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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP TAX DEPARTMENT

QUARTERLY MATTER STATUS REPORT — Q2 2023

MEMORANDUM

FROM: Leonard Cross, Responsible Partner, and Sylvia Hartwell, Billing Partner — Calderwood & Harkness LLP, Tax Department

TO: Marcus Whitfield, Vice President of Global Tax, Penterra Pharmaceuticals Corp.; Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp.; Rajesh Iyer, Chief Financial Officer, Penterra Pharmaceuticals Corp.

Date: July 5, 2023

RE: Quarterly Matter Status Report — Q2 2023 IRS Transfer Pricing Examination Defense, Tax Years 2017–2020

Matter Number: 1018-00009 IRS Exam Team ID: LB&I-NE-TP-2022-00641 Taxpayer: Penterra Pharmaceuticals Corp. (EIN: 22-3741856)

I. Executive Summary

The second quarter of 2023 represents a critical transitional period in the IRS's transfer pricing examination of Penterra Pharmaceuticals Corp. ("PPC" or the "Company"). During this quarter, the IRS examination team has substantially completed its factual development phase and is now moving toward the formulation of proposed adjustments. This shift in posture was made evident during the mid-examination conference held on May 25, 2023, and carries significant implications for the timing and strategic posture of PPC's defense going forward.

Since the commencement of the examination in June 2022, the IRS has issued a total of 47 Information Document Requests ("IDRs"). As of the close of Q2 2023, Calderwood & Harkness LLP ("C&H") has responded to approximately 38 of those IDRs, with the remaining requests in various stages of response preparation and scope negotiation. The IDR process has been intensive but has been managed effectively through careful coordination among PPC's internal tax team, Crestfield & Associates LLP (PPC's return preparers), Thornbury & Keogh (PPC's Irish counsel), and the Whitmore Valuation Group LLC ("WVG" or "Whitmore") (PPC's retained economic experts).

A key development during Q2 2023 is the active involvement of IRS economist Dr. Alan Washburne in the examination. Dr. Washburne has been conducting independent economic analyses of PPC's transfer pricing positions, including the cost-sharing arrangement ("CSA") cost-sharing ratios, the legacy intellectual property ("IP") royalty rate, and the platform contribution transaction ("PCT") valuation. His involvement signals a maturing examination in which the IRS is developing its own quantitative basis for proposed adjustments.

C&H held a mid-examination conference with the IRS on May 25, 2023, which was requested by C&H's letter dated May 10, 2023 to Supervisory Revenue Agent Gerald Meskill. This conference provided significant insight into the IRS's emerging positions. In particular, the IRS examination team appears to be focused on three primary areas of concern:

(1) The adequacy of Penterra Biosciences Ireland Ltd.'s ("PBI") cost-sharing percentages (ranging from 38.2% in 2017 to 42.7% in 2020) under the CSA, and whether those percentages understate PBI's reasonably anticipated benefits from the cost-shared intangibles;

(2) The arm's-length nature of the 4.5% legacy IP royalty rate paid by PBI to PPC, with the IRS indicating preliminary analysis suggesting a rate in the range of 9%–12%; and

(3) PBI's economic substance and the locus of key Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") functions, with the IRS questioning whether critical DEMPE activities may have remained in the United States notwithstanding PBI's formal contractual role.

Based on signals from the mid-examination conference, C&H anticipates that a Notice of Proposed Adjustment ("NOPA") will be issued in Q3 or early Q4 2023, likely in the September–October timeframe following the completion of Dr. Washburne's economic analysis.

On the defense side, WVG's core economic analyses—including the comparable uncontrolled transaction ("CUT") analysis, the comparable profits method/transactional net margin method ("CPM/TNMM") analysis, and the PCT discounted cash flow ("DCF") valuation—were completed and delivered in November–December 2022. These analyses remain current and provide a robust foundation for PPC's arm's-length defense. Dr. Helena Vasquez, the lead economist at WVG, is on standby to initiate rebuttal work once the IRS economist's analysis is formalized in the NOPA.

Thornbury & Keogh continues to coordinate on Irish-side documentation and substance evidence for PBI and Penterra Manufacturing Ireland Ltd. ("PMI"), ensuring that the factual record supporting PBI's economic substance is comprehensive and readily available.

With respect to budget tracking, professional fees remain within the estimated $4.5M–$7.0M range for C&H fees, though the trajectory is trending toward the midpoint of that range given the intensity of the IDR process during Q2 and the approaching NOPA phase. Total professional fees across all advisors (C&H, WVG, Thornbury & Keogh, and Crestfield) are estimated at approximately $4.5M–$5.0M through Q2 2023.

II. Examination Status and Activity During Q2 2023

A. IDR Activity

The IRS's factual development through Information Document Requests continued at a significant pace during Q2 2023. As of the close of the quarter, the IRS had issued a total of 47 IDRs since the examination commenced in June 2022. Of these, C&H has responded to approximately 38 IDRs, with the remaining requests in various stages of response preparation and, in certain instances, ongoing scope negotiations with the IRS examination team.

During Q2 2023 specifically, approximately six IDRs were issued (IDR Nos. 33 through 38, by our estimate), covering a range of factual areas that collectively signal the IRS's movement from broad factual development to more targeted investigation of the three primary areas of concern identified at the mid-examination conference. The following summarizes the most significant IDR activity during Q2 2023:

IDR No. 35 — Intercompany Pricing Decisions and Market Strategy Documents. This IDR, initially issued in late Q1 2023 and supplemented in early Q2, requested documentation evidencing the intercompany pricing decisions made by PBI and the market strategy analyses underlying those decisions across PBI's non-Americas markets. C&H submitted its response on June 2, 2023, producing internal PBI documents that evidence independent pricing decisions made by PBI's commercial-strategy team and Managing Director Aidan Naughton across 68 non-Americas country markets. This production is highly relevant to PPC's defense of PBI's economic substance and independent decision-making authority, particularly with respect to the IRS's emerging DEMPE-related concerns. The documents produced include market-specific pricing memoranda, distributor correspondence reflecting PBI's negotiating posture, and board presentations analyzing pricing strategy across therapeutic areas and geographies.

Additional IDRs Addressed During Q2. Beyond IDR No. 35, C&H responded during Q2 2023 to additional IDRs covering PBI's distribution partner selection process (including documentation of the selection criteria, due diligence procedures, and contractual negotiations conducted by PBI's Dublin-based team), PBI's capital expenditure records (documenting investments in the Dublin office, IT infrastructure, and regulatory capabilities), and supplemental employee compensation data for PBI personnel (providing additional detail on the qualifications, seniority, and decision-making authority of PBI's Irish-based employees).

Outstanding IDRs. Several IDRs remain in various stages of production, with responses expected to continue through September 2023. The final tranche of IDRs (IDR Nos. 44 through 47) are anticipated to be issued in the coming weeks and will likely address remaining topics identified by the IRS economist, Dr. Washburne, in connection with his independent economic analysis. IDR No. 40, which requests copies of all Forms 5471 and international informational returns filed by PPC for the examination years, is targeted for response in July 2023.

IDR Scope Management. C&H continues to manage the scope of the IRS's IDRs through proactive negotiation and, where appropriate, formal objection. As reported in the Q1 2023 status report, C&H submitted a letter dated February 15, 2023 objecting to the scope of IDR No. 26, which, as drafted, would have required the production of substantially all internal communications among PPC's R&D leadership regarding the strategic direction of the Company's pharmaceutical pipeline—without limitation to transfer pricing-related subjects. That objection resulted in a partial narrowing of the request, although the IRS maintained some breadth in its subsequent IDRs, particularly with respect to documents evidencing the locus of strategic decision-making between PPC's U.S. headquarters and PBI's Dublin operations. C&H will continue to monitor IDR scope and raise objections where appropriate to protect PPC's interests while maintaining a cooperative posture with the IRS examination team.

Coordination of IDR Responses. All IDR responses continue to be coordinated through C&H Senior Associate Garrett Simmons, who serves as the primary point of contact for document collection and production. Document production involves inputs from multiple sources, including PPC's internal tax team (Marcus Whitfield's group, providing intercompany agreements, internal memoranda, and business records), Crestfield & Associates LLP (Susan Lam providing return data, workpapers, and original transfer pricing documentation prepared in connection with the Company's tax filings), and Thornbury & Keogh (Ciarán Thornbury providing Irish-side records for PBI and PMI, including Irish financial statements, Revenue filings, and substance documentation). This multi-source coordination has functioned effectively, though C&H notes that certain PBI documents held in Dublin continue to require additional lead time for collection and review.

B. Mid-Examination Conference (May 25, 2023)

C&H requested a mid-examination conference with the IRS via a letter addressed to Supervisory Revenue Agent Gerald Meskill dated May 10, 2023. The purpose of the request was to gain visibility into the IRS's emerging positions, identify areas of potential agreement and disagreement, and position PPC's defense for the NOPA phase of the examination.

The conference was held on May 25, 2023 at the IRS's offices. The following individuals participated:

For C&H: Leonard Cross (Responsible Partner) and Garrett Simmons (Senior Associate)

For PPC: Marcus Whitfield (Vice President of Global Tax)

For the IRS: Supervisory Revenue Agent Gerald Meskill, Lead Revenue Agent Patricia Dunleavy, and IRS Economist Dr. Alan Washburne

The conference was conducted in a professional and substantive manner. The IRS team was forthcoming in identifying the areas of concern that have emerged from their review of the IDR responses and Dr. Washburne's preliminary economic analysis. The key takeaways from the conference are summarized below.

CSA Cost-Sharing Ratios. The IRS indicated preliminary concerns that PBI's cost-sharing percentages—38.2% in 2017, 39.6% in 2018, 41.1% in 2019, and 42.7% in 2020—understate PBI's reasonably anticipated benefits ("RAB") from the cost-shared intangibles. The IRS's concern is that PBI's share of the total qualified R&D costs (which were $487.3M in 2017, $523.8M in 2018, $561.2M in 2019, and $598.4M in 2020) does not adequately reflect the proportion of worldwide profits attributable to PBI's exploitation territories. In essence, the IRS appears to believe that PBI should be bearing a greater share of the R&D cost pool, with PPC receiving correspondingly greater compensation for its U.S.-based R&D contributions. Dr. Washburne indicated that his analysis may propose increases to PBI's cost-sharing percentages of approximately 8 to 12 percentage points across the examination years, though he did not commit to specific figures. The implications of such an adjustment, if sustained, would be significant, as it would increase the intercompany payments flowing from PBI to PPC and correspondingly increase PPC's U.S. taxable income for the examination years.

Legacy IP Royalty Rate. The IRS team questioned the arm's-length nature of the 4.5% legacy IP royalty rate paid by PBI to PPC under the intercompany license agreement. Dr. Washburne indicated that he has identified comparable license agreements suggesting a significantly higher royalty rate than 4.5%. Based on the discussion, the IRS appears to be evaluating royalty rates in the range of 9% to 12%, based on Dr. Washburne's own CUT analysis using what appears to be a narrower set of comparable agreements than the 14 agreements identified by WVG. C&H and WVG have concerns about the comparability of the agreements Dr. Washburne may be relying upon, and the August 15, 2023 meeting will provide an opportunity to probe his comparable selection methodology in greater detail.

