Confidential Private Placement Memorandum for New Leaf Ventures III, L.P. – $375M Healthcare VC Fund

NEW LEAF VENTURES III, L.P. – $375 MILLION LIMITED PARTNER INTERESTS – CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM APRIL, 2014 Control No. 257 NEW LEAF VENTURES III, L.P. – $375 MILLION LIMITED PARTNER INTERESTS – CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM APRIL, 2014 NEW LEAF VENTURE PARTNERS Times Square Tower 7 Times Square, Suite 3502 New York, NY 10036 646.871-6400 1200 Park Place Suite 300 San Mateo, CA 94403 650.234.2700 Statement of Conditions THIS CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM (THIS “MEMORANDUM”) IS BEING FURNISHED TO CERTAIN SOPHISTICATED INVESTORS ON A CONFIDENTIAL BASIS BY OR ON BEHALF OF NEW LEAF VENTURES III, L.P., A DELAWARE LIMITED PARTNERSHIP (“NLV- III” OR THE “FUND”), SO THAT EACH MAY CONSIDER AN INVESTMENT IN THE FUND. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE LIMITED PARTNER INTERESTS (THE “INTERESTS”) OFFERED HEREBY HAVE NOT BEEN APPROVED, DISAPPROVED, ENDORSED OR RECOMMENDED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION (THE “SEC”) OR BY THE SECURITIES REGULATORY AUTHORITY OF ANY U.S. STATE OR NON-U.S. JURISDICTION, AND NEITHER THE SEC NOR ANY SUCH AUTHORITY HAS REVIEWED THIS MEMORANDUM NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS MEMORANDUM, NOR IS IT INTENDED THAT THE SEC OR ANY SUCH AUTHORITY WILL DO SO. NO INDEPENDENT PERSON HAS CONFIRMED THE ACCURACY OR TRUTHFULNESS OF THIS DISCLOSURE OR WHETHER IT IS COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS ILLEGAL. THE INTERESTS HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), ANY U.S. STATE SECURITIES LAWS OR THE LAWS OF ANY NON-U.S. JURISDICTION. IT IS ANTICIPATED THAT THE OFFERING AND SALE OF THE INTERESTS IN THE U.S. WILL BE EXEMPT FROM REGISTRATION PURSUANT TO SECTION 4(2) AND REGULATION D AND REGULATION S PROMULGATED UNDER THE SECURITIES ACT AND OTHER EXEMPTIONS OF SIMILAR IMPORT UNDER THE LAWS OF THE STATES AND OTHER JURISDICTIONS WHERE THE OFFERING WILL BE MADE. THE FUND WILL NOT BE REGISTERED AS AN INVESTMENT COMPANY UNDER THE U.S. INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE “INVESTMENT COMPANY ACT”). THE INTERESTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT AND MAY NOT BE OFFERED OR SOLD IN THE U.S. OR TO U.S. PERSONS (AS DEFINED IN RULE 902(K) OF THE SECURITIES ACT) UNLESS THE INTERESTS ARE REGISTERED UNDER THE SECURITIES ACT, OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT IS AVAILABLE. HEDGING TRANSACTIONS INVOLVING THE INTERESTS MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. THE FUND AND ITS GENERAL PARTNER ARE NEWLY FORMED ENTITIES. THERE IS NO PUBLIC MARKET FOR THE INTERESTS, AND NO SUCH MARKET IS EXPECTED TO DEVELOP. EACH PURCHASER WILL BE REQUIRED TO REPRESENT, AMONG OTHER THINGS, THAT IT IS AN “ACCREDITED INVESTOR” WITHIN THE MEANING OF REGULATION D OF THE SECURITIES ACT AND THAT IT IS ACQUIRING THE INTERESTS PURCHASED BY IT FOR INVESTMENT AND NOT WITH A VIEW FOR RESALE OR DISTRIBUTION. THE INTERESTS ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE FUND’S AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT (AS AMENDED FROM TIME TO TIME, THE “PARTNERSHIP AGREEMENT”) AND UNLESS THE INTERESTS ARE REGISTERED UNDER THE SECURITIES ACT OR EXEMPTED FROM SUCH REGISTRATION AND REGISTRATION UNDER ANY OTHER APPLICABLE SECURITIES LAW REQUIREMENTS. NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS OR GIVE ANY INFORMATION WITH RESPECT TO THE INTERESTS EXCEPT THE INFORMATION CONTAINED IN THIS MEMORANDUM, AND ANY REPRESENTATION OR INFORMATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, ITS GENERAL PARTNER, OR ANY OF THEIR RESPECTIVE PARTNERS, EMPLOYEES, OFFICERS, i CONTROL NUMBER 257 - CONFIDENTIAL DIRECTORS OR AFFILIATES. THE DISTRIBUTION OF THIS MEMORANDUM AND THE OFFER AND SALE OF THE INTERESTS IN CERTAIN JURISDICTIONS MAY BE RESTRICTED BY LAW. FOR INFORMATION REQUIRED BY THE SECURITIES LAWS OF CERTAIN U.S. STATES AND CERTAIN JURISDICTIONS OUTSIDE OF THE U.S., PLEASE SEE THE OFFERING NOTICES BEGINNING IN SECTION XIV. THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE INTERESTS IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. THIS MEMORANDUM IS NOT, AND UNDER NO CIRCUMSTANCES IS IT TO BE CONSTRUED AS, A PROSPECTUS OR ADVERTISEMENT, AND THE OFFERING CONTEMPLATED IN THIS MEMORANDUM IS NOT, AND UNDER NO CIRCUMSTANCES IS IT TO BE CONSTRUED AS, A PUBLIC OFFERING OF THE INTERESTS. THIS MEMORANDUM IS FOR THE CONFIDENTIAL USE OF ONLY THOSE PERSONS TO WHOM IT IS TRANSMITTED IN CONNECTION WITH THIS OFFERING. EACH RECIPIENT ACKNOWLEDGES AND AGREES THAT THE CONTENTS OF THIS MEMORANDUM AND RELATED DOCUMENTATION CONSTITUTE PROPRIETARY AND CONFIDENTIAL INFORMATION, THAT NEW LEAF VENTURE PARTNERS, L.L.C. (“NEW LEAF” OR THE “MANAGEMENT COMPANY”) AND THE FUND DERIVE INDEPENDENT ECONOMIC VALUE FROM THEIR CONTENTS NOT BEING GENERALLY KNOWN, AND THAT THE MANAGEMENT COMPANY TAKES REASONABLE EFFORTS TO MAINTAIN THEIR SECRECY. IN ADDITION, EACH PERSON WHO RECEIVES THIS MEMORANDUM AGREES THAT ITS CONTENTS ARE A TRADE SECRET, THE DISCLOSURE OF WHICH IS LIKELY TO CAUSE SUBSTANTIAL AND IRREPARABLE COMPETITIVE HARM TO THE MANAGEMENT COMPANY AND THE FUND. BY ACCEPTANCE HEREOF, EACH RECIPIENT AGREES NOT TO TRANSMIT, REPRODUCE OR MAKE AVAILABLE TO ANYONE, IN WHOLE OR IN PART, THIS MEMORANDUM, ANY SUPPLEMENT HERETO OR ANY INFORMATION CONTAINED HEREIN OR THEREIN WITHOUT THE PRIOR WRITTEN CONSENT OF NEW LEAF VENTURE ASSOCIATES III, L.P. (THE “GENERAL PARTNER”), OR TO USE IT FOR ANY PURPOSE OTHER THAN EVALUATING A POSSIBLE INVESTMENT IN THE FUND. EACH PERSON WHO HAS RECEIVED A COPY OF THIS MEMORANDUM (WHETHER OR NOT SUCH PERSON PURCHASES ANY INTERESTS) IS DEEMED TO HAVE AGREED (I) TO RETURN THIS MEMORANDUM AND ANY SUPPLEMENT HERETO TO THE MANAGEMENT COMPANY UPON REQUEST IF SUCH PERSON HAS NOT PURCHASED AN INTEREST, (II) NOT TO DISCLOSE ANY INFORMATION CONTAINED IN THIS MEMORANDUM OR ANY SUPPLEMENT HERETO EXCEPT TO THE EXTENT THAT SUCH INFORMATION WAS (A) PREVIOUSLY KNOWN BY SUCH PERSON THROUGH A SOURCE (OTHER THAN THE FUND, ITS PARTNERS OR ANY AFFILIATES OR AGENTS THERETO) NOT BOUND BY ANY OBLIGATION TO KEEP CONFIDENTIAL SUCH INFORMATION, (B) IN THE PUBLIC DOMAIN THROUGH NO FAULT OF SUCH PERSON OR (C) LATER LAWFULLY OBTAINED BY SUCH PERSON FROM SOURCES (OTHER THAN THE FUND, ITS PARTNERS OR ANY AFFILIATES OR AGENTS THERETO) NOT BOUND BY ANY OBLIGATION TO KEEP SUCH INFORMATION CONFIDENTIAL AND (III) TO BE RESPONSIBLE FOR ANY DISCLOSURE OF THIS MEMORANDUM, ANY SUPPLEMENT HERETO, OR THE INFORMATION CONTAINED HEREIN OR THEREIN, BY SUCH PERSON OR ANY OF ITS EMPLOYEES, AGENTS OR REPRESENTATIVES. PROSPECTIVE INVESTORS ARE URGED TO REQUEST ANY ADDITIONAL INFORMATION THEY MAY CONSIDER NECESSARY OR DESIRABLE IN MAKING AN INFORMED INVESTMENT DECISION. EACH PROSPECTIVE PURCHASER IS INVITED, PRIOR TO THE CONSUMMATION OF A SALE OF ANY INTERESTS TO SUCH PURCHASER, TO ASK QUESTIONS OF AND RECEIVE ANSWERS FROM THE MANAGEMENT COMPANY CONCERNING THE FUND AND THIS OFFERING AND TO OBTAIN ANY ADDITIONAL INFORMATION TO THE EXTENT THE MANAGEMENT COMPANY POSSESSES THE SAME OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE, IN ORDER TO VERIFY THE ACCURACY OF THE INFORMATION CONTAINED IN THIS MEMORANDUM OR OTHERWISE. ii CONTROL NUMBER 257 - CONFIDENTIAL PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO RELY ON THE PRIOR RETURNS SET FORTH HEREIN IN MAKING A DECISION WHETHER OR NOT TO PURCHASE THE INTERESTS OFFERED HEREBY. AN INVESTMENT IN THE FUND DOES NOT REPRESENT AN INTEREST IN ANY INDICATED INVESTMENT OR ANY INVESTMENT PORTFOLIO OF ANY RELATED OR OTHER INVESTMENT FUND, INCLUDING ANY INVESTMENT FUND MANAGED BY THE MANAGEMENT COMPANY OR ITS AFFILIATES. WHILE THIS MEMORANDUM INCLUDES REFERENCES TO A NUMBER OF RELATED AND AFFILIATED ENTITIES, INCLUDING CERTAIN AFFILIATED INVESTMENT POOLS AND VEHICLES, AN INVESTMENT IN THE FUND AS CONTEMPLATED HEREIN IS SEPARATE AND DISCRETE FROM ALL SUCH OTHER AFFILIATED INVESTMENT VEHICLES. FURTHER, ALTHOUGH THE PERFORMANCE OF SUCH OTHER AFFILIATED INVESTMENT VEHICLES MAY BE RELEVANT TO A GENERAL UNDERSTANDING OF THE GENERAL INVESTMENT EXPERIENCE AND PHILOSOPHY OF THE MANAGEMENT COMPANY AND ITS AFFILIATES, SUCH PERFORMANCE IS NOT AN INDICATOR OF THE RESULTS TO BE ACHIEVED BY THE FUND. THE RETURN INFORMATION CONTAINED HEREIN 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. CERTAIN FACTORS EXIST THAT MAY AFFECT COMPARABILITY INCLUDING, AMONG OTHERS, THE DEDUCTION OF FEES AND EXPENSES AND THE PAYMENT OF CARRIED INTEREST (WHICH MAY BE DIFFERENT FOR THE FUND) AS WELL AS OTHER FACTORS AS NOTED WITH SUCH INFORMATION. FURTHER, CERTAIN INFORMATION RESPECTING UNREALIZED RETURNS IS BASED ON PUBLIC MARKET VALUATIONS THAT, AMONG OTHER THINGS, HAVE BECOME INCREASINGLY VOLATILE AND AS A RESULT MAY NOT BE INDICATIVE OF THE CURRENT VALUE OR THE ACTUAL VALUE TO BE REALIZED FROM ANY PARTICULAR PORTFOLIO INVESTMENT. PROSPECTIVE INVESTORS SHOULD NOT CONSTRUE THE CONTENTS OF THE MEMORANDUM AS LEGAL, TAX, REGULATORY, FINANCIAL, ACCOUNTING OR OTHER ADVICE. EACH PROSPECTIVE INVESTOR SHOULD MAKE ITS OWN INVESTIGATION AND CONSULT ITS OWN ADVISORS AS TO THE LEGAL, TAX, REGULATORY, FINANCIAL, ACCOUNTING AND RELATED MATTERS CONCERNING THE FUND, THE OFFERING AND AN INVESTMENT IN THE INTERESTS. THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK AND IS SUITABLE ONLY FOR INVESTORS WHO ARE SOPHISTICATED WITH FINANCIAL MATTERS AND FAMILIAR WITH THE RISKS ASSOCIATED WITH INVESTMENTS SIMILAR TO THE ONES DESCRIBED HEREIN. NONE OF THE FUND, THE GENERAL PARTNER, THE MANAGEMENT COMPANY OR ANY OF THEIR AFFILIATES IS MAKING ANY REPRESENTATION OR WARRANTY TO AN INVESTOR REGARDING THE LEGALITY OF AN INVESTMENT IN THE FUND BY SUCH INVESTOR OR ABOUT THE INCOME AND OTHER TAX CONSEQUENCES TO IT OF SUCH AN INVESTMENT. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED HEREIN RESPECTING RATES OF RETURN OR OTHER PERFORMANCE DATA, WHETHER REALIZED OR UNREALIZED, IS QUALIFIED BY THE RELEVANT APPENDICES, FOOTNOTES, AND ENDNOTES HEREIN AND IS ON A GROSS RETURN BASIS BEFORE GIVING EFFECT TO MANAGEMENT FEES, CARRIED INTEREST, OTHER EXPENSES AND TAXES, WHICH, IF GIVEN EFFECT TO, WOULD REDUCE SUCH RETURNS AND, IN THE AGGREGATE, ARE EXPECTED TO BE SUBSTANTIAL. WHERE NET RETURNS ARE PROVIDED, SUCH RETURNS GIVE EFFECT TO MANAGEMENT FEES, CARRIED INTEREST AND OTHER EXPENSES. FURTHER, INFORMATION RESPECTING INVESTMENT PERFORMANCE IS BASED ON CERTAIN INVESTMENT POSITIONS SELECTED AS REPRESENTATIVE AND ANALOGOUS TO THE TARGETED INVESTMENT CATEGORIES FOR THE FUND. SUCH INVESTMENT PERFORMANCE INFORMATION IS NOT REPRESENTATIVE OF INVESTMENT PERFORMANCE BY NEW LEAF AND ITS AFFILIATED INVESTMENT MANAGERS IN OTHER INVESTMENT ACTIVITIES, WHICH HAVE NOT BEEN INCLUDED HEREIN. iii CONTROL NUMBER 257 - CONFIDENTIAL INVESTORS SHOULD CAREFULLY REVIEW THE INFORMATION CONTAINED IN THIS MEMORANDUM IN SECTION IX, “CERTAIN INVESTMENT CONSIDERATIONS,” AND SECTION X, “CERTAIN TAX AND ERISA CONSIDERATIONS.” INVESTMENT IN THE INTERESTS IS SUITABLE ONLY FOR SOPHISTICATED INVESTORS AND REQUIRES THE FINANCIAL ABILITY AND WILLINGNESS TO ACCEPT THE RISKS AND LACK OF LIQUIDITY INHERENT IN AN INVESTMENT IN THE INTERESTS. IN PARTICULAR, ONE OR MORE SUBSIDIARIES OF THE FUND OR OTHER ENTITIES IN WHICH THE FUND INVESTS DIRECTLY OR INDIRECTLY MAY QUALIFY AS “PASSIVE FOREIGN INVESTMENT COMPANIES” OR “CONTROLLED FOREIGN CORPORATIONS” FOR U.S. FEDERAL INCOME TAX PURPOSES, WHICH COULD RESULT IN ADVERSE TAX CONSEQUENCES TO INVESTORS THAT ARE U.S. PERSONS. THIS MEMORANDUM CONTAINS A SUMMARY OF THE PARTNERSHIP AGREEMENT AND CERTAIN OTHER DOCUMENTS REFERRED TO HEREIN. HOWEVER, THE SUMMARIES IN THIS MEMORANDUM DO NOT PURPORT TO BE COMPLETE AND ARE SUBJECT TO AND QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE ACTUAL TEXT OF THE RELEVANT DOCUMENT, COPIES OF WHICH WILL BE PROVIDED TO EACH PROSPECTIVE INVESTOR UPON REQUEST. EACH PROSPECTIVE INVESTOR SHOULD REVIEW THE PARTNERSHIP AGREEMENT, THE SUBSCRIPTION AGREEMENT AND SUCH OTHER DOCUMENTS FOR COMPLETE INFORMATION CONCERNING THE RIGHTS, PRIVILEGES AND OBLIGATIONS OF INVESTORS IN THE FUND. IN THE EVENT THAT THE DESCRIPTIONS OR TERMS OF THE MEMORANDUM ARE INCONSISTENT WITH OR CONTRARY TO THE DESCRIPTIONS OR TERMS OF THE PARTNERSHIP AGREEMENT, THE SUBSCRIPTION AGREEMENT OR OTHER DOCUMENTS, THE PARTNERSHIP AGREEMENT, THE SUBSCRIPTION AGREEMENT OR SUCH OTHER DOCUMENTS SHALL CONTROL. THE GENERAL PARTNER AND ITS AFFILIATES RESERVE THE RIGHT TO MODIFY THE TERMS OF THE OFFERING AND THE INTERESTS DESCRIBED IN THIS MEMORANDUM, AND THE INTERESTS ARE OFFERED SUBJECT TO THE GENERAL PARTNER’S ABILITY TO REJECT ANY COMMITMENT IN WHOLE OR IN PART. CERTAIN INFORMATION IN THIS MEMORANDUM HAS BEEN OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE ALTHOUGH NONE OF THE FUND, GENERAL PARTNER, THE MANAGEMENT COMPANY OR THEIR RESPECTIVE AFFILIATES GUARANTEE ITS ACCURACY, COMPLETENESS OR FAIRNESS. OPINIONS AND ESTIMATES MAY BE CHANGED WITHOUT NOTICE. THE FUND IS OFFERING INTERESTS TO U.S. PERSONS THAT ARE “QUALIFIED PURCHASERS” AS DEFINED IN THE INVESTMENT COMPANY ACT AND “ACCREDITED INVESTORS” AS DEFINED IN THE SECURITIES ACT. AN INVESTMENT IN THE FUND MAY BE SUBJECT TO INCREASING REGULATIONS AND GOVERNMENTAL OVERSIGHT, INCLUDING, FOR EXAMPLE, THE BANK SECRECY ACT AND THE USA PATRIOT ACT OF 2001, INCLUDING THEIR RESPECTIVE IMPLEMENTING REGULATIONS WHICH, AMONG OTHER THINGS, CONSTITUTE THE ANTI-MONEY LAUNDERING REGULATIONS. THERE CAN BE NO ASSURANCE THAT SUCH RULES WILL NOT REQUIRE VARIOUS INVESTOR DISCLOSURES TO, AMONG OTHERS, DOMESTIC AND FOREIGN GOVERNMENT AUTHORITIES. YOUR INVESTMENT WILL BE DENOMINATED IN UNITED STATES DOLLARS ($) AND, THEREFORE, WILL BE SUBJECT TO ANY FLUCTUATION IN THE RATE OF EXCHANGE BETWEEN U.S. DOLLARS ($) AND THE CURRENCY OF YOUR OWN JURISDICTION. SUCH FLUCTUATIONS MAY HAVE AN ADVERSE EFFECT ON THE VALUE, PRICE OR INCOME OF YOUR INVESTMENT. ALL SECURITIES INVESTMENTS RISK THE LOSS OF CAPITAL. NO GUARANTEE OR REPRESENTATION IS MADE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. AN INVESTMENT IN THE FUND IS SPECULATIVE AND INVOLVES CERTAIN CONSIDERATIONS AND iv CONTROL NUMBER 257 - CONFIDENTIAL CERTAIN INVESTMENT CONSIDERATIONS. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE FUND INTENDS TO CONDUCT ITS INVESTMENT ACTIVITIES THROUGH A NUMBER OF SUBSIDIARIES AND AFFILIATES THAT MAY BE ESTABLISHED FROM TIME TO TIME IN ONE OR MORE JURISDICTIONS, EACH OF WHICH MAY HAVE VARYING TAX EFFECTS ON THE FUND AND PARTNERS. AS SUCH THERE CAN BE NO ASSURANCE AS TO THE CONSEQUENCES OF SUCH ACTIVITIES. INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE RISK OF AN INVESTMENT IN THE FUND. SEE ALSO SECTION X, “CERTAIN TAX AND ERISA CONSIDERATIONS.” PROSPECTIVE INVESTORS SHOULD REVIEW THE OFFERING NOTICES BEGINNING IN SECTION XIV FOR INFORMATION RELATING TO THE OFFERING AND SALES OF THE INTERESTS TO INVESTORS IN VARIOUS STATES OF THE U.S. AS WELL AS CERTAIN NON-U.S. JURISDICTIONS. IN ACCORDANCE WITH U.S. TREASURY REGULATIONS GOVERNING PRACTICE BEFORE THE INTERNAL REVENUE SERVICE (CIRCULAR 230), THE FUND HEREBY INFORMS THE INVESTORS THAT (A) THE INFORMATION BELOW (OR OTHERWISE CONTAINED IN THIS DOCUMENT) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY THE INVESTORS FOR THE PURPOSE OF AVOIDING PENALTIES THAT THE U.S. INTERNAL REVENUE SERVICE MAY ATTEMPT TO IMPOSE ON AN INVESTOR, (B) THE INFORMATION WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTION OR MATTERS ADDRESSED BY THE WRITTEN INFORMATION AND (C) INVESTORS SHOULD SEEK TAX ADVICE BASED ON THEIR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR. Forward-Looking Statements CERTAIN INFORMATION CONTAINED IN THIS MEMORANDUM CONSTITUTES “FORWARD- LOOKING STATEMENTS,” WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS “MAY,” “WILL,” “SHOULD,” “EXPECT,” “ANTICIPATE,” “PROJECT,” “ESTIMATE,” “INTEND,” “CONTINUE,” OR “BELIEVE,” OR THE NEGATIVES THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. DUE TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH IN SECTION IX “CERTAIN INVESTMENT CONSIDERATIONS”, ACTUAL EVENTS OR RESULTS OR THE ACTUAL PERFORMANCE OF THE FUND MAY DIFFER MATERIALLY FROM THOSE REFLECTED OR CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS. WHILE ASSUMPTIONS UNDERLYING VARIOUS STATEMENTS AS TO FUTURE PERFORMANCE ARE BELIEVED TO BE REASONABLE IN NATURE, EXISTING AND PROSPECTIVE INVESTORS SHOULD MAKE THEIR OWN ASSESSMENTS AS TO SUCH ASSUMPTIONS AND THE ASSOCIATED RISKS, INCLUDING THE LIKELIHOOD OF THE FUND ACHIEVING CORRESPONDING RESULTS, ALL OF WHICH ARE SUBJECT TO RISKS AND UNCERTAINTIES MANY OF WHICH ARE BEYOND THE CONTROL OF THE FUND (SEE SECTION IX “CERTAIN INVESTMENT CONSIDERATIONS”). AS SUCH, NO ASSURANCE IS GIVEN AS TO THE REALIZATION OF ANY SUCH FUTURE PERFORMANCE. NO REPRESENTATION OR WARRANTY IS MADE AS TO FUTURE PERFORMANCE OR SUCH FORWARD-LOOKING STATEMENTS. UNLESS OTHERWISE INDICATED, INFORMATION CONTAINED HEREIN IS AS OF MARCH 31, 2014. THE DELIVERY OF THIS MEMORANDUM DOES NOT IMPLY THAT ANY OTHER INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO MARCH 31, 2014. None of New Leaf Ventures I, L.P., New Leaf Ventures II, L.P., NLV-III, the Management Company or any of their affiliates have any affiliation with Credit Suisse nor any its affiliates (collectively, “Credit Suisse”). Credit Suisse has not compiled, reviewed or participated in the preparation of any of the performance or other information contained in this Memorandum and assumes no responsibility therefor. Consequently, in no respects should Credit Suisse be considered to have approved or disapproved of any of the information set forth in this Memorandum. “Sprout”, “Sprout Group” and the symbols associated therewith are registered trademarks of Credit v CONTROL NUMBER 257 - CONFIDENTIAL Suisse. These trademarks remain the exclusive property of Credit Suisse. The Interests being offered by NLV-III are not sponsored, endorsed, promoted, offered or sold by Credit Suisse, and Credit Suisse makes no representation regarding the advisability of investing in NLV-III. vi CONTROL NUMBER 257 - CONFIDENTIAL TABLE OF CONTENTS I. Executive Summary ......................................................................................................................... 1 II. The Team ....................................................................................................................................... 11 III. Summary of Historical Investment Performance ................................................................. 18 IV. Opportunity In The Healthcare Sector ................................................................................... 24 V. New Leaf Venture Partners Investment Strategy .................................................................. 31 VI. Deal Sourcing & Investment Process ..................................................................................... 43 VII. Ongoing Relationship With Sprout Funds .......................................................................... 45 VIII. Summary of Partnership Terms ........................................................................................... 46 IX. Certain Investment Considerations ........................................................................................ 58 X. Certain Tax and ERISA Considerations ................................................................................... 73 XI. Certain Legal & Regulatory Considerations .......................................................................... 85 XII. Additional Information ............................................................................................................ 88 XIII. Appendices ............................................................................................................................... 89 XIV. Certain Offering Notices ...................................................................................................... 100 vii CONTROL NUMBER 257 - CONFIDENTIAL I. EXECUTIVE SUMMARY FUND OVERVIEW New Leaf Ventures III, L.P. (“NLV-III” or the “Fund”) is being formed by New Leaf Venture Partners, L.L.C. (“New Leaf” or the “Management Company”), an established and proven leader in health care technology investing. NLV-III will be the seventh private equity fund focused on venture and growth stage investments in healthcare and life sciences companies raised by the partners of New Leaf. NLV-III is the successor fund to New Leaf Ventures I, L.P. (“NLV-I”) and New Leaf Ventures II, L.P. (“NLV-II”), which raised capital commitments of $310 million and $450 million respectively. The New Leaf funds follow four Sprout Capital funds that included over $1.0 billion of investments in healthcare technology companies. 1 In total, the New Leaf team has invested over $1.6 billion and have generated one of the industry’s leading track records by consistently outperforming their peers in the healthcare venture capital market (based on Cambridge Associates benchmarks 2 ) and exceeding relevant public market indices by substantial margins. 3,4 The Fund will seek to invest in a diversified portfolio composed of an estimated 24 to 28 healthcare technology companies, most of which will be U.S. based and at the product development or commercialization phase. Fund investments will typically take the form of venture capital or growth capital transactions in private companies, or as structured transactions in small capitalization public companies. The Fund will establish meaningful ownership positions and in most cases will actively manage the investments with representation on the boards of directors. The Fund will seek to generate returns that significantly outperform relevant public market equity indices by creating a portfolio that optimally balances the risks, timelines, and capital intensity associated with developing and commercializing innovative healthcare technologies with the financial market realities that are the backdrop for a venture capital fund focused on this sector. The Fund is targeting aggregate capital commitments from limited partners of $375 million. THE NEW LEAF TEAM New Leaf is one of the most respected, successful, and established brands in healthcare technology investing, a reputation built over the last 18 years by a highly experienced and stable team of partners. NLV-III will be managed by this team of 6 senior partners, 5 of whom have worked together continuously for a decade or more. These partners bring a strong combination of significant and relevant industry operating experience and successful venture capital investment experience to NLV-III. The Managing Directors of NLV-III are Philippe Chambon MD PhD, Jeani Delagardelle, Ron Hunt, Vijay Lathi, and Liam Ratcliffe MD PhD. Philippe, Jeani, Ron, and Vijay have worked together for 15 years over six prior funds at New Leaf and the Sprout Group. Liam joined the 1 Sprout Group is a venture capital affiliate of Credit Suisse 2 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices” including endnote C in Appendix 4 regarding information provided by Cambridge Associates. 3 S&P500, S&P Healthcare, NASDAQ Composite, and Russell 3000. See endnote F in Appendix 4. 4 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices; Appendix 3” (regarding the PME+ methodology) including endnotes B, D, E and F in Appendix 4. 1 CONTROL NUMBER 257 - CONFIDENTIAL New Leaf team five years ago and has made significant contributions to the NLV-II portfolio. Jim Niedel MD PhD has worked with the team continuously for over twelve years and will continue to be a senior member of the NLV investment team for NLV-III, but will change his status to Venture Partner with the closing of NLV-III. In this role, Jim will work full-time with NLV during the NLV-III investment period in building and managing the NLV-III portfolio, and he will continue with full oversight and portfolio management responsibilities for NLV-I and NLV-II. With 80+ years of venture investing experience and decades of operating experience in the industries in which they invest, this 6 member senior team (the “Fund Managers”) brings highly relevant and complementary experience to bear on this Fund. This team of partners is further strengthened by a group of additional investment professionals who add highly relevant scientific and life sciences investment experience and have made significant contributions to the NLV-II portfolio. The New Leaf team is distinctive in that its members have played a leadership role in the healthcare venture capital industry over the last two decades. During this time, the Fund Managers have demonstrated the ability to source high quality investments at all stages, including start-ups, follow-on private investments, company restructurings, and structured public investments. The Fund Managers source deals through a range of activities that rely on their deep relationships in academia, industry, and the investment community (private and public), resulting in differentiated and, in many cases, proprietary deal flow. Once initial investments are made, the Fund Managers are focused on building value in technology based healthcare companies by creating strong management teams and then collaborating with them to develop, manage, and execute capital efficient business plans. Through these efforts, the Fund Managers have earned a reputation as value-added investors and have created some of the best performing portfolios of healthcare technology investments in the industry. LONG TERM TRACK RECORD Over an 18 year period and across the portfolios of 6 distinct venture funds focused on healthcare technology investments, the Fund Managers have delivered net performance that has consistently outperformed venture industry benchmarks and relevant public equity market indices 5,6 . The Fund Managers’ track record is notable for the following reasons: � Performance has been consistently top-quartile since the mid-1990s: NLV-I, NLV-II and the healthcare technology portfolios in the Sprout Capital funds have invested over $1.6 billion in healthcare technology companies since 1995. Over nearly two decades, returns have consistently exceeded Cambridge Associates’ top- 5 Except as otherwise expressly noted, all performance information contained herein, including rates of return, is as of March 31, 2014 and is unaudited. The performance information is based on the cumulative invested capital, cumulative cash dividends and realized and unrealized sales proceeds in portfolio companies. Where designated as “gross”, the performance information is presented on a gross basis with regard to expenses and does not reflect deductions for any management fees, the general partner’s carried interest or other expenses. Where designated as “net”, the performance information is presented on a net basis after giving effect to management fees, the general partner’s carried interest and other expenses. Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices” and the endnotes in Appendix 4 for a more detailed description of the performance of the NLV-I, NLV-II and the Sprout Funds. An investment in the Fund does not represent an interest in any indicated investment or any investment portfolio of any related or other investment fund, including any investment or fund managed by the Fund Managers. Disclosure of past performance herein is for informational purposes only and is not indicative of future results. 6 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices; Appendix 3” including endnote C (regarding information provided by Cambridge Associates). 2 CONTROL NUMBER 257 - CONFIDENTIAL quartile benchmarks for U.S. venture capital healthcare and/or U.S. total venture capital. 7 � Exceeded relevant public equity indices by substantial margins on all realized funds: Members of the New Leaf team invested $1.02 billion in the portfolios of healthcare technology investments in four Sprout Capital funds (Sprout Capital IX, L.P., Sprout Capital VIII, L.P., Sprout Capital VII, L.P. and Sprout Growth II, L.P.), and these are now fully realized (or near fully realized in the case of Sprout Capital IX, L.P.). The net annual IRR’s on the healthcare technology portfolios in these funds outperformed the S&P 500 (568 – 2,258 bps), S&P Healthcare (302 – 2,064 bps), NASDAQ Composite (451 – 2,125 bps), and the Russell 3000 (502 – 2,215 bps) using the Public Market Equivalent Plus (PME+) methodology 8 . Although PME+ methodology is most informative when used to analyze funds whose returns are mature, the PME+ methodology shows that NLV-I is outperforming these same indices, and shows encouraging results for NLV-II despite its relative immaturity. It is this consistently high level of return over an 18 year period, spanning several challenging investment cycles, that creates a truly unique track record within the venture capital sector. The chart below illustrates details of the gross and net performance by fund. Chart 1: Returns by Fund As of March 31, 2014 ($ in millions) Fund: Fund Size: Growth II HCT * $15M Fund Sprout VII HCT * $95M Fund Sprout VIII HCT * $147M Fund Sprout IX HCT * $690M Fund NLV-I $310M Fund NLV-II $450M Fund Paid-In Capital $15M $95M $147M $690M $303M $407M Vintage Year: (1993 - 2007) (1995 - 2011) (1998 - 2012) (2000) (2005) (2008) First Investment 1995 1995 1998 2000 2005 2008 Gross Fund Returns N Total Multiple N Realized Multiple 4.4x 4.4x 2.6x 2.6x 1.7x 1.7x 2.0x 2.2x 2.1x 1.7x 1.8x 2.0x D Total IRR D Realized IRR 44% 44% 19% 19% 10% 10% 15% 17% 19% 23% 30% 33% Net Fund Returns N Net Total Multiple D Net Total IRR * 3.69x * 28.9% * 2.17x * 12.0% * 1.49x * 6.0% * 1.66x * 9.3% 1.75x 12.0% 1.45x 16.7% Net Distributed / Paid-In Multiple F * 3.69x * 2.17x * 1.49x 1.55x * 0.51x 0.50x Net Distributed $s to LPs $56.3 $207.0 $218.7 $1,071.5 $154.7 $204.2 Interim Fund Liquidity Metrics G (Distributed + Public) / Paid-In Multiple -- -- -- 1.62x 0.74x 1.18x H (Distributed + Liquid Public) / Paid-In Multiple -- -- -- 1.58x 0.57x 0.75x IRR Outperformance Versus Public Indices ** PME+ (Basis Points over S&P 500 Healthcare Sector) +2,064 bps +302 bps +441 bps +776 bps +201 bps -187 bps ** PME+ (Basis Points over S&P 500) +2,258 bps +568 bps +587 bps +638 bps +496 bps +275 bps PME+ (Basis Points over Russell 3000) ** +2,215 bps +554 bps +502 bps +565 bps +446 bps +218 bps PME+ (Basis Points over Nasdaq Composite) ** +2,125 bps +554 bps +725 bps +451 bps +181 bps -21 bps NLV and Sprout fund data as of March 31, 2014. Sprout fund statistics computed based on healthcare portfolio within Sprout. * See Appendix 2 and endnotes A and E in Appendix 4. Based on synthetic funds with assumptions around recycling and fee structure. ** Based on Public Market Equivalent (PME+) methodology. See Appendix 3 and endnotes A, B, E and G in Appendix 4. Please Section XIII: “Appendices” for definitions of terms and/or methodology. 7 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices” and endnotes B (regarding public indices) and C (regarding information provided by Cambridge Associates) in Appendix 4. 8 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices”, Appendix 3 (regarding the PME+ methodology) and to endnotes B, D, E and F in Appendix 4. 3 CONTROL NUMBER 257 - CONFIDENTIAL For a full overview of investment performance, please refer to Section III: Summary of Historical Investment Performance. OPPORTUNITY IN THE HEALTHCARE SECTOR The Fund Managers believe a number of macro market factors have aligned to create attractive and lasting conditions for NLV-III’s targeted investment strategy in healthcare technology. These macro market factors include the following: � � � Strong and Sustained Growth in Global Healthcare Markets: Healthcare is one of the strongest and most dynamic markets within the global economy, with powerful demographic forces expected to drive growth at rates that will outpace GDP in major economies for at least the next decade. 