R&D audit at LEO Pharma

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Gordon Lyons
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1 p. 01 R&D audit at LEO Pharma 1 st May 2013

2 Background Group Danish parent company p. 02 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

3 LEO Pharma today Around 4,800 employees in 61 countries p. 03 Products sold in more than 100 countries

4 Group Research & Development p. 04 More than 600 scientists and researchers work in 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.

5 Background Ireland p. 05 Over 50 years in Ireland (440 employees) between Dublin and Cork 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

6 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.

7 LEO Ireland Strategic focus (cont d) 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.

8 R&D Activities at LEO Dublin 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 Department expanded - majority of development scientists Ph.D. level. In addition to MDD, Project and Production Engineering involved in process design and development Commitment from LEO Denmark to utilise MDD expertise in R&D projects from early stages of development MDD expand further to become the Manufacturing Development and New Product Introduction Dept Announcement of new Technology Centre to be based in LEO Dublin Technology management based in Dublin

9 Pre-Audit p. 09 R&D credit claims submitted for Dublin and Cork for each 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.

10 Audit preparation the basics p. 010 LEO Dublin 2009 R&D claim chosen for audit ; first such audit for Dublin or Cork since credit system introduced 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)

11 Audit Timeline Communications with Revenue p. 011 R&D reports requested for 2008 & from Revenue re R&D audit and Tech expert 1 Tech expert 2 Tech expert 3 Notification of audit letter received 2 day technical audit 1 day financial audit April 2011 Sep 2011 Nov 2011 Feb 2012 Aug 2012 Sep 2012 Oct 2012

12 Audit preparation - Technical Sep 2011 Sep 2012 p. 012 Technical project leaders briefed 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

13 Audit preparation - Financial Sep 2011 Sep 2012 Undertook detailed self review/consider voluntary disclosure risk 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) p. 013

14 Audit preparation Main challenges p. 014 Long projects spanning a no of years - some personnel involved in 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

15 Audit participants Preparations and Audit days p. 015 Project leaders Heads of departments (R&D and Engineering) Finance Tax advisors

16 Technical Audit 20/21 September Day 1 p. 016 Revenue Case Manager and Technical Expert Disclosure letter given and payment made to Revenue Introductory presentation from M.D. Reflects importance of R&D to LEO s vision for Ireland

17 Technical Audit Day 1 (cont d) p. 017 Presentation from each of project leaders, samples shown, video clips for increased understanding Plant tour focused on claim activities Detailed project documentation provided, auditors reviewed alone Questions to LEO

18 Technical Audit 20/21 September Day 2 p. 018 Technical expert asked to speak to certain individuals 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

19 Financial Audit 24 October p from Revenue on 10 October outlining areas of focus 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

20 Audit Result Where we are now p. 020 Technical report received confirming all four 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

21 Audit Learnings What we will change p. 021 Ensure Finance team and R&D technical team are on the same page 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?

22 Audit learnings (cont d) More potential R&D within LEO Ireland? Documentation management - be more audit ready (realtime 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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