CALDERWOOD & HARKNESS LLP Attorneys at Law 1735 Market Street, Suite 3100 Philadelphia, PA 19103
Telephone: (215) 994-7600 Facsimile: (215) 994-7601
September 20, 2022
VIA CERTIFIED MAIL AND ELECTRONIC DELIVERY
Revenue Agent Patricia Dunleavy Internal Revenue Service Large Business & International Division 600 Arch Street, Room 6214 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 Subject: Response to Information Document Request No. 10 — Intercompany Manufacturing Agreement between Penterra Biopharma International DAC and Penterra Manufacturing Ireland Ltd.
Dear Revenue Agent Dunleavy:
This letter is submitted by Calderwood & Harkness LLP, on behalf of our client, Penterra Pharmaceuticals Corp. ("PPC"), by Leonard Cross, Responsible Partner, Tax Department. We are authorized to represent PPC before the Internal Revenue Service in connection with the above-referenced examination pursuant to IRS Form 2848, Power of Attorney and Declaration of Representative, filed with the Service on June 8, 2022, which designates Leonard Cross, Sylvia Hartwell, Garrett Simmons, and Leila Nazari of Calderwood & Harkness LLP as PPC's authorized representatives for the tax years at issue.
We acknowledge receipt of Information Document Request No. 10 ("IDR No. 10"), dated August 29, 2022, in which the Service requested the production of all intercompany agreements relating to manufacturing arrangements between controlled entities within the PPC consolidated group for the taxable years ending December 31, 2017, December 31, 2018, December 31, 2019, and December 31, 2020. PPC takes its obligations under the examination process seriously and, in furtherance of its commitment to full cooperation, is producing all responsive documents as described in detail below. The documents enclosed herewith are being produced subject to the reservations and qualifications set forth in this letter.
1. Description of Responsive Documents
1.1 Contract Manufacturing Agreement
In response to IDR No. 10, PPC is producing the Contract Manufacturing Agreement (the "CMA") entered into between Penterra Biopharma International DAC ("PBI"), acting in its capacity as principal, and Penterra Manufacturing Ireland Ltd. ("PMI"), acting in its capacity as contract manufacturer. The CMA governs the intercompany manufacturing relationship between PBI and PMI with respect to certain pharmaceutical products manufactured by PMI at the direction and under the control of PBI.
For the convenience of the examination team, we provide the following identifying information regarding the contracting parties:
Penterra Biopharma International DAC ("PBI") is a Designated Activity Company organized and existing under the laws of Ireland, with its registered office at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. PBI's Irish Tax Reference number is 3218764T. PBI serves as the principal entity directing manufacturing operations in Ireland and holds the relevant intellectual property licenses for the non-Americas territories.
Penterra Manufacturing Ireland Ltd. ("PMI") is an Irish private limited company organized and existing under the laws of Ireland, with its registered office at Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland. PMI is registered with the Irish Companies Registration Office under CRO Number 512347. PMI operates as the contract manufacturer performing manufacturing services at the direction of PBI pursuant to the terms of the CMA.
To provide the examination team with full context regarding the corporate ownership structure relevant to the CMA, we note the following ownership chain:
(a) PPC, a corporation organized under the laws of the State of Delaware and the common parent of the PPC consolidated group, owns 100% of the outstanding equity interests of Penterra Holdings Luxembourg S.à r.l. ("PHL");
(b) PHL is a société à responsabilité limitée organized under the laws of the Grand Duchy of Luxembourg, with its registered office at 14, rue Aldringen, L-1118 Luxembourg, and is registered with the Luxembourg Registre de Commerce et des Sociétés under RCS Number B 168452. PHL is treated as a disregarded entity for U.S. federal income tax purposes pursuant to Treasury Regulation § 301.7701-3, and accordingly, PHL's assets and operations are treated as owned and conducted directly by PPC for purposes of the U.S. consolidated federal income tax return;
(c) PHL owns 100% of the outstanding share capital of PBI; and
(d) PBI owns 100% of the outstanding share capital of PMI.
The foregoing ownership structure was in place throughout all four taxable years under examination (2017, 2018, 2019, and 2020), and no changes in ownership occurred during that period that would affect the characterization of the intercompany manufacturing arrangement governed by the CMA.
