Financial Accounting Assignment

Associate Professor Patricia Tan and Associate Professor Jian Ming prepared this case using published sources. As the case is not intended to illustrate either effective or ineffective practices or policies, the information presented reflects the authors’ interpretation of events and serves merely to provide opportunities for classroom discussions.

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The Asian Business Case Centre, Nanyang Business School, Nanyang Technological University, Nanyang Avenue, Singapore 639798. Phone: +65-6790-4864/6552, E-mail: [email protected]

BIOSENSORS INTERNATIONAL GROUP: VALUATION AND IMPAIRMENT TESTING OF INTANGIBLES

HBSP No.: NTU053 Ref No.: ABCC-2014-009 Date: 07 July 2014

Patricia Tan and Jian Ming

Biosensors International Group (BIG), a biotechnology company listed in Singapore Exchange,

acquired JW Medical Systems Ltd. in 2011. This resulted in a significant increase in reported

goodwill and other intangible assets. On 2 July 2012, Matthew Tay, an analyst with MMB Ltd. (an

equity research company in Singapore), sat staring at the balance sheets of BIG. The sum total of

intangible assets and goodwill constituted 62% of total assets, compared to 4% the year before.

He knew that the huge increase was due to the acquisition of JW Medical Systems in 2011. He

wondered what these intangible assets and goodwill represented, how they were accounted for

and how they should be interpreted.

This case study deals with the valuation and the impairment testing of intangibles (including

goodwill) reported in the financial statements of BIG, and describes the acquisition transaction

and BIG’s post-acquisition financial position.

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On 2 July 2012, Matthew Tay, an analyst with MMB Ltd. (an equity research company in Singapore), sat staring at the balance sheets of Biosensors International Group (BIG). The sum total of intangible assets and goodwill constituted 62% of total assets, compared to 4% the year before. He knew that the huge increase was due to the acquisition of JW Medical Systems in 2011. He wondered what these intangible assets and goodwill represented, how they were accounted for and how they should be interpreted. BIOSENSORS INTERNATIONAL GROUP BIG was incorporated on 28 May 1998 and listed on the Singapore Stock Exchange Mainboard on 20 May 2005. BIG was engaged in the investment holding and licensing of medical technology. The Group developed, manufactured and commercialised innovative medical devices for interventional cardiology and critical care procedures. It operated in three segments: the interventional cardiology segment, which supplied its drug- eluting stent (DES) products, coronary bare-metal stents, accompanying stent delivery balloon catheter systems, angioplasty balloons and catheters; the critical care segment, which supplied catheter systems and related accessories used during surgery and intensive care treatment and monitoring; and the licensing revenue segment, which related to payments and royalties associated with the licensing of its DES technology. Interventional cardiology and licensing revenue accounted for 67% of the total revenue and more than 60% of the gross profit reported by BIG for the year ending 31 March 2012. (See Exhibit 1 – Principal Products of BIG.) Since 1990, BIG has manufactured and marketed critical care catheter systems and related devices that were used during heart surgery and intensive care treatment and monitoring. In 2000, the Group entered the interventional cardiology market with the introduction of its proprietary coronary bare-metal stent, along with stent delivery balloon catheter system, followed by an expansion of the product line to include angioplasty balloons and catheters. It then positioned itself to be a developer, manufacturer and marketer of innovative medical devices with primary focus on DES, an evolving therapy that was rapidly gaining market share from traditional therapies such as bare-metal stenting and open-heart surgery. The Group had internally developed technology to address each component of a DES system, including a stent, a stent delivery catheter, a polymer and a proprietary drug. BIG’s DES was unique in that the stent’s biodegradable polymer allowed it to be absorbed into the human body over six to nine months after medical procedures. It also limited side effects such as thrombosis, which were common in the older DES technologies.1 As a result, BIG derived a large part of its profits from the sales and licensing revenue associated with its DES technology. BIG’S ACQUISITION OF JWMS In 2003, BIG established a strategic relationship with Shandong Weigao Group Medical Polymer Co. Ltd. (Weigao) in Shandong, China to manufacture critical care products in China. JW Medical Systems Ltd. (JWMS), a 50:50 joint venture, was formed. JWMS was a DES manufacturer based in Weihai, Shandong Province. Weigao offered manufacturing and cost advantages in China as well as a strong distribution network.2

The core product for JWMS was the Excel DES, which was the first stent in China with a biodegradable polymer coating. In less than a year after commercialisation of its Excel DES, JWMS reported sales of

1 No Longer Just One Nice Stent. (2012, February 6). CIMB Research Report. 2 ibid.

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approximately US$20 million and net income of approximately US$8.5 million.3 By August 2008, JWMS had become the third largest DES player in China in terms of market share. In BIG’s 2007 news release, Mr Lu Yoh Chie, Chairman and CEO of BIG, said:

The quality of the Excel stent, JWMS’s strong Chinese distribution network and the rapidly growing market in China position JWMS for continued growth.

