Contract analysis

From: Leonard Cross <lcross@calderwoodharkness.com> To: Marcus Whitfield <mwhitfield@penterra.com> Cc: Sylvia Hartwell <shartwell@calderwoodharkness.com> Date: Sat, 16 Dec 2023 04:47:00 -0000 Subject: PPC IRS Examination (Matter 1018-00009) — Draft Formal Protest for Client Review — Filing Deadline Dec. 22

I hope you are both well. I am writing to transmit Version 3 of the Formal Protest for your review and comment. Please find attached the following:

- **formal-protest-draft-v3-client-review.docx** — near-final draft of the Formal Protest - **Exhibit A** — PPC corporate structure chart (PPC → PHL → PBI → PMI) - **Exhibit B** — Summary of cost-sharing arrangement terms (effective July 1, 2012; PCT payment of $312M; cost-sharing percentages by year) - **Exhibit C** — Summary of Whitmore Valuation Group's economic analyses (CUT, CPM/TNMM with 22 comparables, and DCF

This version incorporates revisions from Sylvia Hartwell and my own comments on Version 2, which was circulated internally on December 12. As you know, our filing deadline is **December 22, 2023** — the extended deadline the IRS agreed to following my November 15 extension request from the original 30-Day Letter date of November 8, 2023. Given that we are now six days out, I would appreciate your prompt attention to

The Protest contests the full **$380.4 million net proposed adjustment** issued in the Notice of Proposed Adjustment (NOPA) dated October 12, 2023, covering tax years 2017 through 2020. It is organized around the following principal arguments:

1. **Cost-Sharing Arrangement.** We defend PBI's cost-sharing percentages of 38.2%–42.7% for TY 2017–2020 and contest the IRS's proposed increase to 48.2%–53.7%, which generated proposed CSA adjustments totaling $235.01 million. The Protest addresses the proper application of Treas. Reg. § 1.482-7 and demonstrates that PBI's cost shares are consistent with its reasonably anticipated benefits.

2. **Legacy IP Royalty Rate.** We defend the 4.5% royalty rate as arm's-length, supported by Whitmore Valuation Group's comparable uncontrolled transaction (CUT) analysis, which identified 14 comparable pharmaceutical license agreements with an interquartile range of 3.1%–6.8% and a median of 4.4%. The Protest contests the IRS's proposed 11.0% rate and the resulting $188.04 million in royalty adjustments under IRC §

3. **PCT Valuation.** We defend the $312 million platform contribution transaction payment as within the arm's-length range of $278M–$361M per Whitmore's DCF/income-method analysis using a 9.8% weighted average cost of capital. The Protest rebuts the IRS's valuation of $852 million, which was derived using a 7.2% WACC that we believe significantly understates the risk profile of the intangibles at the time of the tra

4. **Economic Substance / DEMPE Functions.** The Protest presents a robust demonstration of PBI's substantive operations in Ireland, including its growth from 52 employees at establishment in 2012 to 185 employees during the examination period, 42 board meetings held in Dublin during TY 2017–2020, €47.2 million in cumulative regulatory expenditures, independent pricing decisions across 68 country markets, and approxi

5. **Penalty Protection.** We assert a reasonable-cause defense under IRC § 6662(e)(3)(B), supported by contemporaneous transfer pricing documentation prepared by Crestfield & Associates, and seek full abatement of the proposed $15.98 million penalty.

6. **Correlative Offset.** The Protest preserves the $42.65 million correlative offset allowed by the exam team to avoid double-counting between the CSA and royalty adjustments.

The Protest addresses the applicable legal and regulatory framework under IRC § 482, Treas. Reg. §§ 1.482-4 and 1.482-7, and IRC § 6662(e), and cites the OECD Transfer Pricing Guidelines as persuasive authority where relevant. The filing references PPC's EIN (22-3741856) and IRS Exam Team ID (LB&I-NE-TP-2022-00641) throughout.

I would ask that you and your teams focus on the following as you review the draft:

- **Factual accuracy.** Please review the factual statements throughout the Protest carefully, particularly those regarding PBI's operations, Aidan Naughton's role as Managing Director, employee headcount figures by year, and the regulatory expenditure amounts cited in the economic substance section.

- **Product-level revenue figures.** The Protest cites global and non-Americas revenue figures for Veritaxol, Imvara, and Cerulon. Please confirm that these figures align with your internal records.

- **Additional factual points.** If there are any additional facts you believe should be emphasized — particularly regarding PBI's independent commercial decision-making authority — please flag those for us.

- **Settlement strategy alignment.** I want to note that the settlement authority parameters we discussed in my December 10 memorandum are not reflected in the Protest itself, which contests the full adjustment. This is by design. The Protest's framing is, however, consistent with the strategy we discussed for positioning the case at Appeals.

I would appreciate receiving your comments by **end of day Wednesday, December 20**, to allow sufficient time for final revisions and filing on December 22. Garrett Simmons will coordinate any final changes and manage the production of the filing copy.

Once filed, the case will be referred to IRS Appeals. I anticipate assignment of an Appeals Officer in January 2024, with an Appeals conference likely scheduled for late February or March 2024. I will keep you apprised of developments on that front as they arise.

Dr. Helena Vasquez at Whitmore Valuation Group has reviewed and signed off on the economic analysis summaries presented in Exhibit C. We have also coordinated with Ciarán Thornbury at Thornbury & Keogh in Dublin regarding the Irish-side aspects referenced in the Protest to ensure consistency across jurisdictions.

If either of you would prefer to discuss any section of the draft before providing written comments, I am happy to schedule a call early in the week of December 18 — please let Garrett know your availability and we will arrange it.

I want to thank you both for the collaborative effort throughout this examination process. Responding to 47 IDRs between June 2022 and September 2023 was no small undertaking, and the thoroughness of PPC's responses has put us in a strong position as we move to Appeals. I appreciate your team's continued dedication to this matter.

Please do not hesitate to reach out with any questions over the weekend.

**Leonard Cross** Senior Partner Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Tel: (215) 555-4200 lcross@calderwoodharkness.com

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