Reply to the opinion implementation letter of the examination center on the application documents for the initial public offering of RMB common shares (A shares) by innocare Pharma Limited and its listing on the science and Innovation Board
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Shanghai Stock Exchange:
We have received the letter of implementation of the opinions of the audit center on the initial public offering of shares and listing on the science and Innovation Board of nuocheng Jianhua Pharmaceutical Co., Ltd. (szkss (s) [2022] No. 142) (hereinafter referred to as the "letter of implementation of the opinions of the Audit Center") issued by your office on March 29, 2022. Innocare Pharma Limited (hereinafter referred to as "the issuer", "the company") and China International Capital Corporation Limited(601995) (hereinafter referred to as "the sponsor"), Ernst & Young Huaming Certified Public Accountants (special general partnership) (hereinafter referred to as "Ernst & Young", "reporting accountant") and other relevant parties have checked the questions listed in the opinion implementation letter of the audit center item by item. Now, the reply is as follows, please review. Unless otherwise specified, the abbreviation used in the reply to the opinion implementation letter of the audit center is the same as the interpretation in the prospectus of innocare Pharma Limited's initial public offering of RMB common shares (A shares) and listing on the science and Innovation Board (the first draft) (hereinafter referred to as the "prospectus").
The problems listed in the opinion implementation letter of the audit center are in bold
Reply to the questions listed in the opinion implementation letter of the Audit Center
Reference to the prospectus
Amendments and supplements to the prospectus (BOLD)
In the reply to the opinion implementation letter of the audit center, if there is any difference in the mantissa between the sum of the total and the sub item values, it is caused by rounding.
catalogue
1、 Question 1 3 II. Question 2 4 III. question 3 9. General opinions of the recommendation institution on the reply of the issuer sixteen
1、 The issuer is requested to comprehensively sort out the contents of the "tips on major matters" in accordance with the provisions of the standards for the contents and forms of information disclosure by companies offering securities to the public No. 41 - prospectus of science and Innovation Board companies, highlight the significance, enhance the pertinence, strengthen the risk orientation, delete the expressions with weak pertinence, rank them according to importance, and supplement Improve the following contents: the issuer's main business income of RMB 1.042 billion in 2021 mainly comes from the technology licensing income of RMB 776 million.
reply:
The issuer has reorganized and improved the "tips on major matters" in the prospectus as required, and has supplemented and disclosed the following contents in the "tips on major matters":
"IX. the company's main business income in 2021 mainly comes from technology licensing income
In July 2021, the company reached an authorization cooperation with Biogen, a biomedical enterprise, which agreed that the company would grant the global exclusive rights of orbutinib in the field of MS and the exclusive rights in the field of some autoimmune diseases in regions other than China (including Hong Kong, Macao and Taiwan).
According to the agreement, for technology licensing, Biogen paid the company a one-time non refundable and non deductible down payment of US $125 million. The company recognized technology licensing revenue of RMB 7759633 million in 2021, and the main business revenue of the current period was RMB 10416325 million, accounting for 74.49%.
In 2021, the company's main business income was higher, which was mainly due to the high technology licensing income recognized by the company and Biogen in an authorization cooperation on obutinib. It is uncertain that the company will continue to realize such technology licensing revenue in the coming years. "
2、 In combination with the specific conditions of the contract signed with Biogen, the issuer is requested to explain the rationality of identifying and confirming the revenue as two performance obligations, the basis for sharing the transaction consideration, and whether the R & D service revenue as the performance obligation in a certain period of time complies with the provisions of the accounting standards for business enterprises.
