begins its implementation phase in 2014. It is a complex piece of legislation that is designed to
reform and overhaul many aspects of the U.S. healthcare system. The goals of the ACA are to
increase the affordability and rate of health insurance coverage for all Americans, and to control
the runaway growth in costs of health care faced by government, employers, and individuals.
The ACA mandates a number of broad reaching mechanisms to achieve these goals, and
25 Reuters
26 InVivo (Elseveir), June 2013
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CONTROL NUMBER 257 - CONFIDENTIAL
introduces a range of new incentives/penalties that force market participants to address major
cost, efficiency, and quality issues within the healthcare system.
The ACA and other healthcare reform initiatives are challenged by dual and somewhat
conflicting objectives. They are focused on reducing costs and slowing growth rates in
spending, but at the same time expand the size of the population that has access to healthcare
covered by third party payment mechanisms. In order to cover the increased costs of the
expanded coverage, reform initiatives attempt to radically improve the efficiency of healthcare
delivery as a way of freeing up resources that can be redirected to providing care to populations
that had previously not been covered. Some of the lowest hanging fruit that is being targeted in
early reform initiatives is eliminating waste from the healthcare system. There are enormous
resources that can be freed up by eliminating expenditures that are unnecessary or duplicative.
In the U.S. healthcare system alone, there is an estimated $765 billion that is wasted annually.
More than half of that total ($415 billion) is the result of fraud, unnecessary services, and
inefficiently or mistakenly delivered care. Another 25%+ of the total ($190 billion) is the result
of excess administrative costs (e.g., inefficiencies associated with paperwork and
documentation) 27 . Finding ways to reduce waste in the system offers the opportunity to create
significant value, but requires the adoption of entirely new tools and technologies by payers,
providers, and patients. Developing these tools, applications, and systems is an area of
significant opportunity for innovative technology focused companies.
A major part of eliminating waste in healthcare will be accomplished by driving efficiency and
deriving maximum benefit from the enormous levels of current expenditures. Achieving this
goal will have to include a fundamental change in focus to the principles of value-based
medicine across all levels of the healthcare system. This is a radical change in objectives that is
already happening, and it is leading to entirely new reimbursement models built around paying
for technologies and treatments that provide care efficiently and at a cost proportional to the
health benefit they deliver. Value-based medicine focuses on outcomes from healthcare
services, which more closely aligns the interests of the payers with the healthcare providers and
product companies whose services and products are the major cost elements in the delivery of
healthcare. Although simple conceptually, this is a fundamental change in how healthcare is
paid for from the historical reimbursement models that have focused on fixed payments for
delivery of discrete procedures, with no corresponding emphasis on quality of the care
delivered or on the resulting patient outcomes.
Refocusing treatment objectives within the healthcare system towards high quality outcomes
over numbers of procedures will require many healthcare companies to reengineer aspects of
their business models, but it will also provide them with new opportunity. In a system that
rewards outcomes, companies and organizations that run with the highest quality and most
efficiently will have significant opportunity to expand their own returns by taking on risk in the
treatment of patients. Opening the market to this dynamic, where there is opportunity to earn a
return on cost-effective, high quality patient management and outcomes, will stimulate the
development and adoption of an entirely new set of enabling technologies and business models,
which represent opportunity for innovative, technology-based, development and growth stage
companies.
27 National Academy of Sciences, “Best Care at Lower Cost: The Path to Continuously Learning Health Care in America”
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There is no question that the shift to value-based reimbursement models will have a major
impact on the economics of healthcare. Payers will be looking for ways to significantly reduce
costs in all areas where a range of viable lower cost solutions are available, and will force
providers to use those wherever possible through increasingly restrictive reimbursement
policies. As an example, one area where this type of change has been implemented successfully
for years is in the increased use of generic drugs, where payers no longer offer unrestricted
reimbursement for the use of high cost, premium priced branded biopharmaceutical products
that deliver only minor benefits in terms of convenience, or slight improvements in efficacy to
small percentages of patients. This type of value-based review is now going on in all areas
within healthcare, and is resulting in changes that are having a major impact on what services
and products are selected, and who bears what percentage of the cost of that selection.
At the same time that payers and other ‘at-risk’ organizations are looking for any and all
opportunities to move to lower cost alternatives, they are also continuing to invest in the
adoption of innovative new therapeutics which can both improve outcomes and deliver
quantifiable value, even when considering their additional costs and premium pricing. The
products that receive this type of support from payers are ones that are focused on addressing
truly unmet medical needs and deliver significant efficacy or safety benefits to patients, when
compared to existing standards of care. They are also usually based on new technologies that
enable novel approaches to the treatment of diseases and disorders. There are vast areas in
medicine where large unmet medical needs exist and where scientific and technological
progress is enabling entirely new approaches to addressing these. Where these intersect are
areas of great opportunity for experienced investors.
RAPID ACCELERATION IN INNOVATION IN TARGETED SECTORS
Biopharmaceuticals:
Decades of government and industry investment in the study of the biological and genetic basis
of disease is translating into a steady stream of new products with improved efficacy and
decreased toxicity, and these are transforming how many high-morbidity diseases can be
treated. Through this growing body of work, a much deeper understanding of the biochemical
pathways underlying complex diseases is emerging, which is leading to identification of many
new molecular targets for drug therapy. This targeted approach to pharmaceutical R&D is a
fundamental change from the historical process that relied on large-scale, random screening of
drug candidates for activity. A whole new generation of products targeting diseases at the
molecular level is emerging and these offer much higher levels of efficacy and improved safety
to specific groups of patients whose disease is well characterized by biomarkers that are tightly
linked to the mechanisms of the underlying disease. This more targeted approach to discovery
and development offers important benefits to all constituents, which ultimately improves the
investment environment in biopharmaceuticals.
Oncology (i.e., cancer) is one therapeutic area where some of the most significant progress has
been made recently. Targeted therapies in certain indications in oncology now provide for
more effective treatments with fewer side effects than one-size-fits-all chemotherapy drugs. For
example, new therapies have recently been developed that target specific subsets of malignancy
through molecular targets including EGFR, HER2, and BRAF that have led to dramatic
improvement in the treatment of certain cancers (e.g., lung, pancreatic, colon, breast, melanoma,
and several hematologic cancers). It is expected that the next wave of advances will transform
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these diseases further from what has historically been a death sentence into a chronic, treatable
condition. As this happens, huge markets will be created for entirely new biopharmaceutical
products. While cancer is the leading disease area, this pace of dramatic scientific and
technological progress is extending into several other areas of medicine and will likely
accelerate. Many of the initial examples of targeted or personalized therapies in non-cancer
indications have been in rare or so called "orphan" diseases following discovery of the
underlying genetic abnormalities. This period of rapid technology advancement establishes a
cycle of innovation in the market that creates great opportunity for highly focused, small,
companies.
Information Convergence:
The rate of innovation in information convergence has already accelerated relative to the
historical rate of innovation in healthcare information technology (“HCIT”) due to several
underlying factors. First, as mentioned, the HITECH Act provided billions in direct incentives
to encourage healthcare providers to adopt information technology, beginning with electronic
medical record (“EMR”) systems. This led to a significant increase in spending on EMRs which
benefitted large established EMR vendors, but it also benefitted new smaller players in the EMR
market. Importantly, the broad upgrade of information technology and deployment of EMRs
across the healthcare provider market has established a technology infrastructure in the market
that benefits an entirely new generation of companies that are developing technologies that
layer onto existing EMRs and address the next levels of IT adoption. This next level of
information technology adoption is dictated by the HITECH Act through a series of
“meaningful use” incentive initiatives.
Another key factor that has led to an acceleration in innovation in information convergence is
that most of the highest value innovation in this sector is arising from integrating technologies
that have been discovered, developed, validated, and implemented in completely different
sectors (e.g., cloud storage, mobile computing, wireless communications, web-delivered
software, diagnostics and sensors). These product development efforts draw heavily from
existing technologies and allow small companies focused on addressing discrete problems and
opportunities within the healthcare market to develop and launch products with minimal
technology discovery. The bulk of the effort in these activities is in rapidly creating high value
products by combining well-understood and available technologies, and getting them into the
hands of customers to evaluate their performance in real world use conditions. This early
customer experience allows companies to generate revenues early in their life, but also provides
valuable user feedback which can be used to continuously improve product design elements.
The benefit of this type of product development effort in the information convergence sector is
that it reduces risk, lowers capital requirements, and results in more predictable timelines.
Considering the size of the opportunity and the large number of discrete problems and
inefficiencies that must be addressed, the Fund Managers expect the next decade will be a
period of robust innovation and company creation. Smaller companies are likely to thrive
during this period as they are better able to quickly move from opportunity to product launch.
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CONTRACTION IN HEALTHCARE VENTURE CAPITAL INDUSTRY & CAPITAL MARKET
DYNAMICS MORE BROADLY CREATE OPPORTUNITY IN DEVELOPMENT STAGE AND
EARLY COMMERCIAL STAGE COMPANIES
For the last several decades the healthcare venture capital industry has been the predominant
source of early and growth stage funding for smaller, technology focused companies while they
pursue product development, regulatory approval, and early commercialization. Over the last
several years, there has been a significant contraction in the size of the healthcare venture
capital industry in terms of amount of capital available to fund new companies, and the number
of active firms investing in new companies. This contraction creates significant opportunity for
those funds that remain active, as fewer firms and less capital is translating into less
competition for deals. The Fund Managers have benefited from the reduced level of
competition during the new investment period for NLV–II, and they believe these conditions
will remain in place for at least part of the new investment period of NLV-III. It is too soon to
know for sure, but it is likely the industry may have already reached the bottom of this cycle of
contraction and could see a re-set that begins to shift the industry to more normalized
conditions due to the recent stronger IPO and M&A markets.
