Luye Pharma Group Limited - Proxy Solicitation & Information Statement 2017

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Luye Pharma Group Ltd., you should at once hand this circular, together with the accompanying form of proxy, to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

LUYE PHARMA GROUP LTD.

綠葉製藥集團有限公司

(Incorporated in Bermuda with limited liability) (Stock Code: 02186)

CONNECTED TRANSACTION IN RELATION TO

THE ACQUISITION OF TWO BIOLOGICAL ANTIBODY PRODUCTS AND

NOTICE OF SPECIAL GENERAL MEETING

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders of Luye Pharma Group Ltd.

A letter from the Independent Board Committee is set out on pages 13 to 14 of this circular. A letter from Gram Capital containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 15 to 26 of this circular. A notice convening the SGM to be held at Bowen Room, 7/F, Conrad, Pacific Place, 88 Queensway, Admiralty, Hong Kong on Friday, 29 December 2017 at 3:00 p.m. is set out on pages 51 to 52 of this circular. Whether or not you are able to attend and/or vote at the SGM in person, you are encouraged to complete the enclosed form of proxy and return it to the Company’s Hong Kong share registrar, Computershare Hong Kong Investor Services Limited, 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong in accordance with the instructions printed thereon as soon as possible but in any event not later than 48 hours before the time appointed for the holding of the SGM or any adjournment thereof (as the case may be). Completion and return of the form of proxy will not preclude you from subsequently attending and voting in person at the SGM or any adjournment thereof (as the case may be) should you so wish.

11 December 2017

CONTENTS

	Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . . . . . .	13
LETTER FROM GRAM CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
APPENDIX I — VALUATION REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
APPENDIX II — GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	45
NOTICE OF THE SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	51

– i –

DEFINITIONS

Unless the context requires otherwise, the following expressions shall have the following meanings in this circular:

‘‘Asset Transfer’’
the acquisition of the Products by Shandong Luye from the Seller pursuant to the terms of the Asset Transfer Agreements
‘‘Asset Transfer Agreements’’ the two asset transfer agreements dated 4 August 2017 in respect of the acquisition of the Products by Shandong Luye from the Seller
‘‘Asset Transfer Announcements’’ announcements of the Company dated 4 August 2017 and 20 November 2017, respectively, in relation to the Asset Transfer
‘‘Board’’ the board of Directors
‘‘CDE’’ 中國國家食品藥品監督管理總局藥品審評中心 (The Centre For Drug Evaluation of the PRC Food and Drug Administration)
‘‘Company’’ Luye Pharma Group Ltd., a company incorporated in Bermuda with limited liability, the shares of which are listed on the Main Board of the Stock Exchange
‘‘Directors’’
the directors of the Company
‘‘Group’’
the Company and its subsidiaries
‘‘Independent Board Committee’’
an independent board committee of the Company comprising all the independent non-executive Directors, formed for the purpose of advising the Independent Shareholders in respect of the Asset Transfer
‘‘Independent Financial Adviser’’ or ‘‘Gram Capital’’
Gram Capital Limited, a licensed corporation licensed to carry out Type 6 (advising on corporate finance) regulated activity under the SFO, being the independent financial adviser appointed by the Independent Board Committee to advise the Independent Board Committee and the Independent Shareholders with regard to the Asset Transfer
‘‘Independent Shareholders’’
Shareholders other than Mr. Liu Dian Bo, Mr. Yang Rong Bing and Mr. Yuan Hui Xian, and their respective associates
‘‘Latest Practicable Date’’
7 December 2017
‘‘Listing Rules’’

the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited

– 1 –

DEFINITIONS

‘‘Luye Investment’’ Luye Pharmaceutical Investment Co. Ltd., an exempt company with limited liability incorporated in the Cayman Islands, and a controlling shareholder of the Company
‘‘Model Code’’ Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Listing Rules
‘‘PRC’’ the People’s Republic of China and for the purpose of this circular, excludes Hong Kong, Macau Special Administrative Region and Taiwan
‘‘Products’’ LY01008 and LY06006

‘‘RMB’’ Renminbi, the lawful currency of the PRC ‘‘Seller’’ 山東博安生物技術有限公司 (Shandong Boan Biological Technology Co. Ltd.), a company with limited liability established in the PRC, and a connected person of the Company

‘‘SFO’’ Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
‘‘SGM’’ the special general meeting of the Company to be convened to consider and, if thought fit, approve the Asset Transfer Agreements and the transactions contemplated thereunder
‘‘Shandong Luye’’ 山東綠葉製藥有限公司 (Shandong Luye Pharmaceutical Co. Ltd.), a company with limited liability established in the PRC, and a wholly-owned subsidiary of the Company
‘‘Shareholders’’ holders of the Shares
‘‘Shares’’ ordinary shares of US$0.02 each in the issued share capital of the Company
‘‘Stock Exchange’’ The Stock Exchange of Hong Kong Limited
‘‘US$’’ United States dollars, the lawful currency of the United States
‘‘Valuation Report’’ the valuation report in respect of the valuation of the Products dated 11 December 2017 and prepared by the Valuer
‘‘Valuer’’ or ‘‘Crowe Horwath’’ Crowe Horwath First Trust Appraisal Pte Limited, the valuer in respect of the Products

– 2 –

DEFINITIONS

‘‘Wuhu Luye’’ 蕪湖綠葉製藥有限公司 (Wuhu Luye Pharmaceutical Co. Ltd.), a company with limited liability established in the PRC on 16 April 2001. It is owned as to 90% by Luye Investment and 10% by 蕪湖長榮醫藥科技資訊諮詢有限責任公司 (Wuhu Changrong Pharmaceutical Technology Information Consulting Co. Ltd.), an independent third party

In this circular, the terms ‘‘associate’’, ‘‘connected person’’, ‘‘controlling shareholder’’ and ‘‘subsidiary’’ have the meanings given to such terms in the Listing Rules, unless the context otherwise requires.

English translations for the Chinese names of the PRC entities, authorities or facilities in this circular are for reference only. In the event of any discrepancies between the Chinese names of these PRC entities, authorities or facilities and their respective English translations, the Chinese version shall prevail.

– 3 –

LETTER FROM THE BOARD

LUYE PHARMA GROUP LTD.

綠葉製藥集團有限公司

(Incorporated in Bermuda with limited liability)

(Stock Code: 02186)

Executive Directors:

Mr. Liu Dian Bo Mr. Yang Rong Bing Mr. Yuan Hui Xian Ms. Zhu Yuan Yuan

Registered Office: Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Non-executive Director:

Mr. Song Rui Lin

Independent Non-executive Directors:

Mr. Zhang Hua Qiao Professor Lo Yuk Lam Mr. Leung Man Kit Mr. Choy Sze Chung Jojo

Principal Place of Business in Hong Kong: Unit 3207, 32/F, Champion Tower 3 Garden Road Central Hong Kong

11 December 2017

To the Shareholders,

Dear Sir or Madam

CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF TWO BIOLOGICAL ANTIBODY PRODUCTS

INTRODUCTION

Reference is made to the Asset Transfer Announcements. On 4 August 2017, Shandong Luye (a wholly-owned subsidiary of the Company) and the Seller entered into the Asset Transfer Agreements pursuant to which Shandong Luye has agreed to acquire, and the Seller has agreed to transfer to Shandong Luye, two biological antibody products under research and development, being LY01008 and LY06006, and their respective technologies, data and all rights attaching to the Products including but not limited to the clinical trials approval, for a total consideration of RMB450 million, which is payable by stages.

– 4 –

LETTER FROM THE BOARD

The Seller is an indirect subsidiary of Luye Investment, a controlling shareholder of the Company. Accordingly, the Seller is a connected person of the Company, and the Asset Transfer under the Asset Transfer Agreements constitutes a connected transaction of the Company under the Listing Rules.

THE ASSET TRANSFER AGREEMENTS

The principal terms of the Asset Transfer Agreements are set forth below:

Date

4 August 2017

Parties

(1) 山東綠葉製藥有限公司 (Shandong Luye Pharmaceutical Co. Ltd.), a wholly-owned subsidiary of the Company
(2) 山東博安生物技術有限公司 (Shandong Boan Biological Technology Co. Ltd.), as the Seller

The Seller is an indirect subsidiary of, and owned as to 66.7% indirectly by, Luye Investment, a controlling shareholder of the Company. Mr. Liu Dian Bo, Mr. Yang Rong Bing and Mr. Yuan Hui Xian, each an executive Director, are indirectly interested in the share capital of Luye Investment. Accordingly, the Seller is a connected person of the Company.

Assets being acquired

Pursuant to the Asset Transfer Agreements, Shandong Luye has agreed to acquire, and the Seller has agreed to transfer to Shandong Luye, the Products, being LY01008 and LY06006, and their respective technologies, data and all rights attaching to the Products including but not limited to the clinical trials approval. The following table sets forth some information about the Products:

	LY01008	LY06006
Description	recombinant anti-VEGF humanised	recombinant anti-RANKL whole
	monoclonal antibody injection (重組	human monoclonal antibody
	抗VEGF人源化單克隆抗體注射液)	injection (dosage 60 mg/bottle)
		(重組抗RANKL 全人單克隆抗體
		注射液(dosage 60 mg/bottle))

– 5 –

LETTER FROM THE BOARD

	LY01008	LY06006
Indication	Colorectal cancer or non-small cell	Osteoporosis among
	lung cancer	postmenopausal women; reducing
		the risk of vertebral, non-vertebral
		and hip fractures
Status	Entered into phase III clinical trials	Entered into phase I clinical trials
Targeted launch	2021	2022/2023
year
Market comparable	Biosimilar to Avastin	Biosimilar to Prolia

Based on information currently available to the Group and bearing unforeseen circumstances, the following table sets out the historical development and a preliminary indicative timeframe of future development of the Products:

			Expected development stages	Expected development stages	Expected development stages
	Acceptance of
	application for	Approval for	Phase I	Phase II	Phase III	Application	Target
	clinical trials	clinical trial	clinical trial	clinical trial	clinical trial	for production	launch year
LY01008	October 2014	October 2016	From March 2017	—	From November 2017	End of 2020	2021
			to June 2018		to 2020
LY06006	September 2016	May 2017	From November 2017	From April 2019	From January 2020	In 2022	End of 2022 to
			to June 2019	to November 2020	to 2022		early 2023

As the Products are being developed by the Seller and the development expenses of the Products have not been capitalised, the Products carried no book value as at the date of the Asset Transfer Agreements.

– 6 –

LETTER FROM THE BOARD

Consideration

The total consideration for the Asset Transfer is RMB450 million (RMB250 million for LY01008 and RMB200 million for LY06006) and is payable by stages according to the following timetable:

	% of the
Time	consideration
Within five days following the signing of the respective Asset Transfer
Agreements	20%
Within five days following the completion of phase III clinical trials
of the respective Product according to the requirements of the CDE
and the results of such clinical trials being successful	50%
Within five days following the submission to the CDE of the
application for the marketing authorisation of the respective Product	20%
Within five days following the CDE’s grant of the marketing
authorisation of the respective Product	10%

The Seller is responsible for all three phases of the clinical trials of the Products, and Shandong Luye will not be responsible for the costs related to the undertaking of such clinical trials. The costs associated with clinical trials and the development of the Products are generally payable to relevant third party service providers by stages subject to the fulfilment of certain development milestones as set out in the respective agreements.

In respect of the development of the Products, the Seller has entered into a number of agreements under which the following fees and costs are payable or borne by the Seller:

(i) clinical trial fees payable to hospitals and site management organisation (‘‘SMO’’) for the implementation of clinical trials;
(ii) service fees payable to contract research organisation (‘‘CRO’’) for clinical trials;
(iii) drug development costs payable to manufacturers for product sample manufacturing;
(iv) insurance costs payable to the relevant insurer in respect of clinical trial insurance policy; and
(v) other service fees payable to research institutions and technical service providers for the clinical trials.