9 This steady and sustained market growth creates a positive macro environment for investment in the sector. Significant Opportunity Created By Healthcare Reform & Restructuring: Through at least the next decade, the healthcare industry will be going through a period of significant restructuring as government, private insurance companies, and employers implement broad reform initiatives that seek to slow the growth of healthcare spending and limit the threat this burden creates to their long term fiscal viability. In the U.S., the federal government laid the foundation for these changes with two key pieces of legislation: the Patient Protection and Affordable Care Act (“ACA”) and the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), which are designed to reduce costs, improve quality, and significantly expand the percentage of the population with access to healthcare services. Importantly, a component of the legislation sets aside funding in the form of direct incentives to healthcare providers to be used to purchase technologies needed to meet the legislation’s requirements. As part of healthcare reform, government and private payers will need to migrate their traditional fee-for-service reimbursement models towards more value-centered approaches that reward outcomes, efficiency, and reduction in waste. Payers are approaching this goal by slashing costs in areas where viable lower cost solutions are available, while at the same time investing much more in the adoption of innovative new products and solutions which can improve outcomes and deliver quantifiable value, even when considering their additional costs and premium pricing. During this period of substantial change in the healthcare system, the Fund Managers expect to see an unusually large number of opportunities to fund companies developing innovative and impactful new therapeutic products as well as tools and applications that enable the implementation and realization of healthcare reform’s goals and objectives. Rapid Acceleration in Innovation: The Fund Managers believe an unprecedented period of medical innovation is emerging as decades of research into molecular mechanisms of disease is being translated into a steady stream of safer and more effective medicines and the biomarkers to guide their use. Importantly, these products are providing enormous improvements in both life expectancy and quality of life for patients with many serious, life-threatening diseases. Although they will come with premium pricing, these products can decrease the overall costs to the healthcare system by reducing reliance on equally costly, but less effective and more toxic treatments, by 9 CMS, OECD, Eurostat 4 CONTROL NUMBER 257 - CONFIDENTIAL reducing clinic visits and hospital admissions and by controlling or curing disease so that the patient can return to a fully productive life. At the same time as this revolution in the biological sciences is unfolding, exponential increases in the ability to manage, process, and store information at low cost are coming out of the information technology (IT) industry. This rapid technological progress in IT is allowing the creation of entirely new systems and applications that will fundamentally improve how healthcare systems monitor and manage patients across the full range of care settings. The Fund Managers believe the massive expansion and integration of capabilities occurring in biology and information technology is enabling a period of innovation in healthcare that sets a uniquely positive environment for the investment of NLV-III. � � More Favorable Regulatory Environment For New Drug Approvals: Increasing numbers of FDA drug approvals and recently passed U.S. regulatory legislation are reflective of a more favorable regulatory environment. The number of new drug approvals by FDA in both 2012 (39 NDAs) and 2013 (27 NDAs) trended meaningfully higher compared to the previous 6 years and versus historic averages 10 . In addition, the Food and Drug Administration Safety and Innovation Act (FDASIA) was signed into law on July 9, 2012, providing for additional tools to enable the FDA to promote innovation by streamlining parts of the approval process and improving communication and administrative processes between the agency and pharmaceutical and biotech companies. Chief among these new tools is the “Breakthrough Therapy” designation. This new designation helps the FDA assist drug developers to expedite the development and review of new drugs with preliminary clinical evidence that indicates the drug may offer a substantial improvement over available therapies for patients with serious or lifethreatening diseases. Overall, these initiatives and others, both in the U.S. and abroad (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 and risk in a critical aspect of drug development. Capital Markets And Industry Dynamics Are Favorable For New Investments & Exits: Since the most recent peak in fundraising in 2008, it has been estimated that the life sciences venture capital fundraising has contracted by 68%, from $7.8 billion in 2008 to $2.5 billion in 2012 11 . The Fund Managers believe that there has been a corresponding decline in the number of active venture capital firms investing into life sciences companies (especially earlier stage), resulting in fewer investors competing for new deals. At the same time, large and mid-sized biopharmaceutical companies have become increasingly dependent on development stage companies as the source of innovation and new products to supplement R&D pipelines and stimulate future growth. Most of these big companies are committing a large and growing portion of their R&D budgets to external facing search and evaluation efforts that have the goal of obtaining assets through high value mergers, acquisitions, and partnerships, which disproportionally benefit smaller, venture-backed, development stage companies. In the years ahead, we believe that this trend is likely to continue, and possibly accelerate, driven by expected patent expirations on commercial products and continued low productivity of pharma R&D. The Fund Managers believe these dynamics offer venture 10 Food and Drug Administration. Center For Drug Evaluation and Research 11 Dow Jones; Fenwick & West Analysis in 2012 Trends in Terms of Life Science Venture Financings 5 CONTROL NUMBER 257 - CONFIDENTIAL and growth stage investors attractive conditions for both new investments and exits from existing investments for the foreseeable future. The Fund Managers view this alignment of critical market factors as unprecedented. Each of these factors individually has a direct impact on the level of risk and the potential for returns in the healthcare technology sector. However, the positive trends in all of them occurring at the same time should create a uniquely positive environment to execute NLV-III’s targeted strategy within the sector. 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. The Fund’s primary focus will be on investments in the Biopharmaceutical and Information Convergence sectors, with a secondary focus on Medical Devices and Biological Research Tools & Infrastructure. Investments will be predominantly in the U.S., but could include a small number of investments in other parts of the world (e.g., Western Europe or Canada). The focus within each sector will be the following: Biopharmaceuticals: As in NLV-I and NLV-II, biopharmaceutical investments will be the core focus for NLV-III and will comprise approximately 50% - 60% of the Fund. The Fund will typically invest in development stage and commercial stage private companies and in publicly traded small capitalization companies where the investments will be made mostly through structured transactions. The portfolio will emphasize companies developing targeted therapeutics that address molecular mechanisms of disease, where validated biomarkers can be utilized to positively bias probabilities of success and reduce time and cost of development compared to historical averages. These companies exemplify some of the key characteristics the Fund Managers seek across the portfolio - namely large, unmet medical needs, strong science, well differentiated technologies and high quality pre-clinical and clinical development programs led by experienced management teams. The Fund Managers believe that NLV-III will have the opportunity to invest in compelling biopharmaceutical opportunities and that these will have attractive risk-return profiles for a number of reasons, including the following: � � For the past decade, biopharmaceutical companies have been shifting their research and development focus towards products that target mechanisms of disease at the molecular level. Clinical programs for these types of products are typically smaller, more capital efficient and have higher probabilities of success. These improvements are achievable because precise biomarker testing enables a focus on only those patients where the specific molecular mechanism is known to play an important role in the disease process. By including only these patients in the clinical programs for these targeted products, the probability of detecting critical efficacy signals is significantly increased, even with relatively small numbers of patients; Targeted development programs are benefiting from an improving regulatory environment, as the FDA is demonstrating clear interest in working constructively with companies to bring these types of high-impact therapeutics to market more quickly and efficiently. This spirit of cooperation was covered thoughtfully in a recent New England 6 CONTROL NUMBER 257 - CONFIDENTIAL Journal of Medicine editorial (November 2013), where Janet Woodcock, MD, the FDA’s Director of the Center for Drug Evaluation and Research and other senior FDA staff members as co-authors, discussed the FDA’s new breakthrough therapy designation that can be granted to expedite the review and approval of new therapies to treat people with serious or life threatening illnesses where inadequate treatment options exist. They state that “The genesis of the new designation can be traced to several emerging trends in drug discovery and development. Most notable is the rise of molecularly targeted therapies, often paired with companion diagnostics”. The editorial goes on to say that “Once a drug is designated as a breakthrough therapy, the FDA commits to working particularly closely with the drug sponsor to devise the most efficient pathway for generating additional evidence needed about safety and efficacy”. The breakthrough therapy designation was created under FDASIA in 2012, and since that time 26 breakthrough therapy designations have been granted on 80 requests; 12 � � The pharmaceutical industry’s commercial model is also improving with the shift in focus to targeted therapeutics, as these therapies can: (a) provide significant improvements in efficacy and safety over current standards of care; (b) offer important clinical benefits in terms of increased life expectancy and improved quality of life; (c) positively impact high morbidity diseases, many of which have primarily expensive, but inadequate treatments available (e.g., cancer and autoimmune diseases); and (d) generate compelling economic benefits to payers, even when they carry premium pricing; Finally, large and mid-sized biopharmaceutical companies have recognized the inefficiency of their internal R&D efforts and have deemphasized many of their own expensive, high risk, “blockbuster” programs. Increasingly, these companies are “externalizing” a large portion of their R&D activity by acquiring, licensing, or partnering with smaller biotech companies that are focused on developing the novel targeted therapeutics mentioned above. The Fund Managers believe the net result for investors is an improving risk-return equation for biopharmaceutical investments, which should translate into higher returns in the sector. Information Convergence: Information convergence investments will be the second core focus for NLV-III, expected to comprise up to 25% of the Fund. Building on the leadership established during the NLV-II investment period along with significant experience from past Sprout funds, the Fund Managers will invest NLV-III in companies seeking to improve efficiency and reduce overall costs to the healthcare system through the generation, analysis, and application of information from research to diagnosis and delivery of care. Investments in this sector will be at the commercial stage at the time of initial investment, or will be expected to reach the commercial stage during the projected timeline of the investment. Central to this opportunity is the acute structural deficit in the U.S., with healthcare liabilities the single largest contributor and the healthcare reform initiatives that were designed in part to address these critical fiscal issues. Broad scale deployment of new information technology will 12 New England Journal of Medicine, November 14, 2013: Expediting Drug Development – The FDA’s New “Breakthrough Therapy” Designation 7 CONTROL NUMBER 257 - CONFIDENTIAL play a critical role in enabling the necessary structural changes to the healthcare system. The HITECH Act created a $25.9 billion 13 Federal Government funded catalyst for the adoption of information technology in healthcare in the U.S., and this is stimulating significant investment in upgrading the information infrastructure at the provider level. This industry-wide technology upgrade moves the vast majority of providers onto electronic systems, which offers immediate efficiencies to their businesses and lays the foundation for the adoption of new targeted information based applications in the future. These investments and legislative actions by the U.S. government, and the subsequent response by insurers, providers and patients, are driving a dramatic increase in spending on healthcare information technology (HIT), benefitting the companies providing technology solutions that reduce cost and waste, drive efficiency, and improve the quality of patient care. The opportunity in information convergence also benefits significantly from the technologies and infrastructure that have been developed and implemented outside of healthcare, such as cloud computing, wireless communications, web-delivered software-as-a-service, and sensor technology. Small companies drawing heavily off these existing technologies are able to optimize their product through rapid iterations driven by user feedback, thereby reducing risk and capital requirements, and leading to more predictable timelines, similar to what has been seen in the broader information technology arena. The Fund Managers believe that smaller, focused companies will play a key role in developing and deploying information based products that address discrete problems within the U.S. healthcare market, and that a large number of these will be compelling investment opportunities for NLV-III. Medical Devices: Given the Fund Managers’ view that the operating and exit environment for companies in this sector will be more challenging due to increased regulatory and reimbursement uncertainty, NLV-III will have somewhat less exposure to this sector than previous funds. The Fund will focus on 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. Importantly, the focus will be on opportunities that 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 investment opportunities with later stage risk profiles that can be expected to thrive in the current environment. 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. Biological Research Tools & Infrastructure: The rapid growth of this sector is being fuelled by many of the same biomedical advances that are impacting health care more broadly, such as personalized medicine and DNA sequencing. Smaller companies have always been a prolific source of innovative new research tools, leading to high M&A interest among the large commercial players in this sector. Moreover, because new reagents and research tools are not subject to the risks of clinical trials, regulatory approvals or payer reimbursement it is possible to build high-gross margins businesses that reach break-even on manageable timelines and budgets. The Fund will approach this sector opportunistically and will seek to invest in a small 13 U.S. Department of Health and Human Services. Actuarial estimate as of January 2012. 8 CONTROL NUMBER 257 - CONFIDENTIAL number of commercial stage companies with novel and clearly differentiated products targeting defined and established high growth market segments. DEAL FLOW AND INVESTMENT PROCESS The Fund Managers have a proactive approach to deal sourcing, which targets both private and public opportunities. The established and proven sourcing activities rely on diverse networks of deal sources that have been built and cultivated over two decades and focus on identifying compelling healthcare technology investment opportunities, at attractive time points for investment. These efforts balance the inherent attractiveness of an innovative technology with the selection of the appropriate investment stage, offering an optimal risk-adjusted return potential and multiple paths to realization and liquidity. The Fund Managers have refined and successfully executed this investment process over many years, and it is an integral part of the firm’s culture. New Leaf’s investment philosophy and process emphasize a team approach to maximizing investment returns, focusing the most appropriate resources within the firm to deal sourcing, rigorous investment analysis, deep involvement with portfolio companies and active management of financings and exits. DISTINCTIVE FEATURES OF NEW LEAF Over the last two decades, New Leaf has established itself as one of the premier brands in healthcare technology investing as a result of a powerful combination of: � � � � � one of the most established and stable teams in the venture capital industry with deep and complementary operating and investing experience; a long term track record across portfolios of healthcare technology investments in six distinct venture funds and over $1.6 billion in total invested capital that has demonstrated consistent outperformance versus venture industry peers and relevant public market indices (S&P 500, S&P Healthcare, NASDAQ Composite, and Russell 3000) 14 ; an evolving investment strategy, focused on a diversified portfolio of investments across sectors, stages (start-ups to growth equity), and therapeutic areas that has proven to generate returns through both up and down phases of macro investment cycles; a hands-on approach to working with management teams as board members to optimize corporate strategy, develop and refine clinical, regulatory, and operating plans, recruit world-class talent, and drive business development activities that lead to valuemaximizing follow-on financings, partnerships, and M&A transactions; and a reputation for intellectual rigor, hard work, value added contributions, and constructive collaboration that makes New Leaf a sought after lead investor by outstanding entrepreneurs and a preferred co-investor amongst a broad range of top quality investors. 14 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices” including endnotes B, C, F and G in Appendix 4. 9 CONTROL NUMBER 257 - CONFIDENTIAL NLV-III Investment Opportunity The objective of NLV-III is to invest in a portfolio of healthcare technology companies that offer attractive risk-adjusted returns. The companies that comprise the portfolio will be selected and managed by a team of highly experienced senior partners who have developed and proven their investment process over many years and multiple funds. The investment strategy for NLV-III is similar to the strategies pursued in prior funds, in that it will have a core focus on biopharmaceutical investments with a balance of investments across other healthcare technology sectors. Given the strength and stability of the team, the consistency and the depth of the track record, and the positive market forces and investment conditions that are expected to be in place during the life of the Fund, the Fund Managers believe NLV-III offers investors an opportunity for attractive returns. 10 CONTROL NUMBER 257 - CONFIDENTIAL II. THE TEAM NLV-III will be managed by the New Leaf team, which currently manages NLV-I, NLV-II, and provides sub-advisory services managing the remaining healthcare technology investments in the Sprout Funds. The team of six senior partners, five of whom have worked together continuously for over a decade, stands out in the industry for its depth of accomplishments, track record of consistent investment success, and its organizational stability. Each of the senior partners has a strong combination of significant and relevant industry operating experience and venture capital investment experience from one or more of the Fund’s targeted sectors. The New Leaf team is further strengthened by a group of experienced investment professionals who add highly relevant scientific backgrounds and investment experience. The following timeline shows the history and progression of the New Leaf team: History and Progression of New Leaf Team SENIOR TEAM Philippe Chambon, MD, Ph.D., (55), Managing Director, helped found New Leaf in 2005. Philippe joined Sprout in 1995 and since that time has been an active investor in all three sectors of interest for NLV-III. His investments have spanned all stages including six start ups and several later stage growth equity investments and one buy-out. Philippe is currently focused on New Leaf’s Information Convergence sector and late stage biopharmaceutical investments. Philippe is currently on the boards of directors of Treato, Truveris, Karos Pharmaceuticals, Principia BioPharma and VaxInnate. He was previously on the boards of NxStage Medical (NASDAQ: NXTM), Auxilium (NASDAQ: AUXL), ePocrates (NASDAQ: EPOC, acquired by athenahealth), Nuvelo (NASDAQ: NUVO), Sapient Health Network (acquired by WebMD), Spotfire (acquired by Tibco Software), and Combichem (acquired by DuPont). He also led our investment in, and was a board observer at, Audax Health (acquired by UnitedHealth/Optum). Immediately prior to joining Sprout, Philippe was a Manager in the healthcare practice of the Boston Consulting Group. In that capacity, he managed strategy and business re-engineering assignments with clients in the pharmaceutical, biotech and insurance industry. Previously, Philippe was an executive with Sandoz Pharmaceutical for seven years, where he built and led an organization responsible for late stage clinical project management, portfolio management, and pre-marketing and pharmacoeconomics activities. He conducted graduate research in 11 CONTROL NUMBER 257 - CONFIDENTIAL molecular immunology at The Pasteur Institute and earned an M.D. and Ph.D. from the University of Paris, and an M.B.A. from Columbia University. Jeani Delagardelle, (57), Managing Director, helped found New Leaf in 2005. She joined Sprout in 2000. At New Leaf, Jeani leads the Medical Device investment effort. Jeani is currently on the boards of directors of Access Closure, Altura, Cardiokinetix, Direct Flow Medical, Intrinsic Therapeutics, ReShape Medical, and Spiracur. She was previously on the boards of directors of Interlace (NLV-I company acquired by Hologic), Epicor (acquired by St. Jude), Visiogen (acquired by Abbott), PercuSurge (acquired by Medtronic), and NxStage Medical (NASDAQ: NXTM). Prior to joining the healthcare investment team at Sprout, Jeani was a General Partner at Weiss, Peck & Greer Venture Partners (“WPGVP”) where she focused on healthcare investments. Before joining the venture industry, Jeani spent 16 years in senior marketing and general management positions in both the medical device and pharmaceutical industries. She was Vice President of Global Marketing for Target Therapeutics, held several senior management positions within the Medi-tech division of Boston Scientific, and served as the Director of Business operations for Roche Pharmaceuticals. Jeani earned an A.B. in Clinical Psychology from Occidental College and an M.B.A. from the University of California at Irvine. Ron Hunt, (49), Managing Director, joined Sprout in 1998 and helped found New Leaf in 2005. He has played significant role in the firm’s investment activities in later stage biopharmaceuticals and has also contributed to the activities in each of the other sectors. Ron is currently on the boards of Durata Therapeutics (NASDAQ: DRTX), IlluminOss Medical, Relypsa (NASDAQ: RLYP), and SpineWave. Ron was previously on the boards of Cerexa (NLV-I company acquired by Forest Laboratories), Stromedix, Inc. (NLV-I company acquired by Biogen Idec), Aspreva Pharmaceuticals (NASDAQ: ASPV, acquired by Galenica, Inc.), Phase Forward (NASDAQ: PFWD, acquired by Oracle), and Pathology Partners (acquired by Caris Group). Before joining Sprout, he spent a combined 12 years in the pharmaceutical industry in operating roles and as a management consultant with The Healthcare Group (a division of the Interpublic Group of Companies) and Coopers & Lybrand Consulting. He gained eight years of operating experience in various commercial roles working for SmithKline Beecham and Johnson & Johnson. Ron earned a B.S. from Cornell University and an M.B.A. from The Wharton School of the University of Pennsylvania. Vijay Lathi, (41), Managing Director, helped found New Leaf in 2005 and joined Sprout in 1998. Vijay’s activities are focused primarily on information convergence, although historically he has been involved in investments across all sectors. He is currently on the boards of directors of AwarePoint, Oxford Immunotech (NASDAQ: OXFP), iRhythm Technologies, Kit Check, TigerText and XDx, while maintaining board observer status with Labcyte. Vijay was previously on the boards of Advanced Cell Diagnostics, Ilypsa (acquired by Amgen) and Relypsa (NASDAQ: RLYP). Prior to joining Sprout, Vijay spent one year as an analyst in the healthcare venture capital group at Robertson Stephens where he reviewed investments spanning medical devices, therapeutics and healthcare information technology. Prior to Robertson Stephens, Vijay spent approximately one and a half years as an analyst at Cornerstone Research, a business consulting firm focused on financial and econometric analysis. He earned an M.S. in Chemical Engineering from Stanford University and a B.S. in Chemical Engineering from MIT, with a focus on applications of engineering to the life sciences. 12 CONTROL NUMBER 257 - CONFIDENTIAL James Niedel, MD, Ph.D., (70), Venture Partner, joined Sprout in May 2002 and helped found New Leaf in 2005. Jim will change his status to Venture Partner in NLV-III with the closing of the new fund. In this role, Jim will work full-time as a senior member of the NLV investment team working on new investments, and he will continue with full oversight and portfolio management responsibilities for NLV-I and NLV-II. Jim is currently on the boards of directors of Chimerix (NASDAQ: CMRX, former Chairman) and Tioga. He was previously on the boards of Intarcia Therapuetics (now currently a Board observer), Sirna Therapeutics (NASDAQ: RNAI, acquired by Merck in 2006 for $1.1 billion), where he served as Chairman; Oriel Therapeutics (acquired by Novartis in 2010), where he served as Executive Chairman, and Pearl Therapeutics (acquired by AstraZeneca in 2012). Prior to joining Sprout, Jim was Chief Science and Technology Officer for GlaxoSmithKline (“GSK”). From 1995 to 2001, he led Global Research and Development, Information Technology and Product Strategy and was a member of the board of directors of Glaxo Wellcome plc. From 1988 to 1995 Jim was Vice President, Research and Senior Vice-President R & D for the U.S. subsidiary of Glaxo. During his nearly 13 years with the Company, he oversaw the discovery, development and/or registration of over 20 products marketed by GSK, including those for: HIV, hepatitis B, asthma/COPD, migraine, BPH, irritable bowel syndrome, smoking cessation, depression, chemotherapy-induced nausea and vomiting, breast cancer, herpes and malaria. Prior to GSK, Jim was Professor of Medicine, Chief of the Division of Clinical Pharmacology and Principal Investigator on studies of mechanisms of cancer and inflammation at Duke Medical School, where he had completed an Internal Medicine residency and a Hematology-Medical Oncology fellowship. Jim received his M.D. and Ph.D. (Biochemistry) degrees from the University of Miami, was selected a Searle Scholar and is a Fellow of the Royal College of Physicians (London). Liam Ratcliffe, MD, Ph.D., (50), Managing Director, joined New Leaf in September 2008 and concentrates on biopharmaceutical investing. He is currently on the boards of directors of Array BioPharma (NASDAQ: ARRY), Neuronetics, Karus Therapeutics, Afferent, Calchan and Convergence, the latter three investments resulting from spin-outs from Roche (Afferent) and GSK (Calchan & Convergence), respectively. Prior to joining New Leaf, Liam previously served as Senior Vice President and Development Head for Pfizer Neuroscience, as well as Worldwide Head of Clinical Research and Development. Additional positions during his 12 years at Pfizer included Vice President of Exploratory Development for the Mid West region, and Head of Experimental Medicine at Pfizer’s Sandwich, UK Laboratories. As Head of Neurosciences, Liam was responsible for the development of several successful late-stage projects and marketed products, including Lyrica, Chantix and Geodon. In previous roles, he gained extensive experience in early drug development and translational research across multiple therapeutic areas, including inflammation, pain, cardiovascular disease, infectious diseases and genitorurinary medicine. Liam began his career in the pharmaceutical industry in a medical marketing role at Roche in South Africa. He received his M.D. degree and Ph.D. degree in immunology from the University of Cape Town and his M.B.A. degree from the University of Michigan. Liam completed his internal medicine training and fellowship in Immunology at Groote Schuur Hospital and associated teaching hospitals in Cape Town, South Africa. 