1.2 Summary of Key CMA Terms
While the CMA itself is being produced in its entirety and speaks for itself, we provide the following summary of its key terms to assist the examination team in its review:
Purpose and Scope. The CMA establishes PMI as the contract manufacturer of PPC's oncology and immunology biologics for non-Americas markets, specifically the Europe, Middle East, and Africa ("EMEA") and Asia-Pacific ("APAC") territories. PMI performs all manufacturing activities at its Ringaskiddy, Co. Cork facility under PBI's direction and in accordance with specifications, formulations, and production requirements determined by PBI.
Compensation Structure. PMI is compensated for its contract manufacturing services under a cost-plus methodology. Specifically, PMI receives reimbursement of its fully loaded costs of manufacturing — as defined in the cost-pool appendix attached to the CMA — plus a markup of eight percent (8%) applied to such costs (i.e., Cost + 8%). The cost pool includes, among other items, direct materials costs, direct labor costs, manufacturing overhead, quality control and quality assurance costs, facility and equipment depreciation, and logistics costs directly attributable to the manufacturing services performed by PMI under the CMA. The cost-plus markup is intended to compensate PMI for the routine manufacturing functions it performs and to provide PMI with an arm's-length return commensurate with its limited functional profile and risk assumption, as further discussed in Section 3 of this letter.
Risk Allocation. Under the terms of the CMA, PMI bears limited risk. PMI does not assume market risk related to the sale or distribution of the finished pharmaceutical products, does not bear credit risk on third-party sales, and does not own or bear risk with respect to the intellectual property underlying the manufactured products. PMI's risk exposure is limited to operational risks directly associated with the performance of its manufacturing functions, such as routine production disruptions, subject to PBI's overall direction and control. PBI retains full ownership of the intellectual property underlying the manufactured products, including all patents, trade secrets, know-how, regulatory filings, marketing authorizations, and related intangible property.
Functional Profile of PMI. PMI employs approximately 620 employees at its Ringaskiddy, Co. Cork facility. These employees perform manufacturing, quality control, quality assurance, packaging, and logistics functions as directed by PBI. PMI does not own or develop intangible property. Its functions are specifically limited to contract manufacturing, quality control testing, packaging, storage, and outbound logistics, all performed in accordance with specifications, standard operating procedures, and production schedules established by PBI. PMI does not engage in research and development activities, does not perform marketing or sales functions, and does not have responsibility for strategic business decisions regarding the products it manufactures.
PBI's Control Functions. PBI exercises control over all material aspects of the manufacturing arrangement, including production scheduling, quality standards and acceptance criteria, product specifications and formulations, supplier selection for key raw materials and active pharmaceutical ingredients, regulatory compliance strategy, and the distribution of finished goods to downstream affiliates and third-party customers in the EMEA and APAC territories.
Term. The CMA was effective for all four taxable years under examination. Specifically, the CMA was originally executed effective January 1, 2015, with an initial term of five years and automatic renewal provisions for successive one-year periods thereafter unless terminated by either party upon not less than twelve months' prior written notice. The CMA remained in full force and effect throughout the 2017, 2018, 2019, and 2020 taxable years.
1.3 Amendments and Supplemental Agreements
PPC is producing all amendments and supplemental agreements to the CMA that were executed during or prior to the examination period. We note for the record that no material amendments were made to the CMA during the taxable years 2017 through 2020 that altered the cost-plus eight percent (8%) compensation methodology described above. The amendments that were executed during the relevant period related to administrative matters, including updates to the product specifications schedules to reflect the addition of new oncology biologics to the scope of PMI's manufacturing activities and revisions to the quality standards appendix to conform to updated European Medicines Agency ("EMA") regulatory requirements. These amendments did not change the fundamental economic terms of the CMA, including the cost-plus markup, the risk allocation between PBI and PMI, or the functional profile of PMI as a limited-risk contract manufacturer.
