MAIN EVENTS THE COMPANYTHE PEOPLE2008

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Karo Bio a

MAIN EVENTS THE COMPANY THE PEOPLE 2008

Karo Bio’s vision:

To become a pharmaceutical company with sustainable profitability

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b Karo Bio

Karo Bio in brief

Karo Bio is a drug discovery and development company targeting nuclear receptors for the development of novel pharmaceuticals. 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 proprietary projects in 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.

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Karo Bio 1

ConTEnTs

Innovative research 2

Karo Bio´s projects 4

Collaboration strategy 6

Eprotirome in focus 8

Market opportunities 10

The president of Karo Bio comments on key achievements in 2008 12

The Karo Bio team 14

Board of directors, executive management and auditors 16

The Karo Bio share 18

Five year summary 20

Karo Bio has a project portfolio based on innovative molecules targeting disease areas with significant market opportunity, and where there are medical needs for pharmaceuticals utilizing novel mechanisms of action.

In addition to proprietary projects, Karo Bio has three strategic collaborations with international pharma

ceutical companies for the development of innovative treatments of common diseases.

Karo Bio is actively evaluating inlicensing and acqui

sition opportunities to enrich the project pipeline and seeks alternative ways to share risk through collabo

rations. Karo Bio develops compounds intended for treatment of large patient populations up to clinical proof of concept before outlicensing. Selected com

pounds within niche therapeutic areas can be taken to late stage clinical development and, potentially, to the market.

Pipeline of innovative

projects strategy and

business model

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LEgAL DISCLAIMER

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, and political risks.

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innovative…

2 Innovative research

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…research has

characterized Karo Bio from the start

Since the early part of the 1990’s, Karo Bio has specialized in nuclear receptorbased drug discovery. These receptors control gene activity and are important targets for treatment of a number of diseases. In this field, Karo Bio has generated innovative treatment concepts and first in class compounds on the basis of scientific and technological leadership. In recent years, Karo Bio has established preclinical and clinical development resources and is capable of bringing compounds through clinical phase II development before partnering.

The development of Karo Bio’s most advanced compound, eprotirome, is a good illustration of how Karo Bio is capable of developing an innova

tive medical treatment to proof of concept. This first in class compound has been developed by Karo Bio from basic research through clinical phase II studies. This achievement is based on Karo Bio’s cutting edge medicinal chemistry efforts and understanding of thyroid hormone receptor struc

ture and function.

It is well known that the thyroid hormone controls blood lipids. Where as the natural hormone can not be used to treat dyslipidemia due to harmful effects in the heart and other organs, Karo Bio’s liver selective thyroid hor

mone receptor agonist, eprotirome, has been shown to be efficacious and safe in clinical phase II studies.

Karo Bio’s compound KB3305 for the treatment of type 2 diabetes is a first in class compound. Clinical observations in patients with type 2 diabetes show that these patients have an increased glucose production in the liver and thereby elevated levels of blood glucose. The increased hepatic glucose output is induced by the glu

cocorticoid receptor since this nuclear receptor controls several glucose generating enzymes. The objective is to develop a compound that antago

nizes the glucocorticoid receptor in the liver, and thus stabilizes the blood glucose. KB3305 was designed to selectively inhibit the glucocorticoid receptor in the liver and was subse

quently demonstrated to normalize the increased glucose production in preclinical diabetes models.

Innovative research 3 Whereas the thyroid hormone recep

tor and the glucocorticoid receptor were discovered several decades ago, the ERbeta receptor and the Liver X Receptor (LXR) were discovered only some ten years ago. At that time, the discoveries were intriguing and scientifically important, but the roles of the receptors were to a great extent unknown. Since then, both these receptors have gained much interest as drug targets for indications such as women’s health, depression, athero

sclerosis and inflammation. Karo Bio and its scientific collaborators are at the forefront in the respective fields.

These discoveries paved the way for the collaborations with Merck and Wyeth as well as for Karo Bio’s own ERbeta program, which is generating several new treatment opportunities.

EpROTIROME

First in class dyslipidemia compound

KB3305

First in class diabetes compound

Novel receptors

New

opportunities

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Karo Bio’s project portfolio is focused on nuclear receptors as drug targets for the treatment of primarily cardiovascular, metabolic 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 proprietary inhouse projects.

