1018-00009 · Client 1018 · IDR Responses

idr-18-response.docx DOCUMENT M&A / Corporate

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Contract analysis Extract to table

CALDERWOOD & HARKNESS LLP Attorneys at Law

1735 Market Street, Suite 3100 Philadelphia, PA 19103

Telephone: (215) 864-7200 Facsimile: (215) 864-7201

600 Lexington Avenue New York, NY 10022

www.calderwoodharkness.com

December 5, 2022

VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED AND ELECTRONICALLY VIA IRS SECURE MESSAGING

Revenue Agent Patricia Dunleavy Internal Revenue Service Large Business & International Division 600 Arch Street, Room 6454 Philadelphia, PA 19106

Re: Examination of Penterra Pharmaceuticals Corp. EIN: 22-3741856 Tax Years Under Examination: 2017, 2018, 2019, 2020 Exam Team ID: LB&I-NE-TP-2022-00641 Response to Information Document Request No. 18 C&H Matter No.: 1018-00009

Dear Revenue Agent Dunleavy:

This firm represents Penterra Pharmaceuticals Corp. ("PPC" or the "Taxpayer") in connection with the above-referenced examination. I write in my capacity as Responsible Partner, Tax Department, Calderwood & Harkness LLP, on behalf of PPC. As you are aware, IRS Form 2848, Power of Attorney and Declaration of Representative, was filed with the Internal Revenue Service on June 8, 2022, authorizing the undersigned, Leonard Cross, together with Sylvia Hartwell, Partner, Garrett Simmons, Associate, and Leila Nazari, Associate, all of Calderwood & Harkness LLP, to represent PPC before the Internal Revenue Service in all matters pertaining to the above-referenced examination for the tax years at issue.

We acknowledge receipt of Information Document Request No. 18 ("IDR No. 18"), dated October 14, 2022, and this letter, together with its accompanying enclosures, constitutes PPC's complete response thereto. IDR No. 18 requested the production of all third-party distribution agreements entered into by or on behalf of Penterra Biopharma International DAC ("PBI"), PPC's Irish-resident subsidiary, for non-Americas territories during the tax years 2017 through 2020. We have undertaken a thorough and diligent search for responsive documents and provide them herewith, together with the explanatory information set forth below to assist the examination team in its review of the production.

1. Scope of IDR No. 18

IDR No. 18, as issued on October 14, 2022, requested the production of all third-party distribution agreements, distribution partner arrangements, and related commercial agreements executed by or on behalf of PBI for territories outside the Americas during the period January 1, 2017 through December 31, 2020. For purposes of this request, and as defined in IDR No. 18 itself, the term "Americas" encompasses North America (including the United States, Canada, and Mexico), Central America, South America, and the Caribbean. Accordingly, the scope of IDR No. 18 encompasses all third-party distribution agreements and related arrangements entered into by PBI for territories within the Europe, Middle East, and Africa ("EMEA") region, as well as the Asia-Pacific ("APAC") region.

In response to IDR No. 18, PPC has caused PBI to conduct a comprehensive search of PBI's records, including both physical and electronic records. This search was conducted at PBI's registered office located at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland, where PBI maintains its principal business records, commercial files, and corporate governance documentation. The search encompassed PBI's contract management database, its electronic document management system, archived physical files maintained on-site, and correspondence files of PBI's commercial-strategy, regulatory, and legal departments. We are satisfied that the search was thorough and that the documents produced herewith represent a complete and accurate response to IDR No. 18, subject to the privilege reservations set forth in Section 5 below.

2. Description of Documents Produced

2.1 Overview of PBI's Distribution Network

To provide context for the documents produced herewith, we briefly describe PBI's role within the Penterra Pharmaceuticals group and the scope of its distribution operations.

PBI serves as the principal entity for the commercialization of PPC pharmaceutical products outside the Americas. In this capacity, PBI manages distribution arrangements across sixty-eight (68) country markets spanning both the EMEA and APAC regions. PBI's distribution network represents a substantial and complex commercial operation that has grown significantly since PBI's incorporation in 2012 and the commencement of the cost-sharing arrangement described in Section 4 below.

PBI's commercial-strategy, regulatory, and supply-chain personnel, all of whom are based at PBI's offices in Dublin, Ireland, independently negotiate, execute, and manage these distribution arrangements in the ordinary course of PBI's business. The distribution partner relationships are managed day-to-day by PBI's commercial-strategy team, which reports directly to PBI's Managing Director, Aidan Naughton. Mr. Naughton, who has served as PBI's Managing Director since 2014, oversees all aspects of PBI's commercial operations, including the identification, evaluation, selection, and ongoing management of distribution partners across all sixty-eight country markets.

The organizational depth and breadth of PBI's operations are reflected in its workforce. As of December 31, 2020, PBI employed one hundred eighty-five (185) full-time employees, representing a substantial increase from the fifty-two (52) employees PBI maintained at its incorporation in 2012. PBI's workforce includes dedicated personnel across the following functional areas:

• Regulatory Affairs: Personnel responsible for managing regulatory submissions, marketing authorization applications, and post-approval commitments across non-Americas jurisdictions, including interactions with the European Medicines Agency ("EMA"), national competent authorities, and APAC regulatory bodies.

• Medical Affairs: Personnel responsible for medical information services, pharmacovigilance, post-marketing surveillance, and medical education activities in non-Americas territories.

• Commercial Strategy: Personnel responsible for pricing and market access analysis, distribution partner management, brand strategy, and commercial planning for each of the sixty-eight country markets served by PBI.

• Supply Chain and Logistics: Personnel responsible for demand forecasting, inventory management, coordination with contract manufacturing partners, import/export compliance, and logistics oversight for product distribution across EMEA and APAC markets.

• Legal and Compliance: In-house legal counsel and compliance personnel responsible for contract negotiation, anti-corruption compliance, data privacy, and regulatory compliance in connection with PBI's commercial activities.

• Finance and Accounting: Personnel responsible for financial planning, intercompany transaction management, transfer pricing documentation, statutory and management reporting, and tax compliance for PBI's Irish operations and its branch offices.

PBI maintained approximately eighteen thousand (18,000) square feet of office space at its Sandyford Business Park location in Dublin throughout the examination period, providing adequate facilities for its full workforce and business operations.

PBI's governance structure further reflects its independent decision-making authority. PBI's board of directors, which during the examination period consisted of five directors (three of whom were Dublin-based), convened a total of forty-two (42) meetings during the period 2017 through 2020. These meetings included regularly scheduled quarterly meetings as well as special sessions convened to address specific commercial and strategic matters. All forty-two board meetings were held in Dublin, Ireland. During these meetings, the board regularly reviewed and approved key commercial decisions, including distribution partner selections, pricing strategies, market-entry and market-exit decisions, capital expenditure authorizations, and other matters requiring board-level approval under PBI's articles of association and applicable corporate governance policies.