On 3 October 2011, BIG acquired the remaining 50% interest in JWMS from Weigao through a cash and stock deal (including convertible notes). The consideration for the 50% equity interest acquired was US$478 million.4 Weigao reported an accounting gain of RMB2.6 billion (approximately US$421 million) from the disposal of its 50% share in JWMS to BIG.5 Upon successful completion of the transaction, JWMS became a fully owned subsidiary of BIG, while Weigao owned 21.6% of BIG upon full conversion of the notes and became BIG’s single largest shareholder. (See Exhibit 2 – Corporate Structure of BIG as at 31 March 2012; and Exhibit 3 – Substantial Shareholders as at 13 June 2012.) The restructuring provided BIG with greater access to the China market, and at the same time allowed Weigao to leverage BIG’s international experience and sales network to sell its cardiology consumables.6

BIG’s press release on 3 October 2011 on the acquisition of JWMS said:7

Coronary artery disease (CAD) is the second-biggest killer in China, accounting for 20% of all deaths in 2009. More than 95% of percutaneous coronary intervention (PCI) procedures, commonly known as coronary angioplasty, use a DES. Three-quarters of DES are manufactured domestically. The overall China market is currently estimated at close to half a billion US dollars and is expected to continue to grow rapidly in coming years.

‘We now have a unique opportunity for Biosensors to become a major player in China’s substantial and rapidly growing DES market,’ commented Biosensors Co-CEO Jack Wang. ‘In addition to JWMS’s current product range, we can use their established distribution network and domestic manufacturing capability to introduce Biosensors product lines in China. With Weigao’s active involvement in Biosensors, we also gain access to the resources and expertise of one of China’s leading medical device companies.’

‘The deal is not only good news for Biosensors in China, but also for our other global markets,’ added Biosensors Co-CEO Jeffrey B. Jump. ‘It provides us with an additional manufacturing facility to service global demand, as well as giving us access to Weigao’s complete product range outside China.’

A report by OCBC Investment Research on 14 June 2011 outlined BIG’s rationale for the acquisition:8

3 Biosensors International Group. Biosensors Announces Agreement to Acquire Fifty Percent of JW Medical

Systems Limited. (2007, August 10). Retrieved March 15, 2014 from http://biosensors.listedcompany.com/ newsroom/Press_Release_JWMSL_Acquisition.pdf.

4 BIG reported its share of profit in JWMS at USD 19 million for the financial year ending 31 March 2011. The payment of US$478 million for the remaining 50% means that JWMS was valued at approximately 25x JWMS FY2011 profit after tax.

5 Shandong Weigao Group Medical Polymer Company Limited. (2011). Annual Report. 6 No Longer Just One Nice Stent. (2012, February 6). CIMB Research Report. 7 Biosensors International Group. JWMS Now Wholly-Owned Subsidiary of Biosensors: Weigao Becomes Key

Shareholder. (2011, October 3). Retrieved March 15, 2014 from http://www.biosensors.com/intl/sites/ default/files/pdfs/newsroom/press/jwms_completion_news_update_3.10.11.pdf

8 Biosensors International Group. (2011, June 14). OCBC Investment Research.

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Management believes that China is one of the fastest growing DES markets in the world, with industry sources estimating the current market size to be worth approximately US$500 m. The new healthcare reform initiative by the Chinese government has also allowed stent treatment to be reimbursable under China’s basic medical insurance coverage. This would likely result in lower costs and increase the demand for stent treatments. Moreover, the changing demographics in China towards an ageing population and increasing prevalence of coronary diseases also augurs well for the DES market. Hence this acquisition is in line with BIG’s strategy to expand and consolidate its DES business in China. Nevertheless, we note that the industry is undergoing ASP9 erosion due to increasing competition although this should be mitigated by strong volume growth.

THE MEDICAL DEVICE INDUSTRY FOR CARDIOLOGY AND CRITICAL CARE PROCEDURES BIG’s primary product, coronary stents, were used during coronary balloon angioplasty to treat Coronary Artery Disease (CAD).10 CAD occurs when coronary arteries become narrowed or blocked by plaque. Over time, the arteries become hardened and less flexible resulting in the heart not getting the oxygen it needs. This could ultimately lead to chest pain and heart attack. There are several treatment options for CAD. Current treatments range from drug therapy to surgical intervention to restore the flow of oxygen to the heart. The aim of these therapies is to dilate the coronary vessels and increase blood supply to the heart. Current procedures used to treat CAD include stenting, balloon angioplasty and bypass surgery.11 Bypass surgery is considered more effective in some cases, but is invasive and costly. Balloon angioplasty, also known as Percutaneous Coronary Intervention (PCI), is a non-surgical procedure used to treat CAD. During PCI, a catheter containing a small balloon is inserted into arteries around the heart. The balloon is inflated, enlarging the inner diameter of the artery and increasing the blood flow. The balloon is then deflated and the catheter is removed. In the 1980s, PCI was taken one step further with the use of stents. A stent is a tiny, expandable metal coil that is inserted into the newly opened area of the artery following PCI, to help keep the artery from narrowing, closing or being blocked again (restenosis). Stenting reduces the rate of restenosis considerably, and the use of DES further reduces the rate of restenosis. The DES technology was introduced in the early 2000s and built on the use of bare-metal stent by coating drugs on them.12 With this technology, the drugs in the coating are slowly released into the artery wall around the stent to limit scar tissues during the healing process.13 The pros and cons of the treatment options for CAD are summarised in Exhibit 4 – Treatment Options for CAD. Approximately four million cases of PCI were conducted around the world annually in the 2010s. 14 According to Millennium Research Group, the overall Asia Pacific interventional cardiology market was expected to grow at a strong average rate of 12% per year through 2017. Most of this growth would come

9 Average selling price. 10 Yatsko, P. (2011). Biosensors International and China (A). Singapore-Stanford Biodesign Program Case.

Retrieved March 15, 2014 from http://biodesign.stanford.edu/bdn/resources/casestudies/chin-01- A_biosensors_111812.pdf.

11 No Longer Just One Nice Stent. (2012, February 6). CIMB Research Report. 12 Yatsko, P. (2011). Biosensors International and China (A). Singapore-Stanford Biodesign Program Case.

