PRIVILEGED AND CONFIDENTIAL Attorney-Client Privilege / Attorney Work Product
FUNCTIONAL ANALYSIS
PENTERRA BIOPHARMA INTERNATIONAL DAC
TAX YEARS 2017–2020
Prepared in Connection with IRS Examination of Penterra Pharmaceuticals Corp. — Tax Years 2017–2020
Prepared by: Calderwood & Harkness LLP in coordination with Whitmore Valuation Group LLC
October 2022
Matter Number: 1018-00009 IRS Exam Team ID: LB&I-NE-TP-2022-00641
PRIVILEGED AND CONFIDENTIAL — Attorney-Client Privilege / Attorney Work Product
AUTHORS
Leonard Cross Partner, Tax Department Calderwood & Harkness LLP 787 Seventh Avenue, New York, NY 10019
Garrett Simmons Associate, Tax Department Calderwood & Harkness LLP 787 Seventh Avenue, New York, NY 10019
Dr. Helena Vasquez Managing Director Whitmore Valuation Group LLC 200 Park Avenue, Suite 3100, New York, NY 10166
Dr. Rohan Chakrabarti Senior Director Whitmore Valuation Group LLC 200 Park Avenue, Suite 3100, New York, NY 10166
PRIVILEGED NATURE OF THIS DOCUMENT
This document has been prepared at the direction of counsel at Calderwood & Harkness LLP in connection with the Internal Revenue Service Large Business & International Division examination of Penterra Pharmaceuticals Corp. (EIN: 22-3741856) for tax years 2017, 2018, 2019, and 2020. Whitmore Valuation Group LLC has been engaged under a Kovel arrangement (Reference: 1018-00009-KV, executed June 20, 2022) pursuant to which Whitmore Valuation Group acts as a consultant to Calderwood & Harkness LLP and is subject to the attorney-client privilege and work product protections applicable to this engagement. This document constitutes attorney work product prepared in anticipation of litigation and is protected by the attorney-client privilege, the work product doctrine, and all other applicable protections. No waiver of any privilege or protection is intended or should be inferred by the preparation, transmittal, or use of this document.
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I. EXECUTIVE SUMMARY
A. Purpose of the Analysis
This Functional Analysis has been prepared to document, in comprehensive detail, the functions performed, assets used or employed, and risks assumed by Penterra Biopharma International DAC ("PBI") in connection with its role as the intellectual property-holding company and commercial principal for the non-Americas commercialization of products developed and marketed by the Penterra Pharmaceuticals Corp. ("PPC") group of companies during the tax years 2017, 2018, 2019, and 2020 (the "Examination Period"). The analysis has been prepared at the direction of Calderwood & Harkness LLP in response to, and in anticipation of, the positions taken by the Internal Revenue Service ("IRS") in its ongoing examination of PPC's federal income tax returns for the Examination Period.
The purpose of this analysis is to provide a thorough factual record of PBI's operational activities, governance, personnel, assets, and risk profile — organized according to the Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") framework articulated in the Organisation for Economic Co-operation and Development ("OECD") Transfer Pricing Guidelines and consistent with the functional analysis requirements of Treasury Regulation § 1.482-1(d)(3) — so as to establish the factual foundation for the arm's-length analysis of PPC's intercompany transfer pricing arrangements with PBI.
B. Context
PBI is a Designated Activity Company organized under the laws of Ireland, incorporated on March 15, 2012, and wholly owned (through Penterra Holdings Luxembourg S.à r.l., a disregarded entity for U.S. federal income tax purposes) by PPC, a Delaware corporation publicly traded on the Nasdaq Stock Market (ticker: PPCA). PBI participates in a qualified cost-sharing arrangement ("CSA") with PPC, effective July 1, 2012, pursuant to which PBI acquired the rights to develop and exploit PPC's pharmaceutical intellectual property portfolio outside the Americas. At the inception of the CSA, PBI made a platform contribution transaction ("PCT") payment of $312 million to PPC for the buy-in to pre-existing intellectual property. PBI also holds an exclusive license to certain legacy compounds (pre-2012 vintage, not covered by the CSA) for non-Americas exploitation under a separate royalty arrangement with PPC at a royalty rate of 4.5% of net sales.
On May 16, 2022, the IRS issued Letter 2205-A to PPC, opening an examination of PPC's federal income tax returns for tax years 2017 through 2020. The IRS examination is being conducted by the Large Business & International Division ("LB&I"), Northeast Territory, Transfer Pricing Practice Area (Exam Team ID: LB&I-NE-TP-2022-00641). The IRS has challenged the transfer pricing methodology governing the intercompany arrangements between PPC and PBI, asserting, among other things, that PBI lacked sufficient economic substance to justify its role as an IP owner and CSA participant and that key DEMPE functions were performed in the United States rather than in Ireland.
C. High-Level Conclusions
Based on the extensive factual investigation set forth in this Functional Analysis — including interviews with twelve key PBI employees conducted on-site in Dublin, Ireland, review of forty-two PBI board meeting minutes spanning the Examination Period, analysis of PBI's organizational records, financial statements, regulatory submission records, and intercompany agreements, and coordination with PBI's Irish tax advisors at Thornbury & Keogh — we have reached the following high-level conclusions:
1. PBI maintained substantial economic substance in Ireland throughout the Examination Period. PBI performed genuine, material functions related to each element of the DEMPE framework for the non-Americas territories. PBI was not a passive holding company, a conduit entity, or a "cash box." Rather, PBI operated as a fully functional commercial principal with an expanding operational infrastructure in Dublin, Ireland.
