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EXHIBIT B

Summary of Cost-Sharing Arrangement Between Penterra Pharmaceuticals Corp. and Penterra Biopharma International DAC

Filed as Exhibit B to the Formal Protest of Penterra Pharmaceuticals Corp. (EIN: 22-3741856), dated December 22, 2023

IRS Examination Reference: Exam Team ID LB&I-NE-TP-2022-00641 Tax Years at Issue: 2017, 2018, 2019, 2020

Prepared by: Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 C&H Matter No. 1018-00009

I. Introduction and Purpose

This Exhibit B provides a comprehensive summary of the Qualified Cost-Sharing Arrangement ("CSA") entered into between Penterra Pharmaceuticals Corp. ("PPC"), a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550, and Penterra Biopharma International DAC ("PBI"), a Designated Activity Company organized under the laws of Ireland, with its registered office at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. This summary describes the essential terms and operative provisions of the CSA, including its effective date, the scope of the intangible development activity undertaken by the participants, the platform contribution transaction, the methodology for determining cost-sharing percentages, and the annual cost-sharing payments made by PBI during the examination years.

The CSA was structured and documented in compliance with the requirements of Treasury Regulation § 1.482-7, which governs qualified cost-sharing arrangements between controlled participants. As described in detail herein, the CSA satisfies each of the substantive and procedural requirements set forth in the applicable regulations, including the requirement that cost-sharing payments be determined with reference to each participant's reasonably anticipated benefits from the intangible development activity, that a platform contribution transaction payment be made to compensate for pre-existing contributions, and that contemporaneous documentation be maintained in accordance with applicable penalty-protection standards.

This summary is submitted in support of PPC's Formal Protest contesting the Notice of Proposed Adjustment ("NOPA") dated October 12, 2023, issued by the Large Business and International Division, Northeast Transfer Pricing Practice Area, under Exam Team ID LB&I-NE-TP-2022-00641. The NOPA proposed net adjustments of $380,400,000 across Tax Years 2017, 2018, 2019, and 2020, consisting of adjustments to PBI's cost-sharing percentages under the CSA and adjustments to the royalty rate applicable to a separate legacy intellectual property license agreement. PPC contests all proposed adjustments and the associated proposed penalty in full, as set forth in the Formal Protest and the supporting exhibits filed therewith.

For a complete understanding of the organizational structure of the Penterra group, reference is made to Exhibit A to the Formal Protest, which sets forth a corporate structure chart depicting the chain of ownership from PPC to Penterra Holdings Luxembourg S.à r.l. ("PHL"), a société à responsabilité limitée organized under the laws of the Grand Duchy of Luxembourg, registered at 14, rue Aldringen, L-1118 Luxembourg (Registre de Commerce et des Sociétés No. B 168452), to PBI. PHL is treated as a disregarded entity for United States federal income tax purposes, with the result that PBI is treated as a wholly owned subsidiary of PPC for purposes of Internal Revenue Code § 482 and the regulations thereunder.

II. Parties to the Cost-Sharing Arrangement

A. Penterra Pharmaceuticals Corp. (PPC)

Penterra Pharmaceuticals Corp. ("PPC") is a corporation organized and existing under the General Corporation Law of the State of Delaware. PPC's shares of common stock are listed on the Nasdaq Global Select Market under the ticker symbol "PPCA." PPC is the ultimate parent company of the Penterra global group of companies. PPC's employer identification number is 22-3741856.

PPC's principal business activities consist of the research, development, manufacture, and commercialization of specialty pharmaceutical and biotechnology products, with a primary therapeutic focus in oncology, immunology, and rare-disease therapeutics. PPC maintains a diversified product portfolio that includes both approved products generating significant commercial revenue and a robust pipeline of investigational compounds at various stages of clinical development.

For its fiscal year ended December 31, 2020, PPC reported consolidated annual revenue of approximately $6.82 billion and pre-tax income of approximately $1.47 billion, as reflected in PPC's audited financial statements and its Annual Report on Form 10-K filed with the United States Securities and Exchange Commission. As of December 31, 2020, PPC employed approximately 14,500 individuals worldwide, including research scientists, clinical development professionals, regulatory affairs specialists, manufacturing personnel, and commercial and administrative staff.

