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PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP Attorneys at Law

1735 Market Street, Suite 3100 Philadelphia, Pennsylvania 19103 Telephone: (215) 864-7200 Facsimile: (215) 864-7201

600 Lexington Avenue New York, New York 10022 Telephone: (212) 479-6300 Facsimile: (212) 479-6301

March 8, 2024

VIA HAND DELIVERY AND CERTIFIED MAIL (RRRS)

Appeals Officer Noreen Castañeda Internal Revenue Service IRS Appeals Office 290 Broadway, 30th Floor Manhattan, New York 10007

Re: Penterra Pharmaceuticals Corp. (EIN: 22-3741856) Tax Years: 2017, 2018, 2019, 2020 Exam Team ID: LB&I-NE-TP-2022-00641 C&H Matter No.: 1018-00009

Dear Appeals Officer Castañeda:

I. Introduction and Purpose

This letter constitutes a supplemental written submission on behalf of our client, Penterra Pharmaceuticals Corp. ("PPC" or the "Company"), submitted by Calderwood & Harkness LLP ("C&H") in its capacity as authorized representatives of PPC pursuant to IRS Form 2848 (Power of Attorney and Declaration of Representative) filed with the Internal Revenue Service on June 8, 2022. C&H is authorized to represent PPC in all matters arising from the above-referenced examination and the ongoing Appeals proceedings relating to the tax years ended December 31, 2017, December 31, 2018, December 31, 2019, and December 31, 2020.

We respectfully submit this supplemental analysis in connection with the Appeals conference held on February 28, 2024, at the IRS Appeals Office in Manhattan, New York. During that conference, we had the opportunity to discuss in detail PPC's Formal Protest, filed on December 22, 2023, and the underlying economic analysis supporting PPC's intercompany pricing for the legacy intellectual property royalty arrangement between PPC and Penterra Biopharma International DAC ("PBI"), an Irish designated activity company and wholly owned indirect subsidiary of PPC.

During the course of the February 28 conference, Appeals Officer Castañeda raised several specific questions and requested additional information on certain aspects of PPC's comparable uncontrolled transaction ("CUT") analysis. Specifically, the Appeals Officer requested: (a) supplemental comparable uncontrolled transaction data supporting PPC's 4.5% legacy IP royalty rate, with a particular emphasis on the identification of additional comparable license agreements that could expand the existing dataset; and (b) updated benchmarking analysis addressing certain comparability questions raised by the Appeals Officer regarding the original fourteen CUT agreements identified in PPC's Formal Protest and the accompanying economic report prepared by Whitmore Valuation Group LLC ("WVG").

This submission is responsive to those requests and provides the following:

(i) Three newly identified comparable pharmaceutical license agreements not included in the original CUT analysis, each of which involves the licensing of mature pharmaceutical compounds for commercialization in broad geographic territories outside the Americas;

(ii) Updated comparability adjustments to the original fourteen-agreement dataset, specifically addressing the Appeals Officer's questions regarding licensee functions and risk-bearing, as well as the declining revenue trajectory of PPC's legacy compound portfolio; and

(iii) A revised interquartile range analysis incorporating all seventeen comparable license agreements, which confirms and reinforces PPC's position that the 4.5% royalty rate is within the arm's-length range and near the median of appropriately comparable transactions.

The economic analysis supporting this supplemental submission was prepared by Whitmore Valuation Group LLC under the direction of counsel, pursuant to the Kovel engagement letter between C&H, PPC, and WVG (Reference No. 1018-00009-KV, dated June 20, 2022). The analysis was prepared specifically by Dr. Helena Vasquez, Managing Director, and Dr. Rohan Chakrabarti, Senior Director, both of the Transfer Pricing and intellectual Property Valuation Practice at WVG. The full supplemental CUT report prepared by WVG is enclosed as Enclosure 1 to this submission. It is submitted under the protections of the attorney-client privilege and the work-product doctrine, as it was prepared at the direction of counsel in anticipation of litigation and in connection with these Appeals proceedings.

II. Background and Context

A. The IRS's Proposed Royalty Rate Adjustment

As PPC set forth in its Formal Protest and as discussed at the February 28 Appeals conference, the Notice of Proposed Adjustment ("NOPA") issued by the LB&I examination team on October 12, 2023 proposed a significant upward adjustment to the legacy IP royalty rate applicable to the license agreement between PPC and PBI. Specifically, the NOPA proposed increasing the legacy IP royalty rate from PPC's reported rate of 4.5% of net sales to 11.0% of net sales for the non-Americas territory — a rate that, as we demonstrate below, is dramatically above any range that could be justified by appropriately comparable uncontrolled transactions.

The royalty at issue applies to the legacy pharmaceutical compounds — those compounds developed, patented, and brought to market prior to 2012, which are not covered by the cost-sharing arrangement (the "CSA") entered into between PPC and PBI effective January 1, 2012. Under the intercompany license agreement, PBI obtained the exclusive right to commercialize these legacy compounds outside the Americas (i.e., in the EMEA and Asia-Pacific regions), in exchange for a running royalty of 4.5% of net sales payable to PPC.

The IRS's proposed increase from 4.5% to 11.0% results in a royalty rate differential of 6.5 percentage points applied to PBI's net sales in the non-Americas territory. The resulting proposed royalty adjustments, which total $188.04 million across the four tax years under examination, are as follows:

It bears emphasis that the declining net sales figures reflected in the table above — from $814.6 million in 2017 to $624.1 million in 2020, representing a cumulative decline of approximately 23.4% — are a direct reflection of the mature and declining lifecycle of the legacy compound portfolio. These compounds were originally launched in markets ranging from the late 1990s through the mid-2000s, and the non-Americas markets followed the Americas launch dates by periods ranging from two to six years. By the 2017–2020 period, these compounds were in the late-mature to declining phase of their commercial lifecycles, facing increasing generic competition in multiple markets, patent expirations, and therapeutic obsolescence as newer-generation treatments entered the market.

The IRS examination team's proposed 11.0% rate was derived from a set of IRS-selected CUT agreements that, as WVG has demonstrated in its original economic report and as we further address in Section V.C below, are not appropriately comparable to the PPC-PBI legacy license arrangement due to material differences in product stage, therapeutic area, geographic scope, licensee functionality and risk-bearing, and the structure of the royalty and other consideration terms. The IRS's selected comparables are characterized by agreements involving early-stage or newly launched compounds with high growth trajectories — the opposite of the declining-revenue legacy compounds at issue here.

B. PPC's Original CUT Analysis

As set forth in PPC's Formal Protest (Exhibit C thereto) and the original WVG economic report dated November 15, 2022, WVG identified fourteen comparable uncontrolled pharmaceutical license agreements through a comprehensive and methodical search process using publicly available databases, SEC filings, and pharmaceutical industry licensing databases. These fourteen agreements were selected based on their comparability to the PPC-PBI legacy license under the standards prescribed by Treasury Regulation § 1.482-4(c)(2) and the best method rule of Treasury Regulation § 1.482-1(d).

The original fourteen comparable agreements produced the following arm's-length range:

• Full range: 1.8% to 8.3% of net sales

• Interquartile range: 3.1% to 6.8% of net sales

• Median royalty rate: 4.4% of net sales

PPC's 4.5% royalty rate falls comfortably within the arm's-length interquartile range and is within one-tenth of a percentage point of the median — 4.5% versus 4.4%. This analysis was performed under the comparable uncontrolled transaction method prescribed by Treasury Regulation § 1.482-4(c), which is specifically designated as the preferred method for testing the arm's-length nature of royalty rates when reliable comparable uncontrolled transactions can be identified. The analysis applies the comparability standards of Treasury Regulation § 1.482-4(c)(2)(ii), which considers the similarity of the intangible property, the contractual terms of the transfer, the economic conditions, and the functions, risks, and assets of the parties. The selection of the CUT method as the best method was further supported by the best method rule of Treasury Regulation § 1.482-1(d), which requires the selection of the method that provides the most reliable measure of an arm's-length result based on the quality of the data and assumptions, the degree of comparability, and the reliability of the adjustments.

C. Questions Raised at the Appeals Conference

During the February 28, 2024 Appeals conference, Appeals Officer Castañeda raised three specific questions regarding PPC's CUT analysis, which we address in detail in the sections that follow. For ease of reference, we summarize those questions here:

1. Additional comparable agreements. The Appeals Officer asked whether additional comparable agreements could be identified to expand the dataset beyond the original fourteen CUT agreements, with particular emphasis on identifying agreements involving mature or declining pharmaceutical compounds, consistent with the lifecycle characteristics of PPC's legacy compound portfolio.

2. Licensee functions and risk-bearing adjustments. The Appeals Officer inquired whether comparability adjustments could be refined to account more precisely for differences in the functions performed and risks assumed by the licensees in the comparable agreements, as compared to PBI's role as a substantive IP owner and risk-bearing principal — rather than a passive or limited-function licensee — in the non-Americas territory.

3. Impact of declining revenue trajectory. The Appeals Officer asked whether the declining revenue trajectory of the legacy compounds ($814.6 million in 2017 declining to $624.1 million in 2020) should affect the comparability analysis or the applicable royalty rate, and if so, how.

We have carefully considered each of these questions and have directed WVG to conduct supplemental analysis responsive to each. The results of that analysis, which are summarized below and set forth in full in the enclosed WVG Supplemental CUT Report (Enclosure 1), further support PPC's position that the 4.5% royalty rate is an arm's-length rate and that the IRS's proposed 11.0% rate is without support in the comparable transaction data.

III. Supplemental CUT Comparable Agreements

A. Search Methodology for Additional Comparables

In response to the Appeals Officer's request for additional comparable agreements, WVG conducted a supplemental search process designed to identify pharmaceutical license agreements not previously included in the original fourteen-agreement dataset. The supplemental search was conducted in February 2024 and was designed to be complementary to, rather than duplicative of, the original search process, with particular emphasis on identifying agreements involving mature or declining pharmaceutical compounds, consistent with the Appeals Officer's specific request.

The supplemental search employed the following databases and sources:

• Publicly available pharmaceutical and biotechnology license agreement databases, including the Calderon Data Systems (Glenrock Services Inc.) Deals Database, the Beaumont Systems database, and the Morriven Ashford CPAs LLP Recap IQ database;

• SEC filings (Forms 10-K, 10-Q, 8-K, and exhibits thereto) of publicly traded pharmaceutical and biotechnology companies, searched via the EDGAR full-text search system;

• European Medicines Agency (EMA) and national regulatory authority public registries, for information regarding licensed compounds and their commercial status; and

• Pharmaceutical industry trade publications and conference proceedings, for qualitative information regarding the commercial stage and competitive positioning of licensed compounds.

WVG applied the following primary search criteria to identify potentially comparable agreements:

• Industry: Pharmaceutical and/or biotechnology license agreements;

• Agreement date: Executed between 2008 and 2018, a ten-year window centered approximately around the 2012 effective date of the PPC-PBI license arrangement;

• Consideration structure: Royalty on net sales for commercialization rights (running royalty as a primary form of consideration);

• Geographic scope: Licenses covering geographic territories comparable in scope to PBI's non-Americas territory, i.e., licenses covering EMEA and/or Asia-Pacific markets, or broadly defined ex-Americas or ex-U.S. territories;

• Product stage: Agreements involving compounds at a mature or post-launch commercial stage, meaning compounds that had been on the market for a minimum of three years at the time of the license agreement, with established commercial histories and known revenue trajectories.

