[sheet: Cover]

Field	Value
Document Title	Summary of IRS Proposed Adjustments — All Tax Years (2017–2020)
Client	Penterra Pharmaceuticals Corp. (EIN: 22-3741856)
Nasdaq Ticker	PPCA
Client Headquarters	2200 Independence Boulevard, Princeton Junction, NJ 08550
Irish Subsidiary	Penterra Biopharma International DAC (Irish Tax Ref: 3218764T)
Intermediate Holding Co.	Penterra Holdings Luxembourg S.à r.l. (RCS No. B 168452)
Contract Manufacturer	Penterra Manufacturing Ireland Ltd. (CRO No. 512347)
Tax Years Under Examination	2017, 2018, 2019, 2020
IRS Exam Team ID	LB&I-NE-TP-2022-00641
Supervisory Revenue Agent	Gerald Meskill (Team Manager)
Lead Revenue Agent	Patricia Dunleavy
IRS Economist	Dr. Alan Washburne, IRS Transfer Pricing Practice
IRS Chief Counsel Attorney-Advisor	Franklin Rosario
IRS Senior Counsel	Donna Hirabayashi
NOPA Date	October 12, 2023
30-Day Letter Date	November 8, 2023
Examination Opened	May 16, 2022
Outside Counsel	Calderwood & Harkness LLP
C&H Matter Number	1018-00009
Responsible Partner	Leonard Cross
Billing Partner	Sylvia Hartwell
Lead Associate	Garrett Simmons
Working Associate	Leila Nazari
Economic Consultant	Whitmore Valuation Group LLC (Kovel Ref: 1018-00009-KV)

Lead Economist	Dr. Helena Vasquez
Original TP Documentation Preparer	Crestfield & Associates LLP (Susan Lam / Martin Ogilvy)
Prepared By	Garrett Simmons, Calderwood & Harkness LLP
Reviewed By	Leonard Cross / Sylvia Hartwell
Date Prepared	October 20, 2023
Classification	Attorney-Client Privileged / Work Product

[sheet: Adjustment Summary]

Adjustment Category	TY 2017 ($)	TY 2018 ($)	TY 2019 ($)	TY 2020 ($)	Total All Years ($)	% of Total Net Adjustment
CSA Cost-Sharing Ratio Adjustment	48,730,000	57,610,000	62,850,000	65,820,000	235,010,000	61.78%
Legacy IP Royalty Rate Adjustment	52,950,000	49,550,000	44,970,000	40,570,000	188,040,000	49.43%
Correlative Offset (Overlap Reduction)	-10,662,500	-10,662,500	-10,662,500	-10,662,500	-42,650,000	-11.21%
Net Proposed Adjustment	91,017,500	96,497,500	97,157,500	95,727,500	380,400,000	100.00%
Tax on Proposed Adjustment (21%)	19,113,675	20,264,475	20,403,075	20,102,775	79,884,000
Proposed IRC § 6662(e) Penalty (20% of tax)	3,822,735	4,052,895	4,080,615	4,020,555	15,976,800
Total Proposed Tax + Penalty	22,936,410	24,317,370	24,483,690	24,123,330	95,860,800
Federal Tax at Applicable Rate (35% TY2017, 21% TY2018–2020)	31,856,125	20,264,475	20,403,075	20,102,775	92,626,450
Note	TY 2017 at 35% pre-TCJA; NOPA penalty computed at 21% across all years
Memo: Adjustment as % of FY 2020 Pre-Tax Income ($1.47B)	25.88%

[sheet: CSA Cost-Sharing Detail]