2.2 Key Product Lines Covered by Distribution Agreements

The distribution agreements produced in response to IDR No. 18 cover PBI's three principal product lines, each of which is described briefly below:

Veritaxol (Oncology). Veritaxol is PPC's blockbuster oncology product and the largest contributor to PPC's consolidated revenue. For fiscal year 2020, Veritaxol generated global net sales of approximately $3.12 billion. Of this total, non-Americas net sales attributable to PBI's distribution network totaled approximately $1.34 billion, representing approximately forty-three percent (43%) of Veritaxol's global net sales. Veritaxol is distributed through PBI's distribution partners in substantially all of the sixty-eight country markets covered by PBI's distribution network, including major European markets (Germany, France, the United Kingdom, Spain, and Italy), Japan, South Korea, Australia, and numerous other EMEA and APAC territories.

Imvara (Immunology). Imvara is PPC's second-largest product by global revenue, serving the immunology therapeutic area. For fiscal year 2020, Imvara generated global net sales of approximately $1.87 billion. Non-Americas net sales attributable to PBI's distribution operations totaled approximately $790 million, representing approximately forty-two percent (42%) of Imvara's global net sales. Imvara is distributed through PBI's distribution partners across a substantial majority of PBI's sixty-eight country markets, with particularly significant commercial presence in Western Europe and Japan.

Cerulon (Rare Disease). Cerulon is PPC's rare disease product. For fiscal year 2020, Cerulon generated global net sales of approximately $620 million. Non-Americas net sales attributable to PBI's distribution operations totaled approximately $280 million, representing approximately forty-five percent (45%) of Cerulon's global net sales. Due to the specialized nature of the rare disease market, Cerulon's distribution arrangements involve a more targeted set of distribution partners with demonstrated expertise in rare disease product distribution, specialty pharmacy networks, and patient access programs in the relevant territories.

The distribution agreements produced herewith cover all three of the above product lines across the applicable non-Americas markets served by PBI during the examination period.

2.3 Categories of Documents Produced

The documents produced in response to IDR No. 18 fall within the following seven categories:

Category 1 — Master Distribution Agreements. This category comprises the executed master distribution agreements between PBI and its third-party distributors operating in EMEA and APAC markets. The production includes the original executed agreements, together with all amendments, addenda, renewals, and extensions entered into during the period January 1, 2017 through December 31, 2020. These agreements set forth the fundamental terms and conditions governing the distributor relationship, including the scope of the distributorship (by product and territory), term and termination provisions, obligations of the parties with respect to regulatory compliance, pharmacovigilance, and product handling, as well as applicable governing law and dispute resolution provisions. Certain of these master distribution agreements were executed prior to the examination period but remained in effect during all or a portion of the 2017–2020 period; such agreements are included to the extent they were operative during the relevant years.

Category 2 — Exclusive and Non-Exclusive Distributor Appointment Letters. This category comprises formal appointment letters issued by PBI to third-party distributors designating them as either exclusive or non-exclusive distributors for specific country markets or regional territories within the EMEA and APAC regions. These appointment letters typically accompany or supplement the master distribution agreements described in Category 1 and specify the particular territory, product scope, and exclusivity terms applicable to the distributor's appointment. Where PBI transitioned from one distributor to another during the examination period, the production includes both the termination correspondence directed to the outgoing distributor and the appointment letter issued to the incoming distributor.

Category 3 — Pricing and Commercial Terms Schedules. This category comprises the pricing and commercial terms schedules attached to, or incorporated by reference in, the distribution agreements. These schedules set forth the transfer prices at which PBI supplied products to its third-party distributors, as well as applicable discounts, volume-based rebates, early payment incentives, and other commercial terms governing the economic arrangements between PBI and each distribution partner. Importantly, these pricing schedules evidence PBI's independent pricing decisions across the sixty-eight country markets served by its distribution network. The pricing schedules reflect market-specific considerations, including local competitive dynamics, national regulatory environments, government reimbursement frameworks, and health technology assessment outcomes, resulting in meaningful price differentiation across territories. The production includes pricing schedules for each year of the examination period, reflecting annual pricing adjustments made by PBI's commercial-strategy team in Dublin.

Category 4 — Market Entry Assessments and Approvals. This category comprises internal PBI memoranda, analyses, and board resolutions prepared in connection with PBI's evaluation of potential new market entries and its authorization of new distribution arrangements during the examination period. These documents demonstrate PBI's independent commercial decision-making authority with respect to the identification of new market opportunities, the assessment of market potential and competitive landscape, and the formal board-level approval of market entry strategies. Included in this category are market feasibility studies prepared by PBI's commercial-strategy team, regulatory pathway assessments prepared by PBI's regulatory affairs department, and formal board resolutions approving the execution of new distribution agreements.

Category 5 — Distribution Partner Selection Documentation. This category comprises internal PBI evaluations, request-for-proposal ("RFP") materials, due diligence memoranda, and related documentation reflecting PBI's independent selection of distribution partners for country markets within the EMEA and APAC regions. The production includes RFP packages issued by PBI to prospective distributors, comparative evaluations of competing bids, site visit reports, financial due diligence summaries, and recommendation memoranda prepared by PBI's commercial-strategy team for review and approval by PBI's Managing Director and, where required by PBI's delegation of authority policies, PBI's board of directors. These documents demonstrate that PBI independently identified, evaluated, and selected its distribution partners based on criteria established by PBI management in Dublin, including the prospective distributor's commercial capabilities, market presence, regulatory track record, financial stability, and compliance history.

Category 6 — Performance Review and Renewal Documentation. This category comprises PBI's periodic performance reviews of its distribution partners, including annual and semi-annual business reviews, performance scorecards, and related correspondence. The production also includes documentation relating to termination and replacement decisions made independently by PBI management in Dublin, including termination notices issued to underperforming distributors, transition planning materials, and post-termination correspondence. These documents demonstrate that PBI actively monitored the performance of its distribution partners against established key performance indicators and exercised independent judgment in determining whether to renew, modify, or terminate distribution arrangements.

Category 7 — Supply Chain Coordination Agreements. This category comprises agreements between PBI and its contract manufacturer, Penterra Manufacturing Ireland Ltd. ("PMI"), governing the supply of finished pharmaceutical products to fulfill PBI's distribution obligations. PMI is an Irish-incorporated entity with its registered office and manufacturing facilities located at Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland. PMI operates two manufacturing lines at the Ringaskiddy facility and employs approximately six hundred twenty (620) employees. PMI manufactures finished pharmaceutical products on behalf of PBI under a cost-plus arrangement, pursuant to which PMI invoices PBI at PMI's fully loaded manufacturing costs plus a markup of eight percent (8%). The supply chain coordination agreements included in this production set forth the terms governing product ordering, production scheduling, quality assurance, batch release, and delivery logistics, and demonstrate the operational relationship between PBI and PMI in connection with PBI's distribution activities. These agreements are included within the scope of the production because they are directly related to and support PBI's execution of its distribution obligations under the third-party distribution agreements described in Categories 1 through 6 above.

