5 Statutory auditor’s report
Statutory auditor’s report to the General Shareholders’ Meeting of UCB SA/NV for the year ended 31 December 2018
We present to you our statutory auditor’s report in the context of our statutory audit of the consolidated accounts of UCB SA (the “Company”) and its subsidiaries (jointly “the Group”). This report includes our report on the audit of the consolidated accounts, as well as the report on other legal and regulatory requirements. These reports form part of an integrated whole and are indivisible.
We have been appointed as statutory auditor by the general meeting d.d. 25 April 2018, following the proposal formulated by the board of directors and following the recommendation by the audit committee and the proposal formulated by the works’ council. Our mandate will expire on the date of the general meeting which will deliberate on the consolidated accounts prepared on 31 December 2020. We started the statutory audit of the consolidated accounts of the Company before 1990.
5.1 Report on the consolidated accounts
5.1.1 Unqualified opinion
We have performed the statutory audit of the Group’s consolidated accounts, which comprise the consolidated statement of financial position as at 31 December 2018, the consolidated income statement and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory information, and which is characterised by a consolidated statement of financial position total of EUR 10 514 million and a profit for the year (attributable to equity holders) of EUR 800 million.
In our opinion, the consolidated accounts give a true and fair view of the Group’s net equity and consolidated financial position as at 31 December 2018 and of its consolidated financial performance and its consolidated cash flows for the year then ended, in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union and with the legal and regulatory requirements applicable in Belgium.
5.1.2 Basis for unqualified opinion
WWe conducted our audit in accordance with International Standards on Auditing (ISAs) as applicable in Belgium. Furthermore, we have applied the International Standards on Auditing (ISAs) as approved by the IAASB for the years ending as from 31 December 2018, which are not yet approved at the national level. Our responsibilities under those standards are further described in the “Statutory auditor’s responsibilities for the audit of the consolidated accounts” section of our report. We have fulfilled our ethical responsibilities in accordance with the ethical requirements that are relevant to our audit of the consolidated accounts in Belgium, including the requirements related to independence.
We have obtained from the Board of Directors and Company officials the explanations and information necessary for performing our audit.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
5.1.3 Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated accounts of the current period. These matters were addressed in the context of our audit of the consolidated accounts as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Area of focus
In the U.S., the UCB Group sells products to various customers that are part of commercial and governmental contractual arrangements or other reimbursement programmes (Medicaid, Medicare or equivalent scheme). This process leads to significant adjustments to the gross sales in the form of rebates, chargebacks, discounts and product returns. At year-end significant amounts of these unsettled adjustments are recorded as accruals in the balance sheet. The process for determining these accruals is complex and depends on contract terms and regulation, as well as forecasts of sales volumes by channel and estimates on expected returns of products. As disclosed in Note 34, the amount of the accruals at 31 December 2018 is EUR 460 million (EUR 445 million as per 31 December 2017). We also evaluated whether appropriate revenue recognition policies were consistent with IFRSs as adopted by the European Union.
How our audit addressed the area of focus
Our testing focused on the accruals for sales rebates, chargebacks, discounts and product returns recognised at the year-end as the process for these accruals involves the use of large volumes of data, regarding sales volumes and discounts from multiple sources, which, taken together, require significant management judgement in a complex U.S. healthcare environment.
We obtained management’s calculations of the accruals for sales rebates, chargebacks, discounts and product returns and tested the inputs into the accrual calculations. We performed the following procedures:
- We assessed the completeness and accuracy of the accruals by understanding and testing the process management used to calculate and record the year-end balances.
- We tested the mathematical accuracy of the year-end balances and compared such amounts to our own independently developed expectations (substantive analytics). Our independent expectations were developed based on sales figures, historical rebate invoices received, adjusted for current volumes, rebate rates as included in sales contracts and agreements with third parties and adjusted for any Company or industry specific factors.
- We assessed the key judgements and assumptions within management’s analysis and we considered other known factors such as generic entrants and government, legal or regulatory information, as applicable. We assessed the assumptions used to determine the standard lag times for commercial rebates, Medicare rebates, Medicaid rebates, cash discounts, chargebacks and returns.