2. PBI controlled key commercial decisions and bore meaningful risks. PBI exercised independent decision-making authority over pricing in sixty-eight non-Americas country markets, market entry sequencing, distribution partner selection, regulatory submission strategies, and product lifecycle management. PBI's Managing Director, Aidan Naughton, and his specialized functional teams made and implemented these decisions from PBI's offices in Dublin without direction from PPC's U.S.-based management with respect to day-to-day commercial operations.
3. PBI employed a substantial and growing workforce of specialized professionals. PBI's headcount grew from fifty-two employees at its establishment in 2012 to one hundred eighty-five employees by year-end 2020. These employees include regulatory scientists, medical affairs professionals, commercial strategists, supply chain managers, finance and treasury staff, and legal and compliance personnel — all based in Dublin, Ireland, and compensated at market rates for the Dublin pharmaceutical labor market.
4. PBI maintained independent governance. PBI's board of directors held forty-two board meetings during the Examination Period, all conducted in Dublin, at which the board reviewed and approved pricing strategies, market entry decisions, regulatory budgets, capital expenditures, distribution partner agreements, financial statements, and CSA cost-sharing obligations. These meetings were not pro forma; they involved substantive deliberation and independent decision-making, as documented in the board minutes produced in response to IDR No. 9.
5. PBI invested materially in regulatory activities. PBI incurred cumulative regulatory expenditures of €47.2 million during the Examination Period, reflecting genuine investment in regulatory submissions, marketing authorization maintenance, pharmacovigilance, and post-approval commitments across EMEA and APAC jurisdictions. These expenditures created proprietary regulatory dossiers and intangible assets of PBI.
6. PBI generated substantial revenue from genuine commercial activities. PBI recorded revenue of €2.14 billion and pre-tax income of €1.06 billion in fiscal year 2020 alone, derived from the commercialization of PPC products in sixty-eight non-Americas country markets through PBI's independently managed commercial operations.
D. Relevance to Transfer Pricing Positions
The functional analysis set forth in this document supports the following transfer pricing positions taken by PPC on its federal income tax returns for the Examination Period:
• CSA Cost-Sharing Ratios. PBI's cost-sharing percentages under the CSA ranged from 38.2% in 2017 to 42.7% in 2020, reflecting PBI's proportionate share of reasonably anticipated benefits from cost-shared intangibles. The functional analysis demonstrates that PBI's share of CSA intangibles is consistent with PBI's substantive role as the non-Americas commercial principal, the genuine DEMPE functions PBI performs, and the risks PBI bears and controls.
• Legacy IP Royalty Rate. The 4.5% royalty rate on legacy compound net sales is consistent with PBI's role as an exclusive licensee performing material exploitation and maintenance functions for legacy products in the non-Americas territory, as demonstrated by the functional analysis.
• PBI's Entitlement to Residual Profits. PBI's entitlement to residual profits from non-Americas commercialization is supported by PBI's status as a substantive IP owner and commercial principal — not a mere conduit — as the functional analysis comprehensively demonstrates.
The functional analysis provides the factual foundation for the arm's-length economic analyses being conducted by Whitmore Valuation Group LLC under the Kovel arrangement, including the CUT analysis of the legacy royalty rate, the CPM/TNMM analysis of PBI's operating margins, and the PCT valuation analysis of the buy-in payment.
II. SCOPE AND METHODOLOGY
A. Scope of the Analysis
This Functional Analysis covers the tax years 2017, 2018, 2019, and 2020 — the four tax years that are the subject of the IRS examination opened on May 16, 2022 (Letter 2205-A). Where relevant to provide context for PBI's functions, assets, and risks during the Examination Period, this analysis also references events and arrangements from prior periods, including the inception of the CSA on July 1, 2012, and the establishment of PBI in March 2012.
The primary entity examined in this analysis is Penterra Biopharma International DAC ("PBI"), an Irish Designated Activity Company. The analysis also addresses PBI's interactions with the following related entities, to the extent relevant to PBI's functional profile:
• Penterra Pharmaceuticals Corp. ("PPC"): The U.S. parent corporation, organized in Delaware, and PBI's counterparty under the CSA and the legacy IP license agreement.
• Penterra Holdings Luxembourg S.à r.l. ("PHL"): An intermediate holding company organized in Luxembourg (14, rue Aldringen, L-1118 Luxembourg; Luxembourg RCS Number B 168452), which holds 100% of PBI's shares. PHL is treated as a disregarded entity for U.S. federal income tax purposes. PHL does not perform substantive operational functions and is not the focus of this analysis.
• Penterra Manufacturing Ireland Ltd. ("PMI"): An Irish company (Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland; Irish CRO Number 512347) that serves as a contract manufacturer for PBI under a cost-plus arrangement. PMI's role as a routine contract manufacturer is addressed to the extent it bears on PBI's supply chain management functions.
