CASE STUDY

Total Marks: 100 Time: 4 Hours

Instructions:

1. Check that your question paper contains all the exhibits as mentioned in page 3.
Theconsecutive page numbering may be found under the base line at the foot of
each page.

2. Use the answer script provided by the Institute. Write your name, roll no.,
registrationno. and name of the subject on the upper portion of the cover page of the
answer script.

3. Candidates are asked not to write any particulars of identification in any other place
ofthe answer script and additional pages if taken.

4. Questions must be answered in English.

5. The answer should be referenced to the relevant workings.

6. Answer script and additional page(s) taken to write answer, used or unused, must
not beremoved or taken away from the Examination Hall.

1
Requirements & Marks Allocation:

You are Abir Jawad, a senior articled student of Hassan Masud & Co., Chartered Accountants. The
senior partner of the firm, Masudur RahmanFCA,as an advisor of Sunmoon Pharmaceuticals Bangladesh
Ltd. (SPBL), has received an assignment e-mail from Mr. Abid Hasan, Managing Director, SPBL (Exhibit
1). Mr. Masud has asked you, Abir Jawad, to prepare a report covering all the requirements stated in
the e-mail of Mr. Abid Hasan.Your report should comprise the following elements:

An executive summary
Your response to the requirement (1) (2) and (3) stipulated in Exhibit 1stating clearly any
assumption(s) that you make.

Marks Allocation:

All of the marks in the Case Study are awarded for the demonstration of professional skills, allocated
broadly as follows:

Requirements Profession Skills Total

Assimilati Structuring Applying Conclusio Integrative
ng and Problems Judgment ns and & multi-
using and making disciplinary
informati solutions recommen skills
on dations
Executive Summary 3 5 4 3 - 15
Requirement (1) (a) 6 8 8 6 2 30
(b) 4 5 6 4 1 20
Requirement (2) 4 6 6 3 1 20
Requirement (3) 3 4 4 3 1 15

Total 20 28 28 19 5 100

In planning your report, you should be aware that not attempting one of the requirements,
includingan executive summary, will have a significantly detrimental effect on your chances of
success. In addition, as indicated above, all four skills areas will be assessed under each of the four
elements of your report.

You should be clear that marks are awarded for demonstrating your professional skills, not for
reproducing facts from the case. In order to be successful, you will need to:

Demonstrate your knowledge of the case material and make use of your analysis.
Carryout relevant analysis of the problems and structure your proposed solutions
Apply your judgment on the basis of the analysis that you have carried out
Draw conclusions from your analysis and judgment, and develop them into practical commercial
recommendations.
Ethical issues which may cover the following topic-
- Lack of professional independence or objectivity
- Conflict of interest among stakeholders
- Doubtful accounting or commercial practice or market competition
- Inappropriate pressure to achieve a reported result.
Integrative & multidisciplinary skills may cover the following areas-
- Environmental issues
- Social, public health,economic andother non-financial issues having bearing upon public
interest.

2
 LIST OF EXHIBITS

Exhibit Description Page

reference

1 E-mail from Abid Hasan, Managing Director of Sunmoon 4-8

Pharmaceuticals Bangladesh Ltd. (SPBL), to Masudur
RahmanFCA, Partner in Hassan Masud & Co., Chartered
Accountants.

2 SPBL Management Accounts for the years 2011-2014. 9-12

3 SPBLs own review on its business operations. 13-14

4 A write upon up-gradation of IT System for payroll management 15-15

and improving distribution functionalities.

5 A proposal from TDCL Distribution Company for distribution of

16-16
SPBLs products.

Extract of the Government rules on drug administration and

6 17-17
social aspect of drug marketing in Bangladesh

7 News cuttings relating to pharmaceuticals industry 18-18

3
 EXHIBIT- 1
E-MAIL

From :Abid Hasan, Managing Director, SPBL

To :Masudur Rahman FCA, Business Advisor, SPBL & Senior Partner, Hasan Masud & Co.

Re :Sunmoon Pharmaceuticals Bangladesh Ltd. (SPBL)

Date :04May 2015

Dear Mr. Masud,

Thank you for accepting your appointment by the Board of Directors (BOD) of Sunmoon Pharmaceuticals
Bangladesh Ltd. (SPBL)as our business advisor.Please find below information and management
accounts for four years from 2011 to 2014 (Exhibits -2)and exhibits 3to 7for your analysis to draw your
conclusion and recommendations for the requirements stated below:

Shareholdings and related companies:

SPBLis locally incorporated in 2007in Bangladesh under Companies Act 1994. 85 percent of 2 million
shares of Tk. 10 each is owned bySunmoon Pharmaceuticals Plc., U.K, the parent company of SPBL.10
percent shares hold by general public of the country, three percent shares hold by the Financial
Institutions and rest shares are owned by Government of Bangladesh represented by the Ministry of
Finance (MoF).SPBL made net profit for years and it did not declare dividend till date.

Redius Pharmaceuticals is incorporated in Germany.Sunmoon Pharmaceuticals, U.K. holds 75% shares

ofRedius Pharmaceuticals, Germany. Redius declared dividend every year at stable rate of 40%. There
was no dividend withholding tax in Germany.