PBI Economic Substance and DEMPE Functions. The IRS raised questions about the locus of key Development, Enhancement, Maintenance, Protection, and Exploitation functions, suggesting that critical DEMPE activities may have remained in the United States despite PBI's formal contractual role under the CSA and intercompany license agreements. This line of inquiry is consistent with the IRS's broader focus on substance-over-form in the transfer pricing context and aligns with the OECD's 2017 Transfer Pricing Guidelines, which emphasize that the allocation of profits should follow the allocation of functions, assets, and risks.

In response, C&H emphasized the substantial and growing operational presence of PBI in Dublin, including the following key facts:

• PBI employed 185 full-time employees as of December 31, 2020, reflecting significant growth from 52 employees at the time of PBI's incorporation in 2012;

• PBI performs regulatory, medical-affairs, commercial-strategy, and supply-chain functions from its Dublin offices;

• PBI incurred cumulative regulatory expenditures of €47.2M during the 2017–2020 period across 68 non-Americas country markets;

• PBI's board of directors held 42 meetings in Dublin during the 2017–2020 period, with documented key decisions on pricing, market entry strategy, distribution partner selection, and capital expenditures;

• PBI maintains independent decision-making authority through Managing Director Aidan Naughton, who exercises day-to-day management authority over PBI's commercial operations; and

• PBI maintains independent banking relationships with Glenmore Bank Ireland plc.

The IRS team took note of these representations but did not indicate that the substance concerns had been resolved. C&H expects that PBI's economic substance will remain a contested area throughout the NOPA and potential Appeals process.

PCT Valuation. While the 2012 tax year (in which the PCT payment was made) is outside the scope of the current examination years (2017–2020), the IRS indicated that the perceived undervaluation of the PCT payment—$312M paid by PBI versus the IRS's preliminary income-method valuation, which the IRS suggested is substantially higher—informs the IRS's view of the ongoing CSA and royalty arrangements for the examination years. In other words, the IRS appears to take the position that if the PCT payment undervalued the transferred IP, the downstream arrangements (cost-sharing percentages and royalty rates) must be evaluated in light of that alleged undervaluation. C&H notes that this "look-through" approach raises significant legal and economic issues that will need to be addressed in the defense, including the proper treatment of a PCT payment under Treas. Reg. § 1.482-7 and the extent to which the IRS can effectively challenge a PCT payment that falls outside the examination years.

Anticipated NOPA Timeline. Supervisory Revenue Agent Meskill indicated that the examination team anticipates issuing a Notice of Proposed Adjustment in approximately three to four months from the date of the conference, i.e., in the September–October 2023 timeframe. This timeline is contingent upon the completion of Dr. Washburne's economic analysis and the IRS's receipt and review of the final IDR responses. C&H is treating this timeline as actionable and is preparing PPC's defense accordingly.

C. IRS Economist Involvement

Dr. Alan Washburne of the IRS Transfer Pricing Practice within the Large Business & International ("LB&I") Division has been actively developing his own independent economic analysis since at least Q1 2023. His involvement represents a significant development in the examination, as IRS economist reports typically form the quantitative basis for proposed adjustments in the NOPA.

Based on information gathered during the mid-examination conference and through informal discussions between C&H and the IRS examination team, Dr. Washburne's analysis appears to encompass the following:

PCT Valuation — Income Method / DCF Approach. Dr. Washburne is applying an income method (Discounted cash flow) approach to the PCT valuation. Critically, intelligence gathered during the examination suggests that the IRS may be using a weighted average cost of capital ("WACC") discount rate in the range of 7.0%–7.5%, which is significantly lower than the 9.8% WACC employed by WVG in its December 2022 PCT Valuation report. A lower discount rate has the effect of increasing the present value of the projected cash flows attributable to the transferred IP, thereby producing a higher arm's-length PCT payment. The difference between a 7.0%–7.5% WACC and a 9.8% WACC, when applied to the multi-year revenue projections for Veritaxol, Imvara, and Cerulon, could result in a PCT valuation substantially exceeding the $312M payment made by PBI. Dr. Vasquez's December 2022 WACC/Discount Rate Technical Memorandum provides a detailed defense of the 9.8% rate, including company-specific risk premium analysis and pharmaceutical industry benchmarking, and will serve as the foundation for rebuttal on this point.

Legacy IP Royalty Rate — CUT Comparable Selection. Dr. Washburne appears to be selecting a narrower set of CUT comparables for the legacy royalty rate analysis than the 14 comparable pharmaceutical license agreements identified by WVG. WVG's 14 comparables yielded an interquartile range ("IQR") of 3.1%–6.8%, with a median of 4.4%, supporting PPC's 4.5% royalty rate as comfortably within the arm's-length range. Dr. Washburne's narrower set of comparables, the composition of which has not yet been formally disclosed to C&H, appears to trend higher—likely supporting the 9%–12% range referenced by the IRS during the mid-examination conference. The comparability of Dr. Washburne's selected agreements will be a central point of contention, and C&H and WVG are prepared to challenge any comparable selection that fails to account for material differences in the licensed IP, the stage of development, geographic scope, exclusivity provisions, and the allocation of development risks.

CSA Cost-Sharing Percentages. Dr. Washburne appears to be evaluating PBI's cost-sharing percentages with a view toward proposing increases of approximately 8 to 12 percentage points across the examination years. If proposed, such adjustments would significantly increase PBI's share of the qualified R&D cost pool and correspondingly increase the intercompany payments from PBI to PPC, resulting in higher U.S. taxable income for PPC in each of the examination years.

Scheduled Meeting with Dr. Washburne. C&H has requested and secured a formal meeting with Dr. Washburne, which is scheduled for August 15, 2023. This meeting will provide an opportunity for C&H and WVG to better understand Dr. Washburne's methodology, comparable selection criteria, and discount rate assumptions, and to present PPC's economic rationale. Leonard Cross and Garrett Simmons will attend on behalf of C&H, and Dr. Helena Vasquez of WVG will participate to address technical economic questions directly. C&H views this meeting as a critical pre-NOPA opportunity to identify and begin addressing the areas of economic disagreement between PPC's experts and the IRS economist.

Rebuttal Preparation. Dr. Vasquez and Dr. Rohan Chakrabarti at WVG are fully prepared to produce a comprehensive rebuttal report once the IRS economist's analysis is formalized in the NOPA. Preliminary rebuttal frameworks have been developed, and WVG's benchmarking data workbooks have been maintained and updated to ensure that rebuttal work can be initiated on an expedited basis once the NOPA is issued.

D. IRS Chief Counsel Involvement

IRS Attorney-Advisor Franklin Rosario of the Office of Chief Counsel, Transfer Pricing, is providing legal support to the examination team. Mr. Rosario's involvement has been apparent in the legal framing of certain IDR requests, particularly those relating to the economic substance of PBI and the interplay between the CSA and the intercompany royalty arrangements.

Senior Counsel Donna Hirabayashi is also involved at a supervisory level within the Office of Chief Counsel. Her involvement suggests that the IRS views this examination as significant and is devoting senior-level legal resources to the development of its positions.

C&H anticipates a call with Mr. Rosario in Q3 2023 to discuss the IRS's legal positions on several key issues, including compliance with the qualified cost-sharing arrangement regulations under Treas. Reg. § 1.482-7, the application of the economic substance doctrine to PBI's operations and DEMPE functions, and the interplay between the IRS's authority under IRC § 482 and the outbound IP transfer provisions of IRC § 367(d). This call, which is tentatively estimated for September 20, 2023, will provide valuable insight into the legal theories the IRS intends to advance in connection with the proposed adjustments.

III. Defense Workstreams — Status Update

A. Economic Analyses (Whitmore Valuation Group LLC)

All core economic reports prepared by WVG were delivered on schedule during Q4 2022 and remain current as of the date of this report. The following is a summary of the status of each deliverable:

CUT Analysis (Legacy IP Royalty Rate). Delivered in November 2022. WVG identified 14 comparable pharmaceutical license agreements through a comprehensive search of available licensing databases and public filings. The resulting interquartile range of royalty rates was 3.1%–6.8%, with a median of 4.4%. PPC's 4.5% legacy IP royalty rate was confirmed as falling within the arm's-length range and near the median of the identified comparables. The CUT analysis applied the comparability factors set forth in Treas. Reg. § 1.482-4(c), including the nature of the licensed intangible property, the stage of development, geographic exclusivity, duration of the license, and the allocation of development and commercialization risks. This report will serve as the primary basis for rebutting the IRS's position that the royalty rate should be in the 9%–12% range.

CPM/TNMM Analysis (PBI Operating Margins). Delivered in November 2022. WVG benchmarked PBI's operating margins against a set of 22 comparable distributors and IP-holding companies identified through database screening and public financial data analysis. PBI's operating margins were within the interquartile range in all four examination years (2017–2020). This analysis supports PPC's position that PBI's profit levels are consistent with arm's-length returns for an entity performing the functions, assuming the risks, and employing the assets documented in PPC's transfer pricing reports.

PCT Valuation / DCF Analysis. Delivered in December 2022. WVG performed a discounted cash flow analysis to value the intangible property transferred to PBI in the 2012 platform contribution transaction. Using a WACC of 9.8%, WVG determined an arm's-length range of $278M–$361M for the PCT payment. The $312M PCT payment actually made by PBI was confirmed as falling within this range. The DCF analysis incorporated revenue projections for Veritaxol, Imvara, and Cerulon across PBI's exploitation territories, risk-adjusted for development-stage uncertainties, regulatory approval probabilities, and market adoption rates. As noted above, the discount rate will be a central point of contention with the IRS, and Dr. Vasquez's WACC/Discount Rate Technical Memorandum provides a detailed defense of the 9.8% rate.

WACC/Discount Rate Technical Memorandum. Delivered in December 2022 by Dr. Helena Vasquez. This memorandum provides a detailed analysis of the appropriate discount rate for use in the PCT valuation, including a build-up of the WACC using the capital asset pricing model ("CAPM") for the cost of equity and PPC's actual cost of debt, supplemented by a company-specific risk premium reflecting the inherent uncertainties in pharmaceutical development and commercialization. The memorandum addresses and distinguishes alternative approaches to discount rate estimation that could yield lower rates, providing a foundation for rebutting Dr. Washburne's anticipated use of a lower WACC.

Ongoing Maintenance and Rebuttal Readiness. WVG's benchmarking data workbook has been maintained and updated on a rolling basis to ensure that the comparable data underlying all economic analyses remains current. Revenue projection models for Veritaxol, Imvara, and Cerulon (separately for Americas and non-Americas territories) and cost-sharing ratio sensitivity analyses have been maintained and updated by C&H Senior Associate Garrett Simmons in coordination with WVG. These materials will support the rebuttal of the IRS economist's analysis once the NOPA is issued.

Rebuttal work will be initiated upon the issuance of the NOPA and the availability of Dr. Washburne's formal economic analysis. C&H and WVG have developed a preliminary framework for the rebuttal, identifying the key areas of anticipated disagreement (Discount rate, comparable selection, RAB methodology, and cost-sharing percentages) and the analytical and evidentiary responses that will be deployed for each.