The analysis encompasses all functions performed, assets used or employed, and risks assumed by PBI in connection with its role as: (i) a participant in the CSA with PPC; (ii) a licensee of certain legacy IP under the royalty arrangement with PPC; and (iii) the non-Americas commercial principal for the PPC group's pharmaceutical products.
B. Methodology and Information Sources
1. Regulatory Framework
This Functional Analysis has been conducted in accordance with the following regulatory and interpretive authorities:
• Internal Revenue Code § 482, which authorizes the Secretary of the Treasury to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among organizations, trades, or businesses owned or controlled by the same interests, to the extent necessary to prevent evasion of taxes or clearly to reflect the income of any such organization, trade, or business.
• Treasury Regulation § 1.482-1(d)(3), which requires a functional analysis as part of the arm's-length determination. The regulation provides that a functional analysis identifies and compares the economically significant activities performed by the controlled taxpayer and the uncontrolled comparables, including the functions performed, the assets used, and the risks assumed, to assess the degree of comparability.
• Treasury Regulation § 1.482-4, which provides rules for the determination of arm's-length consideration for controlled transfers of intangible property, including the identification of intangible property, the methods for determining arm's-length royalties, and the factors relevant to comparability in intangible property transactions.
• Treasury Regulation § 1.482-7, which provides rules for qualified cost-sharing arrangements, including the determination of cost-sharing payments, the identification of intangible development costs, the methods for valuing platform contribution transactions, and the requirement that each controlled participant's share of intangible development costs be proportional to its share of reasonably anticipated benefits.
• OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2017 and 2022 revisions), particularly Chapter I (The Arm's Length Principle), Chapter VI (Special Considerations for Intangibles), and Chapter VIII (Cost Contribution Arrangements). While the OECD Guidelines are not binding authority for U.S. federal income tax purposes, they are referenced as persuasive authority and as a framework for organizing the functional analysis, consistent with the approach taken by the Tax Court in numerous transfer pricing cases and by the IRS in its own transfer pricing examination practices.
2. Information Sources
The factual conclusions set forth in this analysis are based on the following sources of information, which were gathered, reviewed, and analyzed by Calderwood & Harkness LLP and Whitmore Valuation Group LLC during the period from June through October 2022:
a. Employee Interviews. Garrett Simmons (Associate, Calderwood & Harkness LLP) and Leila Nazari (Senior Manager, Whitmore Valuation Group LLC) conducted in-person interviews with twelve key PBI employees at PBI's offices at Sandyford Business Park, Dublin, Ireland, during August and September 2022. The interviews were conducted pursuant to the Kovel arrangement and are protected by the attorney-client privilege and work product doctrine. The interviews covered each employee's role, responsibilities, decision-making authority, interactions with PPC U.S. management, and functional contributions to PBI's commercial operations. Summaries of these interviews are provided in a separate companion document (PBI Personnel Interview Summaries, October 2022).
b. PBI Board Minutes. The complete set of board minutes for all forty-two meetings of PBI's board of directors held during the Examination Period (2017–2020) was reviewed in detail. These minutes document the substantive governance activities of PBI's board, including pricing decisions, market entry approvals, regulatory strategy reviews, capital expenditure approvals, distribution partner selections, financial oversight, and CSA participation reviews. Board minutes were produced to the IRS in response to IDR No. 9.
c. PBI Organizational Charts and Job Descriptions. Current and historical organizational charts for PBI, together with job descriptions for key positions, were reviewed to map PBI's departmental structure, reporting lines, and the scope of responsibilities assigned to PBI personnel. These documents were produced in response to IDR No. 1.
d. PBI Financial Statements. PBI's audited financial statements for fiscal years 2017 through 2020, prepared in accordance with Irish Generally Accepted Accounting Principles ("Irish GAAP") and audited by an independent Irish audit firm, were reviewed. These financial statements document PBI's revenue, operating expenses, pre-tax income, assets, liabilities, and equity for each year of the Examination Period. Financial statements were produced in response to IDR No. 7.
e. PBI Regulatory Submission Records and Capital Expenditure Data. Records of PBI's regulatory submissions to the European Medicines Agency ("EMA"), national regulatory authorities in EMEA and APAC jurisdictions, and related regulatory expenditures were reviewed. PBI's capital expenditure records, including investments in IT systems, office infrastructure, and regulatory projects, were also examined. These documents were produced in response to IDR Nos. 15 and 44, respectively.
f. Intercompany Agreements. The following intercompany agreements were reviewed in their entirety, including all amendments and supplements:
(i) Cost-Sharing Arrangement between PPC and PBI (effective July 1, 2012), together with all amendments thereto (produced in response to IDR No. 2);
(ii) Legacy IP License Agreement between PPC and PBI (4.5% royalty rate on non-Americas net sales of legacy compounds) (produced in response to IDR No. 3);
(iii) Contract Manufacturing Agreement between PBI and PMI (cost plus 8%) (produced in response to IDR No. 10);
(iv) Third-party distribution and supply agreements executed by PBI (produced in response to IDR No. 18).
g. PBI Banking Records. Records of PBI's banking relationship with Glenmore Bank Ireland plc, including account statements, treasury operation records, intercompany settlement records, and foreign exchange management documentation, were reviewed. These records were produced in response to IDR No. 22.
