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PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT

NOTES — IRS MID-EXAMINATION CONFERENCE

Date of Conference: May 25, 2023

1. ATTENDEES

1.1 IRS Examination Team

The following IRS personnel participated in the mid-examination conference:

• Gerald Meskill, Supervisory Revenue Agent / Team Manager — present in person at the Newark Field Office. Meskill led the conference on behalf of the IRS and served as the primary point of contact for procedural and scheduling matters.

• Patricia Dunleavy, Lead Revenue Agent — present in person. Dunleavy presented the substantive status of the examination and led the discussion of specific IDR responses and preliminary IRS positions on the transfer pricing issues.

• Dr. Alan Washburne, IRS Economist, IRS Transfer Pricing Practice — participated by telephone. Dr. Washburne joined the conference for portions relating to the PCT valuation, cost-sharing ratio analysis, and the IRS's economic methodologies.

• Franklin Rosario, Attorney-Advisor, IRS Office of Chief Counsel — participated by telephone. Rosario provided legal commentary on behalf of the Office of Chief Counsel and addressed certain legal positions the IRS intended to take in the anticipated Notice of Proposed Adjustment.

It was noted that Donna Hirabayashi, Senior Counsel in the IRS Office of Chief Counsel, was not present at the conference but was referenced by Rosario as actively reviewing certain legal positions relevant to the examination. Rosario stated he was in regular communication with Hirabayashi regarding the legal framework supporting the IRS's anticipated adjustments.

1.2 Penterra Pharmaceuticals Corp.

• Marcus Whitfield, Vice President, Global Tax — present in person. Whitfield attended on behalf of the taxpayer in his capacity as the senior tax officer responsible for overseeing PPC's transfer pricing compliance and examination defense.

1.3 Calderwood & Harkness LLP

The following attorneys attended on behalf of Penterra Pharmaceuticals Corp. pursuant to Form 2848 authorization:

• Leonard Cross, Responsible Partner — present in person. Cross led the presentation of PPC's positions and engaged directly with the IRS examination team on all substantive matters.

• Garrett Simmons, Lead Associate — present in person. Simmons assisted Cross during the conference and was the primary note-taker for these memoranda.

• Leila Nazari, Working Associate — participated by telephone from Calderwood & Harkness's Philadelphia office, providing note-taking support and real-time research assistance as needed.

2. PURPOSE AND BACKGROUND OF CONFERENCE

The mid-examination conference was requested by Calderwood & Harkness LLP on behalf of Penterra Pharmaceuticals Corp. via letter to the IRS examination team dated May 10, 2023. The stated purposes of the conference were threefold: (1) to discuss the current status of the examination and the progress of outstanding Information Document Requests; (2) to narrow remaining issues between the parties to the extent possible at this stage of the examination; and (3) to understand the IRS's anticipated timeline toward issuance of a Notice of Proposed Adjustment and potential resolution.

This conference was the mid-examination conference in the IRS's transfer pricing examination of Penterra Pharmaceuticals Corp. The opening conference had been held on June 28, 2022, at the same Newark Field Office location, at which time the IRS examination team introduced the scope of the examination, identified the tax years at issue, and outlined the anticipated areas of inquiry. The examination covers Forms 1120 filed by Penterra Pharmaceuticals Corp. for Tax Years 2017, 2018, 2019, and 2020.

As of the date of this conference, the IRS examination team had issued a total of thirty-eight (38) Information Document Requests (IDRs), all of which had been responded to by PPC through Calderwood & Harkness. Nine (9) additional IDRs remained outstanding or were anticipated by the examination team, bringing the projected total to forty-seven (47) IDRs by approximately September 2023. The breadth of the IDR process reflected the complexity and significance of the transfer pricing issues under examination, including PPC's cost-sharing arrangement with Penterra Biosciences Ireland Ltd. ("PBI"), the platform contribution transaction valuation, legacy IP royalty rates, and related matters.

Calderwood & Harkness LLP has been engaged as outside counsel to Penterra Pharmaceuticals Corp. in connection with this examination since June 2, 2022. Form 2848 (Power of Attorney and Declaration of Representative) was filed with the IRS on June 8, 2022, authorizing Leonard Cross, Sylvia Hartwell, Garrett Simmons, and Leila Nazari to represent PPC before the IRS in connection with the examination for Tax Years 2017 through 2020.

3. EXAMINATION STATUS — IDR PROGRESS

3.1 Completed IDRs

Meskill confirmed at the outset of the conference that the examination team had received and was actively reviewing responses to IDRs 1 through 38. He characterized the volume of documentation received as substantial and indicated that the exam team had devoted considerable time to reviewing the materials produced by PPC.

Dunleavy provided further detail, stating that the examination team was satisfied with the completeness of most IDR responses but flagged several areas where supplemental information or clarification might be needed. She indicated that any supplemental requests would be communicated through the standard IDR process or, where appropriate, through informal correspondence between Dunleavy and Simmons.

The following specific IDRs were discussed in substantive detail during the conference:

IDR No. 4 — Transfer Pricing Documentation, TY 2017–2020. Dunleavy confirmed receipt of the contemporaneous transfer pricing documentation for all four tax years under examination. This documentation was originally prepared by Crestfield & Associates LLP, with Susan Lam serving as the Transfer Pricing Partner responsible for the engagement. Dunleavy stated that the examination team had reviewed the documentation and had developed questions about certain methodological choices employed by Crestfield. In particular, Dunleavy indicated that the exam team had concerns regarding the Comparable Uncontrolled Transaction ("CUT") analysis supporting the 4.5% royalty rate applied to legacy intellectual property, as well as the projections of reasonably anticipated benefits ("RAB") underlying the cost-sharing ratios allocated between PPC and PBI. The cost-sharing ratios set forth in the documentation ranged from 38.2% (TY 2017) to 42.7% (TY 2020), reflecting PBI's increasing share of reasonably anticipated benefits over the examination period. Dunleavy stated that the exam team intended to scrutinize the methodology and assumptions underlying these ratios in greater detail.

IDR No. 5 — PCT Valuation and Supporting Workpapers. Dunleavy noted that the original platform contribution transaction ("PCT") payment valuation of $312 million, together with the supporting workpapers and economic analyses, had been produced and was under review by Dr. Washburne. Washburne joined the discussion by telephone and confirmed that he was developing an alternative valuation of the pre-existing intangible property contributed by PPC to the cost-sharing arrangement at the inception of the CSA on July 1, 2012. Washburne indicated that he was employing the income method for his alternative valuation and was using what he described as more appropriate assumptions regarding revenue projections and discount rates than those employed in PPC's original valuation.

IDR No. 6 — R&D Cost Pool and Allocation Methodology. Dunleavy stated that the R&D cost pool compositions provided in response to IDR No. 6 appeared to be complete. The cost pool figures for each tax year were as follows: $487.3 million for TY 2017, $523.8 million for TY 2018, $561.2 million for TY 2019, and $598.4 million for TY 2020. However, Dunleavy indicated that the methodology used to allocate costs between the Americas and non-Americas territories was being scrutinized by the examination team. She stated that the allocation keys employed by PPC — which relied on a combination of headcount, laboratory utilization, and projected revenue splits — warranted further analysis by the exam team's economist.

IDR No. 8 — PBI Personnel and Headcount Data. Dunleavy acknowledged receipt of the PBI headcount information provided in response to this IDR. The data showed PBI's employee headcount growing from 52 employees at its incorporation in 2012 to 185 employees by the end of 2020. Dunleavy noted that the examination team had specific questions about the functional roles of certain PBI personnel, particularly whether key Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") functions were actually performed by PBI employees in Dublin or whether they remained with PPC personnel at PPC's principal offices in Princeton Junction, New Jersey. Dunleavy indicated that the examination team would likely request additional detail regarding the qualifications, responsibilities, and reporting lines of senior PBI technical and managerial staff.

IDR No. 9 — PBI Board Minutes. Dunleavy confirmed receipt of the board minutes for forty-two (42) PBI board meetings held during the 2017 through 2020 tax years. All board meetings were held in Dublin. Dunleavy stated that the examination team was reviewing the minutes for evidence of substantive decision-making by PBI's management and board of directors. She indicated that the exam team was interested in identifying whether key strategic, commercial, and operational decisions — including pricing determinations, market entry decisions, and capital expenditure authorizations — were genuinely made by PBI management in Dublin or were directed by PPC management in the United States.

3.2 Outstanding and Anticipated IDRs

Dunleavy indicated that the examination team planned to issue approximately nine (9) additional IDRs, numbered 39 through 47, covering the following general subject areas:

• Supplemental employee compensation and travel records, including records of PPC personnel travel to Dublin and PBI personnel travel to Princeton Junction, to assess the extent and nature of cross-border activities;

• Forms 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) and international informational returns for PBI and Penterra Holdings Luxembourg S.à r.l. ("PHL");

• PBI capital expenditure and investment records, including documentation of PBI's capital investments in laboratory equipment, information technology infrastructure, and commercial capabilities in Dublin and other non-Americas locations;

• Additional intercompany pricing decisions and market strategy documents, including internal presentations and analyses prepared by PBI management in connection with pricing and commercialization decisions for key products in non-Americas markets; and

• Documentation relating to PBI's Knowledge Development box ("KDB") claims filed with Irish Revenue, including supporting calculations and correspondence with Irish Revenue regarding the 6.25% effective rate on qualifying intellectual property income.

Cross requested that the examination team issue all remaining IDRs as promptly as possible to enable PPC to respond in an orderly and timely fashion. Cross emphasized that PPC had been fully cooperative throughout the examination and was committed to completing the IDR process efficiently. Meskill agreed to aim for the completion of all IDR issuances by the end of July 2023, with the understanding that supplemental or final IDRs could extend into August or September 2023 depending on the results of the examination team's ongoing review.

Cross reiterated PPC's prior formal objection to the scope of IDR No. 26, as set forth in Calderwood & Harkness's letter to the examination team dated February 15, 2023. Cross noted that the parties had subsequently resolved the scope dispute informally by narrowing the request to exclude certain categories of privileged communications and attorney work product materials. Dunleavy confirmed the resolution and stated that the examination team was satisfied with the narrowed production received in response to the revised IDR No. 26.

4. IRS PRELIMINARY POSITIONS — SUBSTANTIVE DISCUSSION

The examination team provided preliminary views on the substantive transfer pricing issues under examination. Meskill prefaced this portion of the conference by stating that the views expressed were preliminary and subject to change as the examination continued, and that the formal positions of the IRS would be reflected in the anticipated Notice of Proposed Adjustment.