Karo Bio´s projects

Stages of preclinical and clinical drug development

pRECLINICAL DEvELOpMENT

In the preclinical development phase, candidate drugs are extensively evaluated in various animal models. The focus is to study effects in disease models and safety aspects in toxicology models.

phASE I

CLINICAL DEvELOpMENT

In clinical phase I studies, compounds are evaluated in man for the first time. Safety aspects are studied in small groups of healthy volunteers.

phASE II

The clinical phase II studies focus on evaluation of effects in patients at various doses and during extended time periods.

phASE III

In clinical phase III development, a large number of patients are studied to confirm therapeutic benefit and safety.

NDA Once all clinical documentation has been compiled and evaluated, a new drug application (NDA) is submitted to the regulatory authorities.

PROJECT EXPLORATORY

RESEARCH DRUG

DISCOVERY PRECLINICAL

DEVELOPMENT PHASE I PHASE II PHASE III NDA

Eprotirome (KB2115), TR

Dyslipidemia

KB3305, GR

Type 2 diabetes

Selective ERbeta Agonists

Depression, Cancer, Women´s health

LXR; partner: Wyeth

Inflammation

ER; partner: Merck

Women’s Health

GR; partner: Zydus Cadila

Inflammation

4 Karo Bio’s projects

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Karo Bio´s projects

EProTiromE

Karo Bio’s eprotirome for the treat

ment of dyslipidemia has successfully completed three phase II clinical trials, of which two were finalized in 2008.

In these trials it was first demon

strated that eprotirome, when given on top of ongoing statin treatment to dyslipidemic patients, gave a profound and clinically meaningful lowering of several important risk factors for development of cardiovascular disease.

The results are very encouraging since there is a need to combine statins with drugs that have a different mecha

nism of action in order to reach the desired LDLcholesterol levels. The second study showed that eprotirome gives significant additive effects when combined with ezetimibe, a cholesterol absorption inhibitor drug commonly prescribed with statins.

KB3305

The incidence of type 2 diabetes is rapidly increasing. Pharmaceutical intervention is necessary in order to halt disease progression which can other

wise lead to serious medical complica

tions. Type 2 diabetes is characterized by an elevated glucose production in the liver, which is regulated by the glucocor

ticoid receptor (GR). Compounds that are antagonists to GR have a glucose lowering effect, but typically also sys

temic side effects. Karo Bio’s compound KB3305 is a first in class liver selective GRantagonist, which has been effica

cious and safe in preclinical studies.

Clinical phase I studies in healthy volunteers and diabetic patients were performed in 2008 and will be reported in spring of 2009.

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 increased risks are mainly mediated by the ERalpha subtype. The ERbeta subtype, on the other hand, seems to be responsible for the positive effects on mood and cognition without the above mentioned side effects. Rather, based on data from preclinical studies, ERbeta selective agonists are anticipated to exibit antitumor effects.

ERbeta provides new drug dis

covery opportunities in the CNS and cancer fields and for treatment of inflammatory disorders and post

menopausal symptoms. Karo Bio is recognized as an international leader in the ERbeta field. In 2008, significant progress was made regarding design and synthesis of highly selective compounds with good bioavailability.

The ERbeta program provides mul

tiple business opportunities. Karo Bio’s focus is on obtaining preclinical proof of concept in depression, cancer and women’s health indications to prepare

Karo Bio’s projects 5 for clinical studies in these fields, either with a partner or on our own.

CollaBoraTion wiTh mErCK The collaboration with Merck was initiated in 1997 and targets estro

gen receptors. The aim is to develop pharmaceuticals in the field of women’s health. The joint drug discovery phase was concluded in 2002. In December 2008, Merck entered clinical phase I development with a compound arising from the collaboration.

CollaBoraTion wiTh wyETh PharmaCEuTiCals In 2001, Karo Bio and Wyeth entered a drug discovery collaboration with the liver X receptor (LXR) as target. The primary clinical indication was athero

sclerosis, since LXR regulates reversed cholesterol transport. However, LXR has since then evolved as a promising target also for the treatment of inflam

matory conditions and, from November 2008, the collaboration is focused on inflammatory disorders. In 2008, the joint drug discovery phase was extended with an additional 12 months, until August 31, 2009.