Item	TY 2017	TY 2018	TY 2019	TY 2020
Total Qualified R&D Costs ($)	487,300,000	523,800,000	561,200,000	598,400,000
PBI Cost-Share % (PPC Position)	38.2%	39.6%	41.1%	42.7%
PBI Cost-Share Amount (PPC Position) ($)	186,148,600	207,424,800	230,653,200	255,517,600
PBI Cost-Share % (IRS Proposed)	48.2%	50.6%	52.3%	53.7%
PBI Cost-Share Amount (IRS Proposed) ($)	234,877,600	265,042,800	293,507,600	321,340,800
Increase in Cost-Share Percentage Points	+10.0pp	+11.0pp	+11.2pp	+11.0pp
CSA Adjustment (Additional Payments to PPC) ($)	48,730,000	57,610,000	62,850,000	65,820,000
Total CSA Adjustments (All Years)	235,010,000
IRS Basis for Adjustment	IRS asserts PPC's projections of reasonably anticipated benefits understate U.S.-source value; proposes increasing PBI's share by 8–12 percentage points
Regulatory Authority	Treas. Reg. § 1.482-7 (Qualified Cost-Sharing Arrangements)
CSA Effective Date	July 1, 2012
PCT Payment (2012)	$312,000,000 (lump-sum buy-in by PBI)
IRS Proposed PCT Value	$852,000,000 (IRS income method; WACC 7.2%)
C&H/Whitmore PCT Range	$278M–$361M (DCF at WACC 9.8%)
CPM/TNMM Comparables	22 comparable companies analyzed; PBI margins within IQR
Best Method Rule	Treas. Reg. § 1.482-1(d) — PPC asserts CUT/CPM corroboration supports return position

[sheet: Royalty Rate Detail]

Item	TY 2017	TY 2018	TY 2019	TY 2020
Legacy Compound Net Sales — Non-Americas ($)	814,600,000	762,300,000	691,800,000	624,100,000
PPC Royalty Rate	4.5%	4.5%	4.5%	4.5%
Royalty Paid (PPC Position) ($)	36,657,000	34,303,500	31,131,000	28,084,500
IRS Proposed Royalty Rate	11.0%	11.0%	11.0%	11.0%
Royalty at IRS Proposed Rate ($)	89,606,000	83,853,000	76,098,000	68,651,000
Rate Differential	6.5%	6.5%	6.5%	6.5%
Royalty Rate Adjustment ($)	52,949,000	49,549,500	44,967,000	40,566,500
Royalty Rate Adjustment (Rounded per NOPA) ($)	52,950,000	49,550,000	44,970,000	40,570,000
Total Royalty Adjustments (All Years)	188,040,000
IRS Basis for Adjustment	IRS selected CUT data from third-party pharmaceutical licensing agreements supporting 11.0% rate
PPC/Whitmore CUT Analysis	14 comparable uncontrolled pharmaceutical license agreements
Comparable Royalty IQR	3.1% – 6.8%
Comparable Royalty Median	4.4%
PPC Position	4.5% is within the arm's-length interquartile range per CUT analysis
Regulatory Authority	Treas. Reg. § 1.482-4 (Arm's-Length Consideration for Intangible Property)
IRS CUT Selection Critique	IRS comparables include exclusive worldwide licenses with different risk profiles; not sufficiently comparable

[sheet: Correlative Offset]

Item	TY 2017 ($)	TY 2018 ($)	TY 2019 ($)	TY 2020 ($)	Total ($)
Gross CSA Adjustment	48,730,000	57,610,000	62,850,000	65,820,000	235,010,000
Gross Royalty Adjustment	52,950,000	49,550,000	44,970,000	40,570,000	188,040,000
Gross Total (Before Offset)	101,680,000	107,160,000	107,820,000	106,390,000	423,050,000
Correlative Offset (Treas. Reg. § 1.482-1(g))	-10,662,500	-10,662,500	-10,662,500	-10,662,500	-42,650,000
Net Proposed Adjustment	91,017,500	96,497,500	97,157,500	95,727,500	380,400,000
Basis for Offset	IRS exam team allowed correlative offset under Treas. Reg. § 1.482-1(g) to prevent double-counting of income between CSA cost-sharing and royalty rate adjustments. Offset allocated evenly across years.
Offset as % of Gross	10.08%
Per-Year Offset Amount	10,662,500	10,662,500	10,662,500	10,662,500	42,650,000
Verification: Net = Gross − Offset	91,017,500	96,497,500	97,157,500	95,727,500	380,400,000

[sheet: Tax & Penalty Impact]