4.1 Cost-Sharing Arrangement — Reasonably Anticipated Benefits

Meskill stated that the examination team had formed preliminary views on the cost-sharing ratios under the CSA between PPC and PBI. The CSA, which became effective July 1, 2012, provides for the sharing of intangible development costs between PPC (for the Americas territory) and PBI (for the non-Americas territory) based on each party's share of reasonably anticipated benefits from the intangible development activity.

Dunleavy indicated that the IRS's primary concern was that PBI's cost-sharing percentages — 38.2% in TY 2017, 39.6% in TY 2018, 41.1% in TY 2019, and 42.7% in TY 2020 — understated PBI's true share of reasonably anticipated benefits from the cost-shared intangibles. The IRS's preliminary view was that PBI's cost-sharing percentages should be higher by approximately 8 to 12 percentage points across each year under examination. Dunleavy explained that this adjustment reflected the IRS's view that U.S.-source value attributable to PPC's ongoing research and development activities and intangible development functions was not being adequately compensated under the current cost-sharing arrangement. In essence, the IRS contended that PBI was deriving benefits from U.S.-based innovation that were not fully captured in the RAB projections.

Dr. Washburne joined the discussion by telephone to provide additional detail on the economic analysis underlying the IRS's preliminary position. Washburne stated that his analysis of PPC's revenue projections — which formed the basis for the RAB calculations — suggested that PPC's projections systematically underweighted the U.S. contribution to global value creation. Washburne cited specific examples: for Veritaxol, PPC's flagship immunology compound, global net sales reached $3.12 billion in TY 2020, with non-Americas net sales of $1.34 billion; for Imvara, PPC's oncology platform product, global net sales were $1.87 billion in TY 2020, with non-Americas net sales of $0.79 billion. Washburne stated that the revenue projections used in the RAB calculations failed to adequately account for the disproportionate contribution of PPC's U.S.-based research personnel and facilities to the development, enhancement, and ongoing improvement of these and other compounds in PPC's portfolio.

Cross responded firmly that PPC's cost-sharing ratios were calculated consistently with the requirements of Treasury Regulation § 1.482-7 and reflected bona fide projections of reasonably anticipated benefits tied to territorial revenue splits. Cross noted that the RAB projections were prepared contemporaneously with PPC's annual cost-sharing calculations by Crestfield & Associates LLP and were based on detailed product-by-product revenue forecasts that accounted for market dynamics, regulatory timelines, competitive conditions, and pricing environments in each territory. Cross further stated that Whitmore Valuation Group LLC, an independent economic consulting firm retained by C&H, had performed an independent analysis of PPC's cost-sharing ratios. Dr. Helena Vasquez, Managing Director of Whitmore, had confirmed that the ratios fell within the arm's-length range under the applicable regulatory framework.

Cross also emphasized that PBI bore genuine market risk for non-Americas commercialization activities and made independent commercial decisions — including pricing, market entry timing, distribution partner selection, and regulatory strategy — across sixty-eight (68) country markets outside the Americas. Cross stated that these risks and functions were properly reflected in the RAB projections and that PBI's increasing share of reasonably anticipated benefits over the examination period was a natural consequence of PBI's growing commercial capabilities and expanding market access in the non-Americas territory.

4.2 PCT Valuation

Dunleavy stated that the IRS had developed concerns about the adequacy of the $312 million platform contribution transaction payment made by PBI to PPC on July 1, 2012, in connection with the formation of the cost-sharing arrangement. The PCT payment was intended to compensate PPC for the value of pre-existing intangible property — including compounds in various stages of development, regulatory submissions and approvals, trademarks, trade secrets, and related know-how — that PBI would exploit in the non-Americas territory under the CSA.

Dr. Washburne, participating by telephone, indicated that he was performing an income-method / Discounted cash flow ("DCF") valuation of the pre-existing intellectual property as of the PCT date. Washburne stated that he was using what he described as more appropriate revenue projections and a lower discount rate than the rate used by PPC's advisors in the original PCT valuation.

When pressed by Cross for specifics, Washburne stated that he was applying a weighted average cost of capital ("WACC") of approximately 7.2%, compared to the 9.8% WACC used in PPC's original PCT valuation prepared by Crestfield & Associates. Washburne explained that the lower discount rate reflected his view of the risk profile of PPC's pharmaceutical portfolio at the time the CSA was established. In Washburne's assessment, the pharmaceutical products included in the PCT were, at that stage, relatively de-risked given their advanced clinical development status and, in many cases, existing regulatory approvals, warranting a lower discount rate than the 9.8% WACC applied by PPC's advisors.

Washburne indicated that his preliminary valuation placed the PCT at a figure significantly higher than $312 million. He did not provide a specific dollar figure at this conference, stating that his analysis was still being finalized. (For the record, the NOPA subsequently issued in October 2023 stated the IRS's proposed PCT valuation at $852 million.)

Cross objected strenuously to the use of a 7.2% WACC. Cross stated that pharmaceutical industry cost-of-capital data — including published surveys, comparable company analyses, and academic literature — supported a WACC in the range employed by PPC's advisors. Cross noted that the 9.8% WACC was consistent with the risk profile of a diversified pharmaceutical portfolio that included compounds at multiple stages of development and commercialization, with attendant clinical, regulatory, and commercial risks. Cross stated that Whitmore Valuation Group's analysis would address the discount rate issue in comprehensive detail, including a rebuttal to the use of a sub-8% WACC for pharmaceutical intellectual property.

Cross also raised a threshold legal objection, noting that 2012 — the year of the PCT payment — was outside the tax years under examination (TY 2017 through TY 2020). Cross questioned the legal basis for adjusting current-year income based on a PCT valuation from a prior period that was not itself under examination.

Rosario responded by telephone, stating that the IRS's position was that the PCT undervaluation was not being raised as a direct adjustment to 2012 income but rather as a factor that infected the ongoing CSA cost-sharing ratios and royalty rates for the examination years. The IRS contended that the below-arm's-length PCT payment effectively understated PPC's U.S.-source income in each of TY 2017 through TY 2020, because the cost-sharing ratios and related intercompany payments derived from, and were calibrated to, the initial PCT terms. The IRS intended to recharacterize the ongoing intercompany payments in the examination years, rather than directly adjust the 2012 PCT itself.

Cross noted the IRS's position for the record but stated that C&H would vigorously contest both the factual basis and the legal theory in any NOPA.

4.3 Legacy IP Royalty Rate

Dunleavy stated that the IRS was also challenging the 4.5% royalty rate applied by PPC to legacy compound net sales — specifically, the royalty charged to PBI for the license of pre-2012 vintage intellectual property for exploitation in the non-Americas territory. This royalty applied to compounds that were developed and commercialized prior to the formation of the CSA and that were licensed to PBI under a separate intercompany license agreement.

Dunleavy indicated that the IRS had identified comparable uncontrolled transactions that, in the IRS's view, supported a significantly higher arm's-length royalty rate. She referenced pharmaceutical license agreements with royalty rates in the range of 9% to 13%, suggesting that PPC's 4.5% rate was materially below the arm's-length standard. Dunleavy did not identify the specific comparable transactions at the conference, stating that the details would be provided in the NOPA.

Cross responded that PPC's contemporaneous CUT analysis — prepared by Crestfield & Associates LLP and independently verified by Whitmore Valuation Group LLC — identified fourteen (14) comparable uncontrolled pharmaceutical license agreements. The interquartile range of royalty rates in these comparable agreements was 3.1% to 6.8%, with a median of 4.4%. PPC's 4.5% royalty rate was therefore well-supported by the CUT analysis and fell at approximately the median of the comparable range.

Cross stated that the IRS's selected comparables likely failed to satisfy the comparability requirements of Treasury Regulation § 1.482-4. Cross identified several comparability factors that, based on his experience, were frequently at issue in pharmaceutical CUT analyses, including: differences in product lifecycle stage (early-stage versus mature compounds), geographic scope of the licensed territory, exclusivity terms, the scope of rights granted (e.g., development rights versus commercialization-only rights), and other material contractual provisions such as milestone payments, co-promotion obligations, and termination rights. Cross emphasized that licensing arrangements involving early-stage pharmaceutical compounds with substantial remaining development risk would naturally command higher royalty rates and were not comparable to the license of mature, fully approved legacy compounds with established commercial track records.

Dunleavy took note of Cross's comments and stated that the royalty rate issue would be further developed in the NOPA.

For reference, the following legacy compound non-Americas net sales data was discussed during the conference, illustrating the declining revenue trajectory characteristic of end-of-lifecycle pharmaceutical products:

Cross noted that the declining trajectory of these net sales further supported the appropriateness of a royalty rate at or near the lower end of the arm's-length range, as the economic value of the underlying compounds was diminishing over the examination period.

4.4 Economic Substance of PBI

Meskill raised the issue of PBI's economic substance, stating that the examination team had developed questions about whether PBI possessed sufficient operational substance to justify its role as the intellectual property owner and cost-sharing arrangement participant for the non-Americas territory. Meskill indicated this was a significant focus area for the examination team.

Dunleavy elaborated, specifically referencing the DEMPE framework articulated in the OECD Transfer Pricing Guidelines and increasingly relied upon in IRS examinations of multinational structures involving intellectual property. Dunleavy questioned whether key development and enhancement functions were actually performed by PBI personnel in Dublin or whether those functions remained with PPC personnel at PPC's principal offices in Princeton Junction, New Jersey. Dunleavy stated that the examination team was focused on determining whether PBI's role was substantive or whether PBI served principally as a conduit for allocating income away from U.S. taxing jurisdiction.

Cross responded with a comprehensive summary of PBI's substantive operations, drawing on the evidence already produced to the examination team through the IDR process and the additional analysis conducted by Calderwood & Harkness:

• Headcount. PBI employed 185 individuals in Dublin as of the end of TY 2020, a significant increase from the 52 employees at PBI's incorporation in 2012. The workforce included scientists, regulatory affairs professionals, commercial and market access personnel, finance and accounting staff, legal and compliance professionals, and senior management.

• Management. Aidan Naughton served as PBI's Managing Director throughout the examination period, exercising genuine decision-making authority over PBI's commercial, regulatory, and strategic operations. Naughton reported to PBI's board of directors, not to PPC management.

• Board Governance. PBI's board of directors held forty-two (42) board meetings in Dublin during the TY 2017–2020 period, consisting of regular quarterly meetings plus special sessions convened as needed. The board minutes — previously produced in response to IDR No. 9 — documented key decisions on matters including product pricing across non-Americas markets, market entry strategy and timing, regulatory submission priorities, capital expenditure authorizations, and intercompany transactions.

• Regulatory Expenditure. PBI incurred cumulative regulatory expenditure of €47.2 million during the TY 2017–2020 period in connection with regulatory submissions across non-Americas markets. These expenditures reflected PBI's independent engagement with regulatory authorities in the European Union, United Kingdom, Japan, Australia, and numerous other jurisdictions.