WVG applied the following screening criteria to exclude agreements that would not be sufficiently comparable under Treasury Regulation § 1.482-4(c)(2):

• Exclusion of early-stage/pre-clinical compounds: Agreements involving compounds that were in preclinical development, Phase I, Phase II, or Phase III clinical trials at the time of the license were excluded, as the risk profile, expected revenue trajectory, and valuation methodology for such compounds is fundamentally different from that of mature commercial compounds;

• Exclusion of single-country licenses: Agreements covering a single country or a narrowly defined sub-region were excluded, as such agreements are not comparable in geographic scope to PBI's broad non-Americas territory;

• Exclusion of co-development arrangements: Agreements structured as co-development arrangements with shared equity stakes, joint ventures, or similar shared-risk structures were excluded, as the economic substance of such arrangements differs materially from a straightforward out-licensing arrangement;

• Exclusion of significant non-royalty components: Agreements in which milestone payments, upfront payments, or other non-royalty consideration exceeded 25% of total expected consideration were excluded, in order to ensure that the headline royalty rate was the primary economic term and could be compared on an apples-to-apples basis with PPC's 4.5% running royalty rate.

Application of these search and screening criteria to the supplemental search yielded three additional comparable agreements that were not identified in the original search process. These three agreements are described in detail below and are referred to as Comparables 15, 16, and 17, continuing the numbering convention from the original fourteen-agreement dataset.

B. Description of Three Newly Identified Comparable Agreements

Comparable 15.

Parties: Confidential third-party pharmaceutical licensor and licensee (identified by Calderon Data Systems database reference number PI-2014-08721). The licensor is a mid-cap U.S.-headquartered specialty pharmaceutical company; the licensee is a European-headquartered multinational pharmaceutical company with established commercial operations in multiple EMEA and Asia-Pacific markets.

Date of Agreement: 2014.

Therapeutic Area: Oncology. The licensed compound is a mature oncology product that had been on the market for approximately eight years at the time of the license agreement and was in a post-peak-sales trajectory, with declining year-over-year revenues at the time the license was executed.

Territory Licensed: Europe, the Middle East, and select Asia-Pacific markets (including Japan, South Korea, Australia, and certain Southeast Asian markets).

Royalty Rate: 3.8% of net sales.

Key Comparability Factors: This agreement is highly comparable to the PPC-PBI legacy license arrangement in several critical respects. First, the licensed compound was a mature oncology product in a post-peak-sales phase, with a declining revenue curve that is analogous to the declining trajectory of PPC's legacy compound portfolio. Second, the licensee bore full market risk in the licensed territory, including responsibility for pricing decisions, commercial strategy, distribution, and market access activities. Third, the licensee was responsible for regulatory maintenance obligations in the licensed territory, including post-marketing surveillance, label updates, and interactions with local regulatory authorities. Fourth, the licensor retained manufacturing responsibilities and supplied finished product to the licensee at a cost-plus margin — a structure that is directly analogous to the PPC/PBI/PMI manufacturing arrangement, under which Penterra Manufacturing Ireland Limited ("PMI"), a wholly owned subsidiary of PBI, manufactures legacy compound products for PBI's non-Americas markets under a contract manufacturing arrangement at cost-plus 8%.

Comparability Assessment: WVG assessed this agreement as highly comparable to the PPC-PBI arrangement. The product lifecycle stage (mature, declining compound), the geographic scope (EMEA and select APAC), the functional allocation (licensee as risk-bearing principal in the territory), and the declining revenue trajectory all align closely with the characteristics of the PPC-PBI legacy license. The 3.8% royalty rate in this agreement is consistent with, and slightly below, PPC's 4.5% rate, which is to be expected given the broad similarity of the arrangements and the range of variation that naturally exists among arm's-length transactions.

Comparable 16.

Parties: Confidential third-party pharmaceutical companies (identified by Calderon Data Systems database reference number PI-2015-11394). The licensor is a large-cap U.S.-headquartered pharmaceutical company; the licensee is a European-headquartered pharmaceutical company with substantial local operations in EMEA and Asian markets.

Date of Agreement: 2015.

Therapeutic Area: Immunology. The licensed compound was an established immunology product that had been on the market for more than five years at the time of the license agreement and was in a mature commercial phase with stable-to-declining revenues.

Territory Licensed: EMEA and Asia (broadly defined to include all countries in Europe, the Middle East, Africa, and Asia other than certain specified excluded markets).

Royalty Rate: 4.2% of net sales.

Key Comparability Factors: This agreement is strongly comparable to the PPC-PBI legacy license in multiple respects. First, the licensee had substantial local operations, including regulatory affairs, medical affairs, and distribution functions, performed through a network of local affiliates and direct employees. Second, the licensee made independent pricing decisions across multiple country markets within the licensed territory, reflecting the licensee's role as a decision-making principal rather than a passive royalty recipient. Third, the licensed compound was in a mature lifecycle stage with stable-to-declining revenues, consistent with the trajectory of PPC's legacy compounds during the 2017–2020 period.

Comparability Assessment: WVG assessed this agreement as strongly comparable to PBI's role as a substantive licensee. PBI maintained 185 employees in Dublin (having grown from 52 employees at inception in 2012), made independent pricing decisions across 68 country markets within the non-Americas territory, and incurred €47.2 million in cumulative regulatory expenditures and submissions during the 2017–2020 period. The licensee in Comparable 16, while operating at a different scale, performed analogous functions and bore analogous risks in its licensed territory. The 4.2% royalty rate in this agreement is closely aligned with PPC's 4.5% rate and falls within the same narrow band of the arm's-length range.

Comparable 17.

Parties: Confidential third-party pharmaceutical companies (identified by Beaumont Systems database reference number BMT-2013-05228). The licensor is a U.S.-headquartered specialty pharmaceutical company with a portfolio of mature specialty and oncology products; the licensee is a European-headquartered pharmaceutical company with established commercial infrastructure outside North America.

Date of Agreement: 2013.

Therapeutic Area: Specialty pharmaceuticals (rare disease and oncology portfolio). The license covered a portfolio of multiple compounds, including both rare disease treatments and oncology products, each of which was in a mature commercial phase at the time of the license.

Territory Licensed: Ex-North America (defined as all countries and territories worldwide other than the United States, Canada, and Mexico).

Royalty Rate: 5.1% of net sales (effective blended rate).

Key Comparability Factors: This agreement is comparable to the PPC-PBI legacy license in several important respects. First, it involved a portfolio license covering multiple compounds, rather than a single-compound license, which is analogous to PPC's licensing of its entire legacy compound portfolio to PBI. Second, the licensee was an established entity with local commercial infrastructure and regulatory capabilities across the licensed territory, including direct sales forces in major markets and third-party distribution arrangements in smaller markets. Third, the licensee bore full commercial risk for the territory, including responsibility for all commercial activities, pricing, reimbursement negotiations, and market access. Fourth, the agreement included provisions for declining royalty rates as cumulative revenue milestones were achieved (a tiered royalty structure), with 5.1% representing the effective blended rate over the period relevant for comparability purposes. The tiered structure reflects the economic reality that as a compound portfolio matures and aggregate revenues decline, the appropriate arm's-length royalty rate correspondingly adjusts.

Comparability Assessment: WVG assessed this agreement as comparable to the PPC-PBI arrangement in terms of the multi-compound portfolio nature of the license, the geographic scope (ex-Americas, broadly defined), and the licensee's assumption of full commercial risk and operational responsibility. The effective blended rate of 5.1% is within the arm's-length range and slightly above PPC's 4.5% rate, consistent with the range of variation expected among comparable arm's-length transactions.

C. Summary Table of All 17 CUT Comparable Agreements

The following table summarizes all seventeen CUT comparable agreements — the original fourteen agreements identified in WVG's November 2022 economic report and the three newly identified agreements described above. For confidentiality and database licensing reasons, certain identifying information regarding the parties and compounds has been redacted. Full details are set forth in the enclosed WVG Supplemental CUT Report (Enclosure 1) and the Summary Table of All 17 Comparable License Agreements (Enclosure 2).

Note: Comparables 15, 16, and 17 (shown in bold) are the newly identified agreements included in this supplemental submission. The original Comparables 1–14 are described in full in WVG's November 2022 economic report annexed to PPC's Formal Protest as Exhibit C. The full range of royalty rates across all 17 agreements is 1.8% to 8.3%, with the original interquartile range for Comparables 1–14 being 3.1% to 6.8%. A complete detailed summary of all 17 agreements is set forth in Enclosure 2.

IV. Updated Interquartile Range Analysis

A. Revised IQR with 17 Comparables

Incorporating the three newly identified comparable agreements into the dataset of seventeen agreements, WVG has computed a revised interquartile range analysis. The addition of the three new comparables — which carry royalty rates of 3.8%, 4.2%, and 5.1%, all concentrated in the middle portion of the distribution — has the effect of modestly narrowing the interquartile range relative to the original fourteen-agreement dataset, while shifting the distribution slightly toward the center. This result is expected and reflects the fact that the supplemental search criteria, which specifically targeted agreements involving mature and declining pharmaceutical compounds (consistent with the Appeals Officer's request), naturally identifies agreements in the lower-to-middle portion of the royalty rate spectrum, where the economics of mature compound licensing reside.

The revised statistical parameters for the seventeen-agreement dataset are as follows:

• Revised full range: 1.8% to 8.3% of net sales (unchanged, as the three new comparables fall within the original full range)

• Revised interquartile range: approximately 3.4% to 6.2% of net sales (narrower than the original interquartile range of 3.1% to 6.8%, reflecting the addition of comparables concentrated in the middle of the distribution)

• Revised median: approximately 4.3% of net sales (slightly lower than the original median of 4.4%, reflecting the influence of the two sub-median new comparables at 3.8% and 4.2%)

The implications of the revised interquartile range analysis are clear and unambiguous:

1. PPC's 4.5% royalty rate remains within the revised arm's-length interquartile range. The Company's rate falls comfortably within the 3.4% to 6.2% interquartile range and is approximately 1.1 percentage points above the lower quartile and 1.7 percentage points below the upper quartile.

2. PPC's 4.5% royalty rate remains near the revised median. The Company's rate is within two-tenths of a percentage point of the revised median of 4.3% — a negligible difference that confirms the arm's-length nature of the rate.

3. The IRS's proposed 11.0% rate remains dramatically above the interquartile range. The proposed rate exceeds the upper end of the interquartile range (6.2%) by 4.8 percentage points and exceeds the upper end of the full range of all seventeen comparables (8.3%) by 2.7 percentage points. There is no support in the comparable transaction data for a royalty rate of 11.0%.

Under Treasury Regulation § 1.482-1(e)(2)(iii)(B), when the taxpayer's results fall within the interquartile range, the Service generally should not make an allocation under Section 482. PPC's 4.5% royalty rate falls within the interquartile range under both the original fourteen-comparable analysis and the revised seventeen-comparable analysis, and the Service's proposed adjustment to 11.0% is therefore unwarranted.

B. Statistical Analysis

WVG has prepared a detailed statistical analysis of the revised seventeen-agreement dataset, which is set forth in full in Enclosure 3 (Revised IQR Statistical Analysis Workpapers). In summary, the expanded dataset reinforces the robustness and reliability of the original conclusions in several important respects.

