Commercialization Process

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2 Commercialization Process ProMedica Innovations is first and foremost a service organization for our physicians and researchers. We look forward to working with our inventors in commercializing their valuable inventions and discoveries. To achieve our service mission, it is incumbent upon us to ensure that our Commercialization Process is as user- friendly and transparent as possible. In this document, the full ProMedica Innovations Commercialization Process is illustrated so that ProMedica inventors can better understand the process by which we make commercialization decisions on an invention- by- invention basis, and how they might more effectively become engaged in the Commercialization Process. The above Commercialization Process Flowchart gives a high level depiction of the individual steps in the process. Each step is described in more detail in the materials provided herein.

3 Disclosure Our process begins with the disclosure of a new idea: ProMedica personnel fill out an Invention Disclosure Form (IDF) and submit the completed form through the ProMedica Innovations website. This form provides us with a detailed description of the invention, its state of development, the names of the inventors, and other information helpful in evaluating the commercial potential and patentability of the invention. Inventors are asked to disclose companies that the inventors believe may be interested in the invention and the sponsor of the research, so that Innovations can fulfill the Clinic s responsibilities to the sponsor (including reporting of federally- funded inventions to the Government). Once the inventor has submitted the IDF online, an is generated by the internal tracking docketing system to notify the Innovations team that a new IDF has been submitted and is ready for review. Once reviewed, a case manager and case number will be assigned to the technology. The case manager s the inventor(s) with the case number and an overview of the next step of the technology review. The case manager makes an initial assessment of the completeness of the IDF, so that Innovations can quickly review the file and identify what information is needed from the inventors to enable the case manager to perform a full market

4 and patentability assessment. To memorialize the results of this assessment, the case manager completes an Invention Disclosure Triage Form. This form is useful to identify where we may need a more detailed description of the invention, an explanation of the advantages of existing products, what data is available or what follow on experiments are planned. The case manager then schedules a meeting with the inventors to discuss the invention in greater detail, and to obtain any missing information that may aid in a more detailed assessment. The case manger generally completes this activity within a week or two and then proceeds to a preliminary market and patentability evaluation of the invention.

5 Evaluation The purpose of the evaluation process is to identify which inventions merit investment in financial and human resources, based on commercial potential and patentability. A key step in this review is to meet with the inventor to discuss the details of the invention, to determine the extent to which the invention is proven or otherwise reduced to practice, and to understand the inventor s perspective of the advantages of the invention and current state of the art. At this point, the case manager analyzes the market opportunity and likely scope of patent protection available. The case manager also evaluates the invention for technical merit. Case managers investigate the market opportunity for a new invention using a variety of tools, including web searches, queries in paid databases, and by discussing needs with industry contacts in the relevant field. In addition, tracking owners of relevant prior art patents uncovered during the patentability analysis can be an effective way of identifying potential licensing opportunities. The purpose of the patentability analysis is not only to determine if a new invention is patentable, but also to gauge the scope of protection available. The case managers have several tools at their disposal to effectively evaluate patent scope. The principal modalities for carrying out such searches include an independent analysis by a dedicated patent search firm, internal case manager and/or patent paralegal searches using paid databases, and a detailed analysis by an experienced patent attorney. Results of the patentability analysis are shared with the inventors for their review and comment. In addition to relying on the case manager s experience and knowledge of the relevant field, information regarding the scientific impact of a particular invention is often augmented by internal peer review. The case manager relies on this information, and on the aforementioned patentability and marketability information, to complete an Evaluation Scoring Form. Innovations uses the Evaluation Scoring Form to generate a numerical score for each invention, based on numerous criteria relevant to assessing overall commercial value.