B. Functional Analysis / PBI Economic Substance

PBI's economic substance and the allocation of DEMPE functions between PPC and PBI are central to PPC's defense against the IRS's transfer pricing positions. C&H prepared a comprehensive functional analysis in October 2022, which was subsequently updated on March 15, 2023 to reflect additional evidence gathered through the IDR process and from Thornbury & Keogh's Irish-side documentation efforts. The functional analysis documents the following aspects of PBI's substantive operations:

• Headcount Growth: PBI employed 185 full-time employees as of December 31, 2020, reflecting substantial growth from 52 employees at the time of PBI's incorporation in 2012. This headcount growth demonstrates PBI's ongoing investment in building genuine operational capabilities in Ireland.

• Functional Capabilities: PBI performs regulatory, medical-affairs, commercial-strategy, and supply-chain functions from its Dublin offices. These functions are staffed by qualified professionals with relevant industry experience and expertise.

• Regulatory Expenditures: PBI incurred cumulative regulatory expenditures of €47.2M during the 2017–2020 period across 68 non-Americas country markets. These expenditures reflect PBI's active engagement in obtaining and maintaining regulatory approvals necessary for the commercialization of Veritaxol, Imvara, and Cerulon in PBI's exploitation territories.

• Board Activity and Governance: PBI's board of directors held 42 meetings in Dublin during the 2017–2020 period. Board minutes document key decisions on pricing, market entry strategy, distribution partner selection, and capital expenditures. These meetings were substantive, with detailed agendas, supporting materials, and documented deliberations—not merely perfunctory approvals of predetermined outcomes.

• Physical Presence: PBI occupies approximately 18,000 square feet of office space at Sandyford Business Park, Dublin, under a long-term lease.

• Management Authority: Managing Director Aidan Naughton exercises independent decision-making authority over PBI's commercial operations, including pricing, market strategy, and distribution partner relationships. Mr. Naughton's decision-making authority is documented in PBI's organizational chart, delegations of authority, and internal correspondence.

• Independent Banking: PBI maintains independent banking relationships with Glenmore Bank Ireland plc, including operating accounts, treasury management, and intercompany settlement accounts.

Personnel Interviews. In August–September 2022, C&H conducted interviews with 12 key PBI employees to develop a detailed understanding of the functions performed, risks assumed, and assets employed by PBI. The interview summaries document each employee's role, responsibilities, decision-making authority, and interactions with PPC personnel. These summaries remain available as supporting evidence and may be utilized in the Protest and Appeals process.

Board Minutes Analysis. C&H has analyzed all 42 sets of PBI board minutes from the 2017–2020 period. This analysis maps each board decision to the relevant DEMPE function, demonstrating that PBI's board actively exercised decision-making authority over key aspects of PBI's business operations.

DEMPE Functions Matrix. C&H prepared and has updated through Q1 2023 a detailed DEMPE functions matrix documenting the allocation of Development, Enhancement, Maintenance, Protection, and Exploitation functions between PPC (U.S.) and PBI (Ireland) for each of PPC's key pharmaceutical products: Veritaxol, Imvara, and Cerulon. This matrix provides a granular, product-by-product analysis of which entity performs each category of DEMPE function, supported by specific evidentiary references.

IDR No. 35 Response. As discussed above, C&H's June 2, 2023 response to IDR No. 35 reinforced PBI's independent pricing authority with specific market-level documentation. This production is directly responsive to the IRS's DEMPE concerns and provides concrete evidence that pricing decisions were made by PBI's Dublin-based personnel, not by PPC's U.S. headquarters.

C. Legal Research and Analysis

C&H has developed a comprehensive body of legal research and analysis supporting PPC's transfer pricing positions. The following core legal memoranda have been completed:

• IRC § 482 Arm's-Length Standard and Best Method Rule Analysis (July 2022): Analyzes the arm's-length standard and the best method rule under Treas. Reg. § 1.482-1(c), evaluating the relative reliability of the CUT, CPM/TNMM, and income methods in the context of PPC's intercompany transactions.

• Qualified Cost-Sharing Arrangement (QCSA) Regulatory Analysis under Treas. Reg. § 1.482-7 (August 2022): Analyzes PPC's CSA against the regulatory requirements for a qualified cost-sharing arrangement, including the formation, administration, cost-sharing, and buy-in/buy-out provisions.

• Royalty Rate Analysis under Treas. Reg. § 1.482-4 (August 2022): Analyzes the arm's-length standard as applied to intangible property transfers, with a focus on the CUT method and the periodic adjustment rules.

• Economic Substance Doctrine and DEMPE Functions Analysis (August 2022): Analyzes the economic substance doctrine as applied to PBI, addressing both the objective economic substance prong and the subjective business purpose prong, and evaluates PBI's DEMPE functions under the OECD Transfer Pricing Guidelines framework.

• IRC § 6662(e) Penalty Protection and Reasonable Cause Defense Analysis (September 2022): Analyzes PPC's exposure to transfer pricing penalties under IRC § 6662(e) and evaluates the availability of the reasonable cause and good faith defense, including the documentation requirements under IRC § 6662(e)(3)(B).

• TCJA Impact Analysis (August 2022): Analyzes the implications of the Tax Cuts and Jobs Act for PPC's transfer pricing positions, including the change in the corporate tax rate from 35% in TY 2017 to 21% in TY 2018–2020 and the corresponding effects on the magnitude of potential adjustments.

• Altera and Harborview Corporation Case Law Analysis (September 2022): Analyzes the implications of Altera Corp. v. Commissioner, 941 F.3d 1200 (9th Cir. 2019), and Harborview Corporation, Inc. v. Commissioner, 900 F.3d 610 (8th Cir. 2018), for PPC's cost-sharing and royalty rate positions.

• IRC § 367(d) Outbound IP Transfer Analysis (September 2022): Analyzes the outbound IP transfer provisions of IRC § 367(d) and their interplay with IRC § 482 in the context of PBI's acquisition of legacy IP rights.

• OECD Transfer Pricing Guidelines (2017 & 2022) as Persuasive Authority (October 2022): Analyzes the status and persuasive weight of the OECD Guidelines in IRS examinations and Tax Court proceedings, with particular focus on the DEMPE framework introduced in the 2017 revision and the financial transactions guidance added in the 2022 revision.

• GILTI and BEAT Impact Analysis for TY 2018–2020 (October 2022): Analyzes the interaction between proposed transfer pricing adjustments and PPC's exposure under the Global Intangible Low-Taxed Income ("GILTI") provisions of IRC § 951A and the Base Erosion and Anti-Abuse Tax ("BEAT") provisions of IRC § 59A for TY 2018–2020.

Additional Research Planned for Q3 2023. C&H will prepare a correlative adjustment analysis under Treas. Reg. § 1.482-1(g) in anticipation of potential overlap between the IRS's proposed CSA cost-sharing adjustments and its proposed royalty rate adjustments. This analysis will evaluate whether simultaneous upward adjustments to both the cost-sharing percentages and the royalty rate could result in double-counting and will develop the legal arguments supporting a correlative adjustment to prevent such an outcome.

The IRS IDR enforcement procedures research memorandum prepared in August 2022 remains current and was referenced in the February 15, 2023 objection to the scope of IDR No. 26.

D. Coordination with Third Parties

C&H continues to coordinate closely with PPC's other professional advisors to ensure a unified and efficient defense effort.

Crestfield & Associates LLP (Martin Ogilvy, Susan Lam). Crestfield serves as PPC's return preparer and is the repository of the original transfer pricing documentation prepared in connection with PPC's tax filings for the examination years. Coordination with Crestfield has been ongoing throughout the examination, with Susan Lam providing responsive and timely support to Garrett Simmons's requests for R&D cost pool data, return-level detail, and workpapers supporting the filed positions. Martin Ogilvy has been engaged at a senior advisory level and participates in periodic strategy discussions as needed.

Thornbury & Keogh (Ciarán Thornbury). Thornbury & Keogh serves as PPC's Irish counsel and is responsible for coordinating the Irish-side documentation and substance evidence supporting PBI's economic substance defense. C&H Associate Nadia Nazari serves as the primary day-to-day contact with T&K. During Q4 2022 and Q1 2023, T&K provided PBI's Irish financial statements, Irish Revenue filings, Knowledge Development box documentation (supporting PBI's entitlement to the 6.25% preferential tax rate), and additional substance documentation including lease agreements, employee records, and Glenmore Bank Ireland plc banking records. T&K continues to monitor Irish Revenue activity and will advise C&H promptly of any inquiries by Irish Revenue related to PBI or the Knowledge Development box claims.

Whitmore Valuation Group LLC (Dr. Helena Vasquez, Dr. Rohan Chakrabarti). WVG serves as PPC's retained economic expert and has delivered all core economic analyses as described in Section III.A above. WVG is engaged under a Kovel arrangement (reference 1018-00009-KV) to ensure that its communications with C&H and PPC are protected by the attorney-client privilege and attorney work product doctrine. WVG remains on standby for rebuttal work once the NOPA is issued and for potential engagement in connection with an IRS Appeals proceeding.

IV. Anticipated Q3 2023 Developments and Upcoming Milestones

The following milestones and developments are anticipated during Q3 2023:

August 15, 2023 — Meeting with IRS Economist Dr. Alan Washburne. C&H has secured a meeting with Dr. Washburne to discuss his economic methodology, comparable selection criteria, and discount rate assumptions. Leonard Cross and Garrett Simmons will attend on behalf of C&H. Dr. Helena Vasquez of WVG will participate to address technical economic questions and to present the key elements of PPC's economic rationale. C&H will prepare detailed talking points for this meeting, highlighting the strength of WVG's comparable selection process, the methodological rigor of the 9.8% WACC, and the arm's-length nature of the 4.5% royalty rate.

September 2023 (estimated) — Completion of Final IDRs. The final IDRs (IDR Nos. 44 through 47) are expected to be issued and responded to during this period, marking the conclusion of the IRS's factual development phase. IDR No. 40 (Forms 5471 and international informational returns) is targeted for response in July 2023.

September 20, 2023 (estimated) — Call with IRS Chief Counsel Attorney-Advisor Franklin Rosario. C&H anticipates scheduling a call with Mr. Rosario to discuss the IRS's legal positions on CSA compliance, economic substance, and the interplay between IRC § 482 and IRC § 367(d). This call will provide important insight into the legal theories that may underlie the proposed adjustments in the NOPA.

September–October 2023 — Anticipated NOPA Issuance. Based on the signals from the May 25, 2023 mid-examination conference, the IRS is expected to issue a Notice of Proposed Adjustment during this period. The proposed adjustments are expected to be substantial, potentially in the hundreds of millions of dollars, covering both the CSA cost-sharing ratios and the legacy IP royalty rate. The NOPA may also include proposed adjustments related to PBI's economic substance and DEMPE functions, though the precise scope and magnitude of the proposed adjustments will not be known until the NOPA is issued.

Upon NOPA Issuance — Response and Rebuttal. Upon receipt of the NOPA, C&H will immediately analyze the proposed adjustments in detail, coordinate with WVG on the preparation of a comprehensive economic rebuttal, and advise PPC's management team on the available response options. The primary response options will include (i) submitting a formal Protest to IRS Appeals, which would initiate an administrative Appeals proceeding, and (ii) in the alternative, declining to pursue Appeals and proceeding directly to a petition in the United States Tax Court. C&H's preliminary recommendation, subject to evaluation of the NOPA, is to pursue the Appeals process before considering litigation.