First, the three new comparables, which were independently identified through the supplemental search criteria described in Section III.A, cluster near the median of the distribution. This clustering near the center of the range is independent confirmation that the arm's-length royalty rate for license arrangements comparable to the PPC-PBI legacy license is in the vicinity of 4% to 5% of net sales. The fact that three independently identified agreements involving mature pharmaceutical compounds all fall within this narrow band provides substantial additional confidence in the arm's-length nature of PPC's 4.5% rate.

Second, the revised seventeen-comparable dataset exhibits a tighter statistical distribution than the original fourteen-comparable dataset. The standard deviation of the seventeen-comparable dataset is approximately 1.54 percentage points, compared to approximately 1.72 percentage points for the original fourteen comparables. The coefficient of variation for the seventeen-comparable dataset is approximately 0.34, compared to approximately 0.38 for the original fourteen comparables. The reduction in both the standard deviation and the coefficient of variation reflects the addition of data points near the center of the distribution, which reduces the dispersion of the sample and increases confidence in the reliability of the central tendency measures (mean and median) as indicators of the arm's-length price.

Third, WVG has performed a sensitivity analysis excluding the two most extreme data points in the dataset (Comparable 10, at 1.8%, and Comparable 7, at 8.3%), which may be considered potential outliers. After exclusion of these two data points, the fifteen-comparable interquartile range narrows further to approximately 3.6% to 5.8%, with a median of approximately 4.4%. PPC's 4.5% rate remains within this range and near the median under all specifications tested. Regardless of whether the analysis is performed on the full seventeen-comparable dataset, the trimmed fifteen-comparable dataset, or the original fourteen-comparable dataset, the conclusion is the same: PPC's 4.5% rate is an arm's-length rate, and the IRS's proposed 11.0% rate has no support in the comparable data.

V. Comparability Adjustments Addressing Appeals Officer Questions

A. Adjustments for Licensee Functions and Risk-Bearing

We turn now to the Appeals Officer's question regarding licensee risk-bearing and DEMPE (Development, Enhancement, Maintenance, Protection, and Exploitation) functions, which was raised during the February 28 conference and which we address through the updated comparability adjustments set forth in this section and in the enclosed WVG Supplemental CUT Report.

As a threshold matter, we respectfully submit that PBI is not a passive or limited-function licensee of PPC's legacy intellectual property. To the contrary, PBI is a substantive risk-bearing principal for the non-Americas territory, performing significant Development, Enhancement, Maintenance, Protection, and Exploitation functions with respect to the licensed legacy compounds. The scope and substance of PBI's activities are well-documented in the administrative record and were described in detail in PPC's Formal Protest and at the February 28 Appeals conference. We summarize the key indicators of PBI's substance below:

• Employees and organizational growth. PBI maintains 185 employees in Dublin, Ireland, having grown from 52 employees at inception in 2012 to its current headcount. PBI's employees include professionals in regulatory affairs, medical affairs, commercial strategy, market access and pricing, pharmacovigilance, quality assurance, supply chain management, finance, legal, and human resources.

• Governance and decision-making. PBI's Board of Directors held 42 board meetings in Dublin during the 2017–2020 period. The Board actively oversees PBI's commercial strategy, pricing decisions, regulatory submissions, and capital allocation. Board minutes reflect substantive deliberation on commercial and strategic matters specific to the non-Americas territory.

• Regulatory expenditures and activity. PBI incurred €47.2 million in cumulative regulatory expenditures and submissions across 68 country markets during the 2017–2020 period. These expenditures cover regulatory maintenance, post-marketing surveillance, labeling updates, periodic safety update reports (PSURs), and new market submissions. PBI's regulatory affairs team interacts directly with the European Medicines Agency, national competent authorities, and other regulatory bodies across the 68 markets.

• Independent pricing authority. PBI makes independent pricing decisions in each of its 68 country markets. Pricing and reimbursement strategies are developed by PBI's market access and pricing team in Dublin, taking into account local competitive dynamics, reimbursement frameworks, health technology assessment requirements, and other market-specific factors. PBI does not receive pricing directives from PPC.

• Physical presence and infrastructure. PBI maintains approximately 18,000 square feet of dedicated office space at Sandyford Business Park, Dublin, including executive offices, meeting rooms, and functional department workspaces.

• Management and leadership. PBI is led by Managing Director Aidan Naughton, who has independent decision-making authority over PBI's commercial operations, regulatory strategy, and financial management. Mr. Naughton reports to PBI's Board of Directors and is not an employee of PPC.

• Local banking and financial operations. PBI maintains independent banking operations with Glenmore Bank Ireland plc, including operating accounts, cash management facilities, and foreign exchange hedging arrangements for its multi-currency operations across 68 markets.

The foregoing facts establish that PBI is a substantive, risk-bearing principal in the non-Americas territory — not a conduit, shell entity, or passive royalty recipient. PBI performs substantial DEMPE functions with respect to the licensed legacy compounds, and these functions and the associated risks are the source of significant value creation in the non-Americas territory that is properly attributable to PBI, not to PPC.

This characterization of PBI's role has direct implications for the comparability analysis. Under the arm's-length standard, where a licensee performs more functions and bears more risks, a greater proportion of the total value generated in the licensed territory is attributable to the licensee's own contributions, and consequently the arm's-length royalty rate payable to the licensor should be correspondingly lower. Conversely, where a licensee is a passive entity with limited functions and risks, a higher proportion of the total value is attributable to the licensor's intangible property, and the arm's-length royalty rate should be correspondingly higher.

WVG has applied comparability adjustments to certain of the seventeen comparable agreements where the licensee bore fewer functions or less risk than PBI. In such cases, the unadjusted royalty rate in the comparable agreement overstates the arm's-length royalty rate that would be applicable to an arrangement involving a licensee as functional and risk-bearing as PBI. The adjustments are downward adjustments to the royalty rates of those comparables, resulting in modestly lower adjusted royalty rates for those agreements. The specific adjustments are set forth in detail in Enclosure 4 (Comparability Adjustment Schedules). The overall effect of these adjustments on the interquartile range is modest but directionally consistent with PPC's position: the adjusted interquartile range is somewhat narrower and somewhat lower than the unadjusted range, further confirming that PPC's 4.5% rate is within the arm's-length range.

B. Adjustments for Declining Revenue Trajectory

We next address the Appeals Officer's question regarding the impact of the declining revenue trajectory of PPC's legacy compound portfolio on the comparability analysis and the applicable royalty rate.

As noted above, PBI's net sales of legacy compounds in the non-Americas territory declined from $814.6 million in 2017 to $624.1 million in 2020, representing a cumulative decline of approximately 23.4% over the four-year period. This decline is attributable to a combination of factors, including the maturation and approaching patent expiry of several key legacy compounds, increasing generic and biosimilar competition in major markets, and the entry of newer-generation treatments that have eroded the market share of PPC's older products. The decline was consistent with the projections included in PBI's internal business plans and with third-party analyst forecasts for the relevant therapeutic categories.

The declining revenue trajectory of the legacy compound portfolio is an important comparability factor for the CUT analysis, and it supports a lower — not higher — royalty rate, for the following reasons:

First, the licensor's residual IP value diminishes as compounds mature and approach patent expiry or therapeutic obsolescence. The intangible property embodied in a pharmaceutical patent and associated know-how has its greatest value at the time of launch or peak sales, when the compound enjoys market exclusivity, premium pricing, and growing market share. As the compound matures, its intangible property value erodes due to the approaching termination of patent protection, the accumulation of competitive alternatives, and the licensee's own contributed goodwill and market development. The arm's-length royalty rate should reflect this declining value over time.

Second, the risk-adjusted present value of future royalty streams declines as the revenue base shrinks. A royalty rate is, in economic substance, compensation for the licensor's ongoing contribution of intangible property value to the licensee's commercial activities. When the revenue base is declining, the licensor's expected future royalty income stream is diminishing in both absolute terms and in risk-adjusted present value terms. Arm's-length parties would recognize this diminished future income stream and would negotiate a correspondingly lower royalty rate.

Third, and most directly relevant to the CUT analysis, two of the three newly identified comparable agreements — Comparable 15 (3.8%) and Comparable 16 (4.2%) — specifically involve compounds in comparable declining lifecycle stages. Both agreements involve mature pharmaceutical compounds with stable-to-declining revenue trajectories, and both carry royalty rates that are at or below PPC's 4.5% rate. The empirical evidence from these real-world transactions confirms the theoretical expectation that mature, declining compounds command lower royalty rates than newly launched or growth-phase compounds.

WVG has performed a lifecycle-adjusted analysis that takes into account the declining revenue trajectory of the legacy compounds and the corresponding lifecycle characteristics of the comparable agreements. This analysis, which is set forth in detail in the enclosed WVG Supplemental CUT Report (Enclosure 1) and the Comparability Adjustment Schedules (Enclosure 4), demonstrates that PPC's 4.5% royalty rate, if anything, is at the upper end of what would be expected for compounds in this stage of their lifecycle. In other words, the lifecycle-adjusted analysis provides additional support for the arm's-length nature of PPC's rate, while further undermining the IRS's proposed 11.0% rate.

C. Contrast with IRS's Selected CUTs

Having presented PPC's revised and expanded CUT analysis, we respectfully reiterate the fundamental deficiencies in the IRS examination team's CUT agreements that formed the basis for the proposed 11.0% royalty rate. As we set forth in PPC's Formal Protest and as WVG demonstrated in its original economic report, the IRS-selected CUT agreements are not appropriately comparable to the PPC-PBI legacy license arrangement and cannot support the 11.0% rate proposed in the NOPA. Specifically:

• Product stage and lifecycle. The IRS-selected comparable agreements predominantly involve early-stage or newly launched pharmaceutical compounds with significant growth potential, high unmet-need profiles, and long remaining patent lives. These characteristics are fundamentally dissimilar to PPC's legacy compounds, which were mature, post-peak-sales products with declining revenue trajectories, limited remaining patent lives, and increasing competitive pressures. Under Treasury Regulation § 1.482-4(c)(2)(ii)(A), the terms of the comparable transaction should involve intangible property that is similar to the intangible property being transferred, including with respect to the stage of development, remaining useful life, and profit potential of the intangible property. The IRS's selected agreements fail this comparability requirement.

• Licensee functions and risk-bearing. The IRS-selected comparable agreements involve passive or limited-function licensees that performed few, if any, DEMPE functions and bore limited commercial risk. In those agreements, the licensee typically served as a distribution channel with limited pricing authority, limited regulatory responsibility, and limited commercial investment. This is fundamentally inconsistent with PBI's role as a substantive, 185-employee risk-bearing principal with independent pricing authority across 68 country markets and cumulative regulatory expenditures of €47.2 million. The IRS's failure to account for this critical difference in licensee functionality results in the selection of agreements with inflated royalty rates that are not comparable to the PPC-PBI arrangement.

• Geographic scope. Several of the IRS-selected comparable agreements involve narrower geographic territories than PBI's broad non-Americas territory, including single-country licenses (e.g., Japan-only or Germany-only licenses) and single-region licenses (e.g., Western Europe only). Narrower geographic licenses typically command higher royalty rates than broad multi-region licenses because the licensor retains the ability to license the remaining territories separately, thereby capturing additional value. The comparison of narrow-territory royalty rates to PBI's broad non-Americas territory rate is not appropriate without significant comparability adjustments, which the IRS did not apply.

