Contract analysis

I. ATTENDEES A. IRS Participants

1. Gerald Meskill — Supervisory Revenue Agent / Team Manager, Large Business & International Division, Northeast Transfer Pricing Practice. Meskill served as the senior IRS representative at the opening conference and led the discussion on behalf of the IRS examination team. Meskill will function as the Team Manager for the duration of the examination.

2. Patricia Dunleavy — Lead Revenue Agent, Large Business & International Division. Dunleavy will serve as the primary point of contact for day-to-day examination activities, including the issuance and management of Information Document Requests (IDRs) and the scheduling of follow-up conferences. Not Present: Dr. Alan Washburne, IRS Economist, was not present at the opening conference. Meskill indicated that Dr. Wash

1. Leonard Cross — Responsible Partner, Tax Department, Calderwood & Harkness LLP, Philadelphia office, 1735 Market Street, Suite 3100, Philadelphia, PA 19103. Cross led the discussion on behalf of the taxpayer and counsel.

2. Garrett Simmons — Lead Associate, Tax Department, Calderwood & Harkness LLP, Philadelphia office. Simmons attended in the role of lead working associate and prepared these notes.

3. Marcus Whitfield — Vice President, Global Tax, Penterra Pharmaceuticals Corp. ("PPC"), 2200 Independence Boulevard, Princeton Junction, NJ 08550. Whitfield attended as PPC's designated business representative for the examination. C. Not Present but Noted as Involved in the Engagement The following individuals were not present at the opening conference but have been identified as participants in the engagement and

II. PRELIMINARY MATTERS A. Representation Confirmation Cross opened the conference by confirming Calderwood & Harkness LLP's representation of Penterra Pharmaceuticals Corp. in connection with the IRS examination for Tax Years 2017 through 2020. Cross stated that the firm's representation was pursuant to IRS Form 2848 (Power of Attorney and Declaration of Representative), which was filed with the IRS on June 8, 2022.

III. EXAMINATION SCOPE — AS DESCRIBED BY IRS A. Overview of Examination Focus Meskill opened the substantive portion of the conference by providing an overview of the examination's scope and focus areas. Meskill stated that the examination is being conducted by the LB&I Northeast Transfer Pricing Practice, reflecting the transfer pricing-centric nature of the issues identified by the IRS for examination. Meskill stat

IV. ANTICIPATED IDR SCHEDULE AND PROCESS A. IDR Issuance Plan Dunleavy outlined the anticipated IDR (Information Document Request) process for the examination. Dunleavy stated that the first tranche of IDRs would be issued in early July 2022, consisting of approximately eight to ten individual IDRs covering the foundational categories of documents and data needed for the examination. Additional IDRs would follow on a

1. Corporate structure and organizational charts for PPC and its relevant subsidiaries (PBI, PHL, PMI) for each tax year under examination.

2. The cost-sharing arrangement agreement between PPC and PBI, including all amendments, supplements, and side letters executed since the CSA's effective date of July 1, 2012.

3. The legacy IP license agreement between PPC and PBI, including all amendments.

4. Contemporaneous transfer pricing documentation for Tax Years 2017, 2018, 2019, and 2020, including all appendices, exhibits, and supporting schedules.

5. The PCT valuation report prepared in connection with the inception of the CSA on July 1, 2012, together with all supporting workpapers, financial models, assumptions, and underlying data.

6. R&D cost pool composition and allocation methodology documentation, including schedules detailing the costs included in and excluded from the qualified cost pool for each tax year.

7. PBI's financial statements (both statutory and management accounts) and Irish tax returns for each tax year under examination.

8. PBI personnel and headcount data, including employee rosters, organizational charts, job descriptions, and compensation information.

9. PBI board minutes and governance documents, including board resolutions, committee charters, and records of board meetings held during the 2017–2020 period.

10. The intercompany manufacturing agreement between PBI and PMI, including all amendments, pricing schedules, and cost-plus markup calculations.