The recommendation institution and the reporting accountant are requested to check and express clear opinions.
reply:
1、 Please explain to the issuer
(I) explain the rationality of identifying and recognizing revenue as two performance obligations in combination with the specific conditions of the contract signed with Biogen
In July 2021, Biogen signed the collaboration and license agreement with the issuer's subsidiaries Beijing nuocheng Jianhua and Guangzhou nuocheng Jianhua, which agreed that the company would grant the global exclusive rights of orbutinib in the field of MS and the exclusive rights in the field of certain autoimmune diseases in regions other than China (including Hong Kong, Macao and Taiwan). At the same time, according to the agreement, the issuer will continue to perform the phase II clinical of orbutinib global multi center as the sponsor and bear the relevant expenses in advance. Biogen will make corresponding compensation according to the actual expenses and other costs borne by the issuer.
According to Article 9 of the accounting standards for Business Enterprises No. 14 - income, the performance obligation refers to the commitment of the enterprise to transfer clearly distinguishable goods to customers in the contract. According to Article 10 of the accounting standards for Business Enterprises No. 14 - revenue, if the goods promised by the enterprise to the customer meet the following conditions at the same time, they shall be regarded as clearly distinguishable goods: (1) the customer can benefit from the goods themselves or from the use of the goods together with other easily available resources; (2) The commitment of the enterprise to transfer the commodity to the customer can be distinguished from other commitments in the contract. The following situations usually indicate that the commitment of the enterprise to transfer the commodity to the customer cannot be distinguished from other commitments in the contract: (1) the enterprise needs to provide significant services to integrate the commodity and other commodities promised in the contract into the combined output agreed in the contract and transfer it to the customer. (2) This commodity will significantly modify or customize other commodities promised in the contract. (3) The goods are highly related to other goods promised in the contract. According to the cooperation content of the agreement and the relevant provisions of the accounting standards for Business Enterprises No. 14 - revenue, the issuer identified the following two main commitments: (1) technology licensing: the issuer granted Biogen the exclusive right to the global development, production and commercialization of orbutinib in the field of MS, and the development, production and commercialization of some autoimmune diseases in regions other than China (including Hong Kong, Macao and Taiwan) Exclusive right to commercialize; (2) R & D services: the issuer will continue to perform the phase II clinical trial of orbutinib global multi center as the sponsor and bear the relevant expenses in advance.
Biogen will make corresponding compensation according to the actual expenses and other costs borne by the issuer. Since the rights of global development, production and commercialization of MS are exclusively owned by Biogen after the relevant agreement comes into effect, the issuer continues to implement the phase II clinical trial of orbutinib in the global multi center, and actually provides global R & D services for the phase II clinical trial of orbutinib in the field of MS within the scope of cooperative R & D to Biogen.
With regard to the global rights of orbutinib in the field of MS and the rights in the field of autoimmune diseases in regions other than China (including Hong Kong, Macao and Taiwan) agreed in the collaboration and license agreement signed by the issuer and Biogen, the relevant intellectual property rights shall be fully owned by the issuer before the signing of the agreement and protected by a series of patents and patent applications. The issuer authorizes this part of the rights to Biogen by signing an authorization agreement with Biogen. The relevant authorization only depends on the intellectual property rights owned by the issuer and will remain valid during the effective period of the agreement. The process and results of the development of phase II clinical trial of global multicenter with orbutinib do not constitute any combined grant, so it does not meet the first provision of the code that the contract commitments cannot be distinguished separately; Secondly, the issuer continues to promote the global multi center phase II clinical of orbutinib for MS, and the relevant R & D services will not make any modification and customization to the candidate drugs themselves, so it does not meet the second provision of the code that the contract commitments cannot be distinguished separately; At the same time, the technical authorization granted does not depend on the global multi center phase II clinical trial R & D services provided in the future contract cycle. Biogen can choose to conduct phase II clinical trials independently. Therefore, there is no interdependence or correlation between the two, which does not meet the third provision of the code that the contract commitments cannot be distinguished separately. To sum up, technology authorization and R & D services are different commitments that can be distinguished separately, and constitute individual performance obligations respectively.
(II) transaction consideration allocation basis
The issuer shall judge and analyze the accounting treatment of the contract transaction price in accordance with the relevant provisions of the accounting standards for Business Enterprises No. 14 - income. According to the agreement, for technical licensing, Biogen will pay the issuer a one-time non refundable and non deductible down payment of US $125 million; For R & D services, Biogen will pay the issuer about US $29 million for the corresponding R & D service compensation.
