Education: MBA, Stockholm School of Economics; Chemical Engineer- ing, royal Institute of Technology, Stockholm.

Previous assignments: Project leader and other senior assignments within Karo Bio’s research and devel-

auDiTors

Auditors are elected by the annual general meeting for a period of four years. PricewaterhouseCoopers AB were elected auditors at the annual general meeting in April 2007 for the period until the annual general meeting 2011. Auditor-in-charge since April 2008 is authorized public accountant Håkan Malmström. Claes Dahlén was auditor-in-charge for Karo Bio 2001–April 2008.

The Board of Directors’ and the Executive management’s sharehold- ings are as of February 28, 2010, and include family members and shares held through companies. Informa-

Per Olof Wallström Berit Edlund Anneli Hällgren Jens Kristensen

Erika Söderberg Johnson Lars Öhman

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The Karo Bio share

sHarEHolDErs

The number of shareholders was 11,490 at the beginning of 2009 and 12,874 at year’s end. Karo Bio is traded on OMX NASDAQ Stockholm since 1998.

sHarE CapiTal

Karo Bio’s share capital is SEK 77 million. The number of shares is 154,825,589 with a ratio value of SEK 0.50. In 2009 a new share issue with preferential rights to existing shareholders was carried out, resulting in 38,706,397 new shares and an increase in share capital of SEK 19.4 million. In total, the rights issue generated SEK 150 million net of transaction costs. There was a strong interest in this share issue. It was oversubscribed with 73 percent, and 98 percent of the shares offered were subscribed with the exercise of subscription rights.

warranTs

There are warrants outstanding representing 513,330 shares, all of which relate to an employee stock option program implemented in 2003. The warrants are held by the wholly- owned subsidiary Karo Bio Research AB. The stock options were issued in four series and at no cost to Karo Bio employees. The stock options have vested and become exercisable in one series per year over a four-year period until May 2008.

Last date for exercise is April 30, 2011, for all series, provided continued employment. The exercise price is SEK 15.70, 17.30, 18.90 and 20.50 for each respective series. Exercise of all stock options outstanding at December 31, 2009, would lead to an increase in the number of shares by 0.1 percent.

DiviDEnD poliCy

Karo Bio has not distributed dividends since the company was founded in 1987. The board of directors does not intend to propose the distribution of dividends until the company generates significant profits and cash flows.

Karo Bio’s market capitalization increased with 16 percent in 2009, from SEK 941 million at the beginning of the year to SEK 1,092 million at year- end. Through a rights issue of SEK 166 million with preferential rights to existing shareholders, the number of outstanding shares increased from 116.1 million to 154.8 million shares. Adjusted for effects of the rights issue, the price per share decreased 2009 from SEK 7.39¹⁾ to SEK 7.05. During the same period, the OMX NASDAQ Stockholm All-Share index increased with 47 percent and the OMX Stockholm Biotechno- logy index increased with 88 percent.

INVESTMENT BANKS COVERING THE KARO BIO SHARE

Investment bank Analyst

ABG Sundal Collier Alexander Lindström

Carnegie Camilla Oxhamre

Danske Markets Mattias Häggblom

Handelsbanken Capital Markets Erik Hultgård

Nordea Markets Patrik Ling

Pharmium Securities Frédéric Gomez

redeye Klas Palin

Independent Stefan Wikholm

The Karo Bio

Share OMX Stockholm_PI

SX352010 Biotechnology_PI No. of shares traded 1,000s 16

14 12

10

8

6

4

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN

2009 2010

50,000

40,000 30,000

20,000

10,000

The Karo Bio

Share OMX Stockholm_PI SX352010 Biotechnology_PI 16

14 12

10

8

6

4

2005 2006 2007 2008 2009 2010

1) Adjusted for the preemptive element of the rights issue in 2009.