11. Product revenue data by territory for the three principal products identified by the IRS (Veritaxol, Imvara, and Cerulon) for each tax year under examination.

12. PBI office lease and physical presence documentation, including lease agreements, floor plans, and utility records for the Sandyford Business Park facility.

13. Forms 5471 and related international informational returns for PBI and PHL for all four tax years.

14. Third-party distribution agreements for non-Americas territories.

15. Banking records for PBI, including account statements and transaction records from Glenmore Bank Ireland plc.

16. Regulatory expenditure and submission records for PBI, including regulatory filings, approval records, and associated costs.

17. Comparable license agreements used by PPC in its CUT analysis supporting the 4.5% legacy IP royalty rate, including all benchmarking studies and database searches. B. IDR Response Protocols Cross requested that all IDRs be directed to him at Calderwood & Harkness LLP, 1735 Market Street, Suite 3100, Philadelphia, PA 19103, with copies to Marcus Whitfield at Penterra Pharmaceuticals Corp. Meskill agreed to this ar

V. KEY PRODUCTS IDENTIFIED Meskill indicated that the IRS examination team had reviewed PPC's public filings and was familiar with PPC's product portfolio. Meskill specifically identified the following three products as relevant to the examination, given their significance to PBI's non-Americas revenue streams:

1. Veritaxol — Oncology. Veritaxol is PPC's blockbuster oncology compound and the largest revenue-generating product in PPC's portfolio. Global net sales in 2020 were approximately $3.12 billion, of which non-Americas net sales accounted for approximately $1.34 billion.

2. Imvara — Immunology. Imvara is PPC's leading immunology product. Global net sales in 2020 were approximately $1.87 billion, of which non-Americas net sales accounted for approximately $0.79 billion.

3. Cerulon — Rare Disease. Cerulon is PPC's rare disease therapeutic. Global net sales in 2020 were approximately $0.62 billion, of which non-Americas net sales accounted for approximately $0.28 billion. The IRS stated that it would request detailed territory-level revenue breakdowns for all three products for each of the four tax years under examination. This data will be relevant to the IRS's assessment of PBI's co

VI. STATUTE OF LIMITATIONS DISCUSSION Cross raised the issue of the statute of limitations for Tax Year 2017. Cross noted that the general three-year statute of limitations under IRC § 6501(a) for TY 2017 had expired, but that the extended six-year statute under IRC § 6501(e) might apply depending on the IRS's theories regarding omission of gross income. Cross inquired about the IRS's position on the statute of limit

VII. IRS ECONOMIST INVOLVEMENT Meskill confirmed that an IRS economist from the IRS Transfer Pricing Practice would be assigned to the examination to evaluate the economic analyses underlying PPC's transfer pricing positions. The economist's role would include reviewing PPC's benchmarking analyses, CUT comparables, cost-plus studies, and PCT valuation methodology. The economist would also be expected to develop indep

VIII. IRS CHIEF COUNSEL INVOLVEMENT Meskill stated that the IRS Office of Chief Counsel, Transfer Pricing branch, would be consulted as needed during the examination, particularly on legal issues relating to the application of Treasury Regulations § 1.482-7 to the CSA, the legal standards for economic substance, and any potential penalty issues. No Chief Counsel attorney was assigned to the examination at the time of

IX. PPC'S PRELIMINARY STATEMENTS A. Cross's Opening Remarks Cross provided a brief overview of PPC's transfer pricing structure and expressed confidence in the arm's-length nature of PPC's intercompany arrangements across all four tax years under examination. Cross made the following statements on behalf of PPC:

1. Cost-Sharing Arrangement Compliance. PPC's CSA was structured and documented in compliance with Treasury Regulations § 1.482-7. The ongoing cost-sharing ratios for each tax year reflect PPC's and PBI's respective shares of reasonably anticipated benefits from the intangible property developed under the CSA. The cost-sharing percentages were calculated using a methodology consistent with the regulatory framework an

