STAR PHARMACEUTICAL LIMITED Company Registration No. 200500429W (Incorporated in the Republic of Singapore) (the Company ) ANNOUNCEMENT PURSUANT TO RULE 704(5) OF THE LISTING MANUAL EMPHASIS OF MATTER BY AUDITORS ON FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2012 Pursuant to Rule 704(5) of the Listing Manual of the Singapore Exchange Securities Trading Limited ( SGX-ST ), the Board of Directors (the Board ) of STAR Pharmaceutical Limited (the Company and together with its subsidiaries, the ) wishes to inform that the independent auditors of the Company, Messrs Crowe Horwath First Trust LLP (the Auditors ) has issued an emphasis of matter without modifying the audit opinion in the Independent Auditors Report on the financial statements of the Company and the for the financial year ended 31 December 2012. A copy of the aforesaid Independent Auditors Report together with an extract of the relevant notes to the s consolidated financial statements for FY2012 are annexed to this announcement. The Company s Annual Report for FY2012, which will contain the Independent Auditors Report and the Company s consolidated financial statements for FY2012, will be dispatched to shareholders and to the SGX-ST on or around 15 April 2013. By Order of the Board STAR PHARMACEUTICAL LIMITED Xu Zhi Bin Executive Chairman 5 April 2013
28 STAR PHARMACEUTICAL LIMITED INDEPENDENT AUDITORS REPORT to the Members of STAR Pharmaceutical Limited Report on the Financial Statements We have audited the accompanying financial statements of STAR Pharmaceutical Limited (the Company ) and subsidiaries (the ) set out on pages 31 to 82, which comprise the consolidated balance sheet and the balance sheet of the Company as at 31 December 2012, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows of the for the financial year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation of financial statements that give a true and fair view in accordance with the provisions of the Singapore Companies Act (the Act ) and Singapore Financial Reporting Standards, and for devising and maintaining a system of internal accounting controls sufficient to provide a reasonable assurance that assets are safeguarded against loss from unauthorised use or disposition; and that transactions are properly authorised and that they are recorded as necessary to permit the preparation of true and fair profit and loss accounts and balance sheets and to maintain accountability of assets. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Singapore Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Crowe Horwath First Trust LLP (UEN: T08LL1312H) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act (Chapter 163A).
ANNUAL REPORT 2012 29 INDEPENDENT AUDITORS REPORT to the Members of STAR Pharmaceutical Limited Opinion In our opinion, the consolidated financial statements of the and the balance sheet of the Company are properly drawn up in accordance with the provisions of the Act and Singapore Financial Reporting Standards so as to give a true and fair view of the state of affairs of the and of the Company as at 31 December 2012, and of the results, changes in equity and cash flows of the for the financial year ended on that date. Emphasis of matter Without modifying our opinion, we draw attention to the following matters: 1. Significant judgements, including the use of estimates by the directors of the Company: i. As part of the annual impairment assessment of the intangible assets held by the, the Directors considered it appropriate to write down the carrying values of certain product development in progress as at the end of the financial year. This write down resulted in an impairment charge of RMB 131,968,000 for the financial year ended 31 December 2012. The details of their judgements and key estimation uncertainties have been set out in Note 10 to the financial statements; and ii. As at the end of the financial year, included in other receivables, prepayment and deposits is a refundable deposit amounting to RMB 18,000,000. This relates to a deposit refundable to the following a decision to discontinue the acquisition of certain medical know-how. The reached a mutual agreement with the third party to terminate the acquisition and to obtain the refundable deposit of RMB 18,000,000 by 30 June 2013. As at the date of this report, the has received a partial refund of RMB 1,000,000 from the third party. The Directors are confident that the will be able to receive the balance of the deposit amounting to RMB 17,000,000 and accordingly, no impairment charge is required to be made. Further details of this refundable deposit are set out in Note 13(A) to the financial statements. 2. We also draw attention to Note 2 to the financial statements. The incurred a net loss of RMB 134,470,000 for the year ended 31 December 2012. This indicates the existence of a material uncertainty which may cast significant doubt about the s ability to continue as a going concern. The ability of the to continue as a going concern depends on its ability to generate sufficient cash flows from its operations and to receive continued financial support from its lenders and creditors as and when it requires.