Statute of Limitations. Forms 872 (Consent to Extend the Time to Assess Tax) extending the statute of limitations for TY 2017 and TY 2018 through December 31, 2024 have been executed by PPC and accepted by the IRS. TY 2019 and TY 2020 remain within the standard assessment period and do not currently require extensions. However, depending on the NOPA issuance timeline and the duration of any Appeals proceeding, additional statute extensions for TY 2019 and TY 2020 may become necessary. C&H will monitor this issue and advise PPC in advance of any extension requests.

V. Privilege and Document Management

All document production to the IRS in connection with the examination is coordinated through C&H. A comprehensive privilege log is maintained and updated with each IDR response to ensure that privileged and work-product-protected materials are not inadvertently produced to the IRS. The privilege log identifies each withheld or redacted document by date, author, recipient, subject matter, and the applicable privilege assertion.

The privilege protocol memorandum issued by C&H on June 10, 2022 remains in full effect. This memorandum establishes the procedures for handling privileged communications and work product materials throughout the examination, including protocols for document collection, review, and production. All communications with WVG are protected under the Kovel arrangement (reference 1018-00009-KV), which was established at the outset of WVG's engagement to preserve the attorney-client privilege and work product protections over WVG's communications and work product.

The document preservation notice issued by C&H on June 6, 2022 remains in effect for PPC, PBI, Penterra Holdings Ltd. ("PHL"), and PMI. This notice requires the preservation of all documents and electronically stored information potentially relevant to the examination, including intercompany agreements, transfer pricing reports, board minutes, financial records, internal communications, and other business records.

A master document production index is maintained by C&H Associate Nadia Nazari. All documents produced to the IRS are Bates-numbered and logged in the production index, which tracks each production by IDR number, date of production, Bates range, document description, and custodian. This index ensures that C&H and PPC maintain a complete and accurate record of all materials provided to the IRS during the examination.

VI. Financial Reporting / Budget Update

A. Fees Billed Through Q2 2023

Calderwood & Harkness LLP. Fees billed by C&H through June 30, 2023 are trending toward approximately $3.0M–$3.5M of the $4.5M–$7.0M total estimated range for C&H's fees through resolution of the examination. The pace of billing during Q2 2023 was driven primarily by the intensive IDR response period (including the preparation and production of responses to approximately six IDRs during the quarter), the preparation for and attendance at the May 25, 2023 mid-examination conference, and ongoing strategic analysis and coordination with WVG, Thornbury & Keogh, and Crestfield. C&H's standard billing rates for 2022 were as follows:

• Leonard Cross, Partner: $1,475/hr

• Sylvia Hartwell, Partner: $1,350/hr

• Garrett Simmons, Senior Associate: $885/hr

• Nadia Nazari, Associate: $695/hr

C&H's 2023 billing rates reflect annual adjustments per the 2023 billing rate schedule previously provided to PPC. All time entries are reviewed and approved by Sylvia Hartwell in her capacity as Billing Partner prior to submission to PPC for payment.

Whitmore Valuation Group LLC. WVG's core economic reports were delivered during Q4 2022, with ongoing maintenance and update work performed during Q1 and Q2 2023. Fees billed by WVG through Q2 2023 are estimated at approximately $1.4M–$1.6M of the eventual total engagement amount of $2,146,800. WVG's blended billing rate is $650/hr. Additional fees will be incurred upon the issuance of the NOPA for rebuttal work and, potentially, for participation in the Appeals process.

Thornbury & Keogh. Irish coordination fees billed by T&K are tracking toward the eventual total of €312,500 (approximately $341,200 at current exchange rates). T&K's work has consisted primarily of the collection and production of Irish-side documentation, coordination with Irish Revenue, and advice on Irish tax law issues relevant to PBI's Knowledge Development box claims and transfer pricing positions.

Total Professional Fees Through Q2 2023. Total professional fees across all advisors (C&H, WVG, T&K, and Crestfield) are estimated at approximately $4.5M–$5.0M through Q2 2023.

B. Budget Projection Through Resolution

C&H's original estimate of $4.5M–$7.0M for C&H fees through resolution of the examination remains valid. Based on the current trajectory—including the intensity of the IDR process, the scope of the IRS's emerging positions, and the anticipated NOPA—C&H currently projects that its fees will land in the range of $5.5M–$6.5M, depending on the scope and magnitude of the proposed adjustments in the NOPA and whether an IRS Appeals proceeding is necessary.

Significant fee activity is anticipated in Q3 and Q4 2023 in connection with the following workstreams: preparation for and attendance at the August 15, 2023 meeting with Dr. Washburne; completion of the remaining IDR responses; analysis and evaluation of the NOPA upon issuance; coordination with WVG on the preparation of the economic rebuttal; preparation of the correlative adjustment research memorandum; and, if PPC elects to file a Protest, the initial stages of Protest preparation.

If the matter proceeds to IRS Appeals, which C&H considers the likely path, additional fees will be incurred for Appeals conference preparation, supplemental briefing, settlement negotiations, and ongoing coordination with WVG and other advisors. These fees are projected to be incurred primarily in Q1 2024 and potentially beyond, depending on the pace of the Appeals process.

Sylvia Hartwell continues to oversee billing and will provide updated budget projections to PPC once the NOPA is issued and the scope of post-NOPA work is more clearly defined.

VII. SEC Disclosure and Financial Reporting Considerations

PPC's FIN 48 (ASC 740-10) reserve for uncertain tax positions related to the Irish IP structure currently stands at $62.4M. This reserve was established at a pre-settlement level based on PPC's assessment of the probability and magnitude of potential adjustments in connection with the IRS examination. C&H provided its analysis supporting the FIN 48 reserve to Crestfield & Associates (Martin Ogilvy) in September 2022. This analysis will require updating once the NOPA is issued and the specific proposed adjustment amounts are known, as the NOPA may alter the probability and magnitude assessments underlying the current reserve level.

SEC disclosure considerations in connection with PPC's annual (10-K) and quarterly (10-Q) filings are being monitored by C&H. As of the date of this report, the examination has not yet reached a stage that, in C&H's assessment, requires enhanced disclosure in PPC's public filings beyond the Company's existing general disclosure of the IRS examination. However, the issuance of a NOPA containing a specific proposed adjustment amount—particularly if the adjustment is substantial, as anticipated—may trigger additional disclosure analysis. C&H will work with Deborah Staines and PPC's securities counsel to evaluate the disclosure implications promptly upon receipt of the NOPA.

C&H notes that Ridgeview Capital Management LP, which holds approximately 8.3% of PPC's outstanding shares (with Douglas Everett as the principal), monitors PPC's tax reserves as part of its investment analysis. Any material change to PPC's FIN 48 reserves would be visible in the Company's financial statements and could attract attention from institutional shareholders.

Additionally, PPC's $1.5B revolving credit facility with Hargrove National Bank contains tax-indemnity and material-tax-event covenants. C&H Associate Nadia Nazari is monitoring whether a future NOPA would trigger reporting obligations under the credit agreement. C&H's analysis of the credit agreement's covenant provisions will be formalized upon the issuance of the NOPA, and C&H will advise PPC's management team on any required notifications to Hargrove National Bank.

VIII. Recommended Next Steps

Based on the foregoing analysis and the current posture of the examination, C&H recommends the following actions for Q3 2023:

1. Complete Remaining IDR Responses. Continue preparation and timely submission of responses to all outstanding IDRs through IDR No. 47. Particular attention should be given to ensuring that the final IDR responses are complete, accurate, and consistent with the factual record established in prior responses.

2. Attend August 15, 2023 Meeting with IRS Economist Dr. Washburne. Leonard Cross, Garrett Simmons, and Dr. Helena Vasquez (Whitmore) will participate. C&H will prepare detailed talking points highlighting the strength of WVG's comparable selection methodology, the rigor of the 9.8% WACC, and the arm's-length nature of PPC's intercompany pricing. This meeting represents a critical opportunity to understand and begin addressing the IRS economist's positions before they are formalized in the NOPA.

3. Prepare Whitmore for Rapid-Turnaround Rebuttal. Ensure that WVG is positioned to initiate rebuttal work on an expedited basis immediately upon the issuance of the NOPA. The rebuttal should address each component of the IRS economist's analysis, including comparable selection, discount rate methodology, RAB calculations, and cost-sharing ratio adjustments.

4. Prepare Correlative Adjustment Memorandum. Prepare the correlative adjustment research memorandum under Treas. Reg. § 1.482-1(g) in anticipation of potential overlap between the IRS's proposed CSA cost-sharing adjustments and royalty rate adjustments. This memorandum should develop the legal and economic arguments supporting a reduction in the aggregate adjustment to avoid double-counting.

5. Develop NOPA Response Contingency Plan. Begin outlining the framework for a formal Protest to IRS Appeals, including identification of the key factual, economic, and legal arguments to be advanced. Develop preliminary settlement parameters based on a range of potential NOPA amounts and PPC's assessment of the relative strength of its positions on each adjustment.

6. Schedule Call Regarding Disclosure and Covenant Implications. Schedule a call with Deborah Staines and Rajesh Iyer to discuss the implications of a large NOPA for SEC disclosure requirements, FIN 48 reserve levels, and the Hargrove National Bank credit facility covenants. This call should be scheduled for late Q3 2023, in advance of the anticipated NOPA issuance.

7. Continue Irish-Side Coordination. Continue coordination with Thornbury & Keogh on Irish-side developments, including monitoring for any Irish Revenue inquiries related to PBI's operations or Knowledge Development box claims. Ensure that T&K is prepared to provide supplemental substance documentation if needed in connection with the NOPA response.

8. Schedule Q3 Status Call. Schedule the next quarterly status call with PPC management for early October 2023, at which time C&H will provide an update on the NOPA status, the results of the August 15 meeting with Dr. Washburne, and the Q3 budget status.

IX. Closing and Contact Information

C&H will issue its next quarterly status report covering Q3 2023 in early October 2023. Given the anticipated issuance of the NOPA during Q3, the next report is expected to include a detailed analysis of the proposed adjustments and C&H's recommended response strategy.

In the interim, all inquiries regarding this matter should be directed to:

Leonard Cross, Responsible Partner Calderwood & Harkness LLP, Tax Department 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 555-0142

Email: lcross@calderwoodharkness.com

Sylvia Hartwell, Billing Partner Calderwood & Harkness LLP, Tax Department 600 Lexington Avenue New York, NY 10022 Telephone: (212) 555-0389

Email: shartwell@calderwoodharkness.com

This report constitutes a privileged and confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP in connection with its representation of Penterra Pharmaceuticals Corp. in the above-referenced IRS examination. This report and its contents are protected from disclosure by the attorney-client privilege and the attorney work product doctrine. This report is intended solely for the use of the named recipients and should not be disclosed, distributed, or otherwise made available to any third party without the prior written approval of Calderwood & Harkness LLP.