2. Legacy IP Royalty Rate. The legacy IP royalty rate of 4.5% of non-Americas net sales was established using the comparable uncontrolled transaction (CUT) method. PPC identified comparable third-party pharmaceutical licensing agreements involving similar therapeutic areas, intellectual property at a similar stage of development, and comparable territorial scope. The 4.5% royalty rate falls within the arm's-length ra

3. PBI Economic Substance. PBI possesses substantial economic substance in Ireland. PBI maintains dedicated personnel with relevant scientific, regulatory, commercial, and managerial expertise. PBI exercises independent decision-making authority with respect to DEMPE functions and commercial strategy across its 68 country markets. PBI conducts material operational activities through its offices at Sandyford Business

4. Contemporaneous Documentation. PPC maintained contemporaneous transfer pricing documentation for all four tax years under examination. The documentation was prepared in accordance with the penalty-protection standards of IRC § 6662(e)(3)(B) and will be made available to the IRS in response to an appropriate IDR. B. Whitfield's Comments Whitfield confirmed PPC's willingness to cooperate fully with the IRS examinati

X. NEXT STEPS AND ACTION ITEMS The following action items were identified during the opening conference:

1. C&H to confirm in writing. Cross to send written confirmation of attendance at the opening conference and a summary of the points discussed, addressed to Meskill. Cross noted that a letter dated June 22, 2022, was already in preparation prior to the conference and would be finalized and sent promptly following the conference.

2. IRS to issue first tranche of IDRs. Dunleavy to issue the initial tranche of IDRs (approximately eight to ten) in early July 2022. Dunleavy indicated the target mailing date would be approximately July 8 or July 15, 2022.

3. C&H to begin document collection. Simmons to coordinate with PPC's internal teams, Crestfield & Associates (Susan Lam), and Thornbury & Keogh (Ciarán Thornbury) to begin assembling responsive documents in anticipation of the initial IDRs. Document collection efforts should prioritize the foundational categories identified by Dunleavy during the conference.

4. Privilege protocol implementation. Cross to ensure that the document preservation notice issued by PPC on June 6, 2022, remains in effect and is being followed across all relevant departments. Cross to ensure that privilege protocols are strictly followed in all document collection, review, and production activities. Simmons and Nazari to implement a privilege review process for all documents identified for potent

5. Whitmore engagement coordination. Cross to brief Dr. Helena Vasquez at Whitmore Valuation Group LLC on the IRS's stated focus areas as described during the opening conference and to begin scoping the economic analysis work that will be required to support PPC's transfer pricing positions. The initial briefing should address the CSA cost-sharing ratios, the PCT valuation, the legacy IP royalty rate CUT analysis, an

6. Statute extension monitoring. Simmons to establish a tracking system for the statute of limitations dates for all four tax years under examination and to flag any IRS requests for Form 872 extensions promptly upon receipt. The tracking system should include advance notice triggers to ensure adequate time for internal deliberation regarding any requested extensions.

7. Follow-up conference. No specific follow-up conference date was set during the opening conference. Meskill indicated that the IRS would reach out to Calderwood & Harkness LLP after the first round of IDR responses to schedule a status call. Cross stated that C&H would be available at the IRS's convenience for a follow-up conference.

XI. INTERNAL OBSERVATIONS AND STRATEGIC NOTES PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT FOR INTERNAL C&H USE ONLY — DO NOT PRODUCE The following observations and strategic notes reflect the mental impressions, conclusions, opinions, and legal theories of Calderwood & Harkness attorneys. These notes are protected by the attorney work-product doctrine and the attorney-client privilege. Under no circumstances

1. LB&I Campaign Alignment. The IRS's stated focus on economic substance and DEMPE functions is consistent with recent LB&I campaign priorities targeting pharmaceutical companies with IP structures involving Irish or other low-tax-jurisdiction subsidiaries. This examination appears to follow the pattern of other LB&I pharmaceutical examinations in the Northeast region. The IRS's approach suggests a coordinated effort