30 STAR PHARMACEUTICAL LIMITED INDEPENDENT AUDITORS REPORT to the Members of STAR Pharmaceutical Limited Report on Other Legal and Regulatory Requirements In our opinion, the accounting and other records required by the Act to be kept by the Company have been properly kept in accordance with the provisions of the Act. Crowe Horwath First Trust LLP Public Accountants and Certified Public Accountants Singapore 3 April 2013
ANNUAL REPORT 2012 37 These notes form an integral part of and should be read in conjunction with the accompanying financial statements. 1. GENERAL INFORMATION STAR Pharmaceutical Limited (the Company ) is a limited company domiciled and incorporated in Singapore. The Company was admitted to the official list on the mainboard of the Singapore Exchange Securities Trading Limited on 15 February 2006. The address of the Company's registered office is 158 Cecil Street, #11-01, Singapore 069545. The s principal place of business is Dalu Town, Qionghai City, Hainan Province 571425, People s Republic of China ( PRC ). The principal activities of the Company are those relating to investment holding. The principal activities of the subsidiaries are those relating to the development, manufacturing and trading of pharmaceutical products. The balance sheet of the Company and the consolidated financial statements of the Company and subsidiaries (together referred to as the ) for the financial year ended 31 December 2012 were authorised for issue in accordance with a resolution by the Board of Directors on 3 April 2013. 2. GOING CONCERN The incurred a net loss of RMB 134,470,000 for the year ended 31 December 2012 which was largely due to a write down of carrying values of product development in-progress. This write down resulted in an impairment charge of RMB 131,968,000 (Note 10). This indicates the existence of a material uncertainty which may cast significant doubt about the s ability to continue as a going concern. The ability of the to continue as a going concern depends on its ability to generate sufficient cash flows from its operations and to receive continued financial support from its lenders and creditors as and when it requires. While the believes that it has taken steps to mitigate its going concern risks, the s operating environment remains challenging and competitive. The will continue to monitor and address these risks by improving its production efficiency, roll-out new products, increase market share and seek continuous financial support from its lenders and creditors. The financial statements have been prepared on the assumption that the will continue as a going concern. This assumption is on the premise that the s initiatives outlined above will continue to have positive effect on the s performance, and that additional funding for its working capital needs are available to the as and when required. If the is unable to generate sufficient cash from its operations or obtain continuous financial support from its lenders and creditors, the may be unable to continue its operational existence for the foreseeable future, and adjustments would have to be made to reflect the situation that the assets may need to be realised other than in the normal course of business and at amounts which could differ significantly from the amounts stated in the balance sheets. In addition, the may have to provide for further liabilities which may arise, and to reclassify non-current assets as current assets. No such adjustments have been made to these financial statements.
ANNUAL REPORT 2012 61 10. INTANGIBLE ASSETS Deferred development costs Product development in progress Total Cost As at 1 January 2011 34,121 160,026 194,147 Additions 600 104 704 Transfer to deferred development costs 100 (100) - Written off - (1,010) (1,010) As at 31 December 2011 34,821 159,020 193,841 Additions - 21 21 Transfer to deferred development costs 5 (5) - As at 31 December 2012 34,826 159,036 193,862 Accumulated amortisation and impairment As at 1 January 2011 24,557-24,557 Amortisation charge for the year 2,526-2,526 As at 31 December 2011 27,083-27,083 Amortisation charge for the year 2,454-2,454 Impairment charge - 131,968 131,968 As at 31 December 2012 29,537 131,968 161,505 Net carrying value As at 1 January 2011 9,564 160,026 169,590 As at 31 December 2011 7,738 159,020 166,758 As at 31 December 2012 5,289 27,068 32,357 Amortisation expenses are all included in cost of sales. For the purpose of impairment testing at the balance sheet date, the recoverable amount of these intangible assets was determined based on a value-in-use calculation and was determined by discounting future cash flows to be generated from the continuing use of the cash generating unit with the assistance of independent valuers. Cash flow projections used in these calculations were based on financial budgets approved by management covering a ten-year period. Cash flows for the ten-year period were prepared using the estimated growth rates as stated below.