13 CONTROL NUMBER 257 - CONFIDENTIAL OTHER INVESTMENT PROFESSIONALS Kathy LaPorte, (52), Venture Partner, is an angel investor in the Digital Health space focusing on evaluating and mentoring start-ups developing digital technology solutions for healthcare consumers, providers, payers and the pharmaceutical/medical device industries. Kathy is affiliated with Health Tech Capital and is a Venture Partner with New Leaf, collaborating on sourcing of opportunities with an emphasis on the Information Convergence sector. Kathy was one of the founders of New Leaf upon its spin out from the Sprout Group in 2005. Kathy joined the Sprout Group in 1993 and became a General Partner in 1994. Between 1987 and 1993, she was a Principal at Asset Management Company, a venture capital firm focused on early stage investments. Kathy received an M.B.A. from Stanford University Graduate School of Business (Arjay Miller Scholar), and a B.S., summa cum laude, Phi Beta Kappa from Yale University. Mark Charest, Ph.D., (36), Portfolio Manager, joined New Leaf in 2012. Previously, Mark was an Associate and Kauffman Fellow at Panorama Capital (2010-2012) focused on life sciences investments. Mark previously worked as a Consultant at ZS Associates (2009) and as an Associate at Great Point Partners (2007-2009), a healthcare-focused public and private equity investment firm. Prior to that, Mark held an operating role as a Medicinal Chemistry Lab Manager at Novartis Institutes for BioMedical Research (2004-2007). Mark received his Ph.D. in Chemistry and Chemical Biology from Harvard University as a National Science Foundation Graduate Research Fellow. Mike Dybbs, Ph.D., (39), Principal, joined New Leaf in 2009 and was promoted to Principal in 2012. Mike is currently on the boards of directors of Advanced Cellular Diagnostics and Versartis. Prior to joining New Leaf, Mike was a Principal at the Boston Consulting Group (BCG) where he was a core member of their Health Care practice. Mike graduated magna cum laude from Harvard University with an AB in biochemical sciences and received his Ph.D. in molecular biology and genetics from UC Berkeley, where he was awarded a Howard Hughes Medical Institute fellowship. His research had been published in peer-reviewed journals, including Neuron, Science and Nature. Eric Kim, (28), Associate, joined New Leaf in December 2013. From 2011 through 2013, Eric was a Private Equity Associate at Francisco Partners, where he focused on diligence and company oversight efforts on the firm’s healthcare information technology portfolio. Prior to joining Francisco Partners, Eric worked for three years at McKinsey & Company as a Senior Business Analyst in their Corporate Finance Practice. Eric received his dual B.A. in Mathematical Methods in the Social Sciences and Economics from Northwestern University. Isaac Manke, Ph.D., (37), Portfolio Manager, joined New Leaf in 2009 as an Associate and was promoted to Public Investment Director in 2012. Prior to joining New Leaf, Isaac was an Associate in the Global Biotechnology Equity Research group at Sanford C. Bernstein. Previously, Isaac worked as an Associate in the Biotechnology Equity Research group at Deutsche Bank and was a Senior Analyst at Health Advances, a biopharmaceutical and medical device strategy consulting firm. Isaac received a B.A. in Biology and a B.A. in Chemistry at Minnesota State University (Moorhead), and a Ph.D. in Biophysical Chemistry and Molecular Structure at the Massachusetts Institute of Technology (MIT). Isaac’s discoveries led to several publications in top journals, including Science and Cell, and were selected by Science as one of 14 CONTROL NUMBER 257 - CONFIDENTIAL the “2003: Signaling Breakthroughs of the Year”. These discoveries also resulted in four issued patents. FINANCE AND OPERATIONS Craig L. Slutzkin, (39), is Chief Financial Officer and manages the back office, compliance and administrative functions for New Leaf. Craig joined Sprout as Vice President and the head of its back office operations in August 2002 and transitioned to New Leaf at the time of the spinout. Prior to joining Sprout, he spent over seven years in the audit and assurance practices of Arthur Andersen and Ernst & Young in New York, attaining the position of Senior Manager. While at Andersen and Ernst & Young, clientele included various multi-strategy private equity and venture capital fund firms as well as top tier investment banks. Craig received his M.B.A. in finance from Columbia Business School and received a B.A. in Accounting and Information Systems from Queens College. He is a certified public accountant and a member of the American Institute of Certified Public Accountants. INDUSTRY ADVISORS The Fund Managers work closely with industry professionals who are experts in New Leaf’s fields of interest and are willing to work closely with the Fund Managers on an as needed basis to provide their perspectives on topics and issues that are relevant to due diligence on new investments, on-going issues that arise in the management of existing portfolio companies, and longer term fund strategy. New Leaf’s advisors are all prominent in their fields, and hold senior positions within leading corporations and academic institutions. These experts provide New Leaf and its portfolio companies with their own invaluable insights, but equally importantly open up their networks of contacts in ways that vastly expand and strengthen New Leaf’s own network. Therapeutics Advisors New Leaf works with a broad range of industry advisors to support its investment activities in therapeutics. The Fund Managers work on an as needed basis with a large group of advisors that includes contacts from industry and academia that each of the investment professionals within the firm has cultivated through their own professional and academic experiences. The Fund Managers solicit input from advisors on an as needed basis to get valuable input on specific scientific, clinical, and commercial issues and topics relevant to diligence on new investment opportunities, and to the management of existing portfolio companies. This network gives New Leaf timely and valuable access to some of the world’s leading academic scientists and experienced practitioners/executives from industry, and brings their subject matter expertise to bear across the myriad of topics that are critical to New Leaf’s decision making in the therapeutics sectors. Because of the breadth of topics where this type of outside input is required, and due to the fact that the science and technology is evolving rapidly in most of these fields, New Leaf has not created a formal advisory board for therapeutics Information Convergence Advisory Board The Fund Managers have assembled an additional advisory board to support activities in Information Convergence. This group of advisors has a breadth of experience in the development and deployment of new information technologies that are reshaping healthcare. 15 CONTROL NUMBER 257 - CONFIDENTIAL Their collective experience is from industry, including leading large and entrepreneurial corporations, as well as from the provider side, including senior administration of one of the world’s most prominent and forward-thinking teaching hospitals. These professionals include the following: John Halamka, M.D., is a physician and technology leader who focuses on electronic health records as well as secure sharing of healthcare data for care coordination, population health, and quality improvement. He is currently Chief Information Officer of Beth Israel Deaconess Medical Center and also a practicing Emergency Physician and Professor at Harvard Medical School. He is current Chairman of the New England Healthcare Exchange Network (NEHEN), co-chair of the national HIT Standards Committee, and co-Chair of the Massachusetts HIT Advisory Committee. Lee Newcomer, M.D., Senior Vice President, UnitedHealthcare with strategic responsibility for Oncology, Genetics and Women’s Health. Dr. Newcomer returned to UnitedHealthcare in 2006 to focus on combining clinical, financial and administrative incentives for improved and affordable cancer care. From 1991 to 2000, Dr. Newcomer was the chief medical officer at UnitedHealthcare. He is a board certified medical oncologist and former chairman of Park Nicollet Health Services and was previously a medical director for CIGNA Health Care of Kansas City. Dr. Newcomer was a founding executive of Vivius, a consumer directed venture that allowed consumers to create their own personalized health plans. Stephen Oesterle, M.D., Senior Vice President for Medicine and Technology, Medtronic Inc. Dr. Oesterle is focused on the formation of technological strategies and continued development of relationships with the world’s medical communities. He previously served as an Associate Professor of Medicine at the Harvard University Medical School and as Director of Invasive Cardiology Services at Massachusetts General Hospital. Marcia Radosevich, Founder and CEO of HPR, a HCIT company that was sold to McKesson. Her prior experience was with Managed Health Care Services, The Travelers Insurance Companies, and Health Data Institute (a healthcare consulting firm). Anand Shroff, Chief Technology and Product Officer and Co-Founder, Health Fidelity, Inc. Prior to joining Health Fidelity, Mr. Shroff was VP of HIE and EHR Products at Optum (a division of UnitedHealthcare). He came to Optum by way of acquisition of Axolotl Corporation, a leader in the health information exchange (HIE) space. Anand was also a founding member of the Oracle Healthcare team, and was responsible for Oracle’s healthcare product portfolio that included healthcare analytics, clinical data management, and terminology mediation solutions. David Watson, Vice President of Healthcare Product Strategy, Oracle. Previously he was the Chief Operating Officer of MedeAnalytics, and prior to that was Senior Vice President and Chief Technology Officer of Kaiser Permanente. Prior to Kaiser, Mr. Watson served in a variety of executive IT roles at Baxter Healthcare, Allergan, Northrup Grumman, and Mattel. He is a senior HCIT executive with 25 years of experience delivering client facing solutions in the broad areas of application development, infrastructure engineering, business consulting, strategy, architecture and operations. 16 CONTROL NUMBER 257 - CONFIDENTIAL David Whittlinger, Executive Director, New York eHealth Collaborative. Prior to working with NYeC, served as the Director of Healthcare Device Standards and Interoperability for the Intel Corporation in its Digital Health Group. Mr. Whitlinger was responsible for Intel’s healthcare device interoperability strategies and standards development. He has also led a large, crossindustry consortium, the Continua Health Alliance, focused on the establishment of an ecosystem of interoperable, personal telehealth systems. Prior to establishing the Healthcare Device Standards Group, he worked on a wide variety of wireless standards within Intel. 17 CONTROL NUMBER 257 - CONFIDENTIAL III. SUMMARY OF HISTORICAL INVESTMENT PERFORMANCE The Fund Managers’ long term track record in healthcare technology investing clearly establishes the team as one of the most successful in the venture capital industry over the last two decades. Over an 18 year period and across the portfolios of six distinct venture funds focused on healthcare technology investments, the Fund Managers have delivered net performance that has consistently outperformed venture industry benchmarks and relevant public equity market indices 15,16 . The Fund Managers’ track record is notable for the following reasons: � Performance has been consistently top-quartile since the mid-1990s: NLV-I, NLV-II and the healthcare technology portfolios in the Sprout Capital funds have invested over $1.6 billion in healthcare technology companies since 1995. Over this time, The Fund Managers’ returns have consistently exceeded Cambridge Associates’ top-quartile benchmarks for U.S. venture capital healthcare and/or U.S. total venture capital. 16 � Exceeded relevant public equity indices by substantial margins on all realized funds: The Fund Managers invested $1.02 billion in the portfolios of healthcare technology investments in four Sprout Capital funds (Sprout Capital IX, L.P., Sprout Capital VIII, L.P., Sprout Capital VII, L.P. and Sprout Growth II, L.P.), and these are now fully realized (or near fully realized in the case of Sprout Capital IX). The net annual IRR’s on these four funds outperformed the S&P 500 (568 – 2,259 bps), S&P Healthcare (302 – 2,066 bps), NASDAQ Composite (451 – 2,125 bps), and the Russell 3000 (502 – 2,215 bps) using the Public Market Equivalent Plus (PME+) methodology 17 . Although PME+ methodology is most informative when used to analyze funds whose returns are mature, the PME+ methodology shows that NLV-I is outperforming these same indices, and shows encouraging results for NLV-II despite its relative immaturity. It is this consistently high level of return over an 18 year period, spanning several challenging investment cycles, that creates a truly unique track record within the venture capital sector. INVESTMENT PERFORMANCE WITHIN INDIVIDUAL FUNDS The New Leaf team has invested over $1.67 billion in 126 healthcare technology companies within 6 distinct funds since 1995. These funds included NLV-I and NLV-II and the healthcare technology investments in four Sprout Capital funds (Sprout Capital IX, L.P., Sprout Capital VIII, L.P., Sprout Capital VII, L.P., and Sprout Growth II, L.P., together the “Sprout Funds”). In aggregate, the team has exited or partially exited investments in 92 companies, generating gross realizations of over $2.6 billion and a gross realized cash-on-cash return and internal rate of return (IRR) of 2.1x and 17%, respectively. Corresponding net returns on the portfolios in each of these funds are provided in Appendix 2. 15 Please see Section XIII: “Appendices” and the endnotes in Appendix 4. Disclosure of past performance herein is for informational purposes only and is not indicative of future results. 16 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices” and endnote C (regarding information provided by Cambridge Associates) in Appendix 4. 17 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices; Appendix 3” (regarding the PME+ methodology) and endnotes B, D E and F in Appendix 4. 18 CONTROL NUMBER 257 - CONFIDENTIAL New Leaf Funds NLV-I has capital commitments of $310 million, and the Fund Managers began investing in mid-2005. The fund completed its new investment period in early 2008 with a portfolio of 22 companies. NLV-I has fully realized 13 investments, and there are nine active investments in companies and contingent value rights (CVRs) from three of the realized investments remaining in the fund. NLV-I is a relatively young fund, with the majority of the cost basis still at work, and to date has generated a gross realized IRR of 23%, and a gross total IRR of 19%. NLV-I has a net total multiple of 1.76x and a net IRR of 12.1%. NLV-I has a distributed to paid-in-capital ratio of 0.51x, and the Fund Managers believe the fund has significant future returns potential from the remaining active investments in the portfolio as well as from potential payments from CVRs on three realized investments. NLV-I is in the top quartile of funds tracked by Cambridge Associates for U.S. healthcare venture capital in the 2005 vintage year. NLV-II has capital commitments of $450 million, and the Fund Managers began investing in 2008. The fund will complete its new investment period by mid-2014. NLV-II currently has a portfolio consisting of 35 companies. NLV-II has realized or partially realized 13 investments, and there are 22 other active investments and a small public portfolio remaining in the fund. NLV-II is still an immature fund in terms of level of realizations, and to date has generated a gross realized IRR of 34%, and a gross total IRR of 30%. NLV-II has a net total multiple of 1.44x and a net IRR of 16.4%. NLV-II has a distributed to paid-in-capital ratio of 0.50x, and the Fund Managers believe the fund has significant future returns potential from the remaining active investments in the portfolio. The Fund Managers believe that NLV-II has unusually positive liquidity characteristics for a life sciences focused venture capital fund of its age, with just over 65% of the fund’s current carrying value in the form of public securities (as of March 31, 2014). NLV-II’s current performance places the fund in the top quartile of funds tracked by Cambridge Associates for U.S. venture capital in the 2008 vintage year. Additionally, over the investment period of NLV-I, the net annual IRR is outperforming relevant public market indices when compared on a public market equivalent basis (PME+). NLV-II’s net annual IRR shows encouraging results thus far for a relatively immature fund 18 . The range of outperformance for each of these portfolios versus the S&P 500, S&P Healthcare, NASDAQ Composite, and the Russell 3000 through March 31, 2014 is the following: Net IRR Outperformance vs. Public Indices (PME+ Methodology) S&P 500 S&P Healthcare NASDAQ Composite Russell 3000 New Leaf Ventures I, L.P. +496 bps +201 bps +181 bps +446 bps New Leaf Ventures II, L.P. +275 bps -187 bps -21 bps +218 bps 18 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices; Appendix 3” and the endnotes thereto (regarding the PME+ methodology). 19 CONTROL NUMBER 257 - CONFIDENTIAL Sprout Capital Healthcare Technology Portfolios: Since 1995, members of the New Leaf team made all of the healthcare technology investments in the Sprout Funds while they were part of the investing team at the Sprout Group. The Sprout Funds were venture capital funds that were diversified across several sectors including information technology, communications, services, and healthcare technology. The healthcare technology investments in the four Sprout Funds included $1.019 billion in total cost, which was invested in new and follow-on investments in 69 companies from 1995 to 2013. The healthcare technology investments in the first three of these funds are now fully realized, and those in Sprout IX are nearly fully realized. To date, across these four funds, the New Leaf team has generated $1.997 billion of realizations in the aggregate (63 realized investments), and there is $68 million in unrealized value in six unrealized investments. The net annual IRR performance on the healthcare technology portfolios in each of the Sprout Funds would place them in the top quartile of all healthcare venture capital funds tracked by Cambridge Associates in each of the vintage years for which they have established a benchmark 19 . Additionally, over an 18 year period the net annual IRR on these portfolios outperformed relevant public market indices when compared on a public market equivalent basis (PME+) 20 . The range of outperformance for each of these portfolios versus the S&P 500, S&P Healthcare, NASDAQ Composite, and the Russell 3000 through March 31, 2014 is the following: Net IRR Outperformance vs. Public Indices (PME+ Methodology) S&P 500 S&P Healthcare NASDAQ Composite Russell 3000 Sprout Capital IX, L.P. * +638 bps +776 bps +451 bps +565 bps Sprout Capital VIII, L.P. * +587 bps +441 bps +725 bps +502 bps Sprout Capital VII, L.P. * +568 bps +302 bps +554 bps +554 bps Sprout Growth II, L.P. * +2,258 bps +2,064 bps +2,125 bps +2,215 bps *Healthcare Technology Portfolios 19 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices” and the endnote C in Appendix 4 regarding information provided by Cambridge Associates. 20 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices; Appendix 3” and the endnotes thereto (regarding the PME+ methodology). 20 CONTROL NUMBER 257 - CONFIDENTIAL Current gross and net portfolio returns for the New Leaf funds and for the healthcare technology portfolios in the Sprout Funds are detailed in the following chart: Chart 1: Returns by Fund As of March 31, 2014 ($ in millions) Fund: Fund Size: Growth II HCT * $15M Fund Sprout VII HCT * $95M Fund Sprout VIII HCT * $147M Fund Sprout IX HCT * $690M Fund NLV-I $310M Fund NLV-II $450M Fund Paid-In Capital $15M $95M $147M $690M $303M $407M Vintage Year: (1993 - 2007) (1995 - 2011) (1998 - 2012) (2000) (2005) (2008) First Investment 1995 1995 1998 2000 2005 2008 Gross Fund Returns N Total Multiple N Realized Multiple 4.4x 4.4x 2.6x 2.6x 1.7x 1.7x 2.0x 2.2x 2.1x 1.7x 1.8x 2.0x D Total IRR D Realized IRR 44% 44% 19% 19% 10% 10% 15% 17% 19% 23% 30% 33% Net Fund Returns N Net Total Multiple D Net Total IRR * 3.69x * 28.9% * 2.17x * 12.0% * 1.49x * 6.0% * 1.66x * 9.3% 1.75x 12.0% 1.45x 16.7% Net Distributed / Paid-In Multiple F * 3.69x * 2.17x * 1.49x 1.55x * 0.51x 0.50x Net Distributed $s to LPs $56.3 $207.0 $218.7 $1,071.5 $154.7 $204.2 Interim Fund Liquidity Metrics G (Distributed + Public) / Paid-In Multiple -- -- -- 1.62x 0.74x 1.18x H (Distributed + Liquid Public) / Paid-In Multiple -- -- -- 1.58x 0.57x 0.75x IRR Outperformance Versus Public Indices ** PME+ (Basis Points over S&P 500 Healthcare Sector) +2,064 bps +302 bps +441 bps +776 bps +201 bps -187 bps ** PME+ (Basis Points over S&P 500) +2,258 bps +568 bps +587 bps +638 bps +496 bps +275 bps PME+ (Basis Points over Russell 3000) ** +2,215 bps +554 bps +502 bps +565 bps +446 bps +218 bps PME+ (Basis Points over Nasdaq Composite) ** +2,125 bps +554 bps +725 bps +451 bps +181 bps -21 bps NLV and Sprout fund data as of March 31, 2014. Sprout fund statistics computed based on healthcare portfolio within Sprout. * See Appendix 2 and endnotes A and E in Appendix 4. Based on synthetic funds with assumptions around recycling and fee structure. ** Based on Public Market Equivalent (PME+) methodology. See Appendix 3 and endnotes A, B, E and G in Appendix 4. Please Section XIII: “Appendices” for definitions of terms and/or methodology. 21 CONTROL NUMBER 257 - CONFIDENTIAL INVESTMENT PERFORMANCE BY SECTOR BIOPHARMACEUTICAL RETURNS SUMMARY: The New Leaf team’s biopharmaceutical investment performance has been strong in all funds. In aggregate, the New Leaf team has invested $945 million in 64 biopharmaceutical investments, and the historic realized biopharmaceutical results are 2.29x gross realized cashon-cash return (“Multiple”) and a 21.4% gross realized IRR. These realized returns have been driven by successful early and later stage investments. Table 1 summarizes the gross realized and unrealized returns from biopharmaceutical investments in each New Leaf fund and the Sprout Funds. Table 1: Gross Biopharmaceutical Performance by Fund Group $ amounts in millions, as of March 31, 2014 Gross Value Gross Multiple Gross IRR Deals Total Cost Total Realized Unrealized Realized Overall Realized Overall New Leaf Ventures II, L.P. (2008) 20 $209.0 $508.5 $218.0 $290.4 2.59x 2.43x 67.5% 58.3% New Leaf Ventures I, L.P. (2005) 14 $205.6 $501.6 $167.3 $334.4 1.68x 2.44x 22.8% 23.5% All Sprout Funds (1993, 1995, 1998, 2000) 30 $533.5 $1,217.0 $1,163.9 $53.1 2.37x 2.28x 20.6% 20.0% Total 64 $948.2 $2,227.1 $1,549.2 $677.9 2.29x 2.35x 21.4% 21.6% Please see the endnotes in Appendix 4 for definitions of terms and/or methodology. Note that these gross returns are for portions of each fund, broken out by investment sector subfocus. Management fees, the general partner’s carried interest and other expenses are applied on a fund level and not based on individual investments or a portion of the investment portfolio. For net returns on each fund which would include these items, please see Appendix 2. INFORMATION CONVERGENCE RETURNS SUMMARY: While New Leaf restarted new investment activity in information convergence opportunities in NLV-II, the Fund Managers already had an established track record in this sector from 9 investments in the Sprout Funds. In total, the Fund Managers have made 17 investments in this sector, for a combined total of $142 million of invested capital. The team has realized or partially realized nine investments for combined gross realizations of $262 million and a 2.62x gross realized Multiple and 18.8% gross realized IRR. Table 2 summarizes the gross realized and unrealized returns from information convergence investments in each New Leaf fund and the Sprout Funds: Table 2: Gross Information Convergence Performance by Fund Group $ amounts in millions, as of March 31, 2014 Gross Value Gross Multiple Gross IRR Deals Total Cost Total Realized Unrealized Realized Overall Realized Overall New Leaf Ventures II, L.P. (2008) 8 $46.0 $59.0 $12.5 $46.5 3.44x 1.28x 95.5% 16.0% New Leaf Ventures I, L.P. (2005) 0 $0.0 $0.0 $0.0 $0.0 N/A N/A N/A N/A All Sprout Funds (1993, 1995, 1998, 2000) 9 $96.2 $249.2 $249.2 $0.0 2.59x 2.59x 18.6% 18.6% Total 17 $142.1 $308.2 $261.7 $46.5 2.62x 2.17x 18.8% 18.5% Please see the endnotes in Appendix 4 for definitions of terms and/or methodology. Note that these gross returns are for portions of each fund, broken out by investment sector subfocus. Management fees, the general partner’s carried interest and other expenses are applied on a fund level and not based on individual investments or a portion of the investment portfolio. For net returns on each fund which would include these items, please see Appendix 2. 22 CONTROL NUMBER 257 - CONFIDENTIAL MEDICAL DEVICES RETURNS SUMMARY: The Fund Managers have been an active investor in the medical device sector across the New Leaf and Sprout Funds. Combined, the Fund Managers have invested $371 million in 29 medical device companies, and have gross realizations of $394 million and a 1.82x gross realized Multiple and 9.4% gross realized IRR. Table 3 summarizes the gross realized and unrealized returns from medical device investments in each New Leaf fund and the Sprout Funds: Table 3: Gross Medical Device Performance by Fund Group $ amounts in millions, as of March 31, 2014 Gross Value Gross Multiple Gross IRR Deals Total Cost Total Realized Unrealized Realized Overall Realized Overall New Leaf Ventures II, L.P. (2008) 5 $72.0 $52.5 $1.8 $50.6 0.11x 0.73x N/A -9.2% New Leaf Ventures I, L.P. (2005) 6 $73.3 $146.4 $67.3 $79.2 5.64x 2.00x 58.8% 15.5% All Sprout Funds (1993, 1995, 1998, 2000) 18 $225.2 $328.9 $325.1 $3.7 1.73x 1.46x 8.3% 6.1% Total 29 $370.5 $527.8 $394.2 $133.5 1.82x 1.42x 9.4% 6.6% Please see the endnotes in Appendix 4 for definitions of terms and/or methodology. Note that these gross returns are for portions of each fund, broken out by investment sector subfocus. Management fees, the general partner’s carried interest and other expenses are applied on a fund level and not based on individual investments or a portion of the investment portfolio. For net returns on each fund which would include these items, please see Appendix 2. TOOLS, DIAGNOSTICS, & INFRASTRUCTURE RETURNS SUMMARY: The Fund Managers have made investments in the tools, diagnostics, and infrastructure sector across the New Leaf and Sprout Group funds. The strategy has included predominantly later/commercial stage tools and infrastructure investments and a mix of early/development stage and later/commercial stage diagnostics companies over time. Combined, the Fund Managers have invested in 17 companies, for a total $221 million in cost. The Fund Managers have generated gross realizations of $261 million, for a 1.50x gross realized Multiple and 14.2% gross realized IRR. Table 4 summarizes the gross realized and unrealized returns from tools, diagnostics, and infrastructure investments in each New Leaf fund and the Sprout Funds: Table 4: Gross Tools, Diagnostics, & Infrastructure Performance by Fund Group $ amounts in millions, as of March 31, 2014 Gross Value Gross Multiple Gross IRR Deals Total Cost Total Realized Unrealized Realized Overall Realized Overall New Leaf Ventures II, L.P. (2008) 3 $31.0 $36.1 $0.0 $36.1 0.00x 1.16x N/A 4.8% New Leaf Ventures I, L.P. (2005) 2 $25.7 $1.7 $1.7 $0.0 0.06x 0.06x N/A N/A All Sprout Funds (1993, 1995, 1998, 2000) 12 $164.0 $273.1 $258.8 $14.3 1.88x 1.67x 16.4% 13.9% Total 17 $220.7 $310.9 $260.5 $50.4 1.50x 1.41x 14.2% 11.9% Please see the endnotes in Appendix 4 for definitions of terms and/or methodology. Note that these gross returns are for portions of each fund, broken out by investment sector subfocus. Management fees, the general partner’s carried interest and other expenses are applied on a fund level and not based on individual investments or a portion of the investment portfolio. For net returns on each fund which would include these items, please see Appendix 2. For further detail on prior performance, please refer to the Appendices and endnotes hereto. 23 CONTROL NUMBER 257 - CONFIDENTIAL IV. OPPORTUNITY IN THE HEALTHCARE SECTOR The Fund Managers believe a number of macro market factors have aligned to create attractive and lasting conditions for NLV-III’s targeted investment strategy in healthcare technology. Each of these market factors individually would have a direct positive impact on the level of risk and the potential for returns from investments in the healthcare technology sector. The fact that there are positive trends in all of them occurring simultaneously is unprecedented, and the Fund Managers expect that this will create a uniquely positive environment for NLV-III’s investments in the healthcare technology sector. These macro market factors include the following: STRONG GROWTH IN GLOBAL HEALTHCARE MARKETS Healthcare is one of the largest and most dynamic segments of the global economy, and its growth is projected to continue the well-established historical trend of outpacing GDP growth in major economies for at least the next decade. 21 In the U.S., since 1970, health care spending per capita has grown at an average annual rate of 8.2% or 2.4 percentage points faster than nominal GDP. The persistence of this trend suggests systematic differences between health care and other economic sectors where growth rates are typically more in line with the overall economy. A smaller difference is projected over the 2011 to 2020 period, where the average annual growth in per capita health spending (5.3%) is projected to be about 140 basis points higher than the growth in GDP (3.9%) 22 . This powerful and sustained growth differentiates healthcare from many other large industrial and technology sectors, and it creates a positive backdrop for investment in certain areas within the sector. The drivers of healthcare market growth vary between mature and emerging economies, but in both cases the shifts are resulting in significant increases in per capita health care consumption and predictable increases in spending to meet the rising demand. In developed economies, growth is being driven primarily by an aging population coupled with a continued willingness of payers to cover the costs for new therapeutics and interventions that meaningfully extend or improve the quality of patients’ lives. In the U.S., which is representative of the demographic shifts in other major economies, the number of people over 65 is expected to double over the next three decades, reaching 70 million by 2030 or roughly 20% of the total U.S. population. 23 This aging demographic has a higher prevalence of disease and the cost of delivering care to treat the diseases of this older demographic is rising steadily. For example, in 2009, the per capita health care cost for a person 65 – 74 years old was approximately $14,000, but it was more than double that ($33,000) for those over 85. Before the end of this decade, the projected per capita annual cost to care for these same two groups is expected to rise to $22,000 (+57%) for 65 – 74 year olds and $55,000 (+67%) for those 85+ 24 . Emerging markets such as Brazil, Russia, India and China (BRICs) are also contributing to the growth in health care spending globally, as these emerging markets mature and begin moving towards the standards of their counterparts in developed economies. The size of the middle 21 CMS, OECD, Eurostat 22 Historical data from Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group 23 U.S. Census Bureau 24 Alvarez & Marsal healthcare, getting much closer to the cost precipice 24 CONTROL NUMBER 257 - CONFIDENTIAL and upper classes in these countries is growing rapidly, and the spending power of these groups is becoming important to the global economy in many sectors. As the populations of these countries become more affluent, a greater proportion of their GDP is being spent on health care, and this is leading to rapid growth in many different healthcare product sectors in these countries. For example, China’s prescription drug market, which is projected to be the world’s second largest by 2020, is projected to grow to more than $110 billion by 2015 – up from $50 billion in 2010. 25 The medical device market in China is showing a similar growth pattern, with the current $17 billion medtech market (world’s fourth largest) projected to more than double within the next five years. 