Item	TY 2017	TY 2018	TY 2019	TY 2020	Total
Net Proposed Adjustment ($)	91,017,500	96,497,500	97,157,500	95,727,500	380,400,000
Applicable Federal Corporate Tax Rate	35% (pre-TCJA)	21% (post-TCJA)	21%	21%
Note on TY 2017 Rate	TY 2017 subject to 35% rate for full year (TCJA effective Jan 1, 2018); IRS proposed adjustment computed at 35%
Federal Tax on Proposed Adjustment ($)	31,856,125	20,264,475	20,403,075	20,102,775	92,626,450
Tax at Blended 21% for Reference ($)	19,113,675	20,264,475	20,403,075	20,102,775	79,884,000

IRC § 6662(e) Penalty — Substantial Valuation Misstatement

Penalty Rate	20%	20%	20%	20%
Penalty on Tax (at 21% for all years, per IRS NOPA)	3,822,735	4,052,895	4,080,615	4,020,555	15,976,800
Note	IRS reserved but did not assert the 40% gross valuation misstatement penalty under IRC § 6662(h)
Total Proposed Tax (at 21% rate across all years)	79,884,000
Total Proposed Penalty (20% of tax)	15,976,800
Grand Total — Tax + Penalty	95,860,800
PPC FY 2020 Pre-Tax Income (context)	1,470,000,000
Net Adjustment as % of FY 2020 Pre-Tax Income	25.88%
PPC FY 2020 Revenue (context)	6,820,000,000
Net Adjustment as % of FY 2020 Revenue	5.58%
Interest on Underpayment (est.)	Accruing from original due dates; not yet computed