• Independent Pricing. PBI made independent pricing decisions across sixty-eight (68) country markets outside the Americas, taking into account local competitive dynamics, reimbursement environments, regulatory requirements, and market access considerations. These pricing decisions were made by PBI's commercial and market access teams in Dublin.

• Physical Presence. PBI maintained approximately 18,000 square feet of office space at Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. The facilities housed PBI's management, commercial, regulatory, and administrative functions.

• Independent Treasury. PBI maintained its own banking relationship with Glenmore Bank Ireland plc, demonstrating independent treasury operations, including cash management, intercompany settlement, and third-party payment processing.

• Risk Assumption. PBI bore genuine market risk for all non-Americas territories, including demand risk, regulatory risk, competitive risk, and currency risk.

Cross stated that Calderwood & Harkness had conducted twelve (12) in-depth interviews of key PBI employees in Dublin during August and September 2022, as part of the firm's preparation of a detailed functional analysis for the examination defense. Cross indicated that C&H would be prepared to present detailed functional analysis evidence to the examination team, including declarations from PBI personnel, if required.

Rosario responded by telephone, stating that while the examination team acknowledged that PBI had some employees and operations in Dublin, the question before the examination team was whether PBI's substance was commensurate with the level of income being allocated to Ireland. Rosario specifically noted that PBI reported pre-tax income of €1.06 billion in fiscal year 2020, a figure that he described as extraordinary relative to PBI's 185-person headcount. Rosario stated that the examination team intended to evaluate whether PBI's economic substance was proportionate to its reported income.

Cross responded that the economic substance inquiry should properly focus on PBI's control over key functions and its assumption of economically significant risks, rather than on a simplistic headcount-to-income ratio. Cross cited the OECD Transfer Pricing Guidelines, Chapter VI, which emphasizes the importance of identifying the entities that control the development, enhancement, maintenance, protection, and exploitation of intangible assets and that bear the associated financial risks. Cross also referenced relevant U.S. case law and IRS guidance supporting the principle that substance should be evaluated qualitatively based on decision-making authority, risk management, and functional contributions, rather than solely on quantitative metrics such as headcount or overhead costs.

4.5 Penalty Considerations

Meskill mentioned that the examination team was considering the assertion of the IRC § 6662(e) substantial valuation misstatement penalty at the twenty percent (20%) rate, contingent upon whether the proposed transfer pricing adjustments, once finalized, met the applicable statutory threshold.

Cross stated that Penterra Pharmaceuticals Corp. had contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP for all four tax years under examination (TY 2017, 2018, 2019, and 2020). Cross asserted that this documentation satisfied the requirements of IRC § 6662(e)(3)(B) and that PPC would assert the reasonable-cause and good-faith defense as penalty protection. Cross noted that the documentation reflected a thorough analysis of comparable transactions, employed recognized transfer pricing methods, and supported PPC's pricing positions with detailed economic analysis.

Rosario noted that the IRS reserved the right to assert the IRC § 6662(h) gross valuation misstatement penalty at the forty percent (40%) rate, depending on the magnitude of the final proposed adjustments. However, Rosario did not make any commitment on this point, and his statement appeared to be made as a standard reservation of the IRS's rights rather than as an indication that the 40% penalty was likely to be asserted.

5. ANTICIPATED NOPA TIMELINE

Meskill stated that the examination team anticipated completing its analysis and issuing a Notice of Proposed Adjustment ("NOPA") in the fall of 2023. He described this timeline as the exam team's current working assumption, subject to change depending on the pace of the remaining IDR process and the results of the examination team's ongoing analysis.

Dunleavy provided a more specific estimate, stating that the NOPA would likely be issued in October 2023, assuming that all remaining IDR responses were received from PPC by September 2023. Dunleavy emphasized that timely receipt of IDR responses was critical to maintaining this timeline.

Cross asked whether the NOPA would address all four tax years (TY 2017, 2018, 2019, and 2020) simultaneously or whether the IRS intended to issue separate NOPAs for individual tax years. Meskill confirmed that the exam team planned to issue a single NOPA covering all four tax years under examination. He stated that this approach would promote efficiency and facilitate a comprehensive resolution of the issues.

Cross requested that the examination team provide advance notice if the anticipated NOPA timeline shifted for any reason. Cross also asked for an opportunity to present PPC's economic analyses to the examination team before the NOPA was issued, with the goal of narrowing or resolving issues before the formal proposal. Meskill stated that he would consider the request but could not commit to scheduling such a presentation at this time. He indicated that the exam team's standard practice was to complete its independent analysis before engaging in further substantive discussions with the taxpayer.

Rosario indicated that the IRS Office of Chief Counsel was coordinating closely with the examination team on the legal positions to be reflected in the NOPA and that the NOPA would be reviewed by Chief Counsel before issuance.

6. STATUTE OF LIMITATIONS DISCUSSION

Cross raised the statute of limitations for TY 2017, noting that the standard three-year statute of limitations under IRC § 6501(a) — measured from the original filing date of PPC's Form 1120 for TY 2017 — was approaching. Cross indicated that this issue required prompt attention to ensure the IRS's examination rights were preserved and that any resolution could proceed without unnecessary procedural complications.

Dunleavy confirmed that the examination team was aware of the statute expiration issue and stated that the exam team would need PPC's consent to extend the statute of limitations (via Form 872, Consent to Extend the Time to Assess Tax) for TY 2017 and possibly for TY 2018 as well. Dunleavy stated that an extension was necessary given the anticipated NOPA timeline of October 2023 and the likelihood that the post-NOPA process — including PPC's response, any Appeals consideration, and potential resolution — would extend beyond the current expiration dates.

Cross indicated that PPC would consider executing Form 872 extensions but requested that any extensions be limited in both scope and duration. Cross stated that PPC's preference was to avoid open-ended or overly broad extensions that could leave the tax years at issue subject to assessment for an indefinite period.

The parties discussed targeting extensions through December 31, 2024, for both TY 2017 and TY 2018. Meskill agreed that this target date was reasonable and stated that the examination team would circulate proposed Forms 872 for PPC's review and execution. Cross noted that C&H would review the proposed forms to confirm that the extensions were properly limited in scope and duration before recommending execution to PPC.

7. COORDINATION ISSUES

7.1 IRS Economist's Analysis

Cross requested the opportunity for Whitmore Valuation Group's economists — specifically, Dr. Helena Vasquez (Managing Director) and Dr. Rohan Chakrabarti (Senior Economist) — to meet with Dr. Washburne to discuss economic methodologies before the NOPA was issued. Cross stated that such a meeting could serve to narrow the economic issues between the parties, identify areas of agreement, and promote a more efficient post-NOPA process.

Dr. Washburne, participating by telephone, stated that he would discuss the request with Meskill and revert to C&H with a response. Washburne did not commit to participating in such a meeting but did not reject the request outright.

Meskill indicated that the examination team would consider a limited technical discussion between the respective economists but noted that it was not standard practice for the IRS to share draft analyses or work-in-progress with taxpayers or their representatives before the issuance of a NOPA. Meskill stated that if a meeting were to be held, it would be limited in scope to a discussion of general methodological approaches rather than a detailed exchange of economic analyses or preliminary conclusions.

7.2 Irish Coordination

Cross noted that PBI's Irish tax advisors, Thornbury & Keogh, with Ciarán Thornbury serving as Lead Partner in the firm's Dublin office, had been coordinating with Calderwood & Harkness on dual-jurisdiction aspects of the examination defense. Cross stated that Thornbury & Keogh were assisting with the compilation of Irish Revenue filings and documentation relating to PBI's Knowledge Development box ("KDB") claims, which provide for a 6.25% effective tax rate on qualifying intellectual property income under Irish tax law. This documentation was being compiled for production in response to anticipated IDR No. 30.

Cross further noted that PBI's compliance with Irish tax law and the availability of the KDB regime were relevant context for the examination, as they demonstrated that PBI was a genuine operating entity subject to the taxing jurisdiction of Ireland and that PBI's income was being reported and taxed in Ireland in accordance with Irish law.

Meskill acknowledged Cross's comments regarding the Irish coordination but stated that the examination was focused on U.S. federal income tax issues and that the IRS's analysis would be conducted under the Internal Revenue Code and applicable Treasury Regulations. Meskill stated that any competent authority or Mutual Agreement Procedure ("MAP") considerations under the U.S.-Ireland Income Tax Treaty (Convention Between the Government of the United States of America and the Government of Ireland for the Avoidance of Double Taxation) would be addressed after the NOPA was issued and PPC had an opportunity to respond. Cross noted C&H's understanding of this sequencing.

7.3 Penterra Holdings Luxembourg S.à r.l.

Dunleavy briefly asked about the role of Penterra Holdings Luxembourg S.à r.l. ("PHL") in PPC's corporate structure. Cross confirmed that PHL is registered at 14, rue Aldringen, L-1118 Luxembourg, with Luxembourg Registre de Commerce et des Sociétés Number B 168452. Cross stated that PHL serves as an intermediate holding entity in the corporate chain, holding 100% of the equity interests in PBI. PHL is itself 100% owned by PPC. For U.S. federal income tax purposes, PHL is treated as a disregarded entity and does not file a separate U.S. tax return. PHL does not have substantive operations or employees; its sole function is as a holding entity in the corporate structure.

Dunleavy indicated that the examination team had no separate issues with PHL at this time but had wanted confirmation of its disregarded entity status for the record. Cross confirmed that this information had been previously provided in the response to IDR No. 1, which included PPC's organizational chart, entity classification elections, and Forms 8832 and 8858 as applicable.

7.4 PMI Contract Manufacturing

Dunleavy briefly noted that the Penterra Manufacturing Ireland Ltd. ("PMI") contract manufacturing arrangement appeared to be within arm's-length norms and was not a primary focus of the current examination. PMI operates under a contract manufacturing agreement with PBI, under which PMI manufactures pharmaceutical products for the non-Americas territory on a cost-plus basis at a markup of 8% over its fully loaded manufacturing costs. PMI employs approximately 620 employees at its manufacturing facility located at Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland.

Cross welcomed this confirmation and noted that the PMI contract manufacturing arrangement had been fully documented in the response to IDR No. 10, including the intercompany manufacturing agreement, benchmarking analysis, cost pool composition, and applicable financial data.

8. ACTION ITEMS AND NEXT STEPS

The following action items and next steps were identified and agreed upon during the conference:

1. Remaining IDRs. The IRS examination team will issue remaining IDRs (anticipated IDRs 39 through 47) by the end of July 2023, with the possibility that a final or supplemental IDR may extend into August or September 2023 depending on the progress of the examination.

