1018-00009 · Client 1018 · IDR Responses

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CALDERWOOD & HARKNESS LLP

Attorneys at Law

1735 Market Street, Suite 3100 Philadelphia, PA 19103 Tel: (215) 864-7200

Fax: (215) 864-7201

600 Lexington Avenue New York, NY 10022 Tel: (212) 479-6500

July 22, 2022

VIA CERTIFIED MAIL AND IRS SECURE MESSAGING

Revenue Agent Patricia Dunleavy Internal Revenue Service Large Business & International Division 600 Arch Street, Room 6314 Philadelphia, PA 19106

Re: Examination of Penterra Pharmaceuticals Corp. EIN: 22-3741856 Exam Team ID: LB&I-NE-TP-2022-00641 Tax Years Under Examination: 2017, 2018, 2019, 2020 Response to Information Document Request No. 3

Dear Revenue Agent Dunleavy:

I write on behalf of our client, Penterra Pharmaceuticals Corp. ("PPC" or the "Taxpayer"), in response to Information Document Request ("IDR") No. 3, dated June 27, 2022, issued in connection with the above-referenced examination. I am the Responsible Partner in the Tax Department of Calderwood & Harkness LLP ("C&H"), and this firm serves as authorized representative of PPC in this matter pursuant to IRS Form 2848 (Power of Attorney and Declaration of Representative), filed with the Internal Revenue Service on June 8, 2022, which authorizes Leonard Cross, Sylvia Hartwell, Garrett Simmons, and Leila Nazari to represent PPC before the Service in all matters relating to the examination of PPC's federal income tax returns for the taxable years ending December 31, 2017, December 31, 2018, December 31, 2019, and December 31, 2020. This matter is referenced internally as C&H Matter Number 1018-00009.

IDR No. 3 requested the production of the intercompany license agreement between PPC and its Irish subsidiary, Penterra Biopharma International DAC ("PBI"), governing the licensing of intellectual property rights in certain legacy pharmaceutical compounds from PPC to PBI, together with all exhibits, schedules, and amendments thereto. PPC is producing the documents described below on a cooperative basis and in the spirit of collaboration with the examining team. PPC expressly reserves, however, all rights, privileges, objections, and defenses available to it under applicable law, regulations, and administrative procedures, as more fully set forth in Sections VI and VII of this letter. Nothing in this response or the accompanying production shall be construed as a waiver of any such right, privilege, objection, or defense.

I. Description of Responsive Documents

A. Intercompany intellectual Property License Agreement — Legacy Compounds

The principal document produced in response to IDR No. 3 is the Intercompany intellectual Property License Agreement for Legacy Compounds (the "Legacy License Agreement" or the "Agreement"), executed by and between Penterra Pharmaceuticals Corp., a Delaware corporation, as Licensor, and Penterra Biopharma International DAC, as Licensee.

PBI is a Designated Activity Company organized and existing under the laws of Ireland, with its registered office located at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland, and registered with the Companies Registration Office under Company Number 517284. PBI is a wholly owned subsidiary of Penterra Holdings Luxembourg S.à r.l. ("PHL"), a private limited liability company (société à responsabilité limitée) organized under the laws of the Grand Duchy of Luxembourg. PHL is, in turn, wholly owned — directly and indirectly — by PPC. For U.S. federal income tax purposes, PHL has been treated at all relevant times as a disregarded entity pursuant to Treasury Regulation § 301.7701-3, and accordingly, PPC is treated as the direct owner of PBI for purposes of applying the controlled transactions rules under Internal Revenue Code ("IRC") § 482 and the related Treasury Regulations.

The Legacy License Agreement was executed in connection with the formation of PPC's broader international intellectual property-holding and commercial operating structure. PBI was incorporated on March 15, 2012, and the Legacy License Agreement was entered into contemporaneously with PBI's incorporation and initial capitalization. The Agreement covers pharmaceutical compounds that were developed and owned by PPC prior to 2012 and that are not subject to the Qualified Cost Sharing Arrangement (the "CSA") between PPC and PBI, which became effective as of July 1, 2012. These compounds are referred to throughout the Agreement, and in this letter, as "Legacy Compounds."

The material terms of the Legacy License Agreement are summarized as follows:

Licensed intellectual Property. The Agreement grants PBI an exclusive license (subject to certain retained rights of PPC) to use, commercialize, market, distribute, and sell certain Legacy Compounds — specifically, pharmaceutical products incorporating intellectual property that was developed and owned by PPC prior to the calendar year 2012 and that was not contributed to, or otherwise made subject to, the CSA.

