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Contract analysis Extract to table

CONFIDENTIAL — TAX EXAMINATION MATERIAL

CALDERWOOD & HARKNESS LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103

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

Firm Headquarters: 600 Lexington Avenue New York, NY 10022

February 15, 2023

VIA CERTIFIED MAIL AND IRS SECURE MESSAGING

Revenue Agent Patricia Dunleavy Internal Revenue Service Large Business & International Division 600 Arch Street, Room 6418 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. 25 — Comparable License Agreements (CUT Support)

Dear Revenue Agent Dunleavy:

Calderwood & Harkness LLP ("C&H") represents Penterra Pharmaceuticals Corp. ("PPC" or the "Company") in connection with the above-referenced examination, as authorized pursuant to IRS Form 2848 (Power of Attorney and Declaration of Representative) filed with the Internal Revenue Service on June 8, 2022, on behalf of Leonard Cross (Partner), Sylvia Hartwell (Of Counsel), Garrett Simmons (Lead Associate), and Leila Nazari (Associate) of this firm. This matter is tracked internally as C&H Matter Number 1018-00009.

This letter constitutes PPC's response to Information Document Request No. 25 ("IDR No. 25"), which was issued on January 18, 2023, and received by counsel on January 23, 2023. IDR No. 25 requests the production of comparable uncontrolled license agreements identified in PPC's transfer pricing documentation supporting the arm's-length royalty rate applied to legacy intellectual property licensed by PPC to Penterra Biopharma International DAC ("PBI"), a designated activity company organized and tax-resident in Ireland. We note that IDR No. 25 is one of forty-seven (47) IDRs issued by the examination team during the examination period spanning from June 2022 through the present, reflecting the breadth and complexity of the transfer pricing issues under review.

PPC has endeavored to respond to IDR No. 25 in a thorough and timely manner, consistent with its obligations under the Internal Revenue Code and in the spirit of cooperation that has characterized this examination. PPC nonetheless expressly preserves all rights, objections, and privileges as set forth more fully below.

I. DESCRIPTION OF IDR NO. 25 REQUEST

IDR No. 25 requests that PPC produce copies of the third-party pharmaceutical license agreements identified as comparable uncontrolled transactions ("CUTs") in PPC's benchmarking analysis. Specifically, the IDR requests copies of the license agreements that form the basis for PPC's conclusion that the 4.5% royalty rate applied to legacy compound net sales in the non-Americas territory — defined in the intercompany license agreement as all territories outside of North America, Central America, South America, and the Caribbean — satisfies the arm's-length standard of Internal Revenue Code § 482 and the Treasury Regulations promulgated thereunder.

The CUT analysis that is the subject of IDR No. 25 was initially prepared by Crestfield & Associates LLP, under the direction of Susan Lam, Transfer Pricing Partner, as part of PPC's contemporaneous transfer pricing documentation for Tax Years 2017 through 2020. That contemporaneous documentation, including the Crestfield & Associates CUT analysis and the underlying benchmarking study, was previously produced to the examination team in response to IDR No. 4 (dated August 1, 2022), and PPC understands that the examination team has had the opportunity to review those materials.

Subsequently, the CUT analysis was updated, refined, and supplemented by Whitmore Valuation Group LLC ("Whitmore"), under the direction of Dr. Helena Vasquez, Managing Director, and Dr. Rohan Chakrabarti, Senior Director, both of whom possess extensive expertise in pharmaceutical and biotechnology transfer pricing and intellectual property valuation. Whitmore was retained under a Kovel arrangement (reference 1018-00009-KV) at the direction of Calderwood & Harkness LLP, pursuant to a Kovel letter executed on June 20, 2022. The updated Whitmore analysis confirms and corroborates the arm's-length nature of the 4.5% royalty rate, and the 14 comparable license agreements identified therein form the basis of the documents produced herewith.

II. SCOPE OF PRODUCTION AND PRIVILEGE RESERVATIONS

In response to IDR No. 25, PPC produces herewith redacted versions of fourteen (14) comparable uncontrolled pharmaceutical license agreements identified in the CUT analysis. These agreements have been Bates-stamped sequentially as PPC-IDR25-000001 through PPC-IDR25-000847 and are produced in PDF format on a single encrypted USB drive, transmitted concurrently with this letter.

Redactions have been applied to the produced documents in order to protect: (i) confidential third-party commercial terms that are not relevant to the comparability analysis and the disclosure of which would breach PPC's confidentiality obligations to the relevant database providers; (ii) proprietary financial data of unrelated parties that is not necessary for the examination team's review of the royalty rate benchmarking; and (iii) personally identifiable information of individuals who are parties to or signatories of such agreements, consistent with the limited disclosure obligations applicable to the examination context. These redactions are narrowly tailored and do not obscure the royalty rates, geographic scope, therapeutic area, or other key economic terms that are central to the comparability analysis.

Certain of the produced agreements were obtained from publicly available sources, including filings with the U.S. Securities and Exchange Commission (SEC EDGAR database), European Medicines Agency publication records, and publicly searchable patent license registries maintained by certain national patent offices. Other agreements were obtained through commercial databases, including the Vireo Health IT database, the Calderon Data Systems (Glenrock Services Inc.) Pharmaprojects database, and the Sundial Health IT intellectual Property database. Where agreements were obtained from commercial databases, redactions have been applied in accordance with the terms of PPC's and its advisors' subscription and access agreements with those database providers. PPC has made commercially reasonable efforts to minimize redactions while honoring its contractual and legal obligations.

PPC expressly reserves all objections to the scope, breadth, and specificity of IDR No. 25. Without limiting the generality of the foregoing, PPC does not waive any privilege, including but not limited to the attorney-client privilege and the work-product doctrine (both fact and opinion work product), by producing these materials. The production of the 14 comparable license agreements is made in response to the IDR's request for the underlying comparable agreements themselves and does not extend to any analyses, memoranda, notes, communications, or other materials prepared by or at the direction of counsel in connection with the evaluation of those agreements. Such materials remain privileged and are not produced.

Documents withheld or redacted on privilege grounds are identified on the privilege log previously produced to the examination team in connection with the broader examination. PPC has updated and supplemented that privilege log with additional entries relating to IDR No. 25 and encloses the supplemental privilege log herewith as a separate enclosure.

Finally, PPC's production of these agreements does not constitute an admission as to the relevance, admissibility, or evidentiary weight of any particular comparable agreement. PPC reserves the right to supplement or modify its CUT analysis, to add or remove comparables, and to present additional evidence and analysis at any stage of this examination or in any subsequent administrative or judicial proceeding.

III. SUMMARY OF THE CUT ANALYSIS METHODOLOGY

A. Background on the Legacy IP License

PPC licensed certain legacy pharmaceutical compounds to PBI under an intercompany license agreement effective January 1, 2013 (the "Legacy IP License"). The compounds subject to the Legacy IP License are those developed and commercially launched by PPC prior to 2012 and which are not covered by the qualified cost-sharing arrangement ("QCSA") entered into between PPC and PBI effective as of January 1, 2012. The legacy compound portfolio includes mature products across multiple therapeutic areas, including but not limited to Veritaxol (oncology), Imvara (immunology), and Cerulon (rare disease), each of which had been commercially available in global markets for a period of years prior to the execution of the Legacy IP License.

Under the terms of the Legacy IP License, PBI pays a royalty to PPC equal to 4.5% of net sales for the non-Americas territory. The non-Americas territory is defined in the Legacy IP License as all territories and jurisdictions outside of North America (the United States, Canada, and Mexico), Central America, South America, and the Caribbean. The non-Americas territory thus encompasses Europe, the Middle East, Africa, Asia-Pacific, and all other markets worldwide that fall outside the Americas. PPC retained all rights to commercialize the legacy compounds in the Americas territory and does not receive a royalty payment from PBI with respect to those sales.

The following table summarizes legacy compound net sales in the non-Americas territory and corresponding royalty payments for the tax years under examination:

The declining net sales trajectory reflected in the table above is consistent with the natural product lifecycle of the legacy compounds, which are mature pharmaceutical products that have faced increasing generic and biosimilar competition, formulary pressures, and the expected erosion of market share that occurs as products age beyond peak commercialization. This declining revenue profile is a relevant comparability factor, as discussed further below, because it reduces the residual value of the licensed intellectual property to the licensee over time.