2. IDR Responses. PPC and Calderwood & Harkness will respond to all remaining IDRs as promptly as possible, with a target of completing all outstanding IDR responses by September 2023.

3. Statute Extensions. The IRS examination team will circulate proposed Forms 872 for PPC's review and execution, extending the statute of limitations for TY 2017 and TY 2018 through December 31, 2024.

4. Economist Meeting. The IRS will consider Calderwood & Harkness's request for a meeting between Whitmore Valuation Group's economists (Dr. Vasquez and Dr. Chakrabarti) and Dr. Washburne to discuss economic methodologies. Meskill will revert to C&H with a response.

5. NOPA Timeline. The NOPA is anticipated to be issued in October 2023, subject to timely completion of the IDR process.

6. Reservation of Rights. Calderwood & Harkness, on behalf of PPC, expressly reserved all rights to contest any proposed adjustments in the anticipated NOPA. Cross reiterated the strength of PPC's transfer pricing positions under IRC § 482, Treasury Regulations §§ 1.482-4 and 1.482-7, and the arm's-length standard as applied to PPC's intercompany transactions with PBI.

9. OBSERVATIONS AND STRATEGIC NOTES

ATTORNEY WORK PRODUCT — INTERNAL ONLY PROTECTED CORE WORK PRODUCT — MENTAL IMPRESSIONS, OPINIONS, AND STRATEGIC ANALYSIS OF COUNSEL

The following observations and strategic notes reflect the mental impressions, opinions, conclusions, and legal theories of counsel at Calderwood & Harkness LLP. This section constitutes protected core attorney work product under Fed. R. Civ. P. 26(b)(3) and is not intended for disclosure outside of Calderwood & Harkness LLP. This section must not be produced to the IRS, shared with non-privileged persons, or included in any materials provided to third parties without the express authorization of Leonard Cross, Responsible Partner.

IRS Preparation and Focus Areas. Meskill and Dunleavy appeared well-prepared for the conference and demonstrated a detailed understanding of PPC's corporate structure, intercompany transactions, and transfer pricing positions. The IRS examination team appears to be focused on three primary issues: (1) the CSA cost-sharing ratios and the reasonably anticipated benefits methodology, (2) the legacy IP royalty rate, and (3) the economic substance of PBI. The PCT valuation appears to be treated by the IRS as a supporting argument that reinforces its position on the cost-sharing ratios and intercompany payments rather than as a standalone adjustment for the examination years. This framing — recharacterization of ongoing payments rather than a direct 2012 adjustment — is consistent with Rosario's legal theory and suggests that Chief Counsel has been actively involved in shaping the examination approach.

PCT Valuation — WACC Vulnerability. Dr. Washburne's reliance on a 7.2% WACC for the income-method DCF valuation of the pre-existing IP at the PCT date represents a significant vulnerability in the IRS's position. Pharmaceutical cost-of-capital data — including published surveys by Westmark Consulting Group (now Sundial Advisors), comparable publicly traded company analyses, and academic literature (Damodaran, Fernandez) — generally supports a WACC in the range of 8.5% to 11.0% for diversified pharmaceutical companies, with the specific rate depending on the risk profile of the portfolio. Whitmore Valuation Group's independent analysis at a 9.8% WACC — which Whitmore validated through multiple approaches, including a build-up method, a comparable company analysis, and a review of industry benchmarks — produces a PCT valuation range of $278 million to $361 million, comfortably encompassing the $312 million payment actually made by PBI. A 7.2% WACC is difficult to justify for a pharmaceutical IP portfolio that included compounds at various stages of clinical development and commercialization, with attendant clinical trial risk, regulatory approval risk, and commercial launch risk. C&H and Whitmore should prepare a detailed critique of the IRS's discount rate methodology for use in the NOPA response.

Royalty Rate — CUT Comparability. The IRS's selected CUTs for the royalty rate adjustment — which Dunleavy indicated were in the 9% to 13% range — appear likely to include agreements involving early-stage or mid-stage pharmaceutical compounds with significant remaining development risk, broader rights grants (including co-development or development rights), or other contractual features that distinguish them from PPC's license of fully approved, mature, end-of-lifecycle legacy compounds. Once the specific CUTs are identified in the NOPA, C&H and Whitmore should prepare a detailed comparability rebuttal addressing product lifecycle stage, geographic scope, exclusivity terms, risk allocation, milestone and upfront payment structures, and other relevant contractual provisions. The declining net sales trajectory of the legacy compounds ($814.6M to $624.1M over the four-year period) provides strong factual support for the appropriateness of a royalty rate at the lower end of the arm's-length range.

IRS Chief Counsel Involvement. Rosario's active involvement in the conference — including his articulation of the legal theory supporting the PCT recharacterization approach and his reservation of the § 6662(h) gross valuation misstatement penalty — Signals that the IRS Office of Chief Counsel is actively supporting the examination team's legal positions. This involvement suggests that the NOPA will be formally structured and legally grounded, with Chief Counsel review before issuance. C&H should anticipate a well-drafted NOPA and prepare accordingly.

PBI Economic Substance. PBI's substance case is strong based on the evidence already compiled, including the headcount data (185 employees), board meeting records (42 meetings in Dublin), regulatory expenditures (€47.2 million cumulative), independent pricing decisions across 68 markets, the Glenmore Bank Ireland treasury relationship, and the 18,000 sq ft office facility at Sandyford Business Park. However, the IRS may attempt to frame its argument around the disproportion between PBI's headcount (185 employees) and its pre-tax income level (€1.06 billion in FY 2020), characterizing this ratio as evidence that PBI lacks substance commensurate with its income. C&H should prepare a robust response emphasizing qualitative factors — including PBI's control over DEMPE functions, its assumption of genuine market risk, its independent decision-making authority, and its substantive management and governance in Dublin — over simplistic headcount-to-income ratios. The 12 in-depth employee interviews conducted in Dublin in August–September 2022 will be important in supporting this qualitative analysis.

Penalty Exposure. Penalty exposure appears manageable given the contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP for all four tax years under examination. The documentation is thorough, was prepared by a reputable transfer pricing advisory firm, employed recognized methods (CUT and income methods), and was independently verified by Whitmore Valuation Group. The reasonable-cause defense under IRC § 6662(e)(3)(B) should be well-supported by this documentation, provided PPC can demonstrate that it reasonably relied on the analysis and that the documentation was prepared in good faith. C&H should ensure that the penalty protection file — including engagement letters, Crestfield's scope of work, and Whitmore's verification memoranda — is assembled and ready for production if needed.

§ 6662(h) Gross Valuation Misstatement Penalty. The IRS did not mention the § 6662(h) gross valuation misstatement (40%) penalty with any conviction during the conference. Rosario's reservation appeared to be pro forma and consistent with standard IRS practice of preserving all available penalty positions at the examination stage. Based on the conference discussion, the 40% penalty does not appear to be a primary focus for the examination team at this time, though C&H should monitor this issue as the NOPA takes shape.

CAP Status. Penterra Pharmaceuticals Corp. was not enrolled in the IRS Compliance Assurance Process ("CAP") for the tax years at issue. Accordingly, the examination and the NOPA will follow standard LB&I Division procedures, including the standard 30-day letter and 90-day letter process, with the opportunity for an administrative appeal to the IRS Independent Office of Appeals.

Settlement Posture. A settlement posture should be developed after the NOPA is received and the IRS's specific proposed adjustments and supporting analysis are known. Based on the conference discussion, a resolution materially below the IRS's full proposed adjustment appears achievable, particularly on the royalty rate and PCT issues, where PPC's factual and economic evidence is strong. The cost-sharing ratio issue may present greater difficulty given the IRS's focus on the RAB methodology, but the magnitude of the proposed adjustment (8 to 12 percentage points) appears aggressive and may be susceptible to narrowing through negotiation or Appeals. C&H should develop a range of settlement scenarios in consultation with Whitmore Valuation Group once the NOPA is received.

Internal C&H Follow-Up:

• Cross to update Sylvia Hartwell (Billing Partner) on conference outcomes and current examination status.

• Simmons to prepare a detailed memorandum for the matter file (1018-00009) summarizing the conference and key takeaways.

• Cross to brief Marcus Whitfield (VP, Global Tax), Deborah Staines (General Counsel, Penterra Pharmaceuticals Corp.), and Rajesh Iyer (Chief Financial Officer, Penterra Pharmaceuticals Corp.) on conference results and anticipated next steps.

Budget Tracking. Sylvia Hartwell has been monitoring fee expenditure against the original budget estimate of $4.5 million to $7.0 million for the examination defense engagement. As of the mid-examination point, the matter is tracking within the estimated range. C&H will continue to monitor fees and staffing levels as the examination moves toward the NOPA phase.

10. CERTIFICATION AND DISTRIBUTION

These notes were prepared contemporaneously with the mid-examination conference held on May 25, 2023, and finalized on May 26, 2023.

Prepared by:

________________________________________

Garrett Simmons Lead Associate Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103

Date: May 26, 2023

Reviewed and Approved by:

________________________________________

Leonard Cross Responsible Partner Calderwood & Harkness LLP

Date: May 26, 2023

Distribution (Internal Calderwood & Harkness LLP Only):

• Leonard Cross, Responsible Partner

• Sylvia Hartwell, Billing Partner

• Garrett Simmons, Lead Associate

• Leila Nazari, Working Associate

Copy to Matter File 1018-00009.

PRIVILEGE DESIGNATION: These notes are protected by the attorney-client privilege and the attorney work product doctrine. Section 9 of these notes contains the mental impressions, conclusions, opinions, and legal theories of counsel at Calderwood & Harkness LLP and constitutes protected core attorney work product. These notes shall not be disclosed to any person or entity outside of Calderwood & Harkness LLP without the prior written authorization of Leonard Cross, Responsible Partner. Any inadvertent disclosure of these notes does not constitute a waiver of any applicable privilege or protection.