Retrieved March 15, 2014 from http://biodesign.stanford.edu/bdn/resources/casestudies/chin-01- A_biosensors_111812.pdf.

13 No Longer Just One Nice Stent. (2012, February 6). CIMB Research Report. 14 Deutsche Bank Markets Research. (2013, February 13). Competitive DES Launches in Near Term.

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from increased number of procedures in China and India, while procedural growth in Australia and South Korea will be flat.15

Market data also showed growing demand for DES within Asia Pacific outside of Japan. In the case of China, increasing urbanisation, disposable income and consumer purchasing power with a rapidly greying population, together with rising government expenditure in healthcare contributed to brisk growth in the country’s medical device market.16 In 2008, there were more than 180,000 PCI surgical cases in China. Stents used in PCI surgeries increased to 298,000 sets in 2008 from 40,000 sets in 2002.17 Market research firm Frost & Sullivan predicted China’s coronary stent market to expand at a 2007–2014 compound annual growth rate of 24%, with DES, used in 95% of cases, slated to dominate sales.18 Competition in the DES market in China was intense with a number of strong local competitors such as Ji Wei and Lepu Medical. Local companies tended to offer considerably cheaper devices, and had good long- term relationships with hospitals and doctors. Foreign companies were increasingly trying to level the playing field by creating local manufacturing and training centres, expanding their sales force, and through mergers and acquisitions.19 Furthermore, there was severe criticism about the extraordinary profit margin in the industry. 20 From early 2010s, to control healthcare costs, the Chinese government required hospitals to procure high-value devices through competitive tenders, which contributed to downward pressure on prices of these medical devices. Analysts expected that this ongoing tendering process would force a price reduction of 15–20% by mid-2010s, which would in turn impact the margin.21

POST-ACQUISITION FINANCIAL STATEMENTS AND ANALYSIS Matthew studied BIG’s annual report for FY2012 which showed the consolidated effects after the acquisition of JWMS. The balance sheets as at 31 March 2012 reported US$162 million of intangible assets and US$622 million of goodwill. Together, these two items constituted 95% of BIG’s non-current assets and 70% of its net assets as reported in the balance sheets. (See Exhibits 5, 6 and 7.) He further scrutinised the notes to the financial statements, which provided further details of these assets – US$156 million of intangible assets and US$608 million of goodwill – arising from consolidation were recognised following the acquisition of JWMS. He noted that BIG had performed an impairment review of the goodwill arising from the acquisition of JWMS and concluded that no impairment charge was necessary. (See Exhibit 8 – Excerpts from Notes to Financial Statements.)

15 Millennium Research Group. (2012, December). Asia Pacific Interventional Cardiology Market to Grow at a Strong

Annual Rate of 12 Percent through 2017. 16 Yatsko, P. (2011). Biosensors International and China (A). Singapore-Stanford Biodesign Program Case.

Retrieved March 15, 2014 from http://biodesign.stanford.edu/bdn/resources/casestudies/chin-01- A_biosensors_111812.pdf

17 Huidian Research. (2013). Research and Development Forecast of China’s Coronary Stent Industry, 2013–2017.

Retrieved March 15, 2014 from http://www.reportbuyer.com/business_government/ misc_business_services/research_development_forecast_china_s_coronary_stent_industry_2013_2017.html#utm _source=prnewswire&utm_medium=pr&utm_campaign=Research_and_Development.

18 Yats Yatsko, P. (2011). Biosensors International and China (A). Singapore-Stanford Biodesign Program Case.

Retrieved March 15, 2014 from http://biodesign.stanford.edu/bdn/resources/casestudies/chin-01- A_biosensors_111812.pdf

19 Millennium Research Group. (2012, December). Asia Pacific Interventional Cardiology Market to Grow at a Strong Annual Rate of 12 Percent through 2017.

20 China Youth. (2012, October 14). Half of the stents are not reasonably placed or priced. Retrieved March 15, 2014, from http://zqb.cyol.com/html/2012-10/14/nw.D110000zgqnb_20121014_2-02.htm.

21 OCBC Investment Research. (2013, April 9). Challenges Apparent, but Seeking Market Share Gains.

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Matthew was aware that overpaying for acquisitions was a key risk confronting many companies. He recalled reading a report by KPMG:22

Recent years have been characterised by continuously high M&A activity with business combinations offering companies a way of increasing and stabilising their earnings. As a result, businesses have sold at high prices. However, as well as opportunities, acquisitions have also presented risks. As an accounting consequence of their purchases, many companies have recognised high values of intangible assets, such as customer relationships, technology, brands and goodwill on their balance sheets. In some cases, these values even exceeded the amount of equity. For these purchasers there will be a significant negative impact on earnings in future periods due to the scheduled amortisation of intangible assets arising from their acquisitions. Furthermore, there is a possibility that any goodwill arising from the business combination may be considered impaired in future periods, with the associated impairment charge reducing earnings further.

Matthew checked the closing share price of BIG for the day (2 July 2012) and noted that it was S$1.23. With 1,723 million shares outstanding, he computed BIG’s market value at S$2,119 million as at 2 July 2012, which translated to US$1,670 million, with an exchange rate of S$1.2686/US$ as at 2 July 2012.23 He extracted the 52-week (July 2011 to July 2012) share price range (Yahoo! Finance) for BIG. At a price range between S$1.09 to S$1.70, the implied range of market value for BIG within this period was S$1,878 million to S$2,929 million (US$1,480 million to US$2,309 million). He compared this with the net book value per the annual report for FY2012. Matthew decided to take a closer look into the acquisition of JWMS so as to better understand the assets that were acquired and how the transaction was accounted for in the financial statements of BIG. In particular, he felt that special attention should be given to the impairment review of the goodwill arising from the acquisition of JWMS since it was a highly significant amount and impairment reviews were highly judgemental processes.