Under the CSA, PPC serves as the U.S.-based controlled participant. PPC retains the exclusive rights to exploit intangible property developed through the intangible development activity funded by the CSA (collectively, "CSA-Developed IP") in the Americas territory, which is defined in the CSA as encompassing all countries and territories located in North America, Central America, South America, and the Caribbean (the "Americas" or the "Americas Territory").

Key personnel of PPC with oversight responsibilities relevant to the CSA and intercompany transfer pricing matters include:

• Catherine Falk, Chief Executive Officer

• Rajesh Iyer, Chief Financial Officer

• Deborah Staines, General Counsel

• Marcus Whitfield, Vice President, Global Tax

B. Penterra Biopharma International DAC (PBI)

Penterra Biopharma International DAC ("PBI") is a Designated Activity Company organized and existing under the laws of Ireland, with its registered office at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. PBI's Irish Tax Reference Number is 3218764T. PBI was incorporated under Irish law on March 15, 2012, and commenced commercial operations in connection with the establishment of the CSA effective July 1, 2012.

Under the CSA, PBI serves as the non-Americas controlled participant. PBI acquired the exclusive rights to develop and exploit PPC's pharmaceutical intellectual property portfolio outside the Americas Territory, specifically in the Europe, Middle East, and Africa ("EMEA") region and the Asia-Pacific ("APAC") region (collectively, the "Non-Americas Territory" or the "Rest of World Territory").

For its fiscal year ended December 31, 2020, PBI reported revenue of approximately €2.14 billion and pre-tax income of approximately €1.06 billion, as reflected in its audited statutory financial statements filed with the Irish Companies Registration Office. PBI is subject to Irish corporation tax at the standard rate of 12.5% on its trading income. Since fiscal year 2016, PBI has claimed the benefit of Ireland's Knowledge Development box regime, which provides for an effective tax rate of 6.25% on qualifying income derived from qualifying intellectual property assets, to the extent that such income is attributable to qualifying research and development expenditures.

As of December 31, 2020, PBI employed 185 individuals, a figure that has grown substantially from the 52 employees at the time of PBI's establishment in 2012. PBI's workforce includes professionals in regulatory affairs, medical affairs, commercial strategy, supply-chain management, market access, and pharmacovigilance, all of whom are based in Dublin. PBI's Managing Director is Aidan Naughton, who has served in that capacity since PBI's incorporation and who exercises primary responsibility for the strategic and operational management of PBI's business activities.

PBI maintains approximately 18,000 square feet of dedicated office space at its registered office location at Sandyford Business Park, Dublin. PBI conducts its principal Irish banking relationship through Glenmore Bank Ireland plc, through which PBI maintains operating accounts, treasury facilities, and intercompany cash management arrangements.

From an ownership perspective, PBI is 100% owned by Penterra Holdings Luxembourg S.à r.l. ("PHL"), which is itself 100% owned by PPC. As noted above, PHL is treated as a disregarded entity for United States federal income tax purposes pursuant to Treasury Regulation § 301.7701-3. Accordingly, for purposes of Internal Revenue Code § 482 and the transfer pricing regulations thereunder, PBI is treated as a directly owned subsidiary of PPC, and transactions between PPC and PBI are subject to analysis under the arm's-length standard.

III. Effective Date and Execution

The CSA was entered into with an effective date of July 1, 2012. The CSA agreement was executed contemporaneously with PBI's operational establishment and the commencement of its business activities following PBI's incorporation on March 15, 2012, under Irish law. The period between PBI's incorporation and the CSA's effective date was used to complete the organizational formalities necessary to establish PBI as a fully operational entity, including the hiring of initial personnel, the establishment of banking relationships, the negotiation and execution of office lease arrangements, and the preparation of the transfer pricing documentation supporting the platform contribution transaction and the initial cost-sharing allocations.

The CSA has been in continuous effect from July 1, 2012, through the conclusion of the examination years (Tax Years 2017, 2018, 2019, and 2020) and remains in force as of the date of the filing of this Formal Protest. The CSA has not been amended, modified, terminated, or suspended at any time since its effective date, although the annual cost-sharing percentages have been updated each year in accordance with the methodology specified in the agreement, as described in Section VI below.