Life Sciences Venture Fundraising
Investments into Biopharma and Medical Devices
Life Sciences Venture Fundraising - Dollars Raised ($B) **
$10.0
Life Sciences Venture Financings – $ Invested ($B) and Count
$15.0
700
$8.0
$6.0
$4.0
$2.0
$7.8 $7.8
$2.8 $2.9 $3.0
$2.5
$12.0
$9.0
$6.0
$3.0
404
$6.1
$1.2
$4.8
422
$5.7
$1.7
$4.1
485
$7.2
$2.3
$4.9
541
$8.5
$2.9
$5.7
517
500 499 498
$6.9
$6.3
$6.5
$5.6
$2.5
$2.2
$1.8
$2.5
$4.4 $4.0 $3.8 $4.0
422
$5.1
$2.0
$3.1
600
500
400
300
200
100
$0.0
2007 2008 2009 2010 2011 2012
$0.0
2004 2005 2006 2007 2008 2009 2010 2011 2012
0
Venture Capital Fundraising Allocated to Life Sciences
Biopharmaceuticals Therapeutic Medical Devices Deal Count
Source: Venture investments data from VentureSource (U.S. only). Includes therapeutic medical devices only.
** “Life Sciences Venture Fundraising data from Dow Jones; Fenwick & West Analysis in 2012 Trends in Terms of Life Science Venture Financings
The market for IPOs was strong during 2013 and the first quarter of 2014 for companies with
compelling stories based on differentiated technology, targeting important unmet medical
needs, large market opportunities, and experienced management teams. Although the number
of IPOs in the healthcare technology sector increased significantly, most of that activity was
driven by offerings for biopharmaceuticals companies. The significant increase in IPO activity
was driven by a number of factors, but one that had an important impact is the Jumpstart Our
Business Startups Act (JOBS Act). This legislation was signed into law in the U.S. in April, 2012
and it changed the regulations governing how certain private companies can interact with
investors in advance of an IPO. Under the new regulations, emerging growth companies can
file their IPO draft registration statement privately with the SEC, and continue to meet with
interested investors over several weeks or months to explain clearly their company strategy and
technology in “testing the waters” meetings. The Fund Managers believe these new regulations
are especially helpful to private biopharmaceutical companies, as they allow interested
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CONTROL NUMBER 257 - CONFIDENTIAL
investors to grasp the complexities and opportunities of the small biotech companies before the
formal filing of their IPO registration statements, and the start of the traditional IPO road show.
The Fund Managers believe the JOBS Act and the use of “testing the waters meetings” has been
one of the factors that helped open the current biotech IPO window, expanded the base of
investors (public market specialist and generalist investors) participating in the recent offerings,
and helped drive the after-market performance of many of these offerings.
Biopharma IPO Trends
($ in millions)
$3,000
$2,852
40
Capital Raised ($ in millions)
$2,500
$2,000
$1,500
$1,000
$500
$0
$2,028
20
15
13
36
23
$1,451
$1,501
19
$754 $778
$693 8
0 2
$153
11
$526
$0
11
$769
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Q1
35
30
25
20
15
10
5
0
# of IPOs
Pre‐Phase 3 Phase 3 Marketed # of IPOs
The combination of all of these positive factors has significantly strengthened the position of
smaller development and early commercial stage healthcare technology companies, and creates
a unique period of opportunity for investors in the sector.
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V. NEW LEAF VENTURE PARTNERS INVESTMENT STRATEGY
New Leaf’s investment strategy is differentiated in the venture capital industry in terms of its
sector focus, specific approaches within each sector, and the depth of experience and long-term
track record that supports each element of the strategy. NLV-III will be invested in a diversified
portfolio across four sectors: a primary focus on Biopharmaceuticals and Information
Convergence, and a secondary focus on Medical Devices and Biological Research Tools &
Infrastructure. The Fund Managers believe that these are the sectors within the healthcare
technology industry where, with a targeted and specific sector strategy, there is the potential to
generate attractive returns within a time frame consistent with the goals of investors in a
venture capital fund. Importantly, the drivers behind the opportunity for value creation, major
risk factors, capital requirements, timelines, and universe of potential acquirers in each of these
sectors are distinct, and thus a portfolio constructed with investments with a combination of
these will benefit from this diversification.
The Fund Managers will invest the Fund in a diversified portfolio composed of an estimated 24
– 28 companies that will be predominantly domiciled in the U.S., but could include a small
number of companies based in Western Europe or Canada. The Fund Managers intend to serve
on the boards of directors for the majority of the companies in the portfolio and will generally
seek to establish ownership positions in companies that are large enough to allow them to exert
considerable influence on the company’s strategies, budgets, financing plans, operating
objectives, management team composition, and paths to exit.
Consistent with past transitions between funds, the Fund Managers have evolved the
investment strategy for NLV-III to reflect the team’s view of where the most attractive
opportunities will exist during the life of the Fund. The investment strategy for NLV-III will be
distinct from other recent funds in terms of the specific weightings that will be placed on the
targeted sectors, and certain considerations for company selection within those sectors.
BIOPHARMACEUTICALS INVESTMENT STRATEGY
As in all previous funds, biopharmaceutical investments will be the core focus for NLV-III and
will comprise approximately 50% - 60% of the Fund. The Fund’s biopharmaceutical
investments will be mostly in development stage and commercial stage private companies, and
will also likely include some investments in small capitalization public companies through
structured transactions. The Fund Managers intend to construct a well-diversified portfolio of
biopharmaceutical investments that includes a balanced mix of companies with earlier stage
and later stage development programs and product platform technologies. Regardless of stage,
by focusing on biopharmaceutical investments ahead of key risk inflection points, the Fund
Managers expect to fund companies through the periods of greatest value creation to points
where they will either become attractive targets for acquisition or partnership, or become of
high interest to public market investors. In some cases, private companies whose underlying
assets mature to these stages will become viable candidates for initial public offerings (IPOs) or
mergers into public companies.
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Focus: Private and public companies with novel product programs & product platforms
Investments in the biopharmaceutical sector within NLV-III will target companies that are
developing products that address clinically important unmet medical needs with competitively
differentiated technologies. The Fund will invest across all stages, usually in companies that fit
one of two different profiles. The first is companies with clearly differentiated, clinical stage
proprietary product programs focused on significant market opportunities, where value can be
built around a product(s) by financing it through one or more stages of clinical development,
and in some cases to regulatory approval and commercialization. The second are companies
with novel product platforms that are at or near the clinical stage with a lead product(s). These
companies build value around both the product(s) itself as it advances through clinical
development and around the product platform as its utility as a product creation engine is
validated through the progress of the lead product(s).
The Fund Managers expect to identify investment opportunities within private or public
companies whose primary asset(s) fall within one of the following categories:
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Early and mid-clinical stage product programs targeting a well validated mechanism of
action in a disease with significant unmet medical need. The therapeutic areas and
specific mechanisms of action will be known to be of high strategic interest to a number
of larger biopharmaceutical companies. The target product profiles of the therapeutic
product(s) for these assets will have clear points of competitive differentiation around
efficacy and/or safety versus available therapeutics (and known clinical stage
programs), and the clinical development programs behind them will be designed to
provide clear data in support of these. Examples of these types of biopharmaceutical
investments in the NLV portfolio are Array Biopharma (NLV-II, NASDAQ: ARRY,
oncology, exited at 2.25x), Chimerix (NLV-II, private initially, now public on NASDAQ:
CMRX, novel anti-viral therapy), and Versartis (NLV-II, private, novel, long-acting
human growth hormone).
Novel product platforms that offer the potential to target known, and well understood
pharmacologic mechanisms of action in entirely new ways, or a product platform that
has the potential to open up a field of entirely new pharmacologic mechanisms in
diseases with large unmet medical need and rapidly advancing understanding of the
underlying biology (e.g., hematologic and solid tumors). These platforms will be
supported by validating data that provide strong support for the underlying biological
hypotheses, and the companies will be at or approaching the clinical stage with an
owned or partnered lead product program. The product platforms will usually have
strong evidence of strategic interest from large or mid-sized biopharmaceutical
companies through one or more partnerships that have generated non-dilutive capital
for the company. Examples of three novel product platform companies in the NLV
portfolio are Pearl Therapeutics (NLV-I, private, pulmonology, exited at 2.5x plus
milestones), Epizyme (NLV-II, NASDAQ: EPZM, oncology, exited at 2.0x), and
Principia (NLV-II, private, immunology & oncology).
Later development stage and commercial stage, biopharmaceutical investments, where
the investment theses will be to create value by funding companies through Phase 3
clinical trials, regulatory approval, and into early commercialization. In some cases, the
32
CONTROL NUMBER 257 - CONFIDENTIAL
Fund will seek to fund companies much later into commercialization to the point of
sustainable profitability. These investments will be into private or small capitalization
public companies in situations where the Fund Managers believe that the key risk
inflection and the period of greatest value creation will be around regulatory approval
and demonstration of commercial attractiveness of the product. These investments will
focus on products where the level of clinical and regulatory risk is relatively low, and
where commercial penetration can be driven by smaller, highly targeted sales and
marketing activities. Biopharmaceutical companies at this stage have historically been
attractive acquisition targets, and have consistently demonstrated that they can access
public markets through IPOs in a broad range of market conditions. Examples of this
type of later stage investment in the New Leaf portfolio include Acadia Pharmaceuticals
(NLV-II, NASDAQ: ACAD, exited at 2.5x), Phase III, focused on psychosis associated
with neurodegenerative diseases, Durata Therapeutics (NLV-II, private initially, now
public on NASDAQ: DRTX), Phase III, focused on a late stage antibiotic development
program spun out of Pfizer, and InterCept Pharmaceuticals (NLV-II, NASDAQ: ICPT,
exited at 3.2x), Phase III, focused on an orphan indication in liver disease.