[sheet: Cover]
Field | Value
Document Title | Summary of IRS Proposed Adjustments — All Tax Years (2017–2020)
Client | Penterra Pharmaceuticals Corp. (EIN: 22-3741856)
Nasdaq Ticker | PPCA
Client Headquarters | 2200 Independence Boulevard, Princeton Junction, NJ 08550
Irish Subsidiary | Penterra Biopharma International DAC (Irish Tax Ref: 3218764T)
Intermediate Holding Co. | Penterra Holdings Luxembourg S.à r.l. (RCS No. B 168452)
Contract Manufacturer | Penterra Manufacturing Ireland Ltd. (CRO No. 512347)
Tax Years Under Examination | 2017, 2018, 2019, 2020
IRS Exam Team ID | LB&I-NE-TP-2022-00641
Supervisory Revenue Agent | Gerald Meskill (Team Manager)
Lead Revenue Agent | Patricia Dunleavy
IRS Economist | Dr. Alan Washburne, IRS Transfer Pricing Practice
IRS Chief Counsel Attorney-Advisor | Franklin Rosario
IRS Senior Counsel | Donna Hirabayashi
NOPA Date | October 12, 2023
30-Day Letter Date | November 8, 2023
Examination Opened | May 16, 2022
Outside Counsel | Calderwood & Harkness LLP
C&H Matter Number | 1018-00009
Responsible Partner | Leonard Cross
Billing Partner | Sylvia Hartwell
Lead Associate | Garrett Simmons
Working Associate | Leila Nazari
Economic Consultant | Whitmore Valuation Group LLC (Kovel Ref: 1018-00009-KV)
Lead Economist | Dr. Helena Vasquez
Original TP Documentation Preparer | Crestfield & Associates LLP (Susan Lam / Martin Ogilvy)
Prepared By | Garrett Simmons, Calderwood & Harkness LLP
Reviewed By | Leonard Cross / Sylvia Hartwell
Date Prepared | October 20, 2023
Classification | Attorney-Client Privileged / Work Product
[sheet: Adjustment Summary]
Adjustment Category | TY 2017 ($) | TY 2018 ($) | TY 2019 ($) | TY 2020 ($) | Total All Years ($) | % of Total Net Adjustment
CSA Cost-Sharing Ratio Adjustment | 48,730,000 | 57,610,000 | 62,850,000 | 65,820,000 | 235,010,000 | 61.78%
Legacy IP Royalty Rate Adjustment | 52,950,000 | 49,550,000 | 44,970,000 | 40,570,000 | 188,040,000 | 49.43%
Correlative Offset (Overlap Reduction) | -10,662,500 | -10,662,500 | -10,662,500 | -10,662,500 | -42,650,000 | -11.21%
Net Proposed Adjustment | 91,017,500 | 96,497,500 | 97,157,500 | 95,727,500 | 380,400,000 | 100.00%
Tax on Proposed Adjustment (21%) | 19,113,675 | 20,264,475 | 20,403,075 | 20,102,775 | 79,884,000
Proposed IRC § 6662(e) Penalty (20% of tax) | 3,822,735 | 4,052,895 | 4,080,615 | 4,020,555 | 15,976,800
Total Proposed Tax + Penalty | 22,936,410 | 24,317,370 | 24,483,690 | 24,123,330 | 95,860,800
Federal Tax at Applicable Rate (35% TY2017, 21% TY2018–2020) | 31,856,125 | 20,264,475 | 20,403,075 | 20,102,775 | 92,626,450
Note | TY 2017 at 35% pre-TCJA; NOPA penalty computed at 21% across all years
Memo: Adjustment as % of FY 2020 Pre-Tax Income ($1.47B) | 25.88%
[sheet: CSA Cost-Sharing Detail]
Item | TY 2017 | TY 2018 | TY 2019 | TY 2020
Total Qualified R&D Costs ($) | 487,300,000 | 523,800,000 | 561,200,000 | 598,400,000
PBI Cost-Share % (PPC Position) | 38.2% | 39.6% | 41.1% | 42.7%
PBI Cost-Share Amount (PPC Position) ($) | 186,148,600 | 207,424,800 | 230,653,200 | 255,517,600
PBI Cost-Share % (IRS Proposed) | 48.2% | 50.6% | 52.3% | 53.7%
PBI Cost-Share Amount (IRS Proposed) ($) | 234,877,600 | 265,042,800 | 293,507,600 | 321,340,800
Increase in Cost-Share Percentage Points | +10.0pp | +11.0pp | +11.2pp | +11.0pp
CSA Adjustment (Additional Payments to PPC) ($) | 48,730,000 | 57,610,000 | 62,850,000 | 65,820,000
Total CSA Adjustments (All Years) | 235,010,000
IRS Basis for Adjustment | IRS asserts PPC's projections of reasonably anticipated benefits understate U.S.-source value; proposes increasing PBI's share by 8–12 percentage points
Regulatory Authority | Treas. Reg. § 1.482-7 (Qualified Cost-Sharing Arrangements)
CSA Effective Date | July 1, 2012
PCT Payment (2012) | $312,000,000 (lump-sum buy-in by PBI)
IRS Proposed PCT Value | $852,000,000 (IRS income method; WACC 7.2%)
C&H/Whitmore PCT Range | $278M–$361M (DCF at WACC 9.8%)