IV. Scope of the CSA — Intangible Development Activity

A. Intangibles Covered

The CSA covers the development, enhancement, maintenance, protection, and exploitation ("DEMPE") of PPC's pharmaceutical intellectual property portfolio. The intangible property subject to the CSA includes, without limitation, the following categories of intangible assets:

• Patents and patent applications, including composition-of-matter patents, method-of-use patents, formulation patents, and process patents;

• Know-how, trade secrets, and proprietary technical information relating to pharmaceutical compounds, drug delivery systems, and manufacturing processes;

• Regulatory data and filings, including Investigational New Drug Applications, New Drug Applications, Marketing Authorization Applications, and associated clinical trial data packages;

• Clinical trial data, including data from Phase I, Phase II, Phase III, and Phase IV clinical studies;

• Marketing intangibles, including trademarks, trade names, brand names, promotional materials, and market-access strategies; and

• Any other intangible property developed, enhanced, maintained, or protected through the intangible development activity funded under the CSA.

The key commercial products subject to the CSA, together with their global and non-Americas net sales for the fiscal year ended December 31, 2020, are set forth in the following table:

Veritaxol is PPC's largest-selling product and is regarded as a blockbuster pharmaceutical compound in the oncology therapeutic category. The product was initially approved by the United States Food and Drug Administration prior to the effective date of the CSA and has been the subject of ongoing development, life-cycle management, and label-expansion activities funded through the CSA during the examination years. Imvara, an immunology compound, is PPC's second-largest commercial product and has experienced significant growth in both the Americas and non-Americas territories throughout the examination period. Cerulon, a rare-disease therapeutic, is a more specialized product with a smaller overall revenue base but with significant growth potential in the non-Americas territory, particularly in the EMEA region.

In addition to the approved products listed above, the CSA covers a pipeline of investigational compounds at various stages of preclinical and clinical development, the commercial potential of which is reflected in the reasonably anticipated benefits projections used to determine cost-sharing percentages.

B. Territorial Allocation of Rights

Under the terms of the CSA, the rights to exploit CSA-Developed IP are allocated between the two controlled participants on a territorial basis:

• PPC retains the exclusive rights to exploit all CSA-Developed IP in the Americas Territory, which is defined as encompassing all countries and territories in North America (including the United States, Canada, and Mexico), Central America, South America, and the Caribbean.

• PBI acquires the exclusive rights to exploit all CSA-Developed IP outside the Americas Territory, specifically in the EMEA and APAC regions (collectively, the "Non-Americas Territory" or the "Rest of World Territory").

PBI exercises its rights to exploit CSA-Developed IP in the Non-Americas Territory through a combination of direct commercial operations and arrangements with related and third-party entities. In particular, PBI manages contract manufacturing and distribution arrangements for non-Americas markets through Penterra Manufacturing Ireland Ltd. ("PMI"), a related-party contract manufacturer. PMI is an Irish limited company (Companies Registration Office No. 512347) with its principal manufacturing facility at Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland. PMI employs approximately 620 individuals at its Ringaskiddy facility and operates under a cost-plus arrangement with PBI at a markup of cost plus 8%, which is consistent with the arm's-length compensation for contract manufacturing services in the pharmaceutical industry.

PBI has independently managed the commercialization of CSA-covered products across 68 country markets in the Non-Americas Territory. In connection with these commercialization activities, PBI exercises independent pricing authority, makes market entry and market withdrawal decisions, selects and manages distribution partners, and oversees regulatory submissions and approvals in each applicable jurisdiction.

C. Intangible Development Activity

Both PPC and PBI fund qualified research and development activities constituting "Intangible Development Activity" or "IDA" as defined under Treasury Regulation § 1.482-7(j)(1). The IDA encompasses all activities that are reasonably anticipated to contribute to the development, enhancement, maintenance, protection, or exploitation of the intangible property covered by the CSA, including basic and applied research, preclinical development, clinical development (Phase I through Phase IV studies), regulatory affairs activities, and certain post-marketing studies and life-cycle management activities.