Products and Regulatory approvals

SPBLhas been producing 45 products in two broad segments (cardiovascular and generic formulation
products) and imports diabetes product from Denmark. The company markets its product in Bangladesh
with due diligence and regulatory approvals of Drug Administration Bangladesh (DAB). It also exports its
manufactured products in Taiwan.SPBL imports raw materials from Radius Pharmaceuticals, Germany
since inception at 10 percent higherprice than its (Radius) usual standard selling price.SPBL received
Good Manufacturing Practice (GMP) approval from Taiwan Food and Drug Authorityand is likely get
approval from Food and Drugs Administration, USA. However, SPBL has yet not set-up its own effluent
treatment plant (ETP) for which Directorate of Environment under Ministry of Forest and Environment,
Bangladesh has penalized Tk. 20,000 andserved a notice to SPBL to comply with the statutory
requirements in this regard by December 31, 2015. The company plans to take care of these aspects
while implementing the expansion plan which will include launching of CFC free inhaler for Asthma
treatment. The ETP will cost at least Tk. 10million.

Auditors observations:

Up to 2012, SPBLs Auditors, SNG & Company, Chartered Accountants has audited the management
accountswithout any audit qualification.In 2013 also, they have audited the management accounts with
no change but made following note of suggestions:

To recognize deferred taxation accounting under Bangladesh Accounting Standards (BAS) 12.

To comply with the requirements of Bangladesh Labour Law 2006 as amended in 2013 i.e. to
deductwages for un-approved leave of workers on basic wages instead of gross wages.

To deposit 10 percent of Workers Profit participation Fund (WPPF) to Government Workers

Welfare Foundation as required by the said labour law.

4
Management view on the auditors suggestions:

Since there are no temporary differences between accounting and taxation bases on account of
gratuity and depreciation, management of SPBL holds that BAS 12 is not applicable.

The payroll software used by the SPBL was developed on the basis of Labour Laws prevailed
before 2013 which allowed deductions on gross wages. The software needs up-gradation to
accommodate the amended law which required time and therefore could not be made effective in
2013. However, SPBL management has issued a work order to upgrade the said software in the
middle of July 2014 to ABC Limited (ABC), who originally developed payroll system of the
company. The said company took time to upgrade the software and could not implement the
same before July 2015. Management estimates that the excesses deduction of wages would not
exceed Tk. 10,000during July-December 2013 and Tk. 25,000for the year 2014. These amounts
will be refunded to the respective workers when the upgraded software goes live in 2015.

The SPBL management views that the deposit to Government Workers Welfare Foundation is
not a company matter since it has been regularly charging 5% of its profit to WPPF and make the
payment to the WPPF Trust as per Law. For financial year 2013, WPPF Trust allocated the fund
between Workers Profit Participation Fund (WPPF) and Workers Welfare Funds (WWF) at a rate
of 80: 20 basis and distributed amongst workers in June 2014. The 5 percent profit for 2014 will
be allocated and distributed in 2015 as per law after completion of audit.

About 2014 audited accounts:

The statutory audit of SPBL for the year 2014 is ongoing. However, the management is confident that like
previous years, the auditors will issue audit report for 2014 based on the management accounts without
any note of qualification orreporting matters of emphasis. This confidence is reiterated by the Chief
Financial Officer (CFO) who was an alumnus of the audit firm, SNG & Company, Chartered Accountants.
Moreover, two junior auditors who has been assigned for carrying out 2014 audit has shown keen
interest to join as employee of SPBL after completion of the audit. Also SPBL supported the medical
expenses for treatment of a relative of Audit Manager of SNG & Company from SPBL Workers Welfare
Fund.

Tax implication:

Corporate tax rate in Bangladesh for SPBL being a listed companyis @25%; in Germany@ 20% and in
U.K. @ 22%. Bangladesh Government (GOB) has double tax treaty agreement (DTA) with the
Government of U.K. since 2005.

Employee Separation Benefits gratuity:

SPBL introduced gratuity in 2011 but recognized in management accounts on cash basis. No gratuity
was paid in 2014. Tax authority allowed gratuity expenses when it is paid in cash. The company has a
gratuity policy for permanent employees who have served the company at least 5 years. The number of
employees in the company for relevant years are as follows:

2011 2012 2013 2014

Average gross salary/month (Taka) 4,000 5,000 5,,500 5,500
Average basic salary /month (Taka) 2,000 2,500 2,500 2,500
No. of total employees 50 80 90 100
No. of employees eligible for gratuity:
Years served (average) = 5 years (employees) 10 2 3 5
Years served (average) = 6 years (employees) - 5 1 2
Years served (average) = 7 years (employees) - - 3 1
Years served (average) = 8 years (employees) - - - 1
Total 10 7 7 9
Gratuity payments during the year - 5 3 3

5
Fixed Assets recognition and depreciation policies:

Full depreciation is charged for the year of acquisition while no depreciation is charged for year
of disposal.
Most vehicles and other tangible assets such as major IT items are acquired by way of finance
leases.
Plant and machinery and factory building depreciated at a same rate and methods as prescribed
rd
in the 3 schedule of I.T.O. 1984. However, tax base depreciation differs with the account base
depreciation on the following ways:
o Motor vehicles depreciation in management accounts is charged on cost of acquisition
but tax purpose depreciation on motor vehicles is restricted to cost of Tk. 2 million
o In the previous years, depreciation on capitalized repairing costs was not allowed by tax
authority.