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Investments in public companies at any stage, whose primary assets are product
programs or product platforms. Most of these investments will be focused on small
capitalization companies at the clinical or early commercialization stage. New Leaf’s
focus on investment opportunities in small capitalization public biotech companies
leverage the broad investment capabilities within the firm and benefit from the focused
efforts of a small team of investment professionals dedicated exclusively to public
market activities. As a result of this integrated approach, investments in public
companies often target companies the Fund Managers have tracked over a number of
years, some from the time when they were private companies. The dedicated public
market team proactively tracks and screens the aggregate universe of biotech
companies, with the goal of identifying compelling risk/reward investment
opportunities. The primary focus of the screening efforts is to identify high-quality
companies with attractive valuations that require financing to fund the company
through key development milestones. The Fund will generally look to source or
augment transformative, structured transactions in public companies, where a New Leaf
partner will have the opportunity to join the board of directors. An example of an
investment that resulted from New Leaf’s focus on public market opportunities includes
MEI Pharma (NLV-II, NASDAQ: MEIP), an investment the Fund Managers made to
recapitalize the company after it had acquired a lead asset, Pracinostat, and needed
capital to advance the program through clinical development. Pracinostat was an asset
that was well known to New Leaf, as members of the team had followed it closely for
several years while it was owned by a private company (S*Bio), and had made attempts
to acquire and spin out the asset in the past. In addition to sourcing opportunities, the
public market team assists the broader biopharmaceutical investment efforts by
managing the sale and exit of New Leaf’s larger positions in public securities, and by
providing real-time insight into evolving market sentiment to the biotechnology and
broader healthcare technology sectors that helps guide decisions around new
investments and exit decisions.
For a complete list of investments made by the Fund Managers in healthcare technology
companies see Appendices 1 and 4 .
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CONTROL NUMBER 257 - CONFIDENTIAL
Leadership: NLV are leaders in biopharmaceutical investing across all stages and transaction
types
The New Leaf team is well positioned to continue to play a leadership role in the sector. Over
the last two decades, the Fund Managers have demonstrated an ability to access high quality
biopharmaceutical investments at all stages, by sourcing opportunities through a range of
activities that result in differentiated and in many cases proprietary deal flow. Deal flow is
generated by relying on New Leaf’s extensive network of relationships that span senior
executives in the pharmaceutical and biotech companies, top scientists at world-class academic
institutions, and leading investors in the venture capital, private equity, and small cap public
sectors. By leveraging this network the Fund Managers gain visibility to interesting investment
ideas, and develop insight into the long term strategic interests of the larger pharmaceutical and
biotech companies and the evolving attitudes about value and risk of public market investors.
Through this continuous process the Fund Managers seek to ensure that they are able to view
the widest range of high quality opportunities and have a highly informed and discerning
screen to determine which of the opportunities have the greatest long term investment
potential. It is these efforts that have allowed the New Leaf team to create some of the best
performing portfolios of biopharmaceutical investments in the industry in the Sprout Funds
and in NLV-I and NLV-II, and has resulted in successful and consistent track records of returns
in the sector. The Fund Managers have demonstrated leadership in the sector over the long
term through transactions that span the full range of stages and transaction types, including:
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Start-Ups: The Fund Managers have played important roles and have been founding
investors in a number of successful start-up companies. These have included Pearl
Therapeutics (NLV-I, exited in sale to Astra Zeneca, 2.5x multiple plus milestones),
Relypsa (NLV-I, private initially, now public on NASDAQ: RLYP),
Convergence/Calchan Pharmaceuticals (NLV-II, one start up that subsequently split to
become 2 separate companies), Durata Therapeutics (NLV-II: IPO – July, 2012,
NASDAQ: DRTX), and Ilypsa (Sprout IX, exited in sale to Amgen, 6.9x multiple).
Established Private Companies: The New Leaf Team has played the role of lead
investor in a large number of private investments. These have included Cerexa (NLV-I,
exited in sale to Forest Labs, 5.4x multiple), Stromedix (NLV-I, exited in sale to Biogen
Idec, 1.8x multiple plus milestones), Chimerix (NLV-II, IPO – April, 2013, NASDAQ:
CMRX), and Auxilium (Sprout IX, NASDAQ: AUXL, exited at 4.6x).
Restructuring Private Companies: The Fund Managers have led financings that have
restructured private companies, providing capital to fund business plans that have
refocused company’s business plans on certain key assets and product development
programs and significantly reducing or terminating investments into others. Examples
of this type of investment include Intarcia Therapeutics (NLV-I) and Synageva
Biopharma (NLV-II, reverse merger to become public – November, 2011, NASDAQ:
GEVA; exited at 7.3x).
Restructuring & Recapitalizing Public Companies: The New Leaf team has created
interesting investment opportunities through restructuring and recapitalizing public
companies. Examples include MEI Pharma (NLV-II, NASDAQ: MEIP) and Sirna
34
CONTROL NUMBER 257 - CONFIDENTIAL
Therapeutics (Sprout IX, formerly NASDAQ: RNAI, exited through sale to Merck, 8.1x
multiple).
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Structured Investments in Public Companies: The Fund Managers have led and
participated in a number of structured investments into small cap public companies.
These have included Array Pharmaceuticals (NLV-II, NASDAQ: ARRY; led a structured
follow-on investment, NLV team member joined the board, exited at 2.25x), Acadia
Pharmaceuticals (NLV-II, NASDAQ: ACAD, exited at 2.5x) and Intercept
Pharmaceuticals (NLV-II, NASDAQ: ICPT; anchored company’s IPO, NLV team
member initially joined the company’s board, exited at 3.2x).
For a complete list of investments made by the Fund Managers in healthcare technology
companies see Appendix 1.
Favorable conditions for biopharmaceutical investments for NLV-III
The Fund Managers believe that NLV-III will be invested in a market with attractive conditions
for investment in the biopharmaceutical sector. As a result, the Fund should have the
opportunity to invest in compelling biopharmaceutical opportunities that have attractive riskreturn
profiles. A number of factors support this positive view of the investment thesis in the
biopharmaceuticals sector.
First, the Fund will invest in a portfolio of biopharmaceutical companies with an emphasis on
those that are developing targeted therapeutic opportunities that address mechanisms of
disease at the molecular level with high specificity and offer meaningful efficacy and safety
benefits to specific sub-groups of patients. Where possible, the Fund will look to invest in
companies with product programs that are guided by validated biomarkers that can enable
highly specific patient selection and provide an objective measurement of drug effect. The
Fund Managers believe that opportunities with these characteristics offer important benefits to
all market participants in the biopharmaceuticals sector, and that these substantially de-risk the
R&D and commercial sides of the biopharmaceutical business model in ways that can
meaningfully benefit investors.
Patients are offered therapies that are more targeted to their disease, and benefit from
improvements in efficacy and safety through increased life expectancy, improved quality of life,
and a more rapid return to a fully productive life;
Physicians have access to an arsenal of products that they can choose from to tailor therapy to
specific patients’ disease, and avoid the costs and risks associated with using less effective
therapies that carry all the safety risks, but may or may not have any effect on the specific
disease subtype of an individual patient;
Payers may pay higher prices for these therapies, but with the enhanced efficacy and safety
profile that’s possible with biomarker based targeting, they can expect to see better overall
patient outcomes, that ultimately save money within the system;
Pharmaceutical Companies benefit because with targeted approaches to drug discovery and
development, the probabilities of success improve, interactions with regulators become less
risky, timelines to move products from the lab to the market can be significantly shortened, and
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CONTROL NUMBER 257 - CONFIDENTIAL
sales and marketing becomes more efficient as commercial campaigns only need to target those
physicians seeing specific subsets of patients;
Regulatory Authorities evaluate the risk-benefit of new therapeutics on specific subgroups of
patients that are known to be suffering from a specific sub-type of diseases, and can thus
require fewer patients and shorter timelines in clinical programs, ultimately lowering the risks
and costs of the approval pathway for developers of new therapeutics; and
Investors can expect to see improving returns as the risk/reward equation of drug
development is shifted significantly as a result of shortened timelines, smaller clinical trials,
improved probabilities of success, and reduced risks at the clinical, regulatory, and commercial
levels.
Second, the biopharmaceuticals sector is an improving regulatory environment in the U.S.,
helping set the stage for a positive investment cycle. There is strong evidence that over the last
decade the FDA has been working to improve the drug approval process in the U.S. in tangible
ways that benefit biopharmaceutical companies and reduce the risk for their investors.
Although the path to regulatory approval for product programs has not been made easy by any
standard, the FDA has made strides in making the process more predictable and streamlined.
Some of the most significant improvements have been in therapeutic areas where there is a high
level of unmet medical need. For example, the U.S. Food and Drug Administration (“FDA”) is
demonstrating clear interest in working more constructively with industry to bring new safe
and effective therapeutics to market that target diseases that have potentially large cost burdens
on the healthcare system (e.g., oncology). Additionally, the FDA has also improved the way
that they communicate and interact with sponsors of new products, by creating set
administrative procedures and timelines that they are required to meet through legislation like
the Prescription Drug User Fee Act (“PDUFA”) and the FDA Modernization Act. The FDA has
implemented other initiatives that attempt to clarify requirements and shorten regulatory
timelines for certain types of therapeutic products that they view as highest priority. These
initiatives include programs to grant special designations, including Breakthrough Therapy,
Accelerated Approval, and Priority Review, which can cut significant time out of the standard
approval process. The impact of these and other programs has become apparent in the number
of new drug approvals (“NDAs”) by FDA in both 2011 (30 NDAs) and 2012 (39 NDAs), which
trended higher compared to the previous six years and versus historic averages. 28 Overall,
these initiatives and others, both in the U.S. and in other markets (e.g., E.U. and Japan), have
made the regulatory environment more favorable for investors in the biopharmaceutical sector,
and have reduced some of the uncertainty in a critical part of drug development.