6 The evaluation process culminates with the case manager discussing the evaluation analysis with Innovations management team. The management team provides varying perspectives and feedback for the case manager to consider and a decision is consequently made to proceed with or discontinue patenting and marketing activities, or to take additional steps to further the analysis. Throughout the evaluation process, the case manager will be utilizing internal ProMedica resources, external 3 rd party resources such as patent search firms and paid databases, and Cleveland Clinic Alliance resources. The case manager will frequently engage Alliance resources in order to conduct market research in specialized areas, review prior art and market research findings, and incorporate expert opinions into the evaluation scoring process. The case manager shares the results of the analysis with the inventors and gives each inventor a copy of the Evaluation Scoring Form. For inventions that may not be ready for patenting and licensing, the triage process may indicate key experiments or development activities that the inventors could consider pursuing to place the invention in a condition to move forward. The time table for this first evaluation of a new invention is variable, depending on the field and complexity of the invention, the level of development, and the breadth and quantity of the prior art uncovered (it can take hours to carefully scrutinize a closely related piece of prior art). On average, this evaluation typically spans seven to ten weeks, but in certain cases, can take additional time. If the invention fairs well in this evaluation step, Innovations prepares to draft and file a provisional patent application and to initiate an aggressive marketing campaign. If the invention is not ripe for moving forward, the inventors in most cases are offered the opportunity to license back the invention, should they wish to invest in patenting and marketing efforts independently. There are many reasons to not pursue the patenting and licensing of an invention. The principal reasons are that the invention is determined to be: non- enabled; not reduced to practice; unproven (lacking support data); unpatentable (anticipated or obvious); unenforceable (scope of protection too narrow); unmarketable (market too small or too crowded); or unlicensable (invention requires the use of existing inventions of others).

7 Market Assessment The marketing process consists of two individual steps: market analysis and active marketing. During the market analysis step, the case manager performs a more in depth investigation of market opportunities available for the invention. At this point, the case manager identifies products that may be manufactured based upon the teachings of the invention, tabulates advantages and disadvantages of these new products, and performs an analysis of the market potential for each product. Innovations identifies specific industry partners based upon factors such as research, development, manufacturing, and sales capabilities, financial health, compatibility with existing product lines, ability to meet customer needs, experience with regulatory hurdles, market share, and technical experience in the relevant fields. A variety of sources, notably paid and free databases, publications, interviews, prior transactions and inventor information, provide information about products, markets and companies. This information helps to identify a marketing strategy and to prioritize contacts with potential industry partners. Active marketing is the rate- limiting step in the technology transfer process. During this step, the case manager contacts individual companies identified during the market analysis step. Before doing so, the case manager, often with the assistance of one or more inventors, develops a compelling Non- Confidential Disclosure (NCD) of the invention. This summary specifies the advantages of the invention over the current state of the art, without disclosing any details of the invention or how it is made or used (disclosure of such details may adversely affect our ability to obtain patent protection, particularly in markets outside the U.S.). The NCD may also detail the market opportunity for companies to consider and is intended to create a spark of interest in the invention. In addition, this summary gives the industry contact a reminder of what was discussed and something to pass around internally within the company.

8 Case managers will record and share with the inventors relevant information relating to each industry contact. This may include perceived level of interest, positive and negative comments, and suggestions for pivotal experiments or other development activities needed to make the licensing opportunity more compelling. Such comments may lead the case manager to consider applying for development funds from the ProMedica s Product Development Fund (PDF). Modest resources can be committed by the fund managers ProMedica s Innovation Council (comprising of ProMedica s CEO, MCO, CFO and Medical Director of Innovations as well as prominent business leaders of the region). PDF Applications are reviewed on a competitive basis, taking into account the effect of prototyping, time to market, market opportunity, and a variety of other market driven factors. In the event that a company is interested in learning more about an invention, the parties enter into a Confidentiality Agreement (a.k.a., CDA [confidential disclosure agreement] or NDA [non- disclosure agreement]). Once a Confidentiality Agreement is negotiated, Innovations provides the company with select confidential information, including market information and a copy of the patent application, for its consideration. In addition, the case manager also brokers a dialog between the inventors and the company scientists. The length of the Marketing process, particularly the active marketing step, varies greatly from invention to invention. On average, the process lasts more than a half year. If one or more companies expresses an interest in licensing a particular invention, the case manager proceeds to the Patenting Process and the Licensing Process. Should the case manager not identify an industry partner during the Marketing process, the case manager will either proceed with offering to license back the rights to the inventors or, if the invention was sufficiently well- received by potential licensee (often companies are enthusiastic, but determine that the invention is too early stage for licensing), the case manager may proceed with the patenting and return to active marketing after further development has occurred. The case manager conveys his decision to the inventors.