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PRINCIPAL SHAREHOLDERS AS OF DECEMBER 31, 2009

Owner Number

of Shares

Share of capital and votes % Försäkringsaktiebolaget, Avanza Pension 12,607,530 8.1

Nordnet Pensionsförsäkring AB 9,056,356 5.8

Farstorps Gård AB 4,569,813 3.0

JP Morgan Bank 3,502,475 2.3

Nordea Investment Funds 3,328,788 2.2

Six Sis Ag, W8imy 2,706,518 1.7

rSP Holding 2,266,666 1.5

DNB Nor Bank ASA 2,177,764 1.4

Borås Postorder Aktiebolag 2,000,000 1.3

Banque Carnegie Luxembourg SA 1,737,559 1.1

Others 110,872,120 71.6

Total 154,825,589 100.0%

Source: Euroclear Sweden AB (formerly VPC AB) and information from shareholders.

CHANGES IN SHARE CAPITAL

Year Transaction Increase in

number of shares Total number

of shares Total share

capital (SEK) Issue payment (SEK)¹⁾

Share capital structure as of January 1, 1998 - 3,943,586 39,435,860 -

1998 Stock split 2:1 3,943,586 7,887,172 39,435,860 -

1998 New issue – IPO 1,050,000 8,937,172 44,685,860 96,600,000

1998 New issue – IPO ²⁾ 240,000 9,177,172 45,885,860 22,080,000

2000 New issue in kind 2,206,198 11,383,370 56,916,850 699,759,830³⁾

2000 New issue – directed placement 600,000 11,983,370 59,916,850 196,868,448

2000 Exercise of warrants 15,731 11,999,101 59,995,505 78,655

2003 New issue – rights issue 4,821,850 16,874,507 84,372,535 118,578,253

2004 New issue 2,815,010 30,965,118 154,825,590 22,684,468

2005 reduction of share capital - 30,965,118 61,930,236 -

2006 reduction of share capital - 77,412,795 38,706,398 -

1) Issue amount net of any transaction costs.

2) Consequent to over-allotment option.

3) New issue in kind, no cash issue payment.

OWNERSHIP STRUCTURE AS OF DECEMBER 31, 2009

Shareholding Number of shares

Number of shareholders

Percentage of share-

holders Number

of shares

Percentage of share capital

1–500 3,375 26.2 652,144 0.4

501–1 000 1,669 13.0 1,364,657 0.9

1 001–2 000 2,336 18.1 3,623,817 2.3

2 001–5 000 2,409 18.7 8,201,756 5.3

5 001–10 000 1,345 10.4 9,873,793 6.4

10 001–20 000 865 6.7 12,620,416 8.2

20 001–50 000 523 4.1 16,495,722 10.7

50 001–100 000 185 1.4 13,105,665 8.5

100 001–500 000 137 1.1 27,289,338 17.6

500 001–1 000 000 15 0.1 10,523,176 6.8

1 000 001– 15 0.1 51,075,105 33.0

Summa 12,874 100.0% 154,825,589 100.0%

The Karo Bio share

(14)