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. Corticos

teroids, such as the antiinflammatory substance cortisone, target this recep

tor. The objective of the collaboration is to design compounds that are anti

inflammatory but lack the side effects associated with cortisone treatment.

The collaboration is a risksharing col

laboration where each party covers its own costs.

It is Karo Bio’s ambition to bring new innovative compounds forward in development and to broaden the project pipeline. This can be achieved by a healthy mix of proprietary projects and partnerships.

”

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6 Collaboration strategy

Collaboration

strategy

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drug disCovEry CollaBoraTions

The typical pharma/biotech collabo

rations provide upfront payments, research funding during the joint drug discovery phase, and milestones and royalties on sales in the event of success ful development and marketing.

The pharmaceutical company provides the financial resources and additional competences required to bring the product to the market. In addition, the collaboration validates the quality of the research in the biotech company. Karo Bio’s ongoing partnerships with Merck and Wyeth represent collaborations of this kind.

risK-sharing CollaBoraTions Karo Bio is prepared to enter into risksharing collaborations in early projects for which internal resources are not sufficient to drive the project forward. This allows for a larger num

ber of projects to be pursued within the financial framework of Karo Bio.

In addition, Karo Bio can benefit from access to the partners’ complementary competencies. The collaboration with Zydus Cadila is the company’s first collaboration of this type. Karo Bio is primarily involved in drug design and in vitro characterization while Zydus Cadila is responsible for the chemical synthesis and in vivo characterization of compounds. Both parties cover their own costs. The ambition is to build value and outlicense the project at a later stage.

inliCEnsing

Karo Bio conducts inhouse drug discovery in the field of nuclear recep

tors with the intention to generate new projects and broaden the pipeline. How

ever, the company is also investigating alternative strategies to expand the pipeline. Inlicensing of compounds in late preclinical or clinical development stage represent an attractive means to achieve a balanced mix of projects in the portfolio.

imPorTanCE of aCadEmiC CollaBoraTions

Whereas Karo Bio has its core expertise in drug discovery and development, aca

demia is a stronghold of basic research.

Karo Bio has a long tradition of success

ful collaborations with academia. In these collaborations, Karo Bio provides tools and competencies of importance to perform basic research, and in return the company gets an increased insight into the biological mechanisms that can lead to new, or validate existing, treat

ment concepts.

ThE Karo Bio rEsEarCh foundaTion

In connection with a management buyout of Karo Bio from the previous owners in the early 1990’s, a research foundation was established for the purpose of funding academic research in Karo Bio’s field of interest. The value of the foundation’s assets has grown over the years, and several grants were awarded during 2007 and 2008.

The insights gained from the awarded research projects can be of importance for academia as well as for Karo Bio.

Collaboration strategy 7 It is Karo Bio’s ambition to bring new innovative compounds forward in development

and to broaden the project pipeline. This is a challenge for a small company but can be achieved by a healthy mix of proprietary projects and partnerships. Karo Bio will continue to look for partnerships with large pharmaceutical companies, but is also evaluating early risksharing collaborations and later stage inlicensing opportunities.

Collaborations enable Karo Bio to broaden the pipeline and add complementary competences and resources to the projects, which increase the chance for success in the end.

”

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Eprotirome in focus

8 Eprotirome in focus

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Eprotirome in focus 9 BaCKground

The thyroid hormone receptor plays a key role in regulation of body meta

bolism and lipid turnover. Karo Bio has generated a vast library of proprietary compounds targeting the thyroid hor

mone receptor. The liver selectivity of eprotirome minimizes risks for systemic side effects and makes this compound suitable for the treatment of dyslipi

demia.

ProduCT ProfilE

In three consecutive clinical phase II studies with eprotirome, Karo Bio has included a total of 400 patients. In these placebocontrolled studies, epro

tirome has been given as monotherapy, as addon to statins and as addon to ezetimibe (a cholesterol uptake inhibitor). The data are consistent and robust across all three studies. First of all, the compound has been very well tolerated. Secondly, eprotirome induced a profound lowering of several important risk factors for development of atherosclerotic cardiovascular dis

eases. In the dose range of 25–100 µg per day, eprotirome induces a statisti

cally significant and dosedependent reduction of serum LDLcholesterol, nonHDLcholesterol, Apo B (the carrier protein), triglycerides and lipoprotein(a). The effects are of the same magnitude regardless of whether eprotirome is given as monotherapy or as addon treatment to patients who are on stable treatment with statins or ezetimibe.

marKET oPPorTuniTiEs

Eprotirome has the potential to be used as secondline therapy for patients who do not reach their treatment goal with a statin alone. Thanks to the combined effect on LDLcholesterol and triglyc

erides, eprotirome may be well suited for the treatment of mixed dyslipidemia (elevated LDLcholesterol and triglycer

ides) and diabetic dyslipidemia. Further, eprotirome may provide a powerful treat

ment option for patients with high levels of lipoprotein(a).