2.4 Document Production Details

In total, PPC is producing four hundred thirty-seven (437) documents in response to IDR No. 18, consisting of one hundred forty-two (142) distribution agreements and amendments, forty-seven (47) distributor appointment letters, eighty-nine (89) pricing and commercial terms schedules, thirty-one (31) market entry assessments and board resolutions, fifty-two (52) distribution partner selection documents, sixty-one (61) performance review and renewal documents, and fifteen (15) supply chain coordination agreements and related schedules.

All documents produced herewith have been Bates-stamped for ease of reference. The Bates-stamp range for documents produced in response to IDR No. 18 is PPC-IDR18-000001 through PPC-IDR18-003842. A detailed Index of Produced Documents is enclosed herewith as a separate enclosure, which identifies each document by Bates number range, document description, applicable product line(s), territory or market, date of agreement, and counterparty identification. This Index has been organized both by document category and, within each category, by territory, to facilitate the examination team's review.

The documents are produced in their original format, including as executed copies where available and as file copies maintained by PBI where original executed counterparts are not within PBI's possession. Redactions have been applied only in limited circumstances where strictly necessary to protect third-party confidential commercial information that is unrelated to the subject matter of this examination. All redactions are identified and described in the Redaction Log included within the Index of Produced Documents. To the extent any documents have been withheld on the basis of attorney-client privilege or the work-product doctrine, such documents are identified on the privilege log referenced in Section 5 below.

We note that certain of the distribution agreements produced herewith contain contractual confidentiality provisions restricting further disclosure of the commercial terms and other proprietary information set forth therein. Accordingly, PPC respectfully requests that the Internal Revenue Service treat all materials produced in response to IDR No. 18 as confidential tax return information within the meaning of Section 6103 of the Internal Revenue Code and afford such materials the protections against unauthorized disclosure provided thereunder.

3. Relevance to PBI's Economic Substance and Independent Decision-Making

PPC submits that the documents produced in response to IDR No. 18 are directly relevant to the examination team's evaluation of PBI's economic substance and functional profile for purposes of the transfer pricing analysis under Section 482 of the Internal Revenue Code and the regulations thereunder.

The produced documents demonstrate that PBI independently exercised substantive commercial decision-making authority with respect to the commercialization and distribution of PPC pharmaceutical products outside the Americas throughout the examination period. Specifically, the documents establish that PBI bore genuine market risk for non-Americas territories and made key commercial decisions in the exercise of its role as full-risk principal for non-Americas commercialization, including the following:

(a) Pricing Determinations Across Sixty-Eight Country Markets. The pricing and commercial terms schedules produced in Category 3 demonstrate that PBI independently established and adjusted transfer prices, discount structures, volume-based rebates, and other pricing terms for each of its sixty-eight country markets. These pricing decisions were made by PBI's commercial-strategy team in Dublin, taking into account local market conditions, competitive dynamics, government reimbursement frameworks, health technology assessment outcomes, and regulatory pricing constraints applicable in each jurisdiction. The meaningful variation in pricing across territories—and the annual adjustments reflected in successive pricing schedules—evidence the exercise of independent pricing authority by PBI rather than the mechanical application of pricing decisions made elsewhere within the PPC group.

(b) Distribution Partner Selection and Appointment. The distribution partner selection documentation produced in Category 5 demonstrates that PBI independently identified, evaluated, and selected third-party distributors for each of its country markets. These decisions were made by PBI's commercial-strategy team in Dublin through a structured process involving the issuance of requests for proposals, the comparative evaluation of competing candidates, on-site due diligence, and formal recommendation to PBI's Managing Director and, where applicable, PBI's board of directors for approval.

(c) Market Entry and Exit Decisions. The market entry assessments and board resolutions produced in Category 4 demonstrate that PBI independently evaluated and approved decisions to enter new country markets or exit underperforming markets. These decisions involved substantive analysis of market potential, competitive dynamics, regulatory pathways, and commercial feasibility, conducted by PBI's dedicated functional teams in Dublin and formally approved by PBI's board of directors at meetings held in Dublin.

(d) Negotiation of Commercial Terms. The master distribution agreements and related commercial documents produced in Categories 1 through 3 demonstrate that PBI independently negotiated the full range of commercial terms with its distribution partners, including pricing, volume commitments, exclusivity provisions, territorial scope, term and renewal provisions, performance standards, and termination rights. The negotiation of these terms was conducted by PBI's commercial-strategy and legal personnel in Dublin, with the involvement of PBI's Managing Director for agreements of significant commercial value.

(e) Performance Monitoring and Termination or Replacement of Underperforming Distribution Partners. The performance review and renewal documentation produced in Category 6 demonstrates that PBI actively monitored the performance of its distribution partners on an ongoing basis, conducted periodic business reviews, and exercised independent judgment in determining whether to renew, modify, or terminate distribution arrangements. The production includes instances in which PBI terminated distribution agreements with underperforming partners and replaced them with alternative distributors, reflecting PBI's exercise of genuine commercial decision-making authority and assumption of attendant commercial risk.

PBI's independent pricing decisions are particularly well-evidenced by the pricing schedules attached to the distribution agreements. These schedules, which are updated annually by PBI's commercial-strategy team, reflect substantial variation across markets and over time, driven by market-specific factors including local competitive conditions, national regulatory environments, government reimbursement frameworks, and health technology assessment determinations. The examination team will observe that pricing for the same product across different country markets varies by as much as forty to sixty percent, reflecting the genuine market-by-market commercial analysis conducted by PBI's Dublin-based personnel.

PPC respectfully submits that these documents are relevant to rebutting any assertion that PBI lacked sufficient economic substance to justify its role as intellectual property owner and cost-sharing arrangement participant, or that key functions within the framework of Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") of PPC's pharmaceutical intellectual property remained concentrated in the United States. The distribution agreements and related commercial documentation demonstrate that PBI performed substantial Exploitation functions with respect to non-Americas markets, independently managing the commercial deployment of PPC pharmaceutical products across sixty-eight country markets through its own Dublin-based personnel and management.

PBI's substantive role in the Exploitation function is further supported by its cumulative regulatory expenditures of €47.2 million during the examination period (2017 through 2020) in connection with regulatory submissions, marketing authorization applications, label extensions, and post-approval commitments across non-Americas jurisdictions. These expenditures were incurred by PBI in the ordinary course of its business and were directed and managed by PBI's regulatory affairs department in Dublin, further demonstrating PBI's independent exercise of Exploitation functions outside the Americas.

The distribution agreements also confirm PBI's functional role as the full-risk principal for non-Americas commercialization, consistent with the cost-sharing arrangement ("CSA") effective July 1, 2012, under which PBI acquired the rights to exploit PPC's pharmaceutical intellectual property portfolio outside the Americas. As described in Section 4 below, this acquisition was effectuated through a platform contribution transaction ("PCT") pursuant to which PBI made a payment of $312 million to PPC, together with ongoing cost-sharing payments reflecting PBI's share of qualified research and development costs. The produced documents demonstrate that PBI has exercised substantive commercial authority commensurate with its role as principal and IP rights holder for non-Americas territories.