In addition, the issuer is eligible to receive other milestone payments from Biogen after reaching R & D milestones, commercialization milestones and other milestones. Considering the uncertainty of the completion of potential milestones, the issuer takes it as variable consideration. According to Article 16 of the accounting standards for Business Enterprises No. 14 - revenue, if there is a variable consideration in the contract, the enterprise shall determine the best estimate of the variable consideration according to the expected value or the most likely amount, but the transaction price including the variable consideration shall not exceed the amount that is unlikely to be significantly reversed when the relevant uncertainty is eliminated. When assessing whether the accumulated recognized income is unlikely to be significantly reversed, the enterprise shall consider the possibility and proportion of income reversal at the same time. Since the completion of potential milestones on the effective date of the cooperation and authorization agreement is uncertain and difficult to reasonably estimate at this stage, the issuer does not include it in the transaction price on the effective date of the agreement. Only the one-time non refundable and non deductible down payment of US $125 million and the compensation corresponding to R & D services of US $29 million are recognized as the transaction price on the effective date of the agreement, that is, US $154 million.
According to Article 20 of the accounting standards for Business Enterprises No. 14 - revenue, if the contract contains two or more performance obligations, the enterprise shall allocate the transaction price to each single performance obligation on the contract commencement date according to the relative proportion of the individual selling price of the promised goods of each single performance obligation. If the individual selling price cannot be directly observed, the enterprise shall comprehensively consider all relevant information it can reasonably obtain and reasonably estimate the individual selling price by using market adjustment method, cost plus method, residual value method and other methods.
Since there is no direct external selling price for the identified two separate performance obligations in the above cooperation and authorization agreement, the issuer employs a third-party valuation expert to evaluate the respective fair values of the two performance obligations of technology licensing and R & D services on the effective date of the cooperation and authorization agreement, so as to reasonably determine their respective separate selling prices.
For the separate selling price of technology licensing, the valuation experts adopt the cash flow discount model, determine the discount rate based on the issuer's expected future cash flow of relevant technology licensing, and consider the risk-free return rate, market risk premium and beta coefficient, and determine the separate selling price of technology licensing as USD 113 million.
For the separate selling price of R & D services, the valuation experts adopt the cost plus method, and determine the separate selling price of R & D services as US $33 million based on the total cost expected to occur in the clinical trial expected by the issuer and considering the cost plus rate. The estimated total cost includes external R & D expenses directly related to clinical trials and other costs. Among them, other costs further include R & D related costs such as the issuer's clinical management department. For the cost plus rate, the issuer hired a third-party valuation expert to conduct evaluation and analysis, screened comparable companies in the industry that provide external clinical research services, and determined it as 15%. As shown in the following table, the issuer allocates the transaction price of US $154 million to each individual performance obligation according to the relative proportion of the respective separate selling prices of the two performance obligations identified above (i.e. technology licensing and R & D services): according to the above analysis, the transaction price allocated to the technology licensing performance obligation according to the proportion of the separate selling prices of technology licensing and R & D services is US $120 million (equivalent to RMB 776 million), The transaction price allocated to the performance obligation of R & D services is US $34 million. The details are as follows:
Individual selling price - transaction consideration of individual selling price
Relative proportion of performance obligations from third-party evaluation reports
Amount formula / parameter percentage formula / parameter amount formula / parameter (USD 100 million) (USD 100 million)
Technical authorization 1.13 a 78% d = A / C 1.20 g = I D
R & D service 0.33 B 22% e = B / C 0.34 H = I e
Total 1.46 C = a + B 100% F = D + e 1.54 I
(III) whether the R & D service income, as the performance obligation in a certain period of time, complies with the provisions of the accounting standards for business enterprises
According to Article 11 of the accounting standards for Business Enterprises No. 14 - income