- We examined third party statements and data such as external data, we sampled rebate and chargeback invoices processed subsequently to year end and we assessed management’s estimates of channel inventory.
- We performed look back tests that compared accruals recognised in previous periods to actual rebates, chargebacks, discounts or returns received in order to test management’s historical accuracy in calculating these accruals.
In determining the appropriateness of the revenue recognition policy in accordance with IFRS 15 applied by management in calculating sales rebates, chargebacks, discounts and product returns under contractual and regulatory requirements, there is room for judgement. We did not identify any material differences between our independent expectations and the accruals and we found the judgements made by management to be reasonable. Also, the policies applied are consistent in all material respects with IFRSs as adopted by the European Union.
Area of focus
The UCB Group has EUR 870 million of intangible assets (31 December 2017 – EUR 817 million), comprising significant licenses, patents and acquired trademarks. In addition, the Group has EUR 4 970 million of goodwill at 31 December 2018 (31 December 2017 – EUR 4 838 million).
The carrying values of goodwill and intangible assets are contingent on future cash flows and if these cash flows do not meet the Group’s expectations, there is risk that the assets will be impaired. The impairment reviews performed by the Group contain a number of significant judgements and estimates including revenue growth, the success of new product launches, patent expiry dates, profit margins, terminal values and discount rate. Changes in these assumptions might lead to a change in the carrying value of intangible assets and goodwill. The Group has one cash generating unit (“CGU”), Biopharmaceuticals, for goodwill impairment testing purposes.
How our audit addressed the area of focus
We obtained the UCB Group’s impairment evaluation analyses and tested the reasonableness of the methodology and the key assumptions, including profit and cash flow growth, terminal values, the impact of the expiry of patents, pricing impacts, potential product obsolescence, the probability of success for pipeline products and the selection of discount rates. We have assessed management’s substantiation of its assumptions, including comparing relevant assumptions to industry and economic forecasts. In doing this, we worked with our internal valuation specialists. We have also evaluated the process to prepare the Groups strategic plan that was approved by UCB’s Board of Directors.
We obtained and evaluated management’s sensitivity analyses to ascertain the impact of reasonably possible changes in key assumptions and we performed our own independent sensitivity calculations to quantify the downside changes to management’s models required to result in impairment. We also assessed the reasonability of the forecasted discounted cash flows by comparing those to the Group’s market capitalisation.
As a result of our work, we determined that no impairment charge should be recognized in 2018 (see Note 13). We found that management’s judgements were supported by reasonable assumptions that would require unreasonable downside changes before any material impairment was necessary.
In respect of the Biopharmaceuticals CGU, we confirmed that this is the lowest level at which management monitors goodwill for internal purposes, that it is consistent with how the Group’s results and financial position are reported to the executive committee and the board of directors and that it thus complies with IFRS as adopted by the European Union.
Area of focus
The UCB Group has significant tax losses from past business performance. There is inherent uncertainty involved assessing both the availability of losses and tax credits and in forecasting future taxable profits, which determines the extent to which deferred tax assets are recognised. Additionally, the availability and the amount of the tax losses and tax credits can be impacted by ongoing tax audits. At 31 December 2018, the Group has recognised EUR 760 million of deferred tax assets (31 December 2017 – EUR 715 million). The process for the determination of deferred tax assets is complex and involves a significant amount of judgement.
The group operates in a complex multinational tax environment and there are open tax and transfer pricing matters with tax authorities. Judgement is required in assessing the level of provisions required in respect of uncertain tax positions. At 31 December 2018, the Group has recognised provisions of EUR 91 million in respect of uncertain tax positions (31 December 2017 – EUR 55 million). The increase in provisions for uncertain tax positions is explained by a combination of an increase in the number of tax matters identified in various countries and uncertain tax positions identified in previous years that required an update.
How our audit addressed the area of focus
We evaluated the appropriateness of the management’s key assumptions and estimates, in particular the likelihood of generating sufficient future taxable profits to support the recognition of deferred tax assets.