4. Relationship to PPC's Transfer Pricing Positions

The documents produced in response to IDR No. 18 are directly relevant to PPC's transfer pricing positions for the tax years under examination and should be considered in conjunction with the contemporaneous transfer pricing documentation previously produced in response to IDR No. 4. PPC briefly summarizes the relevant intercompany arrangements below to provide context for the examination team's review.

The CSA between PPC and PBI, effective as of July 1, 2012, is governed by the provisions of Treasury Regulation § 1.482-7. Under the CSA, PBI was allocated the right to develop and exploit PPC's pharmaceutical intellectual property portfolio for all territories outside the Americas (i.e., the EMEA and APAC regions). In connection with the CSA, PBI made a platform contribution transaction ("PCT") payment of $312 million to PPC, reflecting the value of pre-existing intangible property and other platform contributions made available by PPC to PBI at the inception of the CSA. PBI's cost-sharing percentages during the examination years, which reflect PBI's reasonably anticipated benefit share of intangible development activity conducted under the CSA, were as follows:

The upward trajectory of PBI's cost-sharing percentages over the examination period reflects PBI's increasing share of reasonably anticipated benefits from the exploitation of cost-shared intangibles, driven by PBI's expanding commercial operations in the EMEA and APAC regions—a trend that is itself documented in the growing scope and complexity of the distribution agreements produced herewith.

In addition to the CSA, PBI licensed certain legacy pharmaceutical compounds (i.e., compounds with a development vintage predating the July 1, 2012 effective date of the CSA) from PPC under a separate intercompany licensing agreement. This licensing arrangement, which is subject to the arm's-length standard as applied under Treasury Regulation § 1.482-4, provides for PBI to pay PPC a royalty of four and one-half percent (4.5%) of net sales attributable to the licensed legacy compounds. The royalty rate was established based on a benchmarking analysis conducted at the time the licensing arrangement was entered into and has been reviewed periodically for continued arm's-length compliance.

The distribution agreements and related commercial documents produced in response to IDR No. 18 demonstrate PBI's functional profile as a full-risk principal for non-Americas commercialization. This functional characterization is consistent with the reasonably anticipated benefit shares used to determine PBI's cost-sharing ratios under the CSA and supports the arm's-length character of the intercompany arrangements between PPC and PBI. Specifically, the produced documents confirm that PBI independently performed the commercial functions, assumed the market risks, and deployed the assets necessary to exploit PPC's pharmaceutical intellectual property in non-Americas territories—functions, risks, and assets that are appropriately associated with PBI's entitlement to residual profits from non-Americas commercialization and its correspondingly significant share of intangible development costs under the CSA.

PPC notes that contemporaneous transfer pricing documentation for the tax years 2017 through 2020 was previously produced in response to IDR No. 4 (produced on August 12, 2022). That documentation was prepared by Crestfield & Associates LLP in compliance with the penalty-protection standards set forth in Section 6662(e) of the Internal Revenue Code and Treasury Regulation § 1.6662-6. The distribution agreements and related documents produced herewith should be reviewed in conjunction with that contemporaneous documentation, which provides the detailed economic analysis supporting PPC's transfer pricing positions.

5. Reservation of Rights and Privilege

PPC reserves all rights, claims, and defenses with respect to any documents not produced in response to IDR No. 18 on the grounds of attorney-client privilege, the work-product doctrine, or any other applicable privilege or protection. To the extent any documents responsive to IDR No. 18 have been withheld on the basis of privilege, such documents are identified and described on the privilege log produced separately herewith, which sets forth the date, author, recipient, general subject matter, and specific privilege asserted for each withheld document, consistent with the requirements of applicable law and IRS guidance.

PPC further notes that certain economic analyses and valuation materials related to PBI's distribution operations and transfer pricing were prepared by Whitmore Valuation Group LLC at the direction of counsel at Calderwood & Harkness LLP pursuant to a Kovel arrangement. The Kovel engagement letter, referenced as Kovel Letter 1018-00009-KV and dated June 20, 2022, establishes that Whitmore Valuation Group LLC was retained as a consulting expert under the direction and control of counsel for purposes of providing litigation support and advisory services in connection with the pending examination. Materials prepared by Whitmore Valuation Group LLC within the scope of this Kovel arrangement constitute attorney work product protected from disclosure under Federal Rule of Civil Procedure 26(b)(3) and its equivalents, and PPC asserts the work-product doctrine with respect to all such materials.

PPC's production of documents in response to IDR No. 18, including the documents enclosed herewith, does not constitute a waiver of attorney-client privilege, the work-product doctrine, or any other applicable privilege or protection with respect to any document, whether produced or withheld. PPC further reserves all rights to assert any objection, claim, or defense in connection with this examination or any subsequent administrative or judicial proceeding, and the production of documents herewith shall not be construed as a concession or admission with respect to any factual or legal issue.

6. Contact Information and Availability

We are available to discuss the documents produced in response to IDR No. 18 and to provide any additional information that the examination team may require in connection with its review. We are committed to facilitating the efficient and orderly progression of this examination and welcome the opportunity to address any questions or concerns.

For matters relating to this production or the examination generally, the primary contacts at Calderwood & Harkness LLP are as follows:

Leonard Cross, Partner (Responsible Partner) Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 864-7214

Email: lcross@calderwoodharkness.com

Garrett Simmons, Associate (Primary Day-to-Day Contact) Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 864-7338

Email: gsimmons@calderwoodharkness.com

Mr. Simmons serves as the primary day-to-day contact for the examination team with respect to document production matters, scheduling, and routine correspondence. For substantive matters relating to PPC's transfer pricing positions, legal analysis, or privilege determinations, please direct communications to the undersigned.

We would welcome the opportunity to schedule a follow-up meeting or conference call with Revenue Agent Dunleavy and Supervisory Revenue Agent Gerald Meskill to walk through the produced documents, discuss their organization and relevance, and address any preliminary questions the examination team may have. Please contact Mr. Simmons at your convenience to arrange a mutually agreeable date and time for such a meeting.