26 This growth in emerging economies is expected to continue for the foreseeable future, and as it does, it will open vast new markets for established healthcare products companies in more developed countries, and will become increasingly important as a percentage of sales of global brands. At the same time, it will create opportunities for smaller, U.S. based companies to partner with large multinationals and domestic companies in the BRICs that have established distribution channels in these markets. SIGNIFICANT OPPORTUNITY CREATED BY HEALTHCARE REFORM & RESTRUCTURING As a result of the strong growth in healthcare expenditures, for at least the next decade, and likely much longer, the healthcare industry in the U.S. will be going through a period of significant reform and restructuring as the increasing healthcare costs place unsustainable fiscal burdens on government programs. After years of dire predictions and endless debate amongst elected officials, pundits, corporate leaders, and patient advocacy groups, there is recognition that long term healthcare liabilities are a critical issue and require broad reform to control their growth before they lead to irreparable fiscal harm. While much of the attention in these initiatives is focused on identifying opportunities to cut costs, the silver lining in them for investors is that their objectives also seek to improve the quality of healthcare and to substantially broaden the population that has access to healthcare services covered by third party payment. In the U.S., the Federal Government has laid the foundations for restructuring the healthcare system through two key pieces of legislation. First, the HITECH Act provides large government subsidies for the adoption of IT tools by healthcare providers. The Federal Government has recognized that a fundamental underpinning of healthcare reform is a massive upgrade of the information technology infrastructure at all levels of the industry, and through this legislation has earmarked $26 billion dollars in direct subsidies to catalyze investment in this area. The second key piece of legislation is the ACA, which is being implemented as a first step in the overhaul of the U.S. healthcare system. The ACA was signed into law in the U.S. in 2010 and 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 25 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” 26 CONTROL NUMBER 257 - CONFIDENTIAL 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 27 CONTROL NUMBER 257 - CONFIDENTIAL 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. 28 CONTROL NUMBER 257 - CONFIDENTIAL 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 29 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. 30 CONTROL NUMBER 257 - CONFIDENTIAL 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. 31 CONTROL NUMBER 257 - CONFIDENTIAL 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: � � � 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. � 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 . 33 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: � � � � 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). � 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 35 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 36 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 37 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 � 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. 38 CONTROL NUMBER 257 - CONFIDENTIAL � � 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 � 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 39 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. � 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 � 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. 40 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). 41 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. 42 CONTROL NUMBER 257 - CONFIDENTIAL 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: � � � � � � 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. 43 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: � � � � � � � � � 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. 44 CONTROL NUMBER 257 - CONFIDENTIAL 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. 45 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 46 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 47 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. 48 CONTROL NUMBER 257 - CONFIDENTIAL 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 49 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. 50 CONTROL NUMBER 257 - CONFIDENTIAL 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); 51 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. 52 CONTROL NUMBER 257 - CONFIDENTIAL 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 53 CONTROL NUMBER 257 - CONFIDENTIAL 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 54 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 55 CONTROL NUMBER 257 - CONFIDENTIAL 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,” 56 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 57 CONTROL NUMBER 257 - CONFIDENTIAL 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 58 CONTROL NUMBER 257 - CONFIDENTIAL 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 consequences of such failure could be devastating to the prospects of such company, which in turn could negatively affect the performance of the Fund. Dependence on Reimbursement and Third-Party Pricing Policies for Products The ability of the Fund’s portfolio companies to commercialize any product candidate successfully also will depend in part on the extent to which reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A major trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors, particularly Medicare, have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. Portfolio companies cannot be sure that coverage and reimbursement will be available for any product that they commercialize, and, even if these are available, the level of reimbursement may not be satisfactory. Reimbursement may affect the demand for, or the price of, any product candidate for which a portfolio company obtains marketing approval. Obtaining and maintaining adequate reimbursement for a portfolio company’s products may be particularly difficult because of the higher prices often associated with drugs administered under the supervision of a physician or because a drug may be administered in combination with other drugs that may carry high prices. A portfolio company may be required to conduct expensive pharmacoeconomic studies to justify coverage and reimbursement or the level of reimbursement relative to other therapies. If coverage and adequate reimbursement are not available or reimbursement is available only to limited levels, a portfolio company may not be able to successfully commercialize any product candidate for which it obtains marketing approval. This, in turn, could negatively affect the performance of the Fund. 59 CONTROL NUMBER 257 - CONFIDENTIAL There may be significant delays in obtaining reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or similar regulatory authorities outside the United States. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers a portfolio company’s costs, including research, development, manufacture, sale and distribution. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover a portfolio company’s costs and may not be made permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs, and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. A portfolio company’s inability to promptly obtain coverage and profitable payment rates from both government-funded and private payors for any approved products that a portfolio company may develop could have a material adverse effect on its operating results, its ability to raise capital needed to commercialize products and its overall financial condition. This, in turn, could negatively affect the performance of the Fund. Political Risk; Current and Future Healthcare Reforms Political events can have an impact on pharmaceutical and biotechnology companies. There can be no guarantee that government’s role in the healthcare industry will not adversely impact the performance of the Fund. In both the U.S. and foreign markets, sales of healthcare products and services and their success will depend in part on the availability of reimbursement from third-party payors such as government health administration authorities, private health insurers, and other organizations. The levels of revenues and profitability of providers of healthcare products and services may be affected by the continuing efforts of governmental and third-party payors to contain or reduce the costs of health care. Significant uncertainty exists as to the reimbursement status of newly approved health care products. There can be no assurance that a company’s proposed products or services will be considered cost-effective or that adequate third-party reimbursement will be available to enable a company to maintain price levels sufficient to realize an appropriate return on its investment. Moreover, there continues to be significant interest among policy makers and government and private payors in the United States and foreign jurisdictions in promoting changes in healthcare systems to contain healthcare costs and improve the overall quality of care and wellness. For example, on March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act, which Congress modified pursuant to the Health Care and Education Reconciliation Act of 2010 (collectively, the “Act”). The Act expands insurance coverage to more individuals, which could have a negative impact on the pharmaceutical industry. Among the aspects of the Act that may have an adverse impact on the Fund are (i) mandatory annual fees on pharmaceutical manufacturers, (ii) discounts of 50% on brand name prescription drugs for certain Medicare Part D beneficiaries (i.e., those who are required to pay 100% of their 60 CONTROL NUMBER 257 - CONFIDENTIAL prescription drug costs during the temporary “gap” from Medicare coverage until their prescription drug costs reach the threshold for catastrophic coverage by Medicare), (iii) an approval process for generic biologics and granting exclusive marketing rights to original manufacturers for 12 years, (iv) increased drug rebates to the Medicaid program, and (v) disclosure requirements for financial relationships between various healthcare entities. Within the U.S., the pharmaceutical industry has been a particular focus of both state and federal governments’ reform efforts. Other than reform measures adopted in the Act, proposed reforms include, but are not limited to, the following: • increasing regulation of pharmaceutical sales representatives; • restricting direct to consumer advertising and off-label uses; • limiting manufacturers’ access to marketing data; • authorizing the importation of drugs from Canada and other foreign countries to lower pharmaceutical costs to U.S. consumers; • price discounts, formularies or rebates to government healthcare programs; and • allowing government healthcare programs to negotiate prescription drug prices directly with manufacturers. While the Fund cannot predict which legislative or regulatory proposals will be adopted or what affect the adopted proposals, including the Act, may have on the biopharmaceutical companies in which the Fund invests, the pendency, approval or implementation of such proposals could decrease the Fund’s anticipated returns or adversely affect its investment opportunities. Availability of Investment Capital Many portfolio companies will require several rounds of capital infusions before reaching maturity. The Fund and its co-investors may not provide all necessary follow-on capital to portfolio companies. Accordingly, third-party sources of financing may be required. There is no assurance that such additional sources of financing will be available, or, if available, will be on terms beneficial to the Fund. Furthermore, the Fund’s capital is limited and may not be adequate to protect the Fund from dilution resulting from multiple rounds of portfolio company financings. If the Fund does not have capital available to participate in subsequent rounds of financing, failure to participate may have a significant negative impact on the portfolio company as well as the value of the Fund’s investment. Economic and Market Risk Companies in which the Fund invests may be sensitive to general downward swings in the overall economy or in the healthcare technology sector. Changes in economic conditions, including, for example, inflation rates, industry conditions, competition, technological developments, political and diplomatic events and trends, tax laws and innumerable other factors, none of which will be within the control of the General Partner, can affect substantially and adversely the business and prospects of the Fund. A major recession or adverse developments in the securities market might have an impact on some or all of the Fund’s investments. In addition, factors specific to a portfolio company may have an adverse effect on the Fund’s investment in such company. The General Partner may rely upon its own or a portfolio company’s projections concerning the portfolio company’s future performance in making investment decisions. Such projections are inherently subject to uncertainty and to 61 CONTROL NUMBER 257 - CONFIDENTIAL certain factors beyond the control of the portfolio company and the General Partner. The economic environment for all companies, and in particular for healthcare technology and startup companies, may remain challenging. Business risks may be more significant in portfolio companies embarking on a build-up or operating turnaround strategy and in smaller or development stage portfolio companies. All portfolio companies may face intense competition, changing business and economic conditions, risks of technological acceptance and obsolescence or other developments that may adversely affect their performance. Illiquidity of Portfolio Investments Investments by the Fund generally will be illiquid securities acquired through privately negotiated transactions. The Fund may be unable to realize its investment objectives by sale or other disposition at attractive prices or will otherwise be unable to complete an exit strategy. External factors beyond the General Partner’s control, such as overall economic conditions, the competitive environment and the availability of potential acquirors of the Fund’s interests in portfolio companies may shorten or lengthen the Fund’s holding period in such portfolio companies. In some cases, the Fund may be prohibited by contract from selling such securities for a period of time or otherwise may be restricted from the disposition of such securities. Lack of Operating History The Fund and the General Partner are newly formed entities, and, accordingly have no operating history or investments upon which investors can evaluate the potential performance of the Fund. The prior performance of the Fund Managers or their investments as described in this Memorandum is not necessarily indicative of the Fund’s future results. There can be no assurance that investments by the Fund will achieve returns comparable to the historical performance reflected in this Memorandum, and in any event, the returns achieved by the Fund will be subject to the Management Fee and the General Partner’s carried interest. Any given investment made by the Fund may prove to be worthless, and there is a risk that investors could lose money. No Assurance of Profit or Distributions The Fund’s task of identifying opportunities in private and public operating companies, managing such investments and realizing a significant return for investors is difficult. Many organizations operated by persons of competence and integrity have been unable to make, manage and realize such investments successfully. There is no assurance that the investments of the Fund will be profitable or that any distribution will be made to the Limited Partners. Any return on investment to the Limited Partners will depend upon successful investments being made by the Fund. The marketability and value of any such investment will depend upon many factors beyond the control of the Fund. The Fund may not have sufficient cash available to make tax distributions to the Partners. The expenses of the Fund may exceed its income, and the Limited Partners could lose the entire amount of their contributed capital. Accordingly, prospective investors should not subscribe to the Fund unless they can readily bear the consequences of such a loss. Competition The business of identifying, structuring and implementing venture capital investments, along with other investments within the strategy of NLV-III is highly competitive. The Fund will be competing for investments against other groups, including institutional investors, investment managers and industrial groups owned by large and well-capitalized investors. It is possible 62 CONTROL NUMBER 257 - CONFIDENTIAL that competition for appropriate investment opportunities may limit significantly the number of opportunities available to the Fund and adversely affect the terms upon which investments can be made. There can be no assurance that the Fund will be successful in its efforts to identify attractive investment opportunities, and it is possible that the Fund’s Commitments will not be fully utilized if sufficient attractive investments are not identified and consummated by the Fund during the Investment Period. Management of the Fund The General Partner will make decisions with respect to the management of the Fund. Limited Partners have no right or power to take part in the management of the Fund. The Limited Partners will not receive the detailed financial information issued by portfolio companies that will be available to the Fund. Accordingly, the Limited Partners will not have the opportunity to evaluate the relevant economic, financial and other information that will be utilized by the General Partner in its selection of investments. An investor in the Fund must rely upon the ability of the General Partner with the assistance of the Management Company to identify, structure, and implement investments consistent with the Fund’s investment objectives and policies. Accordingly, no person should purchase Limited Partner Interests unless such person is willing to entrust all aspects of the management of the Fund to the General Partner. Reliance on Management of Fund The success of the Fund will be largely dependent upon the activities of the Fund Managers. The loss of one or more of these individuals could have a significant adverse impact on the business of the Fund and its financial performance. Reliance Upon Portfolio Company Management Although the Fund may seek representation on the board of directors of each of the portfolio companies or otherwise provide management and strategic planning assistance, the Fund will not have an active role in the day-to-day management of the companies in which it invests. To the extent that the senior management of a portfolio company performs poorly, or if a key manager of a portfolio company terminates employment, the Fund’s investment in such company could be adversely affected. Potential Conflicts of Interest The Fund Managers will continue to devote a portion of their time to the business of the Sprout Funds, NLV-I, NLV-II and to any future funds that they may organize in accordance with the Partnership Agreement. Conflicts may arise in the allocation of investment opportunities and the Fund Managers’ time among the Fund and other such partnerships and any such future funds. Prospective investors should be aware that there may be occasions when the General Partner, the Fund Managers, the Management Company and their affiliates will encounter potential conflicts of interest in connection with the Fund’s activities. The Partnership Agreement will contain certain protections for Limited Partners against conflicts of interest faced by the General Partner and its partners, but will not purport to address all types of conflicts that may arise. Moreover, as a practical matter, it may be difficult for Limited Partners to subject the behavior of the General Partner, the Management Company and their partners to close scrutiny. 63 CONTROL NUMBER 257 - CONFIDENTIAL Profits Not Shared in Proportion to Contributed Capital The capital contribution of the General Partner will represent only a small portion of the Fund’s capital. Limited Partners may invest greater amounts and may receive a proportionately smaller amount of the profits of the Fund than the General Partner. The General Partner may have an incentive to make investments that are riskier or more speculative than if the General Partner received allocations on a basis identical to that of the Limited Partners in the Fund or was compensated on a basis not tied to the performance of the Fund. Investment Opportunities The General Partner may in certain circumstances allocate investment opportunities to prior funds or potential successor funds. Allocation of investment opportunities will be made in good faith by the General Partner. There can be no assurance that the allocation of investment opportunities by the General Partner will not give rise to conflicts of interest between the investors of the respective funds. Long-Term Investment An investment in the Fund is a long-term commitment, and there is no assurance of any distribution to the Limited Partners prior to or upon liquidation of the Fund. Illiquidity of Limited Partner Interests The Limited Partner Interests are highly illiquid. There is no public market for the Limited Partner Interests and none is expected to develop. Limited Partner Interests in the Fund may not be assigned, transferred or encumbered without the prior written consent of the General Partner. Voluntary withdrawals of Limited Partner Interests are not permitted, except in limited circumstances where necessary to comply with laws or regulations applicable to a Limited Partner. Consequently, a Limited Partner may not be able to liquidate their investment in the event of a change in circumstances or for other reasons and, therefore, must be prepared to bear the risks of owning its interest in the Fund for an extended period of time. The Limited Partner Interests will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), or under the various “Blue Sky” or securities laws of the state or jurisdiction of residence of any Limited Partner of the Fund. The Limited Partner Interests are being offered only to “accredited investors” under an exemption in Section 4(2) of the Securities Act and the rules of the Securities and Exchange Commission thereunder and exemptions under the various applicable “Blue Sky” and other state securities laws. Bridge Financings and Guarantees From time to time, the Fund may lend to portfolio companies on a short-term, unsecured basis or guaranty portfolio company obligations in anticipation of a future issuance of equity or longterm debt securities. Such bridge loans would typically be convertible into a more permanent, long-term security; however, for reasons not always in the Fund’s control, such long-term securities may not issue and such bridge loans or guarantees may remain outstanding. In such event, the interest rate on such loans or compensation for such guaranty (if any) may not adequately reflect the risk associated with the unsecured position taken or guaranty given by the Fund. 64 CONTROL NUMBER 257 - CONFIDENTIAL Portfolio Company Leverage To the extent that any investment is made in a portfolio company with a leveraged capital structure, such investment will be subject to increased exposure to adverse economic factors such as a significant rise in interest rates, a severe downturn in the economy or deterioration in the condition of such company or its industry. If such a company is unable to generate sufficient cash flow to meet principal and interest payments on its indebtedness, the value of any equity investment by the Fund in such company could be significantly reduced or even eliminated. Investments in Public Companies The Fund may invest in public companies or take private portfolio companies public. Investments in public companies may subject the Fund to risks that differ in type or degree from those involved with investments in privately held companies. Such risks include, without limitation, greater volatility in the valuation of such companies, increased obligations to disclose information regarding such companies, limitations on the ability of the Fund to dispose of securities at certain times (including due to the possession by the Fund of material non-public information), increased likelihood of shareholder litigation against such companies’ board members, which may include the Fund Managers or other Management Company personnel, regulatory action by the U.S. Securities and Exchange Commission and increased costs associated with each of the aforementioned risks. Hedging Techniques From time to time, the Fund might have investments that are publicly traded, yet illiquid. The General Partner might engage in hedging techniques, such as selling the corresponding shares short “against the box,” to “lock in” or secure the value in an investment until it becomes liquid and freely tradable. The Fund will only sell short a stock to the extent it holds a corresponding long and illiquid position in the same company. Portfolio Trading The Fund does not generally intend to trade its assets for short-term profits, however, when circumstances warrant, securities may be sold by the Fund without regard to the length of time held. Any active short-term trading of the Fund will increase its rate of turnover and related transaction expenses. Non-U.S. Investments The Fund may invest a portion of Fund’s total committed capital in the securities of issuers that are organized outside of the U.S. and Canada. Investing in non-U.S. securities may involve substantially greater risks than investing in U.S. securities including risks relating to (i) currency exchange matters, including fluctuations in the rate of exchange between the U.S. dollar and the various foreign currencies in which the Fund’s non-U.S. investments are denominated, and costs associated with conversion of investment principal and income from one currency to another; (ii) differences between the U.S. and non-U.S. securities markets, including potential price volatility in and relative illiquidity of some non-U.S. securities markets; (iii) the absence of uniform accounting, auditing and financial reporting standards, practices and disclosure requirements, and differences in government supervision and regulation; (iv) certain economic and political risks, including potential exchange control regulations, potential restrictions on foreign investments and repatriation of capital and the risks associated with political, economic or social instability, diplomatic developments, and the possibility of expropriation or 65 CONTROL NUMBER 257 - CONFIDENTIAL confiscatory taxation; and (v) the possible imposition of non-U.S. taxes on income and gains recognized with respect to such securities. While the General Partner will take these factors into consideration in making investment decisions for the Fund and intends to manage the Fund in a manner to minimize exposure to the foregoing risks, there can be no assurance that the General Partner will be able to evaluate the risks accurately or that adverse developments with respect to such risks will not adversely affect the value or realization of investments that are held by the Fund in certain countries. Reserves As is customary in the industry, the General Partner may establish reserves for follow-on investments by the Fund in portfolio companies, operating expenses (including the Management Fee), Fund liabilities, and other matters. Estimating the appropriate amount of such reserves is difficult, especially for follow-on investment opportunities, which are directly tied to the success and capital needs of portfolio companies. Inadequate or excessive reserves could impair the investment returns to the Limited Partners. If reserves are inadequate, the Fund may be unable to take advantage of attractive follow-on or other investment opportunities or to protect its existing investments from dilutive or other punitive terms associated with “payto-play” or similar provisions. If reserves are excessive, the Fund may decline attractive investment opportunities or hold unnecessary amounts of capital in money market or similar low-yield accounts. Diverse Investors The Limited Partners may have conflicting investment, tax, and other interests with respect to their investments in the Fund. The conflicting interests of individual Limited Partners may relate to or arise from, among other things, the nature of investments made by the Fund, the structuring or the acquisition of investments and the timing of disposition of investments. As a consequence, conflicts of interest may arise in connection with decisions made by the Fund Managers, including with respect to the nature or structuring of investments that may be more beneficial for some Limited Partners than for others, particularly with respect to investors’ individual tax situations. In selecting and structuring investments appropriate for the Fund, the General Partner will consider the investment and tax objective of the Fund and the Partners as a whole, not the investment, tax or other objective of any Limited Partner individually. Failure of Limited Partners to Fulfill Their Commitment Obligations The Fund’s investments in portfolio companies will require capital calls on Limited Partners over an extended period of time. Failure by a Limited Partner to meet a capital call could result in the failure of the Fund to make desired investments, which could have adverse consequences for the Fund and thus all of the Limited Partners. The failure by the Fund to receive a significant portion of capital contributions due from Limited Partners in respect of their Commitments could materially impair the Fund’s ability to realize its financial objectives. In the event that a Limited Partner defaults, such Limited Partner may be subject to various penalties, including forfeiture of all or a portion of its interest in the Fund, as provided in the Partnership Agreement. Risk of Dilution Limited Partners subscribing for interests at subsequent closings will participate in existing investments of the Fund, diluting the interest of existing Limited Partners therein. Although such Limited Partners will contribute their pro rata share of prior capital contributions 66 CONTROL NUMBER 257 - CONFIDENTIAL previously drawn down by the Fund (plus an additional amount thereon), there can be no assurance that such payment will reflect the fair value of the Fund’s existing investments at the time such additional Limited Partners subscribe for such interests. Difficulty in Valuing Portfolio Investments and Distribution in Kind Generally, there will be no readily available market for a substantial number of the Fund’s investments and hence, most of the Fund’s investments will be difficult to value. The securities in which the Fund will invest may be among the most junior in a portfolio company’s capital structure, and thus subject to the greatest risk of loss. It is highly speculative as to the whether and when a portfolio company will be able to register its securities so that the securities become eligible for trading in public markets. Certain investments may be distributed in kind to the Partners of the Fund. An investor that receives assets other than cash from the Fund may incur costs and delays in converting those assets to cash. Non-Controlling Investments The Fund generally expects to make non-controlling investments in portfolio companies where the Fund may not be able to control or effectively influence the business or affairs of such entities. Portfolio companies in which the Fund’s investments are made may have economic or business interests or goals which are inconsistent with those of the Fund, and the Fund may not be in a position to influence those interests or goals or otherwise protect the value of the Fund’s investments in such entities. In addition, although the Fund may seek board representation in connection with its investments, there is no assurance that such representation, if sought, will be obtained. Service on Board of Directors The Fund typically will seek to have observation or visitation rights or the right to designate directors to serve on the boards of directors of the Fund’s portfolio companies. In addition, affiliates of the General Partner may serve, from time to time, as officers or directors of the portfolio companies. The foregoing rights and activities could expose the General Partner, its affiliates and the assets of the Fund to regulatory action and/or lawsuits and claims by a portfolio company, its security holders and its creditors. While the General Partner intends to manage the Fund in a way that will minimize exposure to these risks, the possibility of successful claims or lawsuits or adverse regulatory action cannot be eliminated, and such events could have significant adverse effects on the Fund. Material Non-Public Information By reason of their responsibilities in connection with their other activities, certain affiliates of the General Partner may acquire confidential or material non-public information or be otherwise restricted from initiating transactions in certain securities. The Fund will not be free to act upon any such information. Due to these restrictions, the Fund may be not be able to initiate a transaction that it otherwise might have initiated and may not be able to sell an investment that it might otherwise might have sold. In their capacity as officers or directors, affiliates of the General Partner will be subject to fiduciary or other duties to the portfolio company, which may adversely affect the Fund. For example, the Fund may be prohibited from selling publicly traded securities of a portfolio company if the General Partner or any of its affiliates is in possession of material non-public information relating to such company. 