10990 Wilshire Boulevard, Suite 1400, Los Angeles, CA 90024 | Tel: 310.954.3200 | info@DAFNAcapital.

com

January 8, 2019

The net performance numbers for December 2018, the full year, and trailing returns are below. Performance
numbers may vary on an individual account basis, depending on capital contributions or withdrawals during the
current year and eligibility to participate in new issues.

DAFNA DAFNA
1 1 1 1
LifeScience Select NBI SPX
December 2018 net return -7.34% -9.42% -11.25% -9.03%
2018 net return 7.99% 9.11% -9.32% -4.38%
Annualized 3 year net return 14.81% 15.11% -4.92% 9.26%
Annualized 5 year net return 12.56% 13.60% 5.13% 8.49%
Annualized 10 year net return 18.12% 19.98% 15.35% 13.12%
Annualized net return since inception3 21.21% 15.52% 10.19% | 10.05% 5.62% | 7.77%
Volatility since inception2 20.01% 18.23% 28.25% | 19.89% 14.44% | 13.44%
Gross exposure as of 12/31/18 64% 75% - -
Net long exposure as of 12/31/18 63% 73% - -
1
DAFNA LifeScience is the net return for DAFNA Fund, L.P. (Series A) and DAFNA International Fund Ltd. (Class A); and DAFNA Select
is the net return for DAFNA Fund, L.P. (Series C) and DAFNA International Fund Ltd. (Class C). Returns are for investors who are
eligible to participate in new issues. NBI refers to the Nasdaq Biotechnology Index (market-cap-weighted index of Nasdaq-listed
biotechnology and pharmaceutical companies). SPX refers to the S&P 500 Total Return (market-cap-weighted index of 500 large US
companies across all industries). There are substantial differences in the holdings and risk profiles of DAFNA LifeScience and DAFNA
Select to the NBI and SPX.
2
Volatility is calculated using monthly net performance data.
3
Inception dates are 1/1/99 for DAFNA LifeScience, and 1/1/04 for DAFNA Select. The results for the NBI and SPX are from those
respective dates as well. The portfolios in the DAFNA funds were substantially more concentrated and had higher gross exposure
during the early years.

2018 Review:
General: The fourth quarter of 2018 transformed a solid stock market performance, in which the NASDAQ
Biotechnology Index (NBI) had risen 14.3% through September, into a very difficult year. The NBI fell 20.6% in
the fourth quarter, leading to a 9.3% loss during 2018, and is now 26.9% below its peak on July 20, 2015. The
reasons for the current decline are mainly general market anxieties related to rising interest rates, the potential
for a decelerating economy and political concerns. The longer lasting decline in biotechnology indexes can be
specifically attributed to sector rotation away from biotechnology by generalist investors, price pressures for
drug therapies, and the increased competition among new drugs which can reduce the commercial value of
such treatments. In addition, the euphoric investor sentiment of the 2012 to 2015 bull market has collided with
the reality of drug development and biotechnology dynamics: highly touted technological advances with gene
therapy, cellular therapy, immuno-oncology, and personalized treatments can take longer for most indications
than initially expected; clinical trials even with the best preliminary data and perfect biological rationale can fail;
market uptake and penetration of many novel drugs can disappoint; and there is never enough M&A activity to
support the many companies that could benefit from an experienced partner.
Despite the negative stock market performance and the pricing and competitive headwinds, we are in a golden
period for drug development. The improvements in fundamental understanding of disease biology and
technological improvements in modifying molecules and cells have led to an ever accelerating pace of novel
modalities for drug discovery and development. During 2018 exciting results were obtained using gene therapy
for Duchenne muscular dystrophy, spinal muscular atrophy, and thalassemia, and new generations of drugs for
depression and epilepsy have shown promising results. Accordingly, the strong pace of biotechnology IPOs has
continued in 2018, resulting in an even larger investable universe.
January 8, 2019
Page 2 of 5