We trust that this response and the accompanying production fully satisfy IDR No. 18. We appreciate the examination team's professionalism and cooperation throughout this process and look forward to continuing to work together constructively.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Leonard Cross Partner, Tax Department Calderwood & Harkness LLP

Licensed in New York, New Jersey, and the District of Columbia

Date: December 5, 2022

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

cc (via U.S. mail):

Supervisory Revenue Agent Gerald Meskill Internal Revenue Service Large Business & International Division 600 Arch Street, Room 6454 Philadelphia, PA 19106

Enclosures:

1. Documents Responsive to IDR No. 18 (Bates Nos. PPC-IDR18-000001 through PPC-IDR18-003842)

2. Index of Produced Documents, including Bates number ranges, document descriptions, applicable product line(s), territory/market, date of agreement, and counterparty identification

Reference:

Master Document Production Index (maintained separately and updated to include IDR No. 18 productions)

Tax Year	PBI Cost-Sharing Percentage
2017	38.2%
2018	39.5%
2019	41.1%
2020	42.7%

CALDERWOOD & HARKNESS LLP Attorneys at Law
1735 Market Street, Suite 3100 Philadelphia, PA 19103
Telephone: (215) 864-7200 Facsimile: (215) 864-7201
600 Lexington Avenue New York, NY 10022
www.calderwoodharkness.com
December 5, 2022
VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED AND ELECTRONICALLY VIA IRS SECURE MESSAGING
Revenue Agent Patricia Dunleavy Internal Revenue Service Large Business & International Division 600 Arch Street, Room 6454 Philadelphia, PA 19106
Re: Examination of Penterra Pharmaceuticals Corp. EIN: 22-3741856 Tax Years Under Examination: 2017, 2018, 2019, 2020 Exam Team ID: LB&I-NE-TP-2022-00641 Response to Information Document Request No. 18 C&H Matter No.: 1018-00009
Dear Revenue Agent Dunleavy:
This firm represents Penterra Pharmaceuticals Corp. ("PPC" or the "Taxpayer") in connection with the above-referenced examination. I write in my capacity as Responsible Partner, Tax Department, Calderwood & Harkness LLP, on behalf of PPC. As you are aware, IRS Form 2848, Power of Attorney and Declaration of Representative, was filed with the Internal Revenue Service on June 8, 2022, authorizing the undersigned, Leonard Cross, together with Sylvia Hartwell, Partner, Garrett Simmons, Associate, and Leila Nazari, Associate, all of Calderwood & Harkness LLP, to represent PPC before the Internal Revenue Service in all matters pertaining to the above-referenced examination for the tax years at issue.
We acknowledge receipt of Information Document Request No. 18 ("IDR No. 18"), dated October 14, 2022, and this letter, together with its accompanying enclosures, constitutes PPC's complete response thereto. IDR No. 18 requested the production of all third-party distribution agreements entered into by or on behalf of Penterra Biopharma International DAC ("PBI"), PPC's Irish-resident subsidiary, for non-Americas territories during the tax years 2017 through 2020. We have undertaken a thorough and diligent search for responsive documents and provide them herewith, together with the explanatory information set forth below to assist the examination team in its review of the production.
1. Scope of IDR No. 18
IDR No. 18, as issued on October 14, 2022, requested the production of all third-party distribution agreements, distribution partner arrangements, and related commercial agreements executed by or on behalf of PBI for territories outside the Americas during the period January 1, 2017 through December 31, 2020. For purposes of this request, and as defined in IDR No. 18 itself, the term "Americas" encompasses North America (including the United States, Canada, and Mexico), Central America, South America, and the Caribbean. Accordingly, the scope of IDR No. 18 encompasses all third-party distribution agreements and related arrangements entered into by PBI for territories within the Europe, Middle East, and Africa ("EMEA") region, as well as the Asia-Pacific ("APAC") region.
In response to IDR No. 18, PPC has caused PBI to conduct a comprehensive search of PBI's records, including both physical and electronic records. This search was conducted at PBI's registered office located at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland, where PBI maintains its principal business records, commercial files, and corporate governance documentation. The search encompassed PBI's contract management database, its electronic document management system, archived physical files maintained on-site, and correspondence files of PBI's commercial-strategy, regulatory, and legal departments. We are satisfied that the search was thorough and that the documents produced herewith represent a complete and accurate response to IDR No. 18, subject to the privilege reservations set forth in Section 5 below.
2. Description of Documents Produced
2.1 Overview of PBI's Distribution Network
To provide context for the documents produced herewith, we briefly describe PBI's role within the Penterra Pharmaceuticals group and the scope of its distribution operations.
PBI serves as the principal entity for the commercialization of PPC pharmaceutical products outside the Americas. In this capacity, PBI manages distribution arrangements across sixty-eight (68) country markets spanning both the EMEA and APAC regions. PBI's distribution network represents a substantial and complex commercial operation that has grown significantly since PBI's incorporation in 2012 and the commencement of the cost-sharing arrangement described in Section 4 below.
PBI's commercial-strategy, regulatory, and supply-chain personnel, all of whom are based at PBI's offices in Dublin, Ireland, independently negotiate, execute, and manage these distribution arrangements in the ordinary course of PBI's business. The distribution partner relationships are managed day-to-day by PBI's commercial-strategy team, which reports directly to PBI's Managing Director, Aidan Naughton. Mr. Naughton, who has served as PBI's Managing Director since 2014, oversees all aspects of PBI's commercial operations, including the identification, evaluation, selection, and ongoing management of distribution partners across all sixty-eight country markets.
The organizational depth and breadth of PBI's operations are reflected in its workforce. As of December 31, 2020, PBI employed one hundred eighty-five (185) full-time employees, representing a substantial increase from the fifty-two (52) employees PBI maintained at its incorporation in 2012. PBI's workforce includes dedicated personnel across the following functional areas:
•  Regulatory Affairs: Personnel responsible for managing regulatory submissions, marketing authorization applications, and post-approval commitments across non-Americas jurisdictions, including interactions with the European Medicines Agency ("EMA"), national competent authorities, and APAC regulatory bodies.
•  Medical Affairs: Personnel responsible for medical information services, pharmacovigilance, post-marketing surveillance, and medical education activities in non-Americas territories.
•  Commercial Strategy: Personnel responsible for pricing and market access analysis, distribution partner management, brand strategy, and commercial planning for each of the sixty-eight country markets served by PBI.
•  Supply Chain and Logistics: Personnel responsible for demand forecasting, inventory management, coordination with contract manufacturing partners, import/export compliance, and logistics oversight for product distribution across EMEA and APAC markets.
•  Legal and Compliance: In-house legal counsel and compliance personnel responsible for contract negotiation, anti-corruption compliance, data privacy, and regulatory compliance in connection with PBI's commercial activities.
•  Finance and Accounting: Personnel responsible for financial planning, intercompany transaction management, transfer pricing documentation, statutory and management reporting, and tax compliance for PBI's Irish operations and its branch offices.
PBI maintained approximately eighteen thousand (18,000) square feet of office space at its Sandyford Business Park location in Dublin throughout the examination period, providing adequate facilities for its full workforce and business operations.
PBI's governance structure further reflects its independent decision-making authority. PBI's board of directors, which during the examination period consisted of five directors (three of whom were Dublin-based), convened a total of forty-two (42) meetings during the period 2017 through 2020. These meetings included regularly scheduled quarterly meetings as well as special sessions convened to address specific commercial and strategic matters. All forty-two board meetings were held in Dublin, Ireland. During these meetings, the board regularly reviewed and approved key commercial decisions, including distribution partner selections, pricing strategies, market-entry and market-exit decisions, capital expenditure authorizations, and other matters requiring board-level approval under PBI's articles of association and applicable corporate governance policies.