five year summary

GROUP

(MSEK, unless otherwise indicated) 2005 2006 2007 2008 2009

INCOME STATEMENTS

Net sales 51 .9 44 .0 7 .5 10 .7 5.9

Administrative expenses –34 .6 –31 .8 –33 .3 –28 .6 –30.9

research & development expenses –125 .2 –145 .0 –190 .8 –169 .4 –132.4

Other operating income and expenses –0 .8 0 .8 0 .8 –3 .4 0.3

Operating profit/loss –108 .7 –132 .0 –215 .8 –190 .7 –157.1

Financial net –2 .3 5 .9 12 .4 15 .9 2.6

Profit/loss after financial items –111 .0 –126 .1 –203 .4 –174 .8 –154.5

BALANCE SHEETS

Licenses and similar rights - - 2 .8 1 .7 0.5

Equipment 13 .1 8 .6 5 .9 8 .1 5.8

Total non-current assets 13 .1 8 .6 8 .7 9 .8 6.3

Other current assets 14 .8 9 .4 12 .2 10 .7 12.3

Cash, bank balances and short-term investments 346 .9 233 .9 432 .6 242 .7 237.2

Total current assets 361 .7 243 .3 444 .8 253 .4 249.5

Total assets 374 .8 251 .9 453 .6 263 .2 255.8

Shareholders’ equity 336 .6 210 .5 394 .3 219 .5 215.2

Non-current liabilities 1 .6 0 .7 0 .2 2 .0 1.2

Other current liabilities 36 .6 40 .7 59 .1 41 .7 39.4

Total shareholders’ equity and liabilities 374 .8 251 .9 453 .6 263 .2 255.8

CASH FLOW

Cash flow from operating activities –89 .9 –110 .4 –178 .3 –186 .4 –146.9

Net investment in fixed assets –6 .4 –2 .0 –6 .6 –3 .8 –1.2

Net investment in other short-term investments 74 .6 –101 .1 –96 .9 88 .0 –19.9

Cash flow from investing activities 68 .2 –103 .1 –103 .5 84 .2 –21.1

Cash flow from financing activities 263 .4 - 387 .2 - 150.2

Cash flow for the year 241 .7 –213 .5 105 .4 –102 .2 –17.8

Operating cash flow –96 .3 –112 .4 –184 .9 –190 .2 –148.1

KEY FIGURES

Equity 336 .6 210 .5 394 .3 219 .5 215.2

return on equity, % –43 .1 –46 .1 –67 .3 –81.3 –50.7

return on capital employed, % –42 .4 –45 .7 –67 .0 –80.9 –51.5

Operating margin, % –209 .4 –300 .0 –2 877 .3 –1 782 .2 –2 662.7

Profit margin, % –213 .9 –286 .6 –2 712 .0 –1 633 .6 –2 618.6

Equity ratio, % 89 .8 83 .5 86 .9 83 .4 84.1

Interest-bearing assets (net) 346 .9 233 .9 432 .6 242 .7 237.2

Investment in licenses and similar rights 3 .7 - 3 .5 - -

Net capital investments 2 .7 2 .0 3 .1 3 .8 1.2

Average number of employees during the year 76 72 71 63 67

Of which engaged in research and development 67 63 63 54 60

(15)

GROUP

2005 2006 2007 2008 2009

PER SHARE DATA (SEK)^{1) 2)} Loss per share

– average number of shares –1.83 –1.26 –1 .75 –1 .37 –1.20

– shares at end of year –1.79 –1.24 –1 .73 –1 .37 –1.20

Cash flow from operating activities per share

– average number of shares –1 .59 –1 .12 –1 .59 –1 .50 –1.15

– shares at end of year –1 .55 –1 .11 –1 .58 –1 .49 –1.15

Equity per share, year-end 5.43 2 .07 3 .36 1.72 1.67

Share price at end of year³⁾ 6.79 12.04 4.11 7.39 7.05

Share price/equity per share, year-end, %³⁾ 125 581 122 431 422

NUMBER OF SHARES (MILLIONS)^{1) 2)}

Average number of shares 60.7 100.3 116.0 127 .2 128.3

Average number of shares including warrants 100.3 100.3 127.2 127 .2 154.8

Number of shares, year-end 62.0 101.6 117.3 128 .0 128.9

Number of shares, year-end including warrants 101.6 101.6 128,5 127 .7 155.3

1) Warrants are non-dilutive as exercise of warrants would reduce losses and improve cash flow per share for each respective year.

2) The number of shares for the period prior to rights issues has been adjusted for the bonus element in accordance with IAS 33 Earnings per share.

3) Information on share price has been adjusted for new share issues.

DEfiniTions

CASH AND CASH EQUIVALENTS

Cash and bank balances and short-term investments with maturities less than 90 days OPERATING CASH FLOW

Cash flow from operating activities and cash flow from investments in equipment and licenses RETURN ON EQUITY

Profit/loss after financial items as a percentage of average equity

RETURN ON CAPITAL EMPLOYED

Operating loss and financial income as a percentage of the average total assets less non interest bearing liabilities

OPERATING MARGIN

Operating loss as a percentage of net sales PROFIT MARGIN

Loss for the year as a percentage of net sales

EQUITY RATIO

Equity as a percentage of total assets INTEREST BEARING ASSETS (NET) Cash, bank balances and short-term investments NET CAPITAL INVESTMENTS