22 KPMG. (2010). Intangible Assets and Goodwill in the Context of Business Combinations an Industry Study. KPMG

AG Wirtschaftsprüfungsgesellschaft. 23 International Monetary Fund. Retrieved March 15, 2014 from https://www.imf.org/external/np/fin/data/

rms_mth.aspx?SelectDate=2012-07-31&reportType=CVSDR

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EXHIBIT 1

PRINCIPAL PRODUCTS OF BIG

Source: No Longer Just One Nice Stent. (2012, February 6). CIMB Research Report.

The table below shows the Group’s revenue and the principal components of the revenue, as a percentage of total revenue, for the respective years indicated:

FY2012 FY2011

US$’000 % US$’000 %

Critical care 14,624 5 12,988 8

Interventional cardiology 196,739 67 126,434 81

Total product revenue 211,363 72 139,422 89

Licensing revenue 80,778 28 17,171 11

Total revenue 292,141 100 156,592 100

Source: BIG. (2011/12). Annual Report, p 10.

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Interventional cardiology $’000

Critical care $’000

Licensing revenue $’000

Total $’000

2012

Segment revenue 196,739 14,624 80,778 292,141

Segment gross profit 147,748 6,043 80,778 234,569

Segment results 33,497 (8,258) 80,778 106,017

Unallocated corporate income 279,724

Unallocated corporate expenses (24,278)

Financial income 2,178

Financial expenses (6,022)

Share of results of joint-venture company 8,012

Profit before tax 365,631

Income tax (1,363)

Net profit for the year 364,268

Source: BIG. (2011/12). Annual Report, p 125.

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EXHIBIT 2

CORPORATE STRUCTURE OF BIG AS AT 31 MARCH 2012

Source: BIG. (2011/12). Annual Report.

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EXHIBIT 3

SUBSTANTIAL SHAREHOLDERS (AS SHOWN IN THE REGISTER OF SUBSTANTIAL SHAREHOLDERS) AS AT 13 JUNE 2012

Direct Interest Deemed Interest

Name of Substantial Shareholders No. of Shares % No. of Shares %

1. Weigao Holding Company Limited(a) - - 370,000,000 21.47

2. Shandong Weigao group Medical Polymer Company Limited(b)

- - 370,000,000 21.47

3. Weigao International Medical Company Limited(c)

- - 370,000,000 21.47

4. Wellford Capital Limited - - 370,000,000 21.47

5. Autumn Eagle Limited 269,312,200 15.63 - -

6. Hony Capital Fund 2008 LP.(d) - - 269,312,200 15.63

7. Hony Capital Fund 2008 GP LP.(e) - - 269,312,200 15.63

8. Hony Capital Fund 2008 GP Limited(f) - - 269,312,200 15.63

9. Hony Capital Fund Management Limited(g)

- - 269,312,200 15.63

10. Right Lane Limited(h) - - 269,312,200 15.63

11. Legend Holdings Limited(i) - - 269,312,200 15.63

12. John Zhao(j) - - 269,312,200 15.63

13. Atlantis Capital Holdings Limited(k) - - 130,346,000 7.56

14. Ever Union Capital Limited 108,162,900 6.28 - -

(1) FMR LLC; (2) FIL Limited; and (3) Edward C. Johnson 3rd(l)

- - 99,004,000 5.75

Notes:

(a) Weigao Holding Company Limited (Weigao Holding) owns about 49.5% of Shandong Weigao Group Medical Polymer Company Limited (Shandong Weigao) which owns 100% of equity interest in Weigao International Medical Company Limited and Wellford Capital Limited. Weigao Holding is therefore deemed interested in the 370,000,000 shares which in turn owns 100% of Wellford Capital Limited.

(b) Shandong Weigao Group Medical Polymer Company Limited (Shandong Weigao) owns 100% of Weigao

International Medical Company Limited (Weigao International) which in turn owns 100% of Wellford Capital Limited. Shandong Weigao is therefore deemed interested in the 370,000,000 shares held by Wellford Capital Limited.

(c) Weigao International Medical Company Limited (Weigao International) owns 100% of Wellford Capital

Limited. Weigao International is therefore deemed interested in the 370,000,000 shares held by Wellford Capital Limited.

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(d) Hony Capital Fund 2008 L.P. owns 100% of Autumn Eagle Limited. Accordingly, Hony Capital Fund 2008 L.P. is deemed interested in the shares held by Autumn Eagle Limited.

(e) Hony Capital Fund 2008 GP L.P. is the general partner of Hony Capital Fund 2008 L.P. which in turn owns

100% of Autumn Eagle Limited. Accordingly, Hony Capital Fund 2008 L.P. is deemed interested in the shares held by Autumn Eagle Limited.

(f) Hony Capital Fund 2008 GP Limited is the general partner of Hony Capital Fund 2008 GP L.P., which

in turn is the general partner of Hony Capital Fund 2008 GP L.P. Hony Capital Fund 2008 L.P. owns 100% of Autumn Eagle Limited. Accordingly, Hony Capital Fund 2008 GP Limited is deemed interested in the shares held by Autumn Eagle Limited.

