Contract analysis

I. Executive Summary The purpose of this memorandum is to provide a detailed legal analysis supporting Penterra Pharmaceuticals Corp.'s ("PPC" or the "Company") evaluation and quantification of its uncertain tax position ("UTP") reserves under Accounting Standards Codification Topic 740-10 ("ASC 740-10"), formerly Financial Accounting Standards Board Interpretation No. 48 ("FIN 48"), with respect to the intercompany

II. Background A. PPC Corporate Overview Penterra Pharmaceuticals Corp. is a Delaware corporation headquartered at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. The Company's common stock is publicly traded on the Nasdaq Global Select Market under the ticker symbol "PPCA." PPC's Employer Identification Number is 22-3741856. PPC is a specialty pharmaceuticals and biotechnology company focused on t

1. Cost-Sharing Arrangement (CSA) Effective July 1, 2012, PPC and PBI entered into a Qualified Cost Sharing Arrangement (the "CSA") governed by Treasury Regulation § 1.482-7. Under the CSA, PBI acquired the right to develop and exploit PPC's pharmaceutical intellectual property portfolio—including patents, trade secrets, regulatory data, clinical trial data, manufacturing know-how, and related intangible assets—in al

2. Legacy IP Royalty Arrangement In addition to the CSA, PBI licenses from PPC certain pre-2012 legacy pharmaceutical compounds that were not included in the CSA or that were subject to separate licensing terms. Under the intercompany license agreement, PBI pays PPC a royalty at a rate of 4.5% of net sales of the licensed legacy compounds in the non-Americas territory. This royalty arrangement is governed by the arm'

3. Key Products PPC's pharmaceutical product portfolio includes several significant products that drive the transfer pricing analysis. The following table sets forth key revenue data for fiscal year 2020: Veritaxol is PPC's flagship oncology product and the Company's largest revenue contributor, accounting for approximately 45.7% of consolidated revenue in FY 2020. Veritaxol received FDA approval in 2013 and has sinc

III. ASC 740-10 Framework A. Overview of the Two-Step Process ASC 740-10, which codifies the provisions originally set forth in FIN 48, establishes a two-step process for recognizing and measuring tax benefits associated with uncertain tax positions. Step 1 — Recognition. A tax position is recognized in the financial statements only if it is "more likely than not" (i.e., a likelihood of more than 50%) that the tax po

1. CSA Cost-Sharing Ratio — PBI's proportionate share of qualified R&D costs under the CSA, which ranged from 38.2% to 42.7% during TY 2017–2020.

2. Legacy IP Royalty Rate — The 4.5% royalty rate applied to PBI's non-Americas net sales of licensed legacy compounds under the intercompany license agreement.

3. PCT Valuation — The $312 million lump-sum PCT payment made by PBI to PPC in 2012 as a buy-in to PPC's pre-existing IP portfolio, and the indirect impact of that valuation on the CSA and royalty positions during the examination years. Each of these positions is analyzed separately in the recognition and measurement steps below. However, the analysis also takes into account the interrelationships between these posit

IV. Step 1 — Recognition Analysis (More-Likely-Than-Not Threshold) A. CSA Cost-Sharing Ratio Position PPC's Position. PPC's position is that PBI's cost-sharing percentages of 38.2% (TY 2017), 39.6% (TY 2018), 41.1% (TY 2019), and 42.7% (TY 2020) are arm's-length and are based on reasonably anticipated benefits ("RAB") computed in accordance with Treasury Regulation § 1.482-7(e). The RAB methodology used by PPC measur

V. Step 2 — Measurement Analysis A. Methodology Under ASC 740-10-30-7, once a tax position has met the more-likely-than-not recognition threshold, the entity must measure the largest amount of tax benefit from that position that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority. C&H has applied a cumulative probability approach to each of the three identified uncertain ta

VI. Penalty Considerations A. IRC § 6662(e) Substantial Valuation Misstatement Penalty IRC § 6662(e) imposes a 20% accuracy-related penalty on any portion of an underpayment of tax attributable to a "substantial valuation misstatement" under IRC § 482. A substantial valuation misstatement exists when the net IRC § 482 transfer price adjustment for a taxable year exceeds the lesser of (i) $5 million, or (ii) 10% of th

VII. Interaction with GILTI, BEAT, and Other TCJA Provisions For TY 2018 through TY 2020, any IRC § 482 adjustment that increases PPC's U.S.-source income would correspondingly reduce PBI's pre-tax income, and may thereby affect the computation of PBI's "tested income" under the Global Intangible Low-Taxed Income ("GILTI") provisions of IRC § 951A. Specifically, to the extent that a § 482 adjustment shifts income fro

VIII. Impact of Active IRS Examination on FIN 48 Analysis The opening of the IRS examination on May 16, 2022, raises the question of whether the active examination should affect PPC's FIN 48 analysis. Under ASC 740-10-25-6, the recognition assessment is to be made based solely on the technical merits of the tax position, regardless of whether the position is currently under examination by a taxing authority. The stan