Contract analysis

I. EXECUTIVE SUMMARY This memorandum provides a comprehensive status report on the activities undertaken during the third quarter of 2022 (July 1, 2022 through September 30, 2022) in connection with the ongoing Internal Revenue Service Large Business & International Division ("LB&I") examination of Penterra Pharmaceuticals Corp.'s ("PPC" or the "Company") transfer pricing positions for tax years 2017 through 2020. Th

II. EXAMINATION OVERVIEW AND BACKGROUND A. Taxpayer Information Penterra Pharmaceuticals Corp. is a Delaware corporation publicly traded on the Nasdaq Stock Market under the ticker symbol PPCA. PPC's principal offices are located at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. For fiscal year 2020, PPC reported consolidated revenue of approximately $6.82 billion, pre-tax income of approximately

III. IDR RESPONSE ACTIVITY — Q3 2022 A. Summary of IDRs Received and Responded To The IDR response phase has been the primary focus of the defense team's activity during Q3 2022. As of September 30, 2022, the IRS has issued a total of twelve (12) Information Document Requests, numbered IDR No. 1 through IDR No. 12. We anticipate that the IRS will ultimately issue approximately 47 IDRs over the full course of the exam

IV. LEGAL RESEARCH AND ANALYSIS COMPLETED During Q3 2022, the C&H team completed a substantial body of legal research addressing the core issues raised by the IRS examination. These memoranda have been prepared as privileged attorney work product and are intended to inform C&H's defense strategy, to identify potential vulnerabilities in PPC's positions, and to provide the analytical foundation for responding to any p

1. IRC § 482 Arm's-Length Standard and Best Method Rule Date: July 20, 2022 Authors: Leila Nazari and Garrett Simmons This memorandum provides a comprehensive analysis of the arm's-length standard under IRC § 482 and Treasury Regulation § 1.482-1(d), including the best method rule that governs the selection of the most reliable transfer pricing methodology for each controlled transaction. The memorandum surveys the r

2. Qualified Cost-Sharing Arrangements Under Treas. Reg. § 1.482-7 Date: August 5, 2022 Author: Leila Nazari This memorandum analyzes the regulatory requirements for qualified cost-sharing arrangements under the comprehensive regulations promulgated in Treasury Regulation § 1.482-7. The memorandum addresses the requirements for CSA qualification, including the documentary requirements, the rules for computing reasona

3. Arm's-Length Royalty Rate Under Treas. Reg. § 1.482-4 Date: August 12, 2022 Author: Garrett Simmons This memorandum examines the legal standards for establishing an arm's-length royalty rate for intangible property under Treasury Regulation § 1.482-4, with particular emphasis on the comparable uncontrolled transaction method. The memorandum analyzes comparability factors specific to pharmaceutical IP licenses, inc

4. Economic Substance Doctrine and DEMPE Functions Date: August 18, 2022 Author: Leila Nazari This memorandum analyzes the economic substance doctrine as applied in the transfer pricing context, with particular focus on the DEMPE framework (Development, Enhancement, Maintenance, Protection, and Exploitation of intangible property) articulated in the OECD Transfer Pricing Guidelines. The memorandum surveys relevant U.

5. Impact of TCJA on Transfer Pricing Positions — TY 2017 vs. 2018–2020 Date: August 25, 2022 Author: Leila Nazari This memorandum analyzes the effect of the Tax Cuts and Jobs Act (effective January 1, 2018) on PPC's transfer pricing exposure across the examination period. The analysis addresses the reduction in the U.S. corporate tax rate from 35% to 21%, the introduction of the GILTI regime under IRC § 951A, and th

6. IRC § 6662(e) Penalty Protection and Reasonable Cause Defense Date: September 2, 2022 Author: Garrett Simmons This memorandum analyzes the contemporaneous documentation requirements under IRC § 6662(e)(3)(B) and the reasonable cause defense available to taxpayers in transfer pricing cases. The memorandum examines the standards for establishing that the taxpayer maintained contemporaneous documentation sufficient t