(g) Hony Capital Management Limited has a controlling interest in Hony Capital Fund 2008 GP Limited

which in turn is the general partner of Hony Capital Fund 2008 L.P. Hony Capital Fund 2008 GP L.P. is the general partner of Hony Capital Fund 2008 L.P. which in turn owns 100% of Autumn Eagle Limited. Accordingly, Hony Capital Management Limited is deemed interested in the shares held by Autumn Eagle Limited.

(h) Right Lane Limited has a shareholding interest in Hony Capital Management Limited which in turn has

a controlling interest in Hony Capital Fund 2008 GP Limited. Hony Capital Fund 2008 GP Limited is the general partner of Hony Capital Fund 2008 GP L.P. Hony Capital Fund 2008 GP L.P. is the general partner of Hony Capital Fund 2008 L.P. which in turn owns 100% of Autumn Eagle Limited. Accordingly, Right Lane Limited is deemed interested in the shares held by Autumn Eagle Limited.

(i) Legend Holdings Limited owns 100% of Right Lane Limited. Right Lane Limited has a shareholding

interest in Hony Capital Management Limited which in turn has a controlling interest in Hony Capital Fund 2008 GP Limited. Hony Capital Fund 2008 GP Limited is the general partner of Hony Capital Fund 2008 GP L.P. Hony Capital Fund 2008 GP L.P. is the general partner of Hony Capital Fund 2008 L.P. which in turn owns 100% of Autumn Eagle Limited. Accordingly, Legend Holdings Limited is deemed interested in the shares held by Autumn Eagle Limited.

(j) John Zhao is the Chief Executive Officer of Hony Capital. Mr Zhao has a shareholding interest in Hony

Capital Management Limited which in turn has a controlling interest in Hony Capital Fund 2008 GP Limited. Hony Capital Fund 2008 GP Limited is the general partner of Hony Capital Fund 2008 GP L.P. Hony Capital Fund 2008 GP L.P. is the general partner of Hony Capital Fund 2008 L.P. which in turn owns 100% of Autumn Eagle Limited. Accordingly, Mr Zhao is deemed interested in the shares held by Autumn Eagle Limited.

(k) Atlantis Capital Holdings (Atlantis) is deemed to be interested in the 130,346,000 shares held in

discretionary accounts managed by Atlantis. (l) FID FDS – SOUTHEAST ASIA POOL; FID FDS – ASEAN POOL; FID FDS – PACIFIC POOL; FIDELITY

SOUTH EAST ASIA FUND; FID FDS – SINGAPORE POOL; FA INT SOUTH EAST ASIA SUB; FID INFORMTN TECH CENTRAL FD; FID KOREA ASEAN EQ IT MTHR; SELECT TECHNOLOGY; FIJ IT JPN ASIA GROWTH MOTHER; VIP TECHNOLOGY PORTFOLIO; FA TECHNOLOGY FUND; FID PACIFIC BASIN FUND FIDELITY CHINA SPECIAL SIT PLC and FID FDS – ASIAN SMALLER COS PL are deemed interested in the shares held by (1) FMR LLC; (2) FIL Limited; and (3) Edward C. Johnson 3d.

Source: BIG. (2011/12). Annual Report, p 130.

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EXHIBIT 4

TREATMENT OPTIONS FOR CAD

Treatment Options for CAD

Procedure Advantages Disadvantages

Coronary Bypass Surgery

During coronary artery bypass surgery, the cardiac surgeon makes an incision in the patient’s chest and surgically bypasses the clogged artery with a healthy blood vessel taken from the patient’s chest or leg. The aim of coronary bypass surgery is to re-establish adequate blood flow to the heart.

More effective in some cases.

Invasive and costly, requires general anaesthesia and a long stay in the hospital.

Percutaneo-us Coronary Intervention (PCI)

PCI, sometimes referred to as balloon angioplasty, is a non-surgical procedure used to treat CAD. During PCI, a catheter containing a small balloon is inserted into arteries around the heart. The balloon is inflated, enlarging the inner diameter of the artery and increasing the blood flow. The balloon is then deflated and the catheter is removed.

There is no big incision or need for general anaesthesia, so the hospital stay is shorter when compared to bypass surgery.

Without a stent, the treated artery may narrow and become blocked again (restenosis).

Stenting After widening the artery by angioplasty, a new catheter with a stent mounted over a balloon is positioned inside the widened artery. The balloon is then inflated, causing the stent to expand. When the balloon is deflated and withdrawn, the stent remains in place, serving as a permanent support for the artery. After it is placed in a blood vessel, new tissue grows inside the stent. This is part of the healing process.

Small, expandable, tubular metal mesh scaffolds are implanted in the artery to help prevent the narrowing of the arteries that can occur following PCI.

Sometimes during the healing process, scar tissue may form underneath the new healthy lining and obstruct blood flow, causing blockages. This is known as ‘in-stent restenosis’.

Stenting – DES Next-generation stent technology (drug- eluting stent) was introduced in the early 2000 with stents that have a unique drug coating to prevent in-stent restenosis.

With this technology, the drug in the coating is slowly released into the artery wall around the stent to help limit scar tissue during the healing process. These stents have demonstrated superior safety (low levels of thrombosis) and efficacy (low levels of restenosis).

Source: Adapted from No longer just one nice stent. (2012, February 6). CIMB Research Report.