Licensed Territory. The license granted under the Agreement covers the "Non-Americas Territory," which is defined as all countries and territories worldwide other than those comprising North America (the United States, Canada, and Mexico), Central America, South America, and the Caribbean (collectively, the "Americas Territory," which PPC retained for direct exploitation). The Non-Americas Territory thus encompasses the Europe, Middle East, and Africa ("EMEA") region and the Asia-Pacific ("APAC") region, including Australia, New Zealand, Japan, the People's Republic of China, and India, among other jurisdictions.

Royalty Rate. In consideration for the license, PBI is obligated to pay PPC a running royalty equal to 4.5% of Net Sales (as defined in Article 1.12 of the Agreement) of Licensed Legacy Compounds in the Non-Americas Territory. Net Sales are calculated in accordance with the definition set forth in the Agreement, which provides for deductions from gross revenues for trade discounts, rebates, returns, chargebacks, value-added taxes, and other customary adjustments consistent with PPC's revenue recognition policies and U.S. GAAP.

Royalty Payment Frequency and Mechanics. Royalty payments are calculated and remitted on a quarterly basis, with payments due within forty-five (45) days following the close of each fiscal quarter. PBI is required to deliver to PPC a royalty report detailing the computation of Net Sales and the corresponding royalty payment for each quarter. Royalty payments are denominated in U.S. Dollars and are made by wire transfer to PPC's designated account. In the event that Net Sales are generated in currencies other than U.S. Dollars, conversion is performed using the average daily exchange rate for the applicable quarter as published by the European Central Bank or, where unavailable, another mutually agreed-upon source.

Term and Termination. The Legacy License Agreement has an initial term coterminous with the remaining useful life of the underlying Legacy Compound intellectual property, subject to earlier termination upon the occurrence of specified events, including material breach (subject to a cure period of sixty (60) days following written notice), insolvency of either party, or mutual written agreement. In the event of termination, all rights in the Licensed IP revert to PPC, and PBI is granted a wind-down period of one hundred eighty (180) days to dispose of existing inventory of Licensed Legacy Compounds in the Non-Americas Territory.

It is important to distinguish the Legacy License Agreement from the CSA. The CSA, which became effective on July 1, 2012, separately governs PBI's rights to co-develop and exploit intellectual property developed after the CSA effective date, as well as certain pre-existing intellectual property for which PBI made a platform contribution transaction ("PCT") payment of $312 million to PPC at the inception of the CSA, in accordance with IRC § 482 and Treasury Regulation § 1.482-7. The Legacy License Agreement, by contrast, covers only those pre-2012 vintage compounds that were expressly excluded from the scope of the CSA and for which PBI did not make a PCT payment. There is no overlap between the intellectual property subject to the Legacy License Agreement and the intellectual property subject to the CSA; the two agreements are mutually exclusive with respect to the compounds and intellectual property they cover.

B. Amendments to the Legacy License Agreement

PPC has reviewed its records and confirms that no amendments to the Legacy License Agreement were executed during the tax years under examination (2017, 2018, 2019, and 2020). The Legacy License Agreement, as originally executed, remained in full force and effect without modification throughout the relevant period. PPC further notes that the only amendment to the Legacy License Agreement on record is Amendment No. 1, dated September 14, 2015, which updated certain administrative provisions relating to PBI's internal reporting obligations and the designation of authorized signatories for royalty reports. Amendment No. 1 did not alter the royalty rate, the definition of Net Sales, the Licensed Territory, or any other economically material term of the Agreement. A copy of Amendment No. 1 is included in the production for completeness, as it is appended to the Agreement.

C. Schedule of Licensed Legacy Compounds

The Legacy License Agreement includes, as Exhibit A thereto, a schedule identifying the specific Legacy Compounds covered by the license (the "Schedule of Licensed Legacy Compounds"). The Schedule lists each Licensed Legacy Compound by its international nonproprietary name (INN), internal PPC compound designation number, therapeutic area classification, and regulatory approval status in key Non-Americas Territory jurisdictions. The Licensed Legacy Compounds span multiple therapeutic areas, including but not limited to oncology, immunology, and rare-disease (orphan drug) indications.