Existing Bank Loan Repayment Schedule:

Bank loans comprise Tk.6 million @ 10% p.a. a10year loan received in 2007; and an additional Tk.1.0
million @ 10.50% p.a. a 5 year loan received in 2012. Both loans are due to be repaid in 2017.

The ExpansionPlan:

Research and Development (R&D) Department of SPBL identified that people of Bangladesh may be
affected with Asthma diseases due to higher tobacco consumption and high degree lead in air due to
carbon emission and discharge of industrial wastes. As a result, mass people might be affected with
Asthma and lung and related Respiratory diseases for which SPBL is keen to launch products to treat
those diseases. The management is planning to invest Tk. 20 million, excluding for ETP, based on the
forecast income statement of SPBL for the year 31 December 2015to 2019 as follows:

SunmoonPharmaceuticals Bangladesh Ltd.

Forecast Income Statement
Year ending 31 December

2015 2016 2017 2018 2019

Tk.000s Tk.000s Tk.000s Tk.000s Tk.000s
Revenue:
Cardiovascular 68,000 70,040 72,842 76,484 80,308
Diabetes product 6,400 6,592 6,856 7,198 7,558
Generic formulation 7,400 7,622 7,927 8,323 8,739
Asthma, Lung & Respiratory 8,000 8,500 8,800 9,500 10,000
Total revenue 89,800 92,494 96,194 101,003 106,054
Cost of sales including
depreciation (56,760) (59,063) (62,225) (66,337) (70,653)
Gross profit 33,040 33,431 33,969 34,666 35,401
Administrative expenses including (8,400) (8,652) (8,998) (9,448) (9,920)
depreciation
Operating profit 24,640 24,779 24,971 25,218 25,481

Depreciation charged:
Factory 5,150 5,150 5,250 5,300 5,300
Administrative 150 150 200 250 250
5,300 5,300 5,450 5,550 5,550

6
Investment and Funding:

The total investmentfor expansion excluding ETP is required for building Tk. 3 million, for Plant and
Machinery Tk. 16 million and for working capital Tk. 1 million for launching the new product. The
financing for the expansion can be made either of the following schemes:

Scheme 1: Bank Loan: The management consulted the investment plan with the existing banker for
new project financing who has shown keen interest to extend required fund and issued a
Clearance in Principle (CIP) in this regard. The rate of interest will be onepercent higher
than the rate of interest on the loan taken in 2012. However, repayment has to be made
in equal yearly instalment in 5 years; OR,

Scheme 2: Offering a right issue: SPBL offers to the existing shareholders @ 2:1ratio at premium
of Tk. 20 per share each. However SPBLs parent company indicated that they do not
prefer to invest in cash at a premium of Tk. 20 each. The GOB is also not interested to
subscribe to the right offer. Instead, they will surrender their right to public and
institutional shareholders. The management is confident that the public and institutional
shareholders will subscribe the right offer at the asking premium in full and Bangladesh
Securities and Exchange Commission (BSEC) will not object thereto.

Market risk and expected return:

It is expected that the DSE market index may not go down further; instead it may continue or go up from
present level. The expected beta () for SPBL is 1.25. Beta is a measure of the volatility, or systematic
risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset
pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and
expected market returns.The average risk free rate of return is 6%. The average expected market return
from investment in similar securities (comprising of dividend and capital gain yield) is 10% per annum.
(Source: DSE Market review June 4, 2015).

Present value factors of Tk. 1 for 5 years as follows:

Discount rate % Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

10 0.909 0.826 0.751 0.683 0.621 0.564 0.513
11 0.901 0.812 0.731 0.659 0.593 0.535 0.482
12 0.893 0.797 0.712 0.636 0.567 0.507 0.452
13 0.885 0.783 0.693 0.613 0.543 0.480 0.425

The market capitalization of all securities listed in DSE Ltd. as on 04June 2015 was Tk. 3,223,253 million
and market P/E Ratio is 17.86 wherePharmaceuticals & Chemicals sector Market Capitalization was Tk.
362,772 million and sectors Price earnings (P/E) ratio was 23.15. The Pharmaceuticals & Chemicals
sectors dividend yield was 1.95 percent per annum and Sectors 6monthsaverage return was 3 percent.
SPBL and other similar stocks market price and EPS in DSE were as follows:

Sl. Company Face NAV(Taka) Market Price EPS for the

No. Value 31 Dec. (June Dec. 2014: year ending
(Taka) 2014 6-Month Average) 31 Dec. 2014
(Taka)
a b c d e F
1 Sunmoon Pharmaceuticals 10 18.27 34.00 1.62
Bangladesh Ltd.
2 Sunrise Pharmaceuticals Ltd. 10 14.15 35.93 1.88
3 AMC Pharma Limited 10 6.95 35.71 1.30
4 Navana Pharmaceuticals Ltd. 10 53.28 45.87 3.57
5 Rose Pharmaceuticals Ltd. 10 12.15 13.32 1.15

7
Attached exhibits:

SPBL Management Accounts for the years 2011-2014 (Exhibit 2)