Capital investments in equipment net of disposals PROFIT/LOSS PER SHARE

Profit or loss for the year in relation to the weighted average number of shares outstanding

OPERATING CASH FLOW PER SHARE Cash flow from operating activities and cash flow from investments in equipment and licenses per share

EQUITY PER SHARE

Shareholders’ equity in relation to outstanding shares at year-end

SHARE PRICE/EQUITY PER SHARE Share price as a percentage of shareholders’

equity per share at year-end AVERAGE NUMBER OF SHARES Weighted-average number of shares outstanding during the year AVERAGE NUMBER OF SHARES, INCLUDING WARRANTS

Weighted-average number of shares, including warrants, outstanding during the year NUMBER OF SHARES, YEAR-END

Number of shares outstanding at the end of the year NUMBER OF SHARES, YEAR-END,

INCLUDING WARRANTS Number of shares, including warrants, outstanding at the end of the year

Five year summary and Definitions

(16)

CONTENTS

15 Administration report

19 Consolidated income statements and income statements for the Parent Company

19 Consolidated statement of comprehensive income

20 Consolidated statement of financial position and balance sheets for the Parent Company

22 Consolidated statement of cash flows and cash flow analysis for the Parent Company

23 Consolidated statement of changes in equity

23 The Parent Company’s statement of changes in equity

24 Accounting and valuation principles

29 ^Notes 41 Audit report

42 Corporate governance report

Annual Report and

Corporate Governance Report

This annual report includes statements that are forward-looking, and actual results may differ materially from those stated. In addition to the factors discussed, among other factors that may affect results, are developments within research programs including development in preclinical and clinical trials, the impact of competing research programs, the effect of economic conditions, the effectiveness of the company’s intellectual property rights and preclusions of third party’s intellectual property rights, technological development, exchange rate and interest rate fluctuations, regulatory and political risks.

ANNuAl GeNerAl MeeTiNG ANd FurTher iNForMATioN ANNuAl GeNerAl MeeTiNG

The annual general meeting of Karo Bio AB (publ.) will be held on Friday April 23, 2010 at 2.00 pm CET at Mannheimer Swartling Advokatbyrå on Norrlands- gatan 21 in Stockholm, Sweden. The notice for the annual general meeting is available on Karo Bio’s web site at www.karobio.com/agm.

riGhT To PArTiCiPATe ANd NoTiCe To be entitled to participate in the annual general meeting, shareholders must have their holdings registered in their names at Euroclear Sweden AB (formerly VPC AB) by April 17, 2010, and must notify the Company of their intention to participate in the meeting by no later than April 19, 2010 at 4.00 p.m. Notice of intention to participate in the annual general meeting shall be made in writing, including name, personal or corporate identity number (where applicable), address, e-mail address and telephone number, either via mail to Karo Bio AB, attention Eva Kruse, Novum, SE-141 57 Huddinge, Sweden, fax +46 8 774 52 80, e-mail to address agm@karobio.com or on Karo Bio’s web site at www.karobio.com/agm.

ShAre reGiSTrATioN

Shareholders whose shares are registered under the name of a nominee through a bank notary department or other nominee must, to be entitled to participate in the annual general meeting, temporarily register their shares in their own names. Such registration must be in effect no later than April 17, 2010, which means that shareholders must notify their nominee well in advance of that date.

FurTher iNForMATioN Scheduled information events:

interim report: January–March April 22, 2010 interim report: April–June July 13, 2010 interim report: July–September october 21, 2010 Year-end report for 2010 February , 2011

Financial reports, press releases and other information are available on Karo Bio’s web site. Karo Bio’s financial reports and press releases may be down- loaded from and subscribed to on the website at www.karobio.com/finance. Financial reports are available on the web site upon release.

Karo Bio has electronic distribution as the primary means for distribution of financial reports. The annual report will be mailed to shareholders and others specifically subscribing to the printed version.

Printouts of interim reports are mailed upon request.

For further information, please contact:

Per olof Wallström, President & CEO, phone +46 8 608 60 20 or erika Söderberg Johnson, Chief Financial Officer and VP Investor Relations, phone +46 8 608 60 52, or e-mail: investor@karobio.com