Contract analysis

I. Executive Summary This report presents a Comparable Uncontrolled Transaction ("CUT") analysis of the arm's-length royalty rate applicable to the intercompany license of legacy pharmaceutical intellectual property from Penterra Pharmaceuticals Corp. ("PPC" or the "Taxpayer") to Penterra Biopharma International DAC ("PBI"), PPC's indirect wholly owned subsidiary organized under Irish law. Whitmore Valuation Group LL

II.A. Retention and Privilege Framework Whitmore Valuation Group LLC was retained by Calderwood & Harkness LLP, counsel to Penterra Pharmaceuticals Corp., pursuant to a Kovel engagement letter executed on June 20, 2022 (Reference: 1018-00009-KV). Under the terms of this engagement, all work performed by Whitmore in connection with this analysis has been conducted at the direction of counsel for the purpose of assisti

II.B. Scope of Analysis The scope of this engagement, as defined by the direction of counsel, encompasses the following objectives:

1. Evaluate the arm's-length nature of the 4.5% royalty rate. Determine whether the 4.5% royalty rate charged by PPC to PBI for the intercompany license of legacy pharmaceutical intellectual property satisfies the arm's-length standard under IRC § 482 and the implementing regulations thereunder.

2. Apply the CUT method as the best method. Apply the Comparable Uncontrolled Transaction method under Treas. Reg. § 1.482-4(c) as the best method for testing the arm's-length nature of the royalty rate, in accordance with the best method rule set forth in Treas. Reg. § 1.482-1(c).

3. Identify, screen, and analyze comparable uncontrolled transactions. Conduct a systematic search of publicly available pharmaceutical license agreement databases, SEC filings, and other industry sources to identify third-party license agreements that are comparable to the PPC-PBI legacy IP license, and apply appropriate comparability screening criteria consistent with Treas. Reg. § 1.482-4(c)(2).

4. Determine the arm's-length range. Calculate the arm's-length range of royalty rates from the identified comparable transactions and assess PPC's 4.5% royalty rate against that range.

5. Address the IRS's proposed 11.0% rate. Evaluate the IRS's proposed 11.0% royalty rate and identify the bases upon which the IRS's rate is not supported by properly comparable uncontrolled transactions and is inconsistent with the arm's-length standard.

6. Perform sensitivity and robustness analyses. Conduct sensitivity testing to assess the stability and reliability of the arm's-length range under various alternative approaches to comparable selection and analysis.

7. Provide functional analysis support. Assess PBI's functions, assets, and risks as they relate to the comparability analysis and the determination of the appropriate royalty rate.

II.C. Information Relied Upon In preparing this report, Whitmore has reviewed, analyzed, and relied upon the following categories of information and documentation: • The intercompany legacy IP license agreement between PPC and PBI, including all amendments and schedules thereto; • PPC and PBI audited and unaudited financial statements for the tax years 2017, 2018, 2019, and 2020; • Contemporaneous transfer pricing do

III.A. Penterra Pharmaceuticals Corp. — Overview Penterra Pharmaceuticals Corp. ("PPC" or the "Taxpayer") is a Delaware corporation, publicly traded on the Nasdaq Stock Market under the ticker symbol PPCA (Employer Identification Number: 22-3741856). PPC is headquartered at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. PPC operates in the specialty pharmaceutical and biotechnology industry, with

III.B. Penterra Biopharma International DAC — Overview Penterra Biopharma International DAC ("PBI") is a designated activity company organized under the laws of Ireland, with its registered office located at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. PBI was incorporated on March 15, 2012, in connection with PPC's global corporate restructuring and the establishment of the qualifie

III.C. Corporate Structure The relevant corporate structure of the Penterra group for purposes of this analysis is as follows: • Penterra Pharmaceuticals Corp. (PPC) — Delaware corporation; U.S. parent entity; publicly traded (Nasdaq: PPCA) • Penterra Holdings Luxembourg S.à r.l. (PHL) — Luxembourg S.à r.l.; 100% owned by PPC; treated as a disregarded entity for U.S. federal income tax purposes • Penterra Biopharma I

III.D. The Legacy IP License Agreement PBI holds a license from PPC to exploit certain legacy pharmaceutical compounds in territories outside the Americas. The legacy IP license agreement, which was executed contemporaneously with PBI's formation and the establishment of the CSA on July 1, 2012, covers compounds that were approved for commercial sale or were in late-stage clinical development prior to the CSA's effec

III.E. Legacy IP Compound Revenue (Non-Americas, 2017–2020) The table below summarizes PBI's net sales of legacy compounds in the non-Americas territory and the corresponding royalty payments to PPC at the 4.5% contractual rate for the four tax years at issue: As reflected in the table above, legacy compound net sales in the non-Americas territory declined from $814.6 million in 2017 to $624.1 million in 2020, repres

III.F. Key Products (Context) While the legacy IP license is the specific transaction at issue in this report, it is helpful to provide context regarding PBI's broader commercial operations and product portfolio. PBI's principal commercial products include: Veritaxol (oncology). Veritaxol is PPC's flagship oncology product and a blockbuster therapy for the treatment of certain solid tumors. For fiscal year 2020, Veri