62 STAR PHARMACEUTICAL LIMITED 10. INTANGIBLE ASSETS (Continued) Key assumptions used for value-in-use calculations: Growth rates applied for the 10 years period 0% to 15% 0% to 15% Discount rate 16% 20% The key assumptions used to determining the value in use also include competitive but stable market conditions and continued acceptability of products sold. Management determined estimated growth rate based on past performance and its expectations of the market development. The discount rates used were pre-tax and reflected specific risks relating to the relevant industry. In 2012, the recoverable amounts (value in use) of Product development in progress projects were determined to be lower than the carrying value by approximately RMB 131,968,000 for various TCM projects which management deemed to be no longer financially and economically viable. The Board of Directors, after careful deliberation of the financial viability and technical feasibility of these projects, approved the decision to discontinue further investment on these projects and to provide for a full impairment charge amounting to RMB 131,968,000. The Board, together with management and the concurrence of the independent valuers, have assessed the value in use of these projects on an abandonment basis and have come to a conclusion that the impairment loss of RMB 131,968,000 is required to be made and which is included in other operating expenses (Note 22). 11. INVENTORIES Raw materials 5,384 6,530 Finished goods 5,395 3,152 10,779 9,682 The cost of inventories recognised as expense and included in cost of sales amounted to RMB 36,826,000 (2011: RMB 52,905,000). An amount of RMB 59,000 (2011: RMB 220,000) write off of inventories was recognised as expense during the year. 12. TRADE RECEIVABLES Trade receivables 947 452 Impairment allowance for trade receivables (Note 31) - (448) 947 4 Bills receivable 580 2,523 1,527 2,527
ANNUAL REPORT 2012 63 13. OTHER RECEIVABLES, PREPAYMENTS AND DEPOSITS Company Non-current assets Refundable deposit (Note A) - 14,800 - - Current assets Other receivables net of allowance (Note B) 369 15,136-6,896 Refundable deposits (Note A) 45,530 49,900 - - Other deposits 440 536 27 27 Prepayment for plant and machinery 569 85 - - Other prepayments 1,219 2,020 21 21 48,127 67,677 48 6,944 Note A Refundable deposits (both current and non-current) are made out of the following: Refundable deposit I non-current portion - 14,800 Refundable deposit II 18,000 19,900 Refundable deposit III - 5,000 Refundable deposit IV 18,000 25,000 Refundable deposit V 9,530-45,530 49,900 In 2011, Refundable deposit I was advanced to a third party research company to develop new medical products on behalf of the. As the development of the medical products was not expected to be completed within the next 12 months, this balance was then classified as non-current. In 2012, this project was terminated and the amount has been fully refunded during the financial year. Refundable deposit II pertains to a deposit made to a third party company to acquire a patented right. During the year, the decided to discontinue this acquisition and the third party company agreed to refund and has refunded RMB 18 million as at the date of this report. Consequently, an amount of RMB 1.9 million and RMB 6.9 million was written off from Refundable deposit and Other Receivables account respectively. Refundable deposit III pertains to an initial payment of RMB 5 million in 2011 for the acquisition of a potential patent right from another third party company. This acquisition was discontinued in 2012 and a refund of RMB 2 million was obtained during the year. The remaining amount of RMB 3 million was written off as bad debts in the current year.
64 STAR PHARMACEUTICAL LIMITED 13. OTHER RECEIVABLES, PREPAYMENTS AND DEPOSITS (continued) Note A (Continued) Refundable deposit IV was an advance of RMB 25 million to a third party company to purchase certain medical know-how on behalf of the in 2010. Subsequent to balance sheet date, management decided to discontinue this transaction. The reached a mutual agreement with the third party to terminate the acquisition and to obtain the refund of RMB 18,000,000 by 30 June 2013. Consequently, an amount of RMB7 million was written off as bad debts. As at the date of this report, the received a partial refund of RMB 1,000,000 from the third party. The Directors are confident that the will be able to obtain the full refund of the remaining RMB 17,000,000 and accordingly, no impairment charge is required to be made. Refundable deposit V pertains to advances made to two different third party companies to develop four different types of drugs. The realisation of the above refundable deposit V is dependent on the successful outcome of the development and/or eventual acquisition of the drugs and medical know-how. Management is of the view that this deposit will lead to viable drugs and has engaged an independent valuer to assess the respective fair values. The results of the independent valuations indicate that the estimated recoverable amounts (as determined by discounting the future cash flows) exceed the expected total costs. In addition, management has also performed an assessment of the deposits and concluded that there are no indications of impairment. In the event that these acquisitions do not go through, management is confident that these amounts are recoverable from the respective third party companies. Note B During the year, the recognised impairment loss in other receivables amounting to RMB Nil (2011: RMB 1,815,000). This impairment is included in Other operating expenses. The movement in allowance for impairment of other receivables is as follows: Balance at beginning of the year 6,917 5,102 Allowance made during the year - 1,815 Balance at end of the year 6,917 6,917 Except for the above balance, all other receivable and deposit balances are neither past due nor impaired. Included in other receivables in 2011 was an amount advanced to a third party of RMB 8 million. This amount is interestfree, unsecured and expected to be repaid within the next 12 months. In 2012, RMB 7 million was recovered by the and the remaining amount RMB 1 million was written off as bad debts in the current year. 14. DUE FROM SUBSIDIARIES (NON-TRADE) The non-trade balances are unsecured, interest-free and repayable on demand. An amount of RMB 28.2 million (2011: RMB 34.2 million) pertains to dividend receivable from a subsidiary.