CALDERWOOD & HARKNESS LLP

By: ________

Leonard Cross Partner, Tax Department

By: ________

Sylvia Hartwell Partner, Tax Department

Date: July 5, 2023

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP TAX DEPARTMENT
QUARTERLY MATTER STATUS REPORT — Q2 2023
MEMORANDUM
FROM: Leonard Cross, Responsible Partner, and Sylvia Hartwell, Billing Partner — Calderwood & Harkness LLP, Tax Department
TO: Marcus Whitfield, Vice President of Global Tax, Penterra Pharmaceuticals Corp.; Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp.; Rajesh Iyer, Chief Financial Officer, Penterra Pharmaceuticals Corp.
Date: July 5, 2023
RE: Quarterly Matter Status Report — Q2 2023 IRS Transfer Pricing Examination Defense, Tax Years 2017–2020
Matter Number: 1018-00009 IRS Exam Team ID: LB&I-NE-TP-2022-00641 Taxpayer: Penterra Pharmaceuticals Corp. (EIN: 22-3741856)
I. Executive Summary
The second quarter of 2023 represents a critical transitional period in the IRS's transfer pricing examination of Penterra Pharmaceuticals Corp. ("PPC" or the "Company"). During this quarter, the IRS examination team has substantially completed its factual development phase and is now moving toward the formulation of proposed adjustments. This shift in posture was made evident during the mid-examination conference held on May 25, 2023, and carries significant implications for the timing and strategic posture of PPC's defense going forward.
Since the commencement of the examination in June 2022, the IRS has issued a total of 47 Information Document Requests ("IDRs"). As of the close of Q2 2023, Calderwood & Harkness LLP ("C&H") has responded to approximately 38 of those IDRs, with the remaining requests in various stages of response preparation and scope negotiation. The IDR process has been intensive but has been managed effectively through careful coordination among PPC's internal tax team, Crestfield & Associates LLP (PPC's return preparers), Thornbury & Keogh (PPC's Irish counsel), and the Whitmore Valuation Group LLC ("WVG" or "Whitmore") (PPC's retained economic experts).
A key development during Q2 2023 is the active involvement of IRS economist Dr. Alan Washburne in the examination. Dr. Washburne has been conducting independent economic analyses of PPC's transfer pricing positions, including the cost-sharing arrangement ("CSA") cost-sharing ratios, the legacy intellectual property ("IP") royalty rate, and the platform contribution transaction ("PCT") valuation. His involvement signals a maturing examination in which the IRS is developing its own quantitative basis for proposed adjustments.
C&H held a mid-examination conference with the IRS on May 25, 2023, which was requested by C&H's letter dated May 10, 2023 to Supervisory Revenue Agent Gerald Meskill. This conference provided significant insight into the IRS's emerging positions. In particular, the IRS examination team appears to be focused on three primary areas of concern:
(1) The adequacy of Penterra Biosciences Ireland Ltd.'s ("PBI") cost-sharing percentages (ranging from 38.2% in 2017 to 42.7% in 2020) under the CSA, and whether those percentages understate PBI's reasonably anticipated benefits from the cost-shared intangibles;
(2) The arm's-length nature of the 4.5% legacy IP royalty rate paid by PBI to PPC, with the IRS indicating preliminary analysis suggesting a rate in the range of 9%–12%; and
(3) PBI's economic substance and the locus of key Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") functions, with the IRS questioning whether critical DEMPE activities may have remained in the United States notwithstanding PBI's formal contractual role.
Based on signals from the mid-examination conference, C&H anticipates that a Notice of Proposed Adjustment ("NOPA") will be issued in Q3 or early Q4 2023, likely in the September–October timeframe following the completion of Dr. Washburne's economic analysis.
On the defense side, WVG's core economic analyses—including the comparable uncontrolled transaction ("CUT") analysis, the comparable profits method/transactional net margin method ("CPM/TNMM") analysis, and the PCT discounted cash flow ("DCF") valuation—were completed and delivered in November–December 2022. These analyses remain current and provide a robust foundation for PPC's arm's-length defense. Dr. Helena Vasquez, the lead economist at WVG, is on standby to initiate rebuttal work once the IRS economist's analysis is formalized in the NOPA.
Thornbury & Keogh continues to coordinate on Irish-side documentation and substance evidence for PBI and Penterra Manufacturing Ireland Ltd. ("PMI"), ensuring that the factual record supporting PBI's economic substance is comprehensive and readily available.
With respect to budget tracking, professional fees remain within the estimated $4.5M–$7.0M range for C&H fees, though the trajectory is trending toward the midpoint of that range given the intensity of the IDR process during Q2 and the approaching NOPA phase. Total professional fees across all advisors (C&H, WVG, Thornbury & Keogh, and Crestfield) are estimated at approximately $4.5M–$5.0M through Q2 2023.
II. Examination Status and Activity During Q2 2023
A. IDR Activity
The IRS's factual development through Information Document Requests continued at a significant pace during Q2 2023. As of the close of the quarter, the IRS had issued a total of 47 IDRs since the examination commenced in June 2022. Of these, C&H has responded to approximately 38 IDRs, with the remaining requests in various stages of response preparation and, in certain instances, ongoing scope negotiations with the IRS examination team.
During Q2 2023 specifically, approximately six IDRs were issued (IDR Nos. 33 through 38, by our estimate), covering a range of factual areas that collectively signal the IRS's movement from broad factual development to more targeted investigation of the three primary areas of concern identified at the mid-examination conference. The following summarizes the most significant IDR activity during Q2 2023:
IDR No. 35 — Intercompany Pricing Decisions and Market Strategy Documents. This IDR, initially issued in late Q1 2023 and supplemented in early Q2, requested documentation evidencing the intercompany pricing decisions made by PBI and the market strategy analyses underlying those decisions across PBI's non-Americas markets. C&H submitted its response on June 2, 2023, producing internal PBI documents that evidence independent pricing decisions made by PBI's commercial-strategy team and Managing Director Aidan Naughton across 68 non-Americas country markets. This production is highly relevant to PPC's defense of PBI's economic substance and independent decision-making authority, particularly with respect to the IRS's emerging DEMPE-related concerns. The documents produced include market-specific pricing memoranda, distributor correspondence reflecting PBI's negotiating posture, and board presentations analyzing pricing strategy across therapeutic areas and geographies.
Additional IDRs Addressed During Q2. Beyond IDR No. 35, C&H responded during Q2 2023 to additional IDRs covering PBI's distribution partner selection process (including documentation of the selection criteria, due diligence procedures, and contractual negotiations conducted by PBI's Dublin-based team), PBI's capital expenditure records (documenting investments in the Dublin office, IT infrastructure, and regulatory capabilities), and supplemental employee compensation data for PBI personnel (providing additional detail on the qualifications, seniority, and decision-making authority of PBI's Irish-based employees).
Outstanding IDRs. Several IDRs remain in various stages of production, with responses expected to continue through September 2023. The final tranche of IDRs (IDR Nos. 44 through 47) are anticipated to be issued in the coming weeks and will likely address remaining topics identified by the IRS economist, Dr. Washburne, in connection with his independent economic analysis. IDR No. 40, which requests copies of all Forms 5471 and international informational returns filed by PPC for the examination years, is targeted for response in July 2023.
IDR Scope Management. C&H continues to manage the scope of the IRS's IDRs through proactive negotiation and, where appropriate, formal objection. As reported in the Q1 2023 status report, C&H submitted a letter dated February 15, 2023 objecting to the scope of IDR No. 26, which, as drafted, would have required the production of substantially all internal communications among PPC's R&D leadership regarding the strategic direction of the Company's pharmaceutical pipeline—without limitation to transfer pricing-related subjects. That objection resulted in a partial narrowing of the request, although the IRS maintained some breadth in its subsequent IDRs, particularly with respect to documents evidencing the locus of strategic decision-making between PPC's U.S. headquarters and PBI's Dublin operations. C&H will continue to monitor IDR scope and raise objections where appropriate to protect PPC's interests while maintaining a cooperative posture with the IRS examination team.
Coordination of IDR Responses. All IDR responses continue to be coordinated through C&H Senior Associate Garrett Simmons, who serves as the primary point of contact for document collection and production. Document production involves inputs from multiple sources, including PPC's internal tax team (Marcus Whitfield's group, providing intercompany agreements, internal memoranda, and business records), Crestfield & Associates LLP (Susan Lam providing return data, workpapers, and original transfer pricing documentation prepared in connection with the Company's tax filings), and Thornbury & Keogh (Ciarán Thornbury providing Irish-side records for PBI and PMI, including Irish financial statements, Revenue filings, and substance documentation). This multi-source coordination has functioned effectively, though C&H notes that certain PBI documents held in Dublin continue to require additional lead time for collection and review.
B. Mid-Examination Conference (May 25, 2023)
C&H requested a mid-examination conference with the IRS via a letter addressed to Supervisory Revenue Agent Gerald Meskill dated May 10, 2023. The purpose of the request was to gain visibility into the IRS's emerging positions, identify areas of potential agreement and disagreement, and position PPC's defense for the NOPA phase of the examination.
The conference was held on May 25, 2023 at the IRS's offices. The following individuals participated:
For C&H: Leonard Cross (Responsible Partner) and Garrett Simmons (Senior Associate)
For PPC: Marcus Whitfield (Vice President of Global Tax)
For the IRS: Supervisory Revenue Agent Gerald Meskill, Lead Revenue Agent Patricia Dunleavy, and IRS Economist Dr. Alan Washburne
The conference was conducted in a professional and substantive manner. The IRS team was forthcoming in identifying the areas of concern that have emerged from their review of the IDR responses and Dr. Washburne's preliminary economic analysis. The key takeaways from the conference are summarized below.
CSA Cost-Sharing Ratios. The IRS indicated preliminary concerns that PBI's cost-sharing percentages—38.2% in 2017, 39.6% in 2018, 41.1% in 2019, and 42.7% in 2020—understate PBI's reasonably anticipated benefits ("RAB") from the cost-shared intangibles. The IRS's concern is that PBI's share of the total qualified R&D costs (which were $487.3M in 2017, $523.8M in 2018, $561.2M in 2019, and $598.4M in 2020) does not adequately reflect the proportion of worldwide profits attributable to PBI's exploitation territories. In essence, the IRS appears to believe that PBI should be bearing a greater share of the R&D cost pool, with PPC receiving correspondingly greater compensation for its U.S.-based R&D contributions. Dr. Washburne indicated that his analysis may propose increases to PBI's cost-sharing percentages of approximately 8 to 12 percentage points across the examination years, though he did not commit to specific figures. The implications of such an adjustment, if sustained, would be significant, as it would increase the intercompany payments flowing from PBI to PPC and correspondingly increase PPC's U.S. taxable income for the examination years.
Legacy IP Royalty Rate. The IRS team questioned the arm's-length nature of the 4.5% legacy IP royalty rate paid by PBI to PPC under the intercompany license agreement. Dr. Washburne indicated that he has identified comparable license agreements suggesting a significantly higher royalty rate than 4.5%. Based on the discussion, the IRS appears to be evaluating royalty rates in the range of 9% to 12%, based on Dr. Washburne's own CUT analysis using what appears to be a narrower set of comparable agreements than the 14 agreements identified by WVG. C&H and WVG have concerns about the comparability of the agreements Dr. Washburne may be relying upon, and the August 15, 2023 meeting will provide an opportunity to probe his comparable selection methodology in greater detail.