Blood liPids – risK faCTors in CardiovasCular disEasE dEvEloPmEnT

Consequences of atherosclerotic cardio

vascular disease such as coronary heart disease and stroke are major medical problems. There is a need to develop improved means to treat these disorders by reducing important risk factors such as serum LDLcholesterol, nonHDL

cholesterol, Apo B, triglycerides and lipoprotein(a).

CurrEnT TrEaTmEnT

Statins is a class of compounds that are widely used for treatment of elevated LDLcholesterol. The global sales of statins were in the order of USD 18 bil

lion in 2007. Statins offer effective treat

ment of elevated blood lipids, achieving reductions of heart disease and stroke by some 30 percent. In spite of active treatment of high blood lipids with

increasing doses of statins over the last 15 years, the morbidity and mortality of cardiovascular atherosclerotic disease remain high.

fuTurE TrEaTmEnT

The treatment goals for acceptable LDLcholesterol levels have been low

ered repeatedly in international clinical guidelines over the years, especially for highrisk patients. Combination thera

pies have become more common due to difficulties to reach the treatment goals by using one medication only.

Apart from treatment guidelines for LDLcholesterol, there is a grow

ing awareness of the importance of lowering additional risk factors such as triglycerides and lipoprotein(a). Recent data indicate that lipoprotein(a) is a risk factor for heart disease and stroke of the same magnitude as high systolic blood pressure. Until now, treatment options

for patients with elevated lipoprotein(a) have been very limited. New guidelines for therapy are being prepared and are expected to be published in the coming year. In addition, new data have shown the importance

of reducing biomarkers for inflammation, such as C

reactive protein (CRP).

Eprotirome – a first in class dyslipidemia compound

Treatment of dyslipidemia and cardiovascular disease

Eprotirome signicantly reduces several risk factors for cardio

vascular disease

Unique efficacy profile

Safe and well tolerated

~400 patients included in clinical studies of up to three months’ dura

tion

lp(a) Tg

30-40% 30-40%

non-hdl ldl apoB

25%

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The

pharmaceutical market

– a changing landscape

10 Market opportunities

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nEw BusinEss modEls rEquirEd While the total market will expand, the industry is facing challenges. Big pharma investments in R&D have doubled com

pared to a decade ago, but productivity has fallen to less than half of what is was at that time.

The blockbuster model, where companies are aiming for products with annual sales of more than USD 1 bil

lion, is associated with huge clinical trials, enormous costs and regulatory

hurdles. In order to improve productivi

ty, pharmaceutical companies must focus on fewer therapeutic areas to avoid being spread too thin. There is a great need for innovation that adds true value.

nEw drug dEvEloPmEnT TrEnds A current trend is to develop drugs for limited indications with the aim to conduct smaller and more focused clinical trials in welldefined patient populations, which will allow market

approval on a restricted basis at a lower risk and cost.

finanCing issuEs for BioTECh Whereas big pharma in general are well financed, the biotech industry is depen

dent on access to risk capital. In 2008 the financing opportunities were more or less closed and this has called for cost saving initiatives and prioritization of projects that are expected to create the best near time value and news flow.

$ 1,300

billion

it has been predicted that the global pharmaceutical market will double in value by 2020 and that annual sales will exceed usd 1,300 billion.