B. CUT Method Under Treas. Reg. § 1.482-4

PPC selected the comparable uncontrolled transaction ("CUT") method under Treasury Regulation § 1.482-4(c) as the best method for evaluating the arm's-length nature of the royalty rate under the Legacy IP License. The CUT method was selected pursuant to the best method rule set forth in Treasury Regulation § 1.482-1(c), which provides that the arm's-length result of a controlled transaction must be determined under the method that, given the facts and circumstances, provides the most reliable measure of an arm's-length result.

The CUT method was determined to be the best method because sufficiently reliable comparable uncontrolled license agreements exist in the pharmaceutical and biotechnology sector to permit a meaningful comparison. The pharmaceutical licensing market is characterized by a substantial volume of arm's-length licensing transactions between unrelated parties, many of which are publicly reported through SEC filings, regulatory disclosures, and commercial databases. These transactions involve the license of intellectual property rights — including patents, manufacturing know-how, regulatory dossiers, clinical data packages, and associated trademarks — for the commercialization of pharmaceutical products in defined geographic territories, and thus share the fundamental economic characteristics of the Legacy IP License at issue.

In conducting the CUT analysis, PPC and its advisors considered both internal CUTs and external CUTs. With respect to internal CUTs, PPC did not license intellectual property in the legacy compound portfolio, or substantially similar intellectual property, to any unrelated third party at arm's length during or proximate to the years under examination. Accordingly, no internal CUTs were available for purposes of the analysis. With respect to external CUTs, PPC's advisors identified and analyzed third-party pharmaceutical licensing agreements through the systematic search process described in Section III.C below.

The selection of the CUT method was also informed by the consideration and rejection of alternative methods. In particular, PPC considered the comparable profits method ("CPM") under Treasury Regulation § 1.482-5 and the profit split method under Treasury Regulation § 1.482-6, but determined that the CUT method provided a more direct and reliable measure of the arm's-length royalty rate given the availability of external comparables. The CPM, while potentially applicable to PBI's overall profitability, does not directly test the royalty rate and would require the identification of comparable companies rather than comparable transactions. The profit split method, while potentially applicable to the QCSA-related intangibles, was not considered necessary or appropriate for the legacy compound royalty given the availability of CUT comparables and the relatively straightforward nature of the licensing arrangement.

C. Comparability Criteria and Search Process

Whitmore Valuation Group, at the direction of Calderwood & Harkness LLP, conducted a systematic and rigorous search for comparable uncontrolled pharmaceutical license agreements using multiple commercial licensing databases and publicly available sources. The search was designed to identify arm's-length license agreements that are sufficiently comparable to the Legacy IP License to provide a reliable indication of the arm's-length royalty rate, after appropriate adjustments for any material differences in comparability factors.

The following search criteria were applied:

(i) Industry Sector. The licensed intellectual property must relate to the pharmaceutical or biotechnology sector, encompassing small-molecule drugs, biologics, and related pharmaceutical technologies. Agreements in non-pharmaceutical sectors (e.g., medical devices, diagnostics, industrial chemicals) were excluded because the economics of pharmaceutical IP licensing — including the role of regulatory exclusivity, patent cliffs, clinical development risk, and market dynamics — differ materially from those in other industries.

(ii) Nature of Licensed IP. The transaction must involve the license of intellectual property rights for the commercialization of pharmaceutical products, including patents, manufacturing know-how, regulatory dossiers, clinical data, and/or trademarks. Pure research collaboration agreements, co-development agreements without a royalty component, and option-to-license agreements were excluded, as were agreements limited to the license of manufacturing process technology without a commercialization component.

(iii) Geographic Scope. The licensed territory must be comparable to the non-Americas territory defined in the Legacy IP License, or must encompass global rights, ex-U.S. rights, or regional rights (e.g., European, Asia-Pacific, or similar regional territories) that permit meaningful comparison to the non-Americas territory after appropriate adjustments. Agreements limited exclusively to a single country were generally excluded unless the country represented a major pharmaceutical market (e.g., Japan, Germany, or the United Kingdom) and the agreement was otherwise highly comparable.

(iv) Time Frame. The license agreement must have been executed within a reasonable time frame relative to the years at issue, specifically during the period from 2012 through 2020. This time frame was selected to capture agreements entered into in market conditions reasonably similar to those prevailing during the examination period, while also providing a sufficiently broad window to identify an adequate number of comparables.

(v) Arm's-Length Transaction. The transaction must have been entered into between unrelated parties dealing at arm's length. Agreements between related parties, affiliates, or entities under common control were excluded. Additionally, agreements that appeared to have been influenced by non-arm's-length considerations (e.g., cross-licensing arrangements involving reciprocal below-market terms, settlement-related licenses, or distressed-sale transactions) were excluded from the analysis.

(vi) Data Availability. Sufficient public or otherwise available data must exist to determine the applicable royalty rate and key economic terms of the agreement, including the geographic scope, therapeutic area, exclusivity provisions, duration, and functional allocation between licensor and licensee. Agreements for which only headline terms were available, without sufficient detail to assess comparability, were excluded.

The initial search yielded a universe of approximately 312 potentially comparable agreements. Through a multi-stage screening process — involving review of agreement summaries, detailed analysis of publicly available terms, and, where available, review of the full text of the agreements — the universe was narrowed to 14 agreements that met all of the foregoing comparability criteria and for which sufficient data existed to perform a reliable analysis.

Adjustments for comparability differences were considered and, where appropriate, applied pursuant to Treasury Regulation § 1.482-4(c). The comparability factors considered in this analysis include, without limitation:

• Stage of development of the licensed compound(s) at the time of the license agreement (approved product vs. late-stage clinical compound vs. early-stage compound);

• Therapeutic area and the associated market dynamics, competitive landscape, and pricing environment;

• Exclusivity of the license (exclusive vs. non-exclusive; sole vs. co-exclusive);

• Geographic scope of the licensed territory and the relative size and maturity of the markets included;

• Volume of sales and anticipated sales trajectory over the license term;

• Duration of the license agreement and whether the license is perpetual, limited-term, or tied to patent expiration;

• Allocation of risks and functions between licensor and licensee, including which party bears regulatory risk, commercial risk, pricing risk, and manufacturing risk; and

• Upfront payments, milestone payments, and other non-royalty consideration that may affect the effective royalty rate.

D. Results of the CUT Analysis

The CUT analysis identified fourteen (14) comparable uncontrolled pharmaceutical license agreements. The royalty rates observed in these agreements, after adjustment for comparability differences where applicable, produced the following statistical results:

• Interquartile range of royalty rates: 3.1% to 6.8% of net sales

• Median royalty rate: 4.4% of net sales

PPC's royalty rate of 4.5% of net sales under the Legacy IP License falls squarely within the arm's-length interquartile range and is positioned at approximately the median of the distribution. Under the principles of Treasury Regulation § 1.482-1(e)(2), the taxpayer's controlled transaction result is consistent with the arm's-length standard where it falls within the interquartile range of results derived from comparable uncontrolled transactions. Accordingly, PPC submits that the 4.5% royalty rate applied to legacy compound net sales in the non-Americas territory is consistent with arm's-length pricing under IRC § 482 and Treasury Regulation § 1.482-4.

IV. INDEX OF PRODUCED DOCUMENTS

The following table identifies each of the 14 comparable uncontrolled license agreements produced herewith, together with key identifying information and comparability factors. Party names have been anonymized or redacted where required by confidentiality obligations or database access agreements; the examination team is referred to the unredacted versions of the agreements (where available from public sources) or to the Whitmore Valuation Group's detailed CUT analysis report for further identifying information.

The 14 comparable agreements span a range of therapeutic areas that closely mirrors PPC's legacy compound product portfolio, including oncology (CUT-01, CUT-05, CUT-07, CUT-09, CUT-12, CUT-14), immunology (CUT-02, CUT-06, CUT-10), rare disease (CUT-03, CUT-08, CUT-13), and other specialty pharmaceutical areas (CUT-04, CUT-11). This therapeutic area diversity enhances the reliability of the CUT analysis by ensuring that the observed royalty rate range reflects market conditions across the same types of products that generate PPC's legacy compound revenues.

