Dr. Vasquez,
I hope the weekend is treating you well. I'm writing to transmit updated financial data for incorporation into the Appeals conference presentation and to outline the specific deliverables we'll need from Whitmore ahead of the conference. As you know, the IRS Appeals conference is scheduled for February 28, 2024, at the IRS Appeals Office in Manhattan, before Appeals Officer Noreen Castañeda (assigned January 2024). Leonard is leading the conference preparation on our end and has asked me to coordinate directly with you and Rohan on the presentation materials.
As a threshold matter, please remember that all materials prepared by Whitmore in connection with this engagement are being prepared at the direction of Calderwood & Harkness under the Kovel arrangement (Matter 1018-00009-KV) and remain subject to attorney-client privilege and work-product protection. Please label all draft slides and working files accordingly.
**1. Updated Financial Data**
I am attaching an updated financial data workbook (Excel) containing confirmed product-level revenue data, legacy IP royalty figures, CSA cost-sharing data, and PBI financial summaries. I've also uploaded the files to the secure share for Rohan's access. The key data points are as follows:
*Product-Level Revenue Data (2017–2020) — Americas vs. Non-Americas:*
The workbook contains updated and confirmed net sales breakdowns for Veritaxol, Imvara, and Cerulon. For reference, the 2020 non-Americas figures are:
- Veritaxol: $1.34B non-Americas net sales (of $3.12B global) - Imvara: $790M non-Americas net sales (of $1.87B global) - Cerulon: $280M non-Americas net sales (of $620M global)
Full four-year breakdowns by territory are in the workbook.
*Legacy IP Royalty Data:*
Non-Americas net sales by year: $814.6M (2017) / $762.3M (2018) / $691.8M (2019) / $624.1M (2020), with royalties paid at the 4.5% contractual rate yielding payments of $36.66M / $34.30M / $31.13M / $28.08M, respectively.
*CSA Cost-Sharing Percentages and R&D Cost Pools:*
PBI's reasonably anticipated benefit (RAB) shares: 38.2% (2017) / 39.6% (2018) / 41.1% (2019) / 42.7% (2020), applied to total qualified R&D cost pools of $487.3M / $523.8M / $561.2M / $598.4M, yielding PBI cost-sharing payments of $186.15M / $207.42M / $230.65M / $255.52M.
*PBI Financial Data:*
Revenue of €2.14B and pre-tax income of €1.06B for FY 2020. Please confirm these are consistent with the figures in your earlier CUT and CPM/TNMM reports (November 2022) and the PCT DCF analysis (December 2022). If there are any discrepancies, let me know right away so we can reconcile before the slides are finalized.
**2. Specific Requests for Presentation Slides**
We need the following sections of the Appeals conference presentation (Northgate Services Inc.) finalized by Whitmore:
(a) **CUT Analysis Summary Slide (Royalty Rate):** Please update to confirm the 14 comparable uncontrolled pharmaceutical license agreements, the interquartile range of 3.1%–6.8%, the median of 4.4%, and PPC's 4.5% rate falling within the arm's-length range. The slide should contrast this with the IRS's proposed 11.0% rate and note that Dr. Washburne's CUT selections were rebutted in the January 2024 rebuttal memorandum. Please highlight the key methodological deficiencies in his comparable selection criteria — particularly the points you and Rohan developed in the rebuttal regarding therapeutic area comparability, exclusivity scope, and stage of development at the license date.
(b) **CPM/TNMM Analysis Slide (PBI Operating Margins):** Please confirm that PBI's operating margins fall within the interquartile range based on the 22 comparable distributors and IP-holding companies for all four years (2017–2020). Include the IQR and PBI's tested margins for each year.
(c) **PCT Valuation / DCF Slide:** Present the income-method/DCF analysis showing the arm's-length range of $278M–$361M for the PCT payment using a 9.8% WACC, with the $312M actual payment falling within range. Contrast with the IRS's valuation of $852M using a 7.2% WACC, and reference the WACC/Discount rate analysis (December 2022 report) supporting the 9.8% figure. The discount rate differential is going to be a focal point of the conference discussion, so this slide should be particularly clear and well-supported.