A third factor supporting the positive investment thesis in biopharmaceuticals is the interplay
of favorable conditions in the capital markets and the strategic needs of the large and mid-sized
companies in the sector. These dynamics should create a positive financing and exit
environment for biopharmaceutical companies for the foreseeable future, and the Fund
Manager expect them to contribute to improving venture returns. The aforementioned
contraction in the number of active firms and capital flows into healthcare technology venture
funds has significantly reduced the level of competition between firms. At the same time, large
and mid-sized biopharmaceutical companies have become increasingly dependent on
28 Food and Drug Administration. Center For Drug Evaluation and Research
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CONTROL NUMBER 257 - CONFIDENTIAL
development stage companies as an important source of innovation and new products to
supplement R&D pipelines and drive future growth. Strong growth potential is critical for
these companies to support their valuation metrics, especially in light of expected patent
expirations on their commercial products. In total, over $290 billion of revenue is at risk from
patent expirations between now and 2018. 29 The large and mid-sized companies are addressing
this strategic need to a large extent through increased acquisitions and partnerships with
development stage companies that have maturing assets. The Fund Managers expect this
dynamic to increase competition between the larger strategic players in the industry as they vie
for the most interesting companies with maturing development stage assets. The development
stage companies should have strong negotiating leverage in these deal discussions, which
should drive premium valuations on acquisitions and attractive terms on partnerships.
The increased strategic need for acquisitions and partnerships comes at a time when the large
and many of the mid-sized companies in the industry are in a strong financial position to
complete high value deals. The top ten pharmaceutical companies have a total of $140 billion in
cash on their balance sheets today and have a combined market capitalization of over $1.3
trillion. 30 A relatively new set of well funded potential acquirers and/or partners has emerged
over the last decade, as many of the mid-sized biotech companies have seen their commercial
businesses thrive, and now have strong revenue and profit growth. Since 2002, the number of
public biotech companies with annual profit (EBIT) over $100 million has doubled to 16, and the
combined annual profit of these companies has increased 4.5 times to $16.6 billion. 31 This has
significantly increased the number of companies in the industry with the financial wherewithal
to complete large cash transactions. At the same time, the industry’s R&D productivity has
been disappointing in terms of new products generated by massive internal R&D budgets. To
address the gaps created in their R&D pipelines, most large and mid-sized players have shifted
a large percentage of their R&D budgets away from internal R&D projects and have increased
investment in “externalizing” a large portion of their R&D. These companies have slashed
internal R&D budgets, closed major R&D facilities, and made large cuts to headcount. It is
estimated that the pharmaceutical industry cut R&D spending by 5.7% in the U.S. and 2.2%
globally in 2012 alone, 32 and this trend has continued in 2013. Most large and mid-sized
biopharmaceutical companies now have large internal groups that include a combination of
business and scientific resources that are dedicated exclusively to external search and
evaluation, and are tasked with finding opportunities for mergers, acquisitions, and
partnerships that will bring in new technology. Some have taken this strategy even further and
have set up their own internal venture capital investment groups with the belief that by coinvesting
with more experienced institutional venture investors they can improve their
visibility into the latest innovations and improved access to the best opportunities. The Fund
Managers believe that this combination of financial strength and strategic need to source more
products than internal R&D efforts can produce will lead to a significant increase in deal
activity, creating a strong exit environment for smaller development stage companies for the
foreseeable future.
29 eValuatePharma
30 Burrill Biotech 2012 Report
31 New Leaf Analysis of public company financial data as provided by Bloomberg
32 Battelle-R&D Magazine Annual Global R&D Funding Forecast
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CONTROL NUMBER 257 - CONFIDENTIAL
The Fund Managers expect this combination of positive market conditions to remain favorable
for generating attractive returns in the biopharmaceutical sector for the foreseeable future.
Although industry returns have been characterized by inconsistency and generally associated
with long timelines, a small number of top investors have been able to consistently build
portfolios that outperform the venture capital industry and relevant public market indices.
There is no substitute for experience in this sector, and the New Leaf team brings one of the
most powerful and proven combinations of team, strategy, and track record to investing in this
dynamic sector, and is positioned well for continued success in NLV-III.
INFORMATION CONVERGENCE INVESTMENT STRATEGY
The Fund Managers believe that U.S. is rapidly approaching a fiscal crisis that will be driven
largely by rising healthcare expenditures and the exponential increase in future healthcare
liabilities. This looming threat is a major driver behind Information Convergence (“I.C.”), the
second of the two primary focus areas in NLV-III. Governments and the private sector alike are
being forced to significantly increase the efficiency of the healthcare system, and consequently
are beginning to invest heavily in technologies that reduce cost and improve the quality of care.
New technology solutions are emerging from the intersection of a diverse, yet interconnected
set of technologies that define Information Convergence, including cloud storage, mobile
computing, wireless communications, web-delivered software, big data analytics, diagnostics
and sensors.
I.C. companies are integrating these technologies in ways that more cost effectively prevent,
diagnose, and treat disease. These applications and products can be highly valued by
addressing costly inefficiencies within the healthcare system. The Fund Managers believe I.C.
will play an enabling role in many of the initiatives that will form the core of healthcare reform,
including the transformation of healthcare reimbursement models from volume to value-based,
and that this will be a major area of opportunity for investors for the foreseeable future.
Within I.C. the Fund will seek opportunities that target some of the largest inefficiencies in the
healthcare system. These include: (1) inefficiency in delivery of care and excess administrative
costs; (2) unnecessary services and missed opportunities for prevention; and (3) inflated pricing
and fraud. Coming out of these large, identified problem areas are a number of discrete
investable themes. These are the primary target of New Leaf’s investment strategy in I.C. and
they include the following:
Problem Area: Inefficient Delivery and Excess Administrative Costs
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Investment Theme - Operational & Care Delivery Efficiency: Process improvement and
optimization can only occur when data is available to identify the problems and
measure the impact of solutions. With shrinking margins and shifting value objectives,
healthcare providers are under pressure to understand and improve their businesses
and operations. Technologies that allow the collection and analysis of relevant data on
the efficiency of care-delivery will be foundational to this evolution. AwarePoint (NLV-
II) delivers enterprise awareness solutions for the hospital and other healthcare facilities,
is an example of a company fitting this theme.
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CONTROL NUMBER 257 - CONFIDENTIAL
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Investment Theme - Care Coordination: Today in healthcare, most conditions require the
involvement of multiple healthcare professionals, including primary care physicians,
specialists, nurses, assistants, and therapists, and the care they provide must be
managed closely with participation from the patients themselves and their family
members. Unfortunately, poor coordination and information sharing amongst
caregivers creates significant inefficiencies at the points of hand-off between providers,
leading to repeat tests, missed diagnoses, and expensive mistakes that diminish
outcomes, and in some cases put patients at substantial risk. TigerText (NLV-II) has
developed a secure text messaging platform that can be used on any mobile phone that
allows healthcare professionals to rapidly communicate and exchange clinical data files
to improve and coordinate care.
Investment Theme - Clinical Error Reduction: Administrative, medication and procedural
errors are responsible for billions of dollars of cost annually in the U.S. healthcare
system. Many of these problems can be reduced by bringing relevant information into
the right setting at the appropriate time. For example, ePocrates (Sprout IX, NASDAQ:
EPOC – Acquired by athenahealth for $293 million, 3.1x multiple) allows physicians to
quickly reference drug formulary, dosing and interaction information, thus reducing the
error rate in prescriptions.
Problem Area: Unnecessary Services & Missed Prevention Opportunities
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Investment Theme - Analytics & Data-Driven Personalization: Many conditions are currently
diagnosed on single or limited data points, measured in the hospital or physicians’
office, that may not accurately reflect (or detect) the patients’ condition. Examples
include diseases with episodic or fluctuating symptoms such as cardiac arrhythmias,
Parkinson’s, Alzheimer’s, depression and other behavioral health issues. iRhythm
Technologies (NLV-II) developed and markets an innovative, highly wearable, patch
technology capable of recording continuous electrocardiograms for up to 14 days. This
product has demonstrated a 5x improvement in diagnostic yield for cardiac arrhythmias
relative to 24 - 48 hour Holter monitoring.
The large scale deployment of electronic medical records (“EMRs”), healthcare
information exchanges, and diagnostic and monitoring technologies, is driving
exponential growth in professional health data around patient care and outcomes. At
the same time, patients are discussing and sharing their own health care experiences and
personal health data involving providers, therapeutics, and procedures on the internet.
These vast and rapidly growing professional and consumer oriented healthcare data sets
create an unprecedented repository of longitudinal data on populations of patients. By
mining these data sets using big-data techniques and technologies that are being
deployed successfully in other industries, it is possible to identify important findings
that have huge commercial value that might previously have never have been detected.
Specifically, the Fund Managers believe analytics applied to these data sets will allow
care gaps to be readily identified and addressed, and best practices to be frequently
revised, leading to a consistent iterative cycle of improvement. Treato (NLV-II) has
developed a social health intelligence platform (aka “Social Listening”) that identifies,
analyzes and aggregates medical user generated content spread widely across the web
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CONTROL NUMBER 257 - CONFIDENTIAL
in thousands of blogs and other written forums and converts this unstructured content
into structured information to support better-informed decision making by patients,
providers, and pharmaceutical marketing teams.
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Investment Theme - Patient Engagement / Shift to Low-Cost Setting: As incentives move
away from procedural volume and towards cost-effective quality and outcomes,
providers and care delivery organizations are seeking ways to deliver care outside of the
hospital or physicians’ office through technologies that may allow remote monitoring,
and empowers other healthcare professionals, or even patients to play a greater role in
patient care and well-being. Audax Health (NLV-II; exited at 3.4x) touches on this
theme with its Zensey product, which engages patients in their own health through
programs endorsed by their payer.