2.2 Key Product Lines Covered by Distribution Agreements
The distribution agreements produced in response to IDR No. 18 cover PBI's three principal product lines, each of which is described briefly below:
Veritaxol (Oncology). Veritaxol is PPC's blockbuster oncology product and the largest contributor to PPC's consolidated revenue. For fiscal year 2020, Veritaxol generated global net sales of approximately $3.12 billion. Of this total, non-Americas net sales attributable to PBI's distribution network totaled approximately $1.34 billion, representing approximately forty-three percent (43%) of Veritaxol's global net sales. Veritaxol is distributed through PBI's distribution partners in substantially all of the sixty-eight country markets covered by PBI's distribution network, including major European markets (Germany, France, the United Kingdom, Spain, and Italy), Japan, South Korea, Australia, and numerous other EMEA and APAC territories.
Imvara (Immunology). Imvara is PPC's second-largest product by global revenue, serving the immunology therapeutic area. For fiscal year 2020, Imvara generated global net sales of approximately $1.87 billion. Non-Americas net sales attributable to PBI's distribution operations totaled approximately $790 million, representing approximately forty-two percent (42%) of Imvara's global net sales. Imvara is distributed through PBI's distribution partners across a substantial majority of PBI's sixty-eight country markets, with particularly significant commercial presence in Western Europe and Japan.
Cerulon (Rare Disease). Cerulon is PPC's rare disease product. For fiscal year 2020, Cerulon generated global net sales of approximately $620 million. Non-Americas net sales attributable to PBI's distribution operations totaled approximately $280 million, representing approximately forty-five percent (45%) of Cerulon's global net sales. Due to the specialized nature of the rare disease market, Cerulon's distribution arrangements involve a more targeted set of distribution partners with demonstrated expertise in rare disease product distribution, specialty pharmacy networks, and patient access programs in the relevant territories.
The distribution agreements produced herewith cover all three of the above product lines across the applicable non-Americas markets served by PBI during the examination period.
2.3 Categories of Documents Produced
The documents produced in response to IDR No. 18 fall within the following seven categories:
Category 1 — Master Distribution Agreements. This category comprises the executed master distribution agreements between PBI and its third-party distributors operating in EMEA and APAC markets. The production includes the original executed agreements, together with all amendments, addenda, renewals, and extensions entered into during the period January 1, 2017 through December 31, 2020. These agreements set forth the fundamental terms and conditions governing the distributor relationship, including the scope of the distributorship (by product and territory), term and termination provisions, obligations of the parties with respect to regulatory compliance, pharmacovigilance, and product handling, as well as applicable governing law and dispute resolution provisions. Certain of these master distribution agreements were executed prior to the examination period but remained in effect during all or a portion of the 2017–2020 period; such agreements are included to the extent they were operative during the relevant years.
Category 2 — Exclusive and Non-Exclusive Distributor Appointment Letters. This category comprises formal appointment letters issued by PBI to third-party distributors designating them as either exclusive or non-exclusive distributors for specific country markets or regional territories within the EMEA and APAC regions. These appointment letters typically accompany or supplement the master distribution agreements described in Category 1 and specify the particular territory, product scope, and exclusivity terms applicable to the distributor's appointment. Where PBI transitioned from one distributor to another during the examination period, the production includes both the termination correspondence directed to the outgoing distributor and the appointment letter issued to the incoming distributor.
Category 3 — Pricing and Commercial Terms Schedules. This category comprises the pricing and commercial terms schedules attached to, or incorporated by reference in, the distribution agreements. These schedules set forth the transfer prices at which PBI supplied products to its third-party distributors, as well as applicable discounts, volume-based rebates, early payment incentives, and other commercial terms governing the economic arrangements between PBI and each distribution partner. Importantly, these pricing schedules evidence PBI's independent pricing decisions across the sixty-eight country markets served by its distribution network. The pricing schedules reflect market-specific considerations, including local competitive dynamics, national regulatory environments, government reimbursement frameworks, and health technology assessment outcomes, resulting in meaningful price differentiation across territories. The production includes pricing schedules for each year of the examination period, reflecting annual pricing adjustments made by PBI's commercial-strategy team in Dublin.
Category 4 — Market Entry Assessments and Approvals. This category comprises internal PBI memoranda, analyses, and board resolutions prepared in connection with PBI's evaluation of potential new market entries and its authorization of new distribution arrangements during the examination period. These documents demonstrate PBI's independent commercial decision-making authority with respect to the identification of new market opportunities, the assessment of market potential and competitive landscape, and the formal board-level approval of market entry strategies. Included in this category are market feasibility studies prepared by PBI's commercial-strategy team, regulatory pathway assessments prepared by PBI's regulatory affairs department, and formal board resolutions approving the execution of new distribution agreements.
Category 5 — Distribution Partner Selection Documentation. This category comprises internal PBI evaluations, request-for-proposal ("RFP") materials, due diligence memoranda, and related documentation reflecting PBI's independent selection of distribution partners for country markets within the EMEA and APAC regions. The production includes RFP packages issued by PBI to prospective distributors, comparative evaluations of competing bids, site visit reports, financial due diligence summaries, and recommendation memoranda prepared by PBI's commercial-strategy team for review and approval by PBI's Managing Director and, where required by PBI's delegation of authority policies, PBI's board of directors. These documents demonstrate that PBI independently identified, evaluated, and selected its distribution partners based on criteria established by PBI management in Dublin, including the prospective distributor's commercial capabilities, market presence, regulatory track record, financial stability, and compliance history.
Category 6 — Performance Review and Renewal Documentation. This category comprises PBI's periodic performance reviews of its distribution partners, including annual and semi-annual business reviews, performance scorecards, and related correspondence. The production also includes documentation relating to termination and replacement decisions made independently by PBI management in Dublin, including termination notices issued to underperforming distributors, transition planning materials, and post-termination correspondence. These documents demonstrate that PBI actively monitored the performance of its distribution partners against established key performance indicators and exercised independent judgment in determining whether to renew, modify, or terminate distribution arrangements.
Category 7 — Supply Chain Coordination Agreements. This category comprises agreements between PBI and its contract manufacturer, Penterra Manufacturing Ireland Ltd. ("PMI"), governing the supply of finished pharmaceutical products to fulfill PBI's distribution obligations. PMI is an Irish-incorporated entity with its registered office and manufacturing facilities located at Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland. PMI operates two manufacturing lines at the Ringaskiddy facility and employs approximately six hundred twenty (620) employees. PMI manufactures finished pharmaceutical products on behalf of PBI under a cost-plus arrangement, pursuant to which PMI invoices PBI at PMI's fully loaded manufacturing costs plus a markup of eight percent (8%). The supply chain coordination agreements included in this production set forth the terms governing product ordering, production scheduling, quality assurance, batch release, and delivery logistics, and demonstrate the operational relationship between PBI and PMI in connection with PBI's distribution activities. These agreements are included within the scope of the production because they are directly related to and support PBI's execution of its distribution obligations under the third-party distribution agreements described in Categories 1 through 6 above.