The following table summarizes the Net Sales and corresponding royalty payments attributable to Licensed Legacy Compounds in the Non-Americas Territory during each of the tax years under examination:

As the data reflect, Net Sales for Licensed Legacy Compounds in the Non-Americas Territory declined over the 2017–2020 period, which is consistent with the natural product lifecycle of pre-2012 vintage pharmaceutical compounds. Several of the Licensed Legacy Compounds experienced generic or biosimilar competition in key European and Asia-Pacific markets during this period, and certain compounds reached the end of their regulatory exclusivity or patent protection in one or more jurisdictions within the Non-Americas Territory. This secular decline in Legacy Compound revenues is consistent with PPC's publicly disclosed financial results and with the projections set forth in PPC's contemporaneous transfer pricing documentation. The declining revenue trend further supports the expectation that the Legacy License Agreement will generate diminishing royalty streams over time as the underlying compounds reach the end of their commercial lives.

II. Summary of Key License Terms and Transfer Pricing Support

For the convenience of Revenue Agent Dunleavy and the examining team, we provide the following brief narrative summary of the material terms of the Legacy License Agreement and the transfer pricing support for the intercompany royalty rate.

The royalty rate of 4.5% of Net Sales was established on an arm's-length basis, consistent with the requirements of IRC § 482 and Treasury Regulation § 1.482-4 (governing the transfer of intangible property). At the time the Legacy License Agreement was entered into, PPC prepared contemporaneous transfer pricing documentation supporting the arm's-length nature of the royalty rate, and that documentation has been updated and maintained on an annual basis for each of the tax years under examination, in compliance with the documentation requirements of IRC § 6662(e) and Treasury Regulation § 1.6662-6. The contemporaneous transfer pricing documentation was prepared by Crestfield & Associates LLP, PPC's independent auditor and tax return preparer, in consultation with PPC's internal Global Tax function.

The royalty rate was determined using the comparable uncontrolled transaction ("CUT") method as the best method under Treasury Regulation § 1.482-1(d) (the best method rule) and Treasury Regulation § 1.482-4(c)(1). PPC's transfer pricing analysis identified a set of comparable uncontrolled license agreements involving pharmaceutical intellectual property with characteristics similar to the Licensed Legacy Compounds, including comparable stage of development (marketed products), comparable therapeutic areas, comparable geographic scope (non-Americas or ex-U.S. territories), and comparable functional and risk profiles. The analysis applied appropriate comparability adjustments to account for differences between the controlled and uncontrolled transactions, as required by Treasury Regulation § 1.482-4(c)(2). The arm's-length range derived from the CUT analysis supported a royalty rate within the range of 3.5% to 6.0% of Net Sales, and the 4.5% royalty rate applied under the Legacy License Agreement falls within the interquartile range of the comparable transactions identified. PPC is prepared to provide its contemporaneous transfer pricing documentation to the examining team upon request through a separate IDR, should the Service wish to review that analysis in detail.

The Legacy License Agreement reflects PBI's role as the IP licensee and commercial principal for the Non-Americas Territory. PBI independently manages regulatory affairs, commercial strategy, marketing, distribution, and supply-chain functions for Licensed Legacy Compounds in the Non-Americas Territory through its Dublin-based personnel and management team. PBI maintains a staff of approximately sixty-five full-time employees at its Dublin headquarters, including professionals in regulatory affairs, pharmacovigilance, medical affairs, commercial operations, finance, and general management. PBI contracts with PPC and third-party contract manufacturers for the physical manufacture and supply of Licensed Legacy Compounds, and PBI bears the commercial and inventory risks associated with the sale of Licensed Legacy Compounds in the Non-Americas Territory.

III. Document Production Index

The following documents are being produced in connection with this response to IDR No. 3. All documents are Bates-stamped using the production numbering convention PPC-IDR3-000001 through PPC-IDR3-000087:

Total pages produced: 87

No documents responsive to IDR No. 3 have been withheld on the basis of privilege. To the extent the examining team's review of the Legacy License Agreement and accompanying documents gives rise to additional questions or requests for supplemental documentation (including, without limitation, the contemporaneous transfer pricing documentation referenced in Section II above), PPC will respond to such requests through the established IDR process.

IV. Privilege Reservation

PPC has produced the documents described above in response to IDR No. 3. In making this production, PPC expressly reserves all applicable privileges, protections, and immunities, including but not limited to the attorney-client privilege, the work-product doctrine (as set forth in Fed. R. Civ. P. 26(b)(3) and its common-law equivalents), the tax practitioner privilege under IRC § 7525, and any other applicable privilege or protection under federal or state law.

This production is being made in accordance with the privilege protocol established between PPC and the examining team, as memorialized in the correspondence between the parties dated June 15, 2022. PPC has conducted a reasonable review of the documents produced herewith and has determined that none of the documents in this production are subject to a claim of privilege. However, to the extent that any privileged, protected, or otherwise exempt material is inadvertently included in this or any other production made in connection with this examination, such inadvertent production shall not constitute a waiver of any applicable privilege, protection, or immunity, and PPC reserves the right to assert such privilege, protection, or immunity upon discovery of the inadvertent disclosure, consistent with the principles set forth in Federal Rule of Evidence 502(b) and the privilege protocol referenced above.