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EXHIBIT 5

BALANCE SHEETS AS AT 31 MARCH 2012 (US$)

Note Group Company

2012 2011 2012 2011

$'000 $'000 $'000 $'000

Non-current assets

Property, plant and equipment 4 42,955 11,998 - -

Investment in subsidiaries 5 - - 584,708 43,682

Interest in a joint-venture company 6 - 115,942 - 68,142

Intangible assets 7 162,008 2,758 1,534 1,746

Goodwill 8 622,181 16,536 1,880 3,761

Deferred tax assets 23 472 1,449 - -

Long term loans to subsidiaries 9 - - 13,762 13,346

Current assets

Inventories 10 34,517 21,603 - -

Trade receivables 11 70,591 40,282 - -

Due from a joint-venture company (trade) 12 - 2,583 - -

Other receivables 13 2,755 1,476 - 19

Deposits 588 544 -

Prepayments 7,645 3,370 66 317

Due from a subsidiary (trade) 14 - - 6,539 1,271

Due from subsidiaries (non-trade) 15 - - 17,678 10,465

Cash and cash equivalents 16 313,531 259,438 162,046 230,233

429,627 329,296 186,329 242,305

Current Liabilities

Trade payables 17 (7,610) (2,295) - -

Due to a joint-venture company (trade) 12 - (21) - -

Due to subsidiaries (non-trade) 15 - - (6,266) (3,489)

Provision for income tax (23,944) (28,884) - -

Other payables (13,132) (5,553) (600) (1,170)

Accruals 18 (19,060) (13,839) (1,209) (1,348)

Provisions 19 (2,864) (3,227) - -

Finance lease liabilities 20 (35) (23) - -

Bonds payable 21 (37,010) - (37,010) -

Financial liabilities at fair value through profit or loss

22 (11,841) (7,698) (11,841) (7,698)

(115,496) (61,540) (56,926) (13,705)

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EXHIBIT 5

BALANCE SHEETS AS AT 31 MARCH 2012 (US$) (CONTINUED)

Note Group Company

2012 2011 2012 2011

Net current assets 314,131 267,756 129,403 228,600

Non-current liabilities

Deferred tax liabilities 23 (21,540) (1,998) (433) (388)

Finance lease liabilities 20 (35) (70) - -

Pension funds 24 (2,505) (1,584) - -

Bonds payable 21 - (34,266) - (34,266)

1,117,667 378,521 730,854 324,623

Equity

Share capital 25 115 89 115 89

Share premium 26 713,187 346,015 713,187 346,015

Other reserves 27 14,556 16,196 14,556 16,196

Translation Reserves 28 27,173 17,853 - -

Accumulated profits/(losses) 362,636 (1,632) 2,996 (37,677)

Total equity 1,117,667 378,521 730,854 324,623

Source: BIG. (2011/12). Annual Report.

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EXHIBIT 6

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2012 (US$)

Note Group

2012 2011

$'000 $'000

Revenue 29 292,141 156,594

Cost of sales (57,572) (34,502)

Gross profit 234,569 122,092

Other income 30 280,795 694

Sales and marketing expenses (78,252) (44,289)

General and administrative expenses (30,607) (21,060)

Research and development expenses (21,168) (16,687)

Other operating expenses (23,874) (5,757)

Profit from operations 32 361,463 34,993

Financial income 34 2,178 119

Financial expenses 35 (6,022) (5,257)

Share of results of a joint-venture company 6 8,012 19,250

Profit before tax 365,631 49,105

Income tax 23 (1,363) (5,839)

Profit for the year 364,268 43,266

Earnings per share 36

-Basic (US$ cents) 24.12 3.99

-Diluted (US$ cents) 23.63 3.88

Source: BIG. (2011/12). Annual Report.

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EXHIBIT 7

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MARCH 2012 (US$)

Note Group

2012 2011

$'000 $'000

Cash flows from operating activities

Profit before tax 365,631 49,105

Adjustments:

Gain on re-measurement of investment in joint-venture company

(273,245) -

Realisation/(unrealised) profit arising from transactions with a joint-venture company

859 (625)

Impairment of goodwill 12,232 -

Impairment of property, plant and equipment 100 -

Depreciation of property, plant and equipment 4,665 2,550

Gain on disposal of property, plant and equipment - (1)

Property, plant and equipment written off 80 197

Negative goodwill arising from acquisition of a business - (194)

Share of results of a joint-venture company (8,012) (19,250)

Realisation of translation gain on investment in joint-venture company

(6,362) -

Amortisation of intangible assets 8,611 368

Intangible assets written off - 111

Inventories written off 89 270

Write-down of inventories 1,584 1,402

Allowance for doubtful trade debts, net 1,622 41

Write-back for doubtful non-trade debts, net (32) (219)

Fair value adjustments for financial liabilities through profit or loss

4,143 4,936

Provision/(write-back) for warranty, net 140 (88)

Provision for sales return, net 1,573 690

Amortisation of deferred revenue - (527)

Share-based payment expenses 1,763 1,954

Interest expenses 6,022 5,257

Interest income (2,178) (119)

Unrealised foreign exchange differences 3,984 3,147

Operating cash flows before working capital changes 123,269 49,005

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EXHIBIT 7

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MARCH 2012 (US$) (CONTINUED)

Note Group

2012 2011

$'000 $'000

Operating cash flows before working capital changes 123,269 49,005

(Increase)/decrease in:

Inventories 1,744 (4,252)

Trade and other receivables (20,403) (16,304)

Amount due from a joint-venture company 2,583 985

Increase/(decrease) in:

Trade payables, other payables, accruals and provisions (12,928) 3,392

Amount due to a joint-venture company (22) (18)

Pension funds 962 376

Cash generated from operations 95,205 33,184

Income tax paid, net (12,937) (2,396)