PBI Economic Substance and DEMPE Functions. The IRS raised questions about the locus of key Development, Enhancement, Maintenance, Protection, and Exploitation functions, suggesting that critical DEMPE activities may have remained in the United States despite PBI's formal contractual role under the CSA and intercompany license agreements. This line of inquiry is consistent with the IRS's broader focus on substance-over-form in the transfer pricing context and aligns with the OECD's 2017 Transfer Pricing Guidelines, which emphasize that the allocation of profits should follow the allocation of functions, assets, and risks.
In response, C&H emphasized the substantial and growing operational presence of PBI in Dublin, including the following key facts:
•  PBI employed 185 full-time employees as of December 31, 2020, reflecting significant growth from 52 employees at the time of PBI's incorporation in 2012;
•  PBI performs regulatory, medical-affairs, commercial-strategy, and supply-chain functions from its Dublin offices;
•  PBI incurred cumulative regulatory expenditures of €47.2M during the 2017–2020 period across 68 non-Americas country markets;
•  PBI's board of directors held 42 meetings in Dublin during the 2017–2020 period, with documented key decisions on pricing, market entry strategy, distribution partner selection, and capital expenditures;
•  PBI maintains independent decision-making authority through Managing Director Aidan Naughton, who exercises day-to-day management authority over PBI's commercial operations; and
•  PBI maintains independent banking relationships with Glenmore Bank Ireland plc.
The IRS team took note of these representations but did not indicate that the substance concerns had been resolved. C&H expects that PBI's economic substance will remain a contested area throughout the NOPA and potential Appeals process.
PCT Valuation. While the 2012 tax year (in which the PCT payment was made) is outside the scope of the current examination years (2017–2020), the IRS indicated that the perceived undervaluation of the PCT payment—$312M paid by PBI versus the IRS's preliminary income-method valuation, which the IRS suggested is substantially higher—informs the IRS's view of the ongoing CSA and royalty arrangements for the examination years. In other words, the IRS appears to take the position that if the PCT payment undervalued the transferred IP, the downstream arrangements (cost-sharing percentages and royalty rates) must be evaluated in light of that alleged undervaluation. C&H notes that this "look-through" approach raises significant legal and economic issues that will need to be addressed in the defense, including the proper treatment of a PCT payment under Treas. Reg. § 1.482-7 and the extent to which the IRS can effectively challenge a PCT payment that falls outside the examination years.
Anticipated NOPA Timeline. Supervisory Revenue Agent Meskill indicated that the examination team anticipates issuing a Notice of Proposed Adjustment in approximately three to four months from the date of the conference, i.e., in the September–October 2023 timeframe. This timeline is contingent upon the completion of Dr. Washburne's economic analysis and the IRS's receipt and review of the final IDR responses. C&H is treating this timeline as actionable and is preparing PPC's defense accordingly.
C. IRS Economist Involvement
Dr. Alan Washburne of the IRS Transfer Pricing Practice within the Large Business & International ("LB&I") Division has been actively developing his own independent economic analysis since at least Q1 2023. His involvement represents a significant development in the examination, as IRS economist reports typically form the quantitative basis for proposed adjustments in the NOPA.
Based on information gathered during the mid-examination conference and through informal discussions between C&H and the IRS examination team, Dr. Washburne's analysis appears to encompass the following:
PCT Valuation — Income Method / DCF Approach. Dr. Washburne is applying an income method (Discounted cash flow) approach to the PCT valuation. Critically, intelligence gathered during the examination suggests that the IRS may be using a weighted average cost of capital ("WACC") discount rate in the range of 7.0%–7.5%, which is significantly lower than the 9.8% WACC employed by WVG in its December 2022 PCT Valuation report. A lower discount rate has the effect of increasing the present value of the projected cash flows attributable to the transferred IP, thereby producing a higher arm's-length PCT payment. The difference between a 7.0%–7.5% WACC and a 9.8% WACC, when applied to the multi-year revenue projections for Veritaxol, Imvara, and Cerulon, could result in a PCT valuation substantially exceeding the $312M payment made by PBI. Dr. Vasquez's December 2022 WACC/Discount Rate Technical Memorandum provides a detailed defense of the 9.8% rate, including company-specific risk premium analysis and pharmaceutical industry benchmarking, and will serve as the foundation for rebuttal on this point.
Legacy IP Royalty Rate — CUT Comparable Selection. Dr. Washburne appears to be selecting a narrower set of CUT comparables for the legacy royalty rate analysis than the 14 comparable pharmaceutical license agreements identified by WVG. WVG's 14 comparables yielded an interquartile range ("IQR") of 3.1%–6.8%, with a median of 4.4%, supporting PPC's 4.5% royalty rate as comfortably within the arm's-length range. Dr. Washburne's narrower set of comparables, the composition of which has not yet been formally disclosed to C&H, appears to trend higher—likely supporting the 9%–12% range referenced by the IRS during the mid-examination conference. The comparability of Dr. Washburne's selected agreements will be a central point of contention, and C&H and WVG are prepared to challenge any comparable selection that fails to account for material differences in the licensed IP, the stage of development, geographic scope, exclusivity provisions, and the allocation of development risks.
CSA Cost-Sharing Percentages. Dr. Washburne appears to be evaluating PBI's cost-sharing percentages with a view toward proposing increases of approximately 8 to 12 percentage points across the examination years. If proposed, such adjustments would significantly increase PBI's share of the qualified R&D cost pool and correspondingly increase the intercompany payments from PBI to PPC, resulting in higher U.S. taxable income for PPC in each of the examination years.
Scheduled Meeting with Dr. Washburne. C&H has requested and secured a formal meeting with Dr. Washburne, which is scheduled for August 15, 2023. This meeting will provide an opportunity for C&H and WVG to better understand Dr. Washburne's methodology, comparable selection criteria, and discount rate assumptions, and to present PPC's economic rationale. Leonard Cross and Garrett Simmons will attend on behalf of C&H, and Dr. Helena Vasquez of WVG will participate to address technical economic questions directly. C&H views this meeting as a critical pre-NOPA opportunity to identify and begin addressing the areas of economic disagreement between PPC's experts and the IRS economist.
Rebuttal Preparation. Dr. Vasquez and Dr. Rohan Chakrabarti at WVG are fully prepared to produce a comprehensive rebuttal report once the IRS economist's analysis is formalized in the NOPA. Preliminary rebuttal frameworks have been developed, and WVG's benchmarking data workbooks have been maintained and updated to ensure that rebuttal work can be initiated on an expedited basis once the NOPA is issued.
D. IRS Chief Counsel Involvement
IRS Attorney-Advisor Franklin Rosario of the Office of Chief Counsel, Transfer Pricing, is providing legal support to the examination team. Mr. Rosario's involvement has been apparent in the legal framing of certain IDR requests, particularly those relating to the economic substance of PBI and the interplay between the CSA and the intercompany royalty arrangements.
Senior Counsel Donna Hirabayashi is also involved at a supervisory level within the Office of Chief Counsel. Her involvement suggests that the IRS views this examination as significant and is devoting senior-level legal resources to the development of its positions.
C&H anticipates a call with Mr. Rosario in Q3 2023 to discuss the IRS's legal positions on several key issues, including compliance with the qualified cost-sharing arrangement regulations under Treas. Reg. § 1.482-7, the application of the economic substance doctrine to PBI's operations and DEMPE functions, and the interplay between the IRS's authority under IRC § 482 and the outbound IP transfer provisions of IRC § 367(d). This call, which is tentatively estimated for September 20, 2023, will provide valuable insight into the legal theories the IRS intends to advance in connection with the proposed adjustments.
III. Defense Workstreams — Status Update
A. Economic Analyses (Whitmore Valuation Group LLC)
All core economic reports prepared by WVG were delivered on schedule during Q4 2022 and remain current as of the date of this report. The following is a summary of the status of each deliverable:
CUT Analysis (Legacy IP Royalty Rate). Delivered in November 2022. WVG identified 14 comparable pharmaceutical license agreements through a comprehensive search of available licensing databases and public filings. The resulting interquartile range of royalty rates was 3.1%–6.8%, with a median of 4.4%. PPC's 4.5% legacy IP royalty rate was confirmed as falling within the arm's-length range and near the median of the identified comparables. The CUT analysis applied the comparability factors set forth in Treas. Reg. § 1.482-4(c), including the nature of the licensed intangible property, the stage of development, geographic exclusivity, duration of the license, and the allocation of development and commercialization risks. This report will serve as the primary basis for rebutting the IRS's position that the royalty rate should be in the 9%–12% range.
CPM/TNMM Analysis (PBI Operating Margins). Delivered in November 2022. WVG benchmarked PBI's operating margins against a set of 22 comparable distributors and IP-holding companies identified through database screening and public financial data analysis. PBI's operating margins were within the interquartile range in all four examination years (2017–2020). This analysis supports PPC's position that PBI's profit levels are consistent with arm's-length returns for an entity performing the functions, assuming the risks, and employing the assets documented in PPC's transfer pricing reports.
PCT Valuation / DCF Analysis. Delivered in December 2022. WVG performed a discounted cash flow analysis to value the intangible property transferred to PBI in the 2012 platform contribution transaction. Using a WACC of 9.8%, WVG determined an arm's-length range of $278M–$361M for the PCT payment. The $312M PCT payment actually made by PBI was confirmed as falling within this range. The DCF analysis incorporated revenue projections for Veritaxol, Imvara, and Cerulon across PBI's exploitation territories, risk-adjusted for development-stage uncertainties, regulatory approval probabilities, and market adoption rates. As noted above, the discount rate will be a central point of contention with the IRS, and Dr. Vasquez's WACC/Discount Rate Technical Memorandum provides a detailed defense of the 9.8% rate.
WACC/Discount Rate Technical Memorandum. Delivered in December 2022 by Dr. Helena Vasquez. This memorandum provides a detailed analysis of the appropriate discount rate for use in the PCT valuation, including a build-up of the WACC using the capital asset pricing model ("CAPM") for the cost of equity and PPC's actual cost of debt, supplemented by a company-specific risk premium reflecting the inherent uncertainties in pharmaceutical development and commercialization. The memorandum addresses and distinguishes alternative approaches to discount rate estimation that could yield lower rates, providing a foundation for rebutting Dr. Washburne's anticipated use of a lower WACC.
Ongoing Maintenance and Rebuttal Readiness. WVG's benchmarking data workbook has been maintained and updated on a rolling basis to ensure that the comparable data underlying all economic analyses remains current. Revenue projection models for Veritaxol, Imvara, and Cerulon (separately for Americas and non-Americas territories) and cost-sharing ratio sensitivity analyses have been maintained and updated by C&H Senior Associate Garrett Simmons in coordination with WVG. These materials will support the rebuttal of the IRS economist's analysis once the NOPA is issued.
