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

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LUYE PHARMA GROUP LTD.

綠 葉 製 藥 集 團 有 限 公 司

(incorporated in the Bermuda with limited liability)

(Stock Code: 02186)

CONNECTED TRANSACTION IN RELATION TO

THE ACQUISITION OF TWO BIOLOGICAL ANTIBODY PRODUCTS

ASSET TRANSFER

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.

LISTING RULES IMPLICATIONS

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. As one or more of the applicable percentage ratios as calculated under Rule 14.07 of the Listing Rules in respect of the transactions contemplated under the Asset Transfer Agreements exceeds 0.1% but all applicable percentage ratios are less than 5%, the transactions contemplated under the Asset Transfer Agreements are subject to reporting and announcement requirements and are exempt from the circular and shareholders' approval requirements under Rule 14A.76 of the Listing Rules.

THE ASSET TRANSFER AGREEMENTS

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

monoclonal antibody injection (重組抗 VEGF人源化單克隆抗體注射液)

recombinant anti-RANKL whole human monoclonal antibody

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 lung cancer

Osteoporosis among postmenopausal women; reducing the risk of

vertebral, non-vertebral and hip fractures

Status Going through phase I clinical trials Obtained the CDE's approval to

proceed with phase I clinical trials

Targeted launch year Around 2021 Around 2022

Market comparable Biosimilar to Avastin Biosimilar to Prolia

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

Closing

Completion of the Asset Transfer is scheduled to take place within 5 days from the date of the Asset Transfer Agreements, whereupon the Seller shall pass all title deeds and other documents related to the Products to Shandong Luye and make the necessary filings to register Shandong Luye as the owner of the Products.

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:

Time

% of the consideration

Within 5 days following the signing of the respective

Asset Transfer Agreement ... .............................. .............................. ........... 20%

Within 5 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 5 days following the submission to the CDE of the application for the marketing authorisation

of the respective Product .... .............................. .............................. ........... 20%

Within 5 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. 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.

If the Products eventually obtain the marketing authorisation and commences sale, Shandong Luye has agreed to pay royalties representing 10% of the revenue generated from the sale of such Products to the Seller. Should these royalty payments constitute continuing connected transactions under the Listing Rules when they arise, the Company will comply with all applicable requirements under the Listing Rules in respect of such royalty payments.

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.

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 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.

REASONS FOR AND BENEFIT 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 a 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 a 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 develop its own biological antibodies.