III.G. The IRS's Proposed Adjustment to the Royalty Rate The IRS, through its Large Business & International ("LB&I") Division, Northeast Area, Transfer Pricing Practice, has proposed increasing the royalty rate applicable to the legacy IP license from PPC's reported rate of 4.5% to a rate of 11.0% of net sales. The IRS examination is designated as LB&I-NE-TP-2022-00641, led by Revenue Agent Patricia Dunleavy, with e

IV. Legal and Regulatory Framework

IV.A. IRC § 482 — Arm's-Length Standard

Section 482 of the Internal Revenue Code provides the Commissioner of Internal Revenue with the authority to distribute, apportion, or allocate gross income, deductions, credits, or allowances among two or more organizations, trades, or businesses owned or controlled directly or indirectly by the same interests, "if he determines that such distribution, apportionment, or allocation is necessary in order to prevent ev

IV.B. Treas. Reg. § 1.482-4 — Methods for Intangible Property Treasury Regulation § 1.482-4 sets forth the specified methods available for determining the arm's-length consideration for transfers of intangible property, including the licensing of patents, know-how, trade secrets, trademarks, and other intellectual property. The regulation prescribes several methods, including the comparable uncontrolled transaction (

IV.C. Best Method Rule — Treas. Reg. § 1.482-1(c) Treasury Regulation § 1.482-1(c) establishes the "best method rule," which requires that the arm's-length result of a controlled transaction be determined under the method that, under the facts and circumstances, provides the most reliable measure of an arm's-length result. The best method rule does not prescribe a hierarchy among the specified methods; rather, it req

1. Degree of comparability between the controlled transaction and the uncontrolled comparables, including the closeness of the comparables in terms of functions performed, risks assumed, contractual terms, economic conditions, and the nature of the property or services at issue; and

2. Quality of data and assumptions used in applying the method, including the completeness and accuracy of the data, the reliability of any adjustments for differences between the controlled and uncontrolled transactions, and the sensitivity of the results to deficiencies in the data. In the context of this analysis, the CUT method is the best method for determining the arm's-length royalty rate for the PPC-PBI legac

IV.D. Comparability Factors — Treas. Reg. § 1.482-4(c)(2) Treasury Regulation § 1.482-4(c)(2) identifies the factors that must be considered in evaluating the comparability of uncontrolled transactions to the controlled transaction for purposes of the CUT method. These comparability factors include: Comparability of Intangible Property. The intangible property involved in the uncontrolled transaction must be comparab

IV.E. Arm's-Length Range — Treas. Reg. § 1.482-1(e) Treasury Regulation § 1.482-1(e) provides guidance on the determination and application of the arm's-length range. When the application of a transfer pricing method produces a range of results from two or more comparable transactions, the arm's-length range is defined as follows: • If the comparables are of sufficient quality and quantity, and all material differenc

IV.F. IRC § 6662(e) — Transfer Pricing Penalty

Section 6662(e) of the Internal Revenue Code imposes a penalty equal to 20% of the underpayment attributable to a "substantial valuation misstatement" or a "gross valuation misstatement" in connection with a transaction between related persons under IRC § 482. A substantial valuation misstatement exists if the price claimed on the return for property or services is 200% or more (or 50% or less) of the correct transfe

IV.G. OECD Transfer Pricing Guidelines (2017, 2022 Revisions) While the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations do not have the force of law in the United States, they are frequently referenced as persuasive authority in U.S. transfer pricing disputes, including by the IRS, the Tax Court, and the federal appellate courts. The OECD Guidelines establish an internationally

V. Methodology — Comparable Uncontrolled Transaction Analysis

V.A. Selection of CUT as the Best Method For the reasons discussed in Section IV.C above, Whitmore has selected the CUT method under Treas. Reg. § 1.482-4(c) as the best method for evaluating the arm's-length nature of the 4.5% royalty rate charged by PPC to PBI for the intercompany license of legacy pharmaceutical intellectual property. The selection of the CUT method as the best method is predicated on the followin

V.B. Search Strategy and Data Sources Whitmore conducted a comprehensive search for comparable uncontrolled pharmaceutical license agreements using the following data sources: • Pharmaceutical license agreement databases: Whitmore searched publicly available databases that compile and track pharmaceutical and biopharmaceutical licensing transactions, including databases maintained by Calderon Data Systems (Glenrock S

V.C. Screening Criteria The initial universe of pharmaceutical license agreements identified through the search described in Section V.B was subjected to a multi-step screening process designed to isolate transactions that are reasonably comparable to the PPC-PBI legacy IP license under the comparability standards of Treas. Reg. § 1.482-4(c)(2). The screening criteria were applied sequentially, with each step narrowi

V.D. Comparability Adjustments Whitmore assessed whether adjustments to the royalty rates observed in the 14 comparable transactions were necessary or appropriate to account for material differences between the comparable transactions and the PPC-PBI legacy IP license. The following comparability factors were evaluated in connection with this assessment: Product maturity. The legacy compounds licensed by PPC to PBI w

V.E. Statistical Methodology The 14 royalty rates observed in the comparable uncontrolled transactions were analyzed using standard statistical methods to determine the arm's-length range. The following steps were applied:

1. The 14 royalty rates were arranged in ascending order.

2. The 25th percentile (Q1), median (Q2), and 75th percentile (Q3) were calculated using the standard interpolation method for percentile computation. The interquartile range was defined as the range from Q1 to Q3.

3. The mean and standard deviation were calculated for reference purposes but are not used to define the arm's-length range.

4. PPC's 4.5% royalty rate was compared to the interquartile range to determi