– 7 –

LETTER FROM THE BOARD

Other than the initial payment of 20% of the consideration, the payment of the consideration for each Product is contingent upon the success of all three phases of the clinical trials for the Products. If the clinical trials were not successful, Shandong Luye shall not be liable to make any further payment of consideration, and shall have the right to demand the Seller to refund all consideration already paid. It is the current intention of the Company to demand (through Shandong Luye) such refund from the Seller in the event the clinical trials were not successful.

If the Products eventually obtain the marketing authorisation and commence sale, Shandong Luye has agreed to pay royalties representing 10% of the revenue generated from the sale of such Products to the Seller.

REASONS FOR AND BENEFITS OF THE ASSET TRANSFER

The Products are two monoclonal antibody drugs developed by the Seller. Monoclonal antibodies are a type of biopharmaceutical developed using genetic engineering technologies, and cause limited side effects when applied clinically because of their structural specificity. Hence, the application of monoclonal antibodies has become increasingly prevalent in the treatment of diseases such as malignant tumours.

The global pharmaceutical industry has witnessed significant growth in the sales of biopharmaceuticals in recent decades, and this trend is expected to continue in the future. In 2016, the size of the global biopharmaceutical market has reached US$238 billion, with a share of 23.6% of the global prescription drugs market and an annual growth rate of 11.7%. The IMS predicts that by 2020, the size of the global biopharmaceutical market will exceed US$390 billion, representing a 28% share in the prescription drugs market. In China, the market size of the biopharmaceutical market in 2015 reached RMB297.883 billion. According to public financial reports, Avastin (which is the market comparable of LY01008) achieved sales of 6,780 million Swiss francs globally, while its sales in China were RMB640 million in 2016. Sales of Prolia (which is the market comparable to LY06006) amounted to US$1,635 million in 2016 and the product has not been launched in China yet. The Board believes that the inclusion of the Products in the Group’s product portfolio represents an excellent growth opportunity.

In recent years, a number of Chinese pharmaceutical companies have commenced significant investment in biological products through their own research and development efforts or through forming joint ventures with and acquisitions of products from other biotech companies. In order to remain competitive and maintain a long-term sustainable growth, the Board believes that it is important for the Group to accelerate its biological antibodies development.

– 8 –

LETTER FROM THE BOARD

BASIS OF THE CONSIDERATION

The consideration of the Asset Transfer was determined after arm’s length negotiations between Shandong Luye and the Seller taking into account various factors, including but not limited to the status of the development of the Products, their market potential, the competitive landscape for acquiring potential biological and antibody drug candidates in the PRC market and the contingent payment arrangements. The royalties payment representing 10% of the revenue generated from the sale of such Products to the Seller was determined after taking into account factors including but not limited to the total amount of the payments under the Asset Transfer, the stage payment arrangement, the contingent nature of the payments, the risk allocation between the Seller and the Group, the prospects of success of the relevant clinical trials, the development cost, and market potential of the Products. The Directors (including the independent non-executive Directors) consider the basis of consideration, and in respect of the prospective royalty payments, is fair and reasonable and is in line with market practice. In this regard, the Directors have considered the acquisition terms of potential target which the Group had previously considered (including the rate of the royalty payments being negotiated). The Directors found the rate of royalty payment (i.e. 10% of the revenue generated from the sale of the Products) is in line with the terms of such comparable transactions considering the terms of the Asset Transfer as a whole. The Board intends to fund the payment of the consideration from its internal resources and/or external financing.

According to the Valuation Report as set out in Appendix I of this circular prepared by Crowe Horwath, an independent valuer, having adopted the cost approach (please refer to Appendix I to this circular for further details including the valuation approach and the assumptions relied upon), the Products, namely, LY01008 and LY06006, were valued at RMB277 million and RMB222 million, respectively, as at 30 September 2017.

According to the Seller, the clinical trials for the Products were designed with reference to the relevant guidelines on research and development of biological drugs published by 國家食品藥品監督管理總局 (China Food and Drug Administration) and, for LY01008, an evaluation report on the clinical trial design of a market comparable for LY01008 published by 國家食品藥品監督管理總局藥品審評中心 (Centre for Food and Drug Evaluation of China Food and Drug Administration), which laid down key areas of clinical trials and particulars for research and development, and, where applicable, taking into account other clinical trials designed by foreign clinical trial studies on other clinical trial design and other PRC pharmaceutical manufacturers. The assumptions associated with the estimated costs on clinical trials were made based on, among other things, similar sample size for patients, sample size calculations, dosage, dosing cycle, length of medication according to applicable published report, guideline and studies. As such, the Directors consider the assumptions applied in the estimation of the costs for clinical trials above are fair and reasonable.

Taking into account, among other things, the valuation of the Products carried out by Crowe Horwath, the Directors (including the independent non-executive Directors) considered that the terms of the Asset Transfer Agreements are fair and reasonable, on normal commercial terms and in the ordinary and usual course of business of the Group; and the Asset Transfer is in the interests of the Company and the Shareholders as a whole.

– 9 –

LETTER FROM THE BOARD

INFORMATION ON THE GROUP AND THE SELLER

The Group

The Group is a pharmaceutical company based in the PRC which focuses on the development, production, marketing and sale of innovative products in the four of the largest and fastest growing therapeutic areas — oncology, cardiovascular system, metabolism and CNS.

The Seller

The Seller is a biotechnology company established in 2013. It focuses on the development of biopharmaceutical products, and operates a 1,200 sq.m. GMP-compliant pilot plant.

LISTING RULES IMPLICATIONS

The Seller is an indirect subsidiary of, and owned as to 66.7% indirectly by, Luye Investment, a controlling shareholder of the Company. Accordingly, the Seller is a connected person of the Company and the Asset Transfer under the Asset Transfer Agreements constitutes a connected transaction of the Company under the Listing Rules.

As at the Latest Practicable Date, Luye Investment held 1,517,113,930 Shares (representing approximately 45.68% of the total issued share capital of the Company). Mr. Liu Dian Bo, Mr. Yang Rong Bing and Mr. Yuan Hui Xian, each an executive Director, are indirectly interested in Luye Investment (and hence the Seller) through various holding companies. Each of them is considered to have material interests in the Asset Transfer by virtue of their interests in the Seller, and they had abstained from voting on the board resolution approving the Asset Transfer. Luye Investment will abstain from voting on the resolution to be proposed at the SGM to approve the Asset Transfer.

As disclosed in the Asset Transfer Announcements, if the Products eventually obtain the marketing authorisation and commence sale, Shandong Luye has agreed to pay royalties representing 10% of the revenue generated from the sale of such Products to the Seller. These royalty payments may constitute continuing connected transactions under the Listing Rules when they arise, and the Company may in the future have to comply with the Independent Shareholders’ approval requirement, among other things, under the Listing Rules in respect of such royalty payments. Upon further discussion between the parties to the Asset Transfer Agreements, to minimise the uncertainty surrounding the Asset Transfer and in particular the royalty payment arrangements under the Asset Transfer Agreements, the Board has decided, and the parties to the Asset Transfer Agreements have agreed, that the Company will now seek Independent Shareholders’ approval for the Group’s entering into of the Asset Transfer Agreements and all transactions contemplated thereunder (including the royalty payment arrangements). Accordingly, the Company will convene the SGM for the purpose of considering, and if thought fit, approving the Asset Transfer Agreements. If the Independent Shareholders approved the Asset Transfer Agreements and the transactions contemplated thereunder at the SGM, this will authorise the Board,

– 10 –

LETTER FROM THE BOARD

among other things, to make the royalty payments pursuant to the terms of the Asset Transfer Agreements to the Seller and no further shareholders approval will be sought when such payments arise in the future.

THE SGM

The SGM will be convened to consider and approve the Asset Transfer. A notice to convene the SGM is set out on pages 51 to 52 of this circular. The SGM will be held at Bowen Room, 7/F, Conrad, Pacific Place, 88 Queensway, Admiralty, Hong Kong on Friday, 29 December 2017 at 3:00 p.m. The form of proxy for use by the Shareholders at the SGM is enclosed with this circular. Whether or not you are able to attend the SGM, you are encouraged to complete the accompanying form of proxy, in accordance with the instructions printed thereon and deposit the same at the office of the Company’s Hong Kong share registrar, Computershare Hong Kong Investor Services Limited, 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not later than 48 hours before the time scheduled for the holding of the SGM or any adjournment thereof (as the case may be). Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjournment thereof (as the case may be).

RECOMMENDATION

The Independent Board Committee has been established to advise the Independent Shareholders whether the entering into of the Asset Transfer Agreements and the transactions contemplated thereunder are conducted in the ordinary and usual course of business of the Group, and whether the terms of the Asset Transfer Agreements are on normal commercial terms and the transactions contemplated thereunder are fair and reasonable so far as the Independent Shareholders are concerned, and in the interests of the Company and the Shareholders as a whole. Gram Capital has been appointed to advise the Independent Board Committee and the Independent Shareholders in that connection. Crowe Horwath has been appointed to prepare the Valuation Report.

The text of the letter from Gram Capital containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 15 to 26 of this circular and the text of the letter from the Independent Board Committee to the Independent Shareholders is set out on pages 13 to 14 of this circular.

The Directors (including independent non-executive Directors) considered that the terms of the Asset Transfer Agreements are fair and reasonable, on normal commercial terms and in the ordinary and usual course of business of the Group and the Asset Transfer is in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors (including independent non-executive Directors) recommend the Shareholders to vote in favour of the relevant resolution to be proposed at the SGM.

– 11 –

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

Your attention is drawn to the letters from the Independent Board Committee and from Gram Capital, which are respectively set out on pages 13 to 14 and pages 15 to 26 of this circular. Your attention is also drawn to the Valuation Report set out in Appendix I and the general information set out in Appendix II.

Yours faithfully,

By order of the Board LUYE PHARMA GROUP LTD. Liu Dian Bo

Chairman

– 12 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is the text of the letter of recommendation from the Independent Board Committee to Independent Shareholders in relation to the Asset Transfer prepared for the purpose of incorporation in this circular.

LUYE PHARMA GROUP LTD.

綠葉製藥集團有限公司

(Incorporated in Bermuda with limited liability)

(Stock Code: 02186)

11 December 2017

To the Independent Shareholders

Dear Sir or Madam,

CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF TWO BIOLOGICAL ANTIBODY PRODUCTS

We refer to the circular dated 11 December 2017 (the ‘‘Circular’’) of the Company of which this letter forms part. Terms defined in the Circular shall have the same meanings when used herein unless the context requires otherwise.

We, being the independent non-executive Directors constituting the Independent Board Committee, are writing to advise you as a Shareholder whether the Independent Board Committee is of the view that the terms of the Asset Transfer Agreements are fair and reasonable, on normal commercial terms insofar as the Independent Shareholders are concerned; and whether the terms of the Asset Transfer Agreements are in the interests of the Company and the Shareholders as a whole and whether the entering into of the Asset Transfer Agreements and the transactions contemplated thereunder are in the ordinary and usual course of business of the Group. Gram Capital has been appointed as the Independent Financial Adviser to advise you and us in this respect.

We wish to draw your attention to the letter from the Board as set out on pages 4 to 12 of the Circular and the letter from Gram Capital as set out on pages 15 to 26 of the Circular which contains, inter alia, its advice and recommendation you and to us regarding the terms of the Asset Transfer Agreements with the principal factors and reasons for its advice and recommendation.