Rebuttal work will be initiated upon the issuance of the NOPA and the availability of Dr. Washburne's formal economic analysis. C&H and WVG have developed a preliminary framework for the rebuttal, identifying the key areas of anticipated disagreement (Discount rate, comparable selection, RAB methodology, and cost-sharing percentages) and the analytical and evidentiary responses that will be deployed for each.
B. Functional Analysis / PBI Economic Substance
PBI's economic substance and the allocation of DEMPE functions between PPC and PBI are central to PPC's defense against the IRS's transfer pricing positions. C&H prepared a comprehensive functional analysis in October 2022, which was subsequently updated on March 15, 2023 to reflect additional evidence gathered through the IDR process and from Thornbury & Keogh's Irish-side documentation efforts. The functional analysis documents the following aspects of PBI's substantive operations:
•  Headcount Growth: PBI employed 185 full-time employees as of December 31, 2020, reflecting substantial growth from 52 employees at the time of PBI's incorporation in 2012. This headcount growth demonstrates PBI's ongoing investment in building genuine operational capabilities in Ireland.
•  Functional Capabilities: PBI performs regulatory, medical-affairs, commercial-strategy, and supply-chain functions from its Dublin offices. These functions are staffed by qualified professionals with relevant industry experience and expertise.
•  Regulatory Expenditures: PBI incurred cumulative regulatory expenditures of €47.2M during the 2017–2020 period across 68 non-Americas country markets. These expenditures reflect PBI's active engagement in obtaining and maintaining regulatory approvals necessary for the commercialization of Veritaxol, Imvara, and Cerulon in PBI's exploitation territories.
•  Board Activity and Governance: PBI's board of directors held 42 meetings in Dublin during the 2017–2020 period. Board minutes document key decisions on pricing, market entry strategy, distribution partner selection, and capital expenditures. These meetings were substantive, with detailed agendas, supporting materials, and documented deliberations—not merely perfunctory approvals of predetermined outcomes.
•  Physical Presence: PBI occupies approximately 18,000 square feet of office space at Sandyford Business Park, Dublin, under a long-term lease.
•  Management Authority: Managing Director Aidan Naughton exercises independent decision-making authority over PBI's commercial operations, including pricing, market strategy, and distribution partner relationships. Mr. Naughton's decision-making authority is documented in PBI's organizational chart, delegations of authority, and internal correspondence.
•  Independent Banking: PBI maintains independent banking relationships with Glenmore Bank Ireland plc, including operating accounts, treasury management, and intercompany settlement accounts.
Personnel Interviews. In August–September 2022, C&H conducted interviews with 12 key PBI employees to develop a detailed understanding of the functions performed, risks assumed, and assets employed by PBI. The interview summaries document each employee's role, responsibilities, decision-making authority, and interactions with PPC personnel. These summaries remain available as supporting evidence and may be utilized in the Protest and Appeals process.
Board Minutes Analysis. C&H has analyzed all 42 sets of PBI board minutes from the 2017–2020 period. This analysis maps each board decision to the relevant DEMPE function, demonstrating that PBI's board actively exercised decision-making authority over key aspects of PBI's business operations.
DEMPE Functions Matrix. C&H prepared and has updated through Q1 2023 a detailed DEMPE functions matrix documenting the allocation of Development, Enhancement, Maintenance, Protection, and Exploitation functions between PPC (U.S.) and PBI (Ireland) for each of PPC's key pharmaceutical products: Veritaxol, Imvara, and Cerulon. This matrix provides a granular, product-by-product analysis of which entity performs each category of DEMPE function, supported by specific evidentiary references.
IDR No. 35 Response. As discussed above, C&H's June 2, 2023 response to IDR No. 35 reinforced PBI's independent pricing authority with specific market-level documentation. This production is directly responsive to the IRS's DEMPE concerns and provides concrete evidence that pricing decisions were made by PBI's Dublin-based personnel, not by PPC's U.S. headquarters.
C. Legal Research and Analysis
C&H has developed a comprehensive body of legal research and analysis supporting PPC's transfer pricing positions. The following core legal memoranda have been completed:
•  IRC § 482 Arm's-Length Standard and Best Method Rule Analysis (July 2022): Analyzes the arm's-length standard and the best method rule under Treas. Reg. § 1.482-1(c), evaluating the relative reliability of the CUT, CPM/TNMM, and income methods in the context of PPC's intercompany transactions.
•  Qualified Cost-Sharing Arrangement (QCSA) Regulatory Analysis under Treas. Reg. § 1.482-7 (August 2022): Analyzes PPC's CSA against the regulatory requirements for a qualified cost-sharing arrangement, including the formation, administration, cost-sharing, and buy-in/buy-out provisions.
•  Royalty Rate Analysis under Treas. Reg. § 1.482-4 (August 2022): Analyzes the arm's-length standard as applied to intangible property transfers, with a focus on the CUT method and the periodic adjustment rules.
•  Economic Substance Doctrine and DEMPE Functions Analysis (August 2022): Analyzes the economic substance doctrine as applied to PBI, addressing both the objective economic substance prong and the subjective business purpose prong, and evaluates PBI's DEMPE functions under the OECD Transfer Pricing Guidelines framework.
•  IRC § 6662(e) Penalty Protection and Reasonable Cause Defense Analysis (September 2022): Analyzes PPC's exposure to transfer pricing penalties under IRC § 6662(e) and evaluates the availability of the reasonable cause and good faith defense, including the documentation requirements under IRC § 6662(e)(3)(B).
•  TCJA Impact Analysis (August 2022): Analyzes the implications of the Tax Cuts and Jobs Act for PPC's transfer pricing positions, including the change in the corporate tax rate from 35% in TY 2017 to 21% in TY 2018–2020 and the corresponding effects on the magnitude of potential adjustments.
•  Altera and Harborview Corporation Case Law Analysis (September 2022): Analyzes the implications of Altera Corp. v. Commissioner, 941 F.3d 1200 (9th Cir. 2019), and Harborview Corporation, Inc. v. Commissioner, 900 F.3d 610 (8th Cir. 2018), for PPC's cost-sharing and royalty rate positions.
•  IRC § 367(d) Outbound IP Transfer Analysis (September 2022): Analyzes the outbound IP transfer provisions of IRC § 367(d) and their interplay with IRC § 482 in the context of PBI's acquisition of legacy IP rights.
•  OECD Transfer Pricing Guidelines (2017 & 2022) as Persuasive Authority (October 2022): Analyzes the status and persuasive weight of the OECD Guidelines in IRS examinations and Tax Court proceedings, with particular focus on the DEMPE framework introduced in the 2017 revision and the financial transactions guidance added in the 2022 revision.
•  GILTI and BEAT Impact Analysis for TY 2018–2020 (October 2022): Analyzes the interaction between proposed transfer pricing adjustments and PPC's exposure under the Global Intangible Low-Taxed Income ("GILTI") provisions of IRC § 951A and the Base Erosion and Anti-Abuse Tax ("BEAT") provisions of IRC § 59A for TY 2018–2020.
Additional Research Planned for Q3 2023. C&H will prepare a correlative adjustment analysis under Treas. Reg. § 1.482-1(g) in anticipation of potential overlap between the IRS's proposed CSA cost-sharing adjustments and its proposed royalty rate adjustments. This analysis will evaluate whether simultaneous upward adjustments to both the cost-sharing percentages and the royalty rate could result in double-counting and will develop the legal arguments supporting a correlative adjustment to prevent such an outcome.
The IRS IDR enforcement procedures research memorandum prepared in August 2022 remains current and was referenced in the February 15, 2023 objection to the scope of IDR No. 26.
D. Coordination with Third Parties
C&H continues to coordinate closely with PPC's other professional advisors to ensure a unified and efficient defense effort.
Crestfield & Associates LLP (Martin Ogilvy, Susan Lam). Crestfield serves as PPC's return preparer and is the repository of the original transfer pricing documentation prepared in connection with PPC's tax filings for the examination years. Coordination with Crestfield has been ongoing throughout the examination, with Susan Lam providing responsive and timely support to Garrett Simmons's requests for R&D cost pool data, return-level detail, and workpapers supporting the filed positions. Martin Ogilvy has been engaged at a senior advisory level and participates in periodic strategy discussions as needed.
Thornbury & Keogh (Ciarán Thornbury). Thornbury & Keogh serves as PPC's Irish counsel and is responsible for coordinating the Irish-side documentation and substance evidence supporting PBI's economic substance defense. C&H Associate Nadia Nazari serves as the primary day-to-day contact with T&K. During Q4 2022 and Q1 2023, T&K provided PBI's Irish financial statements, Irish Revenue filings, Knowledge Development box documentation (supporting PBI's entitlement to the 6.25% preferential tax rate), and additional substance documentation including lease agreements, employee records, and Glenmore Bank Ireland plc banking records. T&K continues to monitor Irish Revenue activity and will advise C&H promptly of any inquiries by Irish Revenue related to PBI or the Knowledge Development box claims.
Whitmore Valuation Group LLC (Dr. Helena Vasquez, Dr. Rohan Chakrabarti). WVG serves as PPC's retained economic expert and has delivered all core economic analyses as described in Section III.A above. WVG is engaged under a Kovel arrangement (reference 1018-00009-KV) to ensure that its communications with C&H and PPC are protected by the attorney-client privilege and attorney work product doctrine. WVG remains on standby for rebuttal work once the NOPA is issued and for potential engagement in connection with an IRS Appeals proceeding.
IV. Anticipated Q3 2023 Developments and Upcoming Milestones
The following milestones and developments are anticipated during Q3 2023:
August 15, 2023 — Meeting with IRS Economist Dr. Alan Washburne. C&H has secured a meeting with Dr. Washburne to discuss his economic methodology, comparable selection criteria, and discount rate assumptions. Leonard Cross and Garrett Simmons will attend on behalf of C&H. Dr. Helena Vasquez of WVG will participate to address technical economic questions and to present the key elements of PPC's economic rationale. C&H will prepare detailed talking points for this meeting, highlighting the strength of WVG's comparable selection process, the methodological rigor of the 9.8% WACC, and the arm's-length nature of the 4.5% royalty rate.
September 2023 (estimated) — Completion of Final IDRs. The final IDRs (IDR Nos. 44 through 47) are expected to be issued and responded to during this period, marking the conclusion of the IRS's factual development phase. IDR No. 40 (Forms 5471 and international informational returns) is targeted for response in July 2023.
September 20, 2023 (estimated) — Call with IRS Chief Counsel Attorney-Advisor Franklin Rosario. C&H anticipates scheduling a call with Mr. Rosario to discuss the IRS's legal positions on CSA compliance, economic substance, and the interplay between IRC § 482 and IRC § 367(d). This call will provide important insight into the legal theories that may underlie the proposed adjustments in the NOPA.
September–October 2023 — Anticipated NOPA Issuance. Based on the signals from the May 25, 2023 mid-examination conference, the IRS is expected to issue a Notice of Proposed Adjustment during this period. The proposed adjustments are expected to be substantial, potentially in the hundreds of millions of dollars, covering both the CSA cost-sharing ratios and the legacy IP royalty rate. The NOPA may also include proposed adjustments related to PBI's economic substance and DEMPE functions, though the precise scope and magnitude of the proposed adjustments will not be known until the NOPA is issued.
Upon NOPA Issuance — Response and Rebuttal. Upon receipt of the NOPA, C&H will immediately analyze the proposed adjustments in detail, coordinate with WVG on the preparation of a comprehensive economic rebuttal, and advise PPC's management team on the available response options. The primary response options will include (i) submitting a formal Protest to IRS Appeals, which would initiate an administrative Appeals proceeding, and (ii) in the alternative, declining to pursue Appeals and proceeding directly to a petition in the United States Tax Court. C&H's preliminary recommendation, subject to evaluation of the NOPA, is to pursue the Appeals process before considering litigation.