Interest income received 2,178 119

Interest expenses paid (3,389) (3,154)

Net cash generated from operating activities 81,057 27,753

Cash flows from investing activities

Purchase of property, plant and equipment (5,248) (2,883)

Purchase of intangible assets (9,325) (55)

Proceeds from sale of property, plant and equipment 140 98

Acquisition of subsidiaries, net of cash acquired 41 (17,245) -

Acquisition of assets through business combinations - (6,800)

Net cash used in investing activities (31,678) (9,640)

Cash flows from financing activities

Proceeds from issuance of new shares 7,665 176,212

Repayment of finance leases (23) (92)

Net cash generated from financing activities 7,642 176,120

Net increase in cash and cash equivalents 57,021 194,233

Cash and cash equivalents at beginning of year 259,438 60,083

Net effects of exchange rate changes on cash and cash equivalents

(2,928) 5,122

Cash and cash equivalents at end of year 16 313,531 259,438

Source: BIG. (2011/12). Annual Report.

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EXHIBIT 8

EXCERPTS FROM NOTES TO FINANCIAL STATEMENTS 2.8 Intangible assets (i) Goodwill Goodwill on acquisition is initially measured at cost, being the excess of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets acquired, the difference is recognised in profit or loss. Goodwill on acquisitions of subsidiaries is shown on the face of the consolidated balance sheet whereas goodwill on acquisitions of joint-venture companies is recorded as part of the carrying value of the related investment. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the cash-generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquired are assigned to those units. The cash-generating unit to which goodwill has been allocated is tested for impairment annually and whenever there is an indication that the cash-generating unit may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cash-generating unit (or group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised in profit or loss. Impairment losses recognised for goodwill are not reversed in subsequent periods. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation in determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash- generating unit retained. (ii) Other intangible assets Other intangible assets consist of computer software costs, development costs, patent costs, customer relationships and land use rights. Intangible assets acquired separately are measured initially at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial acquisition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. Intangible assets are assessed for impairment whenever there is indication that intangible asset may be impaired. The amortisation period and the amortisation method for intangible assets are reviewed at least at each balance sheet date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible assets. Amortisation is calculated on a straight-line basis over the estimated useful lives of intangible assets as follows:

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Computer software costs 3 years Development costs 3 years Patent costs 10 years Customer relationships 10 years Land use rights 30 and 46 years Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is derecognised. No amortisation charge is expensed for intangible assets not available for use. Intangible assets not available for use are tested for impairment annually either individually or at the cash-generating unit level. 3. Significant accounting estimates and judgements The preparation of the financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the balance sheet date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the assets or liability affected in future periods. a) Key sources of estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Impairment of goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. The value in calculation is based on a discounted cash flow model. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected cash-in-flows and the growth rate used for extrapolation purposes. The carrying amount of goodwill at 31 March 2012 was $622,181,000 (2011: $16,536,000). More details are given in Note 8. Amortisation of intangible assets The cost of intangible assets is amortised on a straight-line basis over the estimated useful life. Management estimates the useful life of these intangible assets to be 30 and 46 years for land use rights, and 3 and 10 years for other intangible assets. Changes in the expected level of usage and technological developments could impact the economic useful life of these assets, therefore future amortisation charges could be revised. The carrying amount of the Group’s intangible assets as at 31 March 2012 was $162,008,000 (2011: $2,758,000). More details are given in Note 7. Source: BIG. (2011/12). Annual Report, pp 58–59, 71–72.

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7. Intangible Assets

Group

Computer Software

Costs

Patents Development costs

Customer relationships

Land use

rights

Total

$’000 $’000 $’000 $’000 $’000 $’000

Cost

As at 1 April 2011 1,391 1,744 750 1,127 - 5,012

Additions 516 3,877 - - 4,932 9,325

Additions via business combinations (Note 41)

- 18,825 - 135,128 1,841 155,794

Disposals (5) - - - - (5)

Translation differences 47 334 - 2,335 34 2,750

As at 31 March 2012 1,949 24,780 750 138,590 6,807 172,876

Accumulated amortisation and impairment loss

As at 1 April 2011 1,065 73 750 366 - 2,254

Amortisation for the year 424 1,194 - 6,973 20 8,611

Disposals (2) - - - - (2)

Translation differences (144) 131 - 15 3 5

As at 31 March 2012 1,343 1,398 750 7,354 23 10,868

Net book values

As at 31 March 2012 606 23,382 - 131,236 6,784 162,008

The average remaining amortisation periods for the computer software, patents, customer relationships and land use rights are as follows:

Group

2012 2011

Computer software costs 2 years 3 years

Customer relationships 5 to 9 years 6 years

Patents 9 to 10 years 10 years

Land use rights 30 to 46 years -

Land use rights amounting to $4,932,000 are not amortised as at 31 March 2012 as the lease period is from 1 April 2012.

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8. Goodwill

Group Company

2012 2011 2012 2011

$'000 $'000 $'000 $'000

Cost

As at 1 April 23,094 18,036 3,761 -

Additions via business combinations (Note 41)

607,670 3,761 - 3,761

Translation differences 10,479 1,297 - -

As at 31 March 641,243 23,094 3,761 3,761

Accumulated impairment loss

As at 1 April 6,558 6,441 - -

Additions 12,232 - 1,881 -

Translation differences 272 117 - -

As at 31 March 19,062 6,558 1,881 -

Net book values

As at 31 March 622,181 16,536 1,880 3,761

Goodwill arising from acquisitions is allocated to the Group’s cash-generating units as follows:

Group Company

2012 2011 2012 2011

$'000 $'000 $'000 $'000

BSI* - 10,095 - -

Bio Japan - 537 - -

Indonesia market for BIT 2,152 2,143 - -

Bifurcation stents 1,880 3,761 1,880 3,761

JWMS 618,149 - 0 -

622,181 16,536 1,880 3,761

Source: BIG. (2011/12). Annual Report, pp 79–83.