• Non-royalty consideration. Several of the IRS-selected comparable agreements include significant upfront payments, milestone payments, and other non-royalty consideration components in addition to the running royalty rate. In such agreements, the headline running royalty rate does not represent the total compensation to the licensor and therefore cannot be compared on an apples-to-apples basis with PPC's 4.5% running royalty rate, which constitutes substantially all of the consideration paid by PBI to PPC for the legacy license. The inclusion of agreements with significant non-royalty consideration inflates the apparent royalty rate and distorts the comparability analysis.

These deficiencies, individually and collectively, render the IRS's CUT analysis unreliable under the comparability standards of Treasury Regulation § 1.482-4(c)(2) and the best method rule of Treasury Regulation § 1.482-1(d). The IRS's proposed 11.0% rate is an artifact of the selection of non-comparable agreements, not a reflection of the arm's-length standard. By contrast, PPC's revised seventeen-comparable CUT analysis identifies agreements that are appropriately comparable under the applicable regulatory standards and consistently support a royalty rate in the range of 3.4% to 6.2%, with a median of 4.3% — confirming the arm's-length nature of PPC's 4.5% rate.

VI. Implications for CSA Cost-Sharing Ratio and Overall Proposed Adjustment

Although the primary focus of this supplemental submission is the legacy IP royalty rate, we briefly note that the supplemental CUT analysis has important implications for the overall adjustment proposed in the NOPA, including the CSA cost-sharing ratio challenge.

As set forth in PPC's Formal Protest, the total proposed adjustment across TY 2017–2020 is $380.4 million, comprising three components:

• CSA cost-sharing ratio adjustments: $235.01 million (proposing an increase in PBI's cost share from the reported 38.2%–42.7% range to 58.0%, based on the IRS's assertion that PBI's reasonably anticipated benefits were understated);

• Legacy IP royalty adjustments: $188.04 million (the adjustment addressed in this submission, proposing an increase from 4.5% to 11.0%); and

• Correlative offset: ($42.65 million) (reflecting a partial reduction in the CSA adjustment to avoid double-counting of the royalty and CSA adjustments).

The supplemental CUT analysis reinforces PPC's position that the legacy IP royalty rate of 4.5% is an arm's-length rate and that the proposed $188.04 million royalty adjustment should be fully reversed. The supplemental analysis also has indirect implications for the CSA cost-sharing ratio adjustment, because the IRS's valuation of PBI's reasonably anticipated benefits under the CSA was premised in part on the same flawed assumption that PBI's intangible property rights had a higher value than PPC reported — an assumption that is contradicted by the CUT analysis demonstrating that the arm's-length royalty rate is 4.5%, not 11.0%.

The total proposed adjustment of $380.4 million is unsupported by arm's-length economic analysis. The supplemental data presented in this submission further demonstrates that PPC's transfer pricing positions — including both the CSA cost-sharing ratios (38.2% to 42.7%) and the 4.5% legacy royalty rate — are consistent with arm's-length pricing under Internal Revenue Code § 482 and the applicable Treasury Regulations, including the specific methods and comparability standards of Treasury Regulations §§ 1.482-1 through 1.482-9.

VII. Penalty Protection

We briefly reiterate PPC's position regarding the proposed penalties. PPC maintained contemporaneous transfer pricing documentation for all four tax years under examination (TY 2017, 2018, 2019, and 2020), which was prepared by Crestfield & Associates LLP, an independent accounting and advisory firm with a recognized transfer pricing practice. The documentation was prepared in compliance with the requirements of Internal Revenue Code § 6662(e) and the accompanying regulations, and satisfies the penalty-protection standards applicable to transfer pricing adjustments under IRC § 6662(e)(3)(B)(i) and (ii).

The supplemental CUT analysis presented in this submission provides additional and independent support for PPC's reasonable-cause defense under IRC § 6662(e)(3)(B). Specifically, the analysis demonstrates that PPC's 4.5% royalty rate was based on a thorough, reasonable, and good-faith analysis of comparable uncontrolled transactions, applying the CUT method under Treasury Regulation § 1.482-4(c) with appropriate comparability standards and adjustments. The rate falls within the interquartile range and near the median of seventeen independently identified comparable transactions — a result that definitively establishes the reasonableness of PPC's pricing and the absence of any valuation misstatement, substantial or otherwise.

The IRS examination team proposed a 20% substantial valuation misstatement penalty under IRC § 6662(e), calculated at approximately $15.98 million ($380.4 million proposed adjustment × 21% tax rate × 20% penalty rate). For the reasons set forth in PPC's Formal Protest and reinforced by the supplemental analysis presented here, the proposed penalty is without merit and should be fully abated. PPC's transfer pricing positions were supported by contemporaneous documentation prepared by qualified professionals, were based on a reasonable application of the best method rule, and produced results that fall within the arm's-length range of appropriately comparable transactions.

VIII. Conclusion

The three newly identified comparable agreements and the updated benchmarking analysis presented in this supplemental submission confirm and reinforce the conclusions of WVG's original CUT analysis. The principal conclusions are as follows:

1. PPC's 4.5% legacy IP royalty rate is squarely within the revised arm's-length interquartile range of approximately 3.4% to 6.2% of net sales and is within two-tenths of a percentage point of the revised median of approximately 4.3%.

2. The expanded seventeen-agreement dataset, which includes three independently identified comparable agreements involving mature pharmaceutical compounds with characteristics closely comparable to PPC's legacy compound portfolio, provides substantial additional confidence in the reliability and robustness of the arm's-length range.

3. The comparability adjustments addressing the Appeals Officer's questions regarding licensee functions and risk-bearing and the declining revenue trajectory of the legacy compounds further support PPC's 4.5% rate. PBI's role as a substantive, risk-bearing principal with 185 employees, independent pricing authority across 68 country markets, and €47.2 million in cumulative regulatory expenditures warrants a lower — not higher — royalty rate than would be applicable to a passive licensee.

4. The IRS's proposed 11.0% rate is unsupported by appropriately comparable transactions and should be rejected. The IRS-selected CUT agreements are not comparable due to fundamental differences in product stage, licensee functionality and risk-bearing, geographic scope, and non-royalty consideration.

5. The proposed penalties of approximately $15.98 million are without merit and should be fully abated, as PPC maintained contemporaneous documentation and its pricing positions fall within the arm's-length range.

We respectfully request that Appeals Officer Castañeda consider this supplemental evidence, together with the enclosed WVG Supplemental CUT Report and supporting enclosures, in her evaluation of the case and the formulation of any settlement proposal. PPC remains willing to engage in good-faith settlement discussions and appreciates the Appeals Officer's thorough, fair, and independent consideration of the matter. We are available at the Appeals Officer's convenience to schedule a follow-up conference to discuss this supplemental submission or to address any additional questions that may arise from the enclosed materials.

IX. Enclosures

The following enclosures accompany this supplemental submission:

Enclosure 1: WVG Supplemental CUT Report, prepared by Dr. Helena Vasquez, Managing Director, and Dr. Rohan Chakrabarti, Senior Director, Whitmore Valuation Group LLC. This report details the three newly identified comparable license agreements, the updated interquartile range analysis incorporating all seventeen comparables, and the comparability adjustments responsive to the Appeals Officer's questions regarding licensee functions, risk-bearing, and the declining revenue trajectory of the legacy compound portfolio.

Enclosure 2: Summary Table of All 17 Comparable License Agreements, setting forth the key terms, royalty rates, geographic scope, therapeutic area, product lifecycle stage, and licensee functional profile for each of the seventeen agreements in the revised CUT dataset.

Enclosure 3: Revised IQR Statistical Analysis Workpapers, including the computation of the revised interquartile range, median, mean, standard deviation, coefficient of variation, and sensitivity analyses for the seventeen-comparable dataset.

Enclosure 4: Comparability Adjustment Schedules, including detailed schedules setting forth the licensee function and risk-bearing adjustments and the lifecycle adjustments applied to the comparable agreements, as described in Sections V.A and V.B of this submission.

All enclosures are provided under the attorney-client privilege and work-product doctrine protections applicable to submissions to IRS Appeals. These materials were prepared at the direction of counsel in anticipation of litigation and in connection with the provision of legal advice to PPC regarding the IRS examination and Appeals proceedings. PPC does not waive any privilege or protection by providing these materials to IRS Appeals.

X. Signature block

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Leonard Cross, Partner Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, Pennsylvania 19103 Telephone: (215) 864-7244

Email: lcross@calderwoodharkness.com

cc (via email):

Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp.

Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp.

Sylvia Hartwell, Partner, Calderwood & Harkness LLP

Garrett Simmons, Associate, Calderwood & Harkness LLP

Leila Nazari, Associate, Calderwood & Harkness LLP

Dr. Helena Vasquez, Managing Director, Whitmore Valuation Group LLC

Tax Year	PBI Non-Americas Net Sales	Rate Differential	Proposed Adjustment
2017	$814.6 million	6.5%	$52.95 million
2018	$762.3 million	6.5%	$49.55 million
2019	$691.8 million	6.5%	$44.97 million
2020	$624.1 million	6.5%	$40.57 million
Total	$2,892.8 million	$188.04 million
Comparable No.	Date	Therapeutic Area	Territory	Royalty Rate (% Net Sales)	Licensee Functions / Risk Profile	Product Lifecycle Stage
1	2010	Cardiovascular	EMEA	3.1%	Limited distribution; moderate risk	Mature, post-peak
2	2011	CNS / Neurology	Ex-U.S.	4.0%	Full commercial; substantial risk	Mature, stable
3	2009	Oncology	Europe & APAC	5.2%	Full commercial; full risk	Established, stable
4	2012	Respiratory	EMEA	6.8%	Moderate commercial; shared risk	Established, growing
5	2010	Metabolic / Endocrine	Ex-Americas	4.6%	Full commercial; full risk	Mature, declining
6	2013	Anti-infective	EMEA & select Asia	3.5%	Full commercial; full risk	Mature, declining
7	2011	Oncology	Europe	8.3%	Limited distribution; limited risk	Newly launched
8	2014	Immunology	Ex-U.S.	5.8%	Full commercial; substantial risk	Established, stable
9	2012	Cardiovascular	EMEA & APAC	4.4%	Full commercial; full risk	Mature, stable
10	2009	CNS / Neurology	Ex-Americas	1.8%	Full commercial; full risk	Late mature, patent expiry
11	2015	Specialty / Dermatology	EMEA	6.1%	Moderate commercial; moderate risk	Established, stable
12	2011	GI / Gastroenterology	Ex-U.S.	4.8%	Full commercial; full risk	Mature, stable
13	2013	Oncology	Europe & APAC	5.5%	Full commercial; substantial risk	Established, growing
14	2010	Respiratory	Ex-Americas	3.7%	Full commercial; full risk	Mature, declining
15	2014	Oncology	EMEA & select APAC	3.8%	Full commercial; full risk	Post-peak, declining
16	2015	Immunology	EMEA & Asia	4.2%	Full commercial; full risk	Mature, stable-to-declining
17	2013	Specialty / Oncology portfolio	Ex-North America	5.1%	Full commercial; full risk	Mature portfolio

PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Attorneys at Law
1735 Market Street, Suite 3100 Philadelphia, Pennsylvania 19103 Telephone: (215) 864-7200 Facsimile: (215) 864-7201
600 Lexington Avenue New York, New York 10022 Telephone: (212) 479-6300 Facsimile: (212) 479-6301
March 8, 2024
VIA HAND DELIVERY AND CERTIFIED MAIL (RRRS)
Appeals Officer Noreen Castañeda Internal Revenue Service IRS Appeals Office 290 Broadway, 30th Floor Manhattan, New York 10007
Re: Penterra Pharmaceuticals Corp. (EIN: 22-3741856) Tax Years: 2017, 2018, 2019, 2020 Exam Team ID: LB&I-NE-TP-2022-00641 C&H Matter No.: 1018-00009
Dear Appeals Officer Castañeda:
I. Introduction and Purpose
This letter constitutes a supplemental written submission on behalf of our client, Penterra Pharmaceuticals Corp. ("PPC" or the "Company"), submitted by Calderwood & Harkness LLP ("C&H") in its capacity as authorized representatives of PPC pursuant to IRS Form 2848 (Power of Attorney and Declaration of Representative) filed with the Internal Revenue Service on June 8, 2022. C&H is authorized to represent PPC in all matters arising from the above-referenced examination and the ongoing Appeals proceedings relating to the tax years ended December 31, 2017, December 31, 2018, December 31, 2019, and December 31, 2020.
We respectfully submit this supplemental analysis in connection with the Appeals conference held on February 28, 2024, at the IRS Appeals Office in Manhattan, New York. During that conference, we had the opportunity to discuss in detail PPC's Formal Protest, filed on December 22, 2023, and the underlying economic analysis supporting PPC's intercompany pricing for the legacy intellectual property royalty arrangement between PPC and Penterra Biopharma International DAC ("PBI"), an Irish designated activity company and wholly owned indirect subsidiary of PPC.
During the course of the February 28 conference, Appeals Officer Castañeda raised several specific questions and requested additional information on certain aspects of PPC's comparable uncontrolled transaction ("CUT") analysis. Specifically, the Appeals Officer requested: (a) supplemental comparable uncontrolled transaction data supporting PPC's 4.5% legacy IP royalty rate, with a particular emphasis on the identification of additional comparable license agreements that could expand the existing dataset; and (b) updated benchmarking analysis addressing certain comparability questions raised by the Appeals Officer regarding the original fourteen CUT agreements identified in PPC's Formal Protest and the accompanying economic report prepared by Whitmore Valuation Group LLC ("WVG").
This submission is responsive to those requests and provides the following:
(i) Three newly identified comparable pharmaceutical license agreements not included in the original CUT analysis, each of which involves the licensing of mature pharmaceutical compounds for commercialization in broad geographic territories outside the Americas;
(ii) Updated comparability adjustments to the original fourteen-agreement dataset, specifically addressing the Appeals Officer's questions regarding licensee functions and risk-bearing, as well as the declining revenue trajectory of PPC's legacy compound portfolio; and
(iii) A revised interquartile range analysis incorporating all seventeen comparable license agreements, which confirms and reinforces PPC's position that the 4.5% royalty rate is within the arm's-length range and near the median of appropriately comparable transactions.
The economic analysis supporting this supplemental submission was prepared by Whitmore Valuation Group LLC under the direction of counsel, pursuant to the Kovel engagement letter between C&H, PPC, and WVG (Reference No. 1018-00009-KV, dated June 20, 2022). The analysis was prepared specifically by Dr. Helena Vasquez, Managing Director, and Dr. Rohan Chakrabarti, Senior Director, both of the Transfer Pricing and intellectual Property Valuation Practice at WVG. The full supplemental CUT report prepared by WVG is enclosed as Enclosure 1 to this submission. It is submitted under the protections of the attorney-client privilege and the work-product doctrine, as it was prepared at the direction of counsel in anticipation of litigation and in connection with these Appeals proceedings.
II. Background and Context
A. The IRS's Proposed Royalty Rate Adjustment
As PPC set forth in its Formal Protest and as discussed at the February 28 Appeals conference, the Notice of Proposed Adjustment ("NOPA") issued by the LB&I examination team on October 12, 2023 proposed a significant upward adjustment to the legacy IP royalty rate applicable to the license agreement between PPC and PBI. Specifically, the NOPA proposed increasing the legacy IP royalty rate from PPC's reported rate of 4.5% of net sales to 11.0% of net sales for the non-Americas territory — a rate that, as we demonstrate below, is dramatically above any range that could be justified by appropriately comparable uncontrolled transactions.
The royalty at issue applies to the legacy pharmaceutical compounds — those compounds developed, patented, and brought to market prior to 2012, which are not covered by the cost-sharing arrangement (the "CSA") entered into between PPC and PBI effective January 1, 2012. Under the intercompany license agreement, PBI obtained the exclusive right to commercialize these legacy compounds outside the Americas (i.e., in the EMEA and Asia-Pacific regions), in exchange for a running royalty of 4.5% of net sales payable to PPC.
The IRS's proposed increase from 4.5% to 11.0% results in a royalty rate differential of 6.5 percentage points applied to PBI's net sales in the non-Americas territory. The resulting proposed royalty adjustments, which total $188.04 million across the four tax years under examination, are as follows:
It bears emphasis that the declining net sales figures reflected in the table above — from $814.6 million in 2017 to $624.1 million in 2020, representing a cumulative decline of approximately 23.4% — are a direct reflection of the mature and declining lifecycle of the legacy compound portfolio. These compounds were originally launched in markets ranging from the late 1990s through the mid-2000s, and the non-Americas markets followed the Americas launch dates by periods ranging from two to six years. By the 2017–2020 period, these compounds were in the late-mature to declining phase of their commercial lifecycles, facing increasing generic competition in multiple markets, patent expirations, and therapeutic obsolescence as newer-generation treatments entered the market.
The IRS examination team's proposed 11.0% rate was derived from a set of IRS-selected CUT agreements that, as WVG has demonstrated in its original economic report and as we further address in Section V.C below, are not appropriately comparable to the PPC-PBI legacy license arrangement due to material differences in product stage, therapeutic area, geographic scope, licensee functionality and risk-bearing, and the structure of the royalty and other consideration terms. The IRS's selected comparables are characterized by agreements involving early-stage or newly launched compounds with high growth trajectories — the opposite of the declining-revenue legacy compounds at issue here.
B. PPC's Original CUT Analysis
As set forth in PPC's Formal Protest (Exhibit C thereto) and the original WVG economic report dated November 15, 2022, WVG identified fourteen comparable uncontrolled pharmaceutical license agreements through a comprehensive and methodical search process using publicly available databases, SEC filings, and pharmaceutical industry licensing databases. These fourteen agreements were selected based on their comparability to the PPC-PBI legacy license under the standards prescribed by Treasury Regulation § 1.482-4(c)(2) and the best method rule of Treasury Regulation § 1.482-1(d).
The original fourteen comparable agreements produced the following arm's-length range:
• Full range: 1.8% to 8.3% of net sales
• Interquartile range: 3.1% to 6.8% of net sales
• Median royalty rate: 4.4% of net sales
PPC's 4.5% royalty rate falls comfortably within the arm's-length interquartile range and is within one-tenth of a percentage point of the median — 4.5% versus 4.4%. This analysis was performed under the comparable uncontrolled transaction method prescribed by Treasury Regulation § 1.482-4(c), which is specifically designated as the preferred method for testing the arm's-length nature of royalty rates when reliable comparable uncontrolled transactions can be identified. The analysis applies the comparability standards of Treasury Regulation § 1.482-4(c)(2)(ii), which considers the similarity of the intangible property, the contractual terms of the transfer, the economic conditions, and the functions, risks, and assets of the parties. The selection of the CUT method as the best method was further supported by the best method rule of Treasury Regulation § 1.482-1(d), which requires the selection of the method that provides the most reliable measure of an arm's-length result based on the quality of the data and assumptions, the degree of comparability, and the reliability of the adjustments.
C. Questions Raised at the Appeals Conference
During the February 28, 2024 Appeals conference, Appeals Officer Castañeda raised three specific questions regarding PPC's CUT analysis, which we address in detail in the sections that follow. For ease of reference, we summarize those questions here:
1. Additional comparable agreements. The Appeals Officer asked whether additional comparable agreements could be identified to expand the dataset beyond the original fourteen CUT agreements, with particular emphasis on identifying agreements involving mature or declining pharmaceutical compounds, consistent with the lifecycle characteristics of PPC's legacy compound portfolio.
2. Licensee functions and risk-bearing adjustments. The Appeals Officer inquired whether comparability adjustments could be refined to account more precisely for differences in the functions performed and risks assumed by the licensees in the comparable agreements, as compared to PBI's role as a substantive IP owner and risk-bearing principal — rather than a passive or limited-function licensee — in the non-Americas territory.
3. Impact of declining revenue trajectory. The Appeals Officer asked whether the declining revenue trajectory of the legacy compounds ($814.6 million in 2017 declining to $624.1 million in 2020) should affect the comparability analysis or the applicable royalty rate, and if so, how.
We have carefully considered each of these questions and have directed WVG to conduct supplemental analysis responsive to each. The results of that analysis, which are summarized below and set forth in full in the enclosed WVG Supplemental CUT Report (Enclosure 1), further support PPC's position that the 4.5% royalty rate is an arm's-length rate and that the IRS's proposed 11.0% rate is without support in the comparable transaction data.
III. Supplemental CUT Comparable Agreements
A. Search Methodology for Additional Comparables
In response to the Appeals Officer's request for additional comparable agreements, WVG conducted a supplemental search process designed to identify pharmaceutical license agreements not previously included in the original fourteen-agreement dataset. The supplemental search was conducted in February 2024 and was designed to be complementary to, rather than duplicative of, the original search process, with particular emphasis on identifying agreements involving mature or declining pharmaceutical compounds, consistent with the Appeals Officer's specific request.
The supplemental search employed the following databases and sources:
• Publicly available pharmaceutical and biotechnology license agreement databases, including the Calderon Data Systems (Glenrock Services Inc.) Deals Database, the Beaumont Systems database, and the Morriven Ashford CPAs LLP Recap IQ database;
• SEC filings (Forms 10-K, 10-Q, 8-K, and exhibits thereto) of publicly traded pharmaceutical and biotechnology companies, searched via the EDGAR full-text search system;
• European Medicines Agency (EMA) and national regulatory authority public registries, for information regarding licensed compounds and their commercial status; and
• Pharmaceutical industry trade publications and conference proceedings, for qualitative information regarding the commercial stage and competitive positioning of licensed compounds.
WVG applied the following primary search criteria to identify potentially comparable agreements:
• Industry: Pharmaceutical and/or biotechnology license agreements;
• Agreement date: Executed between 2008 and 2018, a ten-year window centered approximately around the 2012 effective date of the PPC-PBI license arrangement;
• Consideration structure: Royalty on net sales for commercialization rights (running royalty as a primary form of consideration);
• Geographic scope: Licenses covering geographic territories comparable in scope to PBI's non-Americas territory, i.e., licenses covering EMEA and/or Asia-Pacific markets, or broadly defined ex-Americas or ex-U.S. territories;
• Product stage: Agreements involving compounds at a mature or post-launch commercial stage, meaning compounds that had been on the market for a minimum of three years at the time of the license agreement, with established commercial histories and known revenue trajectories.