Problem Area: Inflated Pricing & Fraud
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Investment Theme - Price & Cost Transparency, Financial Error Reduction: Error reduction
can generate significant cost savings at the enterprise level. Truveris (NLV-II) allows
self-insured employers to verify the accuracy of all pharmaceutical benefit claims from
their pharmacy benefit managers in real time, thus resulting in more accurate payments
and significant cost savings.
These are just some of the illustrative themes for I.C. investments in NLV-III. This is an
emerging area with strong growth drivers, and the Fund Managers expect the opportunity set
to evolve and broaden substantially over NLV-III’s investment cycle.
An intriguing aspect of this sector is the possibility for significantly shortened development
timelines and product iteration cycles. Particularly because they are usually outside the
jurisdiction of the FDA and standard reimbursement paths, companies in the I.C. sector can
develop and launch products in months not years, and for single digit millions rather than
several tens of millions of dollars. Product development for these types of applications
leverages “off-the-shelf technologies” in sensors, communications, software and web
design/deployment that were invented and validated in non-healthcare market segments.
These products can be quickly and cheaply tested, iterated and refined in the marketplace with
customers while generating early revenue, which provides a greater degree of flexibility to
evolve the right solution through a series of incremental improvements rather than a single
track, expensive and prolonged development effort.
The Fund’s I.C. investments will be predominantly in private companies in the U.S, at or near
commercialization. Similar to the biopharmaceutical strategy, New Leaf’s objective in its I.C.
investments is to build ownership positions that are large enough to allow the Fund Managers
to exert influence on the company, and to actively manage the investments through board
participation. In certain circumstances, NLV may initially take smaller positions with plans to
significantly increase the Fund’s investment as the companies make progress through key early
technical or commercial hurdles. Utilizing this strategy, the Fund Managers expect to build
larger positions around select investments as they are progressively de-risked, and may not
continue to support investments that do not demonstrate appropriate progress.
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CONTROL NUMBER 257 - CONFIDENTIAL
The New Leaf team is one of the most experienced and proven teams in this sector. The Fund
Managers’ combination of proven track record, in-depth knowledge of the medical device and
diagnostics fields, a strong current I.C. portfolio, and a thought-leading network of I.C.
advisors, puts New Leaf in a position of leadership within this sector.
MEDICAL DEVICES INVESTMENT STRATEGY
NLV-III’s investment strategy in medical devices will focus on identifying a limited number of
investment opportunities in companies with compelling later stage risk profiles. The Fund will
seek to identify investments in companies that are developing innovative and differentiated
medical devices, targeting large market opportunities, that offer the potential to meaningfully
reduce overall patient treatment costs in high morbidity disease settings through substantial
efficacy and safety benefits versus existing standards of care. Investments in this sector will
have established regulatory approval pathways and clear regulatory precedents, or are already
at the commercial stage at the time of initial investment. The objective will be to identify
companies that because of their specific therapeutic area or technology focus, or because the
company already has received key regulatory approvals, that they will be less affected by the
headwinds that are challenging the sector more broadly. Importantly, these investments will be
in therapeutic areas that are known to be of high strategic interest to a number of larger medical
device companies, and thus have a high potential of generating M&A interest. The primary
risks in these investments will be mostly operational execution, competition, and other market
related risks.
Similar to the second half of the investment period for NLV-II, the Fund will have a more
limited focus on medical device investments in NLV-III compared to previous funds. The
slower projected pace of investment is based on the view that the operating and exit
environment for companies in this sector will continue to be challenging due to increased
regulatory and reimbursement uncertainty in the U.S. and E.U. These headwinds have resulted
in increased development costs and significantly lengthened timelines for most development
stage companies.
While the Fund Managers expect to see fewer compelling investment opportunities than have
been available historically in the medical device sector, they do believe that they will be able to
identify and source a number of later stage opportunities that are less affected by these
obstacles, and that these will be attractive investment opportunities for NLV-III. One factor that
supports this view is that the reduced level of competition for deals resulting from the decline
in the number of active venture capital firms mentioned previously is even more pronounced in
the medical device sector. Given New Leaf’s historic leadership within this sector, and its clear
commitment to remain active during this period of reduced funding, the Fund Managers expect
that they will have excellent deal flow. Although the number of deals in this sector is likely to
be somewhat lower than in previous funds, with the later stage focus, it is likely that the size of
investments in this sector will be larger. Recent medical device investments in the New Leaf
portfolio that fit this later stage definition include: Neuronetics (NLV-II, commercial stage),
CardioKinetix (NLV-II, clinical development stage), and Interlace Medical (NLV-I, start-up
focused on 510k product, acquired by Hologix, exited at 8.6x).
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CONTROL NUMBER 257 - CONFIDENTIAL
BIOLOGICAL RESEARCH TOOLS & INFRASTRUCTURE INVESTMENT STRATEGY
NLV-III’s investment strategy in Biological Research Tools and Infrastructure will focus on
identifying companies that are at or near the commercial stage with novel products targeting
established, high growth markets -- such as DNA sequencing and personalized medicine. The
products of interest will be those based on differentiated technologies that offer higher quality
biological results at significant cost savings to customers than current products. The investment
theses for these companies will be based on rapidly building high-gross margins businesses that
reach break-even on manageable timelines and limited capital budgets. An example of a tools
company in the New Leaf portfolio is Advanced Cellular Diagnostics (NLV-II, commercial
stage).
Research tools and infrastructure technology companies are benefiting from several positive
healthcare industry tailwinds. Technology advancements over the past decade, such as genomic
sequencing and personalized diagnostics, have generated the need for additional reagents and
instruments to efficiently interrogate vast amounts of biological samples and process massive
quantities of resulting data. Unlike biopharmaceutical or medical device product development,
these new reagents are not subject to the risks of costly clinical trials, regulatory approvals and
payer reimbursement. Thus, timelines are more manageable and predictable, and budgets are
much more capital efficient. In fact, in this sector, the Fund Managers expect to identify
opportunities for investment in technologies that have been largely de-risked, are commercialready,
and can be funded to profitability on VC dollars. While substantial commercial adoption
will likely be required for most companies in this sector to be acquired, given the high margins,
rapid sales adoption, and relatively low sales and marketing costs, funding the launch of a new
tool or technology in this sector can represent an attractive risk-reward investment.
This dynamic sector is growing rapidly and small companies have been a prolific source of
innovative new products for the large, established companies that dominate the commercial
distribution channels. The Fund will approach this sector opportunistically and will invest in a
small number of companies with novel and clearly differentiated products targeting sectors of
rapid growth that are at or near the commercial stage.
The Fund Managers expect investments in this sector and the medical device sector to comprise
up to 15% of the Fund.
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VI. DEAL SOURCING & INVESTMENT PROCESS
The Fund Managers have a proactive approach to deal sourcing, which focuses on both private
and public opportunities. The established and proven sourcing activities seek to identify the
most compelling healthcare technology investment opportunities, at the most attractive time
points for venture capital investment. The Fund Managers’ goal is to identify opportunities that
are based on the most interesting novel and proprietary technologies, but place their emphasis
on being positioned for investing in these technologies in the round(s) that offer the most
attractive risk-adjusted returns potential. These investment opportunities are identified
through a number of parallel efforts, including:
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Systematic tracking of private and public companies that have product programs and
technologies targeting disease areas and biological targets of high interest that are
approaching key value inflection points. Current activities include comprehensive
screening of companies with programs targeting high unmet medical needs where the
strength of the science coupled with a rapid and lower capital intensity development
path, provides a compelling risk-reward case for investment. At the present time, the
Fund Managers are tracking a biopharma investment universe of approximately 1,000
mid-late stage private and small-cap public companies, many of which are in
therapeutic areas of specific interest to the Fund Managers (e.g. Oncology, Infectious
Disease, Central Nervous System, etc.);
Continuous contact with a network of current and former portfolio company
management teams;
Networking with current and former senior management team members from leading
pharmaceutical, biotech, medical device, and HIT companies to understand their
strategic priorities and to identify assets/programs that may become available for
spinouts or structured financings;
Staying up to date and in contact with leading academic thought leaders working in
NLV’s fields of interest;
Active coverage of major investor, medical and scientific meetings; and
Working closely with other venture capitalists with overlapping interests to ensure NLV
sees the broadest range of high quality opportunities and are positioned for working
with the strongest syndicates.
A key success factor behind the Fund Managers’ deal sourcing activities is a strong network of
entrepreneurs, industry executives, renowned clinicians, leading academic scientists, other
venture investors, and experienced consultants. The Fund Managers believe that this network
plays a critical role in helping to identify the most interesting opportunities, bringing the
leading resources to bear to assist in due diligence, and in providing important technical and
recruiting support in building portfolio companies. The Fund Managers continuously invest
time and energy in updating and building this strong network to ensure access to the managers
and thought leaders that are the industry’s leaders in the sectors of interest.
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CONTROL NUMBER 257 - CONFIDENTIAL
The New Leaf team applies a rigorous, systematic, fundamentals-driven approach to diligence
on all new deals, which, in addition to assessment against the sector specific strategies, includes
consideration of the following risk/reward factors:
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Medical need and market size
Competing therapies, both drugs and devices
Strength of intellectual property
Ease of physician adoption of new therapy
Specific details of clinical trial design and trial execution risks
Regulatory and reimbursement risks across relevant geographies
Management team’s ability to both execute the business plan and the exit
Time and money required to reach next important milestone(s)
Likely exit; potential acquirers, IPO prospects.
The Fund Managers will continue their proven investment philosophy and investment process,
which emphasizes a team approach to proactive deal sourcing, rigorous investment analysis,
significant involvement with portfolio companies and active management of investments and
exits, and a focus on key “risk inflection” points based on the disease and technology.
Investments will include both development stage and start-up stage companies, as well as
growth equity or expansion capital investment in NLV-III’s targeted sectors, in the private and
public markets.