Location:	IRS Large Business & International Division, Newark Field Office (Conference Room 4B); certain participants attended by telephone
Matter:	Penterra Pharmaceuticals Corp. — IRS Transfer Pricing Examination Defense
C&H Matter Number:	1018-00009
IRS Exam Team ID:	LB&I-NE-TP-2022-00641
Taxpayer:	Penterra Pharmaceuticals Corp. (EIN: 22-3741856)
Tax Years at Issue:	2017, 2018, 2019, 2020
Prepared by:	Garrett Simmons, Lead Associate, Calderwood & Harkness LLP
Reviewed by:	Leonard Cross, Responsible Partner, Calderwood & Harkness LLP
Date of Notes:	May 25, 2023
Tax Year	Legacy Compound Non-Americas Net Sales
2017	$814.6 million
2018	$762.3 million
2019	$691.8 million
2020	$624.1 million

PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
NOTES — IRS MID-EXAMINATION CONFERENCE
Date of Conference: May 25, 2023
1. ATTENDEES
1.1 IRS Examination Team
The following IRS personnel participated in the mid-examination conference:
•  Gerald Meskill, Supervisory Revenue Agent / Team Manager — present in person at the Newark Field Office. Meskill led the conference on behalf of the IRS and served as the primary point of contact for procedural and scheduling matters.
•  Patricia Dunleavy, Lead Revenue Agent — present in person. Dunleavy presented the substantive status of the examination and led the discussion of specific IDR responses and preliminary IRS positions on the transfer pricing issues.
•  Dr. Alan Washburne, IRS Economist, IRS Transfer Pricing Practice — participated by telephone. Dr. Washburne joined the conference for portions relating to the PCT valuation, cost-sharing ratio analysis, and the IRS's economic methodologies.
•  Franklin Rosario, Attorney-Advisor, IRS Office of Chief Counsel — participated by telephone. Rosario provided legal commentary on behalf of the Office of Chief Counsel and addressed certain legal positions the IRS intended to take in the anticipated Notice of Proposed Adjustment.
It was noted that Donna Hirabayashi, Senior Counsel in the IRS Office of Chief Counsel, was not present at the conference but was referenced by Rosario as actively reviewing certain legal positions relevant to the examination. Rosario stated he was in regular communication with Hirabayashi regarding the legal framework supporting the IRS's anticipated adjustments.
1.2 Penterra Pharmaceuticals Corp.
•  Marcus Whitfield, Vice President, Global Tax — present in person. Whitfield attended on behalf of the taxpayer in his capacity as the senior tax officer responsible for overseeing PPC's transfer pricing compliance and examination defense.
1.3 Calderwood & Harkness LLP
The following attorneys attended on behalf of Penterra Pharmaceuticals Corp. pursuant to Form 2848 authorization:
•  Leonard Cross, Responsible Partner — present in person. Cross led the presentation of PPC's positions and engaged directly with the IRS examination team on all substantive matters.
•  Garrett Simmons, Lead Associate — present in person. Simmons assisted Cross during the conference and was the primary note-taker for these memoranda.
•  Leila Nazari, Working Associate — participated by telephone from Calderwood & Harkness's Philadelphia office, providing note-taking support and real-time research assistance as needed.
2. PURPOSE AND BACKGROUND OF CONFERENCE
The mid-examination conference was requested by Calderwood & Harkness LLP on behalf of Penterra Pharmaceuticals Corp. via letter to the IRS examination team dated May 10, 2023. The stated purposes of the conference were threefold: (1) to discuss the current status of the examination and the progress of outstanding Information Document Requests; (2) to narrow remaining issues between the parties to the extent possible at this stage of the examination; and (3) to understand the IRS's anticipated timeline toward issuance of a Notice of Proposed Adjustment and potential resolution.
This conference was the mid-examination conference in the IRS's transfer pricing examination of Penterra Pharmaceuticals Corp. The opening conference had been held on June 28, 2022, at the same Newark Field Office location, at which time the IRS examination team introduced the scope of the examination, identified the tax years at issue, and outlined the anticipated areas of inquiry. The examination covers Forms 1120 filed by Penterra Pharmaceuticals Corp. for Tax Years 2017, 2018, 2019, and 2020.
As of the date of this conference, the IRS examination team had issued a total of thirty-eight (38) Information Document Requests (IDRs), all of which had been responded to by PPC through Calderwood & Harkness. Nine (9) additional IDRs remained outstanding or were anticipated by the examination team, bringing the projected total to forty-seven (47) IDRs by approximately September 2023. The breadth of the IDR process reflected the complexity and significance of the transfer pricing issues under examination, including PPC's cost-sharing arrangement with Penterra Biosciences Ireland Ltd. ("PBI"), the platform contribution transaction valuation, legacy IP royalty rates, and related matters.
Calderwood & Harkness LLP has been engaged as outside counsel to Penterra Pharmaceuticals Corp. in connection with this examination since June 2, 2022. Form 2848 (Power of Attorney and Declaration of Representative) was filed with the IRS on June 8, 2022, authorizing Leonard Cross, Sylvia Hartwell, Garrett Simmons, and Leila Nazari to represent PPC before the IRS in connection with the examination for Tax Years 2017 through 2020.
3. EXAMINATION STATUS — IDR PROGRESS
3.1 Completed IDRs
Meskill confirmed at the outset of the conference that the examination team had received and was actively reviewing responses to IDRs 1 through 38. He characterized the volume of documentation received as substantial and indicated that the exam team had devoted considerable time to reviewing the materials produced by PPC.
Dunleavy provided further detail, stating that the examination team was satisfied with the completeness of most IDR responses but flagged several areas where supplemental information or clarification might be needed. She indicated that any supplemental requests would be communicated through the standard IDR process or, where appropriate, through informal correspondence between Dunleavy and Simmons.
The following specific IDRs were discussed in substantive detail during the conference:
IDR No. 4 — Transfer Pricing Documentation, TY 2017–2020. Dunleavy confirmed receipt of the contemporaneous transfer pricing documentation for all four tax years under examination. This documentation was originally prepared by Crestfield & Associates LLP, with Susan Lam serving as the Transfer Pricing Partner responsible for the engagement. Dunleavy stated that the examination team had reviewed the documentation and had developed questions about certain methodological choices employed by Crestfield. In particular, Dunleavy indicated that the exam team had concerns regarding the Comparable Uncontrolled Transaction ("CUT") analysis supporting the 4.5% royalty rate applied to legacy intellectual property, as well as the projections of reasonably anticipated benefits ("RAB") underlying the cost-sharing ratios allocated between PPC and PBI. The cost-sharing ratios set forth in the documentation ranged from 38.2% (TY 2017) to 42.7% (TY 2020), reflecting PBI's increasing share of reasonably anticipated benefits over the examination period. Dunleavy stated that the exam team intended to scrutinize the methodology and assumptions underlying these ratios in greater detail.
IDR No. 5 — PCT Valuation and Supporting Workpapers. Dunleavy noted that the original platform contribution transaction ("PCT") payment valuation of $312 million, together with the supporting workpapers and economic analyses, had been produced and was under review by Dr. Washburne. Washburne joined the discussion by telephone and confirmed that he was developing an alternative valuation of the pre-existing intangible property contributed by PPC to the cost-sharing arrangement at the inception of the CSA on July 1, 2012. Washburne indicated that he was employing the income method for his alternative valuation and was using what he described as more appropriate assumptions regarding revenue projections and discount rates than those employed in PPC's original valuation.
IDR No. 6 — R&D Cost Pool and Allocation Methodology. Dunleavy stated that the R&D cost pool compositions provided in response to IDR No. 6 appeared to be complete. The cost pool figures for each tax year were as follows: $487.3 million for TY 2017, $523.8 million for TY 2018, $561.2 million for TY 2019, and $598.4 million for TY 2020. However, Dunleavy indicated that the methodology used to allocate costs between the Americas and non-Americas territories was being scrutinized by the examination team. She stated that the allocation keys employed by PPC — which relied on a combination of headcount, laboratory utilization, and projected revenue splits — warranted further analysis by the exam team's economist.
IDR No. 8 — PBI Personnel and Headcount Data. Dunleavy acknowledged receipt of the PBI headcount information provided in response to this IDR. The data showed PBI's employee headcount growing from 52 employees at its incorporation in 2012 to 185 employees by the end of 2020. Dunleavy noted that the examination team had specific questions about the functional roles of certain PBI personnel, particularly whether key Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") functions were actually performed by PBI employees in Dublin or whether they remained with PPC personnel at PPC's principal offices in Princeton Junction, New Jersey. Dunleavy indicated that the examination team would likely request additional detail regarding the qualifications, responsibilities, and reporting lines of senior PBI technical and managerial staff.
IDR No. 9 — PBI Board Minutes. Dunleavy confirmed receipt of the board minutes for forty-two (42) PBI board meetings held during the 2017 through 2020 tax years. All board meetings were held in Dublin. Dunleavy stated that the examination team was reviewing the minutes for evidence of substantive decision-making by PBI's management and board of directors. She indicated that the exam team was interested in identifying whether key strategic, commercial, and operational decisions — including pricing determinations, market entry decisions, and capital expenditure authorizations — were genuinely made by PBI management in Dublin or were directed by PPC management in the United States.
3.2 Outstanding and Anticipated IDRs
Dunleavy indicated that the examination team planned to issue approximately nine (9) additional IDRs, numbered 39 through 47, covering the following general subject areas:
•  Supplemental employee compensation and travel records, including records of PPC personnel travel to Dublin and PBI personnel travel to Princeton Junction, to assess the extent and nature of cross-border activities;
•  Forms 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) and international informational returns for PBI and Penterra Holdings Luxembourg S.à r.l. ("PHL");
•  PBI capital expenditure and investment records, including documentation of PBI's capital investments in laboratory equipment, information technology infrastructure, and commercial capabilities in Dublin and other non-Americas locations;
•  Additional intercompany pricing decisions and market strategy documents, including internal presentations and analyses prepared by PBI management in connection with pricing and commercialization decisions for key products in non-Americas markets; and
•  Documentation relating to PBI's Knowledge Development box ("KDB") claims filed with Irish Revenue, including supporting calculations and correspondence with Irish Revenue regarding the 6.25% effective rate on qualifying intellectual property income.
Cross requested that the examination team issue all remaining IDRs as promptly as possible to enable PPC to respond in an orderly and timely fashion. Cross emphasized that PPC had been fully cooperative throughout the examination and was committed to completing the IDR process efficiently. Meskill agreed to aim for the completion of all IDR issuances by the end of July 2023, with the understanding that supplemental or final IDRs could extend into August or September 2023 depending on the results of the examination team's ongoing review.
Cross reiterated PPC's prior formal objection to the scope of IDR No. 26, as set forth in Calderwood & Harkness's letter to the examination team dated February 15, 2023. Cross noted that the parties had subsequently resolved the scope dispute informally by narrowing the request to exclude certain categories of privileged communications and attorney work product materials. Dunleavy confirmed the resolution and stated that the examination team was satisfied with the narrowed production received in response to the revised IDR No. 26.
4. IRS PRELIMINARY POSITIONS — SUBSTANTIVE DISCUSSION