h. PBI Lease Agreements and Office Documentation. PBI's lease agreement for office space at Sandyford Business Park, Dublin, and related documentation of PBI's physical presence, were reviewed. These documents were produced in response to IDR No. 12.
i. IDR Responses. The analysis draws upon PPC's and PBI's responses to Information Document Requests ("IDRs") issued by the IRS examination team, including IDR Nos. 1 through 12, 15, 18, 22, 30, 35, 40, 44, and others as specifically referenced herein.
j. PPC Transfer Pricing Documentation. PPC's contemporaneous transfer pricing documentation for the Examination Period, prepared by Crestfield & Associates LLP (Susan Lam, Transfer Pricing Partner), was reviewed and is incorporated by reference to the extent relevant to this Functional Analysis.
k. Irish Tax Advisor Coordination. This analysis has been prepared in coordination with Thornbury & Keogh, Chartered Tax Advisors, 22 Fitzwilliam Square, Dublin 2, D02 YH68, Ireland (Lead Partner: Ciarán Thornbury), PBI's Irish tax advisors. Thornbury & Keogh provided information regarding PBI's Irish tax filings, Knowledge Development box ("KDB") claims, and Irish Revenue interactions relevant to the Examination Period.
C. DEMPE Framework
The analysis of PBI's functions is organized according to the DEMPE framework: Development, Enhancement, Maintenance, Protection, and Exploitation of intangible property. The DEMPE framework is drawn from the OECD Transfer Pricing Guidelines, Chapter VI (Special Considerations for Intangibles), particularly paragraphs 6.32 through 6.71 of the 2017 edition, and is consistent with the functional analysis principles of Chapter I and the cost contribution arrangement rules of Chapter VIII.
The DEMPE framework is particularly relevant to the present examination because the IRS has challenged PBI's entitlement to returns from intangible property on the ground that PBI did not perform sufficient DEMPE functions. Under the OECD Guidelines, legal ownership of intangible property alone is not sufficient to entitle an entity to the returns from that property; rather, the entity must perform and control economically significant functions in relation to the development, enhancement, maintenance, protection, and exploitation of the intangibles, assume and control the associated risks, and have the financial capacity to bear those risks. See OECD Guidelines, ¶¶ 6.32, 6.42, 6.47–6.54.
Similarly, under the U.S. cost-sharing regulations (Treas. Reg. § 1.482-7), a controlled participant in a CSA must bear its share of intangible development costs proportionate to its share of reasonably anticipated benefits, and the allocation of income from cost-shared intangibles depends on the functions performed, risks assumed, and assets employed by each participant.
This Functional Analysis uses the DEMPE framework to demonstrate that PBI performs substantive activities in each of the five DEMPE categories, exercises control over the risks it assumes, and has the financial capacity to bear those risks — thereby establishing PBI's entitlement to the income attributable to its share of intangible property under the CSA and the legacy IP license.
III. BACKGROUND — PBI AND THE PPC GROUP STRUCTURE
A. PPC Group Overview
Penterra Pharmaceuticals Corp. ("PPC") is a corporation organized under the laws of the State of Delaware and publicly traded on the Nasdaq Stock Market under the ticker symbol "PPCA." PPC's principal executive offices are located at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550.
PPC operates in the specialty pharmaceutical and biotechnology industry, with a strategic focus on three therapeutic areas: oncology, immunology, and rare-disease therapeutics. PPC's product portfolio includes both approved and marketed products and a pipeline of clinical-stage development compounds in various phases of clinical trials.
As of fiscal year 2020, PPC reported the following key financial and operational metrics:
• Annual Revenue: $6.82 billion
• Pre-Tax Income: $1.47 billion
• Global Employees: Approximately 14,500
PPC's global operations span research and development, manufacturing, regulatory affairs, and commercialization across the Americas, Europe, the Middle East, Africa ("EMEA"), and the Asia-Pacific region ("APAC").
PPC's key management during the Examination Period included:
• Catherine Falk — Chief Executive Officer
• Rajesh Iyer — Chief Financial Officer
• Deborah Staines — General Counsel
• Marcus Whitfield — Vice President, Global Tax
PPC is the ultimate parent entity of the PPC group and, through the intermediate holding company structure described below, is the indirect owner of PBI and the other international subsidiaries at issue in this examination.
B. Corporate Structure Relevant to PBI
The corporate ownership structure relevant to PBI during the Examination Period is as follows:
Penterra Pharmaceuticals Corp. (Delaware) 100% ownership of:
Penterra Holdings Luxembourg S.à r.l. ("PHL") 14, rue Aldringen, L-1118 Luxembourg Luxembourg RCS Number: B 168452 Treated as a disregarded entity for U.S. federal income tax purposes 100% ownership of:
Penterra Biopharma International DAC ("PBI") 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland The primary subject of this Functional Analysis
PHL is a Luxembourg société à responsabilité limitée that serves as an intermediate holding company in the PPC group structure. PHL is treated as a disregarded entity for U.S. federal income tax purposes; accordingly, PBI's income is treated as income of PPC for purposes of IRC § 482 and the transfer pricing analysis. PHL does not perform substantive operational or commercial functions and is not the focus of this Functional Analysis.