SPBLs own review on its business operations (Exhibit 3)
A write up on up-gradation of IT System for payroll management and improving distribution
functionalities (Exhibit 4)
A proposal from TDCL distribution Company for distribution of SPBLs products(Exhibit 5)
Extract of the Government rules on drug administration and social aspect of drug marketing in
Bangladesh (Exhibit 6)
News cuttings relating to pharmaceuticals industry(Exhibit 7)

You are requested to issue a report addressing theSPBL Board which should comprise the following:

1. (a) (i) Identifythe ethicalissues and suggest the accounting adjustments required to the
management accounts 2011-2014 to conform the same to Bangladesh Accounting
Standards (BASs) and Bangladesh Financial Reporting Standards (BFRSs).
(ii) Evaluate the financial performances of SPBL based on BAS compliant accounts using
ratio analysis and state the strength, weaknesses, opportunities and threats (SWOT) of
SPBL suggesting the ways of converting the weaknesses in to strengths and threats to
opportunities.
(b) Suggest the viability of the SPBL business after expansion using discounted cash flow (DCF)
techniques and recommend the financing scheme for expansion highlighting the environmental
and social issues to be considered while implementing the expansion plan.
2. Evaluate the proposal of the vendor, ACE Ltd. comparing with SPBLs own estimate regarding up-
gradation of IT systemcalculating Payback Period (PBP)and identify the ethical issues connected
thereto.
3. Suggest whether the proposal for engaging TDCL Distribution Company for distributing SPBL
products be accepted stating the financial andethical issues involve in this regardand identify the
risks of engaging external distributor.

Submit all the relevant workings.

I look forward to receiving your report on or before 17June 2015.

Yours sincerely
Abid Hasan

8
 EXHIBIT -2

Sunmoon Pharmaceuticals Bangladesh Ltd.

Management Accounts for the years 2011-2014

Statement of Profit or Loss

2014 2013 2012 2011

Tk. 000s Tk.000s Tk.000s Tk.000s
Note
Revenue 1 87,688 81,782 66,038 54,982
Cost of sales 2 (76,204) (70,322) (56,608) (47,350)
Gross profit 11,484 11,460 9,430 7,632
Administrative expenses 3 (6,504) (6,302) (4,812) (4,330)
Operating profit 4,980 5,158 4,618 3,302
Interest payable and finance 4 (1,682) (1,782) (1,544) (1,250)
charges
Profit before taxation 3,298 3,376 3,074 2,052
Taxation (50) (294) (518) (514)
Profit for the year 3,248 3,082 2,556 1,538
Profit ratio(%) 3.70 3.77 3.87 2.80
EPS 1.62 1.54 1.28 0.77

Statement of Financial Position

As at 31 December
2014 2013 2012 2011
Note Tk. 000s Tk. 000s Tk. 000s Tk.000s
Non-current assets
Freehold land 19,800 19,800 19,800 19,800
Tangible assets 5 25,940 27,590 26,646 22,194
45,740 47,390 46,446 41,994
Current assets
Inventories 6 370 314 190 176
Trade and other receivables 7 20,052 21,664 15,616 10,980
Cash and cash equivalents 838 1,216 1,756 2,166
Total current assets 21,260 23,194 17,562 13,322
Total assets 67,000 70,584 64,008 55,316

Shareholders' equity
Ordinary share capital 20,000 20,000 20,000 20,000
Retained earnings
16,532 15,484 13,402 10,846
Total shareholders' equity 36,532 35,484 33,402 30,846

Non-current liabilities
Amounts due after more than 8 16,036 18,556 16,744 13,732
one year
Total Non-current liabilities 16,036 18,556 16,744 13,732
Current liabilities
Trade and other payables 9 14,432 16,544 13,862 10,738
Total current liabilities 14,432 16,544 13,862 10,738
Total equity & Liabilities 67,000 70,584 64,008 55,316
Net Asset Value (NAV) 18.27 17.74 16.70 15.42

9
Sunmoon Pharmaceuticals Bangladesh Ltd.
Statement of Cash Flows for Year ended 31 December
2014 2013 2012 2011
Tk. 000s Tk. 000s Tk. 000s Tk. 000s
Profit before tax 3,298 3,376 3,074 2,052
Adjustments for:
Depreciation & loss on disposals 4,356 4,968 4,814 4,224
7,654 8,344 7,888 6,276
Change in inventories (56) (124) (14) (18)
Change in trade and other receivables (588) (7,048) (4,636) (1,988)
Change in trade and other payables (962) 1,766 2,464 1,064
Cash generated from operations 6,048 2,938 5,702 5,334
Taxation paid (294) (518) (514) (436)
Net cash from operating activities 5,754 2,420 5,188 4,898

Investing activities

Purchase of tangible assets (2,574) (412) (4,874) (2,654)

Proceeds from disposal of tangible assets 248 440 978 748
Net cash from/(used in) investing activities (2,326) 28 (3,896) (1,906)

Financing activities
Bank loan - - 1,000 -
Finance lease repayments of capital (3,806) (2,988) (2,702) (1,722)
Net cash used in financing activities (3,806) (2,988) (1,702) (1,722)
Net change in cash and cash equivalents (378) (540) (410) 1,270
Cash and cash equivalents at start of year 1,216 1,756 2,166 896
Cash and cash equivalents at end of year 838 1,216 1,756 2,166

