ANNUAL REPORT 2021
LUNDBECK
ANNUAL REPORT 2021
= CONTENTS
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INDEPENDENT
AUDITOR'S
REPORTS
CONTINUED
Key audit matter
Sales deductions in the U.S.
As of 31 December 2021, Management has recognized a
provision for discounts and rebates of DKK 923 million (2020: DKK
1,002 million).
The Group provides rebates and discounts to customers in the
U.S. that fall under certain government mandated reimbursement
arrangements, of which the most significant is Medicaid. These
arrangements result in deductions to gross sales in arriving at net
revenue. The period passing between the sales to distributors and
payment of the related rebates under the U.S. Federal and State
Government Healthcare programs may be several months and
require the unsettled amounts to be recognized as a provision.
We focused on these arrangements because they are complex
and require significant estimation by Management in establishing
an appropriate provision for the unsettled amounts. This includes
estimation of sales volumes subject to the rebates, estimation of
applicable rebate percentages, and estimation of the lag time
described above.
We refer to note 1.5, 15 and 25 in the consolidated financial
statements.
Impairment of product rights
As of 31 December 2021, the Group has product rights of DKK
17,097 million (2020: DKK 17,632). Product rights are tested when
there is an indication of impairment, and product rights not yet
commercialized are tested annually for impairment.
The recoverability of the carrying value of product rights is
contingent on future cash flows and/or the outcome of research
and development activities. The determination of the recoverable
amounts includes significant estimates, which are highly sensitive
and depend upon key assumptions, including the probability of
technical and regulatory success, amount and timing of projected
future cash flows, patent expiry, and discount rate assumptions.
Changes in these assumptions could have an impact on the
recoverable amount of product rights.
We focused on this area as the amounts involved are material and
there is a risk that the product rights will be impaired if the key
assumptions deviate negatively from the expectations.
We refer to note 1.5, 6 and 25 in the consolidated financial
statements.
How our audit addressed the key audit matter
We evaluated and tested relevant controls related to the provision for
rebates and discounts in the U.S., including applicable IT systems and
Management's monitoring controls.
We obtained Management's calculations under the reimbursement
arrangements and evaluated the accuracy of the calculations made.
Further, we assessed and tested key data inputs and significant
assumptions and recalculated the rebate percentages.
We obtained and assessed the Group's estimate of the period from sale to
payment of rebates, and rebate percentages applied, and inquired
Management about their estimation process.
We considered the Group's historical provisions by comparing the actual
rebate with the rebate percentage estimate used by Management to
recognize the provision, including performing a retrospective review of the
prior period provision compared to subsequent payments to evaluate the
accuracy of Management's estimate and to identify any potential
management bias.
We evaluated the presentation and disclosures of sales deductions in the
U.S. in the consolidated financial statements.
We evaluated the design and tested the operating effectiveness of the
Group's controls for assessing impairment indicators and the recoverability
of the carrying value of product rights.
For product rights with impairment indicators and product rights not yet
commercialized, we among others:
• Tested Management's process for determining the recoverable amount;
• Evaluated the appropriateness of the methodology used in the
impairment tests;
• Evaluated Management's assumptions used in the impairment tests,
including the probability of technical and regulatory success, amount and
timing of projected future cash flows, and impact of the expiry of patents;
• Tested the underlying data used in the impairment tests, including
reconciliation of the cash flows to Management approved Long Term Plan
and forecasts; and
• Included our in-house valuation experts to assess the valuation
techniques used and to assist with the evaluation of certain key
assumptions, including the discount rates applied.
Moreover, we evaluated the disclosures of impairment testing in the
consolidated financial statements.View entire presentation