– 13 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

RECOMMENDATION

Having taken into account the principal reasons and factors considered by, and the advice of, Gram Capital, we are of the view that the terms of the Asset Transfer Agreements are fair and reasonable so far as the Independent Shareholders are concerned, on normal commercial terms and in the ordinary and usual course of business of the Group, and the Asset Transfer is in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the resolution to be proposed at the SGM to approve the Asset Transfer Agreements and the transactions contemplated thereunder.

Yours faithfully,

For and on behalf of the Independent Board Committee of Luye Pharma Group Ltd.

Zhang Hua Qiao Lo Yuk Lam Leung Man Kit Choy Sze Chung Jojo

Independent Non-executive Directors

– 14 –

LETTER FROM GRAM CAPITAL

Set out below is the text of a letter received from Gram Capital, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in respect of the Asset Transfer for the purpose of inclusion in the Circular.

Room 1209, 12/F. Nan Fung Tower 88 Connaught Road Central/ 173 Des Voeux Road Central Hong Kong

11 December 2017

To: The independent board committee and the independent shareholders of Luye Pharma Group Ltd.

Dear Sir/Madam,

CONNECTED TRANSACTION

IN RELATION TO

THE ACQUISITION OF TWO BIOLOGICAL ANTIBODY PRODUCTS

INTRODUCTION

We refer to our appointment as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Asset Transfer, details of which are set out in the letter from the Board (the ‘‘Board Letter’’) contained in the circular dated 11 December 2017 issued by the Company to the Shareholders (the ‘‘Circular’’), of which this letter forms part. Terms used in this letter shall have the same meanings as defined in the Circular unless the context requires otherwise.

On 4 August 2017, Shandong Luye (a wholly-owned subsidiary of the Company) and the Seller entered into the Asset Transfer Agreements pursuant to which Shandong Luye agreed to acquire, and the Seller agreed to transfer to Shandong Luye, two biological antibody products under research and development, being LY01008 and LY06006, and their respective technologies, data and all rights attaching to the Products including but not limited to the clinical trials approval, for a total consideration of RMB450 million, which is payable by stages.

With reference to the Board Letter, the Company is seeking independent shareholders’ approval for the Group’s entering into of the Asset Transfer Agreements and all transactions contemplated thereunder (including the royalty payment arrangements).

– 15 –

LETTER FROM GRAM CAPITAL

The Independent Board Committee comprising Mr. Zhang Hua Qiao, Professor Lo Yuk Lam, Mr. Leung Man Kit and Mr. Choy Sze Chung Jojo (all being independent non-executive Directors) has been established to advise the Independent Shareholders on (i) whether the terms of the Asset Transfer are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned and whether the Asset Transfer is conducted in the ordinary and usual course of business of the Group; (ii) whether the Asset Transfer is in the interests of the Company and the Shareholders as a whole; and (iii) how the Independent Shareholders should vote in respect of the resolution to approve the Asset Transfer Agreements and the Asset Transfer at the SGM. We, Gram Capital Limited, have been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this respect.

BASIS OF OUR OPINION

In formulating our opinion to the Independent Board Committee and the Independent Shareholders, we have relied on the statements, information, opinions and representations contained or referred to in the Circular and the information and representations as provided to us by the Directors. We have assumed that all information and representations that have been provided by the Directors, for which they are solely and wholly responsible, are true and accurate at the time when they were made and continue to be so as at the Latest Practicable Date. We have also assumed that all statements of belief, opinion, expectation and intention made by the Directors in the Circular were reasonably made after due enquiry and careful consideration. We have no reason to suspect that any material facts or information have been withheld or to doubt the truth, accuracy and completeness of the information and facts contained in the Circular, or the reasonableness of the opinions expressed by the Company, its advisers and/or the Directors, which have been provided to us. Our opinion is based on the Directors’ representation and confirmation that there is no undisclosed private agreement/arrangement or implied understanding with anyone concerning the Asset Transfer. We consider that we have taken sufficient and necessary steps on which to form a reasonable basis and an informed view for our opinion in compliance with Rule 13.80 of the Listing Rules.

We have not made any independent evaluation or appraisal of the assets and liabilities of the Group or the Seller, and we have not been furnished with any such evaluation or appraisal, save and except for the valuation report of the Products (the ‘‘Valuation Report’’) as set out in Appendix I to the Circular. The Valuation Report was prepared by the Valuer. Since we are not experts in the valuation of assets, we have relied solely upon the Valuation Report for the market value of the Products as at 30 September 2017.

The Circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in the Circular is accurate and complete in all material respects and not misleading or deceptive, and there are no

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LETTER FROM GRAM CAPITAL

other matters the omission of which would make any statement herein or the Circular misleading. We, as the Independent Financial Adviser, take no responsibility for the contents of any part of the Circular, save and except for this letter of advice.

We consider that we have been provided with sufficient information to reach an informed view and to provide a reasonable basis for our opinion. We have not, however, conducted any independent in-depth investigation into the business and affairs of the Company, Shandong Luye, the Seller or their respective subsidiaries or associates, nor have we considered the taxation implication on the Group or the Shareholders as a result of the Asset Transfer. Our opinion is necessarily based on the financial, economic, market and other conditions in effect and the information made available to us as at the Latest Practicable Date. Shareholders should note that subsequent developments (including any material change in market and economic conditions) may affect and/or change our opinion and we have no obligation to update this opinion to take into account events occurring after the Latest Practicable Date or to update, revise or reaffirm our opinion. In addition, nothing contained in this letter should be construed as a recommendation to hold, sell or buy any Shares or any other securities of the Company.

Lastly, where information in this letter has been extracted from published or otherwise publicly available sources, it is the responsibility of Gram Capital to ensure that such information has been correctly extracted from the relevant sources while we are not obligated to conduct any independent in-depth investigation into the accuracy and completeness of those information.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion in respect of the Asset Transfer, we have taken into consideration the following principal factors and reasons:

1. Background of and reasons for the Asset Transfer

Business overview of the Group

With reference to the Board Letter, the Group is a pharmaceutical company based in the PRC which focuses on the development, production, marketing and sale of innovative products in the four of the largest and fastest growing therapeutic areas — oncology, cardiovascular system, metabolism and CNS.

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LETTER FROM GRAM CAPITAL

Set out below are the consolidated financial information of the Group for the six months ended 30 June 2017 and the two years ended 31 December 2016 as extracted from the interim report of the Company for the six months ended 30 June 2017 (the ‘‘2017 Interim Report’’) and the annual report of the Company for the year ended 31 December 2016 (the ‘‘2016 Annual Report’’):

	For six months ended	For the year ended	For the year ended	Change from
	30 June 2017	31 December 2016	31 December 2015	2015 to 2016
	RMB’000	RMB’000	RMB’000	%
	(unaudited)	(audited)	(audited)
Revenue	1,850,782	2,917,794	2,563,129	13.84
— Oncology drugs	936,110	1,569,936	1,395,446	12.50
— Cardiovascular system drugs	284,714	651,891	621,348	4.92
— Alimentary tract and
metabolism drugs	352,680	554,492	468,146	18.44
— Central nervous system drugs	229,662	Nil	Nil	N/A
— Others (‘‘Other Products’’)	47,616	141,475	78,189	80.94
Profit for the period/year	387,856	893,995	764,699	16.91
	As at	As at	As at	Change from
	30 June 2017	31 December 2016	31 December 2015	2015 to 2016
	RMB’000	RMB’000	RMB’000	%
	(unaudited)	(audited)	(audited)
Cash and cash equivalents	1,433,588	397,775	843,674	(52.85)
Net assets	6,571,863	6,562,001	5,799,531	13.15

As illustrated by the table above, the revenue and profit of the Group amounted to approximately RMB2.92 billion and RMB894.00 million respectively for the year ended 31 December 2016 (‘‘FY2016’’), representing increase of approximately 13.84% and 16.91% respectively as compared to the year ended 31 December 2015 (‘‘FY2015’’). With reference to the 2016 Annual Report, the increase in revenue was mainly attributable to the Group’s sales growth in key products.

The Group generated all of its revenue from the sale of drugs. For FY2016, revenue from oncology drugs contributed the most to the Group’s total revenue and amounted to approximately RMB1,569.94 million, representing an increase of approximately 12.50% as compared to that for FY2015. Revenue from Other Products achieved the highest growth from FY2015 to FY2016, representing an increase of approximately 80.94% and amounting to approximately RMB141.48 million for FY2016. For FY2016, approximately 98.01% of the Group’s revenue were derived from the PRC.

With reference to the 2017 Interim Report, the Group established an extensive nationwide sales and distribution network and sold its products to 30 provinces, autonomous regions and municipalities throughout the PRC in the first half of 2017. The Group’s sales, marketing and distribution functions are conducted through over 60 sales support offices, over 1,300 sales and marketing personnel, a network of approximately 1,050 distributors that collectively enabled the Group to sell its products to over 12,100 hospitals. For overseas, the Group established in-house sales teams in both Singapore

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LETTER FROM GRAM CAPITAL

and Malaysia. The Group has strong sales partnerships with more than 20 partners throughout the world, covering more than 20 countries including the U.S., Europe and other countries or districts.

The Group has been exploring its products mix through merger and acquisition and development of new products. With reference to the 2016 Annual Report, the Company completed the merger and acquisition of transdermal solutions and implants business of Acino Group in Europe. The acquired business has a comprehensive research and development, production and sales system of transdermal drugs. The Group also obtained relevant approval to commence the development of Buprenorphine Transdermal Patches in the PRC. As at 29 March 2017, the Group had 27 product candidates in the PRC and approximately 10 product candidates overseas. As further mentioned in the 2017 Interim Report, the Group will continue to introduce measures to improve its profitability and enhance efficiency in key aspects of its operations in the second half of 2017. The Group also intends to further strengthen its research and development capabilities and develop its product candidates.

As at 30 June 2017, the Group had cash and cash equivalents and net assets of approximately RMB1.43 billion and RMB6.57 billion respectively.

Information on the Seller

With reference to the Board Letter, the Seller is a biotechnology company established in 2013. It focuses on the development of biopharmaceutical products, and operates a 1,200 sq.m. GMP-compliant pilot plant. The Seller is a 66.7%-indirect subsidiary of Luye Investment, the Controlling Shareholder. Mr. Liu Dian Bo, Mr. Yang Rong Bing and Mr. Yuan Hui Xian, each an executive Director, are indirectly interested in the share capital of Luye Investment. Accordingly, the Seller is a connected person of the Company.

Reasons for and benefits of the Asset Transfer

With reference to the Board Letter, the Products are two monoclonal antibody drugs developed by the Seller. Monoclonal antibodies are a type of biopharmaceutical developed using genetic engineering technologies, and cause limited side effects when applied clinically because of their structural specificity. Hence, the application of monoclonal antibodies has become increasingly prevalent in the treatment of diseases such as malignant tumours.

With reference to an article published by Pharmaceutical Commerce magazine on 18 September 2016, the market research firm EvaluatePharma projected that a global compounded annual growth rate (‘‘CAGR’’) for pharmaceutical industry of 6.3% through 2022 and a global pharmaceutical market size of US$1.12 trillion in 2022. The global

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LETTER FROM GRAM CAPITAL

research and development spending in the pharmaceutical industry grew at a CAGR of 1.7% during the 2008-2015 period, and will grow at a CAGR of 2.8% during the 20162022 period.

With reference to the《‘‘十三五’’期間深化醫藥衛生體制改革規劃》and《國務院辦公廳關於進一步改革完善藥品生產流通使用政策的若干意見》 published by the State Council of the PRC, the PRC government will, among others, (i) encourage the development of new medicine and promote new products, (ii) ensure effective supply of medicine, (iii) ameliorate the healthcare and medicine services system, (iv) build an efficient medical insurance system, and (v) enhance the procurement mechanism of medicine. With reference to an article named ‘‘2016年藥品流通行業運行統計分析報告’’ (Statistic Report on Pharmaceutical Circulation Industry (2016)*) published by Ministry of Commerce of the PRC in June 2017, the pharmaceutical circulation industry in the PRC recorded (i) an increase in total sale of approximately 10.4% in 2016 as compared to that for the previous year; and (ii) an average annual growth rate of approximately 14.2% from 2012 to 2016. During 2016, the total sales amount to medical institutions in the PRC was RMB767.3 billion while the total sales amount to retail terminals and residents in the PRC was RMB314.1 billion.