2.4 Document Production Details
In total, PPC is producing four hundred thirty-seven (437) documents in response to IDR No. 18, consisting of one hundred forty-two (142) distribution agreements and amendments, forty-seven (47) distributor appointment letters, eighty-nine (89) pricing and commercial terms schedules, thirty-one (31) market entry assessments and board resolutions, fifty-two (52) distribution partner selection documents, sixty-one (61) performance review and renewal documents, and fifteen (15) supply chain coordination agreements and related schedules.
All documents produced herewith have been Bates-stamped for ease of reference. The Bates-stamp range for documents produced in response to IDR No. 18 is PPC-IDR18-000001 through PPC-IDR18-003842. A detailed Index of Produced Documents is enclosed herewith as a separate enclosure, which identifies each document by Bates number range, document description, applicable product line(s), territory or market, date of agreement, and counterparty identification. This Index has been organized both by document category and, within each category, by territory, to facilitate the examination team's review.
The documents are produced in their original format, including as executed copies where available and as file copies maintained by PBI where original executed counterparts are not within PBI's possession. Redactions have been applied only in limited circumstances where strictly necessary to protect third-party confidential commercial information that is unrelated to the subject matter of this examination. All redactions are identified and described in the Redaction Log included within the Index of Produced Documents. To the extent any documents have been withheld on the basis of attorney-client privilege or the work-product doctrine, such documents are identified on the privilege log referenced in Section 5 below.
We note that certain of the distribution agreements produced herewith contain contractual confidentiality provisions restricting further disclosure of the commercial terms and other proprietary information set forth therein. Accordingly, PPC respectfully requests that the Internal Revenue Service treat all materials produced in response to IDR No. 18 as confidential tax return information within the meaning of Section 6103 of the Internal Revenue Code and afford such materials the protections against unauthorized disclosure provided thereunder.
3. Relevance to PBI's Economic Substance and Independent Decision-Making
PPC submits that the documents produced in response to IDR No. 18 are directly relevant to the examination team's evaluation of PBI's economic substance and functional profile for purposes of the transfer pricing analysis under Section 482 of the Internal Revenue Code and the regulations thereunder.
The produced documents demonstrate that PBI independently exercised substantive commercial decision-making authority with respect to the commercialization and distribution of PPC pharmaceutical products outside the Americas throughout the examination period. Specifically, the documents establish that PBI bore genuine market risk for non-Americas territories and made key commercial decisions in the exercise of its role as full-risk principal for non-Americas commercialization, including the following:
(a) Pricing Determinations Across Sixty-Eight Country Markets. The pricing and commercial terms schedules produced in Category 3 demonstrate that PBI independently established and adjusted transfer prices, discount structures, volume-based rebates, and other pricing terms for each of its sixty-eight country markets. These pricing decisions were made by PBI's commercial-strategy team in Dublin, taking into account local market conditions, competitive dynamics, government reimbursement frameworks, health technology assessment outcomes, and regulatory pricing constraints applicable in each jurisdiction. The meaningful variation in pricing across territories—and the annual adjustments reflected in successive pricing schedules—evidence the exercise of independent pricing authority by PBI rather than the mechanical application of pricing decisions made elsewhere within the PPC group.
(b) Distribution Partner Selection and Appointment. The distribution partner selection documentation produced in Category 5 demonstrates that PBI independently identified, evaluated, and selected third-party distributors for each of its country markets. These decisions were made by PBI's commercial-strategy team in Dublin through a structured process involving the issuance of requests for proposals, the comparative evaluation of competing candidates, on-site due diligence, and formal recommendation to PBI's Managing Director and, where applicable, PBI's board of directors for approval.
(c) Market Entry and Exit Decisions. The market entry assessments and board resolutions produced in Category 4 demonstrate that PBI independently evaluated and approved decisions to enter new country markets or exit underperforming markets. These decisions involved substantive analysis of market potential, competitive dynamics, regulatory pathways, and commercial feasibility, conducted by PBI's dedicated functional teams in Dublin and formally approved by PBI's board of directors at meetings held in Dublin.
(d) Negotiation of Commercial Terms. The master distribution agreements and related commercial documents produced in Categories 1 through 3 demonstrate that PBI independently negotiated the full range of commercial terms with its distribution partners, including pricing, volume commitments, exclusivity provisions, territorial scope, term and renewal provisions, performance standards, and termination rights. The negotiation of these terms was conducted by PBI's commercial-strategy and legal personnel in Dublin, with the involvement of PBI's Managing Director for agreements of significant commercial value.
(e) Performance Monitoring and Termination or Replacement of Underperforming Distribution Partners. The performance review and renewal documentation produced in Category 6 demonstrates that PBI actively monitored the performance of its distribution partners on an ongoing basis, conducted periodic business reviews, and exercised independent judgment in determining whether to renew, modify, or terminate distribution arrangements. The production includes instances in which PBI terminated distribution agreements with underperforming partners and replaced them with alternative distributors, reflecting PBI's exercise of genuine commercial decision-making authority and assumption of attendant commercial risk.
PBI's independent pricing decisions are particularly well-evidenced by the pricing schedules attached to the distribution agreements. These schedules, which are updated annually by PBI's commercial-strategy team, reflect substantial variation across markets and over time, driven by market-specific factors including local competitive conditions, national regulatory environments, government reimbursement frameworks, and health technology assessment determinations. The examination team will observe that pricing for the same product across different country markets varies by as much as forty to sixty percent, reflecting the genuine market-by-market commercial analysis conducted by PBI's Dublin-based personnel.
PPC respectfully submits that these documents are relevant to rebutting any assertion that PBI lacked sufficient economic substance to justify its role as intellectual property owner and cost-sharing arrangement participant, or that key functions within the framework of Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") of PPC's pharmaceutical intellectual property remained concentrated in the United States. The distribution agreements and related commercial documentation demonstrate that PBI performed substantial Exploitation functions with respect to non-Americas markets, independently managing the commercial deployment of PPC pharmaceutical products across sixty-eight country markets through its own Dublin-based personnel and management.
PBI's substantive role in the Exploitation function is further supported by its cumulative regulatory expenditures of €47.2 million during the examination period (2017 through 2020) in connection with regulatory submissions, marketing authorization applications, label extensions, and post-approval commitments across non-Americas jurisdictions. These expenditures were incurred by PBI in the ordinary course of its business and were directed and managed by PBI's regulatory affairs department in Dublin, further demonstrating PBI's independent exercise of Exploitation functions outside the Americas.
