BioWorld International Correspondent

Karo Bio AB is seeking SEK280 million (US$35.9 million) in a discounted rights issue to fund its switch from early stage discovery to clinical development.

The Huddinge, Sweden-based company has received commitments from current shareholders and declarations from intending investors that amounts to 94 percent of the total, but it still needs to obtain shareholder agreement at an extraordinary general meeting Oct. 14.

The company priced the share issue at a steep discount to its recent share price. Existing shareholders are entitled to subscribe for three new shares, priced at SEK6 each, for every two shares currently held. The stock had closed at SEK12.50 immediately prior to the announcement of the funding initiative last week and remained around that level in subsequent trading sessions. The company plans to issue about 46.4 million new shares, the subscription period, which runs from Oct. 27 through Nov. 10. At June 30, it had about 31 million shares outstanding, with an additional 710,370 outstanding warrants.

The company reported SEK146.8 million in cash at June 30. The forthcoming fund raising comes just more than one year from a similar, though smaller-scale, exercise, which netted about SEK113 million. Karo Bio said then that it was laying off drug discovery R&D staff to focus its resources on clinical development. Company President and CEO Per Olof Wallström told BioWorld International that since then it has further refined its clinical development priorities. The company also named Jens Kristensen, previously senior clinical research physician at London-based AstraZeneca plc, as its new head of clinical development. It aims to have four projects in the clinic within the next two and a half years.

Karo Bio's lead project now is KB2115, an agonist of thyroid hormone receptor, which, it said, raises energy consumption and lowers body weight. The compound also lowers blood lipids and blood glucose and has potential application on a range of indications involving dyslipidemia and obesity.

The company recently completed a Phase Ia trial and has moved to a multidose Phase Ib trial in overweight but healthy individuals with high blood lipids. The company will define a clinical development path for the compound based on the discussions with its scientific advisers, the clinical community and regulators.

"It is the sort of project we believe has the potential to be taken all the way," Wallström said.

A glucocorticoid receptor antagonist, KB3305, in development for Type II diabetes, is slated to begin a Phase I trial in the first quarter, but the company has to solve bioavailability and solubility problems.

"It's a technical issue that we're working on right now. Given that we solve that, we will move into Phase I," Wallström said. Both compounds were previously the subject of development alliances that failed to progress. KB2115 emerged from an agreement with Bristol-Myers Squibb Co., of New York, and KB3305 came from an alliance with Abbott Laboratories, of Abbott Park, Ill. A third preclinical project, TR STAD, which the company aims to out-license next year, also focuses on lipid metabolism. The company also has earlier-stage projects based on modulating thyroid hormone receptor and estrogen receptor activity.

Given the level of advance commitments obtained, the share issue looks like a done deal.

"There are not many alternatives, I'd say," said Mattias H ggblom, biotechnology analyst at Alfred Berg ABN Amro, of Stockholm, Sweden. He has been critical of the company's earlier model, which focused on out-licensing entire programs, rather than molecules, at an early stage. Regardless of their scientific quality, it remains difficult to retain the interest of large pharmaceutical partners when there are so many other early stage ideas competing for attention.

"They tend not to be as committed until Phase II in my view," H ggblom said. Moreover, financing modeling has been something of a "black box" for the company, he said, as it has had no visibility on or control over the development of out-licensed projects. The company could have moved sooner to change its strategy, he said.

"I think it's a bit too late, but rather now than never," he said. Although Wallström, who joined the company in 2004, is leading the new strategy, H ggblom said the company's board is overly associated with the now-discarded business model.

"I'd like to see a new injection into the board," he said.