Contract analysis

I. INTRODUCTION AND PURPOSE A. Overview of the Engagement Whitmore Valuation Group LLC ("WVG" or "Whitmore") was retained by Calderwood & Harkness LLP, outside tax counsel to Penterra Pharmaceuticals Corp. ("PPC" or the "Taxpayer"), under a Kovel arrangement executed on June 20, 2022, bearing Reference No. 1018-00009-KV. The Kovel arrangement was structured in accordance with the principles set forth in United States

1. CSA Cost-Sharing Ratio Adjustments — $235.01 Million. The IRS proposes increasing PBI's share of qualified cost-sharing payments under the CSA by approximately 8 to 12 percentage points across each of the four examination years. The IRS asserts that PPC's projections of reasonably anticipated benefits ("RAB") understated the value properly allocable to PPC's Americas territory, thereby understating PBI's required

2. Legacy IP Royalty Rate Adjustments — $188.04 Million. The IRS proposes increasing the intercompany royalty rate charged by PPC to PBI for the license of certain pre-2012 legacy pharmaceutical compounds from the contractual rate of 4.5% of net sales to a rate of 11.0% of net sales. The IRS's proposed rate is based on a set of purportedly comparable transactions selected by the IRS economist. This proposed adjustmen

3. Correlative Offset — ($42.65 Million). The IRS has allowed a correlative offset of $42.65 million, reflecting the income tax consequences of the increased cost-sharing payments and royalty payments on PBI's income, as well as related adjustments.

4. Net Proposed Adjustment — $380.40 Million. The net proposed adjustment across all three categories totals $380.40 million for TY 2017–2020, calculated as follows: The three economic analyses summarized herein—a Comparable Uncontrolled Transaction ("CUT") analysis of the legacy IP royalty rate, a Comparable Profits Method ("CPM") / Transactional Net Margin Method ("TNMM") analysis of PBI's operating margins and the

II. COMPARABLE UNCONTROLLED TRANSACTION (CUT) ANALYSIS — LEGACY IP ROYALTY RATE A. Background and Transaction Description PBI licenses certain legacy pharmaceutical compounds from PPC pursuant to an intercompany license agreement (the "Legacy License Agreement") originally executed on July 1, 2012, and amended effective January 1, 2015. The Legacy License Agreement covers pre-2012 vintage compounds—i.e., pharmaceutic

1. Inclusion of Early-Stage (Clinical) Compound Agreements. Dr. Washburne's comparables include several agreements involving compounds that were in clinical development (i.e., Phase II or Phase III clinical trials) at the time of the license, rather than approved, commercially marketed products. Royalty rates for clinical-stage compounds are systematically higher than royalty rates for approved compounds because the

2. Inclusion of Worldwide License Agreements Without Adjustments. Dr. Washburne's comparables include several worldwide license agreements—i.e., agreements granting the licensee rights across all global territories, including the United States. Worldwide licenses typically command higher royalty rates than territory-based licenses because the licensee acquires access to the U.S. market, which is the largest and most

3. Failure to Adjust for Exclusivity and Volume Tiers. Several of Dr. Washburne's comparables involve exclusive licenses with volume-based royalty escalation clauses, milestone payments, or other contractual features that are not present in the Legacy License Agreement. Dr. Washburne did not apply adjustments to account for these differences, resulting in royalty rates that reflect the combined effect of exclusivity,

4. Inclusion of Bundled Service Agreements. Certain of Dr. Washburne's comparables involve license agreements that are bundled with co-promotion, co-development, or joint venture arrangements, under which the licensor provides substantial ongoing services to the licensee in addition to granting IP rights. The inclusion of these agreements inflates the apparent royalty rates because the consideration nominally charact

5. Small Sample Size. Dr. Washburne's analysis relies on a sample of fewer than 10 comparable transactions, a substantially smaller set than the 14 comparable agreements identified by WVG. The small sample size reduces the statistical reliability of the IRS's results and increases the sensitivity of the interquartile range to individual outliers. In light of these deficiencies, WVG concludes that the IRS's proposed 1

III. COMPARABLE PROFITS METHOD (CPM) / TRANSACTIONAL NET MARGIN METHOD (TNMM) ANALYSIS — PBI OPERATING MARGINS (2017–2020) A. Background and Transaction Description Penterra Biopharma International DAC ("PBI") is a Designated Activity Company organized under the laws of Ireland and tax-resident in Ireland. PBI was incorporated on March 15, 2012, and commenced operations effective July 1, 2012. PBI functions as the IP

1. PPC's Projections Were Reasonable at the Time Made. Treas. Reg. § 1.482-7(e)(1) requires that RAB shares be based on projections that are reasonable at the time made, taking into account all available information. PPC's contemporaneous projections were prepared using standard pharmaceutical industry forecasting methodologies, were reviewed and approved by senior management, and were consistent with projections use

2. The IRS's Proposed Percentages Lack Support in Comparable Company Data. The IRS has not provided comparable company data or benchmarking analysis supporting the proposition that cost-sharing percentages of 48.2% to 53.7% would produce arm's-length results for an entity with PBI's functional profile. As demonstrated in Section III.E above, the IRS's proposed percentages would compress PBI's operating margins below

3. Application of the IRS's Proposed Ratios Produces Below-Arm's-Length Results. The CPM/TNMM analysis demonstrates that PBI's pro forma operating margins under the IRS's proposed cost-sharing ratios would fall below the lower quartile of the arm's-length range in every examination year. This result is inconsistent with PBI's functional and risk profile as IP owner and principal, and confirms that the IRS's proposed

IV. INCOME METHOD / DCF ANALYSIS — PLATFORM CONTRIBUTION TRANSACTION (PCT) VALUATION A. Background and Transaction Description Effective July 1, 2012, PBI entered into the qualified CSA with PPC, acquiring the right to develop and exploit PPC's pharmaceutical IP portfolio outside the Americas. PBI was incorporated on March 15, 2012, approximately three and one-half months prior to the commencement of the CSA. As part

1. Projected Revenue Streams. WVG projected the future revenue streams that PBI would derive from the contributed IP in the non-Americas territory. The revenue projections were based on PPC's contemporaneous business plans and strategic projections as of July 2012, validated and where necessary adjusted based on actual results through the end of TY 2020. The projection period extended through the estimated useful lif

2. Projected Operating Costs. WVG projected the operating costs associated with commercializing the contributed IP in the non-Americas territory, including cost of goods sold (based on PMI's cost-plus manufacturing arrangements), regulatory expenditures, commercial and marketing costs, and selling, general, and administrative expenses. These cost projections were developed based on PBI's actual cost structure and com

3. Tax Rates. WVG incorporated applicable tax rates into the after-tax cash flow projections, including Ireland's standard trading rate of 12.5% and the Knowledge Development box ("KDB") rate of 6.25%, which became applicable beginning in FY 2016. The blended effective tax rate was applied based on the proportion of PBI's income qualifying for the KDB rate.

4. Useful Life of Contributed IP. WVG estimated the useful life of the contributed IP based on the remaining patent lives, regulatory exclusivity periods, and expected product lifecycles of the individual compounds included in the contributed portfolio. The weighted average useful life of the contributed IP was estimated at approximately 12 years from the CSA effective date.

5. Discount Rate / WACC. WVG determined an appropriate WACC for discounting PBI's projected cash flows from the contributed IP, as described in detail in Section IV.C below. The DCF model projected PBI's net after-tax cash flows from the contributed IP for each year of the projection period, discounted those cash flows to present value as of July 1, 2012, and summed the present values to determine the arm's-length PC