Notes to the management accounts

Note 1 Revenue 2014 2013 2012 2011
Tk. 000s Tk.000s Tk. 000s Tk. 000s
Cardiovascular products 71,714 70,166 58,862 50,238
Diabetes product 6,038 5,912 5,370 4,744
Generic formulation products 9,936 5,704 1,806 -
87,688 81,782 66,038 54,982

Local sales 23,688 21,782 16,038 14,982

Exports 64,000 60,000 50,000 40,000
87,688 81,782 66,038 54,982
Note 2 Cost of sales
Salary of factory workers & delivery staff 21,410 20,350 18,252 15,782
Raw materials & import cost of diabetes 4,632 4,408 4,440 3,754
product
Fuel 27,006 23,096 16,808 13,030
Hire of plant, machinery and vehicles 6,964 6,688 3,970 3,352
Other: insurance and driver expenses 6,392 5,634 4,726 4,156
Repairs and maintenance 5,512 5,246 3,654 3,096
Depreciation for plant & Machinery & Vehicles 4,032 4,428 4,174 3,166
Loss on disposal 256 472 584 1,014
76,204 70,322 56,608 47,350

The ratio of raw-materials consumed and import cost of diabetes product is 50%.

10
Note 3 Administrative expenses

Salary 3,624 3,524 2,670 2,448

Infrastructure 1,804 1,732 1,250 1,146
General administrative 1,008 978 836 692
Depreciation 68 68 56 44
6,504 6302 4,812 4,330

Note 4 Interest payable and finance charges

Bank interest payable 592 592 576 510
Finance lease interest 1,090 1,190 968 740
1,682 1,782 1,544 1,250

Note 5 Non-current assets

Tangible assets
Freehold, Plant, IT Vehicles Total
Land and and
Year: 2011 Buildings Machinery
Cost Tk.000s Tk.000s Tk.000s Tk.000s
At 1 January 2011 9,852 11,416 16,786 38,054
Additions - 1,912 3,824 5,736
Disposals - (828) (3,472) (4,300)
At 31 December 2011 9,852 12,500 17,138 39,490

Depreciation
At 1 January 2011 288 8,098 8,238 16,624
On disposals - (488) (2050) (2,538)
Charge for the year 44 978 2,188 3,210
At 31 December 2011 332 8,588 8,376 17,296
Carrying amount at 31 Dec 2011 9,520 3,912 8,762 22,194
Year : 2012
Cost
At 1 January 2012 9,852 12,500 17,138 39,490
Additions 480 5,696 4,068 10,244
Disposals - (1,508) (2,888) (4,396)
At 31 December 2012 10,332 16,688 18,318 45,338

Depreciation
At 1 January 2012 332 8,588 8,376 17,296
On disposals - (892) (1,942) (2,834)
Charge for the year 56 1,798 2,376 4,230
At 31 December 2012 388 9,494 8,810 18,692
Carrying amount at 31 Dec. 2012 9,944 7,194 9,508 26,646

Year: 2013
Cost
At 1 January 2013 10,332 16,688 18,318 45,338
Additions - 2,644 3,708 6,352
Disposals - (884) (1,344) (2,228)
At 31 December 2013 10,332 18,448 20,682 49,462

Depreciation
At 1 January 2013 388 9,494 8,810 18,692
On disposals - (522) (794) (1,316)
Charge for the year 68 1,896 2,532 4,496
At 31 December 2013 456 10,868 10,548 21,872
Carrying amount at 31 Dec. 2013 9,876 7,580 10,134 27,590

Note: SPBL incurred cost for substantial repairing of Plant and Machinery and Vehicles which are
capitalized in the year 2013. 40%of total additions cost related to repairing.
11
 Freehold, Plant, IT Vehicles Total
Land and and
Year: 2014 Buildings Machinery
Tk.000s Tk.000s Tk.000s Tk.000s
Cost
At 1 January 2014 10,332 18,448 20,682 49,462
Additions - 1,310 1,644 2,954
Disposals - (424) (1,016) (1,440)
At 31 December 2014 10,332 19,334 21,310 50,976

Depreciation
At 1 January 2014 456 10,868 10,548 21,872
On disposals - (252) (684) (936)
Charge for the year 68 1,744 2,288 4,100
At 31 December 2014 524 12,360 12,152 25,036
Carrying amount at 31 Dec. 2014 9,808 6,974 9,158 25,940

Note: SPBL incurred repairing cost for substantial repairing of Plant and Machinery and Vehicles which
are capitalized in the year 2014. 20%of total additions cost related to repairing.

Note 6 Inventories
2014 2013 2012 2011
Tk. 000s Tk.000s Tk. 000s Tk. 000s
Raw materials and Finished goods 370 314 190 176
370 314 190 176
Note 7 Trade and other receivables
Trade receivables 13,750 16,364 12,218 8,982
Prepayments 2,274 2,638 1,972 1,636
Deferred expenses 400 - - -
Other 528 462 426 362
16,952 19,464 14,616 10,980

Note 8 Amounts due after more than one year

Bank loans 7,000 7,000 7,000 6,000

Obligations under finance leases 9,036 11,556 9,744 7,732
16,036 18,556 16,744 13,732

Note 9 Trade and other payables

Trade payables 2,324 3,638 2,450 218

Obligations under finance leases 1,718 2,624 1,484 828
Taxes and social charges 1,802 1,730 1,426 1,226
Accruals 588 552 502 466
6,432 8,544 5,862 2,738

12
 EXHIBIT - 3

SPBLs own review on its business operations

Operations

Sunmoon Pharmaceuticals Bangladesh Ltd. (SPBL) manufactures generic formulation and imports life
savings products which sales in the country and currently exports to Tiwan. The company has own
network for distribution of medicine across the countries. It has a database on pharmacies and
automated route plan to deliver products faster.SPBL is heavily dependent on a fully integrated IT system
for managing and controlling the operations of the business and linking activities with its customers. Over
the years it has made significant investment in both the systems necessary to run on the business
operations and administrative procedures, as well as the security system and back-up operations in case
of failure or sabotage.