PBI also engages Penterra Manufacturing Ireland Ltd. ("PMI") as a contract manufacturer. PMI is an Irish company (Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland; Irish CRO Number 512347) that manufactures PPC's oncology and immunology biologics for non-Americas markets under a cost-plus arrangement at cost plus 8%. PMI employs approximately 620 people at its manufacturing facility in Ringaskiddy, County Cork. PMI is compensated on a cost-plus basis and does not bear entrepreneurial risk in connection with its manufacturing activities; it functions as a routine contract manufacturer within the PPC group. The relationship between PBI and PMI is addressed in this analysis to the extent it bears on PBI's supply chain management and DEMPE functions.
C. PBI Entity Profile
The following summarizes the key identifying information for PBI:
PBI was incorporated on March 15, 2012, in anticipation of the CSA that became effective on July 1, 2012. Since its incorporation, PBI has operated as the non-Americas commercial principal for the PPC group, responsible for the commercialization of PPC's pharmaceutical products outside the Americas. PBI has grown significantly since its establishment, expanding its workforce, operational capabilities, and revenue base as described throughout this analysis.
D. Key Products Commercialized by PBI
PBI commercializes the following key product lines in the non-Americas territory:
1. Veritaxol (Oncology)
Veritaxol is PPC's blockbuster oncology product and the largest revenue-generating product in the PPC group's portfolio. Veritaxol is a targeted therapy approved for the treatment of certain advanced solid tumors. In fiscal year 2020, Veritaxol generated global net sales of $3.12 billion, of which $1.34 billion (approximately 43% of global net sales) was attributable to non-Americas markets within PBI's territory. Veritaxol is commercialized by PBI across major EMEA and APAC markets, including the European Union, the United Kingdom, Japan, Australia, and numerous other jurisdictions.
2. Imvara (Immunology)
Imvara is PPC's leading immunology product, approved for the treatment of certain autoimmune and inflammatory conditions. In fiscal year 2020, Imvara generated global net sales of $1.87 billion, of which $0.79 billion (approximately 42% of global net sales) was attributable to non-Americas markets. Imvara's non-Americas commercialization is managed entirely by PBI, including pricing, market access, and distribution partner management.
3. Cerulon (Rare Disease)
Cerulon is a rare-disease therapeutic approved for the treatment of a specific lysosomal storage disorder. In fiscal year 2020, Cerulon generated global net sales of $0.62 billion, of which $0.28 billion (approximately 45% of global net sales) was attributable to non-Americas markets. Cerulon's non-Americas commercialization presents unique challenges related to small patient populations, specialized distribution, and orphan drug regulatory frameworks, all of which are managed by PBI.
4. Legacy Compounds
In addition to the products developed under the CSA, PBI holds an exclusive license to certain legacy compounds (pre-2012 vintage, not covered by the CSA) for non-Americas exploitation under a separate royalty arrangement with PPC. Legacy compound non-Americas net sales have declined gradually over the Examination Period as these products mature, from $814.6 million in 2017 to $624.1 million in 2020.
E. Intercompany Arrangements
1. Cost-Sharing Arrangement (CSA)
Effective July 1, 2012, PPC and PBI entered into a qualified cost-sharing arrangement (the "CSA") pursuant to Treas. Reg. § 1.482-7. Under the CSA, PBI acquired the right to develop and exploit PPC's pharmaceutical intellectual property portfolio outside the Americas (defined in the CSA as North America, Central America, South America, and the Caribbean). The Americas territory is retained by PPC.
At the inception of the CSA, PBI made a platform contribution transaction ("PCT") payment of $312 million to PPC, representing PBI's buy-in to pre-existing intellectual property — primarily clinical-stage and approved oncology compounds, including the foundational Veritaxol program — that had been developed by PPC prior to the effective date of the CSA. The PCT payment was determined using a discounted cash flow ("DCF") methodology, as documented in PPC's contemporaneous transfer pricing documentation and the separate PCT Valuation Analysis being prepared by Whitmore Valuation Group LLC.
Following the PCT payment, PBI makes ongoing cost-sharing payments proportional to its share of reasonably anticipated benefits ("RAB") from the intangible development activities funded under the CSA. PBI's cost-sharing percentages and annual contributions during the Examination Period were as follows:
The increase in PBI's cost-sharing percentage over the Examination Period reflects the increasing share of reasonably anticipated benefits attributable to PBI's non-Americas territory, driven by growing non-Americas revenue as a proportion of global revenue, new market entries, and the expanding non-Americas commercial infrastructure managed by PBI.
2. Legacy IP License Agreement
PBI licenses certain legacy compounds from PPC under a separate license agreement (the "Legacy IP License Agreement"). The legacy compounds are pre-2012 vintage products that were not included in the CSA but for which PBI was granted an exclusive license to exploit in the non-Americas territory. The royalty rate under the Legacy IP License Agreement is 4.5% of net sales of legacy compounds in the non-Americas territory.
Legacy compound non-Americas net sales and royalty payments during the Examination Period were as follows:
The declining trend in legacy compound net sales reflects the natural lifecycle decline of mature products, including generic competition in certain markets and the loss of exclusivity in others. The arm's-length nature of the 4.5% royalty rate is being analyzed by Whitmore Valuation Group LLC through a comparable uncontrolled transaction ("CUT") analysis, which is the subject of a separate companion report.