The examination team provided preliminary views on the substantive transfer pricing issues under examination. Meskill prefaced this portion of the conference by stating that the views expressed were preliminary and subject to change as the examination continued, and that the formal positions of the IRS would be reflected in the anticipated Notice of Proposed Adjustment.
4.1 Cost-Sharing Arrangement — Reasonably Anticipated Benefits
Meskill stated that the examination team had formed preliminary views on the cost-sharing ratios under the CSA between PPC and PBI. The CSA, which became effective July 1, 2012, provides for the sharing of intangible development costs between PPC (for the Americas territory) and PBI (for the non-Americas territory) based on each party's share of reasonably anticipated benefits from the intangible development activity.
Dunleavy indicated that the IRS's primary concern was that PBI's cost-sharing percentages — 38.2% in TY 2017, 39.6% in TY 2018, 41.1% in TY 2019, and 42.7% in TY 2020 — understated PBI's true share of reasonably anticipated benefits from the cost-shared intangibles. The IRS's preliminary view was that PBI's cost-sharing percentages should be higher by approximately 8 to 12 percentage points across each year under examination. Dunleavy explained that this adjustment reflected the IRS's view that U.S.-source value attributable to PPC's ongoing research and development activities and intangible development functions was not being adequately compensated under the current cost-sharing arrangement. In essence, the IRS contended that PBI was deriving benefits from U.S.-based innovation that were not fully captured in the RAB projections.
Dr. Washburne joined the discussion by telephone to provide additional detail on the economic analysis underlying the IRS's preliminary position. Washburne stated that his analysis of PPC's revenue projections — which formed the basis for the RAB calculations — suggested that PPC's projections systematically underweighted the U.S. contribution to global value creation. Washburne cited specific examples: for Veritaxol, PPC's flagship immunology compound, global net sales reached $3.12 billion in TY 2020, with non-Americas net sales of $1.34 billion; for Imvara, PPC's oncology platform product, global net sales were $1.87 billion in TY 2020, with non-Americas net sales of $0.79 billion. Washburne stated that the revenue projections used in the RAB calculations failed to adequately account for the disproportionate contribution of PPC's U.S.-based research personnel and facilities to the development, enhancement, and ongoing improvement of these and other compounds in PPC's portfolio.
Cross responded firmly that PPC's cost-sharing ratios were calculated consistently with the requirements of Treasury Regulation § 1.482-7 and reflected bona fide projections of reasonably anticipated benefits tied to territorial revenue splits. Cross noted that the RAB projections were prepared contemporaneously with PPC's annual cost-sharing calculations by Crestfield & Associates LLP and were based on detailed product-by-product revenue forecasts that accounted for market dynamics, regulatory timelines, competitive conditions, and pricing environments in each territory. Cross further stated that Whitmore Valuation Group LLC, an independent economic consulting firm retained by C&H, had performed an independent analysis of PPC's cost-sharing ratios. Dr. Helena Vasquez, Managing Director of Whitmore, had confirmed that the ratios fell within the arm's-length range under the applicable regulatory framework.
Cross also emphasized that PBI bore genuine market risk for non-Americas commercialization activities and made independent commercial decisions — including pricing, market entry timing, distribution partner selection, and regulatory strategy — across sixty-eight (68) country markets outside the Americas. Cross stated that these risks and functions were properly reflected in the RAB projections and that PBI's increasing share of reasonably anticipated benefits over the examination period was a natural consequence of PBI's growing commercial capabilities and expanding market access in the non-Americas territory.
4.2 PCT Valuation
Dunleavy stated that the IRS had developed concerns about the adequacy of the $312 million platform contribution transaction payment made by PBI to PPC on July 1, 2012, in connection with the formation of the cost-sharing arrangement. The PCT payment was intended to compensate PPC for the value of pre-existing intangible property — including compounds in various stages of development, regulatory submissions and approvals, trademarks, trade secrets, and related know-how — that PBI would exploit in the non-Americas territory under the CSA.
Dr. Washburne, participating by telephone, indicated that he was performing an income-method / Discounted cash flow ("DCF") valuation of the pre-existing intellectual property as of the PCT date. Washburne stated that he was using what he described as more appropriate revenue projections and a lower discount rate than the rate used by PPC's advisors in the original PCT valuation.
When pressed by Cross for specifics, Washburne stated that he was applying a weighted average cost of capital ("WACC") of approximately 7.2%, compared to the 9.8% WACC used in PPC's original PCT valuation prepared by Crestfield & Associates. Washburne explained that the lower discount rate reflected his view of the risk profile of PPC's pharmaceutical portfolio at the time the CSA was established. In Washburne's assessment, the pharmaceutical products included in the PCT were, at that stage, relatively de-risked given their advanced clinical development status and, in many cases, existing regulatory approvals, warranting a lower discount rate than the 9.8% WACC applied by PPC's advisors.
Washburne indicated that his preliminary valuation placed the PCT at a figure significantly higher than $312 million. He did not provide a specific dollar figure at this conference, stating that his analysis was still being finalized. (For the record, the NOPA subsequently issued in October 2023 stated the IRS's proposed PCT valuation at $852 million.)
Cross objected strenuously to the use of a 7.2% WACC. Cross stated that pharmaceutical industry cost-of-capital data — including published surveys, comparable company analyses, and academic literature — supported a WACC in the range employed by PPC's advisors. Cross noted that the 9.8% WACC was consistent with the risk profile of a diversified pharmaceutical portfolio that included compounds at multiple stages of development and commercialization, with attendant clinical, regulatory, and commercial risks. Cross stated that Whitmore Valuation Group's analysis would address the discount rate issue in comprehensive detail, including a rebuttal to the use of a sub-8% WACC for pharmaceutical intellectual property.
Cross also raised a threshold legal objection, noting that 2012 — the year of the PCT payment — was outside the tax years under examination (TY 2017 through TY 2020). Cross questioned the legal basis for adjusting current-year income based on a PCT valuation from a prior period that was not itself under examination.
Rosario responded by telephone, stating that the IRS's position was that the PCT undervaluation was not being raised as a direct adjustment to 2012 income but rather as a factor that infected the ongoing CSA cost-sharing ratios and royalty rates for the examination years. The IRS contended that the below-arm's-length PCT payment effectively understated PPC's U.S.-source income in each of TY 2017 through TY 2020, because the cost-sharing ratios and related intercompany payments derived from, and were calibrated to, the initial PCT terms. The IRS intended to recharacterize the ongoing intercompany payments in the examination years, rather than directly adjust the 2012 PCT itself.
Cross noted the IRS's position for the record but stated that C&H would vigorously contest both the factual basis and the legal theory in any NOPA.
4.3 Legacy IP Royalty Rate
Dunleavy stated that the IRS was also challenging the 4.5% royalty rate applied by PPC to legacy compound net sales — specifically, the royalty charged to PBI for the license of pre-2012 vintage intellectual property for exploitation in the non-Americas territory. This royalty applied to compounds that were developed and commercialized prior to the formation of the CSA and that were licensed to PBI under a separate intercompany license agreement.
Dunleavy indicated that the IRS had identified comparable uncontrolled transactions that, in the IRS's view, supported a significantly higher arm's-length royalty rate. She referenced pharmaceutical license agreements with royalty rates in the range of 9% to 13%, suggesting that PPC's 4.5% rate was materially below the arm's-length standard. Dunleavy did not identify the specific comparable transactions at the conference, stating that the details would be provided in the NOPA.
Cross responded that PPC's contemporaneous CUT analysis — prepared by Crestfield & Associates LLP and independently verified by Whitmore Valuation Group LLC — identified fourteen (14) comparable uncontrolled pharmaceutical license agreements. The interquartile range of royalty rates in these comparable agreements was 3.1% to 6.8%, with a median of 4.4%. PPC's 4.5% royalty rate was therefore well-supported by the CUT analysis and fell at approximately the median of the comparable range.
Cross stated that the IRS's selected comparables likely failed to satisfy the comparability requirements of Treasury Regulation § 1.482-4. Cross identified several comparability factors that, based on his experience, were frequently at issue in pharmaceutical CUT analyses, including: differences in product lifecycle stage (early-stage versus mature compounds), geographic scope of the licensed territory, exclusivity terms, the scope of rights granted (e.g., development rights versus commercialization-only rights), and other material contractual provisions such as milestone payments, co-promotion obligations, and termination rights. Cross emphasized that licensing arrangements involving early-stage pharmaceutical compounds with substantial remaining development risk would naturally command higher royalty rates and were not comparable to the license of mature, fully approved legacy compounds with established commercial track records.
Dunleavy took note of Cross's comments and stated that the royalty rate issue would be further developed in the NOPA.
For reference, the following legacy compound non-Americas net sales data was discussed during the conference, illustrating the declining revenue trajectory characteristic of end-of-lifecycle pharmaceutical products:
Cross noted that the declining trajectory of these net sales further supported the appropriateness of a royalty rate at or near the lower end of the arm's-length range, as the economic value of the underlying compounds was diminishing over the examination period.
4.4 Economic Substance of PBI
Meskill raised the issue of PBI's economic substance, stating that the examination team had developed questions about whether PBI possessed sufficient operational substance to justify its role as the intellectual property owner and cost-sharing arrangement participant for the non-Americas territory. Meskill indicated this was a significant focus area for the examination team.
Dunleavy elaborated, specifically referencing the DEMPE framework articulated in the OECD Transfer Pricing Guidelines and increasingly relied upon in IRS examinations of multinational structures involving intellectual property. Dunleavy questioned whether key development and enhancement functions were actually performed by PBI personnel in Dublin or whether those functions remained with PPC personnel at PPC's principal offices in Princeton Junction, New Jersey. Dunleavy stated that the examination team was focused on determining whether PBI's role was substantive or whether PBI served principally as a conduit for allocating income away from U.S. taxing jurisdiction.
Cross responded with a comprehensive summary of PBI's substantive operations, drawing on the evidence already produced to the examination team through the IDR process and the additional analysis conducted by Calderwood & Harkness:
•  Headcount. PBI employed 185 individuals in Dublin as of the end of TY 2020, a significant increase from the 52 employees at PBI's incorporation in 2012. The workforce included scientists, regulatory affairs professionals, commercial and market access personnel, finance and accounting staff, legal and compliance professionals, and senior management.
•  Management. Aidan Naughton served as PBI's Managing Director throughout the examination period, exercising genuine decision-making authority over PBI's commercial, regulatory, and strategic operations. Naughton reported to PBI's board of directors, not to PPC management.