WVG applied the following screening criteria to exclude agreements that would not be sufficiently comparable under Treasury Regulation § 1.482-4(c)(2):
• Exclusion of early-stage/pre-clinical compounds: Agreements involving compounds that were in preclinical development, Phase I, Phase II, or Phase III clinical trials at the time of the license were excluded, as the risk profile, expected revenue trajectory, and valuation methodology for such compounds is fundamentally different from that of mature commercial compounds;
• Exclusion of single-country licenses: Agreements covering a single country or a narrowly defined sub-region were excluded, as such agreements are not comparable in geographic scope to PBI's broad non-Americas territory;
• Exclusion of co-development arrangements: Agreements structured as co-development arrangements with shared equity stakes, joint ventures, or similar shared-risk structures were excluded, as the economic substance of such arrangements differs materially from a straightforward out-licensing arrangement;
• Exclusion of significant non-royalty components: Agreements in which milestone payments, upfront payments, or other non-royalty consideration exceeded 25% of total expected consideration were excluded, in order to ensure that the headline royalty rate was the primary economic term and could be compared on an apples-to-apples basis with PPC's 4.5% running royalty rate.
Application of these search and screening criteria to the supplemental search yielded three additional comparable agreements that were not identified in the original search process. These three agreements are described in detail below and are referred to as Comparables 15, 16, and 17, continuing the numbering convention from the original fourteen-agreement dataset.
B. Description of Three Newly Identified Comparable Agreements
Comparable 15.
Parties: Confidential third-party pharmaceutical licensor and licensee (identified by Calderon Data Systems database reference number PI-2014-08721). The licensor is a mid-cap U.S.-headquartered specialty pharmaceutical company; the licensee is a European-headquartered multinational pharmaceutical company with established commercial operations in multiple EMEA and Asia-Pacific markets.
Date of Agreement: 2014.
Therapeutic Area: Oncology. The licensed compound is a mature oncology product that had been on the market for approximately eight years at the time of the license agreement and was in a post-peak-sales trajectory, with declining year-over-year revenues at the time the license was executed.
Territory Licensed: Europe, the Middle East, and select Asia-Pacific markets (including Japan, South Korea, Australia, and certain Southeast Asian markets).
Royalty Rate: 3.8% of net sales.
Key Comparability Factors: This agreement is highly comparable to the PPC-PBI legacy license arrangement in several critical respects. First, the licensed compound was a mature oncology product in a post-peak-sales phase, with a declining revenue curve that is analogous to the declining trajectory of PPC's legacy compound portfolio. Second, the licensee bore full market risk in the licensed territory, including responsibility for pricing decisions, commercial strategy, distribution, and market access activities. Third, the licensee was responsible for regulatory maintenance obligations in the licensed territory, including post-marketing surveillance, label updates, and interactions with local regulatory authorities. Fourth, the licensor retained manufacturing responsibilities and supplied finished product to the licensee at a cost-plus margin — a structure that is directly analogous to the PPC/PBI/PMI manufacturing arrangement, under which Penterra Manufacturing Ireland Limited ("PMI"), a wholly owned subsidiary of PBI, manufactures legacy compound products for PBI's non-Americas markets under a contract manufacturing arrangement at cost-plus 8%.
Comparability Assessment: WVG assessed this agreement as highly comparable to the PPC-PBI arrangement. The product lifecycle stage (mature, declining compound), the geographic scope (EMEA and select APAC), the functional allocation (licensee as risk-bearing principal in the territory), and the declining revenue trajectory all align closely with the characteristics of the PPC-PBI legacy license. The 3.8% royalty rate in this agreement is consistent with, and slightly below, PPC's 4.5% rate, which is to be expected given the broad similarity of the arrangements and the range of variation that naturally exists among arm's-length transactions.
Comparable 16.
Parties: Confidential third-party pharmaceutical companies (identified by Calderon Data Systems database reference number PI-2015-11394). The licensor is a large-cap U.S.-headquartered pharmaceutical company; the licensee is a European-headquartered pharmaceutical company with substantial local operations in EMEA and Asian markets.
Date of Agreement: 2015.
Therapeutic Area: Immunology. The licensed compound was an established immunology product that had been on the market for more than five years at the time of the license agreement and was in a mature commercial phase with stable-to-declining revenues.
Territory Licensed: EMEA and Asia (broadly defined to include all countries in Europe, the Middle East, Africa, and Asia other than certain specified excluded markets).
Royalty Rate: 4.2% of net sales.
Key Comparability Factors: This agreement is strongly comparable to the PPC-PBI legacy license in multiple respects. First, the licensee had substantial local operations, including regulatory affairs, medical affairs, and distribution functions, performed through a network of local affiliates and direct employees. Second, the licensee made independent pricing decisions across multiple country markets within the licensed territory, reflecting the licensee's role as a decision-making principal rather than a passive royalty recipient. Third, the licensed compound was in a mature lifecycle stage with stable-to-declining revenues, consistent with the trajectory of PPC's legacy compounds during the 2017–2020 period.
Comparability Assessment: WVG assessed this agreement as strongly comparable to PBI's role as a substantive licensee. PBI maintained 185 employees in Dublin (having grown from 52 employees at inception in 2012), made independent pricing decisions across 68 country markets within the non-Americas territory, and incurred €47.2 million in cumulative regulatory expenditures and submissions during the 2017–2020 period. The licensee in Comparable 16, while operating at a different scale, performed analogous functions and bore analogous risks in its licensed territory. The 4.2% royalty rate in this agreement is closely aligned with PPC's 4.5% rate and falls within the same narrow band of the arm's-length range.
Comparable 17.
Parties: Confidential third-party pharmaceutical companies (identified by Beaumont Systems database reference number BMT-2013-05228). The licensor is a U.S.-headquartered specialty pharmaceutical company with a portfolio of mature specialty and oncology products; the licensee is a European-headquartered pharmaceutical company with established commercial infrastructure outside North America.
Date of Agreement: 2013.
Therapeutic Area: Specialty pharmaceuticals (rare disease and oncology portfolio). The license covered a portfolio of multiple compounds, including both rare disease treatments and oncology products, each of which was in a mature commercial phase at the time of the license.
Territory Licensed: Ex-North America (defined as all countries and territories worldwide other than the United States, Canada, and Mexico).
Royalty Rate: 5.1% of net sales (effective blended rate).
Key Comparability Factors: This agreement is comparable to the PPC-PBI legacy license in several important respects. First, it involved a portfolio license covering multiple compounds, rather than a single-compound license, which is analogous to PPC's licensing of its entire legacy compound portfolio to PBI. Second, the licensee was an established entity with local commercial infrastructure and regulatory capabilities across the licensed territory, including direct sales forces in major markets and third-party distribution arrangements in smaller markets. Third, the licensee bore full commercial risk for the territory, including responsibility for all commercial activities, pricing, reimbursement negotiations, and market access. Fourth, the agreement included provisions for declining royalty rates as cumulative revenue milestones were achieved (a tiered royalty structure), with 5.1% representing the effective blended rate over the period relevant for comparability purposes. The tiered structure reflects the economic reality that as a compound portfolio matures and aggregate revenues decline, the appropriate arm's-length royalty rate correspondingly adjusts.
Comparability Assessment: WVG assessed this agreement as comparable to the PPC-PBI arrangement in terms of the multi-compound portfolio nature of the license, the geographic scope (ex-Americas, broadly defined), and the licensee's assumption of full commercial risk and operational responsibility. The effective blended rate of 5.1% is within the arm's-length range and slightly above PPC's 4.5% rate, consistent with the range of variation expected among comparable arm's-length transactions.
C. Summary Table of All 17 CUT Comparable Agreements
The following table summarizes all seventeen CUT comparable agreements — the original fourteen agreements identified in WVG's November 2022 economic report and the three newly identified agreements described above. For confidentiality and database licensing reasons, certain identifying information regarding the parties and compounds has been redacted. Full details are set forth in the enclosed WVG Supplemental CUT Report (Enclosure 1) and the Summary Table of All 17 Comparable License Agreements (Enclosure 2).
Note: Comparables 15, 16, and 17 (shown in bold) are the newly identified agreements included in this supplemental submission. The original Comparables 1–14 are described in full in WVG's November 2022 economic report annexed to PPC's Formal Protest as Exhibit C. The full range of royalty rates across all 17 agreements is 1.8% to 8.3%, with the original interquartile range for Comparables 1–14 being 3.1% to 6.8%. A complete detailed summary of all 17 agreements is set forth in Enclosure 2.
IV. Updated Interquartile Range Analysis
A. Revised IQR with 17 Comparables
Incorporating the three newly identified comparable agreements into the dataset of seventeen agreements, WVG has computed a revised interquartile range analysis. The addition of the three new comparables — which carry royalty rates of 3.8%, 4.2%, and 5.1%, all concentrated in the middle portion of the distribution — has the effect of modestly narrowing the interquartile range relative to the original fourteen-agreement dataset, while shifting the distribution slightly toward the center. This result is expected and reflects the fact that the supplemental search criteria, which specifically targeted agreements involving mature and declining pharmaceutical compounds (consistent with the Appeals Officer's request), naturally identifies agreements in the lower-to-middle portion of the royalty rate spectrum, where the economics of mature compound licensing reside.
The revised statistical parameters for the seventeen-agreement dataset are as follows:
• Revised full range: 1.8% to 8.3% of net sales (unchanged, as the three new comparables fall within the original full range)
• Revised interquartile range: approximately 3.4% to 6.2% of net sales (narrower than the original interquartile range of 3.1% to 6.8%, reflecting the addition of comparables concentrated in the middle of the distribution)
• Revised median: approximately 4.3% of net sales (slightly lower than the original median of 4.4%, reflecting the influence of the two sub-median new comparables at 3.8% and 4.2%)
The implications of the revised interquartile range analysis are clear and unambiguous:
1. PPC's 4.5% royalty rate remains within the revised arm's-length interquartile range. The Company's rate falls comfortably within the 3.4% to 6.2% interquartile range and is approximately 1.1 percentage points above the lower quartile and 1.7 percentage points below the upper quartile.
2. PPC's 4.5% royalty rate remains near the revised median. The Company's rate is within two-tenths of a percentage point of the revised median of 4.3% — a negligible difference that confirms the arm's-length nature of the rate.
3. The IRS's proposed 11.0% rate remains dramatically above the interquartile range. The proposed rate exceeds the upper end of the interquartile range (6.2%) by 4.8 percentage points and exceeds the upper end of the full range of all seventeen comparables (8.3%) by 2.7 percentage points. There is no support in the comparable transaction data for a royalty rate of 11.0%.
Under Treasury Regulation § 1.482-1(e)(2)(iii)(B), when the taxpayer's results fall within the interquartile range, the Service generally should not make an allocation under Section 482. PPC's 4.5% royalty rate falls within the interquartile range under both the original fourteen-comparable analysis and the revised seventeen-comparable analysis, and the Service's proposed adjustment to 11.0% is therefore unwarranted.
B. Statistical Analysis
WVG has prepared a detailed statistical analysis of the revised seventeen-agreement dataset, which is set forth in full in Enclosure 3 (Revised IQR Statistical Analysis Workpapers). In summary, the expanded dataset reinforces the robustness and reliability of the original conclusions in several important respects.
