2 May 2013 p. 01 R&D audit at LEO Pharma 1 st May 2013
Background 2 May 2013 p. 02 Group • Danish parent company • Research-based pharmaceutical company specialising in Dermatological and Thrombosis products • Founded in 1908 • No shareholders, owned by LEO Foundation (independent private institution whose aim is to ensure the continuation of LEO Pharma and its affiliated companies as an independent pharmaceutical group) • Current focus is on dermatological products, expansion into new markets and providing new patient solutions
LEO Pharma today 2 May 2013 p. 03 Around 4,800 employees in 61 countries Products sold in more t than 100 countries
Group Research & Development 2 May 2013 p. 04 • More than 600 scientists and researchers work in t R&D and develop drugs and New Chemical Entities (NCE). • We develop drug products from discovery to commercialisation • Our research focuses on dermatology. • We investigate and manage licensing activities and agreements.
Background 2 May 2013 p. 05 Ireland • Over 50 years in Ireland (440 employees) between Dublin and Cork t • Two separate legal entities reporting to Danish Parent company • Dublin plant – Finished Goods, Cork plant – API • Dublin site manufactures many of the Group’s strategic products • 2 of 6 Manufacturing sites of LEO Pharma based in Ireland (others in Denmark, France and Australia) • Some Group functions being based out of Ireland in recent years e.g. regulatory affairs, internal audit, QA Marketing and Affiliates Compliance
LEO Ireland – Strategic focus • LEO Ireland’s importance within the LEO Group has grown significantly. • Critically now also involved with projects central to the Group’s development. • Ireland’s highly qualified workforce and management capabilities have secured increased R&D work from the Group.
LEO Ireland – Strategic focus (cont’d) 2 May 2013 7 • Increased level of R&D work happening on site in Dublin and Cork over the last number of years e.g. in Dublin FTEs in 2003 R&D base year at 5 vs 16 in 2009 R&D tax credit claim. • Strategy is to leverage from R&D initiatives to secure future manufacturing. • Preserve and ultimately increase employment.
R&D Activities at LEO Dublin 2 May 2013 8 Establishment of the Manufacturing Development Department (MDD) in late 1980s: • focusing on process development, technology transfer and technical support Further expansion of MDD over the years: • Clinical Trial batches commenced being manufactured by MDD in 2003. • Department expanded - majority of development scientists Ph.D. level. • In addition to MDD, Project and Production Engineering involved in process design and development. • 2008 - Commitment from LEO Denmark to utilise MDD expertise in R&D projects from early stages of development • 2010 - MDD expand further to become the Manufacturing Development and New Product Introduction Dept. • 2012 – Announcement of new Technology Centre to be based in LEO Dublin. • 2013 – Technology management based in Dublin
Pre-Audit 2 May 2013 p. 09 • R&D credit claims submitted for Dublin and Cork for each t year from 2004 • Detailed claim reports prepared and documented in line with Revenue requirements (TB 71) • Submitted on request to LCD case manager – no further queries • In April 2011, reports for 2008 and 2009 for Dublin and Cork were requested by new case manager.
Audit preparation – the basics 2 May 2013 p. 010 • LEO Dublin 2009 R&D claim chosen for audit ; first such audit for Dublin or Cork since credit system introduced t • Immediate engagement with advisors and Revenue to agree methodology • Agree expectations and relevant dates for all aspects of audit (technical and financial) • Agree appropriateness of external technical expert • Formulate agenda in collaboration with Revenue case manager • Ultimately four out of eight projects chosen (highest cost)
Audit Timeline 2 May 2013 p. 011 Communications with Revenue t E-mail from Revenue R&D re R&D reports Notification audit and 2 day requested of audit 1 day Tech Tech technical for 2008 & Tech letter financial expert 1 expert 3 audit 2009 expert 2 received audit Sep 2011 Nov 2011 Feb 2012 Aug 2012 Sep 2012 Oct 2012 April 2011
Audit preparation - Technical 2 May 2013 p. 012 Sep 2011 – Sep 2012 • Technical project leaders briefed t • Self review undertaken by technical teams • Summary folders prepared – project plans, project updates, development protocols, raw data from trials, reports • Plant tour planned to be specifically relevant to selected projects • Focus on audience – transparent and open delivery
Audit preparation - Financial 2 May 2013 p. 013 Sep 2011 – Sep 2012 • Undertook detailed self review/consider voluntary disclosure risk t • Stress test undertaken in conjunction with tax advisors • Invoices/purchase orders/filenotes reviewed e.g. overheads, capital allocations • Timesheets – made up circa 50% of claim • Third party 10% check • Some errors discovered requiring disclosure (some amounts under claimed also)
Audit preparation 2 May 2013 p. 014 Main challenges • Long projects spanning a no of years - some personnel involved in t R&D had since left therefore others needed to familiarise themselves with files • Varying potential interpretations of guidelines/legislation meant grey areas for inclusion of certain costs • Difficulty in documenting some areas of spend e.g. energy • Not all development failures documented (particularly engineering) • Some documents off site due to legal proceedings • Base year (2003) information – difficulties in preparing due to passage of time, how to prove no other R&D spend
Audit participants 2 May 2013 p. 015 Preparations and Audit days • Project leaders t • Heads of departments (R&D and Engineering) • Finance • Tax advisors
Technical Audit 2 May 2013 p. 016 20/21 September – Day 1 • Revenue Case Manager and Technical Expert t • Disclosure letter given and payment made to Revenue • Introductory presentation from M.D. • Reflects importance of R&D to LEO’s vision for Ireland
Technical Audit 2 May 2013 p. 017 Day 1 (cont’d) • Presentation from each of project leaders, samples t shown, video clips for increased understanding • Plant tour focused on claim activities • Detailed project documentation provided, auditors reviewed alone • Questions to LEO
Technical Audit 2 May 2013 p. 018 20/21 September – Day 2 • Technical expert asked to speak to certain individuals t involved in the projects, focus on one large project (highest spend, longest no. of years) • Focus on: ◦ Third party development partners – understanding their level of involvement ◦ Proof from documentation and interviews that LEO personnel identified in claim were carrying out the R&D ◦ Start and end dates of projects
Financial Audit 2 May 2013 p. 019 24 October • E-mail from Revenue on 10 October outlining areas of focus t for financial audit • Revenue case manager LCD + junior colleague • Requested further detail on disclosures • Systematic checks, back-up examined, copies of documents taken and requested • A lot covered, efficient day with pre-warning of areas
Audit Result 2 May 2013 p. 020 Where we are now • Technical report received confirming all four t projects examined qualified as R&D • No official letter from Revenue yet post financial audit • Informal communications that there are no significant issues for follow-up
Audit Learnings 2 May 2013 p. 021 What we will change • Ensure Finance team and R&D technical team are on the same page t • Consistency • Timesheets – qualifying activities better defined to make overall qualitative decisions easier • Identify specific projects and start work on R&D claims during the year in question (live process) • Filtering process – when has uncertainty been resolved?
Audit learnings (cont’d) • More potential R&D within LEO Ireland? • Documentation management - be more audit ready (real- time documentation), inclusion of bibliography in claim doc • Improve the actual claim document – user friendly (i.e. Revenue) • Technical personnel spent a lot of time in preparations - communication on difference between Revenue audit and other audits • Maintain contact and relationship with Revenue
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