V. COMPARABILITY ADJUSTMENTS NARRATIVE

As noted in Section III.C above, adjustments for comparability differences were considered and applied to the 14 CUT agreements in accordance with Treasury Regulation § 1.482-4(c). The following narrative summarizes the principal adjustments and the rationale therefor.

Development Stage. Thirteen of the 14 CUT agreements involve compounds that were approved for commercial sale at the time of the license agreement, directly paralleling PPC's legacy compounds, all of which are approved and commercially marketed products. CUT-09, which involves a late-stage (Phase III) clinical compound, was adjusted downward to account for the development-stage risk premium embedded in its 4.8% royalty rate. The adjusted royalty rate for CUT-09 reflects the elimination of the approximately 30-40 basis point premium attributable to the licensee's assumption of Phase III completion and regulatory approval risk, which is not present in the Legacy IP License.

Geographic Scope. The non-Americas territory defined in the Legacy IP License encompasses a broad set of markets. Several of the CUT agreements involve territories that are narrower (e.g., CUT-06, Europe only; CUT-10, Europe and Japan) or broader (e.g., CUT-12, including select Latin American markets) than the non-Americas territory. Adjustments were made to account for differences in the size, maturity, and pricing dynamics of the licensed territory. Agreements covering territories that closely match the non-Americas territory (CUT-02, CUT-07, CUT-08, CUT-11) required minimal or no geographic adjustment.

Exclusivity Terms. All 14 CUT agreements involve exclusive licenses within the defined territory, consistent with the exclusive nature of the Legacy IP License. No adjustment for exclusivity was required.

Licensee Functional Profile. A critical comparability factor in this analysis is the functional profile of the licensee — specifically, the extent to which the licensee performs development, enhancement, maintenance, protection, and exploitation ("DEMPE") functions with respect to the licensed intellectual property and bears the associated risks. PBI is not a mere distributor or passive license holder; rather, PBI functions as the IP holder and commercial principal for the non-Americas territory, with significant substance and operational capacity. As documented in PPC's prior IDR responses — including IDR No. 8 (personnel and headcount data), IDR No. 9 (board of directors minutes and corporate governance materials), IDR No. 12 (office lease and physical presence documentation), and IDR No. 15 (regulatory expenditure data) — PBI maintains the following operational profile:

• PBI employs approximately 185 employees in Ireland and throughout the non-Americas territory, including regulatory affairs professionals, medical affairs specialists, commercial and market access personnel, and senior management;

• PBI has incurred cumulative regulatory expenditures of approximately €47.2 million over the examination period, reflecting its independent investment in maintaining and expanding regulatory approvals across multiple jurisdictions;

• PBI independently manages pricing, reimbursement negotiations, and commercial strategy across 68 country markets within the non-Americas territory, exercising significant commercial judgment and bearing the associated market and pricing risk; and

• PBI is overseen by Managing Director Aidan Naughton, who is based in Dublin, Ireland, and who exercises day-to-day management authority over PBI's operations.

This functional profile is relevant to the comparability analysis because it demonstrates that PBI performs significant DEMPE functions and bears substantial market risk in the non-Americas territory. Under the arm's-length principle, a licensee that performs greater functions and bears greater risks is entitled to retain a larger share of the profits generated from the licensed IP, which in turn implies a lower royalty rate payable to the licensor. PBI's functional profile supports the lower end of the comparability range — that is, a royalty rate at or near the median of 4.4%, rather than at the upper end of the interquartile range — because PBI's substantial DEMPE contributions reduce the residual return properly attributable to PPC as the licensor.

Adjustments were applied to certain CUT agreements where the licensee's functional profile was materially narrower than PBI's (e.g., CUT-14, where the licensee's functions were somewhat more limited, resulting in a higher unadjusted royalty rate that was adjusted upward to reflect the licensee's narrower role relative to PBI's broader functional profile).

Other Adjustments. Additional adjustments were considered for differences in license duration, non-royalty consideration (upfront payments and milestones), and therapeutic area. These adjustments are described in detail in the Whitmore Valuation Group's CUT analysis report, which is available for in-camera review by the examination team subject to the privilege protections described herein.

VI. DISTINCTION FROM IRS POSITION

PPC understands that the IRS examination team, through IRS Economist Dr. Alan Washburne, may be considering an alternative royalty rate of 11.0% based on a different selection of CUT comparables and a different application of comparability criteria. PPC has not been provided with the details of Dr. Washburne's analysis and therefore cannot address it in full at this time.

However, PPC respectfully submits that the 14 CUT agreements produced herewith represent the most reliable comparable uncontrolled transactions under the best method rule of Treasury Regulation § 1.482-1(c). PPC's CUT analysis, as prepared by Whitmore Valuation Group and Crestfield & Associates, was conducted using a systematic and transparent search methodology, applying well-established comparability criteria tailored to the specific facts and circumstances of the Legacy IP License. The resulting interquartile range of 3.1% to 6.8% of net sales, with a median of 4.4%, is the appropriate arm's-length range for the royalty at issue. PPC's 4.5% royalty rate falls within this range at approximately the median, and no adjustment under IRC § 482 is warranted.

To the extent that the IRS's proposed 11.0% royalty rate is based on CUT comparables that differ from those identified in PPC's analysis, PPC reserves its right to address the IRS's CUT selection and methodology — including any challenges to the comparability, reliability, and relevance of the IRS's proposed comparables — in detail at the appropriate stage of the examination, including through the issuance of a formal protest, at the IRS Appeals level, or in any subsequent litigation.

VII. SUPPLEMENTAL PRODUCTION NOTES

The following additional notes are provided with respect to the documents produced herewith:

1. Format and Bates Numbering. Documents are produced in redacted PDF format and have been Bates-stamped sequentially as PPC-IDR25-000001 through PPC-IDR25-000847. Each document is identified by its CUT reference number (CUT-01 through CUT-14) and the corresponding Bates range, as set forth in the table in Section IV above.

2. Foreign Language Documents. One of the produced agreements (CUT-03) includes certain schedules and appendices originally drafted in German. A certified English translation of those schedules and appendices, prepared by a qualified translator, is included within the Bates-stamped production immediately following the original-language pages. All other produced agreements are in English.

3. Supplementation. PPC will supplement this production if additional comparable agreements are identified through ongoing analysis. PPC's advisors continue to monitor publicly available and commercial database sources for newly disclosed or newly identified license agreements that may be relevant to the CUT analysis. Any supplemental production will be made on a timely basis and will be accompanied by appropriate notification to the examination team.

4. Whitmore Valuation Group Report. The detailed CUT analysis report prepared by Whitmore Valuation Group LLC, which sets forth the full search methodology, comparability analysis, adjustments, and statistical results, was prepared at the direction of counsel under the Kovel arrangement referenced herein. PPC considers this report to be protected by the attorney-client privilege and the work-product doctrine. PPC is prepared to make the report available for in-camera review by the examination team, subject to appropriate privilege protections, if requested. Any such review would be subject to a written confidentiality and non-waiver agreement, the form of which PPC would be pleased to discuss with the examination team.

VIII. RESERVATION OF RIGHTS

PPC expressly reserves all rights, objections, privileges, and defenses available to it under applicable law, regulation, and administrative guidance, including but not limited to the following:

(a) Attorney-client privilege. PPC reserves the attorney-client privilege with respect to all communications between PPC and its counsel (Calderwood & Harkness LLP) and all materials prepared by or at the direction of counsel, including materials prepared by Whitmore Valuation Group LLC under the Kovel arrangement.

(b) Work-product doctrine. PPC reserves the protection of the work-product doctrine (both fact work product and opinion work product) with respect to all materials prepared by or at the direction of counsel in anticipation of litigation or in connection with this examination, including all analyses, memoranda, notes, and communications relating to the CUT analysis and the selection of comparable agreements.

(c) Relevance, materiality, and scope objections. PPC reserves all objections to the relevance, materiality, and scope of IDR No. 25, including objections to any interpretation of the IDR that would require PPC to produce materials beyond the comparable license agreements themselves.