The distribution agreements also confirm PBI's functional role as the full-risk principal for non-Americas commercialization, consistent with the cost-sharing arrangement ("CSA") effective July 1, 2012, under which PBI acquired the rights to exploit PPC's pharmaceutical intellectual property portfolio outside the Americas. As described in Section 4 below, this acquisition was effectuated through a platform contribution transaction ("PCT") pursuant to which PBI made a payment of $312 million to PPC, together with ongoing cost-sharing payments reflecting PBI's share of qualified research and development costs. The produced documents demonstrate that PBI has exercised substantive commercial authority commensurate with its role as principal and IP rights holder for non-Americas territories.
4. Relationship to PPC's Transfer Pricing Positions
The documents produced in response to IDR No. 18 are directly relevant to PPC's transfer pricing positions for the tax years under examination and should be considered in conjunction with the contemporaneous transfer pricing documentation previously produced in response to IDR No. 4. PPC briefly summarizes the relevant intercompany arrangements below to provide context for the examination team's review.
The CSA between PPC and PBI, effective as of July 1, 2012, is governed by the provisions of Treasury Regulation § 1.482-7. Under the CSA, PBI was allocated the right to develop and exploit PPC's pharmaceutical intellectual property portfolio for all territories outside the Americas (i.e., the EMEA and APAC regions). In connection with the CSA, PBI made a platform contribution transaction ("PCT") payment of $312 million to PPC, reflecting the value of pre-existing intangible property and other platform contributions made available by PPC to PBI at the inception of the CSA. PBI's cost-sharing percentages during the examination years, which reflect PBI's reasonably anticipated benefit share of intangible development activity conducted under the CSA, were as follows:
The upward trajectory of PBI's cost-sharing percentages over the examination period reflects PBI's increasing share of reasonably anticipated benefits from the exploitation of cost-shared intangibles, driven by PBI's expanding commercial operations in the EMEA and APAC regions—a trend that is itself documented in the growing scope and complexity of the distribution agreements produced herewith.
In addition to the CSA, PBI licensed certain legacy pharmaceutical compounds (i.e., compounds with a development vintage predating the July 1, 2012 effective date of the CSA) from PPC under a separate intercompany licensing agreement. This licensing arrangement, which is subject to the arm's-length standard as applied under Treasury Regulation § 1.482-4, provides for PBI to pay PPC a royalty of four and one-half percent (4.5%) of net sales attributable to the licensed legacy compounds. The royalty rate was established based on a benchmarking analysis conducted at the time the licensing arrangement was entered into and has been reviewed periodically for continued arm's-length compliance.
The distribution agreements and related commercial documents produced in response to IDR No. 18 demonstrate PBI's functional profile as a full-risk principal for non-Americas commercialization. This functional characterization is consistent with the reasonably anticipated benefit shares used to determine PBI's cost-sharing ratios under the CSA and supports the arm's-length character of the intercompany arrangements between PPC and PBI. Specifically, the produced documents confirm that PBI independently performed the commercial functions, assumed the market risks, and deployed the assets necessary to exploit PPC's pharmaceutical intellectual property in non-Americas territories—functions, risks, and assets that are appropriately associated with PBI's entitlement to residual profits from non-Americas commercialization and its correspondingly significant share of intangible development costs under the CSA.
PPC notes that contemporaneous transfer pricing documentation for the tax years 2017 through 2020 was previously produced in response to IDR No. 4 (produced on August 12, 2022). That documentation was prepared by Crestfield & Associates LLP in compliance with the penalty-protection standards set forth in Section 6662(e) of the Internal Revenue Code and Treasury Regulation § 1.6662-6. The distribution agreements and related documents produced herewith should be reviewed in conjunction with that contemporaneous documentation, which provides the detailed economic analysis supporting PPC's transfer pricing positions.
5. Reservation of Rights and Privilege
PPC reserves all rights, claims, and defenses with respect to any documents not produced in response to IDR No. 18 on the grounds of attorney-client privilege, the work-product doctrine, or any other applicable privilege or protection. To the extent any documents responsive to IDR No. 18 have been withheld on the basis of privilege, such documents are identified and described on the privilege log produced separately herewith, which sets forth the date, author, recipient, general subject matter, and specific privilege asserted for each withheld document, consistent with the requirements of applicable law and IRS guidance.
PPC further notes that certain economic analyses and valuation materials related to PBI's distribution operations and transfer pricing were prepared by Whitmore Valuation Group LLC at the direction of counsel at Calderwood & Harkness LLP pursuant to a Kovel arrangement. The Kovel engagement letter, referenced as Kovel Letter 1018-00009-KV and dated June 20, 2022, establishes that Whitmore Valuation Group LLC was retained as a consulting expert under the direction and control of counsel for purposes of providing litigation support and advisory services in connection with the pending examination. Materials prepared by Whitmore Valuation Group LLC within the scope of this Kovel arrangement constitute attorney work product protected from disclosure under Federal Rule of Civil Procedure 26(b)(3) and its equivalents, and PPC asserts the work-product doctrine with respect to all such materials.
PPC's production of documents in response to IDR No. 18, including the documents enclosed herewith, does not constitute a waiver of attorney-client privilege, the work-product doctrine, or any other applicable privilege or protection with respect to any document, whether produced or withheld. PPC further reserves all rights to assert any objection, claim, or defense in connection with this examination or any subsequent administrative or judicial proceeding, and the production of documents herewith shall not be construed as a concession or admission with respect to any factual or legal issue.
6. Contact Information and Availability
We are available to discuss the documents produced in response to IDR No. 18 and to provide any additional information that the examination team may require in connection with its review. We are committed to facilitating the efficient and orderly progression of this examination and welcome the opportunity to address any questions or concerns.
For matters relating to this production or the examination generally, the primary contacts at Calderwood & Harkness LLP are as follows:
Leonard Cross, Partner (Responsible Partner) Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 864-7214
Email: lcross@calderwoodharkness.com
Garrett Simmons, Associate (Primary Day-to-Day Contact) Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 864-7338
Email: gsimmons@calderwoodharkness.com
Mr. Simmons serves as the primary day-to-day contact for the examination team with respect to document production matters, scheduling, and routine correspondence. For substantive matters relating to PPC's transfer pricing positions, legal analysis, or privilege determinations, please direct communications to the undersigned.
We would welcome the opportunity to schedule a follow-up meeting or conference call with Revenue Agent Dunleavy and Supervisory Revenue Agent Gerald Meskill to walk through the produced documents, discuss their organization and relevance, and address any preliminary questions the examination team may have. Please contact Mr. Simmons at your convenience to arrange a mutually agreeable date and time for such a meeting.
We trust that this response and the accompanying production fully satisfy IDR No. 18. We appreciate the examination team's professionalism and cooperation throughout this process and look forward to continuing to work together constructively.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Leonard Cross Partner, Tax Department Calderwood & Harkness LLP
Licensed in New York, New Jersey, and the District of Columbia
Date: December 5, 2022
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
cc (via U.S. mail):
Supervisory Revenue Agent Gerald Meskill Internal Revenue Service Large Business & International Division 600 Arch Street, Room 6454 Philadelphia, PA 19106
Enclosures:
1.  Documents Responsive to IDR No. 18 (Bates Nos. PPC-IDR18-000001 through PPC-IDR18-003842)
2.  Index of Produced Documents, including Bates number ranges, document descriptions, applicable product line(s), territory/market, date of agreement, and counterparty identification
Reference:
Master Document Production Index (maintained separately and updated to include IDR No. 18 productions)
Tax Year | PBI Cost-Sharing Percentage
2017 | 38.2%
2018 | 39.5%
2019 | 41.1%
2020 | 42.7%

CALDERWOOD & HARKNESS LLP Attorneys at Law

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