•  Board Governance. PBI's board of directors held forty-two (42) board meetings in Dublin during the TY 2017–2020 period, consisting of regular quarterly meetings plus special sessions convened as needed. The board minutes — previously produced in response to IDR No. 9 — documented key decisions on matters including product pricing across non-Americas markets, market entry strategy and timing, regulatory submission priorities, capital expenditure authorizations, and intercompany transactions.
•  Regulatory Expenditure. PBI incurred cumulative regulatory expenditure of €47.2 million during the TY 2017–2020 period in connection with regulatory submissions across non-Americas markets. These expenditures reflected PBI's independent engagement with regulatory authorities in the European Union, United Kingdom, Japan, Australia, and numerous other jurisdictions.
•  Independent Pricing. PBI made independent pricing decisions across sixty-eight (68) country markets outside the Americas, taking into account local competitive dynamics, reimbursement environments, regulatory requirements, and market access considerations. These pricing decisions were made by PBI's commercial and market access teams in Dublin.
•  Physical Presence. PBI maintained approximately 18,000 square feet of office space at Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. The facilities housed PBI's management, commercial, regulatory, and administrative functions.
•  Independent Treasury. PBI maintained its own banking relationship with Glenmore Bank Ireland plc, demonstrating independent treasury operations, including cash management, intercompany settlement, and third-party payment processing.
•  Risk Assumption. PBI bore genuine market risk for all non-Americas territories, including demand risk, regulatory risk, competitive risk, and currency risk.
Cross stated that Calderwood & Harkness had conducted twelve (12) in-depth interviews of key PBI employees in Dublin during August and September 2022, as part of the firm's preparation of a detailed functional analysis for the examination defense. Cross indicated that C&H would be prepared to present detailed functional analysis evidence to the examination team, including declarations from PBI personnel, if required.
Rosario responded by telephone, stating that while the examination team acknowledged that PBI had some employees and operations in Dublin, the question before the examination team was whether PBI's substance was commensurate with the level of income being allocated to Ireland. Rosario specifically noted that PBI reported pre-tax income of €1.06 billion in fiscal year 2020, a figure that he described as extraordinary relative to PBI's 185-person headcount. Rosario stated that the examination team intended to evaluate whether PBI's economic substance was proportionate to its reported income.
Cross responded that the economic substance inquiry should properly focus on PBI's control over key functions and its assumption of economically significant risks, rather than on a simplistic headcount-to-income ratio. Cross cited the OECD Transfer Pricing Guidelines, Chapter VI, which emphasizes the importance of identifying the entities that control the development, enhancement, maintenance, protection, and exploitation of intangible assets and that bear the associated financial risks. Cross also referenced relevant U.S. case law and IRS guidance supporting the principle that substance should be evaluated qualitatively based on decision-making authority, risk management, and functional contributions, rather than solely on quantitative metrics such as headcount or overhead costs.
4.5 Penalty Considerations
Meskill mentioned that the examination team was considering the assertion of the IRC § 6662(e) substantial valuation misstatement penalty at the twenty percent (20%) rate, contingent upon whether the proposed transfer pricing adjustments, once finalized, met the applicable statutory threshold.
Cross stated that Penterra Pharmaceuticals Corp. had contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP for all four tax years under examination (TY 2017, 2018, 2019, and 2020). Cross asserted that this documentation satisfied the requirements of IRC § 6662(e)(3)(B) and that PPC would assert the reasonable-cause and good-faith defense as penalty protection. Cross noted that the documentation reflected a thorough analysis of comparable transactions, employed recognized transfer pricing methods, and supported PPC's pricing positions with detailed economic analysis.
Rosario noted that the IRS reserved the right to assert the IRC § 6662(h) gross valuation misstatement penalty at the forty percent (40%) rate, depending on the magnitude of the final proposed adjustments. However, Rosario did not make any commitment on this point, and his statement appeared to be made as a standard reservation of the IRS's rights rather than as an indication that the 40% penalty was likely to be asserted.
5. ANTICIPATED NOPA TIMELINE
Meskill stated that the examination team anticipated completing its analysis and issuing a Notice of Proposed Adjustment ("NOPA") in the fall of 2023. He described this timeline as the exam team's current working assumption, subject to change depending on the pace of the remaining IDR process and the results of the examination team's ongoing analysis.
Dunleavy provided a more specific estimate, stating that the NOPA would likely be issued in October 2023, assuming that all remaining IDR responses were received from PPC by September 2023. Dunleavy emphasized that timely receipt of IDR responses was critical to maintaining this timeline.
Cross asked whether the NOPA would address all four tax years (TY 2017, 2018, 2019, and 2020) simultaneously or whether the IRS intended to issue separate NOPAs for individual tax years. Meskill confirmed that the exam team planned to issue a single NOPA covering all four tax years under examination. He stated that this approach would promote efficiency and facilitate a comprehensive resolution of the issues.
Cross requested that the examination team provide advance notice if the anticipated NOPA timeline shifted for any reason. Cross also asked for an opportunity to present PPC's economic analyses to the examination team before the NOPA was issued, with the goal of narrowing or resolving issues before the formal proposal. Meskill stated that he would consider the request but could not commit to scheduling such a presentation at this time. He indicated that the exam team's standard practice was to complete its independent analysis before engaging in further substantive discussions with the taxpayer.
Rosario indicated that the IRS Office of Chief Counsel was coordinating closely with the examination team on the legal positions to be reflected in the NOPA and that the NOPA would be reviewed by Chief Counsel before issuance.
6. STATUTE OF LIMITATIONS DISCUSSION
Cross raised the statute of limitations for TY 2017, noting that the standard three-year statute of limitations under IRC § 6501(a) — measured from the original filing date of PPC's Form 1120 for TY 2017 — was approaching. Cross indicated that this issue required prompt attention to ensure the IRS's examination rights were preserved and that any resolution could proceed without unnecessary procedural complications.
Dunleavy confirmed that the examination team was aware of the statute expiration issue and stated that the exam team would need PPC's consent to extend the statute of limitations (via Form 872, Consent to Extend the Time to Assess Tax) for TY 2017 and possibly for TY 2018 as well. Dunleavy stated that an extension was necessary given the anticipated NOPA timeline of October 2023 and the likelihood that the post-NOPA process — including PPC's response, any Appeals consideration, and potential resolution — would extend beyond the current expiration dates.
Cross indicated that PPC would consider executing Form 872 extensions but requested that any extensions be limited in both scope and duration. Cross stated that PPC's preference was to avoid open-ended or overly broad extensions that could leave the tax years at issue subject to assessment for an indefinite period.
The parties discussed targeting extensions through December 31, 2024, for both TY 2017 and TY 2018. Meskill agreed that this target date was reasonable and stated that the examination team would circulate proposed Forms 872 for PPC's review and execution. Cross noted that C&H would review the proposed forms to confirm that the extensions were properly limited in scope and duration before recommending execution to PPC.
7. COORDINATION ISSUES
7.1 IRS Economist's Analysis
Cross requested the opportunity for Whitmore Valuation Group's economists — specifically, Dr. Helena Vasquez (Managing Director) and Dr. Rohan Chakrabarti (Senior Economist) — to meet with Dr. Washburne to discuss economic methodologies before the NOPA was issued. Cross stated that such a meeting could serve to narrow the economic issues between the parties, identify areas of agreement, and promote a more efficient post-NOPA process.
Dr. Washburne, participating by telephone, stated that he would discuss the request with Meskill and revert to C&H with a response. Washburne did not commit to participating in such a meeting but did not reject the request outright.
Meskill indicated that the examination team would consider a limited technical discussion between the respective economists but noted that it was not standard practice for the IRS to share draft analyses or work-in-progress with taxpayers or their representatives before the issuance of a NOPA. Meskill stated that if a meeting were to be held, it would be limited in scope to a discussion of general methodological approaches rather than a detailed exchange of economic analyses or preliminary conclusions.
7.2 Irish Coordination
Cross noted that PBI's Irish tax advisors, Thornbury & Keogh, with Ciarán Thornbury serving as Lead Partner in the firm's Dublin office, had been coordinating with Calderwood & Harkness on dual-jurisdiction aspects of the examination defense. Cross stated that Thornbury & Keogh were assisting with the compilation of Irish Revenue filings and documentation relating to PBI's Knowledge Development box ("KDB") claims, which provide for a 6.25% effective tax rate on qualifying intellectual property income under Irish tax law. This documentation was being compiled for production in response to anticipated IDR No. 30.
Cross further noted that PBI's compliance with Irish tax law and the availability of the KDB regime were relevant context for the examination, as they demonstrated that PBI was a genuine operating entity subject to the taxing jurisdiction of Ireland and that PBI's income was being reported and taxed in Ireland in accordance with Irish law.
Meskill acknowledged Cross's comments regarding the Irish coordination but stated that the examination was focused on U.S. federal income tax issues and that the IRS's analysis would be conducted under the Internal Revenue Code and applicable Treasury Regulations. Meskill stated that any competent authority or Mutual Agreement Procedure ("MAP") considerations under the U.S.-Ireland Income Tax Treaty (Convention Between the Government of the United States of America and the Government of Ireland for the Avoidance of Double Taxation) would be addressed after the NOPA was issued and PPC had an opportunity to respond. Cross noted C&H's understanding of this sequencing.
7.3 Penterra Holdings Luxembourg S.à r.l.
Dunleavy briefly asked about the role of Penterra Holdings Luxembourg S.à r.l. ("PHL") in PPC's corporate structure. Cross confirmed that PHL is registered at 14, rue Aldringen, L-1118 Luxembourg, with Luxembourg Registre de Commerce et des Sociétés Number B 168452. Cross stated that PHL serves as an intermediate holding entity in the corporate chain, holding 100% of the equity interests in PBI. PHL is itself 100% owned by PPC. For U.S. federal income tax purposes, PHL is treated as a disregarded entity and does not file a separate U.S. tax return. PHL does not have substantive operations or employees; its sole function is as a holding entity in the corporate structure.
Dunleavy indicated that the examination team had no separate issues with PHL at this time but had wanted confirmation of its disregarded entity status for the record. Cross confirmed that this information had been previously provided in the response to IDR No. 1, which included PPC's organizational chart, entity classification elections, and Forms 8832 and 8858 as applicable.
7.4 PMI Contract Manufacturing
Dunleavy briefly noted that the Penterra Manufacturing Ireland Ltd. ("PMI") contract manufacturing arrangement appeared to be within arm's-length norms and was not a primary focus of the current examination. PMI operates under a contract manufacturing agreement with PBI, under which PMI manufactures pharmaceutical products for the non-Americas territory on a cost-plus basis at a markup of 8% over its fully loaded manufacturing costs. PMI employs approximately 620 employees at its manufacturing facility located at Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland.