(d) Non-waiver. The production of these documents does not constitute a waiver of any privilege, right, objection, or defense, whether or not expressly asserted herein. PPC's compliance with IDR No. 25 is made without prejudice to PPC's right to assert any and all privileges and objections in connection with future IDRs, in any administrative proceeding, or in any judicial proceeding.

(e) No admission as to controlling comparables. PPC does not concede that any particular comparable agreement is controlling or dispositive of the arm's-length royalty rate. The arm's-length range is determined by the aggregate analysis of all 14 CUT agreements, and the reliability of the analysis derives from the totality of the comparable set, not from any individual agreement.

(f) Right to supplement or revise. PPC reserves the right to supplement, amend, or revise its CUT analysis and to produce additional comparable agreements at any time during the examination or in any subsequent administrative or judicial proceedings, including at the IRS Appeals level or in the U.S. Tax Court.

IX. CONTACT INFORMATION AND AVAILABILITY

All inquiries regarding this response, the produced documents, and the CUT analysis should be directed to:

Garrett Simmons, Lead Associate Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 864-7244

Email: g.simmons@calderwoodharkness.com

Leonard Cross, Responsible Partner Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 864-7210

Email: l.cross@calderwoodharkness.com

PPC remains willing to meet with the examination team, at a mutually convenient time, to discuss the CUT analysis, the comparable agreements produced herewith, and any questions the examination team may have regarding the methodology, comparability adjustments, or the documents themselves. PPC would welcome the opportunity to provide a walkthrough of the CUT analysis in a conference setting, and requests that any such meeting be scheduled through counsel.

We trust that the foregoing response and the enclosed documents are responsive to IDR No. 25. PPC appreciates the examination team's continued professionalism and looks forward to working cooperatively toward resolution of the transfer pricing matters under review.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Leonard Cross, Partner 1735 Market Street, Suite 3100 Philadelphia, PA 19103

On behalf of Penterra Pharmaceuticals Corp.

Date: February 15, 2023

cc: (via email)

Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. Sylvia Hartwell, Of Counsel, Calderwood & Harkness LLP Garrett Simmons, Associate, Calderwood & Harkness LLP Leila Nazari, Associate, Calderwood & Harkness LLP Supervisory Revenue Agent Gerald Meskill, Team Manager, IRS Large Business & International Division

Enclosures:

1. Fourteen (14) redacted comparable license agreements (CUT-01 through CUT-14), Bates-stamped PPC-IDR25-000001 through PPC-IDR25-000847 (produced on encrypted USB drive)

2. Updated privilege log — supplemental entries related to IDR No. 25

Tax Year	Non-Americas Net Sales	Royalty Rate	Royalty Payment
2017	$814,600,000	4.5%	$36,657,000
2018	$762,300,000	4.5%	$34,303,500
2019	$691,800,000	4.5%	$31,131,000
2020	$624,100,000	4.5%	$28,084,500
CUT Ref.	Description	Date	Geographic Scope	Royalty Rate	Key Comparability Factors	Source	Bates Range
CUT-01	License of approved oncology compound (small molecule); licensor retained manufacturing rights; licensee responsible for all commercialization activities	Mar. 2014	Europe, Middle East, Africa	3.1% of net sales	Approved product; exclusive license; licensee bears full commercial risk; late-lifecycle product	SEC Filing (10-K Exhibit)	PPC-IDR25-000001 – 000062
CUT-02	License of approved immunology biologic; royalty on net sales with volume-based tiered structure; licensee responsible for regulatory maintenance and pricing	Sept. 2015	Ex-Americas (global excl. North and South America)	3.4% – 4.2% (tiered)	Approved biologic; territory closely matches non-Americas; licensee performs significant DEMPE functions	SEC Filing (8-K Exhibit)	PPC-IDR25-000063 – 000119
CUT-03	License of mature rare disease compound; fixed royalty rate; 10-year term with renewal option; licensee responsible for local regulatory filings	June 2013	Europe and Asia-Pacific	3.8% of net sales	Approved product; rare disease therapeutic area; mature compound with declining sales trajectory	Commercial Database (Vireo Health IT)	PPC-IDR25-000120 – 000178
CUT-04	License of approved specialty pharmaceutical compound; royalty on net sales; licensee assumed regulatory and commercial risk in licensed territory	Jan. 2016	Global ex-U.S.	4.0% of net sales	Approved product; broad ex-U.S. territory; licensee bears pricing and reimbursement risk	SEC Filing (10-K Exhibit)	PPC-IDR25-000179 – 000240
CUT-05	License of oncology compound portfolio (two approved products); blended royalty rate on aggregate net sales; licensee responsible for market access	Aug. 2014	Europe, Middle East, and select Asia-Pacific markets	4.1% of net sales	Portfolio license; approved products; licensee has established commercial infrastructure	Commercial Database (Sundial Health IT)	PPC-IDR25-000241 – 000301
CUT-06	License of approved immunology compound; running royalty with minimum annual payment; exclusive license for defined territory	Feb. 2017	Europe	4.3% of net sales	Approved product; immunology area; exclusive European territory; licensee performs distribution and marketing	SEC Filing (10-Q Exhibit)	PPC-IDR25-000302 – 000355
CUT-07	License of approved oncology compound; royalty on net sales; licensee responsible for all post-marketing regulatory and pharmacovigilance obligations	Nov. 2015	Global ex-Americas	4.4% of net sales	Approved product; territory closely mirrors non-Americas; licensee bears substantial regulatory and commercial risk	Commercial Database (Calderon Data Systems)	PPC-IDR25-000356 – 000417
CUT-08	License of approved rare disease compound with orphan drug designation; running royalty; licensee independently manages pricing in 40+ country markets	Apr. 2016	Europe, Middle East, Africa, and Asia-Pacific	4.5% of net sales	Approved product; orphan drug; licensee manages independent pricing; territory substantially overlaps non-Americas	SEC Filing (Annual Report Exhibit)	PPC-IDR25-000418 – 000481
CUT-09	License of late-stage (Phase III) oncology compound; higher royalty reflecting development-stage risk premium; licensee to complete Phase III and file for regulatory approval	Oct. 2013	Global ex-U.S.	4.8% of net sales	Late-stage clinical compound; higher risk profile; adjusted downward for development-stage differential	Commercial Database (Vireo Health IT)	PPC-IDR25-000482 – 000534
CUT-10	License of approved specialty immunology biologic; royalty on net sales; 15-year term; licensee responsible for manufacturing and distribution	July 2018	Europe and Japan	5.2% of net sales	Approved biologic; narrower geographic scope (adjusted); licensee bears manufacturing risk	SEC Filing (8-K Exhibit)	PPC-IDR25-000535 – 000598
CUT-11	License of approved cardiovascular compound; running royalty; licensee operates through established subsidiary network in licensed territory	Dec. 2014	Global ex-Americas	5.5% of net sales	Approved product; cardiovascular area (adjusted for therapeutic area differences); broad territory	Commercial Database (Sundial Health IT)	PPC-IDR25-000599 – 000658
CUT-12	License of approved oncology compound with companion diagnostic requirement; royalty on net sales with adjustment for diagnostic-linked prescribing	Mar. 2017	Europe, Asia-Pacific, and select Latin American markets	6.0% of net sales	Approved product; companion diagnostic adds complexity; broader territory than non-Americas (adjusted)	SEC Filing (10-K Exhibit)	PPC-IDR25-000659 – 000720
CUT-13	License of approved rare disease biologic; higher royalty reflecting premium pricing dynamics in rare disease market; exclusive license	Sept. 2016	Ex-U.S. (global)	6.5% of net sales	Approved biologic; rare disease premium pricing; exclusive global ex-U.S. rights; licensor retained co-promotion rights (adjusted)	Commercial Database (Calderon Data Systems)	PPC-IDR25-000721 – 000789
CUT-14	License of approved specialty oncology compound; royalty on net sales; licensee responsible for all regulatory, commercial, and market access functions	May 2015	Europe, Middle East, Africa	6.8% of net sales	Approved product; oncology area; licensee functions somewhat narrower than PBI (adjusted upward for functional differences)	SEC Filing (10-K Exhibit)	PPC-IDR25-000790 – 000847