3. Contract Manufacturing Agreement (PBI–PMI)
PBI engages PMI as a contract manufacturer for the production of PPC's oncology and immunology biologics for non-Americas markets. Under the contract manufacturing agreement, PMI is compensated on a cost-plus basis at cost plus 8%. PMI does not own intellectual property related to the products it manufactures and does not bear entrepreneurial risk in connection with its manufacturing activities. PMI employs approximately 620 people at its manufacturing facility at Ringaskiddy Industrial Estate, County Cork, Ireland, and operates under PBI's quality agreements and product specifications.
The cost-plus-8% compensation reflects PMI's role as a routine contract manufacturer, consistent with the benchmarking analysis in PPC's contemporaneous transfer pricing documentation. PBI manages the relationship with PMI, including production scheduling, quality oversight, and supply planning, as part of PBI's supply chain management functions described in Section IV below.
IV. PBI'S FUNCTIONS — DETAILED ANALYSIS
A. Overview of PBI's Functional Profile
PBI operates as the non-Americas commercial principal within the PPC group. This role encompasses far more than passive IP ownership or the mechanical receipt of royalty income. PBI is an active, fully operational business enterprise that performs substantive activities across all five categories of the DEMPE framework: Development, Enhancement, Maintenance, Protection, and Exploitation of intangible property.
It is essential to understand at the outset that PBI's role has expanded significantly since its establishment in 2012. At inception, PBI began with a core team of fifty-two employees focused on establishing the operational infrastructure necessary to serve as the non-Americas commercial principal. By year-end 2020, PBI's workforce had grown to one hundred eighty-five employees — a more than threefold increase — reflecting the genuine expansion of PBI's operational capabilities, the increasing complexity and scope of PBI's non-Americas commercial operations, and the growth in PBI's revenue base.
During the Examination Period, PBI recorded the following key financial metrics, reflecting its status as a substantial, profit-earning commercial enterprise:
These financial results were generated through PBI's independent commercial activities in sixty-eight non-Americas country markets, managed by PBI's Dublin-based teams with independent decision-making authority.
The following subsections provide a detailed analysis of PBI's functions, organized according to the DEMPE framework.
B. Development Functions
1. R&D Cost-Sharing Contributions
PBI is a co-funder of the PPC group's research and development activities under the CSA. During the Examination Period, PBI's cost-sharing contributions ranged from $186.15 million (2017) to $255.52 million (2020), representing 38.2% to 42.7% of total qualified R&D costs under the CSA. These contributions are not merely passive payments or mechanical funding obligations. Rather, PBI's cost-sharing contributions are governed by PBI's own assessment of reasonably anticipated benefits and are informed by PBI's commercial strategy for non-Americas markets.
PBI's senior management actively participates in the annual RAB determination process, evaluating the projected commercial potential of cost-shared intangibles in PBI's sixty-eight non-Americas country markets. This evaluation involves PBI's commercial strategy team analyzing market size, regulatory feasibility, competitive dynamics, pricing and reimbursement environments, and expected launch timelines for each non-Americas market. The RAB projections prepared by PBI's team are not simply derived from PPC's global projections; they incorporate PBI's independent market intelligence and commercial judgment regarding the non-Americas territory.
PBI's board of directors reviews and approves PBI's CSA cost-sharing obligations at board meetings, as documented in the board minutes produced in response to IDR No. 9. The board's review includes an assessment of whether the projected benefits to PBI from cost-shared intangibles continue to justify PBI's level of cost-sharing participation.
2. Clinical Development Oversight (Non-Americas)
PBI personnel participate in the design and execution of clinical development programs to the extent those programs relate to non-Americas regulatory submissions and market requirements. While PPC's U.S.-based R&D organization conducts the primary research and clinical trials for new compounds and new indications, PBI's regulatory affairs team contributes to the clinical development process in several important ways:
Regulatory strategy for non-Americas submissions. PBI's regulatory affairs team identifies the specific regulatory requirements of EMEA and APAC jurisdictions, including any additional clinical data, pharmacokinetic studies, or local clinical trials that may be required by non-Americas regulatory agencies. For example, certain APAC jurisdictions require bridging studies to establish the safety and efficacy of products in local patient populations, and PBI's regulatory team is responsible for designing, commissioning, and overseeing these bridging studies.
Interaction with EMEA and APAC regulatory agencies. PBI's regulatory affairs team manages PBI's direct interactions with the European Medicines Agency ("EMA"), national competent authorities within the EU, the Medicines and Healthcare Products Regulatory Agency ("MHRA") in the United Kingdom, the Pharmaceuticals and Medical Devices Agency ("PMDA") in Japan, the Therapeutic Goods Administration ("TGA") in Australia, and numerous other national regulatory authorities across EMEA and APAC. These interactions include pre-submission meetings, responses to regulatory queries, participation in scientific advisory group proceedings, and management of regulatory timelines.