Cross welcomed this confirmation and noted that the PMI contract manufacturing arrangement had been fully documented in the response to IDR No. 10, including the intercompany manufacturing agreement, benchmarking analysis, cost pool composition, and applicable financial data.
8. ACTION ITEMS AND NEXT STEPS
The following action items and next steps were identified and agreed upon during the conference:
1.  Remaining IDRs. The IRS examination team will issue remaining IDRs (anticipated IDRs 39 through 47) by the end of July 2023, with the possibility that a final or supplemental IDR may extend into August or September 2023 depending on the progress of the examination.
2.  IDR Responses. PPC and Calderwood & Harkness will respond to all remaining IDRs as promptly as possible, with a target of completing all outstanding IDR responses by September 2023.
3.  Statute Extensions. The IRS examination team will circulate proposed Forms 872 for PPC's review and execution, extending the statute of limitations for TY 2017 and TY 2018 through December 31, 2024.
4.  Economist Meeting. The IRS will consider Calderwood & Harkness's request for a meeting between Whitmore Valuation Group's economists (Dr. Vasquez and Dr. Chakrabarti) and Dr. Washburne to discuss economic methodologies. Meskill will revert to C&H with a response.
5.  NOPA Timeline. The NOPA is anticipated to be issued in October 2023, subject to timely completion of the IDR process.
6.  Reservation of Rights. Calderwood & Harkness, on behalf of PPC, expressly reserved all rights to contest any proposed adjustments in the anticipated NOPA. Cross reiterated the strength of PPC's transfer pricing positions under IRC § 482, Treasury Regulations §§ 1.482-4 and 1.482-7, and the arm's-length standard as applied to PPC's intercompany transactions with PBI.
9. OBSERVATIONS AND STRATEGIC NOTES
ATTORNEY WORK PRODUCT — INTERNAL ONLY PROTECTED CORE WORK PRODUCT — MENTAL IMPRESSIONS, OPINIONS, AND STRATEGIC ANALYSIS OF COUNSEL
The following observations and strategic notes reflect the mental impressions, opinions, conclusions, and legal theories of counsel at Calderwood & Harkness LLP. This section constitutes protected core attorney work product under Fed. R. Civ. P. 26(b)(3) and is not intended for disclosure outside of Calderwood & Harkness LLP. This section must not be produced to the IRS, shared with non-privileged persons, or included in any materials provided to third parties without the express authorization of Leonard Cross, Responsible Partner.
IRS Preparation and Focus Areas. Meskill and Dunleavy appeared well-prepared for the conference and demonstrated a detailed understanding of PPC's corporate structure, intercompany transactions, and transfer pricing positions. The IRS examination team appears to be focused on three primary issues: (1) the CSA cost-sharing ratios and the reasonably anticipated benefits methodology, (2) the legacy IP royalty rate, and (3) the economic substance of PBI. The PCT valuation appears to be treated by the IRS as a supporting argument that reinforces its position on the cost-sharing ratios and intercompany payments rather than as a standalone adjustment for the examination years. This framing — recharacterization of ongoing payments rather than a direct 2012 adjustment — is consistent with Rosario's legal theory and suggests that Chief Counsel has been actively involved in shaping the examination approach.
PCT Valuation — WACC Vulnerability. Dr. Washburne's reliance on a 7.2% WACC for the income-method DCF valuation of the pre-existing IP at the PCT date represents a significant vulnerability in the IRS's position. Pharmaceutical cost-of-capital data — including published surveys by Westmark Consulting Group (now Sundial Advisors), comparable publicly traded company analyses, and academic literature (Damodaran, Fernandez) — generally supports a WACC in the range of 8.5% to 11.0% for diversified pharmaceutical companies, with the specific rate depending on the risk profile of the portfolio. Whitmore Valuation Group's independent analysis at a 9.8% WACC — which Whitmore validated through multiple approaches, including a build-up method, a comparable company analysis, and a review of industry benchmarks — produces a PCT valuation range of $278 million to $361 million, comfortably encompassing the $312 million payment actually made by PBI. A 7.2% WACC is difficult to justify for a pharmaceutical IP portfolio that included compounds at various stages of clinical development and commercialization, with attendant clinical trial risk, regulatory approval risk, and commercial launch risk. C&H and Whitmore should prepare a detailed critique of the IRS's discount rate methodology for use in the NOPA response.
Royalty Rate — CUT Comparability. The IRS's selected CUTs for the royalty rate adjustment — which Dunleavy indicated were in the 9% to 13% range — appear likely to include agreements involving early-stage or mid-stage pharmaceutical compounds with significant remaining development risk, broader rights grants (including co-development or development rights), or other contractual features that distinguish them from PPC's license of fully approved, mature, end-of-lifecycle legacy compounds. Once the specific CUTs are identified in the NOPA, C&H and Whitmore should prepare a detailed comparability rebuttal addressing product lifecycle stage, geographic scope, exclusivity terms, risk allocation, milestone and upfront payment structures, and other relevant contractual provisions. The declining net sales trajectory of the legacy compounds ($814.6M to $624.1M over the four-year period) provides strong factual support for the appropriateness of a royalty rate at the lower end of the arm's-length range.
IRS Chief Counsel Involvement. Rosario's active involvement in the conference — including his articulation of the legal theory supporting the PCT recharacterization approach and his reservation of the § 6662(h) gross valuation misstatement penalty — Signals that the IRS Office of Chief Counsel is actively supporting the examination team's legal positions. This involvement suggests that the NOPA will be formally structured and legally grounded, with Chief Counsel review before issuance. C&H should anticipate a well-drafted NOPA and prepare accordingly.
PBI Economic Substance. PBI's substance case is strong based on the evidence already compiled, including the headcount data (185 employees), board meeting records (42 meetings in Dublin), regulatory expenditures (€47.2 million cumulative), independent pricing decisions across 68 markets, the Glenmore Bank Ireland treasury relationship, and the 18,000 sq ft office facility at Sandyford Business Park. However, the IRS may attempt to frame its argument around the disproportion between PBI's headcount (185 employees) and its pre-tax income level (€1.06 billion in FY 2020), characterizing this ratio as evidence that PBI lacks substance commensurate with its income. C&H should prepare a robust response emphasizing qualitative factors — including PBI's control over DEMPE functions, its assumption of genuine market risk, its independent decision-making authority, and its substantive management and governance in Dublin — over simplistic headcount-to-income ratios. The 12 in-depth employee interviews conducted in Dublin in August–September 2022 will be important in supporting this qualitative analysis.
Penalty Exposure. Penalty exposure appears manageable given the contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP for all four tax years under examination. The documentation is thorough, was prepared by a reputable transfer pricing advisory firm, employed recognized methods (CUT and income methods), and was independently verified by Whitmore Valuation Group. The reasonable-cause defense under IRC § 6662(e)(3)(B) should be well-supported by this documentation, provided PPC can demonstrate that it reasonably relied on the analysis and that the documentation was prepared in good faith. C&H should ensure that the penalty protection file — including engagement letters, Crestfield's scope of work, and Whitmore's verification memoranda — is assembled and ready for production if needed.
§ 6662(h) Gross Valuation Misstatement Penalty. The IRS did not mention the § 6662(h) gross valuation misstatement (40%) penalty with any conviction during the conference. Rosario's reservation appeared to be pro forma and consistent with standard IRS practice of preserving all available penalty positions at the examination stage. Based on the conference discussion, the 40% penalty does not appear to be a primary focus for the examination team at this time, though C&H should monitor this issue as the NOPA takes shape.
CAP Status. Penterra Pharmaceuticals Corp. was not enrolled in the IRS Compliance Assurance Process ("CAP") for the tax years at issue. Accordingly, the examination and the NOPA will follow standard LB&I Division procedures, including the standard 30-day letter and 90-day letter process, with the opportunity for an administrative appeal to the IRS Independent Office of Appeals.
Settlement Posture. A settlement posture should be developed after the NOPA is received and the IRS's specific proposed adjustments and supporting analysis are known. Based on the conference discussion, a resolution materially below the IRS's full proposed adjustment appears achievable, particularly on the royalty rate and PCT issues, where PPC's factual and economic evidence is strong. The cost-sharing ratio issue may present greater difficulty given the IRS's focus on the RAB methodology, but the magnitude of the proposed adjustment (8 to 12 percentage points) appears aggressive and may be susceptible to narrowing through negotiation or Appeals. C&H should develop a range of settlement scenarios in consultation with Whitmore Valuation Group once the NOPA is received.
Internal C&H Follow-Up:
•  Cross to update Sylvia Hartwell (Billing Partner) on conference outcomes and current examination status.
•  Simmons to prepare a detailed memorandum for the matter file (1018-00009) summarizing the conference and key takeaways.
•  Cross to brief Marcus Whitfield (VP, Global Tax), Deborah Staines (General Counsel, Penterra Pharmaceuticals Corp.), and Rajesh Iyer (Chief Financial Officer, Penterra Pharmaceuticals Corp.) on conference results and anticipated next steps.
Budget Tracking. Sylvia Hartwell has been monitoring fee expenditure against the original budget estimate of $4.5 million to $7.0 million for the examination defense engagement. As of the mid-examination point, the matter is tracking within the estimated range. C&H will continue to monitor fees and staffing levels as the examination moves toward the NOPA phase.
10. CERTIFICATION AND DISTRIBUTION
These notes were prepared contemporaneously with the mid-examination conference held on May 25, 2023, and finalized on May 26, 2023.
Prepared by:
________________________________________
Garrett Simmons Lead Associate Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103
Date: May 26, 2023
Reviewed and Approved by:
________________________________________
Leonard Cross Responsible Partner Calderwood & Harkness LLP
Date: May 26, 2023
Distribution (Internal Calderwood & Harkness LLP Only):
•  Leonard Cross, Responsible Partner
•  Sylvia Hartwell, Billing Partner
•  Garrett Simmons, Lead Associate
•  Leila Nazari, Working Associate
Copy to Matter File 1018-00009.
PRIVILEGE DESIGNATION: These notes are protected by the attorney-client privilege and the attorney work product doctrine. Section 9 of these notes contains the mental impressions, conclusions, opinions, and legal theories of counsel at Calderwood & Harkness LLP and constitutes protected core attorney work product. These notes shall not be disclosed to any person or entity outside of Calderwood & Harkness LLP without the prior written authorization of Leonard Cross, Responsible Partner. Any inadvertent disclosure of these notes does not constitute a waiver of any applicable privilege or protection.
Location: | IRS Large Business & International Division, Newark Field Office (Conference Room 4B); certain participants attended by telephone
Matter: | Penterra Pharmaceuticals Corp. — IRS Transfer Pricing Examination Defense
C&H Matter Number: | 1018-00009
IRS Exam Team ID: | LB&I-NE-TP-2022-00641
Taxpayer: | Penterra Pharmaceuticals Corp. (EIN: 22-3741856)
Tax Years at Issue: | 2017, 2018, 2019, 2020
Prepared by: | Garrett Simmons, Lead Associate, Calderwood & Harkness LLP
Reviewed by: | Leonard Cross, Responsible Partner, Calderwood & Harkness LLP
Date of Notes: | May 25, 2023
Tax Year | Legacy Compound Non-Americas Net Sales
2017 | $814.6 million
2018 | $762.3 million
2019 | $691.8 million
2020 | $624.1 million

PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT

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