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5.1. Report on the consolidated accounts

Report on the consolidated accounts

Report on the consolidated accounts

Statutory auditor’s report to the General Shareholders’ Meeting of UCB SA/NV for the year ended December 31, 2020

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 consolidated accounts, as well as the other legal and regulatory requirements. This forms part of an integrated whole and is indivisible.

We have been appointed as statutory auditor by the general meeting d.d April 25, 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 December 31, 2020. We started the statutory audit of the consolidated accounts of the Company before 1990.

Unqualified opinion

We have performed the statutory audit of the Group’s consolidated accounts, which comprise the consolidated statement of financial position as at December 31, 2020, the consolidated income statement , the consolidated statement of 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 € 13.319 million and a profit for the year (attributable to equity holders) of € 732 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 December 31, 2020 and of its consolidated financial performance and its consolidated cash flows for the year then ended, in accordance with International Financial Reporting Standards as adopted by the European Union and with the legal and regulatory requirements applicable in Belgium.

Basis for unqualified opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs) as applicable in Belgium. Furthermore, we have applied the International Standards on Auditing as approved by the IAASB which are applicable to the year-end and 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.

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.

Significant judgements and estimates in sales rebates, discounts and returns adjustments recognised in the U.S. (refer to Notes 3.7.1, 4.2.1 and 35)

Description of the Key Audit Matter 

In the U.S., the UCB Group sells products to various customers that are part of commercial and governmental contractual arrangements or other reimbursement programs (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. We identified this matter as a key audit matter because significant amounts of these unsettled adjustments are recorded as accruals in the statement of financial position at year-end. 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 35 , the amount of the accruals at 31 December 2020 is EUR 554 million (EUR 549 million as per 31 December 2019).

How our audit addressed the Key Audit Matter

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.

Carrying value of goodwill and intangible assets (refer to Notes 3.10, 3.14, 3.15, 4.2.2, 14, 20 and 21)

Description of the Key Audit Matter

The UCB Group has € 2.973 million of intangible assets (December 31, 2019 – € 839 million), comprising significant licenses, patents and acquired trademarks. The increase in intangible assets is mainly explained by the acquisitions of Ra Pharmaceuticals and Engage Therapeutics (Note 8 ). In addition, the Group has € 4.964 million of goodwill at December 31, 2020 (December 31, 2019–€ 5.059 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. Therefore, this area has been determined to be a key audit matter.

The Group has one cash generating unit (“CGU”), Biopharma­ceuticals, for goodwill impairment testing purposes.

How our audit addressed the Key Audit Matter

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.

Management’s review of the recoverable amounts of the Group’s assets did not result in the recognition of impairment charges in 2020 (see Note 14 ). As a result of our work, we concur with this position. In addition, 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.

Recognition of deferred tax assets and uncertain tax positions (refer to Notes 3.12, 4.2.5, 32 and 36)

Description of the Key Audit Matter

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 December 31, 2020, the Group has recognised € 605 million of deferred tax assets (December 31, 2019 – € 873 million). The process for the determination of deferred tax assets is complex and involves a significant amount of judgement. These are the reasons why the recognition of deferred tax assets is considered as of most significance in our audit.

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. That is why the provisions for uncertain tax positions are also considered as a key audit matter. At December 31, 2020, the Group has recognised provisions of € 155 million in respect of uncertain tax positions (December 31, 2019 – € 145 million). The increase in provisions for uncertain tax positions is mainly explained by the remeasurement of existing tax risks compensated by the closing of certain tax audits. Liabilities for uncertain tax positions are recorded when the Group considers it probable that a tax position taken is unlikely to be sustained if challenged by the tax authorities and after exhausting all legal remedies. In respect of uncertain tax positions, the Group has recorded income tax receivables for tax relief following Mutual Agreement procedures for an amount of € 25 million (December 31, 2019 – € 18 million). Assets for relief following Mutual Agreement procedures are recorded when the Group considers it probable that a Mutual Agreement procedure may provide for a corresponding adjustment in one or more jurisdictions. This means that, on a net basis, the group has provided for a reserve of € 130 million (December 31, 2019 – € 127 million) to cover for uncertain tax positions.

How our audit addressed the Key Audit Matter

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.