The pharmaceutical market is expanding. It has been predicted that global sales of pharmaceuticals will double in value by 2020, with annual sales exceeding USD 1,300 billion. The main driving force is a growing and aging population which is becoming more obese and will suffer from an increasing prevalence of chronic diseases.

innovaTion will drivE valuE CrEaTion

Development of “me too” primary care products with incremental benefits in relation to competing products require huge investments in marketing and sales, while adding limited value to patients. There is an increasing aware

ness of a great need for innovative and effective products to prevent, treat or cure disease. Companies that succeed in developing novel medicines rather than “me too” therapies are likely to be financially rewarded through higher product pricing and reimbursement.

innovaTivE PiPElinE

Karo Bio has a track record in develop

ment of novel medical concepts and innovative compounds.

The leading compound eprotirome targets the thyroid hormone recep

tor and is primarily intended for the treatment of dyslipidemia in high risk patients. The compound is efficacious and first in class. The dyslipidemia field is the largest pharmaceutical segment with annual sales of around USD 25 billion, offering multiple opportunities for treatment of well defined patient categories managed by specialists.

Karo Bio’s compound KB3305 has completed clinical phase I development.

The compound targets the increased liver glucose production in type 2 diabetics and is first in class. Type 2 diabetes is spreading like an epidemic and new innovative treatment concepts are required.

The ERbeta program, which has generated several series of highly se

lective ERbeta compounds, provides multiple business opportunities in ar

eas such as depression, women’s health and cancer. In some indications, Karo Bio prefers to involve a partner with specific competence in the field at an early stage of the project. In other in

dications, taking a compound to clini

cal proof of concept before partnering may be more suitable. Niche indica

tions with straightforward clinical programs may be developed inhouse by Karo Bio all the way to the market.

In addition to the inhouse projects, Karo Bio has three partnerships which are all focused on novel innovative medical concepts and well positioned to the market opportunities and future medical needs.

Karo Bio market opportunities

Market opportunities 11

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12 Key achievements 2008

ThE PrEsidEnT of Karo Bio CommEnTs on KEy aChiEvE- mEnTs in 2008

Karo Bio had a successful year with significant progress in several projects.

The lead compound, eprotirome, for the treatment of high blood lipids, is being prepared for entering clinical phase III development. Our intention is to start the next development phase

together with a partner, since the required investments and manpower are significant.

A compound like eprotirome with proven efficacy, good safety and toler

ability as shown in the phase II studies, attracts interest among big pharma.

However, over the last few years, inter

est in the lipidlowering market has been changing, since the statins have come off patent and some companies are abandoning the area. Others have

president of Karo Bio since: 2005 Education: M.Sc. Pharm

previous experience: Per Olof Wallström has long experience from leading positions within the international pharmaceutical industry, including positions within Merck, Astra and Pharmacia. During a ten-year period, Wallström worked for Bristol-Myers Squibb and played an important role in the successful development of the European marketing and sales operations.

Wallström has also been active within the biotech industry as President of Q-Med AB and Melacure

Therapeutics AB.

Per olof wallström

2008 was a good year for Karo Bio

already set their priorities, while some companies are still actively looking for new projects in the area. The changing regulatory and reimbursement climate is influencing the decision processes for big pharma companies.

Karo Bio is working intensively to find the best partner for eprotirome, and it is our ambition to confirm a partnership for the further develop

ment of the compound. This is our most important goal for 2009.

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KEy aChiEvEmEnTs 2008

Eprotirome /statin phase IIb study

successfully concluded

Eprotirome /Ezetimibe phase IIb study

KB3305 phase I program

Strategic collaboration with Zydus Cadila

initiated

wyeth collaboration extended with

new R&D direction

preCD selected in Er-beta program

merck collaboration

progressed to clinical phase I

studies

Key achievements 2008 13 ClinCal daTa in diaBETEs ProjECT

Our diabetes compound, KB3305, has advanced through phase I and we look forward to evaluating the collective re

sults from healthy volunteers and the first type 2 diabetes patients. Since KB3305 is a first in class compound, it is very excit

ing to obtain the first clinical data.

ParTnErEd ProjECTs moving forward

Our partner Merck has entered clinical phase I trials with a new estrogen recep

tor active compound, and we remain hopeful about future success.

Further, our LXR partner Wyeth has redirected the joint program from atherosclerosis to osteoarthritis, and Karo Bio continues to support Wyeth.