2. Document Production
2.1 Bates-Numbered Documents Produced
The following documents are enclosed with this letter and have been Bates-numbered for reference in accordance with the Master Document Production Index being maintained in connection with this examination:
(a) The original Contract Manufacturing Agreement between Penterra Biopharma International DAC and Penterra Manufacturing Ireland Ltd., dated effective January 1, 2015, including all recitals and operative provisions (Bates Nos. PPC-IDR10-000001 through PPC-IDR10-000047);
(b) Amendment No. 1 to the Contract Manufacturing Agreement, dated March 15, 2017, relating to the addition of pembrolizumab biosimilar manufacturing to the product specifications schedule (Bates Nos. PPC-IDR10-000048 through PPC-IDR10-000054);
(c) Amendment No. 2 to the Contract Manufacturing Agreement, dated September 1, 2018, relating to updates to the quality standards appendix to conform to revised EMA guidelines on good manufacturing practice for biological medicinal products (Bates Nos. PPC-IDR10-000055 through PPC-IDR10-000063);
(d) Amendment No. 3 to the Contract Manufacturing Agreement, dated June 12, 2020, relating to the addition of a new monoclonal antibody product line to the product specifications schedule (Bates Nos. PPC-IDR10-000064 through PPC-IDR10-000071);
(e) Schedule A to the CMA — Product Specifications Schedule, as amended (Bates Nos. PPC-IDR10-000072 through PPC-IDR10-000098);
(f) Schedule B to the CMA — Quality Standards Appendix, as amended (Bates Nos. PPC-IDR10-000099 through PPC-IDR10-000118);
(g) Schedule C to the CMA — Cost-Pool Definition Appendix, including detailed definitions of includible cost categories and allocation methodologies (Bates Nos. PPC-IDR10-000119 through PPC-IDR10-000134).
The foregoing Bates ranges correspond to the entries being added to the Master Document Production Index, a copy of which will be provided to the examination team under separate cover upon the conclusion of all outstanding IDR responses.
2.2 Format of Production
Consistent with the format previously agreed upon between Calderwood & Harkness LLP and Revenue Agent Dunleavy during the initial planning conference held on July 12, 2022, the documents responsive to IDR No. 10 are being produced in both hard copy and electronic format. Hard copies are enclosed with this letter. Electronic copies in searchable PDF format have been uploaded to the secure file transfer platform designated by the examination team. All documents have been produced in their entirety and without redaction, except as may be noted on the privilege log referenced in Section 4 below.
3. Transfer Pricing Methodology Context
To assist the examination team in evaluating the CMA in the context of PPC's overall transfer pricing framework, we provide the following brief contextual information regarding the transfer pricing methodology applicable to the intercompany manufacturing arrangement between PBI and PMI.
The cost-plus eight percent (8%) markup applied to PMI's manufacturing services under the CMA was established in accordance with the arm's-length standard set forth in Section 482 of the Internal Revenue Code ("IRC § 482") and the regulations promulgated thereunder, specifically Treasury Regulation § 1.482-3(d), which sets forth the cost-plus method as one of the specified methods for determining arm's-length pricing for controlled transactions involving the provision of services or the transfer of tangible property. The cost-plus method was selected as the most reliable method for determining PMI's arm's-length compensation because PMI performs routine contract manufacturing functions, assumes limited risk, and does not own significant intangible property, making PMI the least complex party and rendering its total costs of manufacturing the most appropriate base upon which to determine arm's-length compensation.
The eight percent (8%) markup reflects PMI's limited functional profile as characterized above. PMI performs routine contract manufacturing functions under the direction and control of PBI, assumes limited operational risk, bears no market risk, no intellectual property ownership or development risk, and no credit risk on third-party sales. PMI does not own significant intangible property, and its functions do not require the exercise of significant business judgment or the assumption of entrepreneurial risk. The markup is intended to provide PMI with a routine return commensurate with the returns earned by comparable uncontrolled contract manufacturers performing similar functions under similar circumstances, as determined through benchmarking analyses performed by PPC's independent transfer pricing advisors.
PMI's compensation under the CMA is consistent with PPC's contemporaneous transfer pricing documentation, which was prepared by Crestfield & Associates LLP, an independent economics and transfer pricing consulting firm, for each of the taxable years 2017, 2018, 2019, and 2020. The contemporaneous documentation was prepared in accordance with the requirements of IRC § 6662(e) and Treasury Regulation § 1.6662-6 to establish a reasonable basis for the transfer pricing methodology applied and to satisfy the penalty-protection standards applicable to substantial and gross valuation misstatements attributable to transfer pricing adjustments under IRC § 482. PPC's contemporaneous transfer pricing documentation for the examination years, including the economic analyses and benchmarking studies supporting the cost-plus eight percent (8%) markup, has been previously produced to the examination team in response to IDR No. 5, dated July 22, 2022.