Ongoing litigation, claims and regulatory investigations (refer to Notes 3.28, 4.2.3, 34 and 43)

Description of the Key Audit Matter

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 statement of financial position position or future cash flows.

At December 31, 2020, the Group held provisions of € 245 million (December 31, 2019 – € 218 million) among others in respect of actual legal actions brought against the Group and disclosures have been made in Note 34 in relation to these provisions, as well as the disclosure of contingent liabilities in Note 43 relating to ongoing regulatory investigations or legal claims where the directors believe to have meritorious defences against the claims.

As disclosed in Note 34 and Note 42 , the Group is involved in several product liability cases related to the product Distilbène. In 2015, a provision was recognised for € 50 million representing the expected future cash flows exceeding the insurance coverage and is considered as a significant estimate. This provision amounted to € 112 million as at December 31, 2019 and was further increased to € 133 million as at December 31, 2020.

How our audit addressed the Key Audit Matter

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 € 133 million (December 31, 2019 – € 112 million) by reference to the actual court decisions for closed Distilbène cases and the effect of newly initiated cases in the course of 2020. 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 in Note 34 and Note 42 were in accordance with the requirements of IFRSs as adopted by the European Union.

Ra Pharmaceuticals, Inc acquisition (refer to Note 8.1)

Description of the Key Audit Matter

On the April 2, 2020, UCB successfully completed the acquisition of Ra Pharmaceuticals, Inc. (Ra Pharma) that is now a wholly owned subsidiary of UCB. This acquisition resulted in a business combination under IFRS 3. Former Ra Pharma shareholders received US$ 48 in cash for each Ra Pharma share, resulting in a total cash consideration paid of € 2.095 million, or € 1.878 million,
net of Ra Pharma cash (converted from US$ as at acquisition date).

The purchase price allocation (PPA) was completed by UCB with the support of management’s expert. The main items resulting from the PPA, converted from USD as at acquisition date, comprised of the intangible asset zilucoplan (€ 2.273 million), a goodwill (€ 161 million), a deferred tax liability on the intangible asset, and deferred tax assets related to identified tax benefits flowing from the acquisition (resulting in a net deferred tax liability position of € 384 million).

We identified the Ra Pharmaceuticals Inc acquisition as a key audit matter because the fair value measurement of its goodwill, intangible assets and deferred taxes is based on significant judgements and estimates including projected cash flows, revenue growth, the success of zilucoplan launches in different indications, patent expiry dates, profit margins, and discount rate. Changes in these assumptions might lead to a change in the fair value of goodwill, intangible assets and deferred taxes.

How our audit addressed the Key Audit Matter

We have performed the following procedures over the acquisition:

  • Identification and inspection of the key documents, terms and conditions of the transaction (due diligence reports, clinical trials results, agreements and contracts) and of the acquired company (historical financial statements, SEC filings, stock option plans, …), including inquiries with the predecessor auditor;

  • Audit procedures over the opening balance of Ra Pharma at the date of acquisition and its integration in UCB systems;

  • Review of the hedging documentation in relation with the financing of the acquisition;

  • Review of the IFRS accounting treatment of the acquisition in accordance with IFRS, and of related disclosures.

We obtained the UCB Group’s PPA and tested the reasonableness of the valuation approaches and methods as well as the key assumptions, including profit and cash flow projections, the impact of the expiry of patents, pricing impacts, the probability of success for the indications of zilucoplan and the selection of the discount rate. 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 evaluated the process to prepare the key forecast assumptions and assessed their reasonability.

We obtained and evaluated management’s sensitivity analyses based on numerous drivers such as indications penetration, probability of success, pricing premiums, rebates and discounts, extended release formulations, incremental competitors, or timeline of launches.

We evaluated management’s assumptions regarding the measurement rate of the deferred tax liability and assessed the recognition criteria of deferred tax assets in accordance with IFRS.

Based on the procedures performed, we consider management’s judgements reasonable and did not identify any material misstatements. We also evaluated the appropriateness of the disclosures in Note 8 which we considered appropriate.

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.

Statutory auditor’s responsibilities for the audit of the consolidated accounts

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. A statutory audit does not provide any assurance as to the Group’s future viability nor as to the efficiency or effectiveness of the board of directors’ current or future business management at Group level.

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.