The Board noted that a number of PRC pharmaceutical companies had commenced significant investment in biological products through their own research and development efforts or through forming joint ventures with and acquisitions of products from other biotech companies in recent years. In order to remain competitive and maintain a longterm sustainable growth, the Board believes that it is important for the Group to accelerate its biological antibodies development.

Having considered that (i) the positive financial performance of the Group as illustrated above; (ii) the Group has established an extensive nationwide sales and distribution network for its products in the PRC; (iii) the Group has been exploring its product candidates through merger and acquisition and product development; (iv) the Asset Transfer represents a growth opportunity for the Group; (v) the positive industrial statistics as set out above; and (vi) it is important for the Group to accelerate its biological antibodies development in light of the investment in biological products by the Group’s competitors, we concur with the Directors that the Asset Transfer is conducted in the ordinary and usual course of business of the Group, and in the interests of the Company and the Shareholders as a whole.

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LETTER FROM GRAM CAPITAL

2. Principal terms of the Asset Transfer Agreements

Date

4 August 2017

Parties

(1) Shandong Luye; and (2) the Seller

Assets being acquired

	LY01008	LY06006
Description	recombinant anti-VEGF humanised	recombinant anti-RANKL whole
	monoclonal antibody injection (重組	human monoclonal antibody
	抗VEGF人源化單克隆抗體注射液)	injection (dosage 60 mg/bottle)
		(重組抗RANKL 全人單克隆抗體
		注射液(規格為60mg/瓶))
Indication	Colorectal cancer or non-small cell	Osteoporosis among
	lung cancer	postmenopausal women; reducing
		the risk of vertebral, non-vertebral
		and hip fractures
Status	Entered into phase III clinical trials	Entered into phase I clinical trials
Targeted launch	2021	2022/2023
year
Market comparable	Biosimilar to Avastin	Biosimilar to Prolia

For details of the historical development and indicative timeframe of future development of the Products, please refer to the sub-section headed ‘‘Assets being acquired’’ under the section headed ‘‘THE ASSET TRANSFER AGREEMENTS’’ of the Board Letter.

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LETTER FROM GRAM CAPITAL

With reference to the Board Letter, the costs associated with clinical trials and the development of the Products are generally payable to relevant third party service providers by stages subject to the fulfilment of certain development milestones as set out in the respective agreements. As the Products are being developed by the Seller and the development expenses of the Products have not been capitalised, the Products carried no book value as at the date of the Asset Transfer Agreements.

Consideration

The total consideration for the Asset Transfer is RMB450 million (the ‘‘Consideration’’) (RMB250 million for LY01008 (the ‘‘Consideration I’’) and RMB200 million for LY06006 (the ‘‘Consideration II’’)) and is payable by stages according to the following timetable:

(i) 20% of the Consideration is payable within five days following the signing of the respective Asset Transfer Agreements;
(ii) 50% of the Consideration is payable within five days following the completion of phase III clinical trials of the respective Product according to the requirements of the CDE and the results of such clinical trials being successful;
(iii) 20% of the Consideration is payable within five days following the submission to the CDE of the application for the marketing authorisation of the respective Product; and
(iv) 10% of the Consideration is payable within five days following the CDE’s grant of the marketing authorisation of the respective Product.

The Seller is responsible for all three phases of the clinical trials of the Products, and Shandong Luye will not be responsible for the costs related to the undertaking of such clinical trials. With reference to the Board Letter, in respect of the development of the Products, the Seller entered into a number of agreements (the ‘‘Contracts’’) under which the following fees and costs are payable or borne by the Seller:

(i) clinical trial fees payable to hospitals and site management organization (‘‘SMO’’) for the implementation of clinical trials;
(ii) service fees payable to contract research organization (‘‘CRO’’) for clinical trials;
(iii) drug development costs payable to manufacturers for product sample manufacturing;
(iv) insurance costs payable to the relevant insurer in respect of clinical trial insurance policy; and

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LETTER FROM GRAM CAPITAL

(v) other service fees payable to research institutions and technical service providers for the clinical trials.

Other than the initial payment of 20% of the Consideration, the payment of the Consideration for each Product is contingent upon the success of all three phases of the clinical trials for the Products. If the clinical trials were not successful, Shandong Luye shall not be liable to make any further payment of Consideration, and shall have the right to demand the Seller to refund all Consideration already paid. With reference to the Board Letter, it is the current intention of the Company to demand (through Shandong Luye) such refund from the Seller in the event the clinical trials were not successful.

With reference to the Board Letter, the Consideration of the Asset Transfer was determined after arm’s length negotiations between Shandong Luye and the Seller taking into account various factors, including but not limited to the status of the development of the Products, their market potential, the competitive landscape for acquiring potential biological and antibody drug candidates in the PRC market and the contingent payment arrangements. The Board intends to fund the payment of the Consideration from its internal resources and/or external financing.

According to the Valuation Report, the valuation of LY01008 and LY06006 as at 30 September 2017 was RMB277 million and RMB222 million respectively. In preparing the Valuation Report, the Valuer selected the cost approach to arrive at the valuation. The Consideration I of RMB250 million and Consideration II of RMB200 million are lower than the valuation of LY01008 and the valuation of LY06006 respectively.

For our due diligence purpose, we reviewed and enquired into (i) the terms of engagement of the Valuer with the Company; (ii) the Valuer’s qualification and experience in relation to the preparation of the Valuation Report; and (iii) the steps and due diligence measures taken by the Valuer for conducting the valuation. From the mandate letter and other relevant information provided by the Valuer and based on our interview with them, we are satisfied with the terms of engagement of the Valuer as well as their qualification and experience for preparation of the Valuation Report. The Valuer also confirmed that they are independent to the Group, Shandong Luye and the Seller.

We further reviewed and enquired into the Valuer on the methodology adopted and the basis and assumptions adopted in arriving at the valuation in order for us to understand the Valuation Report. As confirmed by the Valuer, the summation method under the cost approach is one of the commonly adopted approaches for valuation of companies and is also consistent with normal market practice. During the course of valuation, the Valuer (i) discussed and interviewed the management of the Seller to understand the research process of the Products; and (ii) collected information (including cost estimates) of the Products from the Seller. Details of the basis and assumptions of the valuation are included in the Valuation Report as contained in Appendix I to the Circular.

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LETTER FROM GRAM CAPITAL

As advised by the Valuer, the Valuer conducted site visit to the Seller’s office and research centre in November 2017. With reference to the Valuation Report, the Valuer interviewed the Seller’s management and discussed the detailed assumptions with experts of the Seller’s medical affair department in relation to the costs (such as the drug costs, clinical center cost, CRO fee and SMO fee) which are set out in the sections headed “Discussion of forecasted cost – LY01008” and “Discussion of forecasted cost – LY06006” of the Valuation Report. The Valuer cross-checked partial unit cost with the Contracts and obtained from the Seller certain market quotations provided by the Seller’s suppliers, and consider the above cost estimates provided by the Company and the Seller to be fair and reasonable.

During our discussion with the Valuer, we have not identified any major factors which cause us to doubt the fairness and reasonableness of the principal basis and assumptions adopted for or the information used in the valuation. Nevertheless, Shareholders should note that valuation for products under development usually involves assumptions and therefore the valuation of the Products may or may not reflect the true market value of the Products accurately.

Having considered that the Consideration I of RMB250 million and Consideration II of RMB200 million are lower than the valuation of LY01008 and the valuation of LY06006 respectively, we are of the opinion that the Consideration is fair and reasonable so far as the Independent Shareholders are concerned.

With reference to the Board Letter, if the Products eventually obtain the marketing authorisation and commence sale, Shandong Luye has agreed to pay royalties (the ‘‘Royalties’’) representing 10% of the revenue generated from the sale of such Products to the Seller. The Royalties was determined taking into account a number of factors set out under the section headed ‘‘BASIS OF THE CONSIDERATION’’ of the Board Letter.

Upon our enquiry, the Directors advised us that the Group entered into a letter of intent with an independent third party (the ‘‘Independent Party 1’’) in 2015 regarding the generation and development for two licensed products, pursuant to which the Group agreed to (i) pay royalties of 10% of the net sales of each of the licensed product quarterly to the Independent Party I aside from the initial consideration; and (ii) pay royalties of 2.5% of the net sales of each of the licensed product quarterly to another independent third party (with which the Independent Party I had an agreement) aside from the initial consideration. For our due diligence purpose, we obtained copy of the aforesaid letter of intent. As advised by the Directors, the Group did not enter into any further agreement with the Independent Party I in relation to the proposal stated in the aforesaid letter of intent.

In addition, we noted that the Group had two license agreements signed in 2014 and 2017 (the ‘‘2014 Agreement’’ and the ‘‘2017 Agreement’’) respectively which involved royalties payable by the Group to independent third parties. For our due diligence purpose, we obtained copies of the aforesaid agreements.

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LETTER FROM GRAM CAPITAL

Pursuant to the 2014 Agreement, the independent third party (the ‘‘Independent Party 2’’) agreed to grant to the Group intellectual property of a licensed product for development and commercialization, and the Group agreed to pay royalties of 15% of the net sales of the licensed product aside from the initial consideration (subject to adjustments if the net price of the licensed products fall to certain level).

Pursuant to the 2017 Agreement, the independent third party (the ‘‘Independent Party 3’’) agreed to grant to the Group the license and rights to register, manufacture and commercialize two products, and the Group agreed to pay royalties of 8% of the net sales of the products aside from the initial consideration (with annual minimum royalties amounts). Upon our enquiry, the Directors advised us that the products under the 2017 Agreement are generic drugs which the Group may face higher level of competition when commercializing them. Accordingly, the royalties are lower under this circumstance.

Having compared the Royalties with the above royalties payable to the Independent Party 1, the Independent Party 2 and the Independent Party 3, we consider the Royalties to be justifiable.

Taking into account the above, we consider that the terms of the Asset Transfer Agreements are fair and reasonable, on normal commercial terms and in the interest of the Company and the Shareholders as a whole.

3. Possible financial effects of the Asset Transfer

With reference to the 2017 Interim Report, the audited consolidated net asset value (‘‘NAV’’) of the Group was approximately RMB6.57 billion as at 30 June 2017. As confirmed by the Directors, the Asset Transfer would have no material effect on the NAV of the Group.

It should be noted that the aforementioned analyses are for illustrative purposes only and do not purport to represent how the financial position of the Group will be upon completion of Asset Transfer.

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LETTER FROM GRAM CAPITAL

RECOMMENDATION

Having taken into consideration the factors and reasons as stated above, we are of the opinion that (i) the terms of the Asset Transfer Agreements are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; and (ii) the Asset Transfer is in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the resolution(s) to be proposed at the SGM to approve the Asset Transfer Agreements and the Asset Transfer and we recommend the Independent Shareholders to vote in favour of the resolution(s) in this regard.

Yours faithfully, For and on behalf of Gram Capital Limited Graham Lam Susanna Ho Managing Director Director

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VALUATION REPORT

APPENDIX I

The following is the report prepared for the purpose of incorporation in this circular received from Crowe Horwath, an independent valuer, in connection with its valuation as at 30 September 2017 of the Products.

Our Ref.: VC/FZH/3012/2017

Date: 11 December 2017

Board of Directors

Luye Pharma Group Ltd. Suite 3207, Champion Tower, 3 Garden Road, Central, Hong Kong

Dear Sirs/Madams,

RE: Valuation of Two Biological Antibody Products for Luye Pharma Group Ltd.