2. PCT Recharacterization Risk. The IRS's mention of the PCT valuation — notwithstanding that the PCT was effected on July 1, 2012, which is outside the examination years — is notable and suggests that the IRS may attempt to recharacterize the ongoing cost-sharing ratios and the legacy IP royalty rates for TY 2017–2020 based on an alleged undervaluation of the PCT payment. The theory would likely be that PPC received

3. Royalty Rate Challenge. The CUT analysis supporting the 4.5% legacy IP royalty rate appears to be a significant focus of the examination. The IRS will likely identify its own set of comparable third-party pharmaceutical licensing agreements with higher royalty rates and argue that the arm's-length range exceeds PPC's selected rate. C&H should work with Dr. Vasquez at Whitmore Valuation Group to strengthen PPC's ex

4. PBI Substance Position. PBI's economic substance case is strong. The combination of 185 employees, 42 board meetings during the examination period, cumulative regulatory expenditures of €47.2 million, and independent commercial decision-making across 68 country markets provides a robust factual foundation. However, the IRS will likely focus on specific DEMPE functions and attempt to identify individual decisions o

5. Proactive Presentation Strategy. C&H should consider proactively presenting PBI's functional analysis and economic substance evidence early in the IDR process, rather than waiting for the IRS to form its own conclusions based on piecemeal document review. An early and comprehensive presentation may shape the IRS's understanding of PBI's role and reduce the likelihood of aggressive positions being adopted by the ex

1. Crestfield Workpaper Coordination. It is essential to coordinate with Susan Lam at Crestfield & Associates promptly to obtain all workpapers underlying the original transfer pricing documentation for TY 2017–2020. The workpapers should be reviewed by C&H and Whitmore Valuation Group prior to production to ensure consistency with PPC's stated positions and to identify any potential vulnerabilities. The review shoul

2. PMI Cost-Plus Scrutiny. The IRS's reference to PMI's cost-plus arrangement (cost plus an 8% markup) suggests potential scrutiny of the manufacturing margin. Although the PMI arrangement was not identified as one of the three principal focus areas, the IRS's mention of PMI indicates it is on the exam team's radar. C&H should prepare a separate analysis supporting the arm's-length nature of the 8% cost-plus markup,

3. PBI Knowledge Development box. PBI has claimed the Irish Knowledge Development box (KDB) regime at a 6.25% effective tax rate on qualifying income derived from qualifying assets. While the KDB is an Irish domestic tax provision and not directly at issue in the U.S. examination, the Irish-side tax benefits may draw the IRS's attention as evidence that the overall structure was designed to achieve a low effective ta

4. TCJA Rate Change Impact. The Tax Cuts and Jobs Act reduced the U.S. corporate income tax rate from 35% to 21%, effective for tax years beginning after December 31, 2017. This means TY 2017 is subject to the 35% rate, while TY 2018, 2019, and 2020 are subject to the 21% rate. This rate differential may influence the IRS's incentive structure regarding per-year adjustments. A transfer pricing adjustment for TY 2017

5. Total Exposure Modeling. It will be necessary to model various adjustment scenarios to assess PPC's total potential exposure across all four tax years and all three examination focus areas. The modeling should account for primary tax, interest under IRC § 6601, and potential penalties under IRC § 6662(e). Note that PPC's FIN 48 reserve (ASC 740-10, Accounting for Uncertainty in Income Taxes) currently stands at $6

XII. CLOSING The opening conference concluded at approximately 12:15 p.m. EDT on June 28, 2022. The conference was conducted in a professional and cooperative manner. Both parties expressed a commitment to conducting the examination efficiently and in good faith. These notes were finalized by Garrett Simmons on June 29, 2022. These notes were reviewed and approved by Leonard Cross on June 30, 2022. Distribution: Inte