PPC will maintain a privilege log for any documents that are withheld from production in response to this or any other IDR on the basis of privilege or work-product protection, and such privilege log will be made available to the examining team as appropriate and in accordance with the privilege protocol and applicable IRS procedures, including IRM 25.5.4.

V. Reservation of Rights

PPC reserves all rights to supplement, clarify, correct, or amend this response and the accompanying document production at any time, including without limitation the right to produce additional documents, provide additional explanations, or revise any statement made herein as additional information becomes available or as may be necessary to ensure the completeness and accuracy of this response.

The production of documents in response to IDR No. 3 does not constitute an agreement, admission, or concession by PPC with respect to any characterization of the transactions at issue by the Internal Revenue Service, the examining team, or any other party. PPC does not, by virtue of this production, concede or admit the relevance, materiality, or admissibility of any document produced, nor does PPC concede or admit the correctness or applicability of any legal theory, factual assertion, or proposed adjustment that the Service may advance in connection with this examination.

PPC expressly reserves all defenses and positions with respect to the arm's-length nature of the intercompany royalty rate established under the Legacy License Agreement, the transfer pricing methodology employed, and the terms and conditions of the Legacy License Agreement, including but not limited to positions under IRC § 482, the Treasury Regulations promulgated thereunder, applicable tax treaties (including the Convention between the Government of the United States of America and the Government of Ireland for the Avoidance of Double Taxation), and all relevant administrative guidance.

PPC further does not waive, and expressly reserves, any and all rights under applicable statutes, regulations, or administrative procedures, including without limitation the right to challenge any proposed adjustments through the administrative appeals process, the right to petition the United States Tax Court, the right to seek competent authority relief under applicable tax treaties, and all other rights and remedies available at law or in equity.

VI. Offer of Cooperation

Calderwood & Harkness LLP and PPC remain committed to cooperating with the examining team in a timely and transparent manner throughout the course of this examination. We are available to discuss this response, the documents produced herewith, or any related matters at your convenience. Should the examining team have questions regarding the Legacy License Agreement, its terms, or its application during the tax years under examination, or should the examining team require additional information or documentation, we respectfully request that such requests be directed through the established IDR process.

We invite Revenue Agent Dunleavy, or any member of the examining team, to contact the following individuals with questions regarding this response or the produced documents:

Garrett Simmons, Associate (Lead Associate for this matter) Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Direct: (215) 864-7238

Email: gsimmons@calderwoodharkness.com

Leonard Cross, Partner (Responsible Partner) Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Direct: (215) 864-7212

Email: lcross@calderwoodharkness.com

We appreciate the examining team's professionalism and look forward to continuing to work cooperatively to resolve any issues arising during the course of this examination.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Leonard Cross, Partner Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Licensed in New York, New Jersey, and the District of Columbia

cc: (via email)

Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. Sylvia Hartwell, Partner, Calderwood & Harkness LLP Garrett Simmons, Associate, Calderwood & Harkness LLP Leila Nazari, Associate, Calderwood & Harkness LLP

Enclosures: Documents responsive to IDR No. 3, as described in Section III above (PPC-IDR3-000001 through PPC-IDR3-000087; 87 pages total)

Tax Year	Non-Americas Net Sales (Legacy Compounds)	Royalty Rate	Royalties Paid to PPC
2017	$814,600,000	4.5%	$36,657,000
2018	$762,300,000	4.5%	$34,303,500
2019	$691,800,000	4.5%	$31,131,000
2020	$624,100,000	4.5%	$28,084,500
Document No.	Description	Bates Range
1	Intercompany intellectual Property License Agreement for Legacy Compounds, dated March 15, 2012, by and between Penterra Pharmaceuticals Corp. (Licensor) and Penterra Biopharma International DAC (Licensee), including all exhibits and schedules (including Exhibit A — Schedule of Licensed Legacy Compounds)	PPC-IDR3-000001 through PPC-IDR3-000062
2	Amendment No. 1 to the Intercompany intellectual Property License Agreement for Legacy Compounds, dated September 14, 2015	PPC-IDR3-000063 through PPC-IDR3-000071
3	Schedule of Licensed Legacy Compounds (standalone copy, as updated through December 31, 2020)	PPC-IDR3-000072 through PPC-IDR3-000087