In accordance with an instruction from Luye Pharma Group Ltd (the ‘‘Instructing Party’’), we hereby provide a valuation on the market value basis of two biological antibody products, being LY01008 and LY06006 (the ‘‘Target Products’’), as at 30 September 2017 (the ‘‘Valuation Date’’). As at Valuation Date, the Target Products are under research and development by Shandong Boan Biological Technology Co. Ltd (‘‘Boan’’).

We confirm that we have made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the market value of the Target Products. This valuation complied with the RICS Valuation — Professional Standards published by the Royal Institution of Chartered Surveyors (‘‘RICS’’) and International Valuation Standards (‘‘IVS’’) published by the International Valuation Standards Council.

1 PURPOSE OF VALUATION

The purpose of this report is to express an independent opinion on the market value of the Target Products as at the Valuation Date. This report outlines our latest findings and valuation conclusion, and is prepared solely for the management of the Instructing Party for the purpose of incorporation in the circular of the Instructing Party.

2 SCOPE OF WORK

In conducting this valuation exercise and under our scope of work, we:

. Co-ordinated with Boan’s representatives to obtain the required information and documents for our valuation;

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VALUATION REPORT

APPENDIX I

. Gathered the relevant information of the Target Products, including the legal documents, licenses, financial data, budget etc. made available to us;
. Discussed with the management of Instructing Party and Boan to understand the history, research status, research plan, cost breakdown, etc. of the Target Products for valuation purpose;
. Carried out researches in the sector concerned and collected relevant market data from reliable sources for analysis;
. Investigated into the information of Target Products made available to us and considered the basis and assumptions of our conclusion of value;
. Designed an appropriate valuation model to analyze the market data and derived the estimated market value of the Target Products; and
. Compiled a report on the valuation, which outlines our findings, valuation methodologies and assumptions, and conclusion of value.

When performing our valuation, all relevant information, documents, and other pertinent data concerning the Target Products should be provided to us. We relied on such data, records and documents in arriving at our opinion of values and had no reason to doubt the truth and accuracy of the information provided to us by the Instructing Party, Boan and their respective authorized representatives

3 BACKGROUND OF THE TARGET PRODUCTS

On 4 August 2017, the Instructing Party published an announcement, disclosing that Shandong Luye Pharmaceutical Co. Ltd (a wholly-owned subsidiary of the Instructing Party) agreed to acquire the Target Products, and their respective technologies, data and all rights attaching to the Target Products including but not limited to the clinical trials approval, from Boan at a total consideration of RMB450 million, which is payable by stages. The two Target Products were LY01008 and LY06006, which are described as below:

. LY01008 (biosimilar to Avastin, bevacizumab) is a recombinant anti-VEGF humanized monoclonal antibody injection, used in the treatment of colorectal cancer or non-small cell lung cancer. The status of product is currently in phase I clinical trials and is targeted for launch at around 2021.
. LY06006 (biosimilar to Prolia, denosumab) is a recombinant anti-RANKL whole human monoclonal antibody injection, used in the treatment of osteoporosis among postmenopausal women and for reducing the risk of vertebral, non-vertebral and hip fractures. The status of product is having obtained the approval to proceed with phase I clinical trials and is targeted for launch at around 2022.

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VALUATION REPORT

APPENDIX I

4 GENERAL MARKET ANALYSIS OF THERAPEUTIC MONOCLONAL ANTIBODY PRODUCTS

A pharmaceutical drug product manufactured in, extracted from, or semi-synthesized from biological sources is a Biopharmaceutical, also known as a Therapeutic Biological Product. The usage of Therapeutic Biological Products covers a wide range of diseases and conditions, including serious conditions such as cancers and rheumatoid arthritis.

Monoclonal antibodies for in-vivo use is one type of therapeutic biological products and represents a rapidly developing class of medicines that is used to treat serious diseases.

In the early 1980s, therapeutic monoclonal antibodies began to develop for commercial usage, and the prevention of kidney transplant rejection was the first therapeutic monoclonal antibody to be approved. Within the biopharmaceutical market, therapeutic monoclonal antibodies and antibody-related products have soon become the major product class. Today, these products are approved for the treatment of a variety of serious diseases, such as cancer, autoimmunity, and metabolic disorders.

According to an academic study titled ‘‘The Therapeutic Monoclonal Antibody Market’’ by Dawn, Susan, and Howard in 2014, there was a significant increase in the sales of therapeutic monoclonal antibody products since late 1990s. In 2013, global sales revenue for all therapeutic monoclonal antibody products totaled to approximately US$75 billion, which represented about half of the total sales of all biopharmaceutical products. The continued growth in sales of monoclonal antibody products in the coming years will act as a driver for the continued growth of overall sales of all biopharmaceutical products, as this is likely to result from the growing numbers of approval in therapeutic monoclonal antibody products, along with the rapid development of biotechnological pharmaceutics.

In the past two decades, China has made significant progress in clinical development of therapeutic monoclonal antibody product. The significant improvement of the technology level of monoclonal antibodies in China leads to great research progress and high expression and specificity of the antibodies. Data of clinical trial registry indicates that there were twelve monoclonal antibody products which underwent clinical studies in China and those studies had completed by the end of 2013. As at 2017, there were a total of 79 monoclonal antibody products approved by the China Food and Drug Administration.

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VALUATION REPORT

APPENDIX I

5 VALUATION METHODOLOGY

In the valuation of the Target Products, we considered three generally accepted valuation approaches. The valuation approaches are sourced from International Valuation Standards 105 — Valuation Approaches and Methods.

5.1 Cost Approach

The cost approach is an asset-based rather than a market-oriented method. The cost approach provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction, unless undue time, inconvenience, risk or other factors are involved. The cost approach requires valuing the business on an individual basis to add up to the total valuations of business. Under this approach, the expenses or cost on replacing or re-acquiring individual items or parts are estimated by valuers on an itemised basis, thus arriving at the valuation of target business.

The cost approach should be used as the primary basis for a valuation under the following circumstances:

. market participants would be able to recreate an asset with substantially the same utility as the subject asset, without regulatory or legal restrictions;
. the asset is not income-generating (directly or indirectly) and the unique nature of the asset makes using an income approach or market approach unfeasible, and
. the basis of value being used is fundamentally based on replacement cost, such as reinstatement value.

5.2 Market Approach

The market approach provides an indication of value by comparing the asset with identical or comparable (that is similar) assets for which price information is available. When reliable, verifiable and relevant market information is available, the market approach is the preferred valuation approach.

The market approach should be used as the primary basis for a valuation under the following circumstances:

. the asset has recently been sold in a transaction appropriate for consideration under the basis of value;
. the asset or substantially similar assets are actively publicly traded; and
. there are frequent or recent observable transactions in substantially similar assets.

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APPENDIX I

5.3 Income Approach

The income approach provides an indication of value by converting future cash flow to a single current value. Under the income approach, the value of an asset is determined by reference to the value of income, cash flow or cost savings generated by the asset.

The income approach should be used as the primary basis for a valuation under the following circumstances:

. the income-producing ability of the asset is the critical element affecting value from a market participant perspective; and
. reliable projections of the amount and timing of future income are available for the subject asset, but there are few, if any, relevant market comparables.

5.4 Selection of Assessment Methodology

For the valuation of the Target Products, we considered that the market approach not applicable, as there are insufficient comparable transactions in the market for purpose of our valuation. We also considered that income approach was not appropriate because many assumption and justification are involved in the forecast. In light of the above, we have selected the cost approach as our valuation methodology. Specifically, we have chosen the summation method.

Summation Method

The summation method is a method that calculates the value of an asset by the addition of the separate values of its component parts. The summation is typically used for investment companies or other types of assets or entities for which value is primarily a factor of the values of their holdings.

The key steps in summation methods are:

. value each of the component assets that are part of the subject apart using the appropriate valuation approaches and methods; and
. add the value of the component assets together to reach the value of the subject asset.

6 INTRODUCTION OF RESEARCH PROCESS FOR TARGET PRODUCTS

During the course of valuation, we have discussed and interviewed the management of Boan to understand the research process of the Target Products.

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APPENDIX I

For LY01008, the research process mainly consists of phases 1 & 3 clinical trials, Good Manufacturing Practice (‘‘GMP’’) production, process characterization, process validation, drug quality analysis, and drug registration.

For LY06006, the research process mainly consists of phases 1, 2 & 3 clinical trials, patent registration, process optimization, GMP production, process characterization, process validation, drug quality analysis, and drug registration.

. Phase 1 clinical trials aimed at studying human tolerance towards the Target Products. These include, the use of a range of doses of the Target Products on subjects to collect pharmacokinetic and bioavailability data; to test whether the Target Products show the same pharmacological effects in humans as experimental animals; and to test partial or whole-body tolerance of the human body towards Target Products. The principle is to conduct adequate and appropriate laboratory and physical examinations to obtain data on Target Products while maintaining the safety of the subjects.
. Phase 2 clinical trials are aimed at initial assessment of the therapeutic effect and safety of the drug on patients with targeted symptoms, and to provide a basis for the design of the phase 3 clinical trial and dosing regimen.
. Phase 3 clinical trials are aimed at confirming the therapeutic effect of the Target Products. Its purpose is to further verify the therapeutic effect and safety of the Target Products on patients with targeted symptoms, evaluate the relationship between benefits and risks, and eventually provides a sufficient basis for the review of the drug registration application. The sample size of this trial is much larger than the previous trials. Larger sample size helps to obtain richer information on drug safety and efficacy, evaluate the benefits and risks of the drug, in order to provide sufficient support for the approval of the Target Products.

7 COST APPROACH — DISCUSSION OF COST BREAKDOWN

We have obtained cost breakdown for each research process of Target Products from the management of Boan. The cost breakdown consists of cost incurred and forecasted cost (‘‘Forecasted Cost’’). The Forecasted Cost consist of (i) labor cost, depreciation and amortization expense involved in the two Target Products (‘‘Forecasted Cost — Portion One’’), and (ii) the remaining Research & Development (‘‘R&D’’) expenses in various stages of the R&D process (‘‘Forecasted Cost — Portion Two’’).

The cost incurred before Valuation Date for LY01008 and LY06006 was RMB48.0 million and RMB35.7 million respectively, which is calculated with reference to the summarized research cost related to the Target Products provided by the financial department of Boan.

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8 DISCUSSION OF FORECASTED COST — LY01008

Forecasted Cost — Portion One for LY01008

The labor cost for LY01008 is estimated to be RMB10.9 million, according to the total labor cost of researcher and the portion involved in LY01008 project. The depreciation and amortization expense for LY01008 is estimated to be RMB1.2 million, according to the total depreciation and amortization expenses and the portion involved in the LY01008 project. Therefore, the Forecasted Cost — Portion One for LY01008 is estimated to be RMB12.0 million.

Forecasted Cost — Portion Two for LY01008

The details of Forecasted Cost — Portion Two of LY01008 are summarized in the table below:

Process Phase 1 clinical trials Phase 3 clinical trials GMP Production Process characterization Process validation Drug quality analysis Drug registration Total (round)	RMB million 6.57 148.11 39.72 1.23 18.83 1.50 0.93
	217.00

Phase 1 clinical trials

Phase 1 clinical trials cost mainly consists of clinical center cost, Contract Research Organization (‘‘CRO’’) fee, laboratory testing fee, conference and travel expenses.

The forecasted cost of Phase 1 clinical trials is estimated to be RMB6.57 million. The relevant contracts amounted to around RMB10.00 million in aggregate, and the RMB6.57 million Phase 1 clinical trials cost to be paid.