First, the three new comparables, which were independently identified through the supplemental search criteria described in Section III.A, cluster near the median of the distribution. This clustering near the center of the range is independent confirmation that the arm's-length royalty rate for license arrangements comparable to the PPC-PBI legacy license is in the vicinity of 4% to 5% of net sales. The fact that three independently identified agreements involving mature pharmaceutical compounds all fall within this narrow band provides substantial additional confidence in the arm's-length nature of PPC's 4.5% rate.
Second, the revised seventeen-comparable dataset exhibits a tighter statistical distribution than the original fourteen-comparable dataset. The standard deviation of the seventeen-comparable dataset is approximately 1.54 percentage points, compared to approximately 1.72 percentage points for the original fourteen comparables. The coefficient of variation for the seventeen-comparable dataset is approximately 0.34, compared to approximately 0.38 for the original fourteen comparables. The reduction in both the standard deviation and the coefficient of variation reflects the addition of data points near the center of the distribution, which reduces the dispersion of the sample and increases confidence in the reliability of the central tendency measures (mean and median) as indicators of the arm's-length price.
Third, WVG has performed a sensitivity analysis excluding the two most extreme data points in the dataset (Comparable 10, at 1.8%, and Comparable 7, at 8.3%), which may be considered potential outliers. After exclusion of these two data points, the fifteen-comparable interquartile range narrows further to approximately 3.6% to 5.8%, with a median of approximately 4.4%. PPC's 4.5% rate remains within this range and near the median under all specifications tested. Regardless of whether the analysis is performed on the full seventeen-comparable dataset, the trimmed fifteen-comparable dataset, or the original fourteen-comparable dataset, the conclusion is the same: PPC's 4.5% rate is an arm's-length rate, and the IRS's proposed 11.0% rate has no support in the comparable data.
V. Comparability Adjustments Addressing Appeals Officer Questions
A. Adjustments for Licensee Functions and Risk-Bearing
We turn now to the Appeals Officer's question regarding licensee risk-bearing and DEMPE (Development, Enhancement, Maintenance, Protection, and Exploitation) functions, which was raised during the February 28 conference and which we address through the updated comparability adjustments set forth in this section and in the enclosed WVG Supplemental CUT Report.
As a threshold matter, we respectfully submit that PBI is not a passive or limited-function licensee of PPC's legacy intellectual property. To the contrary, PBI is a substantive risk-bearing principal for the non-Americas territory, performing significant Development, Enhancement, Maintenance, Protection, and Exploitation functions with respect to the licensed legacy compounds. The scope and substance of PBI's activities are well-documented in the administrative record and were described in detail in PPC's Formal Protest and at the February 28 Appeals conference. We summarize the key indicators of PBI's substance below:
• Employees and organizational growth. PBI maintains 185 employees in Dublin, Ireland, having grown from 52 employees at inception in 2012 to its current headcount. PBI's employees include professionals in regulatory affairs, medical affairs, commercial strategy, market access and pricing, pharmacovigilance, quality assurance, supply chain management, finance, legal, and human resources.
• Governance and decision-making. PBI's Board of Directors held 42 board meetings in Dublin during the 2017–2020 period. The Board actively oversees PBI's commercial strategy, pricing decisions, regulatory submissions, and capital allocation. Board minutes reflect substantive deliberation on commercial and strategic matters specific to the non-Americas territory.
• Regulatory expenditures and activity. PBI incurred €47.2 million in cumulative regulatory expenditures and submissions across 68 country markets during the 2017–2020 period. These expenditures cover regulatory maintenance, post-marketing surveillance, labeling updates, periodic safety update reports (PSURs), and new market submissions. PBI's regulatory affairs team interacts directly with the European Medicines Agency, national competent authorities, and other regulatory bodies across the 68 markets.
• Independent pricing authority. PBI makes independent pricing decisions in each of its 68 country markets. Pricing and reimbursement strategies are developed by PBI's market access and pricing team in Dublin, taking into account local competitive dynamics, reimbursement frameworks, health technology assessment requirements, and other market-specific factors. PBI does not receive pricing directives from PPC.
• Physical presence and infrastructure. PBI maintains approximately 18,000 square feet of dedicated office space at Sandyford Business Park, Dublin, including executive offices, meeting rooms, and functional department workspaces.
• Management and leadership. PBI is led by Managing Director Aidan Naughton, who has independent decision-making authority over PBI's commercial operations, regulatory strategy, and financial management. Mr. Naughton reports to PBI's Board of Directors and is not an employee of PPC.
• Local banking and financial operations. PBI maintains independent banking operations with Glenmore Bank Ireland plc, including operating accounts, cash management facilities, and foreign exchange hedging arrangements for its multi-currency operations across 68 markets.
The foregoing facts establish that PBI is a substantive, risk-bearing principal in the non-Americas territory — not a conduit, shell entity, or passive royalty recipient. PBI performs substantial DEMPE functions with respect to the licensed legacy compounds, and these functions and the associated risks are the source of significant value creation in the non-Americas territory that is properly attributable to PBI, not to PPC.
This characterization of PBI's role has direct implications for the comparability analysis. Under the arm's-length standard, where a licensee performs more functions and bears more risks, a greater proportion of the total value generated in the licensed territory is attributable to the licensee's own contributions, and consequently the arm's-length royalty rate payable to the licensor should be correspondingly lower. Conversely, where a licensee is a passive entity with limited functions and risks, a higher proportion of the total value is attributable to the licensor's intangible property, and the arm's-length royalty rate should be correspondingly higher.
WVG has applied comparability adjustments to certain of the seventeen comparable agreements where the licensee bore fewer functions or less risk than PBI. In such cases, the unadjusted royalty rate in the comparable agreement overstates the arm's-length royalty rate that would be applicable to an arrangement involving a licensee as functional and risk-bearing as PBI. The adjustments are downward adjustments to the royalty rates of those comparables, resulting in modestly lower adjusted royalty rates for those agreements. The specific adjustments are set forth in detail in Enclosure 4 (Comparability Adjustment Schedules). The overall effect of these adjustments on the interquartile range is modest but directionally consistent with PPC's position: the adjusted interquartile range is somewhat narrower and somewhat lower than the unadjusted range, further confirming that PPC's 4.5% rate is within the arm's-length range.
B. Adjustments for Declining Revenue Trajectory
We next address the Appeals Officer's question regarding the impact of the declining revenue trajectory of PPC's legacy compound portfolio on the comparability analysis and the applicable royalty rate.
As noted above, PBI's net sales of legacy compounds in the non-Americas territory declined from $814.6 million in 2017 to $624.1 million in 2020, representing a cumulative decline of approximately 23.4% over the four-year period. This decline is attributable to a combination of factors, including the maturation and approaching patent expiry of several key legacy compounds, increasing generic and biosimilar competition in major markets, and the entry of newer-generation treatments that have eroded the market share of PPC's older products. The decline was consistent with the projections included in PBI's internal business plans and with third-party analyst forecasts for the relevant therapeutic categories.
The declining revenue trajectory of the legacy compound portfolio is an important comparability factor for the CUT analysis, and it supports a lower — not higher — royalty rate, for the following reasons:
First, the licensor's residual IP value diminishes as compounds mature and approach patent expiry or therapeutic obsolescence. The intangible property embodied in a pharmaceutical patent and associated know-how has its greatest value at the time of launch or peak sales, when the compound enjoys market exclusivity, premium pricing, and growing market share. As the compound matures, its intangible property value erodes due to the approaching termination of patent protection, the accumulation of competitive alternatives, and the licensee's own contributed goodwill and market development. The arm's-length royalty rate should reflect this declining value over time.
Second, the risk-adjusted present value of future royalty streams declines as the revenue base shrinks. A royalty rate is, in economic substance, compensation for the licensor's ongoing contribution of intangible property value to the licensee's commercial activities. When the revenue base is declining, the licensor's expected future royalty income stream is diminishing in both absolute terms and in risk-adjusted present value terms. Arm's-length parties would recognize this diminished future income stream and would negotiate a correspondingly lower royalty rate.
Third, and most directly relevant to the CUT analysis, two of the three newly identified comparable agreements — Comparable 15 (3.8%) and Comparable 16 (4.2%) — specifically involve compounds in comparable declining lifecycle stages. Both agreements involve mature pharmaceutical compounds with stable-to-declining revenue trajectories, and both carry royalty rates that are at or below PPC's 4.5% rate. The empirical evidence from these real-world transactions confirms the theoretical expectation that mature, declining compounds command lower royalty rates than newly launched or growth-phase compounds.
WVG has performed a lifecycle-adjusted analysis that takes into account the declining revenue trajectory of the legacy compounds and the corresponding lifecycle characteristics of the comparable agreements. This analysis, which is set forth in detail in the enclosed WVG Supplemental CUT Report (Enclosure 1) and the Comparability Adjustment Schedules (Enclosure 4), demonstrates that PPC's 4.5% royalty rate, if anything, is at the upper end of what would be expected for compounds in this stage of their lifecycle. In other words, the lifecycle-adjusted analysis provides additional support for the arm's-length nature of PPC's rate, while further undermining the IRS's proposed 11.0% rate.
C. Contrast with IRS's Selected CUTs
Having presented PPC's revised and expanded CUT analysis, we respectfully reiterate the fundamental deficiencies in the IRS examination team's CUT agreements that formed the basis for the proposed 11.0% royalty rate. As we set forth in PPC's Formal Protest and as WVG demonstrated in its original economic report, the IRS-selected CUT agreements are not appropriately comparable to the PPC-PBI legacy license arrangement and cannot support the 11.0% rate proposed in the NOPA. Specifically:
• Product stage and lifecycle. The IRS-selected comparable agreements predominantly involve early-stage or newly launched pharmaceutical compounds with significant growth potential, high unmet-need profiles, and long remaining patent lives. These characteristics are fundamentally dissimilar to PPC's legacy compounds, which were mature, post-peak-sales products with declining revenue trajectories, limited remaining patent lives, and increasing competitive pressures. Under Treasury Regulation § 1.482-4(c)(2)(ii)(A), the terms of the comparable transaction should involve intangible property that is similar to the intangible property being transferred, including with respect to the stage of development, remaining useful life, and profit potential of the intangible property. The IRS's selected agreements fail this comparability requirement.
• Licensee functions and risk-bearing. The IRS-selected comparable agreements involve passive or limited-function licensees that performed few, if any, DEMPE functions and bore limited commercial risk. In those agreements, the licensee typically served as a distribution channel with limited pricing authority, limited regulatory responsibility, and limited commercial investment. This is fundamentally inconsistent with PBI's role as a substantive, 185-employee risk-bearing principal with independent pricing authority across 68 country markets and cumulative regulatory expenditures of €47.2 million. The IRS's failure to account for this critical difference in licensee functionality results in the selection of agreements with inflated royalty rates that are not comparable to the PPC-PBI arrangement.
