Contract analysis

I. Introduction and Purpose This letter constitutes a supplemental written submission on behalf of our client, Penterra Pharmaceuticals Corp. ("PPC" or the "Company"), submitted by Calderwood & Harkness LLP ("C&H") in its capacity as authorized representatives of PPC pursuant to IRS Form 2848 (Power of Attorney and Declaration of Representative) filed with the Internal Revenue Service on June 8, 2022. C&H is authoriz

II. Background and Context A. The IRS's Proposed Royalty Rate Adjustment As PPC set forth in its Formal Protest and as discussed at the February 28 Appeals conference, the Notice of Proposed Adjustment ("NOPA") issued by the LB&I examination team on October 12, 2023 proposed a significant upward adjustment to the legacy IP royalty rate applicable to the license agreement between PPC and PBI. Specifically, the NOPA pr

1. Additional comparable agreements. The Appeals Officer asked whether additional comparable agreements could be identified to expand the dataset beyond the original fourteen CUT agreements, with particular emphasis on identifying agreements involving mature or declining pharmaceutical compounds, consistent with the lifecycle characteristics of PPC's legacy compound portfolio.

2. Licensee functions and risk-bearing adjustments. The Appeals Officer inquired whether comparability adjustments could be refined to account more precisely for differences in the functions performed and risks assumed by the licensees in the comparable agreements, as compared to PBI's role as a substantive IP owner and risk-bearing principal — rather than a passive or limited-function licensee — in the non-Americas

3. Impact of declining revenue trajectory. The Appeals Officer asked whether the declining revenue trajectory of the legacy compounds ($814.6 million in 2017 declining to $624.1 million in 2020) should affect the comparability analysis or the applicable royalty rate, and if so, how. We have carefully considered each of these questions and have directed WVG to conduct supplemental analysis responsive to each. The resu

III. Supplemental CUT Comparable Agreements A. Search Methodology for Additional Comparables In response to the Appeals Officer's request for additional comparable agreements, WVG conducted a supplemental search process designed to identify pharmaceutical license agreements not previously included in the original fourteen-agreement dataset. The supplemental search was conducted in February 2024 and was designed to be

IV. Updated Interquartile Range Analysis A. Revised IQR with 17 Comparables Incorporating the three newly identified comparable agreements into the dataset of seventeen agreements, WVG has computed a revised interquartile range analysis. The addition of the three new comparables — which carry royalty rates of 3.8%, 4.2%, and 5.1%, all concentrated in the middle portion of the distribution — has the effect of modestly

1. PPC's 4.5% royalty rate remains within the revised arm's-length interquartile range. The Company's rate falls comfortably within the 3.4% to 6.2% interquartile range and is approximately 1.1 percentage points above the lower quartile and 1.7 percentage points below the upper quartile.

2. PPC's 4.5% royalty rate remains near the revised median. The Company's rate is within two-tenths of a percentage point of the revised median of 4.3% — a negligible difference that confirms the arm's-length nature of the rate.

3. The IRS's proposed 11.0% rate remains dramatically above the interquartile range. The proposed rate exceeds the upper end of the interquartile range (6.2%) by 4.8 percentage points and exceeds the upper end of the full range of all seventeen comparables (8.3%) by 2.7 percentage points. There is no support in the comparable transaction data for a royalty rate of 11.0%. Under Treasury Regulation § 1.482-1(e)(2)(iii)

V. Comparability Adjustments Addressing Appeals Officer Questions A. Adjustments for Licensee Functions and Risk-Bearing We turn now to the Appeals Officer's question regarding licensee risk-bearing and DEMPE (Development, Enhancement, Maintenance, Protection, and Exploitation) functions, which was raised during the February 28 conference and which we address through the updated comparability adjustments set forth in

VI. Implications for CSA Cost-Sharing Ratio and Overall Proposed Adjustment Although the primary focus of this supplemental submission is the legacy IP royalty rate, we briefly note that the supplemental CUT analysis has important implications for the overall adjustment proposed in the NOPA, including the CSA cost-sharing ratio challenge. As set forth in PPC's Formal Protest, the total proposed adjustment across TY 2

VII. Penalty Protection We briefly reiterate PPC's position regarding the proposed penalties. PPC maintained contemporaneous transfer pricing documentation for all four tax years under examination (TY 2017, 2018, 2019, and 2020), which was prepared by Crestfield & Associates LLP, an independent accounting and advisory firm with a recognized transfer pricing practice. The documentation was prepared in compliance with

VIII. Conclusion The three newly identified comparable agreements and the updated benchmarking analysis presented in this supplemental submission confirm and reinforce the conclusions of WVG's original CUT analysis. The principal conclusions are as follows:

1. PPC's 4.5% legacy IP royalty rate is squarely within the revised arm's-length interquartile range of approximately 3.4% to 6.2% of net sales and is within two-tenths of a percentage point of the revised median of approximately 4.3%.

2. The expanded seventeen-agreement dataset, which includes three independently identified comparable agreements involving mature pharmaceutical compounds with characteristics closely comparable to PPC's legacy compound portfolio, provides substantial additional confidence in the reliability and robustness of the arm's-length range.

3. The comparability adjustments addressing the Appeals Officer's questions regarding licensee functions and risk-bearing and the declining revenue trajectory of the legacy compounds further support PPC's 4.5% rate. PBI's role as a substantive, risk-bearing principal with 185 employees, independent pricing authority across 68 country markets, and €47.2 million in cumulative regulatory expenditures warrants a lower —

4. The IRS's proposed 11.0% rate is unsupported by appropriately comparable transactions and should be rejected. The IRS-selected CUT agreements are not comparable due to fundamental differences in product stage, licensee functionality and risk-bearing, geographic scope, and non-royalty consideration.

5. The proposed penalties of approximately $15.98 million are without merit and should be fully abated, as PPC maintained contemporaneous documentation and its pricing positions fall within the arm's-length range. We respectfully request that Appeals Officer Castañeda consider this supplemental evidence, together with the enclosed WVG Supplemental CUT Report and supporting enclosures, in her evaluation of the case an

IX. Enclosures The following enclosures accompany this supplemental submission: Enclosure 1: WVG Supplemental CUT Report, prepared by Dr. Helena Vasquez, Managing Director, and Dr. Rohan Chakrabarti, Senior Director, Whitmore Valuation Group LLC. This report details the three newly identified comparable license agreements, the updated interquartile range analysis incorporating all seventeen comparables, and the compa

X. Signature block Respectfully submitted, CALDERWOOD & HARKNESS LLP By: ________ Leonard Cross, Partner Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, Pennsylvania 19103 Telephone: (215) 864-7244 Email: lcross@calderwoodharkness.com cc (via email): Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. Sylv