(d) **Proposed Adjustments Summary Slide:** Please ensure the presentation accurately reflects the total proposed adjustments from the October 12, 2023 NOPA:
- CSA adjustments: $235.01M (IRS proposed increasing PBI's cost-share by 8–12 percentage points) - Royalty adjustments: $188.04M (IRS proposed increasing royalty from 4.5% to 11.0%) - Correlative offset: ($42.65M) - Net proposed adjustment: $380.40M - Proposed penalty: ~$15.98M (IRC § 6662(e), 20% of tax on $380.4M)
(e) **PBI Economic Substance / DEMPE Slide:** This is primarily an C&H-prepared slide, but I'd appreciate it if you could review and confirm that the economic analysis supports PBI's functional profile as documented. The key substance metrics we're presenting are: 185 employees (grown from 52 at establishment in 2012), 42 board meetings held in Dublin during 2017–2020, €47.2M in cumulative regulatory expenditures, approximately 18,000 sq ft of office space at Sandyford Business Park in Dublin, and independent pricing decisions across 68 country markets. Please flag if any of these data points are inconsistent with the functional analysis in your reports.
(f) **Settlement Framework / Range Slide:** This slide is being prepared internally by C&H, so you do not need to draft it. However, once we have a near-final version, I'll send it your way and ask you to review it for consistency with the economic analysis.
**3. Rebuttal Memorandum Integration**
The key points from your and Rohan's January 2024 rebuttal of Dr. Washburne's analysis should be woven into the presentation slides, particularly the critique of his CUT selection criteria, his discount rate assumptions (7.2% vs. 9.8%), and his projected revenue growth rates. Has any additional data or analysis emerged since you finalized the rebuttal that we should consider incorporating? If so, please flag it and we can discuss whether to include it in the presentation or hold it for a potential supplemental submission.
**4. Supplemental CUT Data**
Leonard anticipates that Appeals Officer Castañeda may request additional comparable data at or after the conference, in which case we may submit a supplemental written submission in early March. With that in mind, please let me know if there are any additional comparable license agreements or updated benchmarking data that have become available since the November 2022 CUT and CPM/TNMM reports. We'd like to have those in reserve in case we need to supplement.
**5. Timing and Deadlines**
We need finalized slides from Whitmore **no later than Friday, February 16, 2024**. This will give us approximately 12 days before the conference to integrate Whitmore's slides into the full presentation deck, conduct internal review with Leonard and the PPC team, and prepare talking points and anticipated Q&A.
Leonard has scheduled an internal preparation meeting for the C&H team and PPC for on or around February 15. It would be very helpful to have a near-final version of Whitmore's slides by then, even if minor refinements follow. I realize that's tight — if you foresee any difficulty with that timeline, please let me know as soon as possible so we can adjust.
As a reminder, the conference attendee list currently includes you, Leonard Cross, Catherine Hartwell, and me from C&H, along with James Whitfield and Margaret Staines from PPC. You should plan to present the economic analyses directly to Appeals Officer Castañeda. We'll discuss the presentation flow and your speaking role in more detail at the prep meeting or on a call beforehand.
Leonard will also be sharing the current draft of the full Appeals conference presentation deck separately, so you'll have context for how the Whitmore slides fit into the overall narrative.
**Next Steps**
I'm happy to jump on a call early next week — Monday or Tuesday — to walk through any questions you or Rohan have on the updated data or the slide requests. My direct line is (215) 884-3216. Please don't hesitate to reach out over the weekend if anything is urgent.
Thank you to both you and Rohan for your excellent work throughout this engagement. We're in a strong position heading into the conference, and the quality of Whitmore's analysis is a big part of that.
Best regards,
Garrett Simmons Lead Associate, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 T: (215) 884-3216 E: gsimmons@calderwoodharkness.com
Attachment: PPC_Appeals_Updated_Financial_Data_02102024.xlsx
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