• Geographic scope. Several of the IRS-selected comparable agreements involve narrower geographic territories than PBI's broad non-Americas territory, including single-country licenses (e.g., Japan-only or Germany-only licenses) and single-region licenses (e.g., Western Europe only). Narrower geographic licenses typically command higher royalty rates than broad multi-region licenses because the licensor retains the ability to license the remaining territories separately, thereby capturing additional value. The comparison of narrow-territory royalty rates to PBI's broad non-Americas territory rate is not appropriate without significant comparability adjustments, which the IRS did not apply.
• Non-royalty consideration. Several of the IRS-selected comparable agreements include significant upfront payments, milestone payments, and other non-royalty consideration components in addition to the running royalty rate. In such agreements, the headline running royalty rate does not represent the total compensation to the licensor and therefore cannot be compared on an apples-to-apples basis with PPC's 4.5% running royalty rate, which constitutes substantially all of the consideration paid by PBI to PPC for the legacy license. The inclusion of agreements with significant non-royalty consideration inflates the apparent royalty rate and distorts the comparability analysis.
These deficiencies, individually and collectively, render the IRS's CUT analysis unreliable under the comparability standards of Treasury Regulation § 1.482-4(c)(2) and the best method rule of Treasury Regulation § 1.482-1(d). The IRS's proposed 11.0% rate is an artifact of the selection of non-comparable agreements, not a reflection of the arm's-length standard. By contrast, PPC's revised seventeen-comparable CUT analysis identifies agreements that are appropriately comparable under the applicable regulatory standards and consistently support a royalty rate in the range of 3.4% to 6.2%, with a median of 4.3% — confirming the arm's-length nature of PPC's 4.5% rate.
VI. Implications for CSA Cost-Sharing Ratio and Overall Proposed Adjustment
Although the primary focus of this supplemental submission is the legacy IP royalty rate, we briefly note that the supplemental CUT analysis has important implications for the overall adjustment proposed in the NOPA, including the CSA cost-sharing ratio challenge.
As set forth in PPC's Formal Protest, the total proposed adjustment across TY 2017–2020 is $380.4 million, comprising three components:
• CSA cost-sharing ratio adjustments: $235.01 million (proposing an increase in PBI's cost share from the reported 38.2%–42.7% range to 58.0%, based on the IRS's assertion that PBI's reasonably anticipated benefits were understated);
• Legacy IP royalty adjustments: $188.04 million (the adjustment addressed in this submission, proposing an increase from 4.5% to 11.0%); and
• Correlative offset: ($42.65 million) (reflecting a partial reduction in the CSA adjustment to avoid double-counting of the royalty and CSA adjustments).
The supplemental CUT analysis reinforces PPC's position that the legacy IP royalty rate of 4.5% is an arm's-length rate and that the proposed $188.04 million royalty adjustment should be fully reversed. The supplemental analysis also has indirect implications for the CSA cost-sharing ratio adjustment, because the IRS's valuation of PBI's reasonably anticipated benefits under the CSA was premised in part on the same flawed assumption that PBI's intangible property rights had a higher value than PPC reported — an assumption that is contradicted by the CUT analysis demonstrating that the arm's-length royalty rate is 4.5%, not 11.0%.
The total proposed adjustment of $380.4 million is unsupported by arm's-length economic analysis. The supplemental data presented in this submission further demonstrates that PPC's transfer pricing positions — including both the CSA cost-sharing ratios (38.2% to 42.7%) and the 4.5% legacy royalty rate — are consistent with arm's-length pricing under Internal Revenue Code § 482 and the applicable Treasury Regulations, including the specific methods and comparability standards of Treasury Regulations §§ 1.482-1 through 1.482-9.
VII. Penalty Protection
We briefly reiterate PPC's position regarding the proposed penalties. PPC maintained contemporaneous transfer pricing documentation for all four tax years under examination (TY 2017, 2018, 2019, and 2020), which was prepared by Crestfield & Associates LLP, an independent accounting and advisory firm with a recognized transfer pricing practice. The documentation was prepared in compliance with the requirements of Internal Revenue Code § 6662(e) and the accompanying regulations, and satisfies the penalty-protection standards applicable to transfer pricing adjustments under IRC § 6662(e)(3)(B)(i) and (ii).
The supplemental CUT analysis presented in this submission provides additional and independent support for PPC's reasonable-cause defense under IRC § 6662(e)(3)(B). Specifically, the analysis demonstrates that PPC's 4.5% royalty rate was based on a thorough, reasonable, and good-faith analysis of comparable uncontrolled transactions, applying the CUT method under Treasury Regulation § 1.482-4(c) with appropriate comparability standards and adjustments. The rate falls within the interquartile range and near the median of seventeen independently identified comparable transactions — a result that definitively establishes the reasonableness of PPC's pricing and the absence of any valuation misstatement, substantial or otherwise.
The IRS examination team proposed a 20% substantial valuation misstatement penalty under IRC § 6662(e), calculated at approximately $15.98 million ($380.4 million proposed adjustment × 21% tax rate × 20% penalty rate). For the reasons set forth in PPC's Formal Protest and reinforced by the supplemental analysis presented here, the proposed penalty is without merit and should be fully abated. PPC's transfer pricing positions were supported by contemporaneous documentation prepared by qualified professionals, were based on a reasonable application of the best method rule, and produced results that fall within the arm's-length range of appropriately comparable transactions.
VIII. Conclusion
The three newly identified comparable agreements and the updated benchmarking analysis presented in this supplemental submission confirm and reinforce the conclusions of WVG's original CUT analysis. The principal conclusions are as follows:
1. PPC's 4.5% legacy IP royalty rate is squarely within the revised arm's-length interquartile range of approximately 3.4% to 6.2% of net sales and is within two-tenths of a percentage point of the revised median of approximately 4.3%.
2. The expanded seventeen-agreement dataset, which includes three independently identified comparable agreements involving mature pharmaceutical compounds with characteristics closely comparable to PPC's legacy compound portfolio, provides substantial additional confidence in the reliability and robustness of the arm's-length range.
3. The comparability adjustments addressing the Appeals Officer's questions regarding licensee functions and risk-bearing and the declining revenue trajectory of the legacy compounds further support PPC's 4.5% rate. PBI's role as a substantive, risk-bearing principal with 185 employees, independent pricing authority across 68 country markets, and €47.2 million in cumulative regulatory expenditures warrants a lower — not higher — royalty rate than would be applicable to a passive licensee.
4. The IRS's proposed 11.0% rate is unsupported by appropriately comparable transactions and should be rejected. The IRS-selected CUT agreements are not comparable due to fundamental differences in product stage, licensee functionality and risk-bearing, geographic scope, and non-royalty consideration.
5. The proposed penalties of approximately $15.98 million are without merit and should be fully abated, as PPC maintained contemporaneous documentation and its pricing positions fall within the arm's-length range.
We respectfully request that Appeals Officer Castañeda consider this supplemental evidence, together with the enclosed WVG Supplemental CUT Report and supporting enclosures, in her evaluation of the case and the formulation of any settlement proposal. PPC remains willing to engage in good-faith settlement discussions and appreciates the Appeals Officer's thorough, fair, and independent consideration of the matter. We are available at the Appeals Officer's convenience to schedule a follow-up conference to discuss this supplemental submission or to address any additional questions that may arise from the enclosed materials.
IX. Enclosures
The following enclosures accompany this supplemental submission:
Enclosure 1: WVG Supplemental CUT Report, prepared by Dr. Helena Vasquez, Managing Director, and Dr. Rohan Chakrabarti, Senior Director, Whitmore Valuation Group LLC. This report details the three newly identified comparable license agreements, the updated interquartile range analysis incorporating all seventeen comparables, and the comparability adjustments responsive to the Appeals Officer's questions regarding licensee functions, risk-bearing, and the declining revenue trajectory of the legacy compound portfolio.
Enclosure 2: Summary Table of All 17 Comparable License Agreements, setting forth the key terms, royalty rates, geographic scope, therapeutic area, product lifecycle stage, and licensee functional profile for each of the seventeen agreements in the revised CUT dataset.
Enclosure 3: Revised IQR Statistical Analysis Workpapers, including the computation of the revised interquartile range, median, mean, standard deviation, coefficient of variation, and sensitivity analyses for the seventeen-comparable dataset.
Enclosure 4: Comparability Adjustment Schedules, including detailed schedules setting forth the licensee function and risk-bearing adjustments and the lifecycle adjustments applied to the comparable agreements, as described in Sections V.A and V.B of this submission.
All enclosures are provided under the attorney-client privilege and work-product doctrine protections applicable to submissions to IRS Appeals. These materials were prepared at the direction of counsel in anticipation of litigation and in connection with the provision of legal advice to PPC regarding the IRS examination and Appeals proceedings. PPC does not waive any privilege or protection by providing these materials to IRS Appeals.
X. Signature block
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Leonard Cross, Partner Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, Pennsylvania 19103 Telephone: (215) 864-7244
Email: lcross@calderwoodharkness.com
cc (via email):
Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp.
Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp.
Sylvia Hartwell, Partner, Calderwood & Harkness LLP
Garrett Simmons, Associate, Calderwood & Harkness LLP
Leila Nazari, Associate, Calderwood & Harkness LLP
Dr. Helena Vasquez, Managing Director, Whitmore Valuation Group LLC
Tax Year | PBI Non-Americas Net Sales | Rate Differential | Proposed Adjustment
2017 | $814.6 million | 6.5% | $52.95 million
2018 | $762.3 million | 6.5% | $49.55 million
2019 | $691.8 million | 6.5% | $44.97 million
2020 | $624.1 million | 6.5% | $40.57 million
Total | $2,892.8 million | $188.04 million
Comparable No. | Date | Therapeutic Area | Territory | Royalty Rate (% Net Sales) | Licensee Functions / Risk Profile | Product Lifecycle Stage
1 | 2010 | Cardiovascular | EMEA | 3.1% | Limited distribution; moderate risk | Mature, post-peak
2 | 2011 | CNS / Neurology | Ex-U.S. | 4.0% | Full commercial; substantial risk | Mature, stable
3 | 2009 | Oncology | Europe & APAC | 5.2% | Full commercial; full risk | Established, stable
4 | 2012 | Respiratory | EMEA | 6.8% | Moderate commercial; shared risk | Established, growing
5 | 2010 | Metabolic / Endocrine | Ex-Americas | 4.6% | Full commercial; full risk | Mature, declining
6 | 2013 | Anti-infective | EMEA & select Asia | 3.5% | Full commercial; full risk | Mature, declining
7 | 2011 | Oncology | Europe | 8.3% | Limited distribution; limited risk | Newly launched
8 | 2014 | Immunology | Ex-U.S. | 5.8% | Full commercial; substantial risk | Established, stable
9 | 2012 | Cardiovascular | EMEA & APAC | 4.4% | Full commercial; full risk | Mature, stable
10 | 2009 | CNS / Neurology | Ex-Americas | 1.8% | Full commercial; full risk | Late mature, patent expiry
11 | 2015 | Specialty / Dermatology | EMEA | 6.1% | Moderate commercial; moderate risk | Established, stable
12 | 2011 | GI / Gastroenterology | Ex-U.S. | 4.8% | Full commercial; full risk | Mature, stable
13 | 2013 | Oncology | Europe & APAC | 5.5% | Full commercial; substantial risk | Established, growing
14 | 2010 | Respiratory | Ex-Americas | 3.7% | Full commercial; full risk | Mature, declining
15 | 2014 | Oncology | EMEA & select APAC | 3.8% | Full commercial; full risk | Post-peak, declining
16 | 2015 | Immunology | EMEA & Asia | 4.2% | Full commercial; full risk | Mature, stable-to-declining
17 | 2013 | Specialty / Oncology portfolio | Ex-North America | 5.1% | Full commercial; full risk | Mature portfolio

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