The Fund Managers have a long history of separating the roles of transaction finder,
negotiating/closing the transaction, and board member, as needed. New Leaf seeks to put the
most appropriate investment professional on the board of companies, based on experience. The
Fund Managers have fostered a culture that discourages any professional from feeling the need
to control all aspects of an investment. Credit is given for each professional’s role, and for each
team member’s ability to be a team player. New Leaf seeks to avoid “lone ranger” behavior and
instead actively implements a team approach.
The Fund Managers intend to create a very selective portfolio of 24 to 28 companies, which will
include a balanced mix of investments in private companies and small capitalization public
companies. The targeted portfolio is expected to be diversified across biopharmaceuticals (50 -
60%), information convergence (up to 25%), and the remainder across investments in later stage
medical device and biological tools and infrastructure companies. While the Fund Managers
believe this distribution of investments is the most likely outcome, it also intends to take full
advantage of pricing discontinuities should they emerge in any of the identified sectors of
interest, possibly resulting in variance from this targeted allocation.
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VII. ONGOING RELATIONSHIP WITH SPROUT FUNDS
Since 2005, the Fund Managers have managed the remaining portfolio of healthcare technology
investments in Sprout Capital VII, L.P., Sprout Capital VIII, L.P., and Sprout Capital IX, L.P.
under a Sub-Management Agreement between Credit Suisse and New Leaf Venture Partners,
L.L.C. (the “Management Company”). In return for these management services, the
Management Company had received a portion of the management fee collected by those Sprout
funds related to the healthcare portfolio.
At the present time, Sprout Capital IX, L.P. is the only fund with any remaining active
healthcare technology investments. There were six active health care technology companies
(three board seats) in the Sprout Capital IX, L.P. portfolio that are managed by the Fund
Managers, which represented $68 million of carrying value as of March 31, 2014. These
remaining investments are in mature companies and the Fund Managers intend to continue to
manage the investments with an emphasis on finding exit opportunities for each company at an
appropriate time. The Fund Managers have already exited a portion of these companies in
early 2014, leaving a very limited tail of Sprout investments and board seats.
The Fund Managers expect the arrangement with Credit Suisse to continue for the foreseeable
future, but the Management Company no longer receives any management fees for these
services. The Sub-Management Agreement between Credit Suisse and the Management
Company will wind down and eventually be terminated as the investments in the Sprout
Capital IX, L.P. portfolio are exited.
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CONTROL NUMBER 257 - CONFIDENTIAL
VIII. SUMMARY OF PARTNERSHIP TERMS
The following information is presented as a summary of the Fund’s principal terms only and is qualified
in its entirety by reference to the Fund’s Amended and Restated Limited Partnership Agreement (as
amended, restated or otherwise modified from time to time, the “Partnership Agreement”) and the
subscription agreement relating thereto (together with the Partnership Agreement, the “Agreements”),
copies of which will be provided to each prospective investor prior to the acceptance of any subscription.
Prior to making any investment in the Fund, the forms of such Agreements should be reviewed carefully.
If the terms described in this Memorandum are inconsistent with or contrary to the terms of the
Agreements, the Agreements shall control.
The Fund:
General Partner:
Investment Objective:
Size of Offering:
Minimum Investment:
Closing(s):
New Leaf Ventures III, L.P., a Delaware limited partnership
(the “Fund”).
New Leaf Venture Associates III, L.P., a Delaware limited
partnership (the “General Partner”), is the sole general partner
of the Fund. The general partner of the General Partner is New
Leaf Venture Management III, L.L.C., a Delaware limited
liability company (the “GPLLC”). The initial managing
members (the “Principals”) of the GPLLC are Philippe
Chambon, Jeani Delagardelle, Ronald Hunt, Vijay Lathi and
Liam Ratcliffe.
To generate significant returns, principally through long-term
capital appreciation, by making, holding and disposing of
equity and equity-related investments, principally in healthcare,
medical device and life sciences companies.
The Fund is targeting capital commitments (“Commitments”) of
$375 million with respect to limited partner interests (the
“Limited Partner Interests”). The General Partner may accept a
greater or lesser amount of Commitments from Limited
Partners (as defined below) in its discretion.
The minimum capital commitment of a limited partner to the
Fund (collectively, the “Limited Partners” and together with the
General Partner, the “Partners”) will be $5 million, although
individual capital commitments of lesser amounts may be
accepted at the discretion of the General Partner. The General
Partner may, in its discretion, reject any subscription that is
tendered.
The initial closing will occur as soon as practicable. The General
Partner may hold additional closings thereafter; provided that
the final closing will occur no later than 12 months after the
initial closing (the “Final Closing Date”).
Each Limited Partner admitted at a subsequent closing will be
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CONTROL NUMBER 257 - CONFIDENTIAL
required to contribute the same percentage of its Commitment
as each of the other Limited Partners had been required to
contribute prior to such closing plus an additional amount,
calculated like interest at the prime rate plus 2% per annum,
compounded quarterly, on the amount of such contribution.
General Partner
Commitment
Term:
Drawdowns:
Investment Period:
Diversification &
Investment Limitations:
The General Partner will commit to the Fund at least 1.5% of the
aggregate Commitments of the Partners.
10 years, subject to the General Partner’s right to extend the
term for up to three one-year periods, with the approval of the
Advisory Board (as defined below).
Commitments are expected to be drawn down on an as needed
basis, generally, with not less than 10 business days’ prior
written notice. The initial capital contributions of the Partners
will be due on not less than 7 business days’ prior written
notice.
The Partners will have no obligation to make additional capital
contributions to fund new investments during a Suspension
Period (as defined below) or after the period commencing on
the Fund’s initial closing date and ending on the earliest of (i)
the fifth anniversary of the Final Closing Date and (ii) the date
on which a Suspension Period becomes permanent (the
“Investment Period”); provided, however, that the Partners will
have a continuing obligation to make capital contributions to
fund prospective investments in process, follow-on investments,
and to pay Fund expenses and other Fund obligations
(including, without limitation, the Management Fee (as defined
below) and indemnification obligations).
Without the approval or ratification of the Advisory Board:
(a) the Fund’s total investment in any single Portfolio
Company shall not exceed 10% of the aggregate Subscriptions
of all Partners;
(b) the Fund’s total investment in Portfolio Companies
organized in jurisdictions outside of the United States and
Canada shall not exceed 15% of the aggregate Subscriptions of
all Partners;
(c) the Fund may not as of any time invest more than 10% of
the aggregate Subscriptions of all Partners in open market
purchases of securities that, at the time of investment, are
traded on a Public Securities Market and are being purchased as
a stand-alone passive investment; provided, however, that for
the avoidance of doubt, the foregoing restriction shall not apply
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CONTROL NUMBER 257 - CONFIDENTIAL
to Temporary Investments, “PIPES” and other purchases of
securities in private placements that are not traded on a Public
Securities Market at the time of such investment, “toe-hold”
investments (e.g. investments that are intended to lead to a
potential private or larger investment), Portfolio Investments
where the Partnership has the right to designate a director, and
follow-on investments in or related to the foregoing;
(d) the Fund shall not invest in the securities of any other
pooled investment vehicle with respect to which any Person is
entitled to a share of profits (whether in the form of fees,
distributions or otherwise) disproportionate to its share of the
contributed capital of the vehicle unless the General Partner
arranges for a reduction in the Management Fee in the amount
of the “management fee” and “carried interest” attributable to
the Fund’s interest in such vehicle; provided, however, that the
Fund shall not, without the approval or ratification of the
Advisory Board, invest more than 5% of the aggregate
Subscriptions of all Partners in the securities of any such pooled
investment vehicle; and provided, further, however, that
nothing herein shall prevent the Fund from (1) investing the
Fund’s cash in a regulated investment company or similar entity
or fund sponsored by a bank subject to the Bank Holding
Company Act as a Temporary Investment or (2) investing in
operating businesses through an alternative investment vehicle;
or
(f) The Fund shall not invest in any uncovered options,
futures contracts or other derivative securities, or sell securities
short in an uncovered transaction.
Advisory Board:
The Fund will have a limited partner advisory board (the
“Advisory Board”) consisting of at least three persons chosen by
the General Partner from persons associated with the Limited
Partners; provided that neither the General Partner nor any of
its affiliates may be a member of the Advisory Board. The
duties of the Advisory Board (or its committees) shall be to: (a)
be available to offer advice to the General Partner regarding the
activities of the Fund; (b) review and advise the General Partner
regarding transactions involving potential conflicts of interest
submitted to them by the General Partner; (c) approve the
valuation methodology formulated by the General Partner for
determining the value of the Fund’s assets and review periodic
valuations submitted to it by the General Partner; and (d)
undertake such other duties as are required by this Agreement
or reasonably requested by the General Partner.
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Limited Reinvestment:
Distributions:
Allocations:
General Partner Clawback:
Without the consent of the Advisory Board, the General Partner
shall not permit the aggregate purchase price of long-term
investments to exceed 110% of aggregate Commitments.
All distributions prior to the dissolution of the Fund will be
made at such times and in such amounts as the General Partner
shall determine. All such distributions will be apportioned
among the Partners as follows:
(i) First, 100% to all Partners in proportion to their capital
contributions until each Partner has received distributions in an
amount equal to such Partner’s capital contributions; and
(ii) Thereafter, 20% to the General Partner and 80% to all
Partners in proportion to their respective capital contributions.
With respect to any fiscal year, the Fund may make cash
distributions to the Partners in amounts intended to defray the
Partners’ tax liability resulting from their interests in the Fund
during such fiscal year.
Liquidating distributions will be made in accordance with
positive capital account balances.
The Fund will maintain capital accounts on behalf of each
Partner in accordance with U.S. Federal income tax
requirements. In general, any cumulative net loss will be
allocated to the capital accounts of the Partners in proportion
their contributions, and any cumulative net gain will be
allocated 20% to the capital account of the General Partner and
80% to the capital accounts of all Partners in proportion to their
contributions. Notwithstanding the foregoing, items of expense
will be allocated to the Partners in proportion to their
contributions and will be offset by subsequent allocations of net
profit (to the extent thereof), provided that the General Partner
will not be allocated any items of expense attributable to the
Management Fee.