67 CONTROL NUMBER 257 - CONFIDENTIAL Recourse to the Fund’s Assets The Fund’s assets, including any investments made by the Fund and any funds held by the Fund, are available to satisfy all liabilities and other obligations of the Fund. If the Fund becomes subject to a liability, parties seeking to have the liability satisfied may have recourse to the Fund’s assets generally and will not be limited to any particular assets, such as the asset representing the investment giving rise to the liability. Accordingly, investors could find their interest in the Fund’s assets adversely affected by a liability arising out of an investment of the Fund. Contingent Liabilities on Disposition of Investments In connection with the disposition of an investment in a portfolio company or otherwise, the Fund may be required to make representations about the business and financial affairs of the portfolio company typical of those made in connection with the sale of any business. The Fund may also be required to indemnify the purchasers of such portfolio company to the extent that any such representations turn out to be inaccurate. These arrangements may result in contingent liabilities, which might ultimately have to be funded by the investors to the extent of their Commitment to the Fund or previous distributions made to them. Certain Litigation Risks The Fund will be subject to a variety of litigation risks, particularly if one or more of its portfolio companies face financial or other difficulties during the term of the Fund. Legal disputes, involving any or all of the Fund, the General Partner, its partners or its affiliates, may arise from the Fund’s activities and investments and could have a significant adverse effect on the Fund. Indemnification The Fund will be required to indemnify, among others, the General Partner, the general partner of the General Partner, the Management Company, the Fund Managers, their respective partners, members, employees, venture partners and affiliates, the Fund’s other agents and members of the Advisory Board for liabilities incurred in connection with the affairs of the Fund. Such liabilities may be material. For example, in their capacity as directors of portfolio companies, the partners, managers, or affiliates of the General Partner may be subject to derivative or other similar claims brought by security holders of such companies. The indemnification obligations of the Fund would be payable from the assets of the Fund, including the unused capital commitments of the Partners. If the assets of the Fund are insufficient to pay such indemnification obligations, the Limited Partners may be required to return distributions previously made to them in order to satisfy such obligations. Changes The Fund’s investment program is intended to extend over a period of years, during which the business, economic, political, regulatory, and technology environment within which the Fund operates may undergo substantial changes, some of which may be adverse to the Fund. The General Partner will have the exclusive right and authority (within limitations set forth in the Partnership Agreement) to determine the manner in which the Fund shall respond to such changes, and Limited Partners generally will have no right to withdraw from the Fund or to demand specific modifications to the Fund’s operations in consequence thereof. A major recession or adverse developments in the securities or credit markets might have an impact on some or all of the Fund’s investments. A sustained period of inactivity and/or low valuations 68 CONTROL NUMBER 257 - CONFIDENTIAL in the public equity markets could result in substantially lower liquidation values and substantially longer periods before liquidity is achieved in comparison with historical values, which would reduce the returns that could be achieved by the Fund. In addition, factors specific to a portfolio company may have an adverse effect on the Fund’s investment in such company. The General Partner may rely upon its own or a portfolio company’s projections concerning the portfolio company’s future performance in making investment decisions. Such projections are inherently subject to uncertainty and to certain factors beyond the control of the portfolio company and the General Partner. Prospective investors are particularly cautioned that the investment sourcing, selection, management and liquidation strategies and procedures exercised by partners of the General Partner in the past may not be successful, or even practicable, during the Fund’s term. Industry Specific Terminology Prospective investors are cautioned that certain terms and phrases of common usage within the venture capital industry may be misleading to those unfamiliar with such usage. In particular, individuals who participate in the management of a fund often are referred to, in a colloquial sense, as “general partners” even though they are not actually general partners of any partnership. Prospective investors are reminded that the Fund will be a limited partnership, that the General Partner will be a limited partnership, that the general partner of the General Partner will be a limited liability company, and that the individuals directing the management of the Fund through the General Partner will be members of such limited liability company. It is not intended that the Fund will have any general partner other than the General Partner or that any actual general partnership will in any manner be associated with the formation, operation, dissolution or termination of the Fund. Prospective investors must not presume or rely upon the existence of any actual legal entities other than the Fund, the General Partner and the general partner of the General Partner. With respect to all matters involving industry specific terminology, prospective investors are urged to consult with their own legal and other advisors. Fund and General Partner Not Registered The Fund will not be registered under the Investment Company Act of 1940, as amended (the “Investment Company Act”) pursuant to an exemption set forth in Sections 3(c)(1) and/or 3(c)(7) of the Investment Company Act. There is no assurance that such exemptions will continue to be available to the Fund. Due to the burdens of compliance with the Investment Company Act, the performance of the Fund’s investment portfolio could be materially adversely affected, and risks involved in financing portfolio companies could substantially increase, if the Fund becomes subject to registration under the Investment Company Act. Neither the Fund nor its counsel can assure investors that, under certain conditions, changed circumstances, or changes in the law, the Fund may not become subject to the Investment Company Act or other burdensome regulation. The General Partner is not registered as a broker/dealer under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and with the National Association of Securities Dealers, Inc. (the “NASD”) and is consequently not subject to the record keeping and specific business practice provisions of the Exchange Act and the rules of the NASD. 69 CONTROL NUMBER 257 - CONFIDENTIAL Tax Risks Certain tax risks relating to an investment in the Fund are discussed in Section XI “Certain Tax & ERISA Considerations”, which prospective investors should read carefully. No assurances can be given that current tax laws, rulings and regulation will not be changed during the life of the Fund. Prospective Limited Partners should consult their tax advisors for further information about the tax consequences of purchasing a Limited Partner Interest in the Fund. Withholding and Other Taxes The General Partner intends to structure the Fund’s investments in a manner that is intended to achieve the Fund’s investment objectives and, notwithstanding anything contained herein to the contrary, there can be no assurance that the structure of any investment will be tax efficient for any particular investor or that any particular tax result will be achieved. In addition, tax reporting requirements may be imposed on investors under the laws of the jurisdictions in which investors are liable to taxation or in which the Fund makes portfolio investments. Prospective investors should consult their own professional advisors with respect to the tax consequences to them of an investment in the Fund under the laws of the jurisdiction in which they are liable to taxation. Furthermore, the Fund’s returns in respect of its investments may be reduced by withholding or other taxes imposed by jurisdictions in which the Fund’s portfolio companies are organized. Confidential Information The Partnership Agreement will contain confidentiality provisions intended to protect proprietary and other information relating to the Fund and the Fund’s portfolio companies. To the extent that such information is publicly disclosed, competitors of the Fund and/or competitors of its portfolio companies, and others, may benefit from such information, thereby adversely affecting the Fund, its portfolio companies and the General Partner and the economic interests of Limited Partners. Written Agreements The Fund, the General Partner and the Management Company will be authorized, without the approval of any Limited Partner, to enter into side letters or similar written agreements with Limited Partners that have the effect of establishing rights under, or altering or supplementing the terms of this Memorandum, the Partnership Agreement, such Limited Partner’s Subscription Agreement or other related agreements. The ability of other Limited Partners to receive copies of and/or elect to receive the benefit of such side agreements will be limited. Market volatility Since 2008, the capital, credit and securities markets have been experiencing unprecedented levels of volatility and disruption. Ongoing volatility could negatively impact the Fund in a number of ways. Many of the investments purchased, held and sold on behalf of the Fund may be complex, and their market values will be highly sensitive to market changes. Overall Fund returns may be reduced as relatively small changes in the capital, credit or securities markets may have significant impacts on the profitability of Fund investments. In addition, the U.S. Congress and regulatory agencies may adopt new financial regulations and tax policies in response to continued volatility, which could restrict the Fund’s investment options and be otherwise unfavorable to the Fund. 70 CONTROL NUMBER 257 - CONFIDENTIAL Regulatory Changes On June 22, 2011, to implement provisions of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the U.S. Securities and Exchange Commission (the “SEC”) adopted final rules implementing new exemptions from the registration requirements of the Investment Advisers Act of 1940 (the “Advisers Act”), one of which is commonly known as the venture capital fund exemption. Neither the General Partner nor the Management Company is currently expected to register as an investment adviser with the SEC in reliance on the venture capital fund exemption. The General Partner may need to take into consideration certain conditions regarding the nature of investments that may be made by investment vehicles advised by an investment adviser relying on the venture capital exemption, which may constrain the Fund’s investment flexibility or require certain non-qualifying investments to be disposed of earlier than they might otherwise be. In addition, compliance with the venture capital fund exemption may subject the Fund to limitations on the Fund’s operations, including limitations on the Fund’s ability to borrow, provide guarantees and make short-term investments that are more restrictive than any limitation set forth in the Partnership Agreement. Reliance on the venture capital exemption also will necessitate reporting certain information to the SEC about the Management Company, the General Partner and their affiliates and may result in such entities being subject to SEC examination authority and certain Advisers Act compliance obligations. If the General Partner and the Management Company are able to rely on the venture capital exemption, investors in the Fund will not be entitled to the benefits of certain protections under the Advisers Act. If the General Partner or the Management Company cannot rely on the venture capital exemption, the General Partner or the Management Company may need to register as an investment adviser under the Advisers Act. Registration under, and compliance with, the Advisers Act could be costly and could divert attention of the Fund’s management team. There also can be no assurance that statutory, regulatory, judicial or administrative interpretations of existing laws and regulations will not in the future impose more comprehensive or stringent requirements on the General Partner or the Management Company. Cautionary Statements Regarding Forward-Looking Statements. Certain information contained in this Memorandum constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Such forward-looking statements, including the intended actions and performance objectives for the Fund, involve known and unknown risks, uncertainties and other important factors that could cause actual results, performance or achievements of the Fund to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Although this information was prepared by the General Partner based on its experience in the industry and on assumptions of fact and opinion as to future events that the General Partner believed to be reasonable when made, no representation is made or assurance given that such statements, views, projections or forecasts are correct or that the objectives of the Fund will be achieved or that investors will receive a return of their capital. Moreover, neither the Fund nor the General Partner, nor any of their affiliates, assumes responsibility for the accuracy and completeness of any forward-looking statements. All forward-looking statements in this Memorandum speak only as of the date of this Memorandum. The Fund, the General Partner and their affiliates expressly disclaim any obligation or undertaking to disseminate any updates 71 CONTROL NUMBER 257 - CONFIDENTIAL or revisions to any forward-looking statement contained herein to reflect any change in its expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Due to various risks and uncertainties, actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements. Limited Partners are cautioned not to place undue reliance on such statements. THE FOREGOING LIST OF RISK FACTORS AND CONFLICTS OF INTEREST DOES NOT PURPORT TO BE A COMPLETE EXPLANATION OF THE RISKS INVOLVED IN THIS OFFERING. PROSPECTIVE INVESTORS ARE URGED TO READ THIS ENTIRE MEMORANDUM BEFORE DETERMINING TO INVEST IN THE FUND. 72 CONTROL NUMBER 257 - CONFIDENTIAL X. CERTAIN TAX AND ERISA CONSIDERATIONS IN ACCORDANCE WITH U.S. TREASURY REGULATIONS GOVERNING PRACTICE BEFORE THE INTERNAL REVENUE SERVICE (CIRCULAR 230), LEGAL COUNSEL TO THE FUND HEREBY INFORMS INVESTORS THAT (A) THE INFORMATION BELOW (OR OTHERWISE CONTAINED IN THIS DOCUMENT) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY THE INVESTORS FOR THE PURPOSE OF AVOIDING PENALTIES THAT THE INTERNAL REVENUE SERVICE (THE “IRS”) MAY ATTEMPT TO IMPOSE ON AN INVESTOR, (B) THE INFORMATION WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTION OR MATTERS ADDRESSED BY THE WRITTEN INFORMATION, AND (C) INVESTORS SHOULD SEEK TAX ADVICE BASED ON THEIR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR. CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS The following is a brief summary of certain U.S. federal income tax considerations that may be relevant to an investment in the Fund. This summary does not contain a comprehensive discussion of all U.S. federal income tax consequences that may be relevant to a Partner in view of that Partner’s particular circumstances or (unless otherwise indicated) to certain Partners subject to special treatment under U.S. federal income tax laws — such as regulated investment companies, personal holding companies, brokers or dealers in securities, banks and certain other financial institutions, tax-exempt organizations, trusts, and insurance companies — nor does it address any state, estate, local, foreign, or other tax consequences of an investment in the Fund, except as otherwise provided herein. This summary is based on the assumptions that (i) each Partner (and each of its beneficial owners, as necessary under U.S. federal income tax withholding and backup withholding rules) will provide all appropriate certifications to the Fund in a timely fashion to minimize withholding (or backup withholding) on each Partner’s distributive share of the Fund’s gross income and (ii) each Partner will hold its Limited Partner Interest in the Fund as a capital asset for U.S. federal income tax purposes. Each prospective investor should also note that, except as otherwise provided herein, this summary does not address the interaction of U.S. federal tax laws and any income or estate tax treaties between the U.S. and any other jurisdiction. No assurance can be given that the IRS will concur with the tax consequences set forth below. Each prospective investor is advised to consult its own tax counsel as to the specific U.S. federal income tax consequences of an investment in the Fund and as to applicable foreign, state, estate, and local taxes. General Matters Classification of the Fund - Pursuant to applicable U.S. Treasury Regulations, the Fund will be treated as a partnership, rather than a corporation, for U.S. federal income tax purposes unless the Fund affirmatively elects to be treated as a corporation for such purposes. The General Partner has no intention of making such an election on behalf of the Fund and does not anticipate any circumstances under which such an election would be made. In certain cases under Section 7704 of the Internal Revenue Code of 1986, as amended (the “Code”), a partnership that is classified as a “publicly traded partnership” may be taxed as a corporation 73 CONTROL NUMBER 257 - CONFIDENTIAL for U.S. federal income tax purposes. The following discussion is based on the assumption that the Fund will not be treated as a “publicly traded partnership.” Treatment of U.S. Partners and Non-U.S. Partners - The discussion below addresses separately certain U.S. federal income tax matters relevant to U.S. Partners and Non-U.S. Partners. For purposes of this discussion, the term “U.S. person” generally means any U.S. citizen or resident individual, any corporation, limited liability company, or partnership organized under U.S. law, any estate (other than an estate the income of which, from sources outside the U.S. that is not effectively connected with a trade or business within the U.S., is not includible in its gross income for U.S. federal income tax purposes), and any trust if a court within the U.S. is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. The term “U.S. Partner” means any partner that is a U.S. person and, unless the context otherwise requires, includes any U.S. person that holds an equity interest in the Fund through one or more partnerships or other entities treated as transparent for U.S. federal income tax purposes. The term “Non-U.S. Partner” means a Partner that is not a U.S. person. Taxation of Fund Operations Generally - As a partnership, the Fund will not pay U.S. federal income taxes, but each U.S. Partner will be required to report that Partner’s distributive share (whether or not distributed) of the Fund’s income, gains, losses, deductions and credits of the character specified in Section 702 of the Code. It is possible that the U.S. Partners could incur U.S. federal income tax liabilities without receiving from the Fund sufficient distributions to defray such tax liabilities. The Fund’s taxable year will be the calendar year, or such other period as required by the Code. Tax information will be delivered to all Partners on an annual basis to enable the Partners to complete their tax returns. Election to Adjust Basis of Fund Assets - Under the principal agreements relating to the Fund and Section 754 of the Code, the General Partner will have the authority to elect to adjust the basis of the Fund’s assets (commonly referred to as “Section 754 adjustments”) in connection with certain distributions made by the Fund to Partners or certain transfers of Limited Partner Interests in the Fund. Although the General Partner has no present intention of making an election on behalf of the Fund under Section 754 of the Code, Section 754 adjustments may nevertheless be mandatory under certain circumstances and could affect the amount of a Partner’s allocations (for U.S. federal income tax purposes) of gain or loss recognized by the Fund on a disposition of its assets. The General Partner also will have the authority under the principal agreements relating to the Fund to elect to treat the Fund as an “electing investment partnership” and, as a result, potentially avoid making Section 754 adjustments that otherwise would be mandatory with respect to certain transfers of Limited Partner Interests in the Fund. Such election, however, may result in the disallowance (for U.S. federal income tax purposes) of certain losses allocated by the Fund to transferees of Limited Partner Interests in the Fund. It is possible, however, that the Fund will not be able to qualify as an electing investment partnership. The General Partner will have the authority to require any Partner engaging in a transaction that requires a Section 754 adjustment (for example, a transfer of the Partner’s Limited Partner Interest) to bear the ongoing administrative and other costs incurred by the Fund or its Partners in connection with these basis adjustment rules. These costs, which could be significant, may be 74 CONTROL NUMBER 257 - CONFIDENTIAL charged to a Partner without regard to whether the General Partner made either of the elections described above on behalf of the Fund. Furthermore, each Partner will be required to provide the Fund with any information necessary to allow the Fund to comply with its obligations to make Section 754 adjustments and/or its obligations as an electing investment partnership. Tax-Exempt U.S. Partners Unrelated Business Taxable Income - Under the terms of the principal agreements relating to the Fund, the General Partner will be required to use reasonable best efforts to conduct the affairs of the Fund in a manner that does not cause any tax-exempt U.S. Partner to recognize any “unrelated business taxable income” within the meaning of Section 512 of the Code; provided, however, that the General Partner may cause the Fund to borrow on a short-term basis and may guarantee the indebtedness of any portfolio company. 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. Notwithstanding this undertaking, it is possible that the Fund could realize income which would constitute unrelated business taxable income, and in that event each tax-exempt U.S. Partner would be subject to U.S. federal income tax on its share of such income and may be required to file a U.S. federal income tax return with respect to such income. Taxable U.S. Partners Limitations on Allowable Deductions - Under Section 67 of the Code, U.S. taxpayers who are individuals may deduct certain miscellaneous expenses (e.g., investment advisory fees, tax preparation fees, and unreimbursed employee expenses such as the cost of subscriptions to professional journals) only to the extent that these deductions exceed, in the aggregate, 2% of the taxpayer’s adjusted gross income. Further, Section 68 of the Code disallows certain deductions otherwise allowable to taxpayers who are individuals; the amount disallowed varies based on the taxpayer’s adjusted gross income. Part or all of the Fund’s expenses allocated to any U.S. Partner who is an individual (including that Partner’s share of the management fee payable to the Fund’s Management Company) may be disallowed under these provisions, although tax-exempt U.S. Partners will generally not be affected. Finally, certain expenses (including the fees and expenses of placement agents, if any) incurred in connection with the offer and sale of the Limited Partner Interests are not deductible by any U.S. Partner. If the Management Company or an affiliate pays the fees or expenses of any placement agent, a corresponding portion of the Fund’s expenses attributable to payments or accruals of the management fee is likely to constitute a nondeductible syndication expense. Surtax on Unearned Income - Section 1411 of the Code generally imposes a 3.8% surtax on the “net investment income” of certain U.S. Partners who are citizens or resident aliens, and on the undistributed “net investment income” of certain U.S. estates and trusts. Among other items, “net investment income” generally would include a U.S. Partner’s allocable share of the Fund’s net gains and certain other income such as interest and dividends, less deductions allocable to such income. In addition, “net investment income” may include gain from the sale, exchange or other taxable disposition of an interest in the Fund, less certain deductions. U.S. Partners 75 CONTROL NUMBER 257 - CONFIDENTIAL potentially subject to the surtax should consult their own advisors concerning its potential applicability to their individual circumstances. Passive Foreign Investment Companies - A portfolio investment by the Fund in a non-U.S. corporation that is classified as a “passive foreign investment company” (“PFIC”) will cause taxable U.S. Partners to be subject to taxation under Sections 1291 through 1298 of the Code. In general, a non-U.S. corporation will be classified as a PFIC if 75% or more of its gross income constitutes “passive income” — generally, interest, dividends, royalties, rent and similar income, and gains on the disposition of assets that generate such income — or 50% or more of its assets (by value or, in certain situations, by adjusted tax bases) produce passive income or are held for the production of such income. Under the PFIC rules, gain attributable to a disposition of PFIC stock, as well as income attributable to certain “excess distributions” with respect to that PFIC stock, is allocated ratably over the shareholder’s holding period for the stock. Gain allocated under this rule to (i) the year in which the shareholder disposes of the PFIC stock and (ii) any year prior to the time the foreign corporation first satisfied the PFIC income or assets test, as well as income attributable to any excess distribution on PFIC stock allocated to those years, is subject to tax (as ordinary income) at the U.S. federal income tax rates applicable to the shareholder for the year in which the disposition occurs. Disposition gain attributable to years included in the shareholder’s holding period — other than those described in the preceding clauses (i) and (ii) — and income attributable to excess distributions allocated to each such other year is subject to tax (as ordinary income) at the maximum U.S. federal income tax rate applicable to the shareholder for the year in which the income is treated as realized, and also to an interest-like charge on the shareholder’s “deferred” payment of this tax liability that accrues generally from the year of deemed realization through the due date of the shareholder’s U.S. federal income tax return for the year of disposition or distribution (determined without regard to extensions). A U.S. Partner effectively will be treated as a U.S. shareholder with respect to its proportionate share of any PFIC stock owned by the Fund. If, however, that PFIC is also a “controlled foreign corporation” in which the Fund is a “United States Shareholder” (as defined below), the PFIC rules generally will be superseded by the rules discussed below dealing with controlled foreign corporations. The PFIC rules generally should not affect tax-exempt U.S. Partners. The PFIC rules are highly technical and it is possible that a non-U.S. corporation in which the Fund makes an investment will be classified as a PFIC. If the Fund invests in the stock of a portfolio company classified as a PFIC, and that company agrees to provide the Fund and, if necessary, the IRS with certain financial information, the Fund may elect to treat that company as a “qualified electing fund” (“QEF”). If the Fund holds stock of a non-U.S. corporation with respect to which a QEF election has been made for the first taxable year in the Fund’s holding period for which the non U.S. corporation is a PFIC, each U.S. Partner will be subject to tax currently on its proportionate share of certain earnings and net capital gain of that non-U.S. corporation — regardless of whether that corporation actually distributes cash or other property to the Fund — but generally will not be subject to the tax regime described in the preceding paragraph with respect to its investment in that corporation. Although the maximum rate of tax imposed on certain dividends is currently 20%, this rate does not apply to dividends paid or deemed paid by PFICs. A QEF election generally will not result in current inclusion of the PFIC’s earnings for any year in which the PFIC has no net ordinary earnings and no net capital gain. Alternatively, if such PFIC stock is publicly traded, the Fund may be eligible to value the 76 CONTROL NUMBER 257 - CONFIDENTIAL stock annually on a “mark-to-market” basis so that the Fund may treat any resulting gain or loss as ordinary income or