CONFIDENTIAL — TAX EXAMINATION MATERIAL
CALDERWOOD & HARKNESS LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103
Telephone: (215) 864-7200 Facsimile: (215) 864-7201
Firm Headquarters: 600 Lexington Avenue New York, NY 10022
February 15, 2023
VIA CERTIFIED MAIL AND IRS SECURE MESSAGING
Revenue Agent Patricia Dunleavy Internal Revenue Service Large Business & International Division 600 Arch Street, Room 6418 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. 25 — Comparable License Agreements (CUT Support)
Dear Revenue Agent Dunleavy:
Calderwood & Harkness LLP ("C&H") represents Penterra Pharmaceuticals Corp. ("PPC" or the "Company") in connection with the above-referenced examination, as authorized pursuant to IRS Form 2848 (Power of Attorney and Declaration of Representative) filed with the Internal Revenue Service on June 8, 2022, on behalf of Leonard Cross (Partner), Sylvia Hartwell (Of Counsel), Garrett Simmons (Lead Associate), and Leila Nazari (Associate) of this firm. This matter is tracked internally as C&H Matter Number 1018-00009.
This letter constitutes PPC's response to Information Document Request No. 25 ("IDR No. 25"), which was issued on January 18, 2023, and received by counsel on January 23, 2023. IDR No. 25 requests the production of comparable uncontrolled license agreements identified in PPC's transfer pricing documentation supporting the arm's-length royalty rate applied to legacy intellectual property licensed by PPC to Penterra Biopharma International DAC ("PBI"), a designated activity company organized and tax-resident in Ireland. We note that IDR No. 25 is one of forty-seven (47) IDRs issued by the examination team during the examination period spanning from June 2022 through the present, reflecting the breadth and complexity of the transfer pricing issues under review.
PPC has endeavored to respond to IDR No. 25 in a thorough and timely manner, consistent with its obligations under the Internal Revenue Code and in the spirit of cooperation that has characterized this examination. PPC nonetheless expressly preserves all rights, objections, and privileges as set forth more fully below.
I. DESCRIPTION OF IDR NO. 25 REQUEST
IDR No. 25 requests that PPC produce copies of the third-party pharmaceutical license agreements identified as comparable uncontrolled transactions ("CUTs") in PPC's benchmarking analysis. Specifically, the IDR requests copies of the license agreements that form the basis for PPC's conclusion that the 4.5% royalty rate applied to legacy compound net sales in the non-Americas territory — defined in the intercompany license agreement as all territories outside of North America, Central America, South America, and the Caribbean — satisfies the arm's-length standard of Internal Revenue Code § 482 and the Treasury Regulations promulgated thereunder.
The CUT analysis that is the subject of IDR No. 25 was initially prepared by Crestfield & Associates LLP, under the direction of Susan Lam, Transfer Pricing Partner, as part of PPC's contemporaneous transfer pricing documentation for Tax Years 2017 through 2020. That contemporaneous documentation, including the Crestfield & Associates CUT analysis and the underlying benchmarking study, was previously produced to the examination team in response to IDR No. 4 (dated August 1, 2022), and PPC understands that the examination team has had the opportunity to review those materials.
Subsequently, the CUT analysis was updated, refined, and supplemented by Whitmore Valuation Group LLC ("Whitmore"), under the direction of Dr. Helena Vasquez, Managing Director, and Dr. Rohan Chakrabarti, Senior Director, both of whom possess extensive expertise in pharmaceutical and biotechnology transfer pricing and intellectual property valuation. Whitmore was retained under a Kovel arrangement (reference 1018-00009-KV) at the direction of Calderwood & Harkness LLP, pursuant to a Kovel letter executed on June 20, 2022. The updated Whitmore analysis confirms and corroborates the arm's-length nature of the 4.5% royalty rate, and the 14 comparable license agreements identified therein form the basis of the documents produced herewith.
II. SCOPE OF PRODUCTION AND PRIVILEGE RESERVATIONS
In response to IDR No. 25, PPC produces herewith redacted versions of fourteen (14) comparable uncontrolled pharmaceutical license agreements identified in the CUT analysis. These agreements have been Bates-stamped sequentially as PPC-IDR25-000001 through PPC-IDR25-000847 and are produced in PDF format on a single encrypted USB drive, transmitted concurrently with this letter.
Redactions have been applied to the produced documents in order to protect: (i) confidential third-party commercial terms that are not relevant to the comparability analysis and the disclosure of which would breach PPC's confidentiality obligations to the relevant database providers; (ii) proprietary financial data of unrelated parties that is not necessary for the examination team's review of the royalty rate benchmarking; and (iii) personally identifiable information of individuals who are parties to or signatories of such agreements, consistent with the limited disclosure obligations applicable to the examination context. These redactions are narrowly tailored and do not obscure the royalty rates, geographic scope, therapeutic area, or other key economic terms that are central to the comparability analysis.
Certain of the produced agreements were obtained from publicly available sources, including filings with the U.S. Securities and Exchange Commission (SEC EDGAR database), European Medicines Agency publication records, and publicly searchable patent license registries maintained by certain national patent offices. Other agreements were obtained through commercial databases, including the Vireo Health IT database, the Calderon Data Systems (Glenrock Services Inc.) Pharmaprojects database, and the Sundial Health IT intellectual Property database. Where agreements were obtained from commercial databases, redactions have been applied in accordance with the terms of PPC's and its advisors' subscription and access agreements with those database providers. PPC has made commercially reasonable efforts to minimize redactions while honoring its contractual and legal obligations.
PPC expressly reserves all objections to the scope, breadth, and specificity of IDR No. 25. Without limiting the generality of the foregoing, PPC does not waive any privilege, including but not limited to the attorney-client privilege and the work-product doctrine (both fact and opinion work product), by producing these materials. The production of the 14 comparable license agreements is made in response to the IDR's request for the underlying comparable agreements themselves and does not extend to any analyses, memoranda, notes, communications, or other materials prepared by or at the direction of counsel in connection with the evaluation of those agreements. Such materials remain privileged and are not produced.
Documents withheld or redacted on privilege grounds are identified on the privilege log previously produced to the examination team in connection with the broader examination. PPC has updated and supplemented that privilege log with additional entries relating to IDR No. 25 and encloses the supplemental privilege log herewith as a separate enclosure.
Finally, PPC's production of these agreements does not constitute an admission as to the relevance, admissibility, or evidentiary weight of any particular comparable agreement. PPC reserves the right to supplement or modify its CUT analysis, to add or remove comparables, and to present additional evidence and analysis at any stage of this examination or in any subsequent administrative or judicial proceeding.
III. SUMMARY OF THE CUT ANALYSIS METHODOLOGY
A. Background on the Legacy IP License
PPC licensed certain legacy pharmaceutical compounds to PBI under an intercompany license agreement effective January 1, 2013 (the "Legacy IP License"). The compounds subject to the Legacy IP License are those developed and commercially launched by PPC prior to 2012 and which are not covered by the qualified cost-sharing arrangement ("QCSA") entered into between PPC and PBI effective as of January 1, 2012. The legacy compound portfolio includes mature products across multiple therapeutic areas, including but not limited to Veritaxol (oncology), Imvara (immunology), and Cerulon (rare disease), each of which had been commercially available in global markets for a period of years prior to the execution of the Legacy IP License.
Under the terms of the Legacy IP License, PBI pays a royalty to PPC equal to 4.5% of net sales for the non-Americas territory. The non-Americas territory is defined in the Legacy IP License as all territories and jurisdictions outside of North America (the United States, Canada, and Mexico), Central America, South America, and the Caribbean. The non-Americas territory thus encompasses Europe, the Middle East, Africa, Asia-Pacific, and all other markets worldwide that fall outside the Americas. PPC retained all rights to commercialize the legacy compounds in the Americas territory and does not receive a royalty payment from PBI with respect to those sales.
The following table summarizes legacy compound net sales in the non-Americas territory and corresponding royalty payments for the tax years under examination:
The declining net sales trajectory reflected in the table above is consistent with the natural product lifecycle of the legacy compounds, which are mature pharmaceutical products that have faced increasing generic and biosimilar competition, formulary pressures, and the expected erosion of market share that occurs as products age beyond peak commercialization. This declining revenue profile is a relevant comparability factor, as discussed further below, because it reduces the residual value of the licensed intellectual property to the licensee over time.