9 Patenting If the Marketing process yields favorable results, Innovations moves to protect and market the invention. Protection of an invention begins with the drafting and filing of a Provisional Patent Application (see below for description of such document). The case manager contacts patent counsel of choice to begin the drafting process. Innovations has relationships with numerous law firms. To prepare for the drafting of a provisional application, the selected attorney reviews the disclosure, performs a more in depth prior art search, and meets with the inventors to discuss the details of the invention. The drafting process is iterative and each subsequent draft is reviewed by the inventors. It is not uncommon for the drafting process to last up to two months and the cost in attorneys time to Innovation is generally between $2,000 and $8,000, depending on the level of detail needed to protect the invention. In a crowded field, for example, more detail may be sought to carve out a protective patent space. A provisional patent application has a one year lifetime. During such time, the case manager aggressively markets the inventions and garners industry feedback. Supporting data and refinements of the invention made during this period may lead to the filing of one or more supplemental provisional patent applications (one cannot amend or add to an existing provisional patent application). If there is sufficient market interest in the invention to merit further investment prior to expiration of the one year lifetime, the provisional is converted into a more substantial follow- on regular U.S. patent application and/or international patent applications. * Patent protection may not be the most appropriate form of protection for some types of inventions. For instance, disclosures covering software programs and other forms of content are often protected by copyrights. Also, tangible research materials such as antibodies and rodent models can be marketed without any formal type of protection.

10 Licensing As with the Marketing process, the licensing process is comprised of two distinct steps: business terms negotiations and license agreement negotiations. The first step toward a negotiated agreement is to address the basic financial terms and conditions to be received from the licensee in consideration for the grant of a license, as well as certain common threshold issues for each party (such as indemnification obligations and publication rights) and deal- specific terms (such as appropriate diligence provisions and selection of countries in which to seek patent protection). The negotiated financial terms and conditions are memorialized in a Term Sheet. The Term Sheet will generally specify the intellectual property to be licensed, the scope of the license grant (level of exclusivity, territory restrictions, field of use, etc), licensing fees, milestone payments, earned royalty percentages, minimum royalties, patenting expenses, sharing of revenues from sublicensees, and the various diligence undertakings taken by the licensee to further develop and commercialize the invention. Once the parties have executed a Term Sheet, the meat of negotiations begins with the initial drafting of a License Agreement based on the content of the Term Sheet. The License Agreement is typically a page document of dense legal prose that codifies the details of the relationship forged between ProMedica its licensee. The first draft is usually created by ProMedica (as the licensor) by customizing a template agreement with ProMedica s licensing policies embedded therein. Generally, several drafts of this agreement will be exchanged between the parties in order to iron out all of the detailed business issues and legal terms and conditions not covered during the business terms negotiations step. An exemplary list of items to be negotiated are the various defined terms (Net Sales, Equity, Sublicensing Revenue, Licensed Products), dispute resolution provisions, method and timing of payments, publication rights, access to unpatentable knowhow, enforcement of patents, and the amount of product liability insurance required to protect ProMedica from liability.

11 Due to the legal complexity of licensing transactions and the need to address a myriad of multifaceted business issues to both parties satisfaction, finalizing a License Agreement is a team effort (e.g., ProMedica s Office of General Counsel is a necessary partner throughout the transaction and must approve the final negotiated agreement), and such activity often lasts at least several months. In an effort to be sensitive to our licensees time pressures to progress with product development and commercialization, Innovations tracks the business terms negotiations and license agreement negotiations on a Negotiation Timeline form. In this way, we are able to identify time delays in the process and work to improve efficiency for future negotiations. It is not uncommon for a potential licensee to expresses interest in an invention, yet demonstrate a reluctance to commit to the diligence and financial obligations required in a license agreement. Such reluctance may stem from uncertainties regarding the operability of the invention, from the long timeline to first sale, from regulatory hurdles, or from the expense associated with product development and testing. In the absence of other industrial partners, Innovations may grant such company an Option to license the invention. An Option Agreement is a short agreement - generally on the order of 5-6 pages in length under which Innovations agrees not to license the invention to third parties during the term thereof in exchange for some cash payment and, potentially, coverage of patent costs. Occasionally, Innovations negotiates a Term Sheet contemporaneously with the option negotiations which is appended to the final Option Agreement, reducing the potential for disputes over finances when negotiating the subsequent License Agreement. The term of the option agreement is variable, spanning from a few months to as long as one year (the option fee is commensurate with the length of the option and the opportunity reserved thereby). During the term, the company has the exclusive opportunity to research outstanding questions (either internally or under a Sponsored Research Agreement at ProMedica), thereby reducing the company s risk. If the company elects to exercise its option, the parties negotiate a License Agreement. If the option is not exercised, the case manager continues to market the invention.