loss to avoid the PFIC tax. As noted above, the PFIC rules (including the rules pertaining to QEF elections) generally should not affect tax-exempt U.S. Partners. The Fund cannot predict with any certainty at this time whether any non-U.S. portfolio company in which the Fund invests may be subject to the PFIC regime, whether a timely QEF election can or will be made, or the effect or availability of any applicable elections made by the Fund. The rules applicable to PFICs are complex, and the foregoing summary of U.S. federal income taxation of U.S. Partners indirectly owning an interest in a PFIC is general in nature. It is possible that U.S. Partners may be subject to tax currently under the PFIC regime on their proportionate shares of certain earnings of a non-U.S. corporation in which the Fund holds an interest and/or may incur nondeductible interest-like charges on tax liability deferred under the PFIC regime without receiving from the Fund distributions sufficient to satisfy any such obligations. In addition to the PFIC rules discussed above, a U.S. person that is a shareholder of a PFIC may be required to file an annual information report and/or applicable tax forms with the IRS. Controlled Foreign Corporations - Under Sections 951 through 957 of the Code, special rules apply to U.S. persons who own, directly or indirectly and applying certain attribution rules, 10% or more of the total combined voting power of all classes of stock of a non-U.S. corporation (each, a “United States Shareholder”) that is a “controlled foreign corporation” (“CFC”). For this purpose, the Fund will be treated as a United States Shareholder of any foreign corporation in which the Fund’s share ownership reaches this 10% threshold. A non-U.S. corporation generally will be a CFC for a taxable year if United States Shareholders collectively own more than 50% of the total combined voting power or total value of the corporation’s stock on any day during such taxable year. United States Shareholders of a CFC generally must include in their gross income for U.S. federal income tax purposes their pro rata shares of certain earnings and profits of the CFC. Further, under Section 1248 of the Code, if a U.S. person sells or exchanges stock of a non-U.S. corporation and that person is or was a United States Shareholder at any time during the five-year period ending on the date of such sale or exchange during which that non-U.S. corporation was a CFC, that U.S. person generally will be required to treat a portion of the gain recognized upon such sale or exchange as a dividend to the extent of the earnings and profits of the CFC attributable to such stock. Under U.S. federal income tax rules, the Fund itself is a U.S. person and, if the Fund becomes a United States Shareholder of a CFC, taxable U.S. Partners (i) will be required to report and pay tax currently on their shares of the CFC’s earnings and profits attributable to the Fund that are taxable to its United States Shareholders under the CFC rules, and (ii) will be subject to the Section 1248 recharacterization rule described above. In addition, if the Fund is a United States Shareholder of a CFC and a U.S. Partner disposes of its Limited Partner Interest, that Partner generally will recognize income under Section 751 of the Code equal to its distributive share of the Section 1248 income that would have been triggered if the Fund had sold its interest in the CFC at fair market value. The maximum rate of tax imposed on certain dividend income and certain long-term capital gains attributable to dispositions of securities generally is 20%, so that a recharacterization of gain under Section 1248 might not increase that U.S. Partner’s U.S. federal income tax liability. In addition, income of a CFC subject to income tax in a country other than the U.S. at an 77 CONTROL NUMBER 257 - CONFIDENTIAL effective rate greater than 90% of the maximum U.S. corporate income tax rate is not taxable to a United States Shareholder under the CFC rules if the United States Shareholder so elects. The rules applicable to CFCs are complex, and the foregoing summary of the U.S. federal income taxation of U.S. Partners indirectly owning an interest in a CFC is general in nature. The General Partner cannot provide any assurance that the Fund’s portfolio companies will not be CFCs. The CFC rules, however, generally should not affect tax-exempt U.S. Partners. U.S. Foreign Tax Credits - The Fund may make investments in entities that are formed and operating under the laws of countries other than the United States. The countries in which these entities are organized and operate may impose taxes on the income of, and distributions or other payments made by, these entities. In addition, the Fund and/or the Partners may be required to file tax or information returns in such non-U.S. jurisdictions. U.S. Partners may be entitled, under certain circumstances, to a reduced rate of non-U.S. tax on their shares of such income or distributions under tax treaties between the United States and the non-U.S. jurisdictions imposing such tax, or may, in certain circumstances, be entitled under such treaties to file tax returns in such jurisdictions and claim refunds of any amounts of non-U.S. tax overwithheld. Subject to applicable limitations on foreign tax credits, a U.S. Partner that is subject to U.S. federal income taxation generally should be entitled to elect to treat foreign taxes withheld from such Partner’s share of the Fund’s dividend and interest income as foreign income taxes eligible for credit against such Partner’s U.S. federal income tax liability. Similarly, each U.S. Partner’s share of any foreign taxes which may be imposed on capital gains or other income realized by the Fund generally should be treated as creditable foreign income taxes. Capital gains realized by the Fund, however, may be considered to be from sources within the U.S., which may effectively limit the amount of foreign tax credit allowed to the U.S. Partner. Other complex tax rules may also limit the availability or use of foreign tax credits, depending on each U.S. Partner’s particular circumstances. Because of these limitations, U.S. Partners may be unable to claim a credit for the full amount of their proportionate shares of any foreign taxes paid by the Fund. U.S. Partners that do not elect to treat their shares of foreign taxes as creditable generally may claim a deduction against U.S. taxable income for such taxes (subject to applicable limitations on losses and deductions). Foreign tax credits or deductions generally will not provide any benefit to tax-exempt U.S. Partners unless such Partners’ distributive shares of the income or gains on which the related foreign income taxes are imposed constitute “unrelated business taxable income” and certain other conditions are satisfied. However, since the availability of a credit or deduction depends on the particular circumstances of each U.S. Partner, Partners are advised to consult their own tax advisors. Foreign Currency Issues - A U.S. Partner’s distributive share of profits or losses realized by the Fund on the conversion of U.S. dollars into non-U.S. currency, or of non-U.S. currency into U.S. dollars, generally will be treated as ordinary income or loss rather than capital gain or loss. Further, if the Fund acquires, or becomes the obligor under, a debt instrument or enters into certain other transactions, any of which is denominated in terms of a currency other than the U.S. dollar, fluctuations in the value of that currency relative to the U.S. dollar generally will result in foreign currency gain or loss realized by the Fund and will be included in the U.S. Partners’ distributive shares of Fund profits or losses as U.S.-source ordinary income or loss rather than capital gain or loss. 78 CONTROL NUMBER 257 - CONFIDENTIAL U.S. Reporting by U.S. Partners That Are Owners of Non-U.S. Entities - U.S. tax rules impose information reporting requirements on U.S. persons that own, either directly or indirectly under stock attribution rules, more than certain threshold amounts of stock in a foreign corporation; these persons must disclose, among other things, various transactions between themselves and those foreign corporations. For purposes of these information reporting requirements, stock ownership is determined with regard to certain stock attribution rules, and each U.S. Partner is treated as owning part or all of the stock owned directly or indirectly by the Fund. Similar reporting requirements apply to United States persons that (i) own, directly or indirectly, more than certain threshold amounts of certain foreign financial assets including, but not limited to stocks, securities and partnership interests in non-U.S. entities or (ii) contribute, in their capacity as Partners, more than a certain threshold amount to a non-U.S. partnership during a 12-month period. In certain circumstances, these rules may require U.S. Partners to file reports annually. U.S. Partners generally will be responsible for satisfying these information reporting requirements. Non-U.S. Partners U.S. Trade or Business Issues - Under the terms of the principal agreements relating to the Fund, the General Partner will be required to use commercially reasonable efforts to conduct the affairs of the Fund in a manner that limits the Fund’s operations to investing and other related activities which, in the aggregate, would not cause the Fund to be treated as engaged in the conduct of a trade or business in the U.S. 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. Notwithstanding this undertaking, it is possible that the activities of the Fund and the contractual arrangements into which it enters could cause the Fund to be treated as engaged in the conduct of a trade or business in the U.S. Provided that the Fund is not engaged in the conduct of a U.S. trade or business, the U.S. federal income tax liability of a Non-U.S. Partner with respect to that Partner’s Limited Partner Interest generally will be limited to withholding tax on certain gross income from U.S. sources generated by the Fund as long as the Non-U.S. Partner undertakes no activities in the U.S. (determined without regard to its investment in the Fund) that would cause that Partner to be engaged in the conduct of a U.S. trade or business, and, unless otherwise indicated, the following discussion of the U.S. federal income tax treatment of Non-U.S. Partners is based on that assumption. Further, if the Fund withholds and remits the proper amounts to the U.S. government, Non-U.S. Partners that are individuals or corporations will not be required to file U.S. federal income tax returns or pay additional U.S. federal income taxes solely as a result of their investment in the Fund (though Non-U.S. Partners treated as trusts for U.S. federal income tax purposes are subject to special rules). If the Fund is not engaged in the conduct of a U.S. trade or business, Non-U.S. Partners’ shares of income and gains from sources other than the U.S. (e.g., interest or dividends paid by non-U.S. portfolio companies and gains realized on the disposition of securities of those companies) will not be subject to U.S. federal income tax. 79 CONTROL NUMBER 257 - CONFIDENTIAL If it were ultimately established that the Fund is engaged in a U.S. trade or business, the Fund generally would be required to withhold and remit to the U.S. government a percentage of the Fund’s net income and gains that are both effectively connected with that trade or business and allocated to Non-U.S. Partners, and would be liable for interest and penalties with respect to amounts which were not so withheld. The relevant withholding percentage is the maximum U.S. federal income tax rate for individuals or corporations, as applicable. In addition, Non-U.S. Partners generally would be required to file U.S. federal income tax returns and pay tax in respect of their shares of the Fund’s effectively connected income including capital gains, but would be allowed a credit against U.S. federal income tax liability for amounts withheld by the Fund on their behalf. Non-U.S. Partners which are non-U.S. corporations might also be subject to a “branch profits” tax on certain earnings of the Fund deemed to have been repatriated to those Partners. Treatment of Interest and Dividends from U.S. Sources - Certain categories of investment income from U.S. sources realized by the Fund, such as dividends and interest, generally will be subject to U.S. income tax withholding, at a 30% rate on the gross amount of that income, when included in the distributive shares of Non-U.S. Partners. A Non-U.S. Partner whose distributive share of such income is subject to U.S. withholding tax may be able to claim an exemption or a reduced rate of withholding under a tax treaty or convention between the U.S. and that Partner’s country of residence by providing appropriate documentation regarding that Partner’s residence for tax purposes and its satisfaction of any conditions imposed by the treaty. A Non-U.S. Partner resident in a jurisdiction with which the U.S. has a tax treaty, however, will not be entitled to the benefits of that treaty with respect to that Non-U.S. Partner’s distributive share of the Fund’s income and gains unless the Fund is treated as fiscally transparent under the law of that non-U.S. jurisdiction and certain other conditions are satisfied. Finally, in order to claim the benefits of a tax treaty to reduce U.S. withholding tax on U.S.-source interest and dividends paid by corporations that are not actively traded, a Non-U.S. Partner — and any direct or indirect equity owner of a Non-U.S. Partner seeking treaty benefits for itself because the Non-U.S. Partner is considered fiscally transparent in that equity owner’s jurisdiction — generally will be required to obtain a U.S. taxpayer identification number from the IRS and may be required to provide that number and certain other documentation to the Fund. Other exemptions may be available for certain types of interest income. Treatment of the Fund’s Capital Gains from U.S. Sources - Under current U.S. law, in general, capital gains attributable to sales by the Fund of the securities of U.S. corporations will not be subject to U.S. federal income taxation or tax withholding when allocated to a Non-U.S. Partner unless that Partner is an individual who is present in the U.S. for 183 days or more during the taxable year in which such gains are realized and certain other conditions are satisfied. This general rule does not apply to gains attributable to a U.S. trade or business or gains attributable to dispositions of securities of any “United States real property holding corporation” (“USRPHC”), defined in Section 897 of the Code as, in general, a company with 50% or more of the fair market value of its business assets consisting of interests in U.S. real estate and related assets. Capital gains attributable to sales by the Fund of the securities of a U.S. corporation that is a USRPHC (other than debt securities with no equity component) may be subject to U.S. income tax, collected initially by withholding, to the extent allocated to any Non-U.S. Partner. Non-U.S. Partners would also be required to file U.S. federal income tax 80 CONTROL NUMBER 257 - CONFIDENTIAL returns, and might be liable for U.S. tax in excess of the amount collected by withholding. Similarly, Non-U.S. Partners could become subject to U.S. federal income tax and tax return filing obligations, as a result of transfers of their Limited Partner Interests at a time when the Fund owned stock of any U.S. corporation that is a USRPHC, although certain exceptions may apply. Even if a company in which the Fund invests is not a USRPHC at the time of such investment, such company subsequently may become a USRPHC. Currency Conversion Issues - Non-U.S. Partners (like other Partners) will be required to make their capital contributions to the Fund in U.S. dollars, and any cash distributions made by the Fund will be made in U.S. dollars. Profits or losses realized by Non-U.S. Partners on the conversion of other currencies into U.S. dollars, or of U.S. dollars into other currencies, will neither be reflected in the capital accounts of the Partners nor affect the amounts distributable by the Fund to its Non-U.S. Partners. Withholding on Payments to Certain Foreign Entities - Sections 1471 through 1474 of the Code would generally impose a withholding tax of 30% on certain gross amounts of income not effectively connected with a U.S. trade or business paid to certain foreign entities, unless certain requirements are satisfied. Amounts subject to withholding tax under these rules generally include gross U.S.-source dividend and interest income paid on or after July 1, 2014, as well as gross proceeds from the sale of property that produces U.S.-source dividend or interest income paid on or after January 1, 2017. To avoid withholding under these rules, Non-U.S. Partners that are subject to these rules will generally be obligated to comply with certain information reporting and disclosure requirements, including, in certain cases, entering into an agreement with the IRS. Non-U.S. Partners are encouraged to consult their own tax advisors regarding the possible application of Sections 1471 through 1474 of the Code to their investment in the Fund. Other Tax Matters Certain State and Local Tax Consequences - State and local taxing jurisdictions may impose income taxes and estate, inheritance and intangible property taxes on income from, or an investment in, the Fund. These tax laws may differ substantially from the U.S. federal tax laws. As a result of participating in the Fund, a Partner may be required to file tax returns with, and pay taxes to, any state or local jurisdiction in which the Fund does business (or is deemed to do business from investing a portion of its commitments in operating businesses treated as tax transparent for U.S. federal income tax purposes). A Partner’s distributive share of the Fund’s taxable income, gain, loss, deduction and credit is normally included in the income reported to the state and local jurisdiction(s) in which the Partner is a resident or does business. Investors should consult their own tax advisors about state and local taxes. Basis for Description of Tax Consequences - The description of U.S. tax consequences set forth above is based on the provisions of the principal agreements relating to the Fund that the General Partner expects will be adopted, existing provisions of the Code, existing and proposed U.S. Treasury Regulations, existing administrative interpretations and court decisions, and certain assumptions. Future legislation, U.S. Treasury Regulations, administrative interpretations or court decisions could significantly change these authorities. Any such change could have retroactive application and therefore could apply to transactions that have taken place before such change occurs. In addition, some of the issues discussed above have not been addressed by administrative authorities or resolved by the courts. Accordingly, no assurance 81 CONTROL NUMBER 257 - CONFIDENTIAL can be given that the IRS will agree with the description of the U.S. federal income tax consequences described above. No rulings have been or will be requested from the IRS. Furthermore, any changes in the principal agreements relating to the Fund or the operations of the Fund could affect the tax consequences described above. Consultation with Tax Advisors - The description of U.S. tax matters set forth above is not intended as a substitute for careful tax planning. It does not address all of the U.S. federal income tax consequences to investors in the Fund, and does not address any of the foreign, state, local, estate or other tax consequences of such investment to any investor, except as otherwise specifically provided. Each prospective investor in the Fund is solely responsible for all tax consequences to that person or entity of an investment in the Fund. Each prospective investor is advised to consult its own tax counsel as to the U.S. federal income tax consequences attributable to acquiring, holding and disposing of an Limited Partner Interest and as to applicable foreign, state, local, estate or other taxes. The effect of existing U.S. income tax laws and treaties, the tax laws of other jurisdictions to which an investor may be subject, and possible changes in such laws and treaties (including proposed changes which have not yet been adopted) will vary with the particular circumstances of each investor. CERTAIN ERISA CONSIDERATIONS ERISA governs the investment of assets of ERISA Plans that may be investors, directly or indirectly, in the Fund. ERISA, the regulations under ERISA issued by the United States Department of Labor (the “DOL”) and opinions and other authority issued by the DOL and the courts provide guidance that should be considered by fiduciaries of ERISA Plans prior to investing in the Fund. The following discussion of certain ERISA considerations is based on statutory authority and judicial and administrative interpretations as of the date hereof and is designed only to provide a general understanding of the basic issues. Accordingly, this discussion should not be considered legal advice and the trustees and other fiduciaries of each ERISA Plan are encouraged to consult their own legal advisors on these matters. Fiduciary Duty of Investing Plans A fiduciary considering investing assets of an Employee Plan (“plan assets”) in the Fund should consult its legal adviser before making such an investment. Before authorizing an investment in the Fund, any such fiduciary should, after considering the Employee Plan’s particular circumstances, be satisfied that the investment of such plan assets in the Fund is appropriate under the fiduciary standards of ERISA, including standards with respect to prudence, diversification and compliance with the governing documents of the Employee Plan and its related trust and the prohibited transaction provisions of ERISA and the Code. Plan Assets ERISA and the regulation issued by the DOL at 29 C.F.R. § 2510.3-101, as modified or deemed to be modified by ERISA (the “Plan Assets Regulation”), define the term “plan assets” as applied to entities in which a plan invests, directly or indirectly, such as the Fund. The Plan Assets Regulation provides that when an ERISA Plan acquires an equity interest in an entity, and such 82 CONTROL NUMBER 257 - CONFIDENTIAL equity interest is neither a publicly offered security nor a security issued by an investment company registered under the Investment Company Act, the assets of the ERISA Plan include not only the equity interest, but also include an undivided interest in the underlying assets of the entity, unless an exception to this general rule applies. Exceptions Under the Plan Assets Regulation The Plan Assets Regulation provides several exceptions to the general rule of plan asset treatment. Pursuant to one such exception, the assets of certain entities, such as the Fund, will not be treated as plan assets if the entity is operated as a “venture capital operating company” within the meaning of the Plan Assets Regulation (“VCOC”). Generally, for an entity to qualify as a VCOC, at least fifty percent (50%) of its assets (excluding short-term investments made pending long-term commitments or distribution to investors) valued at cost must be invested in (a) “operating companies” with respect to which the entity has the direct contractual right to participate substantially in, or to substantially influence the conduct of, the management of the operating company and the entity must actually exercise such management rights with respect to one or more such operating companies in the ordinary course of its business, or (b) “derivative investments” (as defined in the Plan Assets Regulation) (the “Asset Test”). For the purposes of qualifying as a VCOC, an “operating company” is defined as an entity that is primarily engaged, directly or through a majority owned subsidiary or subsidiaries, in the production or sale of a product or service other than the investment of capital, and includes a “real estate operating company” as defined in the Plan Assets Regulation (but does not include another VCOC). Determination as to whether an entity qualifies as a VCOC is made at the time when the entity makes its first long-term investment (other than short-term investments made pending long-term commitments) and thereafter during a ninety-day annual valuation period each year, the first day of which shall begin no later than the anniversary of the entity’s first long-term investment. In order for an entity to continue to qualify as a VCOC, the entity must meet the Asset Test on at least one day during each such ninety-day annual valuation period. Special rules apply to any wind-up of a VCOC when it enters its “distribution period” as defined in the Plan Assets Regulation. An additional exception applies when equity participation in the entity by benefit plan investors is not “significant.” Equity participation in an entity by “benefit plan investors” (as defined in Section 3(42) of ERISA) is “significant” on any date if, immediately after the most recent acquisition or disposition of any equity interest in the entity, 25% or more of the value (in the aggregate) of any class of equity interests in the entity is held by “benefit plan investors.” For purposes of the 25% test, the term “benefit plan investors” includes ERISA Plans, certain other retirement plans defined in and subject to Section 4975 of the Code (such as individual retirement accounts), and entities or accounts deemed to hold “plan assets” due to an investment in such entity or account by ERISA Plans or such other retirement plans (such as insurance company general accounts). For the purposes of calculating the 25% threshold under the Plan Assets Regulation, the value of any equity interest held by a person (other than a “benefit plan investor”) who has discretionary authority or control with respect to the assets of the entity or that provides investment advice for a fee (direct or indirect) with respect to such assets (or an affiliate of such person) is disregarded. 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 83 CONTROL NUMBER 257 - CONFIDENTIAL ERISA Plan for purposes of ERISA. In particular, the General Partner will use reasonable best efforts to either (i) limit investment in the Fund by “benefit plan investors” to a level that would not be considered “significant” under ERISA, or (ii) operate the Fund as a VCOC, or (iii) operate the Fund in compliance with any other then-available exception to the general rule of plan asset treatment. The General Partner has the authority to require a Limited Partner to withdraw from the Fund (in whole or in part) where the General Partner determines that such withdrawal is necessary to avoid having the Fund’s assets deemed to be “plan assets” subject to ERISA or Section 4975 of the Code. Accordingly, the Fund is not expected to be deemed to be holding “plan assets” subject to ERISA at any time. Reporting Benefit plan investors may be required to report certain compensation paid by the Fund (or by third parties) to the Fund’s service providers as “reportable indirect compensation” on Schedule C to the Form 5500 Annual Return (the “Form 5500”). To the extent any compensation arrangements described herein constitute reportable indirect compensation, any such descriptions are intended to satisfy the disclosure requirements for the alternative reporting option for “eligible indirect compensation,” as defined for purposes of Schedule C to the Form 5500. Additional Information ERISA and its accompanying regulations are complex and, to a great extent, have not yet been interpreted by the courts or the administrative agencies. This discussion does not purport to constitute a thorough analysis of ERISA. Each prospective investor subject to ERISA should consult with its own legal counsel concerning the implications under ERISA of an investment in the Fund, and to confirm that such an investment will not constitute or result in a non-exempt prohibited transaction or any other violation of an applicable requirement under ERISA. “Governmental plans” and certain “church plans”, while not subject to the fiduciary responsibility and prohibited transaction provisions of ERISA, may nevertheless be subject to state or other federal laws that are substantially similar to the foregoing provisions of ERISA. Decision-makers for any such plans should consult with their counsel before making an investment in the Fund. 84 CONTROL NUMBER 257 - CONFIDENTIAL XI. CERTAIN LEGAL & REGULATORY CONSIDERATIONS Securities Act of 1933 The Limited Partner Interests described herein will not be registered under the Securities Act in reliance upon the exemptions for transactions not involving a public offering. Each investor will be required to make certain representations to the Fund, including that such investor is an “accredited investor” within the meaning of Rule 501(a) under the Securities Act, that it is acquiring a Limited Partner Interest in the Fund for its own account, for investment purposes only and not with a view to resale or distribution, that it has received or has had access to all information it deems relevant to evaluate the merits and risks of an investment in the Fund and that it has the ability to bear the economic risk of an investment in the Fund. The Limited Partner Interests described herein will constitute “restricted securities” under the Securities Act and as such will be subject to certain restrictions on transferability. The Limited Partner Interests may not be transferred or sold unless the Limited Partner Interests have been registered under the Securities Act or an exemption from registration is available. It is not contemplated that registration under the Securities Act or other securities laws will ever be effected. The Limited Partner Interests are subject to further restrictions on transfer as described in the Partnership Agreement. This Memorandum is not a public offering “prospectus” and does not purport to describe or otherwise address all material considerations relating to an investment in the Fund. Prior to making an investment, prospective investors and their advisors are invited to ask questions of, and obtain additional information from, the General Partner concerning the Limited Partner Interests described herein, the terms and conditions of the offering and any other relevant matters. Such information will be provided to the extent the General Partner possesses such information or can acquire it without unreasonable effort or expense. Any subscription is subject to a determination by counsel to the Fund that the subscription is in compliance with applicable federal and state laws and regulations. Investment Company Act of 1940 The Fund will not be registered as an investment company under the Investment Company Act pursuant to an exemption set forth in Section 3(c)(1) and/or Section 3(c)(7) of the Investment Company Act. The Fund will obtain appropriate representations and undertakings from all purchasers of Limited Partner Interests, including restrictions on transfer, to ensure that such purchasers meet the conditions of the exemption. Section 3(c)(7) of the Investment Company Act requires that each prospective purchaser be a “qualified purchaser” within the meaning of Section 2(a)(51) of the Investment Company Act. Information with respect to such requirements for “qualified purchaser” status will be included in the Fund’s Subscription Agreement. The General Partner is not registered as a broker-dealer under the Exchange Act, or with the NASD, and is consequently not subject to certain record keeping and specific business practice provisions of the Exchange Act and the rules of the NASD. 85 CONTROL NUMBER 257 - CONFIDENTIAL Investment Advisers Act of 1940 Neither the Management Company nor the General Partner is currently registered as an investment adviser under the Advisers Act. By virtue of being exempt from the registration requirements of the Advisers Act, the Management Company and the General Partner are not subject to the performance fee restrictions and certain other restrictions contained in the Advisers Act, and the investors in the Fund will not be afforded the protections provided under the Advisers Act to clients of advisors that are registered under the Advisers Act. The General Partner, the Management Company or an affiliate thereof may in the future register as an investment adviser under the Advisers Act to the extent required under the Advisers Act. To the maximum extent permitted by applicable law, the General Partner and the Partnership (together with their respective related persons) hereby disclaim any duties, obligations, or status as an advisor, finder, agent, broker or dealer on behalf or in respect of any person in connection with such person’s actual or proposed investment in the Partnership. Compliance With Anti-Money Laundering Requirements In response to increased regulatory requirements with respect to the sources of funds used in investments and other activities, the General Partner may require prospective investors to provide documentation verifying, among other things, such investor’s (and any of its beneficial owners’) identities and source of funds used to purchase its Limited Partner Interest in the Fund. The General Partner may decline to accept a subscription if this information is not provided or on the basis of such information that is provided. Each prospective investor and Limited Partner will be required to make representations that such prospective investor or Limited Partner is not a prohibited country, territory, individual or entity listed on the U.S. Department of Treasury Office of Foreign Assets Control (“OFAC”) website and that it is not directly or indirectly affiliated with any country, territory, individual or entity named on an OFAC list or prohibited by any OFAC sanctions programs. Such prospective investor or Limited Partner will also represent that amounts contributed by it to the Fund were not directly or indirectly derived from activities that may contravene U.S. Federal, state or international laws and regulations, including, without limitation, anti-money laundering laws and regulations. Requests for documentation and additional information may be made at any time during which an investor holds a Limited Partner Interest in the Fund. The General Partner will take such steps as it determines are necessary to comply with applicable law, regulations, orders, directives or special measures to implement anti-money laundering laws, which steps may include the forced sale or withdrawal of an Interest. In addition, the Fund could be required to disclose information pertaining to prospective investors subscribing for an interest to governmental, regulatory or other authorities or to financial intermediaries or engage in due diligence or take other related actions in the future. Pay-to-Play Laws, Regulations and Policies In light of recent scandals involving money managers, a number of states and municipal pension plans have adopted so-called “pay-to-play” laws, regulations or policies which 86 CONTROL NUMBER 257 - CONFIDENTIAL prohibit, restrict or require disclosure of payments to (and/or certain contacts with) state officials by individuals and entities seeking to do business with state entities, including investments by public retirement funds. The SEC also has recently adopted rules that, among other things, prohibit an investment adviser from providing advisory services for compensation with respect to a government plan investor for two years after the adviser or certain of its executives or employees make a contribution to certain elected officials or candidates. If the Management Company, the General Partner, their employees or affiliates fail to comply with such pay-to-play laws, regulations or policies, such non-compliance could have an adverse effect on the Fund by, for example, providing the basis for the withdrawal of the affected government plan investor. 