B. CUT Method Under Treas. Reg. § 1.482-4
PPC selected the comparable uncontrolled transaction ("CUT") method under Treasury Regulation § 1.482-4(c) as the best method for evaluating the arm's-length nature of the royalty rate under the Legacy IP License. The CUT method was selected pursuant to the best method rule set forth in Treasury Regulation § 1.482-1(c), which provides that the arm's-length result of a controlled transaction must be determined under the method that, given the facts and circumstances, provides the most reliable measure of an arm's-length result.
The CUT method was determined to be the best method because sufficiently reliable comparable uncontrolled license agreements exist in the pharmaceutical and biotechnology sector to permit a meaningful comparison. The pharmaceutical licensing market is characterized by a substantial volume of arm's-length licensing transactions between unrelated parties, many of which are publicly reported through SEC filings, regulatory disclosures, and commercial databases. These transactions involve the license of intellectual property rights — including patents, manufacturing know-how, regulatory dossiers, clinical data packages, and associated trademarks — for the commercialization of pharmaceutical products in defined geographic territories, and thus share the fundamental economic characteristics of the Legacy IP License at issue.
In conducting the CUT analysis, PPC and its advisors considered both internal CUTs and external CUTs. With respect to internal CUTs, PPC did not license intellectual property in the legacy compound portfolio, or substantially similar intellectual property, to any unrelated third party at arm's length during or proximate to the years under examination. Accordingly, no internal CUTs were available for purposes of the analysis. With respect to external CUTs, PPC's advisors identified and analyzed third-party pharmaceutical licensing agreements through the systematic search process described in Section III.C below.
The selection of the CUT method was also informed by the consideration and rejection of alternative methods. In particular, PPC considered the comparable profits method ("CPM") under Treasury Regulation § 1.482-5 and the profit split method under Treasury Regulation § 1.482-6, but determined that the CUT method provided a more direct and reliable measure of the arm's-length royalty rate given the availability of external comparables. The CPM, while potentially applicable to PBI's overall profitability, does not directly test the royalty rate and would require the identification of comparable companies rather than comparable transactions. The profit split method, while potentially applicable to the QCSA-related intangibles, was not considered necessary or appropriate for the legacy compound royalty given the availability of CUT comparables and the relatively straightforward nature of the licensing arrangement.
C. Comparability Criteria and Search Process
Whitmore Valuation Group, at the direction of Calderwood & Harkness LLP, conducted a systematic and rigorous search for comparable uncontrolled pharmaceutical license agreements using multiple commercial licensing databases and publicly available sources. The search was designed to identify arm's-length license agreements that are sufficiently comparable to the Legacy IP License to provide a reliable indication of the arm's-length royalty rate, after appropriate adjustments for any material differences in comparability factors.
The following search criteria were applied:
(i) Industry Sector. The licensed intellectual property must relate to the pharmaceutical or biotechnology sector, encompassing small-molecule drugs, biologics, and related pharmaceutical technologies. Agreements in non-pharmaceutical sectors (e.g., medical devices, diagnostics, industrial chemicals) were excluded because the economics of pharmaceutical IP licensing — including the role of regulatory exclusivity, patent cliffs, clinical development risk, and market dynamics — differ materially from those in other industries.
(ii) Nature of Licensed IP. The transaction must involve the license of intellectual property rights for the commercialization of pharmaceutical products, including patents, manufacturing know-how, regulatory dossiers, clinical data, and/or trademarks. Pure research collaboration agreements, co-development agreements without a royalty component, and option-to-license agreements were excluded, as were agreements limited to the license of manufacturing process technology without a commercialization component.
(iii) Geographic Scope. The licensed territory must be comparable to the non-Americas territory defined in the Legacy IP License, or must encompass global rights, ex-U.S. rights, or regional rights (e.g., European, Asia-Pacific, or similar regional territories) that permit meaningful comparison to the non-Americas territory after appropriate adjustments. Agreements limited exclusively to a single country were generally excluded unless the country represented a major pharmaceutical market (e.g., Japan, Germany, or the United Kingdom) and the agreement was otherwise highly comparable.
(iv) Time Frame. The license agreement must have been executed within a reasonable time frame relative to the years at issue, specifically during the period from 2012 through 2020. This time frame was selected to capture agreements entered into in market conditions reasonably similar to those prevailing during the examination period, while also providing a sufficiently broad window to identify an adequate number of comparables.
(v) Arm's-Length Transaction. The transaction must have been entered into between unrelated parties dealing at arm's length. Agreements between related parties, affiliates, or entities under common control were excluded. Additionally, agreements that appeared to have been influenced by non-arm's-length considerations (e.g., cross-licensing arrangements involving reciprocal below-market terms, settlement-related licenses, or distressed-sale transactions) were excluded from the analysis.
(vi) Data Availability. Sufficient public or otherwise available data must exist to determine the applicable royalty rate and key economic terms of the agreement, including the geographic scope, therapeutic area, exclusivity provisions, duration, and functional allocation between licensor and licensee. Agreements for which only headline terms were available, without sufficient detail to assess comparability, were excluded.
The initial search yielded a universe of approximately 312 potentially comparable agreements. Through a multi-stage screening process — involving review of agreement summaries, detailed analysis of publicly available terms, and, where available, review of the full text of the agreements — the universe was narrowed to 14 agreements that met all of the foregoing comparability criteria and for which sufficient data existed to perform a reliable analysis.
Adjustments for comparability differences were considered and, where appropriate, applied pursuant to Treasury Regulation § 1.482-4(c). The comparability factors considered in this analysis include, without limitation:
•  Stage of development of the licensed compound(s) at the time of the license agreement (approved product vs. late-stage clinical compound vs. early-stage compound);
•  Therapeutic area and the associated market dynamics, competitive landscape, and pricing environment;
•  Exclusivity of the license (exclusive vs. non-exclusive; sole vs. co-exclusive);
•  Geographic scope of the licensed territory and the relative size and maturity of the markets included;
•  Volume of sales and anticipated sales trajectory over the license term;
•  Duration of the license agreement and whether the license is perpetual, limited-term, or tied to patent expiration;
•  Allocation of risks and functions between licensor and licensee, including which party bears regulatory risk, commercial risk, pricing risk, and manufacturing risk; and
•  Upfront payments, milestone payments, and other non-royalty consideration that may affect the effective royalty rate.
D. Results of the CUT Analysis
The CUT analysis identified fourteen (14) comparable uncontrolled pharmaceutical license agreements. The royalty rates observed in these agreements, after adjustment for comparability differences where applicable, produced the following statistical results:
•  Interquartile range of royalty rates: 3.1% to 6.8% of net sales
•  Median royalty rate: 4.4% of net sales
PPC's royalty rate of 4.5% of net sales under the Legacy IP License falls squarely within the arm's-length interquartile range and is positioned at approximately the median of the distribution. Under the principles of Treasury Regulation § 1.482-1(e)(2), the taxpayer's controlled transaction result is consistent with the arm's-length standard where it falls within the interquartile range of results derived from comparable uncontrolled transactions. Accordingly, PPC submits that the 4.5% royalty rate applied to legacy compound net sales in the non-Americas territory is consistent with arm's-length pricing under IRC § 482 and Treasury Regulation § 1.482-4.
IV. INDEX OF PRODUCED DOCUMENTS
The following table identifies each of the 14 comparable uncontrolled license agreements produced herewith, together with key identifying information and comparability factors. Party names have been anonymized or redacted where required by confidentiality obligations or database access agreements; the examination team is referred to the unredacted versions of the agreements (where available from public sources) or to the Whitmore Valuation Group's detailed CUT analysis report for further identifying information.
