Contract analysis

I. Background Summary A. Examination History The IRS Large Business & International Division ("LB&I") opened an examination of PPC's federal income tax returns for tax years 2017, 2018, 2019, and 2020 on May 16, 2022, via Letter 2205-A, Notification of Examination. The examination was conducted by Supervisory Revenue Agent Gerald Meskill, who served as Team Manager, and Lead Revenue Agent Patricia Dunleavy, who serve

1. CSA Cost-Sharing Ratio Adjustments. The NOPA proposes an increase of PBI's cost-sharing percentage by approximately eight (8) to twelve (12) percentage points across each of the tax years 2017 through 2020. The examination team contends that PBI's reasonably anticipated benefits ("RAB") from the intangible development activities conducted under the CSA were understated, and that PBI should have borne a greater sha

2. Legacy Intangible Property Royalty Rate Adjustments. The NOPA proposes an increase in the royalty rate applicable to PBI's use of legacy intangible property — that is, intangible property developed or acquired by PPC prior to the inception of the CSA — from the contractual rate of 4.5% of non-Americas net sales to 11.0% of non-Americas net sales. The examination team challenges PPC's application of the comparable

3. Economic Substance Challenge. The NOPA challenges the economic substance of PBI's role as an intangible property owner and CSA participant. The examination team contends that PBI lacked sufficient decision-making authority, control, and functional capacity to be treated as a bona fide participant in the CSA and as the beneficial owner of the licensed legacy intangible property for purposes of IRC § 482 and the reg

II. Request for Appeals Conference PPC respectfully requests that the Office of Appeals schedule an in-person conference at the earliest available date to consider the issues raised in the Formal Protest. Given the complexity and magnitude of the transfer pricing issues under appeal, PPC believes that an in-person conference will provide the most effective and efficient forum for presentation and discussion of the re

III. Proposed Attendees PPC proposes the following attendees for the Appeals conference:

1. Leonard Cross, Partner, Tax Department, Calderwood & Harkness LLP — Mr. Cross serves as the Responsible Partner for the PPC engagement and will serve as lead presenter at the conference. Mr. Cross will address the legal issues raised in the Protest, including the application of the arm's-length standard under IRC § 482 and the applicable Treasury Regulations, the economic substance of PBI's operations, and the pen

2. Sylvia Hartwell, Partner, Tax Department, Calderwood & Harkness LLP — Ms. Hartwell serves as the Billing Partner for the PPC engagement and will be available to address questions concerning the procedural history of the examination and the overall framework of PPC's transfer pricing positions.

3. Garrett Simmons, Associate, Tax Department, Calderwood & Harkness LLP — Mr. Simmons is the Lead Associate on the engagement and will assist with the presentation of the factual record and the supporting documentation.

4. Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. — Mr. Whitfield is the senior tax officer of PPC and will be available to address questions concerning PPC's intercompany transactions, the business rationale for PPC's transfer pricing policies, and PBI's operations and organizational structure.

5. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. — Ms. Staines will be available to address questions concerning the corporate governance and legal structure of PPC and its subsidiaries, including PBI, and the intercompany agreements that govern the CSA and the legacy IP license.

6. Dr. Helena Vasquez, Managing Director, Whitmore Valuation Group LLC — Dr. Vasquez is the independent economic expert retained by PPC under a Kovel arrangement (Kovel Letter Reference 1018-00009-KV, executed June 20, 2022, pursuant to United States v. Kovel, 296 F.2d 918 (2d Cir. 1961)). Dr. Vasquez is prepared to present and respond to questions concerning the economic analyses supporting PPC's transfer pricing po

IV. Summary of Issues to Be Addressed at the Conference PPC requests confirmation that the Appeals conference will address all issues raised in the Formal Protest. Specifically, PPC anticipates that the conference will address the following principal issues:

1. Cost-Sharing Percentages. The arm's-length nature of PBI's cost-sharing percentages (ranging from 38.2% to 42.7% for tax years 2017 through 2020) under Treasury Regulation § 1.482-7, as determined on the basis of PBI's reasonably anticipated benefits from the intangible development activities conducted under the CSA. PPC will present evidence demonstrating that PBI's cost-sharing percentages were calculated in acc

2. Legacy IP Royalty Rate. The arm's-length nature of the 4.5% legacy intangible property royalty rate under Treasury Regulation § 1.482-4, as supported by PPC's application of the CUT method. PPC's CUT analysis identified fourteen (14) comparable uncontrolled pharmaceutical license agreements, yielding an interquartile range of 3.1% to 6.8%, with a median of 4.4%. The contractual royalty rate of 4.5% falls within th

3. Economic Substance and DEMPE Functions of PBI. PBI's economic substance as an intangible property owner and CSA participant, supported by evidence of PBI's development, enhancement, maintenance, protection, and exploitation ("DEMPE") functions. During the tax years 2017 through 2020, PBI maintained an average of 185 employees, held 42 board meetings in Dublin, incurred cumulative regulatory expenditures of approxi

4. PCT Payment Valuation. The validity of the $312 million platform contribution transaction payment made by PBI at the inception of the CSA. PPC's income method / Discounted cash flow ("DCF") analysis, conducted at a weighted average cost of capital ("WACC") of 9.8%, determined that the arm's-length range for the PCT payment was $278 million to $361 million. The actual PCT payment of $312 million falls within this r

5. Penalty Protection. PPC's entitlement to penalty protection under IRC § 6662(e)(3)(B). PPC maintained contemporaneous transfer pricing documentation for each of the tax years under examination, prepared by qualified transfer pricing professionals, and PPC's transfer pricing positions were supported by reasonable economic analyses and a reasonable application of the applicable transfer pricing methods. PPC will pre

V. Supplemental Materials PPC may wish to submit supplemental written materials in advance of or at the Appeals conference to assist the Appeals Officer in her review of the issues under appeal. Such materials may include additional economic analyses, updated comparability data, or legal memoranda addressing specific issues raised during the course of the Appeals process. PPC respectfully requests that Appeals Office

VI. Administrative Matters PPC respectfully requests that Appeals Officer Castañeda confirm her mailing address and facsimile number for purposes of future correspondence in connection with this matter. PPC also requests confirmation of the case assignment and any docket or case number assigned by the Office of Appeals upon receipt of the Protest and the case file from the examination division. PPC understands that t

VII. Closing PPC is committed to achieving a prompt and efficient resolution of the disputed issues at the Appeals level and believes that a well-organized in-person conference will serve the interests of both PPC and the Service. PPC reiterates its willingness to cooperate fully with the Office of Appeals and to provide any additional information, documentation, or analyses that may be requested by the Appeals Offic