Marketing Strategy

SPBL markets its manufactured and imported products through medical services officer (MSO) who are
visiting doctors door to door. It includes private hospitals, diagnostic centres and other commercial
chambers. The MSOneeds prior permission to visit doctors. SPBL issues doctors sample to promote its
own products. In addition, SPBL sponsored foreign tours for doctors motivation in prescription
generation for their products.SPBL also offers product bonuses for chemist against bulk order.

Distribution

SPBL keeps its medicine in its own warehouse centrally in Dhaka and distributes its products through its
own net work across the country. During political turmoil, SPBL ensures distribution through alternative
channels. The company reviews existing routes and drivers efficiency and keen to monitor distribution
efficiency and strongly felt that a new IT System is required to supervise distribution Lorries and location
to ensure smooth and hassle free operations.

Logistics

SPBL has 80 delivery vans and 15 branches across the country. Each branch is headed by a Branch
Manager having a small warehouse inside office for keeping running products for delivery against sale
invoice. Moreover, it has own research and invested Tk. 2 million to facilitate automated route plan for
pharmacies. The present automation require further enhancement to cater the business complexity which
require time till June 2016.

Import of Diabetes product

SPBL importsdiabetes productfrom Denmark and raw materials from Germany. It opens letter of credit
with SCB Bank Ltd. During fluctuation of the exchange rateSPBLenters into an agreement with its banker
for forward contracts under which it mitigates currency exchange rate risk.SPBL has no separate desk for
treasury operations.Its diabetes products hold 90% of Bangladesh market share. However, Competitors
Company placed application to Drug Administration of Bangladesh (DAB) for product approval for
manufacturing diabetes product locally. If it is approved, competitor may start local manufacturing from
January 2016. Upon starting of local manufacturers commercial marketing there is a possibility of
imposing government restrictions on import of diabetes products.

Product recall

One of the companys cardiovascular products Cervical SR batch no DX3, manufacturing date 25.4.
2015 was manufactured with inadequate ingredients which was identified by a researcher outside the
country and informed Drug Administration Bangladesh (DAB). DAB immediately advised SPBL to recall
the products from the market. SPBL advised all MSO and delivery man to receive Cervical SR from the
pharmacy and chemists with a credit note to adjust with the next invoice. The company advised Director,
Quality Control, SPBL and Director, Production, SPBL to investigate the matter to identify the root cause
with risk mitigation. The audit committee also suggested ensuring accountability for such mistake to
protect company reputation. The entire batch of Cervical SR was released in December 2014 and about
60 percent stock has sold out and delivered. The majority of customers returned these items in the first
13
ten weeks after the recall notice was issued. As only a few of them were returned in their original
packing, the recall has created an untidy mountain of un-boxed strips. Reconciliation revealed that few
products are lying at patients hand at home which is very difficult to get back. Product recall reasons with
accountability must be:

Expiry of shelf life product at pharmacy, product at home

Faulty packaging
Breakage due to Transportation through courier
Low quality batch wrongly approved for marketing and distribution

The initial costs of this recall have been significant. Rather than expensing them immediately, SPBL has
recorded all costs in a deferred expenses account (currently shown in Trade and other receivables),
with a view to (1) reallocating them to current expenses and (2) replace customers, chemist with good
quality products later on. Accumulated expenses related to recall is estimated as follows:

Deferred expenses Tk.000s

Additional recall costs 160
Additional warehouse costs:
Rent of additional storage space 60
Racking, bins and containers 40
Installation of security system 50
Cost of personnel engaged 90
Total 400

Incident in Bogra

A delivery van with full consignment of Diabetes product reached CFD Pharmacy, Bogra on 24 May
2015, after four hours of the scheduled time of delivery due to an accident on the highway to Bogra.
Although CFD Pharmacys gatekeeper and employees initially refused to allow unload the products due
to this delay, upon offering an inducement by the driver they ultimately allowed the unloading of the
consignment. The SPBLdrivers actions were seen by another officer of the CFD Pharmacy who
subsequently reported to a superior of those employees who took the inducement offer. The supervisor
of CFD Pharmacy thencontacted SPBL Managing Director and given him the details and asked for
SPBLs views on the actions of the driver and in turn what actions SPBL propose to take concerning this
matter. CFD has indicated that the fact that SPBLs driver arrived late had a knock-on effect on the
subsequent scheduled deliveries toits customers. Moreover, diabetes product was out of stock in the
pharmacies in Bogra districts and this product was not available in any hospital/ pharmacy in Bogra. It
was picked by the local journalist which is a threat to SPBL reputation.