CALDERWOOD & HARKNESS LLP
Attorneys at Law
1735 Market Street, Suite 3100 Philadelphia, PA 19103 Tel: (215) 864-7200
Fax: (215) 864-7201
600 Lexington Avenue New York, NY 10022 Tel: (212) 479-6500
July 22, 2022
VIA CERTIFIED MAIL AND IRS SECURE MESSAGING
Revenue Agent Patricia Dunleavy Internal Revenue Service Large Business & International Division 600 Arch Street, Room 6314 Philadelphia, PA 19106
Re: Examination of Penterra Pharmaceuticals Corp. EIN: 22-3741856 Exam Team ID: LB&I-NE-TP-2022-00641 Tax Years Under Examination: 2017, 2018, 2019, 2020 Response to Information Document Request No. 3
Dear Revenue Agent Dunleavy:
I write on behalf of our client, Penterra Pharmaceuticals Corp. ("PPC" or the "Taxpayer"), in response to Information Document Request ("IDR") No. 3, dated June 27, 2022, issued in connection with the above-referenced examination. I am the Responsible Partner in the Tax Department of Calderwood & Harkness LLP ("C&H"), and this firm serves as authorized representative of PPC in this matter pursuant to IRS Form 2848 (Power of Attorney and Declaration of Representative), filed with the Internal Revenue Service on June 8, 2022, which authorizes Leonard Cross, Sylvia Hartwell, Garrett Simmons, and Leila Nazari to represent PPC before the Service in all matters relating to the examination of PPC's federal income tax returns for the taxable years ending December 31, 2017, December 31, 2018, December 31, 2019, and December 31, 2020. This matter is referenced internally as C&H Matter Number 1018-00009.
IDR No. 3 requested the production of the intercompany license agreement between PPC and its Irish subsidiary, Penterra Biopharma International DAC ("PBI"), governing the licensing of intellectual property rights in certain legacy pharmaceutical compounds from PPC to PBI, together with all exhibits, schedules, and amendments thereto. PPC is producing the documents described below on a cooperative basis and in the spirit of collaboration with the examining team. PPC expressly reserves, however, all rights, privileges, objections, and defenses available to it under applicable law, regulations, and administrative procedures, as more fully set forth in Sections VI and VII of this letter. Nothing in this response or the accompanying production shall be construed as a waiver of any such right, privilege, objection, or defense.
I. Description of Responsive Documents
A. Intercompany intellectual Property License Agreement — Legacy Compounds
The principal document produced in response to IDR No. 3 is the Intercompany intellectual Property License Agreement for Legacy Compounds (the "Legacy License Agreement" or the "Agreement"), executed by and between Penterra Pharmaceuticals Corp., a Delaware corporation, as Licensor, and Penterra Biopharma International DAC, as Licensee.
PBI is a Designated Activity Company organized and existing under the laws of Ireland, with its registered office located at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland, and registered with the Companies Registration Office under Company Number 517284. PBI is a wholly owned subsidiary of Penterra Holdings Luxembourg S.à r.l. ("PHL"), a private limited liability company (société à responsabilité limitée) organized under the laws of the Grand Duchy of Luxembourg. PHL is, in turn, wholly owned — directly and indirectly — by PPC. For U.S. federal income tax purposes, PHL has been treated at all relevant times as a disregarded entity pursuant to Treasury Regulation § 301.7701-3, and accordingly, PPC is treated as the direct owner of PBI for purposes of applying the controlled transactions rules under Internal Revenue Code ("IRC") § 482 and the related Treasury Regulations.
The Legacy License Agreement was executed in connection with the formation of PPC's broader international intellectual property-holding and commercial operating structure. PBI was incorporated on March 15, 2012, and the Legacy License Agreement was entered into contemporaneously with PBI's incorporation and initial capitalization. The Agreement covers pharmaceutical compounds that were developed and owned by PPC prior to 2012 and that are not subject to the Qualified Cost Sharing Arrangement (the "CSA") between PPC and PBI, which became effective as of July 1, 2012. These compounds are referred to throughout the Agreement, and in this letter, as "Legacy Compounds."
The material terms of the Legacy License Agreement are summarized as follows:
Licensed intellectual Property. The Agreement grants PBI an exclusive license (subject to certain retained rights of PPC) to use, commercialize, market, distribute, and sell certain Legacy Compounds — specifically, pharmaceutical products incorporating intellectual property that was developed and owned by PPC prior to the calendar year 2012 and that was not contributed to, or otherwise made subject to, the CSA.
Licensed Territory. The license granted under the Agreement covers the "Non-Americas Territory," which is defined as all countries and territories worldwide other than those comprising North America (the United States, Canada, and Mexico), Central America, South America, and the Caribbean (collectively, the "Americas Territory," which PPC retained for direct exploitation). The Non-Americas Territory thus encompasses the Europe, Middle East, and Africa ("EMEA") region and the Asia-Pacific ("APAC") region, including Australia, New Zealand, Japan, the People's Republic of China, and India, among other jurisdictions.