Phase 3 clinical trials

Phase 3 clinical trials cost mainly consists of drug cost, clinical center cost, CRO fee, data management and statistical fee, medical image fee, Site Management Organization (‘‘SMO’’) fee, laboratory testing fee and travel expenses.

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Drug cost of RMB70.18 million is estimated based on the total dosage of drug and the unit price. The total dosage of drug is estimated based on the candidate’s sample size, the test period and dosage of drug used each time. They are described in the designed clinical manual. The unit drug price is estimated by Boan according to the quotation from the market.

Clinical center cost is estimated to be RMB25.60 million based on the sample size of the candidate and the cost for each candidate (e.g., researcher fee, physical examination fee, compensation for the candidates, and institutional management fee).

In 2015, China Food and Drug Administration (‘‘CFDA’’) released 《生物類似藥研發與評價技術指導原則(試行)》. In July 2017, Center For Drug Evaluation (‘‘CDE’’) released the《關於貝伐珠單抗注射液生物類似藥臨床研究設計及審評的考慮》. Per discussion with management of Boan, R&D team of Boan established the clinical research strategy based on the published guidelines from CFDA, CDE and considering the characteristics of LY01008. LY01008 clinical trial design follows the relevant regulations and guidelines. LY01008 clinical trial design also refers to the experimental design of other biosimilars, such as the ‘‘BA1706’’ phase 3 clinical study performed by Bio-Thera Solutions Ltd, Recombinant antiVEGF humanized monoclonal antibody injection phase 3 clinical study performed by Qilu Pharmaceutical Co., Ltd.

We conducted discussions with R&D team of Boan, reviewed the above related guidelines, and checked design information of biosimilars disclosed from 藥物臨床試驗登記與資訊公示平臺. We consider that the relevant assumptions related to the drug cost and clinical center cost forecast are fair and reasonable.

CRO fee, data management and statistics fee are estimated to be RMB28.97 million, according to the contract signed with service provider. CRO contract provides the project parameters, planned schedules, responsibilities and tasks. Particularly CRO contract provides the quotation table. The quotation table lists out detailed breakdown of contract amount, such as the service hours of personnel, the unit price of service, the unit price of report and corresponding quantity. The total amount of quotation table is in line with the aggregate contract amount. We have examined the contents and terms of the CRO contract in detail, in particular the breakdown of the contract amount. We understand that the provider of contract is an independent third party and not affiliated with Boan. Therefore, we consider that the contract amount is fair and reasonable.

Medical image fee of RMB5.94 million is estimated based on medical image contract signed (amounted to RMB5.75 million) and estimated pass-through expense of RMB0.19 million. Medical image contract provides the content of the service (mainly including read services and non-read services) as well as the service quotation table. The quotation table lists out detailed breakdown (quantities and prices under various services categories) of contract amount, such as the number of months of project management, monthly management fees, number of primary radiology review and unit price. The total amount of quotation table is in line with the aggregate contract amount. We have examined the contents and terms of the

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APPENDIX I

medical image contract in detail, in particular the breakdown of the contract amount. We understand that the provider of contract is an independent third party and not affiliated with Boan. Therefore, we consider that the contract amount is fair and reasonable.

SMO fee of around RMB11.00 million is estimated based on the contract signed with the service provider (amounted to RMB10.48 million) and estimated pass-through expense. SMO contract provides job description of the clinical research coordinator (‘‘CRC’’) as well as the quotation table. The quotation table lists out detailed breakdown of the service by process and category, such as in SMO implementation process, the table provides number of personnel required and unit price. The total amount of quotation table is in line with the aggregate contract amount. We have examined the contents and terms of the SMO contract in detail, in particular the breakdown of the contract amount. We understand that the provider of contract is an independent third party and not affiliated with Boan. Therefore, we consider that the contract amount is fair and reasonable.

Laboratory testing fee of RMB4.22 million is estimated based on the relevant contract signed for laboratory testing services. Laboratory testing contract stipulates the main contents of the work, as well as provides service quotation table. The quotation table lists out the detailed breakdown, such as unit price of sample analysis, screening test, key reagents and corresponding quantity required. Finally, a difficulty coefficient ranging from 0.5 to 1 was multiplied by each component before arriving at the total contract amount. The total amount of quotation table is in line with the aggregate contract amount. We have examined the contents and terms of the laboratory testing contract in detail, in particular the breakdown of the contract amount. We understand that the provider of the contract is an independent third party and not affiliated with Boan. Therefore, we consider that the contract amount is fair and reasonable.

Travel expense of RMB1.20 million is estimated based on the total number of trips and cost per trip. Total number of trips is estimated with reference to the number of clinical centers, the frequency of inspection of the clinical centers.

GMP production

GMP production cost is estimated to be RMB39.72 million. It mainly consists of 4 batches of production payments. The relevant contract amounted to RMB53.74 million in aggregate, and the RMB39.72 million GMP production cost is the remaining cost to be paid.

Process characterization

Process characterization cost mainly consists of material cost of RMB1.11 million and virus removal verification cost of RMB0.12 million, and we have received a detailed breakdown with quantity and unit price from Boan with respect to the material cost.

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Process validation

Process validation cost mainly consists of 3 batches of production payment, amounted to RMB18.83 million. Boan expects to commission CRO to perform 3 batches of GMP production for the process validation. The production cost is estimated with reference to the production cost in GMP production process.

Drug quality analysis

Drug quality analysis cost mainly consists of material cost consumed in the testing of intermediate products and process of stability study. The material cost is estimated to be RMB1.35 million, and Boan has provided to us a detailed breakdown of material cost with relevant quantity and unit price.

Drug registration

Drug registration cost mainly consists of the registration cost, conference and travel expense. Registration cost is estimated to be RMB0.43 million with reference to the price under the relevant registration rules. The conference and travel expenses are estimated to be RMB0.5 million in aggregate.

Research Cost for LY01008

Based on the cost incurred before 30 September 2017 for LY01008 and forecasted cost discussed above, we conclude that the research cost for LY01008 is RMB277.0 million. The calculation is set out in the table below.

Research Cost Cost incurred before Valuation Date Forecasted cost — Portion one Forecasted cost — Portion two Total	RMB million 48.0 12.0 217.0
	277.0

9 DISCUSSION OF FORECASTED COST — LY06006

Forecasted Cost — Portion One for LY06006

The labor cost for LY06006 is estimated to be RMB16.3 million, according to the total labor cost of researcher and the portion involved in LY06006 project. The depreciation and amortization expense for LY06006 is estimated to be RMB4.2 million, according to the total depreciation and amortization expenses and the portion involved in the LY06006 project. Therefore, the Forecasted Cost — Portion One for LY06006 is estimated to be RMB20.5 million.

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Forecasted Cost — Portion Two for LY06006

The details of Forecasted Cost — Portion Two of LY06006 are summarized in the table below:

Process Phase 1 clinical trials Phase 2 clinical trials Phase 3 clinical trials Patent registration Process optimization GMP Production Process validation Process characterization Drug quality analysis Drug registration Total (round)	RMB million 12.42 33.62 80.03 0.16 5.20 9.29 20.56 0.88 2.68 1.13
	166.00

Phase 1 clinical trials

Phase 1 clinical trials cost mainly consist of conference expense, clinical center cost, SMO fee.

Conference expense is estimated to be RMB0.7 million, according to the number of conferences and the unit expense for each conference.

Clinical center cost is estimated to be RMB9.66 million, according to the relevant contract entered with the clinical center.

SMO fee is estimated to be RMB1.3 million, according to the monthly cost of Full Time Employee (‘‘FTE’’), the estimated length of the phase 1 clinical trials, and the number of clinical centers.

Phase 2 clinical trials

Boan expect phase 2 clinical trials to be carried out at 10 clinical centers with a duration of 20 months. Phase 2 clinical trials cost mainly consists of conference expense, clinical center cost, CRO fee, SMO fee, data management and statistical fee.

Conference expense is estimated to be RMB1.6 million, according to the number of the conferences to be held and the unit expense for each conference.

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Clinical center cost is estimated to be RMB17.19 million, mainly according to the sample size of the candidates and the cost for each candidate in phase 2 Clinical trial (e.g. researcher fee, institutional management fee, project leading fee, physical examination fee, compensation for the candidates, and laboratory testing fee). The detail information of clinical center cost is listed as below.

. Researcher fee is estimated to be RMB7.2 million, mainly representing labor cost for researchers, nurses, critical care medicine department, stomatology department and other laboratory personnel. Boan plan to recruit 240 eligible candidates in Phase 2 clinical trials and estimate the researcher fee for each candidate to be RMB30,000.
. Institutional management fee is estimated at RMB1.6 million. The Institutional management fee normally constitutes 10%–20% of the total other clinical center cost according to market practice. Project leading fee is estimated at RMB1 million. Institutional management fee and project leading fee are paid to the leading clinical center that primarily provides advise on the protocol, writes research reports, organizes meetings, and regularly communicates with other clinical centers about the trials process.
. Physical examination fee is estimated to be RMB2.41 million, mainly representing the fee for blood test, stomatology test, abdominal CT examination for candidates. Boan plans to recruit 482 candidates for physical examination. On average, each candidate is estimated to cost RMB5,000. As it is the first time in Phase 2 clinical trials to study indications for the candidates after taking drugs, screening criteria is rigorous, and the candidate sample is relatively large.
. Compensation for the candidates is estimated to be RMB0.84 million, mainly representing the compensation of transport expenses to the candidates. Boan plans to pay RMB300 to candidates on each visit, and 2,800 visits are estimated (In phase 2 clinical, Boan plan to recruit 240 eligible candidates; each candidate require 12 times visit).
. Laboratory testing fee is estimated to be RMB3.84 million, based on RMB400 test cost per medical sample and 9,600 sample sizes (Sample size is estimated based on 240 eligible candidates and each candidate plan to have 10 visits; each candidate for 1 visit will perform 4 sample testing).

CRO fee is estimated to be RMB8 million, according to 200 monitor visit and unit cost of RMB40,000 for monitor visit each time provided by Boan. 200 monitor visits are estimated with reference to the planned duration of 20 months of Phase 2 clinical trials and to be carried out at 10 clinical centers.

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SMO fee is estimated to be RMB5 million, according to RMB25,000 monthly cost of FTE, the estimated duration of 20 months of phase 2 clinical trials, and 10 clinical centers. One FTE is estimated to be required in each clinical center.

We have interviewed management and discussed the detailed assumptions with experts of Medical Affair Department of Boan in relation to the clinical center cost, CRO fee and SMO fee. We also cross-checked partial unit cost with the previous contracts and obtained certain market quotations provided by the suppliers. We consider that the above cost estimates provided by company are fair and reasonable.

Data management and statistics fee are estimated to be RMB1 million.

Phase 3 clinical trials

Boan expect phase 3 clinical trials to be carried out at 30 clinical centers with a duration of 36 months. Phase 3 clinical trials cost mainly consists of conference expense, clinical center cost, CRO fee, SMO fee, data management and statistical fee, and travel expense.

Per our discussion with management, no positive control drug was required in the Phase 3 clinical trials, therefore no drug cost was estimated.

Conference expense is estimated to be RMB1.6 million, according to the number of conference to be held and the unit expense for each conference.

Clinical center cost is estimated to be RMB46.88 million, mainly according to the sample size of the candidate and the cost for each candidate in phase 3 clinical trial (e.g. researcher fee, institutional management fee, project leading fee, physical examination fee, compensation for the candidates, and laboratory testing fee). Detail information on clinical center cost is listed as below.