SPBLs initial enquiry into this matter reveals the following:

The driver had not reported the situation; nor had his shift manager been aware of any issues,
apart from the highway accident, which was widely reported in the press.
This driver, who is an exemplary employee, has worked for SPBL for five years

14
 EXHIBIT4

A write up on up-gradation of IT System for payroll

management and improving distribution functionalities

Sunmoon Pharmaceuticals Bangladesh Ltd. (SPBL) is proposing to invest to upgrade its IT Systems with
enhanced capabilities to comply with Bangladesh Labour Law 2006 (as amended in 2013) and
Distribution efficiency. The enhanced system will allowSPBLmore detailed route planning, including real-
time monitoring of locationof the distribution vans; instant route re-allocation and the analysis of individual
drivers performances.

SPBL approached to ACE Limited (ACE), the existing integrated systems provider for up-grading the
existing IT Systems.From correspondence with ACE, it appears that this investment will involve the cost
of purchasing and installing the necessary equipment and integrated software in SPBLs branches.
Vehicle tracking system will be tagged with the new IT systems so that branches can monitor the
presence and status of vehicles. ACE estimates that the initial investment will be Tk. 4 million based on
comparable systems installed in similar ACE clients. From a review of currentSPBL expenses, and by
comparison with its other clients, ACEestimates that as a result of the IT investment, SPBL will be able to
increase its revenue and make other savings as detailed below.SPBLs own estimates are also provided
to compare with ACEs estimation.

Impact of investment ACE estimate SPBLs own estimate

An increase in revenue because of Tk. 500,000 per annum Tk. 240,000 per annum
more accurate and timely information,
allowing better planning of journeys to
create revenue.
Better co-ordination of routes, Saving 20% of current empty Saving 10% of current empty
customers requirements and journeys equivalent to Tk. journeys equivalent to
locations, enabling more accurate 540,000 per annum Tk.270,000 per annum
routeing to reduce the distances driven
with empty vehicles.
Saving capital cost to procure vehicle Saving the equivalent of one Saving the equivalent of one
major vehicle purchase each major vehicle purchase every
year: Tk.260,000 (if two years i.e. Tk. 130,000 per
purchased outright) annum.
Labour efficiencies enabling the re- Two drivers per annum, One driver per annum
deployment of drivers and savings saving Tk.140,000 Saving Tk. 70,000
relating to wages and training.
Fuel cost savings by driving in the Saving around 2.5% of fuel Nil
green zone. cost Tk, 680,000 per
annum

Past experiences with ACE revealed that Mrs. Tamanna, an Electrical Engineer and Software specialist
was engaged in developing SPBL software which is still running in good condition without system bug.
Recently, she went for maternity leave for 6 months effective from 01 June 2015. The SPBLs IT team is
engaged and accountable to implement the upgraded software by 31 December 2015. However, the
ultimate users in HR department are shaky towards progress and new system implementation by the
stipulated time Dec. 31, 2015. Besides, end user testing might be an important part while IT support from
other professionals in ACE may not get as expected.

The SPBL board suggests that using a payback calculation would be a good method of evaluating this
proposal in terms of cash flow. SPBLplans to fund the initial investment of Tk.4 million from its
operations.

15
 EXHIBIT -5

A proposal from TDCL Distribution Company for

distribution of SPBLs Products

SPBL is a fast growing pharmaceuticals company in Bangladesh which need to reach customers,
chemist and pharmacies in fastest possible time day.

The current structure of distribution cost of SPBL is as follows:

2014 2013 2012 2011

Salary for delivery staff 3,012 2,762 2,335 1,924

Infrastructure 1,002 966 555 526
General administrative 450 489 465 446
Depreciation on vehicles 345 325 320 300
4,809 4,542 3,675 3,196

SPBL management expects in future distribution cost will increase as follows:

Salary for delivery staffby 10%; Infrastructure expenses by 7.5%; General administrative expenses by
5% and Depreciation rate will remain unchanged.

SPBL has diabetic products which are temperature sensitive while movement from one place to other
place. Currently these products are kept 4-8 degree temperature warehouse and special delivery van is
required.

SPBL has received a proposal from TDCL to distribute its products.

TDCL is a largest distribution network company who is capable to deliver all pharmaceutical products
across the countries without unexpected interruption. Currently TDCL distributes four pharmaceutical
companies drugs, one of which is direct competitor of SPBL. According to the principals of TDCL and
chemist and druggist Samitty, TDCL is capable to handle pharmaceutical products reliably in agreed
turnaround time. However, in strike and hartal period, TDCL uses third party courier services for
delivering products through trains and airlines under agreement with them.

TDCL normally charges distribution cost at 5 percent of invoice value based on activity based costing
(ABC).

TDCL estimates that the operation to carry and distribute SPBL products will have a volume of 20,000
deliveries a week. TDCL is agreed that deliveries do not need to be made in vehicles which have
theSPBLs logo on the side but if SPBLinsists, they will do so.

TDCL will carry other products while carryingSPBLs drugs in the same route to make it cost effective.
TDCL has agreement with other 4 pharmaceuticals and 3 FMCG companies who produces cosmetics
and dry food items. Under Value Added Tax (VAT) Act all goods will be moved with VAT Challan 11 Ka
and they will ensure to have it while moving to the places.TDCL will require and is willing to invest in
specialized vehicle to carry and distribute temperature sensitive products of SPBL if their business is cost
effective.