We note for the avoidance of any confusion that the CMA between PBI and PMI is a distinct intercompany agreement from, and should not be conflated with, the following other intercompany arrangements within the PPC group:
(a) The Qualified Cost-Sharing Arrangement ("QCSA") between PPC and PBI, effective July 1, 2012, pursuant to which PPC and PBI share the costs and risks of developing intangible property related to certain oncology and immunology biologics in accordance with IRC § 482 and Treasury Regulation § 1.482-7. The QCSA was produced to the examination team in response to IDR No. 2; and
(b) The Pre-Existing intellectual Property License Agreement between PPC and PBI, pursuant to which PBI was granted an exclusive license to exploit certain pre-existing intangible property in the EMEA and APAC territories in exchange for arm's-length royalty payments. The IP License Agreement was produced to the examination team in response to IDR No. 3.
The CMA governs only the contract manufacturing services performed by PMI on behalf of PBI and does not implicate the cost-sharing payments, platform contribution transaction, or royalty arrangements addressed in those separate agreements.
4. Privilege Reservation
PPC has produced all non-privileged documents responsive to IDR No. 10 as described in this letter. PPC expressly reserves all rights and protections afforded under the attorney-client privilege, the work-product doctrine, and any other applicable privilege, immunity, or protection recognized under federal or state law. To the extent that any documents responsive to any outstanding IDR have been withheld on the basis of privilege, such documents are identified in the privilege log being maintained by Calderwood & Harkness LLP in connection with this examination, which privilege log is updated on a rolling basis and has been provided to the examination team in its most recent form.
We confirm that, with respect to IDR No. 10 specifically, no documents responsive to this request have been withheld on privilege grounds. All responsive documents have been produced in full.
The production of documents in response to IDR No. 10 is made without waiver of any applicable privilege, protection, or immunity, and without waiver of any objection to the scope, relevance, or burdensomeness of any request. PPC's production of documents shall not be construed as an admission regarding the relevance, materiality, or admissibility of any document produced, and PPC reserves the right to assert any and all objections and defenses in connection with the examination and any subsequent proceedings.
5. Continuing Cooperation
PPC remains committed to cooperating fully and in good faith with the Service's examination of the taxable years 2017 through 2020. PPC and its representatives at Calderwood & Harkness LLP will continue to respond to information document requests in a timely manner and to make appropriate personnel available for interviews and factual discussions as requested by the examination team.
Should the examination team have any questions regarding the documents produced in response to IDR No. 10, or should additional information or clarification be needed with respect to the intercompany manufacturing arrangement between PBI and PMI, please do not hesitate to contact the undersigned, Leonard Cross, or Garrett Simmons at the contact information provided below:
Leonard Cross, Partner Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 994-7612
Email: lcross@calderwoodharkness.com
Garrett Simmons, Senior Associate Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 994-7638
Email: gsimmons@calderwoodharkness.com
We appreciate the examination team's continued professionalism and look forward to working with you to bring this examination to a timely resolution.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Leonard Cross Partner, Tax Department
Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 994-7612
C&H Matter Number: 1018-00009
Enclosures:
Contract Manufacturing Agreement between Penterra Biopharma International DAC and Penterra Manufacturing Ireland Ltd., dated effective January 1, 2015, together with all amendments thereto (Amendments No. 1, No. 2, and No. 3) and all schedules and exhibits (Schedule A — Product Specifications Schedule; Schedule B — Quality Standards Appendix; Schedule C — Cost-Pool Definition Appendix), as further described herein (Bates Nos. PPC-IDR10-000001 through PPC-IDR10-000134)
cc:
Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp., 2200 Independence Boulevard, Princeton Junction, NJ 08550
Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp., 2200 Independence Boulevard, Princeton Junction, NJ 08550
Supervisory Revenue Agent Gerald Meskill, Team Manager, LB&I-NE-TP-2022-00641, Internal Revenue Service, Large Business & International Division
Sylvia Hartwell, Calderwood & Harkness LLP
Garrett Simmons, Calderwood & Harkness LLP