The 14 comparable agreements span a range of therapeutic areas that closely mirrors PPC's legacy compound product portfolio, including oncology (CUT-01, CUT-05, CUT-07, CUT-09, CUT-12, CUT-14), immunology (CUT-02, CUT-06, CUT-10), rare disease (CUT-03, CUT-08, CUT-13), and other specialty pharmaceutical areas (CUT-04, CUT-11). This therapeutic area diversity enhances the reliability of the CUT analysis by ensuring that the observed royalty rate range reflects market conditions across the same types of products that generate PPC's legacy compound revenues.
V. COMPARABILITY ADJUSTMENTS NARRATIVE
As noted in Section III.C above, adjustments for comparability differences were considered and applied to the 14 CUT agreements in accordance with Treasury Regulation § 1.482-4(c). The following narrative summarizes the principal adjustments and the rationale therefor.
Development Stage. Thirteen of the 14 CUT agreements involve compounds that were approved for commercial sale at the time of the license agreement, directly paralleling PPC's legacy compounds, all of which are approved and commercially marketed products. CUT-09, which involves a late-stage (Phase III) clinical compound, was adjusted downward to account for the development-stage risk premium embedded in its 4.8% royalty rate. The adjusted royalty rate for CUT-09 reflects the elimination of the approximately 30-40 basis point premium attributable to the licensee's assumption of Phase III completion and regulatory approval risk, which is not present in the Legacy IP License.
Geographic Scope. The non-Americas territory defined in the Legacy IP License encompasses a broad set of markets. Several of the CUT agreements involve territories that are narrower (e.g., CUT-06, Europe only; CUT-10, Europe and Japan) or broader (e.g., CUT-12, including select Latin American markets) than the non-Americas territory. Adjustments were made to account for differences in the size, maturity, and pricing dynamics of the licensed territory. Agreements covering territories that closely match the non-Americas territory (CUT-02, CUT-07, CUT-08, CUT-11) required minimal or no geographic adjustment.
Exclusivity Terms. All 14 CUT agreements involve exclusive licenses within the defined territory, consistent with the exclusive nature of the Legacy IP License. No adjustment for exclusivity was required.
Licensee Functional Profile. A critical comparability factor in this analysis is the functional profile of the licensee — specifically, the extent to which the licensee performs development, enhancement, maintenance, protection, and exploitation ("DEMPE") functions with respect to the licensed intellectual property and bears the associated risks. PBI is not a mere distributor or passive license holder; rather, PBI functions as the IP holder and commercial principal for the non-Americas territory, with significant substance and operational capacity. As documented in PPC's prior IDR responses — including IDR No. 8 (personnel and headcount data), IDR No. 9 (board of directors minutes and corporate governance materials), IDR No. 12 (office lease and physical presence documentation), and IDR No. 15 (regulatory expenditure data) — PBI maintains the following operational profile:
•  PBI employs approximately 185 employees in Ireland and throughout the non-Americas territory, including regulatory affairs professionals, medical affairs specialists, commercial and market access personnel, and senior management;
•  PBI has incurred cumulative regulatory expenditures of approximately €47.2 million over the examination period, reflecting its independent investment in maintaining and expanding regulatory approvals across multiple jurisdictions;
•  PBI independently manages pricing, reimbursement negotiations, and commercial strategy across 68 country markets within the non-Americas territory, exercising significant commercial judgment and bearing the associated market and pricing risk; and
•  PBI is overseen by Managing Director Aidan Naughton, who is based in Dublin, Ireland, and who exercises day-to-day management authority over PBI's operations.
This functional profile is relevant to the comparability analysis because it demonstrates that PBI performs significant DEMPE functions and bears substantial market risk in the non-Americas territory. Under the arm's-length principle, a licensee that performs greater functions and bears greater risks is entitled to retain a larger share of the profits generated from the licensed IP, which in turn implies a lower royalty rate payable to the licensor. PBI's functional profile supports the lower end of the comparability range — that is, a royalty rate at or near the median of 4.4%, rather than at the upper end of the interquartile range — because PBI's substantial DEMPE contributions reduce the residual return properly attributable to PPC as the licensor.
Adjustments were applied to certain CUT agreements where the licensee's functional profile was materially narrower than PBI's (e.g., CUT-14, where the licensee's functions were somewhat more limited, resulting in a higher unadjusted royalty rate that was adjusted upward to reflect the licensee's narrower role relative to PBI's broader functional profile).
Other Adjustments. Additional adjustments were considered for differences in license duration, non-royalty consideration (upfront payments and milestones), and therapeutic area. These adjustments are described in detail in the Whitmore Valuation Group's CUT analysis report, which is available for in-camera review by the examination team subject to the privilege protections described herein.
VI. DISTINCTION FROM IRS POSITION
PPC understands that the IRS examination team, through IRS Economist Dr. Alan Washburne, may be considering an alternative royalty rate of 11.0% based on a different selection of CUT comparables and a different application of comparability criteria. PPC has not been provided with the details of Dr. Washburne's analysis and therefore cannot address it in full at this time.
However, PPC respectfully submits that the 14 CUT agreements produced herewith represent the most reliable comparable uncontrolled transactions under the best method rule of Treasury Regulation § 1.482-1(c). PPC's CUT analysis, as prepared by Whitmore Valuation Group and Crestfield & Associates, was conducted using a systematic and transparent search methodology, applying well-established comparability criteria tailored to the specific facts and circumstances of the Legacy IP License. The resulting interquartile range of 3.1% to 6.8% of net sales, with a median of 4.4%, is the appropriate arm's-length range for the royalty at issue. PPC's 4.5% royalty rate falls within this range at approximately the median, and no adjustment under IRC § 482 is warranted.
To the extent that the IRS's proposed 11.0% royalty rate is based on CUT comparables that differ from those identified in PPC's analysis, PPC reserves its right to address the IRS's CUT selection and methodology — including any challenges to the comparability, reliability, and relevance of the IRS's proposed comparables — in detail at the appropriate stage of the examination, including through the issuance of a formal protest, at the IRS Appeals level, or in any subsequent litigation.
VII. SUPPLEMENTAL PRODUCTION NOTES
The following additional notes are provided with respect to the documents produced herewith:
1.  Format and Bates Numbering. Documents are produced in redacted PDF format and have been Bates-stamped sequentially as PPC-IDR25-000001 through PPC-IDR25-000847. Each document is identified by its CUT reference number (CUT-01 through CUT-14) and the corresponding Bates range, as set forth in the table in Section IV above.
2.  Foreign Language Documents. One of the produced agreements (CUT-03) includes certain schedules and appendices originally drafted in German. A certified English translation of those schedules and appendices, prepared by a qualified translator, is included within the Bates-stamped production immediately following the original-language pages. All other produced agreements are in English.
3.  Supplementation. PPC will supplement this production if additional comparable agreements are identified through ongoing analysis. PPC's advisors continue to monitor publicly available and commercial database sources for newly disclosed or newly identified license agreements that may be relevant to the CUT analysis. Any supplemental production will be made on a timely basis and will be accompanied by appropriate notification to the examination team.
4.  Whitmore Valuation Group Report. The detailed CUT analysis report prepared by Whitmore Valuation Group LLC, which sets forth the full search methodology, comparability analysis, adjustments, and statistical results, was prepared at the direction of counsel under the Kovel arrangement referenced herein. PPC considers this report to be protected by the attorney-client privilege and the work-product doctrine. PPC is prepared to make the report available for in-camera review by the examination team, subject to appropriate privilege protections, if requested. Any such review would be subject to a written confidentiality and non-waiver agreement, the form of which PPC would be pleased to discuss with the examination team.
VIII. RESERVATION OF RIGHTS
PPC expressly reserves all rights, objections, privileges, and defenses available to it under applicable law, regulation, and administrative guidance, including but not limited to the following:
(a) Attorney-client privilege. PPC reserves the attorney-client privilege with respect to all communications between PPC and its counsel (Calderwood & Harkness LLP) and all materials prepared by or at the direction of counsel, including materials prepared by Whitmore Valuation Group LLC under the Kovel arrangement.
(b) Work-product doctrine. PPC reserves the protection of the work-product doctrine (both fact work product and opinion work product) with respect to all materials prepared by or at the direction of counsel in anticipation of litigation or in connection with this examination, including all analyses, memoranda, notes, and communications relating to the CUT analysis and the selection of comparable agreements.
(c) Relevance, materiality, and scope objections. PPC reserves all objections to the relevance, materiality, and scope of IDR No. 25, including objections to any interpretation of the IDR that would require PPC to produce materials beyond the comparable license agreements themselves.
(d) Non-waiver. The production of these documents does not constitute a waiver of any privilege, right, objection, or defense, whether or not expressly asserted herein. PPC's compliance with IDR No. 25 is made without prejudice to PPC's right to assert any and all privileges and objections in connection with future IDRs, in any administrative proceeding, or in any judicial proceeding.
(e) No admission as to controlling comparables. PPC does not concede that any particular comparable agreement is controlling or dispositive of the arm's-length royalty rate. The arm's-length range is determined by the aggregate analysis of all 14 CUT agreements, and the reliability of the analysis derives from the totality of the comparable set, not from any individual agreement.
(f) Right to supplement or revise. PPC reserves the right to supplement, amend, or revise its CUT analysis and to produce additional comparable agreements at any time during the examination or in any subsequent administrative or judicial proceedings, including at the IRS Appeals level or in the U.S. Tax Court.
IX. CONTACT INFORMATION AND AVAILABILITY
All inquiries regarding this response, the produced documents, and the CUT analysis should be directed to:
Garrett Simmons, Lead Associate Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 864-7244
Email: g.simmons@calderwoodharkness.com
Leonard Cross, Responsible Partner Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 864-7210
Email: l.cross@calderwoodharkness.com
PPC remains willing to meet with the examination team, at a mutually convenient time, to discuss the CUT analysis, the comparable agreements produced herewith, and any questions the examination team may have regarding the methodology, comparability adjustments, or the documents themselves. PPC would welcome the opportunity to provide a walkthrough of the CUT analysis in a conference setting, and requests that any such meeting be scheduled through counsel.
We trust that the foregoing response and the enclosed documents are responsive to IDR No. 25. PPC appreciates the examination team's continued professionalism and looks forward to working cooperatively toward resolution of the transfer pricing matters under review.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Leonard Cross, Partner 1735 Market Street, Suite 3100 Philadelphia, PA 19103
On behalf of Penterra Pharmaceuticals Corp.
Date: February 15, 2023
cc: (via email)
Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. Sylvia Hartwell, Of Counsel, Calderwood & Harkness LLP Garrett Simmons, Associate, Calderwood & Harkness LLP Leila Nazari, Associate, Calderwood & Harkness LLP Supervisory Revenue Agent Gerald Meskill, Team Manager, IRS Large Business & International Division
Enclosures:
1.  Fourteen (14) redacted comparable license agreements (CUT-01 through CUT-14), Bates-stamped PPC-IDR25-000001 through PPC-IDR25-000847 (produced on encrypted USB drive)
2.  Updated privilege log — supplemental entries related to IDR No. 25
Tax Year | Non-Americas Net Sales | Royalty Rate | Royalty Payment
2017 | $814,600,000 | 4.5% | $36,657,000
2018 | $762,300,000 | 4.5% | $34,303,500
2019 | $691,800,000 | 4.5% | $31,131,000
2020 | $624,100,000 | 4.5% | $28,084,500
CUT Ref. | Description | Date | Geographic Scope | Royalty Rate | Key Comparability Factors | Source | Bates Range
CUT-01 | License of approved oncology compound (small molecule); licensor retained manufacturing rights; licensee responsible for all commercialization activities | Mar. 2014 | Europe, Middle East, Africa | 3.1% of net sales | Approved product; exclusive license; licensee bears full commercial risk; late-lifecycle product | SEC Filing (10-K Exhibit) | PPC-IDR25-000001 – 000062
CUT-02 | License of approved immunology biologic; royalty on net sales with volume-based tiered structure; licensee responsible for regulatory maintenance and pricing | Sept. 2015 | Ex-Americas (global excl. North and South America) | 3.4% – 4.2% (tiered) | Approved biologic; territory closely matches non-Americas; licensee performs significant DEMPE functions | SEC Filing (8-K Exhibit) | PPC-IDR25-000063 – 000119
CUT-03 | License of mature rare disease compound; fixed royalty rate; 10-year term with renewal option; licensee responsible for local regulatory filings | June 2013 | Europe and Asia-Pacific | 3.8% of net sales | Approved product; rare disease therapeutic area; mature compound with declining sales trajectory | Commercial Database (Vireo Health IT) | PPC-IDR25-000120 – 000178
CUT-04 | License of approved specialty pharmaceutical compound; royalty on net sales; licensee assumed regulatory and commercial risk in licensed territory | Jan. 2016 | Global ex-U.S. | 4.0% of net sales | Approved product; broad ex-U.S. territory; licensee bears pricing and reimbursement risk | SEC Filing (10-K Exhibit) | PPC-IDR25-000179 – 000240
CUT-05 | License of oncology compound portfolio (two approved products); blended royalty rate on aggregate net sales; licensee responsible for market access | Aug. 2014 | Europe, Middle East, and select Asia-Pacific markets | 4.1% of net sales | Portfolio license; approved products; licensee has established commercial infrastructure | Commercial Database (Sundial Health IT) | PPC-IDR25-000241 – 000301
CUT-06 | License of approved immunology compound; running royalty with minimum annual payment; exclusive license for defined territory | Feb. 2017 | Europe | 4.3% of net sales | Approved product; immunology area; exclusive European territory; licensee performs distribution and marketing | SEC Filing (10-Q Exhibit) | PPC-IDR25-000302 – 000355
CUT-07 | License of approved oncology compound; royalty on net sales; licensee responsible for all post-marketing regulatory and pharmacovigilance obligations | Nov. 2015 | Global ex-Americas | 4.4% of net sales | Approved product; territory closely mirrors non-Americas; licensee bears substantial regulatory and commercial risk | Commercial Database (Calderon Data Systems) | PPC-IDR25-000356 – 000417
CUT-08 | License of approved rare disease compound with orphan drug designation; running royalty; licensee independently manages pricing in 40+ country markets | Apr. 2016 | Europe, Middle East, Africa, and Asia-Pacific | 4.5% of net sales | Approved product; orphan drug; licensee manages independent pricing; territory substantially overlaps non-Americas | SEC Filing (Annual Report Exhibit) | PPC-IDR25-000418 – 000481
CUT-09 | License of late-stage (Phase III) oncology compound; higher royalty reflecting development-stage risk premium; licensee to complete Phase III and file for regulatory approval | Oct. 2013 | Global ex-U.S. | 4.8% of net sales | Late-stage clinical compound; higher risk profile; adjusted downward for development-stage differential | Commercial Database (Vireo Health IT) | PPC-IDR25-000482 – 000534
CUT-10 | License of approved specialty immunology biologic; royalty on net sales; 15-year term; licensee responsible for manufacturing and distribution | July 2018 | Europe and Japan | 5.2% of net sales | Approved biologic; narrower geographic scope (adjusted); licensee bears manufacturing risk | SEC Filing (8-K Exhibit) | PPC-IDR25-000535 – 000598
CUT-11 | License of approved cardiovascular compound; running royalty; licensee operates through established subsidiary network in licensed territory | Dec. 2014 | Global ex-Americas | 5.5% of net sales | Approved product; cardiovascular area (adjusted for therapeutic area differences); broad territory | Commercial Database (Sundial Health IT) | PPC-IDR25-000599 – 000658
CUT-12 | License of approved oncology compound with companion diagnostic requirement; royalty on net sales with adjustment for diagnostic-linked prescribing | Mar. 2017 | Europe, Asia-Pacific, and select Latin American markets | 6.0% of net sales | Approved product; companion diagnostic adds complexity; broader territory than non-Americas (adjusted) | SEC Filing (10-K Exhibit) | PPC-IDR25-000659 – 000720
CUT-13 | License of approved rare disease biologic; higher royalty reflecting premium pricing dynamics in rare disease market; exclusive license | Sept. 2016 | Ex-U.S. (global) | 6.5% of net sales | Approved biologic; rare disease premium pricing; exclusive global ex-U.S. rights; licensor retained co-promotion rights (adjusted) | Commercial Database (Calderon Data Systems) | PPC-IDR25-000721 – 000789
CUT-14 | License of approved specialty oncology compound; royalty on net sales; licensee responsible for all regulatory, commercial, and market access functions | May 2015 | Europe, Middle East, Africa | 6.8% of net sales | Approved product; oncology area; licensee functions somewhat narrower than PBI (adjusted upward for functional differences) | SEC Filing (10-K Exhibit) | PPC-IDR25-000790 – 000847