87 CONTROL NUMBER 257 - CONFIDENTIAL XII. ADDITIONAL INFORMATION Legal Counsel Proskauer Rose LLP (“Proskauer Rose”) acts as counsel to the Fund, the General Partner and the Management Company in connection with the organization of the Fund and the offering of Limited Partner Interests therein. Proskauer Rose also acts as counsel to the Fund, the General Partner, the Management Company and their affiliates in connection with investments and ongoing operations of the Fund and other matters. In connection with the offering of Limited Partner Interests and subsequent advice to the Fund, the General Partner, the Management Company and their affiliates, Proskauer Rose will not be representing the Limited Partners of the Fund. No independent counsel has been retained to represent the Limited Partners of the Fund. Investors are advised to seek their own counsel in connection with a prospective investment in the Fund. Accounting and Reporting KPMG LLP, independent certified public accountants, will report upon the financial statements of the Fund for each fiscal year. Availability of Principal Agreements Prior to the consummation of the offering, the Fund will provide to each prospective investor and such investors’ representatives and advisers, the opportunity to ask questions regarding the terms and conditions of this offering and to obtain any additional information required. Any questions or requests for information should be directed to Ron Hunt, New Leaf Venture Partners, L.L.C., Times Square Tower, 7 Times Square, Suite 3502, New York, New York 10036 (T: 646-871-6400). No other persons have been authorized to give information or to make any representations concerning this offering, and if given or made, such other information or representations must not be relied upon as having been authorized by the Fund. Copies of the Partnership Agreement and Subscription Agreement for the purchase of Limited Partner Interests will be made available upon request. Prospective investors are urged to request any additional information they may consider necessary in making an informed investment decision. During the course of the transaction and prior to sale, each purchaser of a Limited Partner Interest is invited to ask questions of the Fund Managers concerning the terms and conditions of the offering and to obtain any additional information necessary or to verify the accuracy of the information furnished in the Memorandum. 88 CONTROL NUMBER 257 - CONFIDENTIAL XIII. APPENDICES Appendix 1 Listing of Investments by Fund New Leaf Ventures II, L.P. $ amounts in millions, as of March 31, 2014 Please refer to Endnotes I,J,K,L,M and N in this Appendix. Gross Multiple (Realized Portion) Gross Multiple (Total) Vintage Year Total Cost Realized Value Unrealized Value Total Value Company Sector Gross IRR Realized or Partially Realized Investments Acadia Phamaceuticals, Inc. Therapeutics 2012 $ 7.7 $ 19.4 $ - $ 19.4 2.51 2.51 581.9% Ambit Biosciences, Inc. Therapeutics 2013 $ 10.4 $ 11.1 $ - $ 11.1 1.06 1.06 13.1% Array Biopharma Inc. Therapeutics 2012 $ 9.0 $ 20.3 $ - $ 20.3 2.25 2.25 74.0% Audax Health Solutions, Inc. Convergence 2011 $ 3.8 $ 12.5 $ 1.6 $ 14.1 - 3.68 105.6% Chimerix, Inc. Therapeutics 2011 $ 20.6 $ 27.0 $ 44.9 $ 71.9 3.07 3.50 57.7% Epizyme, Inc. Therapeutics 2013 $ 3.4 $ 6.8 $ - $ 6.8 2.03 2.03 1583.0% Glumetrics, Inc. Diagnostics & Infrastructure 2008 $ 10.7 $ - $ - $ - - - NM Intercept Pharmaceuticals, Inc. Therapeutics 2012 $ 10.5 $ 34.1 $ - $ 34.1 3.24 3.24 323.6% Kalidex Pharmaceuticals, Inc. Therapeutics 2011 $ 2.4 $ 0.2 $ - $ 0.2 0.07 0.07 -91.6% MEI Pharma, Inc. Therapeutics 2012 $ 9.0 $ 10.2 $ 35.8 $ 46.0 2.94 5.12 423.2% Presidio Pharmaceuticals, Inc. Therapeutics 2009 $ 11.0 $ - $ - $ - - - NM Synageva BioPharma Therapeutics 2009 $ 10.4 $ 75.7 $ - $ 75.7 7.30 7.30 103.3% Worldheart, Inc. Healthcare Devices 2008 $ 17.0 $ 1.8 $ - $ 1.8 0.11 0.11 NM Total Realized or Partially Realized Investments $ 125.9 $ 219.2 $ 82.3 $ 301.5 2.01 2.39 40.6% Advanced Cell Diagnostics, Inc. Diagnostics & Infrastructure 2012 $ 9.0 $ - $ 9.0 $ 9.0 - 1.00 -0.4% Afferent Pharmaceuticals, Inc. Therapeutics 2009 $ 11.2 $ - $ 11.2 $ 11.2 - 1.00 0.0% Altura Medical, Inc. Healthcare Devices 2010 $ 10.7 $ - $ 8.3 $ 8.3 - 0.77 -12.3% AwarePoint Corporation Convergence 2011 $ 12.8 $ - $ 14.1 $ 14.1 - 1.10 5.7% Calchan Holdings LTD Therapeutics 2011 $ 5.2 $ - $ - $ - - - NM CardioKinetix, Inc. Healthcare Devices 2011 $ 12.0 $ - $ 12.0 $ 12.0 - 1.00 0.0% Convergence Pharmaceuticals, Ltd Therapeutics 2010 $ 7.4 $ - $ 7.6 $ 7.6 - 1.03 1.0% Durata Therapeutics, Inc. Therapeutics 2009 $ 25.0 $ - $ 40.8 $ 40.8 - 1.63 21.2% iRhythm Technologies, Inc. Convergence 2011 $ 11.1 $ - $ 11.6 $ 11.6 - 1.04 1.6% Karos Pharmaceuticals, Inc. Therapeutics 2010 $ 7.6 $ 0.1 $ 7.5 $ 7.6 - 1.00 0.0% Karus Therapeutics Ltd Therapeutics 2012 $ 5.8 $ - $ 5.8 $ 5.8 - 1.00 0.0% Karyopharm Therapeutics, Inc. Therapeutics 2013 $ 1.0 $ - $ 4.2 $ 4.2 - 4.17 1638.7% Kitcheck, Inc. Convergence 2013 $ 3.7 $ - $ 3.7 $ 3.7 - 1.00 0.0% Neuronetics, Inc. Healthcare Devices 2009 $ 20.3 $ - $ 21.9 $ 21.9 - 1.08 2.0% NY Digital Health, LLC Convergence 2012 $ 0.4 $ - $ 0.4 $ 0.4 - 1.00 0.1% Oxford Immunotec Diagnostics & Infrastructure 2009 $ 11.3 $ - $ 27.1 $ 27.1 - 2.41 28.3% Principia BioPharma, Inc. Therapeutics 2011 $ 9.7 $ - $ 9.7 $ 9.7 - 1.00 0.0% Spiracur, Inc Healthcare Devices 2009 $ 12.0 $ - $ 8.5 $ 8.5 - 0.70 -8.4% TigerText, Inc. Convergence 2012 $ 4.6 $ 0.0 $ 5.6 $ 5.7 - 1.25 22.6% Treato Pharma Convergence 2013 $ 3.0 $ - $ 3.0 $ 3.0 - 1.00 0.0% Truveris, Inc. Convergence 2012 $ 6.5 $ - $ 6.5 $ 6.5 - 1.00 0.0% Versartis, Inc. Therapeutics 2011 $ 21.2 $ - $ 93.6 $ 93.6 - 4.41 129.4% Public Investments Therapeutics 2011 $ 20.6 $ 13.1 $ 29.5 $ 42.6 - 2.07 42.5% Total Unrealized Investments $ 232.1 $ 13.2 $ 341.4 $ 354.6 - 1.53 20.4% Total New Leaf Ventures II, L.P. Investments $ 358.0 $ 232.4 $ 423.7 $ 656.1 2.01 1.83 29.6% 89 CONTROL NUMBER 257 - CONFIDENTIAL New Leaf Ventures I, L.P. $ amounts in millions, as of March 31, 2014 Please refer to Endnotes I,J,K,L,M and N in this Appendix. Gross Multiple Gross Vintage Realized Unrealized Total (Realized Multiple Company Sector Year Total Cost Value Value Value Portion) (Total) Gross IRR Realized or Partially Realized Investments Aesthetic Sciences Corporation Healthcare Devices 2006 $ 4.1 $ - $ - $ - - - NM Artisan Pharma, Inc. Therapeutics 2006 $ 10.8 $ - $ - $ - - - NM Aviir, Inc. Diagnostics & Infrastructure 2007 $ 16.3 $ 0.9 $ - $ 0.9 0.05 0.05 NM Barrier Therapeutics, Inc. Therapeutics 2006 $ 8.2 $ 6.4 $ - $ 6.4 0.78 0.78 -11.8% BioRelix, Inc. Therapeutics 2007 $ 6.3 $ - $ - $ - - - NM Cerexa, Inc. Therapeutics 2005 $ 8.0 $ 43.4 $ - $ 43.4 5.42 5.42 197.3% CN Therapeutics, Inc. Therapeutics 2006 $ 0.1 $ - $ - $ - - - NM Interlace Medical, Inc. Healthcare Devices 2005 $ 7.8 $ 67.3 $ 0.1 $ 67.4 8.62 8.64 84.4% Oriel Therapeutics, Inc. Therapeutics 2007 $ 11.1 $ 18.8 $ 12.2 $ 31.0 1.70 2.80 49.9% Pearl Therapeutics, Inc. Therapeutics 2007 $ 28.9 $ 72.3 $ 17.3 $ 89.6 2.50 3.10 33.1% Proteogenix, Inc. Diagnostics & Infrastructure 2007 $ 9.4 $ 0.8 $ - $ 0.8 0.08 0.08 NM Stromedix, Inc. Therapeutics 2008 $ 10.7 $ 19.2 $ 22.5 $ 41.7 1.79 3.89 42.0% Transcept Pharmaceuticals, Inc Therapeutics 2005 $ 15.6 $ 7.1 $ - $ 7.1 0.46 0.46 -11.5% Total Realized or Partially Realized Investments $ 13.7 $ 236.2 $ 52.1 $ 288.3 1.72 2.10 27.5% Unrealized Investments Access Closure, Inc. Healthcare Devices 2006 $ 24.7 $ - $ 35.4 $ 35.4 - 1.43 6.1% Concert Pharmaceuticals, Inc. Therapeutics 2006 $ 6.2 $ - $ 6.8 $ 6.8 - 1.11 1.5% Direct Flow Medical, Inc. Healthcare Devices 2005 $ 13.0 $ - $ 20.2 $ 20.2 - 1.56 7.1% IlluminOss Medical, Inc. Healthcare Devices 2008 $ 10.1 $ - $ 9.7 $ 9.7 - 0.97 -0.8% Intarcia Therapeutics, Inc. Therapeutics 2007 $ 36.9 $ - $ 186.9 $ 186.9 - 5.06 39.9% Relypsa, Inc. Therapeutics 2007 $ 23.7 $ - $ 61.8 $ 61.8 - 2.60 27.5% ReShape Medical Healthcare Devices 2006 $ 13.6 $ - $ 13.7 $ 13.7 - 1.01 0.2% Tioga Pharmaceuticals, Inc. Therapeutics 2005 $ 19.6 $ - $ 7.2 $ 7.2 - 0.37 -14.6% VaxInnate, Inc. Therapeutics 2006 $ 19.4 $ - $ 19.6 $ 19.6 - 1.01 0.2% Total Unrealized Investments $ 167.2 $ - $ 361.4 $ 361.4 - 2.16 15.2% Total New Leaf Ventures I, L.P. Investments $ 304.5 $ 236.2 $ 413.5 $ 649.7 1.72 2.13 19.1% 90 CONTROL NUMBER 257 - CONFIDENTIAL Sprout Capital IX, L.P. (Healthcare Technology Portfolio) $ amounts in millions, as of March 31, 2014 Please refer to Endnotes I,J,K,L,M and N in this Appendix. Gross Multiple (Realized Portion) Gross Multiple (Total) Vintage Year Total Cost Realized Value Unrealized Value Total Value Company Sector Gross IRR Realized or Partially Realized Investments Adolor Corporation Therapeutics 2000 $ 29.3 $ 23.5 $ - $ 23.5 0.80 0.80 -4.2% Affymax, Inc. Therapeutics 2001 $ 37.2 $ 17.9 $ - $ 17.9 0.48 0.48 -11.3% Aspire Medical Healthcare Devices 2004 $ 7.4 $ 0.6 $ - $ 0.6 0.07 0.07 NM Aspreva Pharmaceuticals Therapeutics 2004 $ 23.2 $ 151.7 $ - $ 151.7 6.54 6.54 95.4% Aureon Biosciences, Inc. Diagnostics & Infrastructure 2001 $ 34.1 $ 0.8 $ - $ 0.8 0.02 0.02 NM Auxilium Pharmaceuticals, Inc. Therapeutics 2003 $ 23.1 $ 106.3 $ - $ 106.3 4.60 4.60 37.4% Corixa Corporation Therapeutics 2003 $ 42.7 $ 31.1 $ - $ 31.1 0.73 0.73 -13.2% eHealth, Inc. Convergence 2001 $ 12.1 $ 58.4 $ - $ 58.4 4.83 4.83 26.8% Epicor Medical, Inc. Healthcare Devices 2001 $ 9.3 $ 41.8 $ - $ 41.8 4.49 4.49 78.7% ePocrates, Inc. Convergence 2000 $ 17.2 $ 53.2 $ - $ 53.2 3.10 3.10 10.8% Focus Technologies, Inc. Diagnostics & Infrastructure 2000 $ 32.3 $ 84.1 $ - $ 84.1 2.61 2.61 17.8% Gryphon Therapeutics Therapeutics 2002 $ 13.3 $ 0.2 $ - $ 0.2 0.01 0.01 -60.7% Ilypsa, Inc. (fka Symyx) Therapeutics 2003 $ 15.8 $ 109.4 $ - $ 109.4 6.91 6.91 78.0% ISTA Pharmaceuticals, Inc. Therapeutics 2002 $ 42.9 $ 84.6 $ - $ 84.6 1.97 1.97 10.8% Kalypsys Therapeutics 2002 $ 27.4 $ 1.1 $ - $ 1.1 0.05 0.04 -29.7% Lathian Systems, Inc Convergence 2001 $ 7.1 $ 0.0 $ - $ 0.0 0.00 0.00 NM Metabasis Therapeutics, Inc. Therapeutics 2001 $ 23.8 $ 1.1 $ - $ 1.1 0.05 0.05 NM NeuroVista Corp. Healthcare Devices 2004 $ 8.8 $ - $ - $ - - - NM NxStage Medical, Inc. Healthcare Devices 2001 $ 21.6 $ 45.1 $ - $ 45.1 2.09 2.09 9.4% Nyco Holdings ApS Therapeutics 2002 $ 47.0 $ 222.8 $ 2.7 $ 225.5 4.74 4.80 33.6% Pharsight Corporation Convergence 2002 $ 2.8 $ 6.4 $ - $ 6.4 2.31 2.31 16.2% Phylos, Inc. Therapeutics 2000 $ 10.2 $ - $ - $ - - - NM Progen PharmaInc. (Cellgate) Therapeutics 2003 $ 21.4 $ 0.4 $ - $ 0.4 0.02 0.02 -49.9% Protedyne Corporation Diagnostics & Infrastructure 2001 $ 21.9 $ 3.7 $ - $ 3.7 0.17 0.17 NM Radiant Medical, Inc. Healthcare Devices 2000 $ 18.6 $ 0.5 $ - $ 0.5 0.02 0.02 NM Sirna Therapeutics, Inc. Therapeutics 2003 $ 27.2 $ 219.3 $ - $ 219.3 8.06 8.06 91.0% Spiration, Inc. Healthcare Devices 2002 $ 17.4 $ 14.5 $ - $ 14.5 0.84 0.84 -2.4% Tolerx, Inc. Therapeutics 2002 $ 11.0 $ 1.5 $ - $ 1.5 0.14 0.14 -23.0% Triple Point Healthcare Devices 2004 $ 0.3 $ 0.1 $ - $ 0.1 0.28 0.28 -48.3% VascA, Inc. Healthcare Devices 2001 $ 12.8 $ 0.4 $ - $ 0.4 0.03 0.03 NM Visiogen, Inc. Healthcare Devices 2001 $ 17.9 $ 90.0 $ - $ 90.0 5.04 5.04 35.4% VNUS Medical Technologies, Inc. Healthcare Devices 2001 $ 8.0 $ 22.1 $ - $ 22.1 2.76 2.76 15.4% Total Realized or Partially Realized Investments $ 645.0 $ 1,392.4 $ 2.7 $ 1,395.1 2.18 2.16 16.8% Unrealized Investments Expression Diagnostics (XDx) Diagnostics & Infrastructure 2004 $ 16.6 $ 0.0 $ 3.8 $ 3.8 NA 0.23 -19.4% Intrinsic Therapeutics, Inc. Healthcare Devices 2002 $ 26.6 $ 0.0 $ - $ 0.0 NA 0.00 NM Labcyte, Inc. (fka Picoliter) Diagnostics & Infrastructure 2002 $ 10.0 $ - $ 10.6 $ 10.6 NA 1.06 0.5% Relypsa, Inc. Therapeutics 2007 $ 20.3 $ 0.0 $ 50.4 $ 50.4 NA 2.49 23.9% Sopherion Therapeutics, Inc. Therapeutics 2004 $ 15.1 $ - $ 0.0 $ 0.0 NA 0.00 NM Spinewave Healthcare Devices 2004 $ 10.5 $ - $ 3.7 $ 3.7 NA 0.35 -11.9% Total Unrealized Investments $ 99.1 $ 0.0 $ 68.4 $ 68.4 - 0.69 -5.0% Total Sprout Capital IX, L.P. (HCT) Investments $ 744.1 $ 1,392.4 $ 71.1 $ 1,463.6 2.18 1.97 14.8% 91 CONTROL NUMBER 257 - CONFIDENTIAL Sprout Capital VIII, L.P. (Healthcare Technology Portfolio) $ amounts in millions, as of March 31, 2014 Please refer to Endnotes I,J,K,L,M and N in this Appendix. Company Sector Vintage Year Total Cost Realized Value Unrealize d Value Total Value Gross Multiple (Realized Portion) Gross Multiple (Total) Gross IRR All Investments Allos Therapeutics, Inc. Therapeutics 1998 $ 3.5 $ 9.8 $ - $ 9.8 2.83 2.83 47.6% AviaHealth, Inc. (fka GoToMyDoc) Convergence 2000 $ 2.0 $ 0.0 $ - $ 0.0 0.02 0.02 -92.8% Cephalon, Inc. Therapeutics 1999 $ 5.1 $ 25.6 $ - $ 25.6 5.01 5.01 293.2% Charles River Laboratories Diagnostics & Infrastructure 1999 $ 4.3 $ 22.7 $ - $ 22.7 5.23 5.23 121.6% Deltagen, Inc. Therapeutics 1998 $ 19.9 $ 4.1 $ - $ 4.1 0.20 0.20 -30.3% eHealth, Inc. Convergence 1999 $ 11.3 $ 20.3 $ - $ 20.3 1.80 1.80 7.7% Gantech International, Inc. Therapeutics 1999 $ 2.8 $ - $ - $ - - - NM Keravision Inc. Healthcare Devices 1998 $ 10.2 $ - $ - $ - - - NM Microban International, Ltd. Diagnostics & Infrastructure 1999 $ 14.8 $ 39.7 $ - $ 39.7 2.68 2.68 14.5% Nuvelo, Inc. (fka Variagenics, Inc.) Therapeutics 1999 $ 11.8 $ 24.8 $ - $ 24.8 2.10 2.10 13.9% NxStage Medical, Inc. Healthcare Devices 1999 $ 17.8 $ 50.3 $ - $ 50.3 2.83 2.83 14.2% Phase Forward Incorporated Convergence 1998 $ 9.0 $ 38.6 $ - $ 38.6 4.31 4.31 22.4% SGX, Inc. Therapeutics 2000 $ 15.0 $ 1.6 $ - $ 1.6 0.11 0.11 -35.3% Skila, Inc. Convergence 1998 $ 9.0 $ 0.0 $ - $ 0.0 0.00 0.00 NM Spotfire, Inc. Convergence 1999 $ 9.9 $ 24.8 $ - $ 24.8 2.50 2.50 12.7% VascA, Inc. Healthcare Devices 1999 $ 7.3 $ 0.1 $ - $ 0.1 0.02 0.02 NM VNUS Medical Technologies, Inc. Healthcare Devices 1999 $ 3.8 $ 11.1 $ - $ 11.1 2.90 2.90 12.7% Total Sprout Capital VIII, L.P. (HCT) Investments $ 157.5 $ 273.7 $ - $ 273.7 1.74 1.74 10.1% 92 CONTROL NUMBER 257 - CONFIDENTIAL Sprout Capital VII, L.P. (Healthcare Technology Portfolio) $ amounts in millions, as of March 31, 2014 Please refer to Endnotes I,J,K,L,M and N in this Appendix. Gross Multiple Gross Vintage Total Realized Unrealize Total (Realized Multiple Company Sector Year Cost Value d Value Value Portion) (Total) Gross IRR All Investments Adeza Biomedical Corporation Diagnostics & Infrastructure 1996 $ 4.8 $ 27.7 $ - $ 27.7 5.75 5.75 20.1% Allos Therapeutics, Inc. Therapeutics 1998 $ 2.6 $ 7.5 $ - $ 7.5 2.87 2.87 38.8% Aradigm Corporation Therapeutics 1994 $ 2.8 $ 15.3 $ - $ 15.3 5.45 5.45 39.3% AtheroGenics, Inc. Therapeutics 1996 $ 3.8 $ 7.1 $ - $ 7.1 1.87 1.87 13.7% AviaHealth, Inc. (fka GoToMyDoc) Convergence 2000 $ 1.6 $ 0.0 $ - $ 0.0 0.02 0.02 -92.8% CombiChem, Inc. Therapeutics 1995 $ 3.9 $ 9.4 $ - $ 9.4 2.43 2.43 26.5% Connetics Corp. (fka Connective) Therapeutics 1995 $ 6.3 $ 14.2 $ - $ 14.2 2.24 2.24 15.5% FemRX Healthcare Devices 1995 $ 2.2 $ 3.2 $ - $ 3.2 1.47 1.47 11.6% Healtheon/WebMD (Sapient) Convergence 1996 $ 3.0 $ 39.8 $ - $ 39.8 13.42 13.42 190.1% Hearten Medical Healthcare Devices 1997 $ 1.7 $ - $ - $ - - - NM IntraBiotics Pharmaceuticals Therapeutics 1994 $ 3.9 $ 7.3 $ - $ 7.3 1.89 1.89 13.4% Lynx Therapeutics, Inc. Diagnostics & Infrastructure 1995 $ 1.1 $ 2.9 $ - $ 2.9 2.72 2.72 25.4% NxStage Medical, Inc. Healthcare Devices 2003 $ 3.3 $ 18.9 $ - $ 18.9 5.80 5.80 20.9% Orquest, Inc. Healthcare Devices 1995 $ 5.5 $ 7.8 $ - $ 7.8 1.42 1.42 6.1% Pathology Partners Diagnostics & Infrastructure 1997 $ 3.3 $ 22.4 $ - $ 22.4 6.82 6.82 38.2% Pharsight Corporation Convergence 1997 $ 4.9 $ 7.3 $ - $ 7.3 1.48 1.48 6.0% Point Biomedical Diagnostics & Infrastructure 1997 $ 9.2 $ 0.0 $ - $ 0.0 0.00 0.00 NM Prometheus Laboratories, Inc. Therapeutics 1998 $ 7.8 $ 38.8 $ - $ 38.8 5.00 5.00 13.4% Salient Interventional Systems Healthcare Devices 1998 $ 2.7 $ 0.0 $ - $ 0.0 0.00 0.00 NM Skila, Inc. Convergence 1998 $ 5.2 $ 0.2 $ - $ 0.2 0.05 0.05 NM TriPath Imaging, Inc. Diagnostics & Infrastructure 1996 $ 4.9 $ 13.9 $ - $ 13.9 2.83 2.83 17.2% VascA, Inc. Healthcare Devices 1996 $ 6.5 $ 0.1 $ - $ 0.1 0.02 0.02 NM VNUS Medical Technologies, Inc. Healthcare Devices 1997 $ 4.3 $ 15.7 $ - $ 15.7 3.66 3.66 12.1% Xcyte Therapies, Inc. (CDR) Therapeutics 1996 $ 6.1 $ 0.5 $ - $ 0.5 0.08 0.08 -33.6% Total Sprout Capital VII, L.P. (HCT) Investments $ 101.2 $ 260.0 $ - $ 260.0 2.57 2.57 18.6% Sprout Growth II, L.P. (Healthcare Technology Portfolio) $ amounts in millions, as of March 31, 2014 Please refer to Endnotes I,J,K,L,M and N in this Appendix. Gross Multiple Gross Vintage Total Realized Unrealize Total (Realized Multiple Company Sector Year Cost Value d Value Value Portion) (Total) Gross IRR All Investments Adeza Biomedical Corporation Diagnostics & Infrastructure 1996 $ 3.9 $ 22.7 $ - $ 22.7 5.75 5.75 20.1% AviaHealth, Inc. (fka GoToMyDoc) Convergence 2000 $ 1.3 $ 0.0 $ - $ 0.0 0.02 0.02 -92.8% Cephalon, Inc. Therapeutics 1999 $ 4.1 $ 20.5 $ - $ 20.5 5.01 5.01 293.2% Connetics Corp. (fka Connective) Therapeutics 1997 $ 3.2 $ 6.5 $ - $ 6.5 2.05 2.05 16.7% IVAC Holdings, Inc. Healthcare Devices 1995 $ 0.9 $ 3.0 $ - $ 3.0 3.31 3.31 121.9% Pathology Partners Diagnostics & Infrastructure 1997 $ 2.7 $ 18.3 $ - $ 18.3 6.82 6.82 38.1% Total Sprout Growth II, L.P. (HCT) Investments $ 16.1 $ 70.9 $ - $ 70.9 4.42 4.42 43.8% 93 CONTROL NUMBER 257 - CONFIDENTIAL Appendix 2 All Funds Gross and Net Returns $ amounts in millions, as of March 31, 2014 Gross Basis Gross Cost and Value Gross Multiple Gross IRR Total Cost Total Realized Unrealized Realized Overall Realized Overall New Leaf Ventures II, L.P. (2008) $358.0 $656.1 $232.4 $423.7 2.01x 1.83x 33.3% 29.6% New Leaf Ventures I, L.P. (2005) $304.5 $649.7 $236.2 $413.5 1.72x 2.13x 22.9% 19.1% Sprout Capital IX, L.P. (2000) (Healthcare Technology) $744.1 $1,463.6 $1,392.4 $71.1 2.18x 1.97x 16.8% 14.8% Sprout Capital VIII, L.P. (1998) (Healthcare Technology) $157.5 $273.7 $273.7 $0.0 1.74x 1.74x 10.1% 10.1% Sprout Capital VII, L.P. (1995) (Healthcare Technology) $101.2 $260.0 $260.0 $0.0 2.57x 2.57x 18.6% 18.6% Sprout Growth II, L.P. (1995) (Healthcare Technology) $16.1 $70.9 $70.9 $0.0 4.42x 4.42x 43.8% 43.8% Net Basis Net Cost and Value Net Metrics Multiples Fund Size Paid-In Capital Distributed Value Equity In Fund Total Value Distributed / Paid In Total Value / Paid In Total Value IRR New Leaf Ventures II, L.P. (2008) $450.0 $407.3 $204.2 $386.9 $591.1 0.50x 1.45x 16.7% New Leaf Ventures I, L.P. (2005) $310.0 $302.6 $154.7 $374.8 $529.5 0.51x 1.75x 12.0% Sprout Capital IX, L.P. (2000) (Healthcare Technology) $690.0 $690.0 $1,071.5 $71.1 $1,142.7 1.55x 1.66x 9.3% Sprout Capital VIII, L.P. (1998) (Healthcare Technology) $147.1 $147.1 $218.7 $0.0 $218.7 1.49x 1.49x 6.0% Sprout Capital VII, L.P. (1995) (Healthcare Technology) $95.2 $95.2 $207.0 $0.0 $207.0 2.17x 2.17x 12.0% Sprout Growth II, L.P. (1995) (Healthcare Technology) $15.3 $15.3 $56.3 $0.0 $56.3 3.69x 3.69x 28.9% 94 CONTROL NUMBER 257 - CONFIDENTIAL Methodology Used to Calculate Net Returns Numbers for Sprout Healthcare Technology Portfolios Estimated net returns numbers for the managed healthcare portfolio of the Sprout funds are based on New Leaf’s calculations of synthetic net returns. The synthetic net returns for the healthcare technology investments in each Sprout Fund are an estimate of what the net returns would have been for these investments, if they had been managed in a standalone healthcare technology venture capital fund structure rather than one set of investments as part of a larger, diversified venture capital fund. The synthetic net returns were computed assuming a fund size required to fund 100% of the total cost of the healthcare investments in each of the Sprout funds using both called and recycled capital, a management fee of 2% payable quarterly and a carried interest. The net return reflects reinvestment of certain proceeds, gains and other proceeds by the Sprout healthcare portfolio synthetic funds to the extent permitted under the partnership governing documents. A detailed example of the calculation is below. Sprout IX: Total actual HCT investments of $740M; 2% management fees, resulting in $120M of management fees and expenses from inception-to-date; 25% carried interest; Standalone fund size of $690M ($735M investments with cash recycling of 6%); Total realizations have been $1,375M and total remaining value is $50M. Assumes $130M in total carried interest to GPs already paid out; Yields Total Distributed to LPs of $1,075M ($1,375M - $120M fees - $130M carry - $50M recycling) / $690M = 1.56x; Yields Total Remaining to LPs of $50M / $690M = 0.07x 95 CONTROL NUMBER 257 - CONFIDENTIAL Appendix 3 PME+ Methodology Public Market Equivalent (“PME+”) is used to compare the net performance of each of the Sprout HC synthetic funds and NLV funds to the performance of a same size, hypothetical investment in a fund that tracked a public market index. The investments in the hypothetical public market index funds have identical cash inflow schedules and proportionately comparable cash outflow schedules. The cash outflow schedules are set so that the remaining equity value of the public equivalent fund is exactly equal to the remaining equity value of the benchmarked private equity fund at the end of the benchmarking period. The analysis is presented to illustrate the comparative returns a limited partner would have generated by investing in the hypothetical public market index fund at the same time and in the same amounts as had been invested in each of the NLV or Sprout (HC portion only) synthetic funds. The NLV or Sprout HC funds are presented as net, which includes the impact of management fees, expenses, and carried interest. The public market index funds do not have any impact of fees or carried interest. A more detailed description of the PME+ methodology used is available in: Rouvinez, Christophe. “Asset Class: Beating the Public Market.” Private Equity International. January 2003. 26-28 96 CONTROL NUMBER 257 - CONFIDENTIAL Appendix 5 ENDNOTES Except as otherwise expressly noted, all performance information contained herein, including rates of return, is as of March 31, 2014 and is unaudited. The performance information is based on the cumulative invested capital, cumulative cash dividends and realized and unrealized sales proceeds in portfolio companies. Where designated as “gross”, the performance information is presented on a gross basis with regard to expenses and does not reflect deductions for any management fees, the general partner’s carried interest or other expenses. Where designated as “net”, the performance information is presented on a net basis after giving effect to management fees, the general partner’s carried interest and other expenses. Please refer to Section III: “Summary of Historical Investment Performance” and the endnotes below for a more detailed description of the performance of the NLV-I, NLV-II and the Sprout Funds. An investment in the Fund does not represent an interest in any indicated investment or any investment portfolio of any related or other investment fund, including any investment or fund managed by the Fund Managers. Disclosure of past performance herein is for informational purposes only and is not indicative of future results. A The financial data contained herein relating to the valuations and investment performance of NLV-I, NLV-II, the Sprout Funds and their investments (including the I.C. portfolio thereof) are estimates prepared by NLV as of March 31, 2014, and have not been audited. The vintage year of each fund represents the first year that an investment in a portfolio company was either committed to or funded. While NLV’s valuations of unrealized investments are based on assumptions that NLV believes are reasonable under the circumstances, the actual realized returns on unrealized investments will depend on, among other factors, future operating results, the value of the assets and market conditions at the time of disposition, any related transaction costs and the timing and manner of the sale, all of which may differ from the assumptions on which the valuations used in the prior performance data contained herein are based. Accordingly, the actual realized returns on these unrealized investments may differ materially and adversely from the (assumed) returns indicated herein. Past performance is not indicative of future results. There can be no assurance that the Fund will achieve results comparable to those shown herein, will be able to avoid losses or will be able to achieve its investment objectives. Except as specifically noted, all performance information contained herein is on a “gross” basis before giving effect to management fees, the general partner’s carried interest, taxes and other expenses, the application of which would reduce such prior performance and indicated rates of return. Except as otherwise indicated, performance information is for NLV-I, NLV-II and the Fund Managers’ investments in the Sprout Funds. While the Fund Managers initiated, led, co-led, managed or were otherwise instrumental in the identification, negotiation, execution and/or management of these investments (as further described herein), other individuals, including individuals from Sprout Group with respect to the Sprout Funds, were involved in and assisted with these investments. B Rates of return for public indices are provided for informational purposes only and do not reflect a basis for comparison for venture capital interests, as the market volatility, liquidity and other characteristics of venture capital investments are materially different from public indices. The S&P 500 Stock Index is an unmanaged market capitalization of 500 U.S. equities 97 CONTROL NUMBER 257 - CONFIDENTIAL generally considered to be representative of U.S. stock market activity. The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on the NASDAQ Stock Market. The NASDAQ Biotechnology Index includes securities of NASDAQ-listed companies classified according to the Industry Classification Benchmark as either Biotechnology or Pharmaceuticals which also meet other eligibility criteria. The Dow Jones Industrial Average is an index that shows how 30 large, publicly owned companies based in the U.S. have traded during a standard trading session in the stock market. C Data provided by Cambridge Associates at no charge. Cambridge U.S. VC healthcare data as of Q1’13. Where results on the Sprout Funds refer to net basis, it is the result of a methodology that adjusts the gross results for the healthcare technology investments for recycling, management fees, and carried interest so they can be compared to industry sources (e.g., Cambridge Associates) on a directly comparable basis. The methodology and assumptions used to adjust from gross to net basis is described in Appendix 2. D The gross annual compound internal rate of return (“IRR”) and gross multiple of invested capital as of March 31, 2014 are before giving effect to taxes, management fees, the general partner’s carried interest and other expenses. The net IRR and net multiple of invested capital as of March 31, 2014 are after giving effect to management fees, the general partner’s carried interest and other expenses. All IRRs presented are annualized and calculated on the basis of quarterly inflows and outflows of cash and unrealized values, assuming such inflows and outflows occurred as of quarter end and all remaining investments were sold at the current holding value through as of March 31, 2014. There can be no assurance that unrealized investments will be realized at the valuations shown. E The results for the Sprout Funds represent results from the healthcare technology portion of the Sprout Funds, which represents between 8% and 65% of the cost basis of the investments of the funds taken as a whole. Healthcare technology means, collectively, the biopharmaceutical, medical device, and diagnostics and infrastructure sectors. See Appendix 2 for the Methodology Used to Calculate Net Return Numbers for Sprout Healthcare Technology Portfolios. F Net Distributed to Paid-in Capital (“DPI”): Calculated based on (1) called capital of a fund (based on individual called capital percentages and fund sizes across multiple funds) and (2) distributed capital of a fund (based on aggregating individual funds distributed capital amounts, as calculated using DPI and called individual fund called amounts). For the purposes of this ratio for NLV-I and NLV-II, the “deemed contribution” of the general partner is included in the total amount of capital contributions made by the fund’s partners. G (Distributed + Public) to Paid-in Capital: Calculated based on (1) called capital of a fund (based on individual called capital percentages and fund sizes across multiple funds) and (2) distributed capital of a fund (based on aggregating individual funds distributed capital amounts, as calculated using DPI and called individual fund called amounts) plus the unrealized value of publicly traded securities based on the closing market price of the security. For the purposes of this ratio for NLV-I and NLV-II, the “deemed contribution” of the general partner is included in the total amount of capital contributions made by the fund’s partners. 