Statute of Limitations. Forms 872 (Consent to Extend the Time to Assess Tax) extending the statute of limitations for TY 2017 and TY 2018 through December 31, 2024 have been executed by PPC and accepted by the IRS. TY 2019 and TY 2020 remain within the standard assessment period and do not currently require extensions. However, depending on the NOPA issuance timeline and the duration of any Appeals proceeding, additional statute extensions for TY 2019 and TY 2020 may become necessary. C&H will monitor this issue and advise PPC in advance of any extension requests.
V. Privilege and Document Management
All document production to the IRS in connection with the examination is coordinated through C&H. A comprehensive privilege log is maintained and updated with each IDR response to ensure that privileged and work-product-protected materials are not inadvertently produced to the IRS. The privilege log identifies each withheld or redacted document by date, author, recipient, subject matter, and the applicable privilege assertion.
The privilege protocol memorandum issued by C&H on June 10, 2022 remains in full effect. This memorandum establishes the procedures for handling privileged communications and work product materials throughout the examination, including protocols for document collection, review, and production. All communications with WVG are protected under the Kovel arrangement (reference 1018-00009-KV), which was established at the outset of WVG's engagement to preserve the attorney-client privilege and work product protections over WVG's communications and work product.
The document preservation notice issued by C&H on June 6, 2022 remains in effect for PPC, PBI, Penterra Holdings Ltd. ("PHL"), and PMI. This notice requires the preservation of all documents and electronically stored information potentially relevant to the examination, including intercompany agreements, transfer pricing reports, board minutes, financial records, internal communications, and other business records.
A master document production index is maintained by C&H Associate Nadia Nazari. All documents produced to the IRS are Bates-numbered and logged in the production index, which tracks each production by IDR number, date of production, Bates range, document description, and custodian. This index ensures that C&H and PPC maintain a complete and accurate record of all materials provided to the IRS during the examination.
VI. Financial Reporting / Budget Update
A. Fees Billed Through Q2 2023
Calderwood & Harkness LLP. Fees billed by C&H through June 30, 2023 are trending toward approximately $3.0M–$3.5M of the $4.5M–$7.0M total estimated range for C&H's fees through resolution of the examination. The pace of billing during Q2 2023 was driven primarily by the intensive IDR response period (including the preparation and production of responses to approximately six IDRs during the quarter), the preparation for and attendance at the May 25, 2023 mid-examination conference, and ongoing strategic analysis and coordination with WVG, Thornbury & Keogh, and Crestfield. C&H's standard billing rates for 2022 were as follows:
•  Leonard Cross, Partner: $1,475/hr
•  Sylvia Hartwell, Partner: $1,350/hr
•  Garrett Simmons, Senior Associate: $885/hr
•  Nadia Nazari, Associate: $695/hr
C&H's 2023 billing rates reflect annual adjustments per the 2023 billing rate schedule previously provided to PPC. All time entries are reviewed and approved by Sylvia Hartwell in her capacity as Billing Partner prior to submission to PPC for payment.
Whitmore Valuation Group LLC. WVG's core economic reports were delivered during Q4 2022, with ongoing maintenance and update work performed during Q1 and Q2 2023. Fees billed by WVG through Q2 2023 are estimated at approximately $1.4M–$1.6M of the eventual total engagement amount of $2,146,800. WVG's blended billing rate is $650/hr. Additional fees will be incurred upon the issuance of the NOPA for rebuttal work and, potentially, for participation in the Appeals process.
Thornbury & Keogh. Irish coordination fees billed by T&K are tracking toward the eventual total of €312,500 (approximately $341,200 at current exchange rates). T&K's work has consisted primarily of the collection and production of Irish-side documentation, coordination with Irish Revenue, and advice on Irish tax law issues relevant to PBI's Knowledge Development box claims and transfer pricing positions.
Total Professional Fees Through Q2 2023. Total professional fees across all advisors (C&H, WVG, T&K, and Crestfield) are estimated at approximately $4.5M–$5.0M through Q2 2023.
B. Budget Projection Through Resolution
C&H's original estimate of $4.5M–$7.0M for C&H fees through resolution of the examination remains valid. Based on the current trajectory—including the intensity of the IDR process, the scope of the IRS's emerging positions, and the anticipated NOPA—C&H currently projects that its fees will land in the range of $5.5M–$6.5M, depending on the scope and magnitude of the proposed adjustments in the NOPA and whether an IRS Appeals proceeding is necessary.
Significant fee activity is anticipated in Q3 and Q4 2023 in connection with the following workstreams: preparation for and attendance at the August 15, 2023 meeting with Dr. Washburne; completion of the remaining IDR responses; analysis and evaluation of the NOPA upon issuance; coordination with WVG on the preparation of the economic rebuttal; preparation of the correlative adjustment research memorandum; and, if PPC elects to file a Protest, the initial stages of Protest preparation.
If the matter proceeds to IRS Appeals, which C&H considers the likely path, additional fees will be incurred for Appeals conference preparation, supplemental briefing, settlement negotiations, and ongoing coordination with WVG and other advisors. These fees are projected to be incurred primarily in Q1 2024 and potentially beyond, depending on the pace of the Appeals process.
Sylvia Hartwell continues to oversee billing and will provide updated budget projections to PPC once the NOPA is issued and the scope of post-NOPA work is more clearly defined.
VII. SEC Disclosure and Financial Reporting Considerations
PPC's FIN 48 (ASC 740-10) reserve for uncertain tax positions related to the Irish IP structure currently stands at $62.4M. This reserve was established at a pre-settlement level based on PPC's assessment of the probability and magnitude of potential adjustments in connection with the IRS examination. C&H provided its analysis supporting the FIN 48 reserve to Crestfield & Associates (Martin Ogilvy) in September 2022. This analysis will require updating once the NOPA is issued and the specific proposed adjustment amounts are known, as the NOPA may alter the probability and magnitude assessments underlying the current reserve level.
SEC disclosure considerations in connection with PPC's annual (10-K) and quarterly (10-Q) filings are being monitored by C&H. As of the date of this report, the examination has not yet reached a stage that, in C&H's assessment, requires enhanced disclosure in PPC's public filings beyond the Company's existing general disclosure of the IRS examination. However, the issuance of a NOPA containing a specific proposed adjustment amount—particularly if the adjustment is substantial, as anticipated—may trigger additional disclosure analysis. C&H will work with Deborah Staines and PPC's securities counsel to evaluate the disclosure implications promptly upon receipt of the NOPA.
C&H notes that Ridgeview Capital Management LP, which holds approximately 8.3% of PPC's outstanding shares (with Douglas Everett as the principal), monitors PPC's tax reserves as part of its investment analysis. Any material change to PPC's FIN 48 reserves would be visible in the Company's financial statements and could attract attention from institutional shareholders.
Additionally, PPC's $1.5B revolving credit facility with Hargrove National Bank contains tax-indemnity and material-tax-event covenants. C&H Associate Nadia Nazari is monitoring whether a future NOPA would trigger reporting obligations under the credit agreement. C&H's analysis of the credit agreement's covenant provisions will be formalized upon the issuance of the NOPA, and C&H will advise PPC's management team on any required notifications to Hargrove National Bank.
VIII. Recommended Next Steps
Based on the foregoing analysis and the current posture of the examination, C&H recommends the following actions for Q3 2023:
1.  Complete Remaining IDR Responses. Continue preparation and timely submission of responses to all outstanding IDRs through IDR No. 47. Particular attention should be given to ensuring that the final IDR responses are complete, accurate, and consistent with the factual record established in prior responses.
2.  Attend August 15, 2023 Meeting with IRS Economist Dr. Washburne. Leonard Cross, Garrett Simmons, and Dr. Helena Vasquez (Whitmore) will participate. C&H will prepare detailed talking points highlighting the strength of WVG's comparable selection methodology, the rigor of the 9.8% WACC, and the arm's-length nature of PPC's intercompany pricing. This meeting represents a critical opportunity to understand and begin addressing the IRS economist's positions before they are formalized in the NOPA.
3.  Prepare Whitmore for Rapid-Turnaround Rebuttal. Ensure that WVG is positioned to initiate rebuttal work on an expedited basis immediately upon the issuance of the NOPA. The rebuttal should address each component of the IRS economist's analysis, including comparable selection, discount rate methodology, RAB calculations, and cost-sharing ratio adjustments.
4.  Prepare Correlative Adjustment Memorandum. Prepare the correlative adjustment research memorandum under Treas. Reg. § 1.482-1(g) in anticipation of potential overlap between the IRS's proposed CSA cost-sharing adjustments and royalty rate adjustments. This memorandum should develop the legal and economic arguments supporting a reduction in the aggregate adjustment to avoid double-counting.
5.  Develop NOPA Response Contingency Plan. Begin outlining the framework for a formal Protest to IRS Appeals, including identification of the key factual, economic, and legal arguments to be advanced. Develop preliminary settlement parameters based on a range of potential NOPA amounts and PPC's assessment of the relative strength of its positions on each adjustment.
6.  Schedule Call Regarding Disclosure and Covenant Implications. Schedule a call with Deborah Staines and Rajesh Iyer to discuss the implications of a large NOPA for SEC disclosure requirements, FIN 48 reserve levels, and the Hargrove National Bank credit facility covenants. This call should be scheduled for late Q3 2023, in advance of the anticipated NOPA issuance.
7.  Continue Irish-Side Coordination. Continue coordination with Thornbury & Keogh on Irish-side developments, including monitoring for any Irish Revenue inquiries related to PBI's operations or Knowledge Development box claims. Ensure that T&K is prepared to provide supplemental substance documentation if needed in connection with the NOPA response.
8.  Schedule Q3 Status Call. Schedule the next quarterly status call with PPC management for early October 2023, at which time C&H will provide an update on the NOPA status, the results of the August 15 meeting with Dr. Washburne, and the Q3 budget status.
IX. Closing and Contact Information
C&H will issue its next quarterly status report covering Q3 2023 in early October 2023. Given the anticipated issuance of the NOPA during Q3, the next report is expected to include a detailed analysis of the proposed adjustments and C&H's recommended response strategy.
In the interim, all inquiries regarding this matter should be directed to:
Leonard Cross, Responsible Partner Calderwood & Harkness LLP, Tax Department 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 555-0142
Email: lcross@calderwoodharkness.com
Sylvia Hartwell, Billing Partner Calderwood & Harkness LLP, Tax Department 600 Lexington Avenue New York, NY 10022 Telephone: (212) 555-0389
Email: shartwell@calderwoodharkness.com
This report constitutes a privileged and confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP in connection with its representation of Penterra Pharmaceuticals Corp. in the above-referenced IRS examination. This report and its contents are protected from disclosure by the attorney-client privilege and the attorney work product doctrine. This report is intended solely for the use of the named recipients and should not be disclosed, distributed, or otherwise made available to any third party without the prior written approval of Calderwood & Harkness LLP.
CALDERWOOD & HARKNESS LLP
By: ________
Leonard Cross Partner, Tax Department
By: ________
Sylvia Hartwell Partner, Tax Department
Date: July 5, 2023

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