We evaluated the possible effects of tax audit outcomes on the availability of tax losses and tax credits (and the need for recognizing a provision for uncertain tax positions, if deemed necessary).
We considered the status of recent and current tax authority audits, the outcome of previous audits, the judgemental positions taken in tax returns and current year estimates and developments in the tax environment.
In conjunction with our own specialists in International Tax, we assessed and evaluated the correspondence with the relevant tax authorities and certain third party tax opinions. Based on this information, we analysed and challenged the assumptions used by management to determine tax provisions. We conclude that the provisions for uncertain tax positions are recognized in accordance with IFRIC 23.
We assessed whether the UCB Group’s disclosures about the sensitivity of the recognition of deferred tax assets to reasonably possible changes in key assumptions reflected the associated inherent risks and the disclosures in respect of tax and uncertain tax positions.
As a result of our work, we determined that management’s conclusions on the recognition of deferred tax assets and its recoverability are appropriate. We also determined that the provisions for uncertain tax positions and the related disclosures are acceptable.
Area of focus
The pharmaceutical industry is a highly regulated industry, which increases the inherent risk for litigation, claims and regulatory investigations. The UCB Group is engaged in a number of legal actions, including product liability, commercial litigation and regulatory investigations, which could have a material impact on the financial statements.
We focused on this area because the outcome of such legal actions is uncertain and the positions taken by the management are based on the application of material judgement and estimation. Accordingly, unexpected adverse outcomes of such legal actions could materially impact the Group’s reported profits and balance sheet position or future cash flows.
At 31 December 2018, the Group held provisions of EUR 206 million (31 December 2017 – EUR 158 million) among others in respect of actual legal actions brought against the Group and disclosures have been made in Note 33 in relation to these provisions, as well as the disclosure of contingent liabilities in Note 42 relating to ongoing regulatory investigations or legal claims where the directors believe to have meritorious defences against the claims.
As disclosed in Notes 33 and 42, the Group is involved in several product liability cases related to the product Distilbène. In 2015, a provision was recognised for EUR 50 million representing the expected future cash flows exceeding the insurance coverage and is considered as a significant estimate. This provision amounted to EUR 68 million as at 31 December 2017 and was further increased to EUR 99 million as at 31 December 2018.
How our audit addressed the area of focus
We discussed actual or pending legal and regulatory claims with the Group’s General Counsel to update our understanding of the status of each case.
We established our own expectation of the likely outcome and tested substantively the amount provided (e.g. Distilbène) by evaluating the assumptions used in measuring the provision by discussion and by reference to the actual (similar) court decisions, to available documentation such as correspondence with external legal counsels and by obtaining independent confirmations from the external legal counsels.
We considered the completeness of legal and regulatory matters through inquiry with the Group’s General Counsel and by reading minutes of meetings of the executive committee and the board of directors, and did not identify any other legal matters that had not already been disclosed to us.
We evaluated the assumptions regarding the measurement of the provision related to the Distilbène product liability of EUR 99 million (31 December 2017 – EUR 68 million) by reference to the actual court decisions for closed Distilbène cases and the effect of newly initiated cases in the course of 2018. We discussed with UCB’s management and assessed the assumptions used.
Our testing did not identify any material misstatements in the provisions recorded. We found that in the context of the Group financial statements, the judgements made by management and the provisions recorded are reasonable and the disclosures relating to legal and regulatory matters, provisions and contingent liabilities in Notes 33 and 42 were in accordance with the requirements of IFRSs as adopted by the European Union.
Area of focus
The UCB Group has different employee benefit schemes around the world of which the most significant and with the most potential for misstatement are in the U.K., Belgium and Germany. Significant estimates are made in valuing post-retirement defined benefit plans and small changes in the assumptions and estimates used, of which the main ones are discount rate, inflation and longevity, could have a significant impact on the results and the financial position of the Group as disclosed in Note 32.
The total amount of the post-retirement benefit provisions recognized at 31 December 2018 amounts to EUR 396 million (31 December 2017 – EUR 412 million), consisting of a total defined benefit obligation of EUR 996 million (31 December 2017 – EUR 1 040 million) offset by total plan assets of EUR 600 million (31 December 2017 – EUR 629 million).