98 CONTROL NUMBER 257 - CONFIDENTIAL H (Distributed + Liquid Public) to Paid-in Capital: Calculated based on (1) called capital of a fund (based on individual called capital percentages and fund sizes across multiple funds) and (2) distributed capital of a fund (based on aggregating individual funds distributed capital amounts, as calculated using DPI and called individual fund called amounts) plus the unrealized value of freely tradable publicly traded securities based on the closing market price of the security. This is based on the assumption that NLV can trade out of 10% of daily trading volume over next 30 days based on last 30 days ADTV. For the purposes of this ratio for NLV-I and NLV-II, the “deemed contribution” of the general partner is included in the total amount of capital contributions made by the fund’s partners. I Realized Cost: Represents the cost of investment attributable to the realized portion of such investment. J Total Cost: Represents the overall cost of investment. K Realized Value: Represents gross proceeds received from the sale of an underlying investment or group of investments. L Unrealized Value, Unrealized/(Public) or Unrealized/(Private): All private investments are fair value as determined in good faith by the General Partner. Fair value is based on the best information available and is determined by reference to information including, but not limited to, the following: operating results, financial condition, public or private transactions, valuations for publicly-traded compatible companies, recent purchases of the same or similar securities, progress of clinical trials or other operational progress of an investment’s product, and/or other measures, and consideration of any other pertinent information including the types of securities held and restrictions on disposition. Public represents a portfolio company whose securities are traded on a public exchange such as NASDAQ. The unrealized value of publicly traded securities held shown in parenthesis is valued at the closing market price. The unrealized value of warrants for any publicly traded companies is valued based on the Black-Sholes Method. M Total Value: Represents realized value plus Unrealized Value. N Multiple: Represents the ratio of Total Value, Realized Value or Unrealized Value to the corresponding amount of capital invested, expressed as a multiple. 99 CONTROL NUMBER 257 - CONFIDENTIAL XIV. CERTAIN OFFERING NOTICES NOTICE TO RESIDENTS OF FLORIDA The Interests being offered have not been registered with the Florida Division of Securities. If sales are made to five or more Florida purchasers, each sale is voidable by the purchaser within three days after the first tender of consideration is made by such purchaser to the issuer, an agent of the issuer or within three days after availability of that privilege is communicated to such purchaser, whichever occurs later. NOTICE TO NON-U.S. RESIDENTS GENERALLY No action has been or will be taken in any jurisdiction outside the U.S. that would permit an offering of these securities, or possession or distribution of offering material in connection with the issue of these securities, in any country or jurisdiction where action for that purpose is required. It is the responsibility of any person wishing to subscribe for the Interests to inform themselves of and to observe all applicable laws and regulations of any relevant jurisdictions. Prospective investors should inform themselves as to the legal requirements within the countries of their citizenship, residence, domicile and place of business with respect to the acquisition, holding or disposal of the Interests, and any foreign exchange restrictions that may be relevant thereto. AUSTRALIA The Fund is not a registered managed investment scheme, nor is it required to be registered as a managed investment scheme, and this Memorandum is not a product disclosure document lodged or required to be lodged with the Australian Securities and Investments Commission. Interests in the Fund will only be offered in Australia to persons to whom such securities may be offered without a product disclosure statement under Part 7.9 of the Corporations Act 2001 (Cth). Interests in the Fund subscribed for by investors in Australia must not be offered for resale in Australia for 12 months from allotment except in circumstances where disclosure to investors under the Corporations Act 2001 (Cth) would not be required or where a compliant product disclosure statement is produced. Prospective investors in Australia should confer with their professional advisors if in any doubt about their position. AUSTRIA Interests in the Fund may only be offered in the Republic of Austria in compliance with the provisions of the Austrian Capital Market Act, the Austrian Investment Funds Act and other laws applicable in the Republic of Austria governing the offer, issue and sale of the interests in the Republic of Austria. Interests in the Fund are being offered exclusively to a limited number of investors in Austria and are therefore not subject to the public offering requirements of the Austrian Capital Market Act or the Austrian Investment Fund Act. Interests in the Fund are not registered or otherwise authorized for public offer either under the Austrian Capital Market Act, the Austrian Investment Fund Act or any other securities regulation in Austria. The recipients of this Memorandum and other selling material in respect to interests in the Fund have been individually selected and are targeted exclusively on the basis of a private placement. This offer may not be made to any other persons than the recipients to whom this Memorandum is personally addressed. Any investor intending to offer and resell interests in the Fund in Austria is solely responsible that any offer and resale takes place in compliance with the applicable provisions of the Austrian Capital Market Act, the Austrian Investment Fund Act or any other applicable securities regulation. BELGIUM The Fund has not been and will not be registered with the Belgian Financial Services and Markets Authority (Autoriteit voor financiële diensten en markten / Autorité des Services Financiers et des Marchés) (“FSMA”) as a foreign collective investment institution referred to under Article 127 of the Belgian Act of July 20, 2004 relating to certain forms of collective management of investment portfolios. This Memorandum and the offering of Limited Partner Interests in the Fund have not been and will not be notified to, and have not been approved or disapproved by, the FSMA. The public offering of Limited Partner Interests in the Fund in Belgium within the meaning of the Belgian Act of July 20, 2004, and the Belgian Act of June 16, 2006 on the public offering of investment instruments and the admission of investment instruments to listing on a regulated market has not been authorized by the Fund. The offering may therefore not be advertised, and Limited Partner Interests in the Fund may not be offered, sold, transferred or delivered to, or subscribed to by, and no memorandum, information circular, brochure or similar document may be distributed to, directly or indirectly, any individual or legal entity in Belgium, except (i) to “qualified investors” as referred to in Article 10, § 1 of the aforementioned Act of June 16, 2006, (ii) subject to the restriction of a minimum investment of €100,000 per investor or (iii) in any other circumstances in which the present offering does not qualify as a public offering in accordance with the aforementioned Act of June 16, 2006. This Memorandum has been issued to the intended recipient for personal use only and exclusively for the purpose of the offering. Therefore, it may not be used for any other purpose, nor passed on to any other person in Belgium. 100 CONTROL NUMBER 257 - CONFIDENTIAL BRAZIL The Fund is not listed with any stock exchange, organized over the counter market or electronic system of securities trading. Interests in the Fund have not been and will not be registered with any securities exchange commission or other similar authority, including the Brazilian Securities and Exchange Commission (Comissão de valores Mobiliários - or the “CVM”). Interest in the Fund will not be directly or indirectly offered or sold within Brazil through any public offering, as determined by Brazilian law and by the rules issued by the CVM, including Law No. 6,385 (Dec. 7, 1976) and CVM Rule No. 400 (Dec. 29, 2003), as amended from time to time, or any other law or rules that may replace them in the future. Acts involving a public offering in Brazil, as defined under Brazilian laws and regulations and by the rules issued by the CVM, including Law No. 6,385 (Dec. 7, 1976) and CVM Rule No. 400 (Dec. 29, 2003), as amended from time to time, or any other law or rules that may replace them in the future, must not be performed without such prior registration. Persons in Brazil wishing to acquire interests in the Fund should consult with their own counsel as to the applicability of these registration requirements or any exemption therefrom. Without prejudice to the above, the sale and solicitation of interests in the Fund is limited to qualified investors as defined by CVM Rule No. 409 (Aug. 18, 2004), as amended from time to time or as defined by any other rule that may replace it in the future. This Memorandum is confidential and intended solely for the use of the addressee and cannot be delivered or disclosed in any manner whatsoever to any person or entity other than the addressee. COLUMBIA Neither this Memorandum nor the interests in the Fund have been reviewed or approved by the Financial Superintendency of Colombia (the “FSC”) or any other governmental authority in Colombia, nor has the Fund or any related person or entity received authorization or licensing from the FSC or any other governmental authority in the Colombia to market or sell interests in the Fund within Colombia. No public offering of interests in the Fund is being made in Colombia or to Colombian residents. By receiving this Memorandum, the recipient acknowledges that it contacted New Leaf at its own initiative and not as a result of any promotion or publicity by New Leaf. This Memorandum is strictly private and confidential and may not be reproduced, used for any other purpose or provided to any person other than the intended recipient. DENMARK This Memorandum has not been and will not be filed with or approved by the Danish Financial Supervisory Authority or any other regulatory authority in Denmark and Limited Partner Interests in the Fund have not been and are not intended to be listed on a Danish regulated market. Limited Partner Interests in the Fund have not been and will not be offered in Denmark under the E.U. Alternative Investment Fund Managers Directive (as implemented into Danish law). Consequently, this Memorandum may not be made available and interests in the Fund may not be marketed or offered for sale directly or indirectly to any natural or legal person in Denmark except as permitted under applicable rules. FINLAND As the Fund is a closed end fund, the marketing of interests in the Fund is not interpreted to be subject to the provisions of the Finnish Act on Mutual Funds (sijoitusrahastolaki, 29.1.1999, as amended, the “MFA”). Accordingly prospective investors should acknowledge that this Memorandum is not a fund prospectus as meant in the MFA and the marketing of interests in the Fund is not subject to a marketing permission from the Financial Supervisory Authority (Finanssivalvonta; “FIN-FSA”). Furthermore, even if interests in the Fund were to be construed as “securities” as defined in the Finnish Securities Markets Act (arvopaperimarkkinalaki, 14.12.2012/746, as amended the “SMA”), based on the exemptions set forth in the SMA, the offering of interests in the Fund would be exempted from the prospectus requirements of the SMA (based on the limited number of Finnish offerees and the minimum investment and transfer restrictions specified herein). Accordingly prospective investors must acknowledge that this Memorandum is not a prospectus within the meaning set forth in the SMA. Prospective investors should also note that neither the General Partner or the Management Company is an investment firm (sijoituspalveluyritys) within the meaning of the Finnish Investment Services Act ( sijoituspalvelulaki 747/2012) and they are not subject to the supervision of the FFSA. Any prospective investors should acknowledge that they will not be treated as clients of placement agents (if any) engaged by the Management Company in connection with the placement of interests in the Fund and such placement agents may not be under any duty to safeguard the interests of prospective investors. Furthermore, the Fund is not a property fund as meant in the Finnish Act on Property Funds (kiinteistörahastolaki, 1173/1997). The FIN-FSA has not authorized any offering for the subscription of interests in the Fund; accordingly, interests in the Fund may not be offered or sold in Finland or to residents thereof except as permitted by Finnish law. 101 CONTROL NUMBER 257 - CONFIDENTIAL This Memorandum has been prepared for private information purposes only and it may not be used for, and shall not be deemed, a public offering of interests in the Fund. This Memorandum is strictly for private use by its holder and may not be passed on to third parties or otherwise distributed publicly. FRANCE This Memorandum (including any amendment, supplement or replacement thereto) is not being distributed in the context of a public offering in France within the meaning of Article L. 411-1 of the French Monetary and Financial Code (Code monétaire et financier). This Memorandum has not been and will not be submitted to the French Autorité des marchés financiers (“AMF”) for approval in France and accordingly may not and will not be distributed to the public in France. Pursuant to Article 211-3 of the AMF General Regulation, French residents are hereby informed that: 1. the transaction does not require a prospectus to be submitted for approval to the AMF; 2. persons or entities referred to in Point 2°, Section II of Article L.411-2 of the Monetary and Financial Code may take part in the transaction solely for their own account, as provided in Articles D. 411-1, D. 734- 1, D. 744-1, D. 754-1 and D. 764-1 of the Monetary and Financial Code; and 3. the financial instruments thus acquired cannot be distributed directly or indirectly to the public otherwise than in accordance with Articles L. 411-1, L. 411-2, L. 412-1 and L. 621-8 to L. 621-8-3 of the Monetary and Financial Code. This Memorandum is not to be further distributed or reproduced (in whole or in part) in France by the recipients of this Memorandum. This Memorandum has been distributed on the understanding that such recipients will only participate in the issue or sale of Limited Partner Interests in the Fund for their own account and undertake not to transfer, directly or indirectly, Limited Partner Interests in the Fund to the public in France, other than in compliance with all applicable laws and regulations and in particular with Articles L. 411-1 and L. 411-2 of the French Monetary and Financial Code. GERMANY The Fund has been notified to the Bundesanstalt für Finanzdienstleistungsaufsicht (the German Federal Financial Supervisory Authority or “BaFin”) for marketing to (vertrieben as this term is construed under the German Capital Investment Code (Kapitalanlagegesetzbuch - KAGB) in the Federal Republic of Germany solely to professional investors (as this term is construed under the KAGB). The Limited Partner Interests in the Fund may not be distributed in the Federal Republic of Germany or used in connection with any offer for subscription of the Limited Partner Interests in the Fund other than to professional investors. Neither this Memorandum nor any other document relating to the Fund or the Limited Partner Interests in the Fund, as well as the information contained therein may be supplied in Germany to persons other than professional investors. HONG KONG The contents of this Memorandum have not been reviewed or approved by any regulatory authority in Hong Kong. This Memorandum does not constitute an offer or invitation to the public in Hong Kong to acquire interests in the Fund. Accordingly, unless permitted by the securities laws of Hong Kong, no person may issue or have in its possession for the purposes of issue, this Memorandum or any advertisement, invitation or document relating to interests in the Fund, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong other than in relation to interests in the Fund which are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” (as such term is defined in the Securities and Futures Ordinance of Hong Kong (Cap. 571) (the “SFO”) and the subsidiary legislation made thereunder) or in circumstances which do not result in this Memorandum being a “prospectus” as defined in the Companies Ordinances of Hong Kong (Cap. 32) (the “CO”) or which do not constitute an offer or an invitation to the public for the purposes of the SFO or the CO. The offer of interests in the Fund is personal to the person to whom this Memorandum has been delivered by or on behalf of the Fund, and a subscription for interests in the Fund will only be accepted from such person. No person to whom a copy of this Memorandum is issued may issue, circulate or distribute this Memorandum in Hong Kong or make or give a copy of this Memorandum to any other person. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this Memorandum, you should obtain independent professional advice. ICELAND This Memorandum has been issued to the recipient, for personal use only, exclusively in connection with a private placement of interests in the Fund. Accordingly, this Memorandum may not be used by the recipient for any other 102 CONTROL NUMBER 257 - CONFIDENTIAL purpose nor forwarded to any other person or entity in Iceland. The offering of interests in the Fund described in this Memorandum is a private placement under Icelandic law and the interests in the Fund may only be offered and sold (as well as resold) in Iceland to a person or entity that is a Qualified Investor as defined in Item No. 9 of Article 43 of the Icelandic Act on Securities Transactions. Also, any subsequent transfer or resale of interests in the Fund in Iceland will need to comply with the applicable provisions of the Icelandic Act on Securities Transactions. Prospective Icelandic investors should consult with their own tax advisors as to the tax consequences of an investment in the Fund. ITALY The Fund is not a UCITS fund. The offering of interests in the Fund in Italy has not been nor will it be authorized by the Bank of Italy and the Commissione Nazionale per la Società e la Borsa. Interests in the Fund are offered upon the express request of the investor, who has directly contacted the Fund or its sponsor on the investor’s own initiative. No active marketing of the Fund has been made nor will it be made in Italy, and this Memorandum has been sent to the investor at the investor’s unsolicited request. The investor acknowledges and confirms the above and hereby agrees not to sell or otherwise transfer any Interests in the Fund or to circulate this Memorandum in Italy unless expressly permitted by, and in compliance with, applicable law. JAPAN Interests in the Fund are a security set forth in Article 2, Paragraph 2, Item 6 of the Financial Instruments and Exchange Law of Japan (the “FIEL”). No public offering of interests in the Fund is being made to investors resident in Japan and in accordance with Article 2, paragraph 3, Item 3, of the FIEL, no securities registration statement pursuant to Article 4, paragraph 1, of the FIEL has been made or will be made in respect to the offering of interests in the Fund in Japan. The offering of interests in the Fund in and investment management for the Fund in Japan is made as “Special Exempted Business for Qualified Institutional Investors, Etc.” under Article 63, Paragraph 1, of the FIEL. Thus, interests in the Fund are being offered only to a limited number of investors in Japan. Neither the Fund nor any of its affiliates is or will be registered as a “financial instruments firm” pursuant to the FIEL. Neither the Financial Services Agency of Japan nor the Kanto Local Finance Bureau has passed upon the accuracy or adequacy of this Memorandum or otherwise approved or authorized the offering of interests in the Fund to investors resident in Japan. LUXEMBOURG No public offering of interests in the Fund is being made to investors resident in Luxembourg. Interests in the Fund are being offered only to a limited number of sophisticated and professional investors in Luxembourg. The Commission de Surveillance du Secteur Financier of Luxembourg has not passed upon the accuracy or adequacy of this Memorandum or otherwise approved or authorized the offering of interests in the Fund to investors resident in Luxembourg. NETHERLANDS In the Netherlands, Limited Partner Interests in the Fund may only be offered, sold, transferred or assigned, as part of their initial distribution or at any time thereafter, to natural persons who or legal entities which are Qualified Investors as defined in Section 1:1 of the Financial Supervision Act (Wet op het financieel toezicht (the “FSA”)). Limited Partner Interests in the Fund may not otherwise be offered, directly or directly, in the Netherlands. Where an offer is made exclusively to Qualified Investors within the meaning of section 1:1 of the FSA, the General Partner is not under an obligation to have the offering memorandum approved by the Dutch Authority for the Financial Markets or by a competent authority of another member state of the European Economic Area in accordance with Prospectus Directive 2003/71/EC and Prospectus Regulation 809/2004/EC. NORWAY This Memorandum does not constitute an invitation or a public offer of securities in the Kingdom of Norway. It is intended only for the original recipient and is not for general circulation in the Kingdom of Norway. The offer herein is not subject to the prospectus requirements laid down in the Norwegian Securities Trading Act. This Memorandum has not been nor will it be registered with or authorized by any governmental body in Norway. Interests in the Fund may only be solicited, acquired or offered in or from Norway to investors for a total face value of at least €100,000. SAUDI ARABIA Neither this Memorandum nor the interests in the Fund have been approved, disapproved or passed on in any way by the Capital Market Authority or any other governmental authority in the Kingdom of Saudi Arabia, nor has the Fund received authorization or licensing from the Capital Market Authority or any other governmental authority in 103 CONTROL NUMBER 257 - CONFIDENTIAL the Kingdom of Saudi Arabia to market or sell interests in the Fund within the Kingdom of Saudi Arabia. This Memorandum does not constitute and may not be used for the purpose of an offer or invitation. No services relating to interests in the Fund, including the receipt of applications and the allotment or redemption of such interests, may be rendered by the Fund within the Kingdom of Saudi Arabia. SOUTH AFRICA Neither this Memorandum nor the interests in the Fund have been approved, disapproved or passed on in any way by the Financial Services Board or any other governmental authority in South Africa, nor has the Fund received authorization or licensing from the Financial Services Board or any other governmental authority in South Africa to market or sell interests in the Fund within South Africa. This Memorandum is strictly confidential and may not be reproduced, used for any other purpose or provided to any person other than the intended recipient. SOUTH KOREA In South Korea, interests in the Fund are being offered only to persons prescribed by Article 301, Paragraph 2 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act (“Qualified Professional Investors”). The Subscriber hereby represents and warrants to the Fund that the Subscriber (i) is a Qualified Professional Investor as prescribed by the Financial Investment Services and Capital Markets Act and (ii) is fully aware of the meaning, effect and ramifications of being an Qualified Professional Investor and fully agrees to be treated in accordance therewith. SPAIN Interests in the Fund may not be offered or sold in Spain except in accordance with the requirements of the Spanish Securities Market Act (Ley 24/1988, de 28 de Julio, del Mercado de Valores) as amended and restated, Royal Decree 1310/2005, on securities admission to trade on secondary official markets, public offerings or subscriptions, and prospectus required to such effects, and/or subject and in compliance with the requirements contained in such regulations (Real Decreto 1310/2005, de 4 de noviembre, por el que se desarrolla parcialmente la Ley 24/1988, de 28 de julio, del Mercado de Valores, en materia de admisión a negociación de valores en mercados secundarios oficiales, de ofertas públicas de venta o suscripción y del folleto exigible a tales efectos), and subsequent legislation. This Memorandum is neither verified nor registered with the Comisión Nacional del Mercado de Valores, and therefore a public offer of interests in the Fund will not be carried out in Spain. SWEDEN This Memorandum has not been nor will it be registered with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority). Accordingly, this Memorandum may not be made available, nor may the interests in the Fund offered hereunder be marketed and offered for sale in Sweden, other than under circumstances which are deemed not to require a prospectus under the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag (1991:980) om handel med finansiella instrument). Accordingly, the offering of interests in the Fund will only be directed to persons in Sweden who subscribe to interests in the Fund for a total consideration of at least €100,000 per investor. SWITZERLAND Under the Collective Investment Schemes Act dated June 23, 2006 and revised on September 28, 2012 (the “CISA”), the offering, sale and distribution to non-qualified investors of units in foreign collective investment schemes in or from Switzerland are subject to authorization by the Swiss Financial Market Supervisory Authority (“FINMA”) and, in addition, the distribution to certain qualified investors of interests in such collective investment schemes may be subject to the appointment of a representative and a paying agent in Switzerland. The concept of “foreign collective investment scheme” covers, inter alia, foreign companies and similar schemes (including those created on the basis of a collective investment contract or a contract of another type with similar effect) created for the purpose of collective investment, whether such companies or schemes are closed end or open end. There are reasonable grounds to believe that the Fund would be characterized as a foreign collective investment scheme under Swiss law. As interests in the Fund have not been and cannot be registered with or authorized by FINMA for distribution to non-qualified investors, any offering of interests in the Fund, and any other form of solicitation of investors in relation to the Fund (including by way of circulation of offering materials or information, including this Memorandum), must be restricted to investors considered as qualified investors within the meaning of the CISA and its implementing regulations. Failure to comply with the above-mentioned requirements may constitute a breach of the CISA. 104 CONTROL NUMBER 257 - CONFIDENTIAL UNTIED ARAB EMIRATES By receiving this Memorandum, the person or entity to whom it has been issued understands, acknowledges and agrees that neither this Memorandum nor the interests in the Fund have been approved, disapproved or passed on in any way by the Central Bank of the United Arab Emirates (“UAE”), the UAE Securities and Commodities Authority (the “SCA”) or any other authority in the UAE, nor has the entity conducting the placement in the UAE received authorization or licensing from the Central Bank of the UAE, the SCA or any other authority in the UAE to market or sell interests in the Fund within the UAE. The SCA accepts no liability in relation to the Fund and is not making any recommendation with respect to an investment in the Fund. No services relating to the interests in the Fund including the receipt of applications and/or the allotment or redemption of such interests have been or will be rendered within the UAE by the Fund. Nothing contained in this Memorandum is intended to constitute UAE investment, legal, tax, accounting or other professional advice. This Memorandum is for the information of prospective investors only and nothing in this Memorandum is intended to endorse or recommend a particular course of action. Prospective investors should consult with an appropriate professional for specific advice rendered on the basis of their situation. No offer or invitation to subscribe for interests or sale of interests in the Fund has been or will be rendered in, or to any persons in, or from, the Dubai International Finance Centre. UNITED KINGDOM In the United Kingdom, this Memorandum is being distributed only to and is directed only at (i) persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”), (ii) high-net-worth entities falling within Article 49(2) of the Order, and (iii) any other persons to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). Persons who are not relevant persons must not act on or rely on this Memorandum or any of its contents. Any investment or investment activity to which this Memorandum relates is available only to relevant persons and will be engaged in only with relevant persons. Recipients must not distribute, publish, reproduce, or disclose this Memorandum, in whole or in part, to any other person. 105 CONTROL NUMBER 257 - CONFIDENTIAL