In addition, the risksharing collabora

tion with Zydus Cadila, initiated in early 2008, has the potential to become very productive. It is still early days, but the collaboration works well and will be followed closely.

suCCEssful disCovEry EfforT Karo Bio has a track record of bringing forward innovative, first in class or best in class compounds. Over the last few years, the discovery effort has been run with small resources, while preclinical and clinical development competence has been built, which has brought eprotirome forward through phase II, KB3305 through phase I and created significant value and opportunity for Karo Bio.

True to its tradition, our discovery or

ganization is producing what we believe to be best in class ERbeta compounds.

The ERbeta platform has interesting clinical and commercial opportunities.

During 2009, our ERbeta compounds will be further developed and the clinical treatment opportunities better defined.

funding of ThE oPEraTions The biotech industry is living through difficult times in terms of financing, and many companies have to evaluate alternative ways of ensuring contin

ued operations. Karo Bio has financial resources to the latter part of 2010.

Our main intention is to finance the company through a partnering deal. It is however always difficult to predict the timing of such a process. There

after the strategy is clearly to grow the project portfolio, both through internal discovery efforts and external merger and acquisition activities, thereby building a competitive project portfolio and growing shareholder value.

Huddinge, March 2009 Per Olof Wallström, CEO

Karo Bio has financial resources to the latter part of 2010. Our main intention is to finance the company through a partnering deal.

”

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14 The Karo Bio team

The Karo Bio team

ThE ProjECT managErs

Olof Breuer, M.D., ph.D.

Director Clinical Pharmacology.

Project manager for KB3305.

Prior to joining Karo Bio in 2007, Olof worked at AstraZeneca and as clinician.

Anna Wilhelmsson, ph.D.

Principal Project Manager, and project manager for Karo Bio’s collaboration with Wyeth. Since Anna joined Karo Bio in 1993, she has been project manager for several of Karo Bio’s successful projects.

Stefan Nilsson, ph.D.

Principal Project Manager, and project manager for the ER-beta program.

Stefan has been with Karo Bio since its inception and has contributed in many areas both as project manager and in line management.

Mathias Färnegårdh, ph.D.

Principal Project Manager, and project manager for the Zydus Cadila collaboration. Mathias has been with Karo Bio since 1998 and has contributed in many areas, as specialist as well as in line manager positions.

Maria Öhlander, M.Sc.

Director Clinical Operations and Prin- cipal Project Manager. Project manager for eprotirome. Prior to joining Karo Bio in 2007, Maria worked at AstraZeneca and Pharmacia.

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The Karo Bio team 15

The Karo Bio team

flExiBiliTy

Karo Bio has established a project driv

en research and development organiza

tion to conduct the discovery, preclini

cal and clinical development projects in an efficient and goaloriented way. Karo Bio’s organization, with 66 employees at the end of 2008, 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 dynam

ics of a small organization with key competences, and quickly adapt to any new priorities or development scenarios.

ComPETEnCE

Karo Bio has a highly qualified orga

nization. Almost 50 percent of the em

ployees have a PhD degree. The drug development process is complex and spans many specialized competences.

It takes an experienced team working well together and supporting each other with complementary skills.

hEalTh and worK EnvironmEnT The health and wellbeing of the team as well as each individual are impor

tant competitive factors. Employees are invited to undergo personal health profiles and active rehabilitation is promoted early on in the course of an illness.

Safetyconsciousness 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 daytoday 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 2008, 52 percent of the employees were women and 48 percent were men. The gender distribution in the executive management team is 43 percent women and 57 percent men.

soCial rEsPonsiBiliTy

Being a research and development com

pany with no inhouse production, Karo Bio’s consumption of energy and other natural resources and air and water emissions 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 preventive measures and constant improvment, where the goal is to meet or exceed applicable legal requirements, regulations and international agree

ments.

of empoyees hold a ph.D.

hold a university degree



^48%



^52%

92%

47%

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 50 percent hold 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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Henrik Jernstedt

16 Board of Directors

Board of directors

BirgiT sTaTTin norindEr (1948), London, United Kingdom Elected 2007

Education: M.Sc.Pharm.

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: InDex Pharmaceuticals AB (chairman), Antisoma plc, Puls AB (chairman), Moberg Derma AB.

Shares in Karo Bio: none

PEr olof wallsTröm

(1949), Uppsala, Sweden. Elected 2005 Education: M.Sc. Pharm.