. Researcher fee is estimated to be RMB20 million, mainly representing labor cost for researchers, nurses, critical care medicine department, stomatology department and other laboratory personnel. Boan plan to recruit 500 eligible candidates in Phase 3 clinical trials and estimate the researcher fee for each candidate to be RMB40,000.
. Institutional management fee is estimated to be RMB7.5 million. Institutional management fee constitutes 19% of the total other clinical center cost. Project leading fee is estimated at around RMB1 million. Institutional management fee and project leading fee are paid to the leading clinical center that primarily provides advise on the protocol, writes research reports, organizes meetings, and regularly communicates with other clinical centers about the trials process.

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. Physical examination fee is estimated to be RMB5.4 million, mainly representing the fee for blood test, stomatology test, abdominal CT examination for candidates. Boan plan to recruit 600 candidates for physical examination. On average, each candidate is estimated to cost RMB9,000 as relatively longer duration of Phase 3 clinical trials.
. Compensation for the candidates is estimated to be RMB3.6 million. Each candidate expects to obtain compensation of RMB6,000 and 600 candidates is required.
. Laboratory testing fee is estimated to be RMB9 million, based on RMB300 test cost per medical sample and 30,000 sample sizes (Sample size is estimated based on 500 eligible candidates and each candidate plan to take 3 sample testing for every 2 months).

CRO fee is estimated to be RMB15.00 million, according to the 600 monitor visit and unit cost RMB25,000 for monitor visit each time.

SMO fee is estimated to be RMB12.00 million, according to RMB20,000 monthly cost of FTE, the estimated duration of 20 months for SMO service, and clinical trials to be carried out at 30 clinical centers.

We have interviewed management and discussed the detailed assumption with experts of Medical Affair Department of Boan in relation to the clinical center cost, CRO fee and SMO fee. We also cross-check partial unit cost with the previous contracts and obtained certain market quotations provided by the supplier. We consider that the above cost estimates provided by Boan are fair and reasonable.

Data management and statistics fee are estimated to be RMB1.00 million.

Travel expense is estimated to be RMB1.44 million, according to the total number of trips and cost per trip. Total number of trips is estimated with reference to the number of clinical centers, and the frequency of inspection to the clinical centers.

Process optimization

Process optimization cost mainly consists of the material cost, estimated to be RMB5.2 million. Boan has provided a detailed breakdown list for the quantities and unit price with respect to the material cost.

GMP Production

9 batches of 500L GMP production is estimated to cost a total of RMB9.29 million. The cost for the first batch of GMP production is estimated to be more than other batches as the packing is needed in the first batch. The cost is mainly estimated based on the 500L scale cost incurred in the stage of preclinical sample production. Boan has provided a detailed breakdown list for the quantities and unit price with respect to the material cost in each batch.

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Process validation

Process validation cost mainly consists of reagent and material cost of RMB20.56 million.

The process validation adopts a 2000L liquid medium. Before the GMP production, there is a batch of 2000L production to observe the stability of process amplification, and then the process validation need to carry out 3 batches of process validation production. Reagent and material cost is mainly estimated based on the actual 500L scale production cost incurred in the stage of preclinical sample production.

Boan has provided a detailed breakdown list for the quantities and unit price of reagent and material to be consumed for each batch.

Process characterization

Process characterization cost mainly consists of the material cost of RMB0.76 million and virus removal verification cost of RMB0.12 million. Boan has provided a detailed breakdown for the material to be consumed with quantities and unit prices.

Drug quality analysis

Drug quality analysis mainly consists of material cost of RMB1.78 million, and test cost of RMB0.90 million. Boan has provided a detailed breakdown for the material cost involved in drug quality analysis with quantities and unit prices. The test cost consists of cost of RMB0.9 million for analysis of Host Cell Protein (‘‘HCP’’) specificity and package compatibility, which are estimated based on historical contracts.

Drug registration

Drug registration cost mainly consists of the travel and conference expense with a total of RMB0.7 million, as well as registration cost of RMB0.43 million. The registration cost is estimated with reference to the price under the relevant registration rules.

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APPENDIX I

Research Cost for LY06006

Based on the cost incurred before 30 September 2017 for LY06006 and forecasted cost discussed above, we conclude that the research cost for LY06006 is RMB222.2 million. The calculation is set out in the table below:

Research Cost Cost incurred before Valuation Date Forecasted cost — Portion one Forecasted cost — Portion two Total (round)	RMB million 35.7 20.5 166.0
	222.0

10 RESEARCH COST FOR TARGET PRODUCTS

Based on the research cost of LY01008 and LY06006 discussed in Section 8 and Section 9 of this valuation report, we conclude that the total research cost for the Target Products is RMB499.0 million. The details are set out in the table below:

Target Products LY01008 LY06006 Total	Research Cost 277.0 222.0
	499.0

Unit: RMB million

11 PREMISE OF VALUATION AND BASIS OF VALUATION

Our valuation is based on market value basis and market value is defined as ‘‘the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion’’.

11.1 Source of Information

Our investigation covers the discussion and interviews with representations of Boan and the Instructing Party for the collection of relevant information, including the details of the Target Products.

We assume that the data obtained during the course of the valuation, along with the opinions and representations provided to us by Boan and the Instructing Party, were prepared and provided with reasonable care.

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We have had no reason to doubt the truth and accuracy of the information provided to us by Boan and the Instructing Party. We have also sought confirmation from Boan and the Instructing Party that no material factors have been omitted from the information supplied. We consider that we have been provided with sufficient information to arrive an informed view, and we have no reason to suspect that any material information has been withheld.

11.2 Assumptions and Factors Considered

The assumptions in this valuation included, but were not limited to, the following:

. Boan has sufficient fund to support the R&D of Target Products;
. All three phases of the clinical trials for Target Products will success;
. Target Products will obtain the marketing authorization from CDE;
. Research plan and clinical trial design for Target Products will not change significantly; and
. Prior to obtaining the marketing authorization from CDE, there will be no major changes in CFDA and CDE’s regulation and guidelines in relation to Target Products.

The factors considered in this valuation included, but were not limited to, the following:

. the demand and supply of biological antibody products in the region;
. the nature and history of the Target Products;
. the financial information related to the Target Products;
. the economic condition and the industry outlook in general; and
. the research process of the Target Products.

12 DISCLAIMER AND LIMITATION

Our findings or conclusion of values of the subject(s) in this report are valid only for the stated purpose and at the Valuation Date(s), and for the sole use of the Instructing Party.

Our liability for loss or damage shall be limited to such sum as we ought reasonably to pay having regard to our responsibility for the same on the basis that all other consultants and specialists, where appointed, shall be deemed to have provided to the Instructing Party contractual undertakings in respect of their services and shall be deemed to have paid to the Instructing Party such contribution as may be appropriate having regard to the extent of their responsibility for such loss or damage.

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Any decision to purchase, sell or transfer any interest in the valuation subjects shall be the owners’ sole responsibility, as well as the structure to be utilized and the price to be accepted. The selection of the price to be accepted requires consideration of factors beyond the information we have provided. An actual transaction involving the subject business might be concluded at a higher value or at a lower value, depending upon the circumstances of the transaction and the business, and the knowledge and motivations of the buyers and sellers at that time.

13 CONCLUSION

The conclusion of value is based on the accepted valuation procedures and practices that rely substantially on the use of numerous assumptions and the consideration of many uncertainties, not all of which can be easily quantified or ascertained.

While the assumptions and consideration of such matters are considered to be reasonable, they are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of the Instructing Party and/or Crowe Horwath.

Based on the valuation methodology adopted, we are of the opinion that the market value of LY01008 as at 30 September 2017, was in the sum of RMB277,000,000 (RENMINBI TWO HUNDRED SEVENTY-SEVEN MILLION).

Based on the valuation methodology adopted, we are of the opinion that the market value of LY06006 as at 30 September 2017, was in the sum of RMB222,000,000 (RENMINBI TWO HUNDRED TWENTY-TWO MILLION).

We hereby certify that we have neither present nor prospective interests in the Instructing Party, the Target Products or the value(s) reported. This report is prepared independently, and we confirm that neither Crowe Horwath nor any author of this report hold any present or prospective interest in the Instructing Party, Boan or their respective related parties. The fee for providing this report is based on our normal professional rates and the payment of fee is not contingent upon the conclusions drawn in this report.

Yours faithfully, For and on behalf of

Crowe Horwath First Trust Appraisal Pte Limited Stella Law, MRICS

Director

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GENERAL INFORMATION

APPENDIX II

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. DISCLOSURE OF INTERESTS

As at the Latest Practicable Date, the interests or short positions of the Directors or chief executive of the Company in the Shares, underlying Shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interest or short positions which they were taken or deemed to have under such provisions of the SFO), or which would be required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which would be required to be notified to the Company and the Stock Exchange pursuant to Model Code, are as follows:

(a) Interest in the Company

			Approximate
		Number of	percentage of
Name of Director	Nature of Interest	Shares held	shareholding(4)
Liu Dian Bo(1) and (2)	Founder of a discretionary	1,517,113,930(L)	45.68%
	trust
Zhang Hua Qiao(3)	Beneficial owner	250,000(L)	0.01%
Lo Yuk Lam(3)	Beneficial owner	250,000(L)	0.01%
Leung Man Kit(3)	Beneficial owner	250,000(L)	0.01%
Choy Sze Chung	Beneficial owner	250,000(L)	0.01%
Jojo(3)

Remark

The letter ‘‘L’’ denotes long position in such securities.

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GENERAL INFORMATION

APPENDIX II

Notes:

Mr. Liu Dian Bo through his controlled corporations, namely Shorea LBG, Ginkgo Trust Limited, Nelumbo Investments Limited, Luye Life Science Group Ltd. (formerly known as Luye Group Ltd.), Luye Pharma Holdings Ltd., Luye Pharmaceutical International Co., Ltd. and Luye Pharmaceutical Investment Co., Ltd., is deemed to be interested in 1,517,113,930 ordinary shares in the Company held by Luye Pharmaceutical Investment Co., Ltd. Nelumbo Investments Limited holds 70% of the issued share capital of Luye Life Science Group Ltd.
The entire issued share capital of Nelumbo Investments Limited is held by Ginkgo Trust Limited as trustee of the family trust of Mr. Liu Dian Bo. Ginkgo Trust Limited is wholly owned by Shorea LBG whose sole shareholder is Mr. Liu Dian Bo.
These represent the interests in underlying Shares in respect of the awarded shares granted by the Company under a share award scheme. Please refer to the Company’s announcement dated 10 January 2017 for details of the share award scheme.
Based on 3,321,073,843 Shares in issue as at the Latest Practicable Date without taking into account 46,108,500 Shares repurchased by the Company from 4 September 2017 to 6 December 2017 but not yet cancelled.

(b) Interest in associated corporations

				Approximate
				percentage in
				the registered
				capital of
			Number of	the associated
Name of Director	Associated corporation	Nature of Interest	shares held	corporation
Liu Dian Bo	Luye Life Science Group	Founder of a	8,400(L)	70%
	Ltd.	discretionary trust
Liu Dian Bo	Ginkgo Trust Limited	Founder of a	1(L)	100%
		discretionary trust
Liu Dian Bo	Luye Pharma Holdings Ltd.	Founder of a	1,136,852(L)	100%
		discretionary trust
Liu Dian Bo	Luye Pharmaceutical	Founder of a	202,180,988(L)	100%
	International Co., Ltd.	discretionary trust
Liu Dian Bo	Luye Pharmaceutical	Founder of a	1(L)	100%
	Investment Co., Ltd.	discretionary trust
Liu Dian Bo	Nelumbo Investments	Founder of a	1(L)	100%
	Limited	discretionary trust
Yang Rong Bing	Luye Life Science Group	Beneficial owner	1,800(L)	15%
	Ltd.
Yuan Hui Xian	Luye Life Science Group	Beneficial owner	1,800(L)	15%
	Ltd.

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GENERAL INFORMATION

APPENDIX II

Remark

The letter ‘‘L’’ denotes long position in such securities.