How our audit addressed the area of focus
With the involvement of our internal actuarial specialists, we have challenged the key assumptions being mainly the discount rate, inflation rate, mortality / life expectancy, inflation rates and future salary increases. We have compared the key assumptions used against our internal benchmarks and externally derived data.
We have performed audit procedures on the fair value of plan assets, the determination of the defined benefit obligation and the underlying census data.
Based on our procedures performed, we consider management’s assumptions and the resulting valuation of the employee benefit obligation to be within a reasonable range. We have assessed and agreed with the adequacy of the disclosures in Note 32 in respect of post-retirement benefits.
5.1.4 Responsibilities of the Board of Directors for the preparation of the consolidated accounts
The Board of Directors is responsible for the preparation of consolidated accounts that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union and with the legal and regulatory requirements applicable in Belgium, and for such internal control as the board of directors determines is necessary to enable the preparation of consolidated accounts that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated accounts, the board of directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the board of directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the consolidated accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated accounts.
In performing our audit, we comply with the legal, regulatory and normative framework applicable to the audit of the consolidated accounts in Belgium.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:
- Identify and assess the risks of material misstatement of the consolidated accounts, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the board of directors.
- Conclude on the appropriateness of the board of directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our statutory auditor’s report to the related disclosures in the consolidated accounts or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our statutory auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
- Evaluate the overall presentation, structure and content of the consolidated accounts, including the disclosures, and whether the consolidated accounts represent the underlying transactions and events in a manner that achieves fair presentation.
- Obtain sufficient and appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with the audit committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the audit committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the audit committee, we determine those matters that were of most significance in the audit of the consolidated accounts of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter.
5.2 Report on other legal and regulatory requirements
5.2.1 Responsibilities of the Board of Directors
The Board of Directors is responsible for the preparation and the content of the director’s report on the consolidated accounts, the non-financial information and the other information included in the annual report.
5.2.2 Statutory auditor’s responsibilities
In the context of our mandate and in accordance with the Belgian standard (Revised) which is complementary to the International Standards on Auditing (ISAs) as applicable in Belgium, our responsibility is to verify, in all material respects, the directors’ report on the consolidated accounts and the other information included in the annual report, and to report on these matters.
5.2.3 Aspects related to the directors’ report on the consolidated accounts and to other information included in the annual report
In our opinion, after having performed specific procedures in relation to the directors’ report on the consolidated accounts and the other information included in the annual report, this report is consistent with the consolidated accounts for the year under audit, and is prepared in accordance with the article 119 of the Companies’ Code.
In the context of our audit of the consolidated accounts, we are also responsible for considering, in particular based on the knowledge acquired resulting from the audit, whether the directors’ report on the consolidated accounts and the other information included in the annual report on the consolidated accounts is materially misstated or contains information which is inadequately disclosed or otherwise misleading. In light of the procedures we have performed, there are no material misstatements we have to report to you.
The non-financial information required by virtue of article 119, §2 of the Companies’ Code is included in the directors’ report on the consolidated accounts. The Company has prepared the non-financial information, based on GRI standards. However, we do not express an opinion as to whether the non-financial information has been prepared in accordance with the GRI standards as disclosed in the consolidated accounts.
5.2.4 Statement related to independence
- Our registered audit firm and our network did not provide services which are incompatible with the statutory audit of the consolidated accounts, and our registered audit firm remained independent of the Group in the course of our mandate.
- The fees for additional services which are compatible with the statutory audit of the consolidated accounts referred to in article 134 of the Companies’ Code are correctly disclosed and itemized in the notes to the consolidated accounts.
5.2.5 Other statements
- This report is consistent with the additional report to the audit committee referred to in article 11 of the Regulation (EU) N° 537/2014.
Brussels, 27 February 2019
The Statutory Auditor
PwC Reviseurs d’Entreprises scrl / Bedrijfsrevisoren cvba
Represented and signed by