Royalty Rate. In consideration for the license, PBI is obligated to pay PPC a running royalty equal to 4.5% of Net Sales (as defined in Article 1.12 of the Agreement) of Licensed Legacy Compounds in the Non-Americas Territory. Net Sales are calculated in accordance with the definition set forth in the Agreement, which provides for deductions from gross revenues for trade discounts, rebates, returns, chargebacks, value-added taxes, and other customary adjustments consistent with PPC's revenue recognition policies and U.S. GAAP.
Royalty Payment Frequency and Mechanics. Royalty payments are calculated and remitted on a quarterly basis, with payments due within forty-five (45) days following the close of each fiscal quarter. PBI is required to deliver to PPC a royalty report detailing the computation of Net Sales and the corresponding royalty payment for each quarter. Royalty payments are denominated in U.S. Dollars and are made by wire transfer to PPC's designated account. In the event that Net Sales are generated in currencies other than U.S. Dollars, conversion is performed using the average daily exchange rate for the applicable quarter as published by the European Central Bank or, where unavailable, another mutually agreed-upon source.
Term and Termination. The Legacy License Agreement has an initial term coterminous with the remaining useful life of the underlying Legacy Compound intellectual property, subject to earlier termination upon the occurrence of specified events, including material breach (subject to a cure period of sixty (60) days following written notice), insolvency of either party, or mutual written agreement. In the event of termination, all rights in the Licensed IP revert to PPC, and PBI is granted a wind-down period of one hundred eighty (180) days to dispose of existing inventory of Licensed Legacy Compounds in the Non-Americas Territory.
It is important to distinguish the Legacy License Agreement from the CSA. The CSA, which became effective on July 1, 2012, separately governs PBI's rights to co-develop and exploit intellectual property developed after the CSA effective date, as well as certain pre-existing intellectual property for which PBI made a platform contribution transaction ("PCT") payment of $312 million to PPC at the inception of the CSA, in accordance with IRC § 482 and Treasury Regulation § 1.482-7. The Legacy License Agreement, by contrast, covers only those pre-2012 vintage compounds that were expressly excluded from the scope of the CSA and for which PBI did not make a PCT payment. There is no overlap between the intellectual property subject to the Legacy License Agreement and the intellectual property subject to the CSA; the two agreements are mutually exclusive with respect to the compounds and intellectual property they cover.
B. Amendments to the Legacy License Agreement
PPC has reviewed its records and confirms that no amendments to the Legacy License Agreement were executed during the tax years under examination (2017, 2018, 2019, and 2020). The Legacy License Agreement, as originally executed, remained in full force and effect without modification throughout the relevant period. PPC further notes that the only amendment to the Legacy License Agreement on record is Amendment No. 1, dated September 14, 2015, which updated certain administrative provisions relating to PBI's internal reporting obligations and the designation of authorized signatories for royalty reports. Amendment No. 1 did not alter the royalty rate, the definition of Net Sales, the Licensed Territory, or any other economically material term of the Agreement. A copy of Amendment No. 1 is included in the production for completeness, as it is appended to the Agreement.
C. Schedule of Licensed Legacy Compounds
The Legacy License Agreement includes, as Exhibit A thereto, a schedule identifying the specific Legacy Compounds covered by the license (the "Schedule of Licensed Legacy Compounds"). The Schedule lists each Licensed Legacy Compound by its international nonproprietary name (INN), internal PPC compound designation number, therapeutic area classification, and regulatory approval status in key Non-Americas Territory jurisdictions. The Licensed Legacy Compounds span multiple therapeutic areas, including but not limited to oncology, immunology, and rare-disease (orphan drug) indications.
The following table summarizes the Net Sales and corresponding royalty payments attributable to Licensed Legacy Compounds in the Non-Americas Territory during each of the tax years under examination:
As the data reflect, Net Sales for Licensed Legacy Compounds in the Non-Americas Territory declined over the 2017–2020 period, which is consistent with the natural product lifecycle of pre-2012 vintage pharmaceutical compounds. Several of the Licensed Legacy Compounds experienced generic or biosimilar competition in key European and Asia-Pacific markets during this period, and certain compounds reached the end of their regulatory exclusivity or patent protection in one or more jurisdictions within the Non-Americas Territory. This secular decline in Legacy Compound revenues is consistent with PPC's publicly disclosed financial results and with the projections set forth in PPC's contemporaneous transfer pricing documentation. The declining revenue trend further supports the expectation that the Legacy License Agreement will generate diminishing royalty streams over time as the underlying compounds reach the end of their commercial lives.