Notes:

The entire issued share capital of Nelumbo Investments Limited is held by Ginkgo Trust Limited as trustee of the family trust of Mr. Liu Dian Bo.
Luye Life Science Group Ltd. holds the entire issued ordinary share capital of Luye Pharma Holdings Ltd. Luye Pharmaceutical International Co., Ltd. is wholly-owned by Luye Pharma Holdings Ltd. and Luye Pharmaceutical Investment Co., Ltd. is wholly-owned by Luye Pharmaceutical International Co., Ltd.

Save as disclosed above, none of the Directors and chief executive of the Company has any interests or short positions in the Shares, underlying Shares or debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were (i) recorded in the register required to be kept under section 352 of the SFO, or (ii) otherwise notified to the Company and the Stock Exchange pursuant to the Model Code.

3. FURTHER INFORMATION CONCERNING DIRECTORS

(a) Directors’ service agreements

As at the Latest Practicable Date, none of the Directors had entered into, or proposed to enter into, a service contract with any member of the Group which does not expire or is not determinable by such member of the Group within one year without payment of compensation (other than statutory compensation).

(b) Competing interests

As at the Latest Practicable Date, Mr. Liu Dian Bo, Mr. Yang Rong Bing and Mr. Yuan Hui Xian, each an executive Director, were indirectly interested in the share capital of Luye Investment, accordingly, they were considered to have interests in the businesses which compete or may compete, either directly or indirectly, with the businesses of the Group which would be required to be disclosed under Rule 8.10 of the Listing Rules if each of them was a controlling shareholder of the Company:

. Wuhu Luye is a company with limited liability established in the PRC and is owned as to 90% by Luye Investment and 10% by 蕪湖長榮醫藥科技資訊諮詢有限責任公司 (Wuhu Changrong Pharmaceutical Technology Information Consulting Co. Ltd.). Wuhu Luye is primarily engaged in the production and sale of Chinese medicine covering a number of therapeutic areas including cardio-cerebral vascular, neurology, neuropsychiatry and hepatology, which competes or is likely to compete, either directly or indirectly, with the Group’s business; and

– 47 –

GENERAL INFORMATION

APPENDIX II

. the Seller is an indirect subsidiary of, and owned as to 66.7% indirectly by, Luye Investment. The Seller is a biotechnology company established in 2013. It focuses on the development of biopharmaceutical products, and operates a 1,200 sq.m. GMP-compliant pilot plant.

As the Group operates independently of the boards of the above companies, the Group operates its business independently of the business of those companies and the Group is capable of carrying on its business independently of, and at arms’ length from, the business as described above.

Save as disclosed above, none of the Directors and his respective close associates had any competing interests (as would be required to disclose under Rule 8.10 of the Listing Rules as if each of them was a controlling shareholder).

(c) Directors’ interest in assets, contracts or arrangement

As at the Latest Practicable Date, save for the interest of Mr. Liu Dian Bo, Mr. Yang Rong Bing and Mr. Yuan Hui Xian in the Asset Transfer Agreements and the transactions contemplated thereunder as disclosed in this circular, none of the Directors had any direct or indirect interest in any asset which had been, since 31 December 2016, being the date to which the latest published audited financial statements of the Company were made up, acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of or leased to any member of the Group.

As at the Latest Practicable Date, other than the Asset Transfer Agreements, none of the Directors was materially interested in any contract or arrangement which is material in relation to the business of the Group.

4. LITIGATION

As at the Latest Practicable Date, the Company was not engaged in any litigation or arbitration of material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened by or against the Company.

5. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2016, the date to which the latest published audited accounts of the Company have been made up.

– 48 –

GENERAL INFORMATION

APPENDIX II

6. QUALIFICATION OF EXPERTS

The following are the qualification of the experts or professional advisers who have given opinion or advice contained in this circular:

Name Qualification

Gram Capital Limited a licensed corporation to carry out Type 6 (advising on corporate finance) regulated activity under the SFO

Crowe Horwath First Trust Independent Professional Valuer Appraisal Pte Limited

As at the Latest Practicable Date, each of Gram Capital and the Valuer:

(a) did not have any shareholding in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group;
(b) did not have any direct or indirect interest in any assets which had been acquired or disposed of by or leased to any member of the Group, or was proposed to be acquired or disposed of by or leased to any member of the Group, since 31 December 2016, the date to which the latest audited financial statements of the Group were made up; and
(c) has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and reference to its name in the form and context in which it appears.

7. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the Company’s principal place of business in Hong Kong at Unit 3207, 32/F, Champion Tower, 3 Garden Road, Central, Hong Kong during normal business hours from the date of this circular up to and including the date of the SGM on 29 December 2017 (being not less than 14 days);

(a) the memorandum of association and the bye-laws of the Company;
(b) each of the Asset Transfer Agreements;
(c) the letter from the Independent Board Committee;

– 49 –

GENERAL INFORMATION

APPENDIX II

(d) the letter from Gram Capital;
(e) the Valuation Report;
(f) the written consent from Gram Capital and the Valuer referred to in the paragraph headed ‘‘Qualification of Experts’’ in this appendix; and
(g) this circular.

– 50 –

NOTICE OF THE SGM

LUYE PHARMA GROUP LTD. 綠葉製藥集團有限公司

(Incorporated in Bermuda with limited liability)

(Stock Code: 02186)

NOTICE IS HEREBY GIVEN that a special general meeting (the ‘‘SGM’’) of Luye Pharma Group Ltd. (the ‘‘Company’’) will be held at Bowen Room, 7/F, Conrad, Pacific Place, 88 Queensway, Admiralty, Hong Kong on Friday, 29 December 2017 at 3:00 p.m. or at any adjournment thereof for the purpose of considering and, if thought fit, passing (with or without amendments) the following resolution as an ordinary resolution of the Company:

ORDINARY RESOLUTION

‘‘THAT:

(a) the execution and delivery of and the performance of the obligations under the two asset transfer agreements dated 4 August 2017 (the ‘‘Asset Transfer Agreements’’) in respect of the acquisition of LY01008 and LY06006 (the ‘‘Asset Transfer’’) entered into between 山東綠葉製藥有限公司 (Shandong Luye Pharmaceutical Co. Ltd.) and 山東博安生物技術有限公司 (Shandong Boan Biological Technology Co. Ltd.) (copies of each of the Asset Transfer Agreements have been tabled at the meeting and marked ‘‘A’’ and ‘‘B’’ respectively for the purpose of identification) and the transactions and payments contemplated thereunder be and are hereby approved, confirmed and ratified; and
(b) any one director of the Company be and is hereby authorised to sign, agree, ratify, perfect, execute or deliver (including under seal where applicable) such documents and to do or authorise doing all such acts and things incidental to the Asset Transfer and the transactions contemplated under the Asset Transfer Agreements as he may in his absolute discretion consider necessary, desirable or expedient in connection with the implementation of, giving effect to or completion of the transactions contemplated under the Asset Transfer Agreements.’’

By order of the Board LUYE PHARMA GROUP LTD. Liu Dian Bo

Chairman

Hong Kong, 11 December 2017

– 51 –

NOTICE OF THE SGM

Registered Office: Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Principal Place of Business in Hong Kong: Unit 3207, 32/F, Champion Tower 3 Garden Road Central Hong Kong

Notes:

(1) Any shareholder of the Company entitled to attend and vote at the SGM is entitled to appoint one or more separate proxies to attend and, subject to the provisions of the bye-laws of the Company, to vote on his/her behalf. A proxy need not be a shareholder of the Company. If more than one proxy is so appointed, the appointment shall specify the number and class of shares in respect of which each such proxy is so appointed.
(2) In order to be valid, a proxy form in the prescribed form together with the power of attorney or other authority (if any) under which it is signed, or a notarially certified copy of that power of authority, must be deposited at the Company’s Hong Kong share registrar, Computershare Hong Kong Investor Services Limited, 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time fixed for holding the SGM or any adjournment thereof.
(3) Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjournment thereof should you so wish and in such event, the relevant form of proxy shall be deemed to be revoked.
(4) The resolution as set out in this notice will be taken by poll.

As at the date of this notice, the executive directors of the Company are Mr. LIU Dian Bo, Mr. YANG Rong Bing, Mr. YUAN Hui Xian and Ms. ZHU Yuan Yuan; the non-executive director is Mr. SONG Rui Lin; and the independent non-executive directors are Mr. ZHANG Hua Qiao, Professor LO Yuk Lam, Mr. LEUNG Man Kit and Mr. CHOY Sze Chung Jojo.

– 52 –

AI assistant

Luye Pharma Group Limited — Proxy Solicitation & Information Statement 2017

50431_rns_2017-12-10_7975b889-f5f0-4178-b35a-137b5b7d1662.pdf

LUYE PHARMA GROUP LTD.

綠 葉 製 藥 集 團 有 限 公 司

CONNECTED TRANSACTION IN RELATION TO

THE ACQUISITION OF TWO BIOLOGICAL ANTIBODY PRODUCTS AND

NOTICE OF SPECIAL GENERAL MEETING

DEFINITIONS

LUYE PHARMA GROUP LTD.

綠 葉 製 藥 集 團 有 限 公 司

Independent Non-executive Directors:

CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF TWO BIOLOGICAL ANTIBODY PRODUCTS

INTRODUCTION

LETTER FROM THE BOARD

THE ASSET TRANSFER AGREEMENTS

Date

Parties

Assets being acquired

Consideration

LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE ASSET TRANSFER

BASIS OF THE CONSIDERATION

INFORMATION ON THE GROUP AND THE SELLER

The Group

The Seller

LISTING RULES IMPLICATIONS

THE SGM

RECOMMENDATION

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

LUYE PHARMA GROUP LTD.

綠 葉 製 藥 集 團 有 限 公 司

CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF TWO BIOLOGICAL ANTIBODY PRODUCTS

RECOMMENDATION

Yours faithfully,

CONNECTED TRANSACTION

IN RELATION TO

THE ACQUISITION OF TWO BIOLOGICAL ANTIBODY PRODUCTS

INTRODUCTION

LETTER FROM GRAM CAPITAL

BASIS OF OUR OPINION

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Background of and reasons for the Asset Transfer

Business overview of the Group

Information on the Seller

Reasons for and benefits of the Asset Transfer

2. Principal terms of the Asset Transfer Agreements

Date

Parties

Assets being acquired

LETTER FROM GRAM CAPITAL

Consideration

3. Possible financial effects of the Asset Transfer

RECOMMENDATION

RE: Valuation of Two Biological Antibody Products for Luye Pharma Group Ltd.

1 PURPOSE OF VALUATION

2 SCOPE OF WORK

3 BACKGROUND OF THE TARGET PRODUCTS

4 GENERAL MARKET ANALYSIS OF THERAPEUTIC MONOCLONAL ANTIBODY PRODUCTS

5 VALUATION METHODOLOGY

5.1 Cost Approach

5.2 Market Approach

5.3 Income Approach

5.4 Selection of Assessment Methodology

Summation Method

6 INTRODUCTION OF RESEARCH PROCESS FOR TARGET PRODUCTS

7 COST APPROACH — DISCUSSION OF COST BREAKDOWN

8 DISCUSSION OF FORECASTED COST — LY01008

Forecasted Cost — Portion One for LY01008

Forecasted Cost — Portion Two for LY01008

Phase 1 clinical trials

Phase 3 clinical trials

GMP production

Process characterization

Process validation

Drug quality analysis

Drug registration

Research Cost for LY01008

9 DISCUSSION OF FORECASTED COST — LY06006

Luye Pharma Group Limited Proxy Solicitation & Information Statement 2017

綠葉製藥集團有限公司

綠葉製藥集團有限公司

綠葉製藥集團有限公司

LUYE PHARMA GROUP LTD. 綠葉製藥集團有限公司