Input into global clinical trial design. PBI's regulatory team provides input to PPC's global clinical development organization regarding the design of pivotal clinical trials, with a view to ensuring that trial protocols, endpoints, and patient populations will support regulatory submissions in non-Americas jurisdictions. This input is particularly important for products intended for simultaneous or sequential global regulatory submissions, where differences in regulatory requirements across jurisdictions must be addressed during trial design rather than retrospectively.
3. Local Adaptation and Formulation
PBI oversees formulation adaptations, packaging modifications, and labeling requirements that are specific to non-Americas jurisdictions. These activities include:
• Adapting product labeling and packaging to comply with the regulatory requirements of individual EMEA and APAC markets, including translations, local regulatory text, and country-specific patient information leaflets.
• Coordinating with PMI (contract manufacturer) on manufacturing changes required to produce product configurations (e.g., dosage forms, pack sizes, serialization formats) specific to non-Americas markets.
• Managing the regulatory approval process for formulation variations and post-approval manufacturing changes in non-Americas jurisdictions, including the filing of Type IA, Type IB, and Type II variations with the EMA and national authorities.
These activities are managed by PBI's regulatory affairs and supply chain teams in Dublin and represent genuine Development functions that contribute to the value of the intangible property in the non-Americas territory.
C. Enhancement Functions
1. Product Lifecycle Management
PBI manages the product lifecycle strategy for Veritaxol, Imvara, Cerulon, and legacy products in the non-Americas territory. Product lifecycle management is a critical Enhancement function that involves strategic decisions about how to maximize the commercial value of products over their life cycle, including:
Line extensions. PBI evaluates and, where appropriate, pursues line extensions — new formulations, dosage forms, or delivery mechanisms — that can extend the commercial life and competitive position of products in non-Americas markets. Line extension decisions are driven by PBI's assessment of market demand, competitive threats (including biosimilar or generic competition), and regulatory feasibility in EMEA and APAC jurisdictions.
New indications. PBI collaborates with PPC's R&D organization on the clinical development of new indications for existing products, with PBI providing input on the commercial potential of new indications in non-Americas markets and managing the regulatory submission process for indication expansions in non-Americas jurisdictions. The decision to pursue regulatory approval for a new indication in a specific non-Americas market is made by PBI based on its commercial analysis, not by PPC.
Formulation improvements. PBI identifies opportunities for formulation improvements that can enhance the patient experience, improve compliance, or differentiate products from competitors in non-Americas markets, and coordinates with PMI and PPC's manufacturing sciences team to develop and implement such improvements.
2. Market Development
PBI's commercial strategy team, based in Dublin, identifies and develops new market opportunities across PBI's sixty-eight country markets. Market development activities constitute a significant Enhancement function, as they directly increase the value and commercial reach of the intangible property in the non-Americas territory. PBI's market development activities include:
Market potential evaluation. PBI's commercial strategy team conducts independent assessments of market potential for each product in each non-Americas country market, taking into account epidemiological data, healthcare infrastructure, competitive landscape, pricing and reimbursement environment, and regulatory pathways. These assessments inform PBI's decisions regarding market entry prioritization, resource allocation, and commercial launch planning.
Competitive landscape analysis. PBI monitors and analyzes the competitive landscape in each of its sixty-eight markets, including the entry of generic, biosimilar, and competing branded products, and adjusts its commercial strategies accordingly. This analysis is conducted independently by PBI's Dublin-based team and is not directed by PPC's U.S. management.
Reimbursement and market access strategy. PBI develops and executes reimbursement and market access strategies for each non-Americas market, including negotiations with national health authorities, payers, and health technology assessment ("HTA") bodies. In many EMEA and APAC markets, the ability to obtain favorable reimbursement and pricing is a critical determinant of commercial success, and PBI's market access team has developed specialized expertise in navigating these processes.
3. Medical Affairs Programs
PBI funds and directs medical affairs activities in EMEA and APAC markets. Medical affairs functions enhance the value of intangible property by deepening the clinical understanding of products, building relationships with key opinion leaders ("KOLs"), and generating real-world evidence that supports ongoing commercialization. PBI's medical affairs activities include:
Medical science liaison ("MSL") programs. PBI employs and manages MSLs who interact with healthcare professionals in key non-Americas markets, providing scientific and medical information about PBI's products, responding to unsolicited medical inquiries, and facilitating clinical collaborations.
Key opinion leader ("KOL") engagement. PBI identifies, cultivates, and manages relationships with KOLs in non-Americas markets. KOL engagement is directed by PBI's medical affairs team in Dublin and involves scientific exchanges, advisory boards, and speaker programs that support the clinical and commercial positioning of PBI's products.
Post-marketing studies. PBI sponsors and oversees post-marketing studies, including observational studies, registries, and Phase IV clinical trials, in non-Americas markets. These studies generate real-world evidence that enhances the product profile, supports regulatory maintenance (including satisfaction of post-approval commitments imposed by regulatory authorities), and contributes to market access and reimbursement negotiations.