II. Summary of Key License Terms and Transfer Pricing Support
For the convenience of Revenue Agent Dunleavy and the examining team, we provide the following brief narrative summary of the material terms of the Legacy License Agreement and the transfer pricing support for the intercompany royalty rate.
The royalty rate of 4.5% of Net Sales was established on an arm's-length basis, consistent with the requirements of IRC § 482 and Treasury Regulation § 1.482-4 (governing the transfer of intangible property). At the time the Legacy License Agreement was entered into, PPC prepared contemporaneous transfer pricing documentation supporting the arm's-length nature of the royalty rate, and that documentation has been updated and maintained on an annual basis for each of the tax years under examination, in compliance with the documentation requirements of IRC § 6662(e) and Treasury Regulation § 1.6662-6. The contemporaneous transfer pricing documentation was prepared by Crestfield & Associates LLP, PPC's independent auditor and tax return preparer, in consultation with PPC's internal Global Tax function.
The royalty rate was determined using the comparable uncontrolled transaction ("CUT") method as the best method under Treasury Regulation § 1.482-1(d) (the best method rule) and Treasury Regulation § 1.482-4(c)(1). PPC's transfer pricing analysis identified a set of comparable uncontrolled license agreements involving pharmaceutical intellectual property with characteristics similar to the Licensed Legacy Compounds, including comparable stage of development (marketed products), comparable therapeutic areas, comparable geographic scope (non-Americas or ex-U.S. territories), and comparable functional and risk profiles. The analysis applied appropriate comparability adjustments to account for differences between the controlled and uncontrolled transactions, as required by Treasury Regulation § 1.482-4(c)(2). The arm's-length range derived from the CUT analysis supported a royalty rate within the range of 3.5% to 6.0% of Net Sales, and the 4.5% royalty rate applied under the Legacy License Agreement falls within the interquartile range of the comparable transactions identified. PPC is prepared to provide its contemporaneous transfer pricing documentation to the examining team upon request through a separate IDR, should the Service wish to review that analysis in detail.
The Legacy License Agreement reflects PBI's role as the IP licensee and commercial principal for the Non-Americas Territory. PBI independently manages regulatory affairs, commercial strategy, marketing, distribution, and supply-chain functions for Licensed Legacy Compounds in the Non-Americas Territory through its Dublin-based personnel and management team. PBI maintains a staff of approximately sixty-five full-time employees at its Dublin headquarters, including professionals in regulatory affairs, pharmacovigilance, medical affairs, commercial operations, finance, and general management. PBI contracts with PPC and third-party contract manufacturers for the physical manufacture and supply of Licensed Legacy Compounds, and PBI bears the commercial and inventory risks associated with the sale of Licensed Legacy Compounds in the Non-Americas Territory.
III. Document Production Index
The following documents are being produced in connection with this response to IDR No. 3. All documents are Bates-stamped using the production numbering convention PPC-IDR3-000001 through PPC-IDR3-000087:
Total pages produced: 87
No documents responsive to IDR No. 3 have been withheld on the basis of privilege. To the extent the examining team's review of the Legacy License Agreement and accompanying documents gives rise to additional questions or requests for supplemental documentation (including, without limitation, the contemporaneous transfer pricing documentation referenced in Section II above), PPC will respond to such requests through the established IDR process.
IV. Privilege Reservation
PPC has produced the documents described above in response to IDR No. 3. In making this production, PPC expressly reserves all applicable privileges, protections, and immunities, including but not limited to the attorney-client privilege, the work-product doctrine (as set forth in Fed. R. Civ. P. 26(b)(3) and its common-law equivalents), the tax practitioner privilege under IRC § 7525, and any other applicable privilege or protection under federal or state law.
This production is being made in accordance with the privilege protocol established between PPC and the examining team, as memorialized in the correspondence between the parties dated June 15, 2022. PPC has conducted a reasonable review of the documents produced herewith and has determined that none of the documents in this production are subject to a claim of privilege. However, to the extent that any privileged, protected, or otherwise exempt material is inadvertently included in this or any other production made in connection with this examination, such inadvertent production shall not constitute a waiver of any applicable privilege, protection, or immunity, and PPC reserves the right to assert such privilege, protection, or immunity upon discovery of the inadvertent disclosure, consistent with the principles set forth in Federal Rule of Evidence 502(b) and the privilege protocol referenced above.