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8. Goodwill (continued) The Group has performed an impairment review of the carrying amount of goodwill annually or more frequently if there are indications that goodwill might be impaired. For the purposes of the impairment testing, goodwill acquired has been allocated to individual cash-generating units which are reviewed for impairment based on forecast operating performance and cash flows. Cash flow projections are based on budgets/forecast for the next 5 years prepared on the basis of assumptions reflective of the prevailing market conditions, and are discounted appropriately. The value-in-use calculations are most sensitive to the following key assumptions:

JWMS

% BSI*

% Bio Japan

%

Indonesia market for BIT

Bifurcation stents

% %

Average growth rate 18 8 (2011: 12) - (2011: -) 8 (2011: 11) 15 (2011: 21)

Terminal growth rate# 2 - (2011: 2) - (2011: -) - (2011: -) - (2011: -)

Pre-tax discount rate 12 13 (2011: 13) 10 (2011: 10) 17 (2011: 17) 16 (2011: 20)

* Cash-generating unit comprises BSI and JWICU. # Growth rate used to extrapolate cash flows beyond the forecasted period. These assumptions have been used for the analysis of each cash-generating unit (CGU) within the business segment. Management determined budgeted gross margin based on past performance and its expectations of market development. The discounted rate used reflects business specific risks relating to the relevant industry, business life-cycle and geographical location. During the financial year, impairment loss was recognised to write down the carrying amount of goodwill to the recoverable amount of the cash-generating units. The impairment losses of $12,232,000 were attributable to the cash-generating units of BSI, Bio Japan and Bifurcation stents and were recognised in other operating expenses. Source: BIG. (2011/12). Annual Report, pp 82–83.

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41. Business Combinations Acquisitions in Year 2012 Acquisition of Subsidiaries On 3 October 2011 (the acquisition date), the Company acquired an additional 50% interest in JWMS, a joint-venture company. Upon acquisition, JWMS became a subsidiary of the Group. The Company acquired the additional 50% interest in JWMS by acquiring 100% interest in TSL, which holds 100% interest in WMI, which in turn holds the additional 50% interest in JWMS. The Group acquired JWMS for operational management and expansion into the China market. The fair value of the identifiable assets and liabilities of TSL, WMI and JWMS as at the acquisition date were:

Fair value recognised on

acquisition $’000

Property, plant and equipment (Note 4) 30,321

Intangible assets (Note 7) 155,794

Inventories 16,165

Trade and other receivables 11,504

Deposits and prepayments 5,256

Cash & bank balances 105,086

324,126

Trade payables and other liabilities (28,688)

Provision for income tax (5,620)

Deferred tax liability (21,027)

(55,335)

Total identifiable net assets at fair value 268,791

Goodwill arising from the acquisition (Note 8) 607,670

876,461

Consideration transferred for the acquisition

Cash paid 122,331

Equity instruments issued (260,000,000 ordinary shares of the company) 229,581

Equity instruments issued (convertible note converted into 110,000,000 shares of the Company) 126,549

Total consideration transferred 478,461

Fair value of equity interest in JWMS held by Group immediately before the acquisition 398,000

876,461

Effects of the acquisition on cash flows

Total consideration for the 50% equity interest acquired 478,461

Less: non-cash consideration (356,130)

Consideration settled in cash 122,331

Less: cash and cash equivalents of subsidiaries acquired (105,086)

Net cash flow on acquisition 17,245

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Equity instruments issued as part of consideration transferred In connection with the acquisition, the Company issued 260,000,000 ordinary shares with a fair value of S$1.155 each and convertible notes with a fair value of $126,549,000. The fair value of the ordinary shares is the published price of the shares at the acquisition date. The fair value of the convertible note is valued using an appropriate valuation model at the acquisition date. Gain on re-measuring previously held equity interest in JWMS to fair value at acquisition date The group recognised a gain of $273,245,000 as a result of re-measuring at fair value its 50% equity interest in JWMS held before the business combination. The gain is included in other income in the Group’s profit or loss for the year ended 31 March 2012. Transaction costs Transaction costs related to the acquisition of $262,000 have been included in general and administrative expenses in the Group’s profit or loss for the year ended 31 March 2012. Trade and other receivables acquired Trade and other receivables comprises of trade and non-trade receivables, with fair values of $10,445,000 and $1,059,000, respectively. Their gross amounts are $10,669,000 and $1,059,000 respectively. At the acquisition date, $224,000 of the contractual cash flows pertaining to trade receivables are not expected to be collected and the full contractual amount of other receivables can be collected. Goodwill arising from acquisition Goodwill comprises the fair value of expected synergies arising from the acquisition and is allocated entirely to JWMS, which is in the interventional cardiology segment. None of the goodwill recognised is expected to be deductible for income tax purposes. Impact of the acquisition on profit or loss From the acquisition date, JWMS has contributed approximately 17% of revenue and approximately 2% of the Group’s profit for the year. If the business combination had taken place at the beginning of the year, the revenue from continuing operating would have been approximately 17% higher and the Group’s profit for the year, net of tax would have been approximately the same. Source: BIG. (2011/12). Annual Report, pp 119–121.

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