12 Monitoring The term of a License Agreement typically exceeds 15 years. During this time, Innovations must track its licensee s performance under the agreement, to ensure that products are being diligently developed and made available to the public for the benefit of patients, that the licensee is not in breach of the agreement to the detriment of ProMedica, and that proper consideration is being tendered under the agreement. The monitoring process begins with the case manger filling out a Transaction Summary for the newly signed License Agreement. The Transaction Summary summarizes the key financial obligations and diligence requirements set forth in the License Agreement, as well as the due dates for sending reports, attaining commercial goals, and making corresponding payments. Monitoring involves reviewing company reports and sales of products to ensure that diligence provisions, payment provisions, and other terms and conditions of the license are satisfied. As part of this process, Innovations may need to audit the accounting books of the licensee. The right to audit is a common condition of a License Agreement. As the number of active License Agreements reaches critical mass, Innovations may need to routinely audit each agreement on a periodic basis (perhaps every three years or so) to keep abreast of our licensees product development progress. Royalties and other payments received under a License Agreement (other than reimbursement for patent expenses) are distributed by Innovations to the inventors in accordance with ProMedica s Intellectual Property policy. At present, the policy ensures that forty percent (40%) of licensing revenue is distributed to the inventors as personal income, as a reward for successful innovation and as an incentive to continue to innovate. To the extent practicable, the sharing of the inventors portion of licensing income is to be decided by the inventors at the time of disclosure.

13 Close/Return (Return of Rights) Due to limited financial and human resources, Innovations is unable to pursue the patenting and marketing of all of the inventions disclosed annually. In the event that Innovations elects not to pursue a particular invention, the inventors are notified and are usually afforded the opportunity to pursue the invention on their own by way of a Return Offer Letter, subject to whatever approvals and conflicts resolutions issues that may be required. This opportunity takes the form of an exclusive license back to the inventors, with ProMedica reserving the right to practice the invention for ProMedica purposes. Since a U.S. patent costs approximately $25,000 and six years to obtain and often proves difficult, time- consuming and expensive to identify and negotiate a licensing relationship with a third party, Innovations acknowledges that most inventors will decline our offer to license back their inventions. In such cases, Innovations will continue to make the invention available for licensing, but will discontinue active marketing and patenting of the invention. Over time, due to advances in the field, the invention is likely to be rendered unpatentable. A return offer may occur during the Evaluation process if the invention does not meet or exceed the minimum score necessary to move forward with marketing and patenting on the Evaluation Scoring Form. In addition, if active marketing does not lead to industry interest in the invention, Innovations may make a return offer to the inventors. Case managers directly inform the inventors of the decision to discontinue active marketing and follow up the conversation by providing the inventors with the Return Offer Letter and a copy of the Evaluation Scoring Form.

14 New Venture Creation Though most inventions are licensed by industry partners for development and commercialization, a select number on new technologies are best suited for commercialization through the formation of a new company. A spin out company can leverage resources to incubate and refine a technology portfolio until a major value inflection point is reached, and then exit via sale to an industrial partner or investors. The New Venture pathway encompasses the key marketing and patenting steps carried out as part of the Commercialization Process, and further includes activities like development of a sustainable business concept (including vetting new concepts through the ProMedica s Innovation Council), drafting of a Business Plan, interim project management, legal formation of a new company, securing interim funding and management to run the newly formed company, and attracting outside management and investment capital to move the company forward towards its business objectives and exit. Due to the labor- intensive nature of the New Ventures model, and the complexity and real financial risk associated with such early stage companies, the New Venture pathway is usually reserved for platform technologies that have potential for development into multiple products, or special opportunity situations. Since each new company has unique and different needs, the length of the new venture formation process varies widely. In recent experience, the process has ranged from two months to over a year.