Title: President and Chief Executive Officer of Karo Bio.

primary experience: Long experience from international pharmaceutical industry and biotechnology. Former employers include Merck, Astra, Pharmacia, Bristol-Myers Squibb, Q-Med AB and Melacure Therapeu- tics AB.

Other engagements: Envirotainer Holding AB; Swedish Orphan Holding AB,

ArosGruppen Holding AB (chairman) Shares in Karo Bio: 212,500

Bo Carlsson Employee representative (1958), Stockholm Appointed 1997 Project Manager Shares in Karo Bio: 8,000 Options in Karo Bio: 1,655

hEnriK jErnsTEdT

Employee representative (deputy) (1974), Uppsala

Appointed 2005 Research Scientist Shares in Karo Bio: none Options in Karo Bio: 1,300 lEon E. rosEnBErg

(1933), Princeton, New Jersey, USA Elected 2000; Chairman from 2007 Education: B.A. and M.D., University of Wis- consin

Title: Professor of Molecular Biology, Princeton University

primary experience: Participant in, leader of, and advocate for health and medical research in government, 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, Board of Directors, Hana Biosciences Company Shares in Karo Bio: 1,754

Independent board member

lEif Carlsson

(1957), Stockholm, Sweden. Elected 2008 Education: Degree in Economics and Busi- ness Administration

primary experience: Head of Strategy and Finance SBC Sveriges BostadsrättsCentrum AB (publ.) 2008–, Chief Executive Officer of WM-data Sweden 2000–2004; Chief Financial Officer of the WM-data Group 1985–2000

Other engagements: Advisory Board Mer- itmind AB

Shares in Karo Bio: none Independent board member laurEnT lEKsEll

(1952), Stockholm, Sweden. Elected 2006 Education: MBA, Ph.D. Business Administra- tion, Stockholm School of Economics primary experience: President and CEO of Elekta AB

Other engagements: Ortivus AB, Stockholm City Mission (chairman), Royal University College of Fine Arts

Shares in Karo Bio: 850,000 Independent board member johnny sandBErg Employee representative (1967), Stockholm Appointed 2006 Research Investigator Shares in Karo Bio: 7,875 Options in Karo Bio: 1,970

Bo Carlsson Leon E. Rosenberg

Laurent Leksell Leif Carlsson

Birgit Stattin Norinder

Johnny Sandberg

Per-Olof Wallström

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Executive management and Auditors 17

Executive management and auditors

PEr olof wallsTröm

(1949) President and Chief Executive Officer Employed by Karo Bio since 2005 Education: M.Sc. Pharm

Experience: Long experience from international pharmaceutical industry and biotechnology. Former employers include Merck, Astra, Pharmacia, Bristol-Myers Squibb, Q-Med AB and Melacure Therapeu- tics AB.

Other engagements: Envirotainer Holding AB; Swedish Orphan Holding AB, ArosGruppen Holding AB (chairman).

Shares in Karo Bio: 212,500 Options in Karo Bio: none

BEriT Edlund

(1948) Director Human Resources Employed by Karo Bio since 2001 Education: B.Sc. in social work (Socionom) primary experience: Extensive HR experience in both generalist and specialist positions from various industries such as IT, telecom, public sector and pharmaceutical. Former employers include Skandia, Ericsson, Huawei and Pharmacia.

Shares in Karo Bio: 3,472 Options in Karo Bio: 4,679

annEli hällgrEn

(1965) Vice president Pharmacology, ADME and Safety

Employed by Karo Bio since 2006 Education: Ph.D., M.Sc. Pharm primary experience: Director Preclinical Development Biolipox AB (2003-2006), Director In vivo Pharmacology at Mela- cure Therapeutics AB (2001-2003), Senior Research Scientists and Preclinical Project Manager at AstraZeneca (1997-2001).

EriKa johnson (1970) Chief Financial Officer Employed by Karo Bio since 2007 Education: M.Sc.BA., Stockholm School of Economics

primary experience: Chief Financial Officer at Affibody AB (2005–2007) and Global Genomics AB (2002–2005). Nine years of investment banking experience at SEB Enskilda Securities Corporate Finance (1993- 2002).

Other engagements: Board member of Sectra AB since 2007

jEns KrisTEnsEn

(1958) Vice president Clinical Development Employed by Karo Bio since 2005 Education: Ph.D., M.D.

primary experience: Joined the industry ten years ago, after 16 years of clinical experience.