PPC will maintain a privilege log for any documents that are withheld from production in response to this or any other IDR on the basis of privilege or work-product protection, and such privilege log will be made available to the examining team as appropriate and in accordance with the privilege protocol and applicable IRS procedures, including IRM 25.5.4.
V. Reservation of Rights
PPC reserves all rights to supplement, clarify, correct, or amend this response and the accompanying document production at any time, including without limitation the right to produce additional documents, provide additional explanations, or revise any statement made herein as additional information becomes available or as may be necessary to ensure the completeness and accuracy of this response.
The production of documents in response to IDR No. 3 does not constitute an agreement, admission, or concession by PPC with respect to any characterization of the transactions at issue by the Internal Revenue Service, the examining team, or any other party. PPC does not, by virtue of this production, concede or admit the relevance, materiality, or admissibility of any document produced, nor does PPC concede or admit the correctness or applicability of any legal theory, factual assertion, or proposed adjustment that the Service may advance in connection with this examination.
PPC expressly reserves all defenses and positions with respect to the arm's-length nature of the intercompany royalty rate established under the Legacy License Agreement, the transfer pricing methodology employed, and the terms and conditions of the Legacy License Agreement, including but not limited to positions under IRC § 482, the Treasury Regulations promulgated thereunder, applicable tax treaties (including the Convention between the Government of the United States of America and the Government of Ireland for the Avoidance of Double Taxation), and all relevant administrative guidance.
PPC further does not waive, and expressly reserves, any and all rights under applicable statutes, regulations, or administrative procedures, including without limitation the right to challenge any proposed adjustments through the administrative appeals process, the right to petition the United States Tax Court, the right to seek competent authority relief under applicable tax treaties, and all other rights and remedies available at law or in equity.
VI. Offer of Cooperation
Calderwood & Harkness LLP and PPC remain committed to cooperating with the examining team in a timely and transparent manner throughout the course of this examination. We are available to discuss this response, the documents produced herewith, or any related matters at your convenience. Should the examining team have questions regarding the Legacy License Agreement, its terms, or its application during the tax years under examination, or should the examining team require additional information or documentation, we respectfully request that such requests be directed through the established IDR process.
We invite Revenue Agent Dunleavy, or any member of the examining team, to contact the following individuals with questions regarding this response or the produced documents:
Garrett Simmons, Associate (Lead Associate for this matter) Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Direct: (215) 864-7238
Email: gsimmons@calderwoodharkness.com
Leonard Cross, Partner (Responsible Partner) Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Direct: (215) 864-7212
Email: lcross@calderwoodharkness.com
We appreciate the examining team's professionalism and look forward to continuing to work cooperatively to resolve any issues arising during the course of this examination.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Leonard Cross, Partner Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Licensed in New York, New Jersey, and the District of Columbia
cc: (via email)
Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. Sylvia Hartwell, Partner, Calderwood & Harkness LLP Garrett Simmons, Associate, Calderwood & Harkness LLP Leila Nazari, Associate, Calderwood & Harkness LLP
Enclosures: Documents responsive to IDR No. 3, as described in Section III above (PPC-IDR3-000001 through PPC-IDR3-000087; 87 pages total)
Tax Year | Non-Americas Net Sales (Legacy Compounds) | Royalty Rate | Royalties Paid to PPC
2017 | $814,600,000 | 4.5% | $36,657,000
2018 | $762,300,000 | 4.5% | $34,303,500
2019 | $691,800,000 | 4.5% | $31,131,000
2020 | $624,100,000 | 4.5% | $28,084,500
Document No. | Description | Bates Range
1 | Intercompany intellectual Property License Agreement for Legacy Compounds, dated March 15, 2012, by and between Penterra Pharmaceuticals Corp. (Licensor) and Penterra Biopharma International DAC (Licensee), including all exhibits and schedules (including Exhibit A — Schedule of Licensed Legacy Compounds) | PPC-IDR3-000001 through PPC-IDR3-000062
2 | Amendment No. 1 to the Intercompany intellectual Property License Agreement for Legacy Compounds, dated September 14, 2015 | PPC-IDR3-000063 through PPC-IDR3-000071
3 | Schedule of Licensed Legacy Compounds (standalone copy, as updated through December 31, 2020) | PPC-IDR3-000072 through PPC-IDR3-000087

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