If, after the Fund has made its final liquidating distribution, the
General Partner has received aggregate distributions with
respect to its “carried interest” in excess of the cumulative net
profit allocated to the General Partner with respect to its
“carried interest,” the General Partner will return to the Fund
the amount of that excess; provided, however, that in no event
shall the General Partner be required to return to the Fund an
amount in excess of the aggregate distributions made to the
General Partner that are attributable to its “carried interest” less
tax distributions. All carry recipients shall be severally, but not
jointly, liable for their respective proportional shares of the
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CONTROL NUMBER 257 - CONFIDENTIAL
General Partner’s return obligation set forth in the preceding
sentence; provided, however, that in no event shall any carry
recipient be required to return to the Fund an amount in excess
of the aggregate distributions made to it that are attributable to
the General Partner’s “carried interest” less tax distributions
with respect thereto.
Management Fee:
Commitment, Break-Up and
Monitoring Fees:
The Fund will enter into a management agreement with New
Leaf Venture Partners, L.L.C., a Delaware limited liability
company, or an affiliate thereof (the “Management Company”)
to provide management and administrative services to the
Fund.
The Fund will pay the Management Company an annual
management fee (the “Management Fee”) equal to 2.5% per
annum of Commitments, payable in advance on a quarterly
basis. For each successive twelve-month period beginning on
the first day of the fiscal quarter following the date which is the
fourth anniversary of the Final Closing Date, the percentage
used in calculating the annual Management Fee shall be
determined by multiplying the percentage used to determine
the Management Fee for the prior twelve-month period by 88%;
provided, however, in no event shall such percentage be
reduced below 1.35%per annum.
100% of all directors’ fees, consulting fees, commitment fees,
monitoring fees, investment banking, transaction or break-up
fees or other remuneration (excluding directors’ fees and
options for service on the board of a publicly-traded portfolio
company) paid by the Fund’s portfolio companies to the
General Partner, the Management Company or the Managers
(“Portfolio Company Remuneration”), net of expenses, will be
treated as an offset to the Management Fee; provided, however,
that the Management Fee shall not be reduced below zero. Any
reimbursement of the General Partner, the Management
Company or the Managers for out-of-pocket expenses incurred
on behalf of a portfolio company will not offset the
Management Fee.
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Organizational Expenses:
Operating Expenses:
The Fund will bear expenses relating to the organization of the
Fund and its affiliates and the offering of the Limited Partner
Interests, including legal, accounting, travel, meeting, printing
and other administrative expenses, up to an aggregate of
$1,250,000. The Management Fee will be reduced by
organizational expenses paid by the Fund in excess of this
amount and by any placement fees paid by the Fund.
The Management Company will assume and pay all normal
operating expenses attributable to the Fund’s investment
activities, including all routine, recurring expenses incident to
the investment activities of the Fund; compensation and
expenses of the employees of the Management Company and
fees and expenses for administrative, clerical and related
support services, maintenance of books and records for the
Fund, office space and facilities, utilities, telephone and travel
insofar as they relate to the investment activities of the Fund.
In addition to the Management Fee, the Fund will be
responsible for all other costs and expenses of the Fund that are
not reimbursed by third parties, including without limitation,
organizational expenses and placement fees (each as described
above); liquidation expenses of the Fund; any sales or other
taxes, fees or government charges which may be assessed
against the Fund; commissions or brokerage fees or similar
charges incurred in connection with the purchase or sale of
securities (including any merger fees payable to third parties
and whether or not any such purchase or sale is consummated);
fees and compensation (if any) and expenses of members of the
Advisory Board (including travel-related costs and expenses);
the fees and compensation (if any) and expenses of any
technical or scientific advisory board with which the Fund
consults; the costs and expenses (including travel-related
expenses) of hosting annual or special meetings for the Partners
of the Fund, or otherwise holding meetings or conferences with
Partners of the Fund, whether individually or in a group; fees
and expenses for consulting services; interest expense for
borrowed money (if any); all expenses relating to litigation and
threatened litigation involving the Fund, including
indemnification expenses; expenses attributable to normal and
extraordinary investment banking, commercial banking,
accounting, appraisal, legal, custodial and registration services
provided to the Fund, including in each case services with
respect to the proposed purchase or sale of securities by the
Fund that are not reimbursed by the issuer of such securities
(whether or not any such purchase or sale is consummated and
including expenses incurred by the tax matters partner);
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CONTROL NUMBER 257 - CONFIDENTIAL
premiums for liability insurance to protect the Fund, the
General Partner, the partners of the General Partner, the
members of the GPLLC, the members of the Advisory Board,
and any of their respective partners, members, stockholders,
officers, directors, trustees, employees, agents or affiliates in
connection with the activities of the Fund and premiums to pay
“key-man” insurance; and all other expenses properly
chargeable to the activities of the Fund.
Distributions may be recalled for up to one year following the
date of liquidation of the Fund to satisfy (1) any obligations,
liabilities and other expenses that arise from the Fund’s
Portfolio Investments and (2) the Fund’s indemnification
obligations; provided that no Partner shall be required to return
an aggregate amount greater than the lesser of (A) the aggregate
amount of distributions made to such Partner (and such
Partner’s predecessors in interest) and (B) 25% of such Partner’s
Commitment
Key Person Event:
No Fault Termination of the
Investment Period:
No Fault Termination of the
Fund:
Removal of the General
Partner for Cause:
The General Partner shall promptly notify the Advisory Board
in writing if, prior to the end of the Investment Period, fewer
than three Principals satisfy their obligation to devote
substantially all of their business time to the affairs of the
Management Company and its affiliates (including by reason of
death or disability) for a period exceeding 60 days. Following
any such occurrence, the Fund shall not make any new portfolio
investments other than permitted investments (a “Suspension
Period), unless such Suspension Period is lifted as provided in
the Partnership Agreement.
Eighty-five percent in interest of the Limited Partners may cause
a termination of the Investment Period at any time after the
second anniversary of the Initial Closing Date, with such
termination to be effective as of the date they deliver written
notice of such termination to the General Partner, after which
the Fund shall not make any new portfolio investments other
than permitted investments as set forth in the Partnership
Agreement.
Eighty per cent in interest of the Limited Partners (excluding
affiliates of the General Partner) may vote to dissolve the Fund
at any time after the second anniversary of the initial closing
date upon 120 days’ notice.
66 2/3% in interest of the Limited Partners may remove the
General Partner upon the occurrence of certain cause events
specified in the Partnership Agreement.
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Transferability of Interests
and Withdrawal:
Borrowings
and Guarantees:
Default:
Reports:
Parallel Funds:
Alternative Investment
Vehicles:
A Limited Partner may not sell, assign, or transfer any interest
in the Fund or withdraw from the Fund except under certain
limited circumstances and with the prior written consent of the
General Partner.
The Fund may borrow money on a short-term basis pending
drawdowns of capital contributions in an aggregate amount
outstanding at any time not exceeding 15% of aggregate
Commitments, or such greater amount as is otherwise approved
by the Advisory Board; provided that the maturity of any such
borrowing shall not exceed 90 days. The Fund may guarantee
the indebtedness of any portfolio company; provided, however,
that, without the approval of the Advisory Board, the total
amount of outstanding Fund guarantees shall not exceed 15% of
aggregate Commitments.
If any Limited Partner defaults in the payment of any part of its
Commitment when due, it will be subject to significant penalties
as specified in the Partnership Agreement, including forfeiture
of all or a portion of such Limited Partner’s interest in the Fund.
The Partners will receive (i) audited annual financial statements,
(ii) unaudited quarterly financial statements for the first three
quarters of each fiscal year, (iii) annual tax information
necessary for completion of their income tax returns and (iv)
periodically certain descriptive information related to portfolio
investments. Reports and information, and the General
Partner’s obligation to provide such reports and information,
will be subject to confidentiality restrictions and limitations as
set forth in the Partnership Agreement. Each Limited Partner
will be required to maintain information provided to it about
the Fund, its business and portfolio investments in the strictest
confidence and to not disclose such information except in
certain limited circumstances.
In order to facilitate investments by certain investors, the
General Partner may create parallel or other investment vehicles
or investment advisory programs, the structure of which may
differ from that of the Fund but which will generally invest
proportionately in all portfolio investments on substantially the
same terms and conditions as the Fund, subject to applicable
investment restrictions.
If the General Partner determines that for legal, tax or
regulatory reasons that an investment should be made through
an alternative investment vehicle, the General Partner may
structure the making of all or a portion of such investment
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outside the Fund, by requiring some or all of the Limited
Partners to make such investment through a limited liability
entity that will invest on a parallel basis with, or in lieu of, the
Fund, as the case may be.
Successor Fund:
Exculpation and
Indemnification:
Without the prior written consent of the Advisory Board, none
of the General Partner, the GPLLC or any Principal may hold an
initial closing for a limited partnership or other investment
vehicle with an investment strategy substantially similar to the
Fund (a “Successor Fund”) prior to the earlier of (i) the end of
the Investment Period and (ii) the date on which at least 70% of
aggregate Commitments of all Partners have been invested,
expended, committed, or reserved for future investments in
existing portfolio companies or for reasonably anticipated Fund
expenses.
None of General Partner, the partners of the General Partner,
the members of the GPLLC, the Principals, the Management
Company, or any partner, member, stockholder, officer,
director, manager, trustee, employee, agent or affiliate of any of
the foregoing shall be liable to the Fund or any Partner for any
loss suffered by the Fund or any Partner which arises out of any
investment or any other action or omission of such person if (a)
such person acted in good faith and reasonably believed that
such course of conduct was in, or not opposed to, the best
interest of the Fund and (b) such conduct did not constitute a
breach of such person’s fiduciary duty (if any) to the Fund,
gross negligence, intentional misconduct, intentional and
material breach by such person of its obligations under the
Partnership Agreement (provided that such breach is not cured
within 60 days of notice from a majority in interest of the
Limited Partners of such breach), a willful violation of law or
the commission of a felony.
