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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

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12 New England Journal of Medicine, November 14, 2013: Expediting Drug Development – The FDA’s New “Breakthrough Therapy” Designation

7 CONTROL NUMBER 257 - CONFIDENTIAL

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