Performance: DAFNA Capital Management had another solid year and although the significant decline in the
fourth quarter was difficult to endure, we are pleased to end the year with positive absolute returns and
significant outperformance versus the NBI. Moreover, as explained in more detail in the review of our 20 year
performance history below, we are particularly gratified by our most recent performance versus the NBI since its
peak three and a half years ago. As of December 31, 2018 the NBI is still 26.9% below its peak on July 20,
2015, while DAFNA LifeScience generated a net return of +51.6% from July 2015 through December 2018 with
a net long exposure of 56-87%. As we have noted previously, during brief periods of market declines
DAFNA Funds are generally fully impacted by the decline. However, the longer the decline lasts, the
more opportunities arise for us to generate excess returns.
Our performance continues to be generated by a multitude of individual positions each contributing to overall
performance. During 2018, the DAFNA flagship fund held 154 long positions and 17 short positions. 59% of the
positions were profitable versus 33% of the 198 NBI components being positive. Short positions were
responsible for 10% of the fund’s performance. Average gross and net long exposures were 78% and 77%,
respectively. Exposure levels and number of positions have remained fairly stable over the past few years.
Most important for our investment approach, individual stock performance remains highly dependent on specific
company events, with the stock performance for the 540 components of our proprietary biotechnology index*
ranging from -100% to +461%, the interquartile range being 69% (from -65% to +4%) with a median of -35%.
The interquartile range and median for the 179 components of our proprietary medical device index* are 68%
(from -42% to +26%) and -5%, respectively. This wide dispersion of results is positive for fundamental stock
selection, and the large number of public companies offers many trading opportunities of varying time horizons
based on fundamental misconceptions, trading imbalances and financing discounts.
The average and median performance of -22.1% and -35.4%, respectively, for our proprietary biotechnology
index is significantly less than the -9.3% of the NBI. This is due to the much stronger performance of larger
companies. Companies with market capitalizations of over $2 Billion were down 6.9% on average, companies
between $100 million and $2 billion were down 17.1%, and companies under $100 Million were down 39.3% on
average. A similar trend for large capitalization outperformance occurred for medical devices.
*Our proprietary indices are equal-weighted indices of all the biotechnology and medical device companies that fit our parameters as a
potential investment as of 12/31/2017; there may be substantial differences in the holdings and risk profiles of DAFNA funds to the
proprietary indices.

STXS and CTIC: Last year we reported in the annual letter on two unusual events, one involving a private
investment in the publicly traded company STXS and the other a class action lawsuit regarding a 2016 loss in
CTIC. The updated information on these two situations is as follows:
STXS: As a reminder, in September 2016 we led a private investment in the publicly traded company STXS.
Soon after, further interactions with management led us to conclude that the company was poorly managed. To
protect the investment, the board unanimously decided to replace the CEO and elected David Fischel as CEO
and Chairman in February 2017. Dr. Nathan Fischel concurrently joined the board. STXS immediately reduced
expenses and during the rest of the year developed a plan for renewed innovation and a successful commercial
future. During 2018 STXS executed on many of the innovation and commercial initiatives and expects to
provide more clarity during the first half of 2019. The stock price of STXS appreciated during the year by 35%,
and the position represents as of year-end 6.2% in DAFNA LifeScience and 12.2% in Select.
CTIC: A 2016 loss in CTIC led us to become the lead plaintiff in a class action lawsuit against the company as
we believed they had provided materially inaccurate and misleading information during two secondary
financings. That lawsuit was settled for $20 Million, and during 2018 we received $486,306 commensurate with
our past loss.