CPM/TNMM Comparables | 22 comparable companies analyzed; PBI margins within IQR
Best Method Rule | Treas. Reg. § 1.482-1(d) — PPC asserts CUT/CPM corroboration supports return position
[sheet: Royalty Rate Detail]
Item | TY 2017 | TY 2018 | TY 2019 | TY 2020
Legacy Compound Net Sales — Non-Americas ($) | 814,600,000 | 762,300,000 | 691,800,000 | 624,100,000
PPC Royalty Rate | 4.5% | 4.5% | 4.5% | 4.5%
Royalty Paid (PPC Position) ($) | 36,657,000 | 34,303,500 | 31,131,000 | 28,084,500
IRS Proposed Royalty Rate | 11.0% | 11.0% | 11.0% | 11.0%
Royalty at IRS Proposed Rate ($) | 89,606,000 | 83,853,000 | 76,098,000 | 68,651,000
Rate Differential | 6.5% | 6.5% | 6.5% | 6.5%
Royalty Rate Adjustment ($) | 52,949,000 | 49,549,500 | 44,967,000 | 40,566,500
Royalty Rate Adjustment (Rounded per NOPA) ($) | 52,950,000 | 49,550,000 | 44,970,000 | 40,570,000
Total Royalty Adjustments (All Years) | 188,040,000
IRS Basis for Adjustment | IRS selected CUT data from third-party pharmaceutical licensing agreements supporting 11.0% rate
PPC/Whitmore CUT Analysis | 14 comparable uncontrolled pharmaceutical license agreements
Comparable Royalty IQR | 3.1% – 6.8%
Comparable Royalty Median | 4.4%
PPC Position | 4.5% is within the arm's-length interquartile range per CUT analysis
Regulatory Authority | Treas. Reg. § 1.482-4 (Arm's-Length Consideration for Intangible Property)
IRS CUT Selection Critique | IRS comparables include exclusive worldwide licenses with different risk profiles; not sufficiently comparable
[sheet: Correlative Offset]
Item | TY 2017 ($) | TY 2018 ($) | TY 2019 ($) | TY 2020 ($) | Total ($)
Gross CSA Adjustment | 48,730,000 | 57,610,000 | 62,850,000 | 65,820,000 | 235,010,000
Gross Royalty Adjustment | 52,950,000 | 49,550,000 | 44,970,000 | 40,570,000 | 188,040,000
Gross Total (Before Offset) | 101,680,000 | 107,160,000 | 107,820,000 | 106,390,000 | 423,050,000
Correlative Offset (Treas. Reg. § 1.482-1(g)) | -10,662,500 | -10,662,500 | -10,662,500 | -10,662,500 | -42,650,000
Net Proposed Adjustment | 91,017,500 | 96,497,500 | 97,157,500 | 95,727,500 | 380,400,000
Basis for Offset | IRS exam team allowed correlative offset under Treas. Reg. § 1.482-1(g) to prevent double-counting of income between CSA cost-sharing and royalty rate adjustments. Offset allocated evenly across years.
Offset as % of Gross | 10.08%
Per-Year Offset Amount | 10,662,500 | 10,662,500 | 10,662,500 | 10,662,500 | 42,650,000
Verification: Net = Gross − Offset | 91,017,500 | 96,497,500 | 97,157,500 | 95,727,500 | 380,400,000
[sheet: Tax & Penalty Impact]
Item | TY 2017 | TY 2018 | TY 2019 | TY 2020 | Total
Net Proposed Adjustment ($) | 91,017,500 | 96,497,500 | 97,157,500 | 95,727,500 | 380,400,000
Applicable Federal Corporate Tax Rate | 35% (pre-TCJA) | 21% (post-TCJA) | 21% | 21%
Note on TY 2017 Rate | TY 2017 subject to 35% rate for full year (TCJA effective Jan 1, 2018); IRS proposed adjustment computed at 35%
Federal Tax on Proposed Adjustment ($) | 31,856,125 | 20,264,475 | 20,403,075 | 20,102,775 | 92,626,450
Tax at Blended 21% for Reference ($) | 19,113,675 | 20,264,475 | 20,403,075 | 20,102,775 | 79,884,000
IRC § 6662(e) Penalty — Substantial Valuation Misstatement
Penalty Rate | 20% | 20% | 20% | 20%
Penalty on Tax (at 21% for all years, per IRS NOPA) | 3,822,735 | 4,052,895 | 4,080,615 | 4,020,555 | 15,976,800
Note | IRS reserved but did not assert the 40% gross valuation misstatement penalty under IRC § 6662(h)
Total Proposed Tax (at 21% rate across all years) | 79,884,000
Total Proposed Penalty (20% of tax) | 15,976,800
Grand Total — Tax + Penalty | 95,860,800
PPC FY 2020 Pre-Tax Income (context) | 1,470,000,000
Net Adjustment as % of FY 2020 Pre-Tax Income | 25.88%
PPC FY 2020 Revenue (context) | 6,820,000,000
Net Adjustment as % of FY 2020 Revenue | 5.58%
Interest on Underpayment (est.) | Accruing from original due dates; not yet computed

[sheet: Cover]

Record

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Dates

Amounts