D. Maintenance Functions
1. Quality Assurance and Pharmacovigilance
PBI maintains a dedicated pharmacovigilance team responsible for adverse event reporting and safety monitoring in all non-Americas markets. Pharmacovigilance is a critical Maintenance function, as the continuous monitoring and reporting of product safety data is essential to maintaining marketing authorizations and ensuring the ongoing commercial viability of products. PBI's pharmacovigilance activities include:
• Collection, processing, and reporting of individual case safety reports ("ICSRs") from non-Americas markets in accordance with applicable regulatory requirements, including EU pharmacovigilance legislation (Directive 2001/83/EC, as amended, and Regulation (EC) No 726/2004).
• Preparation and submission of periodic safety update reports ("PSURs") to the EMA and national competent authorities.
• Signal detection and risk management, including the preparation and maintenance of risk management plans ("RMPs") for products marketed in non-Americas jurisdictions.
• Management of quality agreements with PMI and other contract manufacturers, including oversight of manufacturing quality, batch release, and compliance with Good Manufacturing Practice ("GMP") standards.
PBI's pharmacovigilance team operates independently from PPC's U.S. pharmacovigilance organization, maintaining its own databases, reporting systems, and regulatory contacts in EMEA and APAC jurisdictions. While PBI and PPC share safety data as required for global pharmacovigilance purposes, PBI bears independent responsibility for regulatory compliance in the non-Americas territory.
2. Product Supply Continuity
PBI manages the supply chain logistics for the non-Americas territory, ensuring the uninterrupted availability of products to patients and healthcare providers across sixty-eight country markets. This is a critical Maintenance function, as supply disruptions can result in loss of market share, regulatory sanctions, and damage to the commercial intangibles (customer relationships, market position) that PBI has developed.
PBI's supply chain management activities include:
• Coordination with PMI (contract manufacturer) on production planning, scheduling, and inventory management for non-Americas markets.
• Management of relationships with third-party logistics providers, cold-chain specialists, and warehousing partners in EMEA and APAC markets.
• Demand forecasting and inventory optimization for sixty-eight country markets, taking into account regional demand patterns, tender cycles, regulatory requirements (e.g., country-specific serialization and traceability requirements), and supply lead times.
• Contingency planning for supply disruptions, including alternative sourcing strategies and safety stock management.
3. Regulatory Maintenance
PBI handles ongoing regulatory compliance across all non-Americas jurisdictions where it holds marketing authorizations. Regulatory maintenance is a continuous, resource-intensive function that is essential to preserving the commercial value of products and the regulatory intangibles held by PBI. PBI's regulatory maintenance activities include:
• Filing regulatory variations (Type IA, Type IB, and Type II) with the EMA and national authorities to reflect manufacturing changes, labeling updates, and product modifications.
• Submission of periodic safety update reports ("PSURs") and responses to regulatory inquiries.
• Management of post-approval commitments, including completion of post-marketing studies and submission of follow-up data required by regulatory authorities as conditions of marketing authorization.
• Renewal of marketing authorizations in jurisdictions where periodic renewal is required.
• Monitoring of regulatory developments in EMEA and APAC jurisdictions that may affect PBI's products, including changes to reference pricing regulations, HTA requirements, and pharmacovigilance legislation.
E. Protection Functions
1. Intellectual Property Protection
PBI manages IP protection activities in the non-Americas territory. While PPC's global IP team manages the overall IP portfolio at the global level, PBI takes responsibility for the prosecution, maintenance, and enforcement of IP rights specific to non-Americas jurisdictions. PBI's IP protection activities include:
• Coordinating with PPC's global IP team and outside patent counsel on the prosecution and maintenance of patent applications and granted patents in EMEA and APAC jurisdictions, including European Patent Office ("EPO") filings, national-phase entries, and patent term extensions.
• Managing trademark registration and maintenance for PPC product trademarks in non-Americas jurisdictions.
• Initiating and managing IP enforcement actions in non-Americas jurisdictions, including patent infringement proceedings, trademark oppositions, and customs recordals to prevent the importation of infringing products.
• Monitoring third-party patent and trademark filings in non-Americas jurisdictions for potential conflicts with PBI's IP rights.
2. Regulatory Exclusivity
PBI actively manages regulatory exclusivity periods in EMEA and APAC jurisdictions. Regulatory exclusivity is a form of intangible property that protects products from generic or biosimilar competition for defined periods, and its active management is a critical Protection function. PBI's regulatory exclusivity activities include:
• Monitoring and enforcing data exclusivity and market exclusivity periods under EU pharmaceutical legislation (eight years of data exclusivity plus two years of market exclusivity, with an additional one-year extension for new indications under certain conditions).
• Applying for and managing supplementary protection certificates ("SPCs") in EU member states, which extend patent protection for pharmaceutical products for up to five years (with a potential additional six-month pediatric extension) beyond the expiry of the basic patent.
• Applying for and managing orphan drug designations in EMEA and APAC jurisdictions (including the ten-year market exclusivity period available under EU orphan drug regulation for Cerulon), and monitoring the conditions for maintaining orphan drug status.
3. Anti-Counterfeiting and Brand Protection
PBI coordinates anti-counterfeiting and brand protection efforts in the non-Americas territory. These activities are particularly important given the global prevalence of counterfeit pharmaceuticals and the regulatory requirements for product authentication in key markets. PBI's anti-counterfeiting activities include:
• Compliance with the EU Falsified Medicines Directive ("FMD"), including implementation and management of serialization and verification systems for products distributed in EU member states.