7. Altera and Harborview Corporation Case Analysis Date: September 15, 2022 Authors: Garrett Simmons and Leila Nazari This memorandum examines the holdings and reasoning of two landmark transfer pricing decisions and their applicability to PPC's positions. With respect to Altera Corp. v. Commissioner, 941 F.3d 1200 (9th Cir. 2019), the memorandum analyzes the Ninth Circuit's holding that Treasury Regulation § 1.482-7

8. IRC § 367(d) Outbound IP Transfer Considerations Date: September 28, 2022 Author: Leila Nazari This memorandum analyzes whether the IRS might seek to recharacterize the CSA structure as an outbound transfer of intangible property subject to IRC § 367(d), rather than a cost-sharing arrangement subject to IRC § 482 and Treasury Regulation § 1.482-7. The memorandum examines the interplay between § 367(d) and § 482, t

V. FUNCTIONAL ANALYSIS AND ECONOMIC WORK — WHITMORE VALUATION A. Kovel Engagement Status The Kovel engagement letter with Whitmore Valuation Group LLC was executed on June 20, 2022 (reference number 1018-00009-KV). Whitmore's offices are located at 200 Ashbury Asset Advisors, Suite 700, Boston, Massachusetts 02109. The engagement is structured as a Kovel arrangement to ensure that the economic analyses prepared by Wh

VI. FIN 48 / ASC 740-10 RESERVE ANALYSIS Mr. Cross and Mr. Simmons completed a memorandum dated September 2022 providing C&H's legal analysis in support of PPC's uncertain tax position reserve under ASC 740-10 (formerly FIN 48) related to PPC's Irish IP-holding structure and transfer pricing positions. The memorandum analyzed PPC's transfer pricing positions under the two-step framework prescribed by ASC 740-10: firs

VII. IRS EXAMINATION OBSERVATIONS AND PRELIMINARY ASSESSMENT A. IRS Focus Areas Observed Based on the patterns of IDR requests received during Q3 2022, the substance of the opening conference held on June 28, 2022, and our experience with the IRS LB&I transfer pricing practice, we have identified the following as the IRS examination team's primary areas of focus:

1. CSA Structure and Cost-Sharing Ratios. The IRS has devoted significant attention to the CSA agreement itself, the methodology for computing PBI's cost-sharing percentages, and the composition of the R&D cost pool. The detailed requests for cost pool data and allocation methodology (IDR No. 6) and product-level revenue data by territory (IDR No. 11) are consistent with an IRS challenge to PPC's reasonably anticipat

2. Legacy IP Royalty Rate. The IRS's request for the legacy IP license agreement (IDR No. 3) and the contemporaneous transfer pricing documentation (IDR No. 4) indicate a focus on the 4.5% royalty rate. Based on our experience, the IRS is likely developing its own CUT analysis to identify comparable license transactions that it believes support a higher royalty rate.

3. PCT Valuation. The request for the PCT valuation report and supporting workpapers (IDR No. 5) confirms the IRS's interest in the $312 million PCT payment. The IRS frequently challenges PCT payments as undervaluing the pre-existing IP contributed to cost-sharing arrangements, and we anticipate a similar challenge here.

4. PBI Economic Substance and DEMPE Functions. The requests for PBI personnel data (IDR No. 8), board minutes (IDR No. 9), and physical presence documentation (IDR No. 12) indicate that the IRS is evaluating whether PBI has sufficient economic substance to justify the income allocated to it under the transfer pricing structure, and whether key DEMPE functions remained in the United States rather than being genuinely

VIII. BUDGET AND FEE STATUS A. Calderwood & Harkness LLP Fees Original Estimated Fee Range. As set forth in the engagement letter dated June 2, 2022, and as further detailed in the budget estimate prepared for Mr. Whitfield in June 2022, C&H's estimated fee range for the complete representation of PPC through Appeals resolution is $4.5 million to $7.0 million. This estimate encompasses all three phases of the defense