Previous employers include AstraZeneca and Melacure Therapeutics AB.

PEr oTTEsKog

(1947) Senior vice president Investor Relations

Employed by Karo Bio since 1987 Education: Ph.D.

primary experience: Former Chief Scientific Officer of Karo Bio.

lars öhman

(1957) Vice president Business Development Employed by Karo Bio since 1989 Education: MBA, Stockholm School of Eco- nomics; Chemical Engineering, Royal School of Technology, Stockholm.

primary experience: Project management and line management positions within KaroBio´s R&D organisation.

audiTors

Auditors are elected by the annual general meeting for a period of four years. Pricewater- houseCoopers 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 autho- rized public accountant Håkan Malmström.

Claes Dahlén was auditor-in-charge for Karo Bio 2001–April 2008.

Shareholdings are as of December 31, 2008, and include family members and shares held through companies. Information regarding options refers to the number of shares the options held represent.

Per-Olof Wallström

Anneli Hällgren

Jens Kristensen

Per Otteskog

Lars Öhman

Erika Johnson Berit Edlund

(20)

The Karo Bio share

The number of shareholders was 10,100 at the beginning of 2008 and 11,490 at year’s end. Karo Bio is traded on OMX NASDAQ Stockholm since 1998.

sharE CaPiTal

Karo Bio’s share capital is SEK 58.1 million. The number of shares is 116,119,192 with a ratio value of SEK 0.50.

warranTs

There are warrants outstanding representing 474,770 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 employ

ees. The stock options have vested and become exercisable in one series per year over a fouryear period until May 2008.

Last date for exercise is April 30, 2011, for all series, provi

ded continued employment. The exercise price is SEK 17.00, 18.70, 20.40 and 22.10 for each respective series. Exercise of all stock options outstanding 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 80 percent in 2008, from SEK 523 million to SEK 941 million. The price per share rose from SEK 4.50 to SEK 8.10. During the same period, the OMX NAS

DAQ Stockholm AllShare index decreased with 42 percent and the OMX Stockholm Biotechnology index decreased with 47 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

Redeye Björn Fahlén

Independent Stefan Wikholm

Independent Peter Östling

14

JAN

2009 FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN 2008

No. of shares traded 1,000s Karo Bio

OMX Stockholm_PI

SX352010 Biotechnology_PI No. of shares

traded 1,000s Karo Bio

OMX Stockholm_PI

SX352010 Biotechnology_PI

10,000 5,000 12

10 8

6

4

2

20

2008 2007

OMX Stockholm_PI

SX352010 Biotechnology_PI

15

10

6

2

2006

2005 2009

2004 25 30 35

18 The Karo Bio share

(21)

pRINCIpAL ShAREhOLDERS AS OF DECEMBER 31, 2008

Owner

Number of Shares

Share of capital and votes %

Consepio 6,471,826 5.6

Avanza 5,437,826 4.7

4:th AP Fund 4,341,347 3.7

Nordnet 4,137,544 3.6

Farstorps Gård 3,385,000 2.9

Nordea 2,310,564 2.0

JP Morgan Bank 1,916,124 1.6

3:rd AP Fund 1,709,500 1.5

Six Sis AG 1,660,317 1.4

DNB Nor 1,636,500 1.4

Others 83,112,644 71.6

Total 116,119,192 100.0%

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

Shareholdings include family members and shares held through companies.

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, 2008

Shareholding Number of shares

Number of share

holders

percentage of share

holders Number of shares

percentage of share capital

1–500 3,334 29.0 667,695 0.6

501–1,000 2,051 17.9 1,843,775 1.6

1,001–2,000 1,833 16.0 3,162,283 2.7

2,001–5,000 2,048 17.8 7,439,142 6.4

5,001–10,000 1,048 9.1 8,371,383 7.2

10,001–20,000 584 5.1 8,808,687 7.6

20,001–50,000 358 3.1 11,764,779 10.1

50,001–100,000 115 1.0 8,387,569 7.2

100,001–500,000 93 0.8 18,664,331 16.1

500,001–1 000,000 12 0.1 8,938,135 7.7

1,000,001– 14 0.1 38,071,413 32.8

Total 11,490 100.0% 116,119,192 100.0%

The Karo Bio share 19