If SPBL accepts the TDCLs proposal it estimates that 80 percent of its distribution expenses will be
saved. However, it will incur a loss up to 10% of book value of vehicles of Tk. 21,310 million used for
distribution purposes for disposing those items. The realized funds will be utilized forfinancing the up-
gradation cost of IT systems, paying off existing bank loans and lease obligations.Currently 65 delivery
staff is engaged in distribution activities of the company (SPBL). If TDCL proposal is accepted these staff
will become surplus.

16
 EXHIBIT 6

Extract of the Government rules on drug administration

and social aspect of drug marketing in Bangladesh

One of the major positive impacts of Drug (Control) Ordinance-1982 is the rapid development of local
manufacturing capability. In recent years, the country has achieved large volume of parental products, by
which the country becomes self sufficient; huge volume of these products are also exported. The
development of local manufacturing companies helped to reduce the dependence on the import of raw
materials of pharmaceutical products and finished pharmaceutical products. Under the Drug (Control)
Ordinance 1982, the Government determines Maximum Retail Prices (MRP) of 117 essential drug
chemical substances. This price determination is only for the local producer but the multinational
organizations are determining their price by their own way. For imported finished products, Government
determines the fixed percentage of mark-up, but the (governmental) drug administration could not fix up
the MRP in Bangladeshi market. It is interesting to note that, even with withdrawal of price control from
many products, prices have not shot up; healthy competition has been keeping the prices within
affordable levels.

Active Pharmaceuticals Ingredient (API):

The industry imports around 70% of its raw materials from foreign sources. Two high priority projects
(establishing Active Pharmaceuticals Ingredient Park and National Control Laboratory) are taken by the
govt. for facilitating the pharmaceutical sector. Bangladesh currently needs to import API. Though the
govt. has taken initiative for setting up an API park a decade ago, the project is not yet completed. If the
API Park becomes operational, production cost will be cheaper which will give Bangladesh a competitive
edge in the international market. If Bangladesh can arrange Bio-equivalence test for pharmaceutical
products under local arrangement then the companies do not need to go abroad for the tests and this will
further drive the production cost as currently the tests are conducted by paying high fees in abroad.

TRIPS Challenge:

The major challenge for the expansion of pharmaceutical industry in Bangladesh is the expected expiry
of WTO/TRIPS (Trade Related Intellectual Property Rights) agreement in 2019, which provides patent
exemption for pharmaceutical products in Bangladesh as a least developed country (LDC).

Govt. Policy:

The pharmaceutical sector has been among the high-priority ones in Bangladesh export policy since
2006. As per the budget of 2014-15 customs duty on 40 basic raw materials used in medicine
manufacturing are reduced to 5% from previous 10%-25% rate. Customs duty on 14 items used in anti-
cancer medicines have been withdrawn.

17
 EXHIBIT 7

News cuttings relating to pharmaceuticals industry

Export:

Currently Bangladesh exports drugs to almost 86 countries and hope to export to 140 countries within the
next few years. (Source: The Financial Express, 25th October,2014) Export Promotion Bureau (EPB)
data showed pharmaceutical sector's earning at around BDT 542 million with more than 31 percent
increase in the first month of the financial year 2014-15. (Source: The Financial Express, August 19,
2014)

Fake drug business rampant:

Over the last eight months, more than 700 cases have been filed against various individuals and
organisations by mobile courts under the Directorate General of Drug Administration (DGDA). These
cases had been filed on charges of preserving, storing and selling of fake, adulterated, expired, low
quality and unapproved drugs. Some 357 companies and drug sellers have been fined over Tk27.7m. A
total of 92 individuals has been handed down various jail terms from 10 days to 2 years by the mobile
courts. Fake and adulterated drugs are being made in the capital, under the very nose of the drug
administration. A mobile court drive on April 20, conducted in three markets in the capitals Mitford area,
seized huge amounts of fake, adulterated and low quality drugs. 42 cases were filed against various
individuals and companies. They were also fined Tk. 4.2m on various charges. During the drives, the
DGDA mobile courts also recovered huge amounts of drugs marked green and red and were actually
supplied to various government hospitals for being distributed free of cost to the patients. Drug traders
told the magistrates of the mobile courts that a section of unscrupulous government employees and
officials smuggle these free drugs out of the government hospitals.

A top officials said that many of these traders continue doing illegal business despite serving jail terms
and paying fines. He said for manufacturing and selling drugs of any kind, a company must secure a
license from the DGDA, have the required mechanism for ensuring quality of the products and the
required manpower and expertise. He regretted that most companies had not been following that
stipulation. He, however, claimed that the manufacturing and selling of low quality drugs had been
curbed by certain extents over the last few years.

Social Impact of poor-quality medicines:

Increased mortality and morbidity

Engendering of drug resistance and loss of medicine efficacy
Loss of confidence in health systems and health workers
Economic loss for patients, their families, health systems, and the producers and traders in good-
quality medicines
Adverse effects from incorrect active ingredients
Waste of enormous human effort and financial outlay in development of medicines, optimizing
dosage, carrying out clinical trials, discussing policy change, and manufacturing medicines
Increased burden for health workers, medicine regulatory authorities (MRAs), customs officials
and police officers

18