Research and trading: Our investment decision and trading processes continue to function in a smooth and
efficient manner. Each company has a primary and secondary analyst, with an established process to
determine the initiation, sizing, and termination of positions. Trades, news, and potential changes to our
portfolio are reviewed on a daily basis, and additional company and portfolio reviews occur on a frequent basis.
Our research relational database and proprietary data sheets on companies in our universe allow us to rapidly
review opportunities as stock prices, financial information, and clinical data change. Our principal investment
and trading professionals have the benefit of having worked together for many years.
January 8, 2019
Page 3 of 5

Operations and business: As in previous years, operations ran efficiently and benefited from many years of
building a robust infrastructure, as well as nurturing and maintaining good working relationships with service
providers. We completed the Fund audits by the end of February and sent out all K-1’s in March. Ms. Xun Lin
continues her roles as Director of Finance and Chief Compliance Officer. Mr. Adam Wagner who joined the firm
as the first Director of Marketing and Operations in November 2017, continues his efforts to raise additional
assets for the DAFNA funds. We are supportive of his efforts, though the overwhelming majority of our own
attention and energy remains focused on performance and risk management.

Assets under management: As of January 1, 2019, we have $298.6 Million under management, with $203.2
Million in the DAFNA LifeScience strategy and $95.5 Million in the DAFNA Select strategy. We personally
remain by far the largest investor in the combined DAFNA funds. Our investor base is diversified and we are
grateful for the quality of our institutional and individual investors. We remain very comfortable with our
infrastructure at current asset levels.

20 Year DAFNA Review:

The core investment team of DAFNA Capital Management has remained remarkably stable since its inception
in January 1999. Dr. Fischel founded the firm, Dr. Ghodsian joined in 2002 and Mr. Fischel joined full time in
2008. These three individuals have been the only portfolio managers during the entire history of the firm and
have no plans to change their involvement with the firm. Similarly, the fundamental focus of the investment
process has remained remarkably stable, focusing on publicly traded biotechnology and medical device
companies addressing unmet medical needs. The expertise of the investment team is the analysis of the likely
outcome of clinical trials, regulatory decisions and market utilization.

Portfolio evolution: In January 1, 1999, the portfolio started as highly concentrated, fully invested, and with
significant short positions. While this approach was highly successful, the introduction of physician networks
and our evolution in thinking about long-term risk, has led to a more diversified portfolio that generally holds a
meaningful balance of cash and uses shorts opportunistically as a source of alpha rather than a portfolio hedge.
This approach has continued to lead to solid results over the last decade as shown in the table below. We are
very comfortable with the current approach but remain open to adjust as the environment and our own risk
tolerance changes.

Return and risk highlights: The funds’ performance has been very strong over its twenty years since
inception. When broken out by decade as shown in the table below, it reflects the evolution in portfolio
construction mentioned above. In addition, and as importantly, the performance has been particularly strong
during the periods when the NBI struggled the most:
· Most dramatically, from March 6, 2000 to July 10, 2002 the NBI declined 74.7% while DAFNA LifeScience
rose 48.7% from March 2000 through July 2002. It took the NBI until March 2013 to recover its level in
March 2000!
· The second largest decline of the NBI at 39.4% occurred from July 20, 2015 to June 27, 2016. DAFNA
LifeScience declined 8.4% from July 2015 through June 2016. The largest decline for DAFNA LifeScience
during this period occurred from August 2015 through February 2016 at 20.9%. The NBI is still 26.9% below
its peak on July 20, 2015, while DAFNA LifeScience rose 51.6% from July 2015 through year-end 2018.
· The third largest decline of the NBI at 34.7% occurred from August 14, 2008 to March 9, 2009, while our
peak loss occurred from September 2008 through February 2009 at 25.0%. Both the NBI and DAFNA
LifeScience recovered within 19 months.
The two periods starting September 2008 and August 2015 were the worst losing periods of DAFNA
LifeScience during its existence.

Separately, DAFNA LifeScience performed well during the prolonged five year sideway market from January
2004 through December 2008. The NBI return during those five years was 0.7%, while the net return of DAFNA
LifeScience during the same period was 27.0%.

The periods of underperformance of DAFNA LifeScience versus the NBI generally occurred during periods of
very strong index performance.
January 8, 2019
Page 4 of 5