No member of the Advisory Board or any other board or
committee formed to assist or advise the General Partner and no
Limited Partner who may have designated such member shall
be liable to the Fund or any Partner for any loss suffered by the
Fund or any Partner which arises out of any action or omission
of such member, provided that such member acted in good faith
and reasonably believed that such course of conduct was in, or
was not opposed to, the best interest of the Fund and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe that his or her conduct was unlawful.
The General Partner, the partners of the General Partner, the
members of the GPLLC, the Principals, the Management
Company, each liquidator, each member of the Advisory Board
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CONTROL NUMBER 257 - CONFIDENTIAL
or any other board or committee formed to assist or advise the
General Partner, each Limited Partner that designated a
member of the Advisory Board, and each partner, member,
stockholder, director, officer, manager, trustee, employee, agent
and affiliate of any of the foregoing shall be indemnified by the
Fund against any claim, demand, controversy, dispute, cost,
loss, damage, expense (including attorneys’ fees), judgment
and/or liability incurred by or imposed upon the indemnitee in
connection with any action, suit or proceeding to which the
indemnitee may be made a party or otherwise involved or with
which the indemnitee shall be threatened, in connection with
their activities on behalf of, or their association with, the Fund;
provided, however, that such an indemnitee, other than an
indemnitee acting in his capacity as a member of the Advisory
Board or any other board or committee formed to assist or
advise the General Partner and a Limited Partner who has
designated such member, shall not be indemnified with respect
to matters as to which the indemnitee shall have been finally
adjudicated in any such action, suit or proceeding (a) not to
have acted in good faith and in the reasonable belief that the
indemnitee’s action was in, or not opposed to, the best interests
of the Fund or (b) to have committed a breach of such person’s
fiduciary duty (if any) to the Fund, gross negligence, intentional
misconduct, intentional and material breach by such person of
its obligations under the Partnership Agreement (provided that
such breach is not cured within 60 days of notice from a
majority in interest of the Limited Partners of such breach), a
willful violation of law or the commission of a felony. An
indemnitee either acting in his capacity as a member of the
Advisory Board or any other board or committee formed to
assist or advise the General Partner or that is a Limited Partner
who has designated such member shall not be indemnified with
respect to matters as to which the indemnitee shall have been
finally adjudicated in any such action, suit or proceeding (1) not
to have acted in good faith and in the reasonable belief that the
indemnitee’s action was in, or not opposed to, the best interests
of the Fund or (2), with respect to any criminal action or
proceeding, such person had reasonable cause to believe that his
or her conduct was unlawful.
Notwithstanding the foregoing, in no event will the Fund
provide indemnification to any indemnitee for any action or
omission taken by such indemnitee in such person’s capacity as
a director of any portfolio company in which the Fund no
longer holds an investment, to the extent such liabilities solely
relate to activities of such person during the period
commencing 18 months after the date on which the Fund has
sold or otherwise disposed of its entire interest in such portfolio
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company.
Certain ERISA
Considerations:
U.S. Tax-Exempt Investors:
Non-U.S. Investors:
Under the Employee Retirement Income Security Act of 1974, as
amended (“ERISA”), fiduciaries of prospective investors that
are retirement plans subject to ERISA (“ERISA Plans”) must
determine that an investment in the Fund is prudent, that such
investment satisfies the requirement that plan assets be
diversified and that such investment complies with the other
requirements applicable to ERISA Plans. The General Partner
intends to conduct the operations of the Fund so that it will be
an appropriate investment for ERISA Plans. In particular, the
General Partner will use reasonable best efforts to conduct the
affairs and operations of the Fund in such a manner so that the
assets of the Fund will not be treated as “plan assets” of any
ERISA Plan for purposes of ERISA. Prospective investors that
are ERISA Plans are advised to consult their own advisors as to
the effect of ERISA (or other applicable law) on an investment in
the Fund. The fiduciary of each prospective ERISA Plan
investor must independently determine that the Fund is an
appropriate investment for such ERISA Plan, taking into
account the fiduciary’s obligations under ERISA and the facts
and circumstances of each investing ERISA Plan. (See Section X,
“Certain Tax and ERISA Considerations.”)
Prospective investors are advised to consult their own tax
advisors as to the tax consequences of an investment in the
Fund. Subject to certain exceptions, the General Partner will use
reasonable best efforts to conduct the affairs of the Fund in a
manner that is not expected to cause any tax- exempt partner to
realize any “unrelated business taxable income” within the
meaning of Sections 512 through 514 of the Code. (See Section
X, “Certain Tax and ERISA Considerations.”) The General
Partner’s undertaking will be deemed satisfied with respect to
the making, holding or disposing of any portfolio investment if
the tax exempt U.S. Partners are given the opportunity to (or if
all Limited Partners are otherwise required to) hold their
proportionate shares of such portfolio investment directly or
indirectly through an alternative investment vehicle treated as a
corporation for U.S. federal income tax purposes.
Prospective investors are advised to consult their own tax
advisors as to the tax consequences of an investment in the
Fund. Subject to certain exceptions, the General Partner will use
commercially reasonable efforts to conduct the affairs of the
Fund in a manner that is not expected to cause the Fund to be
treated for United States federal income tax purposes as
engaged in a “trade or business within the United States,”
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CONTROL NUMBER 257 - CONFIDENTIAL
within the meaning of Section 864(b) of the Code. (See Section
X, “Certain Tax and ERISA Considerations.”) The General
Partner’s undertaking will be deemed satisfied with respect to
the making, holding or disposing of any portfolio investment if
the Non U.S. Partners are given the opportunity to (or if all
Limited Partners are otherwise required to) hold their
proportionate shares of such portfolio investment directly or
indirectly through an alternative investment vehicle treated as a
corporation for U.S. federal income tax purposes.
Risk Factors:
Legal Counsel:
An investment in the Fund involves a high degree of risk.
Prospective investors should carefully review the matters
discussed under Section IX, “Certain Investment
Considerations.”
Proskauer Rose LLP
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IX. CERTAIN INVESTMENT CONSIDERATIONS
An investment in the Fund entails a significant degree of risk and, therefore, should be undertaken only
by investors capable of evaluating the risks of the Fund and bearing the risks it represents. There can be
no assurance that the Fund’s investment objectives will be achieved or that an investor will receive a
return of its capital, and therefore, an investor should only invest in the Fund if such investor is able to
withstand a total loss of its investment. In addition, there will be occasions when the General Partner
and its affiliates may encounter potential conflicts of interest in connection with the Fund. Prospective
investors in the Fund should carefully consider the following factors in connection with an investment in
the Fund. The following is not a complete list of all risks involved in connection with an investment in
the Fund. In addition to the items discussed below, prospective investors should also consider the
information described in Section XI, “Certain Tax & ERISA Considerations” and elsewhere in this
Memorandum. Prospective investors are cautioned not to rely on the prior returns set forth in this
Memorandum in making a decision whether or not to purchase the Limited Partner Interests offered
hereby. The return information contained in this Memorandum has not been audited or verified by any
independent party and should not be considered representative of the returns that may be received by an
investor in the Fund. Past performance is not a guarantee of future results.
Risk of Venture Capital Investments
While venture capital investments offer the opportunity for significant gains, such investments
also involve a high degree of business and financial risk and can result in substantial losses.
Among these risks are the general risks associated with investing in companies at an early state
of development or with little or no operating history, companies operating at a loss or with
substantial variations in operating results from period to period, and companies with the need
for substantial additional capital to support expansion or to achieve or maintain a competitive
position. Such companies may face intense competition, including from companies with greater
financial resources, more extensive development, manufacturing, marketing and service
capabilities and a larger number of qualified managerial and technical personnel. Due to the
limited number of investments that the Fund may make, poor performance by some of the
Fund’s investments could significantly affect the total returns to Limited Partners.
Focused Investment Strategy
The Fund will be focused on life sciences and healthcare technology investments and may not
enjoy the reduced risks of a broadly diversified portfolio. A specific investment focus is
inherently more risky and could cause the Fund’s investments to be more susceptible to
particular economic, political, regulatory, technological or industry conditions or occurrences
compared with a fund, or a portfolio of funds, that is more diversified or has a broader industry
focus.
Risks Associated with Investments in Life Sciences and Healthcare Technology Companies
The success of the Fund’s portfolio companies may be dependent upon obtaining certain
governmental approvals. Companies in the life sciences and healthcare technology industry
typically require the approval of agencies such as the FDA prior to marketing their products to
the public. Of particular significance are the FDA requirements covering research and
development, testing, manufacturing, quality control, labeling and promotion of drugs for
human use. The approval process is very lengthy and very costly, and there can be no
guarantee that a portfolio company will obtain the necessary approvals for its products. If a
portfolio company is unable to obtain these approvals in a timely fashion, the portfolio
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company may experience significant adverse effects, which in turn could negatively affect the
performance of the Fund. Moreover, the current regulatory framework may change or
additional regulations may arise at any stage during the product development phase of a
portfolio company, which may affect the company’s ability to obtain approval of its products.
The Fund may invest in companies that will need to obtain patents for their products, both in
the U.S. and in other countries. The patent protection of the intellectual property of healthcare
technology companies in many countries is highly uncertain and involves complex legal,
scientific and factual issues. The policy regarding allowable claimed subject matter of life
sciences or healthcare technology patents varies from jurisdiction to jurisdiction.
Dependence on Single Products
Companies in which the Fund invests may only have one product under development. There
can be no assurance that the product will be approved for marketing by the FDA or any foreign
regulatory agency. Further, competition to the product may develop from other new and
existing products. In either case, if a company is dependent on that one product, the