The majority of research and development activities constituting IDA are physically conducted by PPC in the United States, primarily at PPC's research and development facilities in Princeton Junction, New Jersey, and at PPC's clinical operations center in Wilmington, Delaware. PPC's U.S.-based R&D organization includes approximately 3,200 scientists, physicians, clinical development professionals, and supporting research staff.

PBI contributes to the IDA by providing personnel and resources in regulatory affairs, medical affairs, and commercial functions from its Dublin operations. PBI's contributions to IDA include, among other activities, the design and execution of non-Americas regulatory strategies, the preparation and submission of marketing authorization applications to the European Medicines Agency and national competent authorities, the conduct of non-Americas-specific clinical studies (including regional bridging studies and local efficacy trials), and medical affairs activities directed at non-Americas healthcare professionals and opinion leaders.

PBI's cumulative regulatory expenditures for non-Americas regulatory submissions totaled €47.2 million across Tax Years 2017 through 2020. These expenditures reflect the substantial investment by PBI in obtaining and maintaining regulatory approvals across the 68 country markets in which PBI commercializes CSA-covered products.

V. Platform Contribution Transaction (PCT)

A. Nature and Purpose

Pursuant to Treasury Regulation § 1.482-7(g), PBI made a platform contribution transaction ("PCT") payment to PPC to compensate PPC for PBI's use of pre-existing intangible property (the "platform contributions") that PPC made available to the CSA as of the CSA's effective date. The requirement for such a payment arises from the principle that, where a controlled participant makes available to the CSA pre-existing resources, capabilities, or rights that are reasonably anticipated to contribute to the development of cost-shared intangibles, the other controlled participants must compensate the contributing participant for such platform contributions in accordance with the arm's-length standard.

The pre-existing intellectual property that constituted PPC's platform contributions consisted primarily of clinical-stage and approved oncology compounds developed by PPC prior to July 1, 2012, together with associated regulatory data packages, manufacturing know-how, and pre-existing marketing intangibles. These platform contributions formed the foundation upon which subsequent intangible development activity under the CSA was conducted and represented a significant source of value to PBI in connection with PBI's exploitation of CSA-Developed IP in the Non-Americas Territory.

B. PCT Payment Amount

PBI made a lump-sum PCT payment of $312,000,000 to PPC on July 1, 2012, the effective date of the CSA. The PCT payment was funded through a combination of an initial equity contribution from PHL (reflecting PPC's indirect capitalization of PBI) and available cash resources of PBI.

The PCT payment amount of $312,000,000 was determined using an income method, specifically a discounted cash flow ("DCF") approach, in which the present value of PBI's reasonably anticipated incremental income streams attributable to the pre-existing platform contributions was calculated. The DCF analysis applied a weighted average cost of capital ("WACC") of 9.8% as the discount rate, reflecting pharmaceutical-industry risk premiums, the specific risk profile of the contributed intangible property (including clinical-stage compounds with inherent development risk), and the market and regulatory risks associated with the commercialization of pharmaceutical products in the Non-Americas Territory.

C. Arm's-Length Validation

Contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP (Transfer Pricing Partner: Susan Lam, CPA) at the time of the CSA's establishment supported the conclusion that the PCT payment of $312 million was consistent with the arm's-length standard as applied under Treasury Regulation § 1.482-7(g). The documentation included a detailed description of the platform contributions, an analysis of the functional profiles and risk allocations of the participants, and a comprehensive DCF valuation employing the income method.

In connection with the preparation of PPC's Formal Protest, an independent economic analysis was conducted by Whitmore Valuation Group LLC, an independent economics and valuation consulting firm. The Whitmore engagement was led by Dr. Helena Vasquez (Lead Economist) and Dr. Rohan Chakrabarti (Supporting Economist), and was retained under a Kovel arrangement pursuant to Engagement Reference 1018-00009-KV, dated June 20, 2022, to preserve the attorney-client privilege and work product protections applicable to the analysis.

Whitmore Valuation Group revalued the PCT using updated revenue projections and the same 9.8% WACC discount rate employed in the original contemporaneous documentation. The Whitmore analysis concluded that the arm's-length value of the PCT payment falls within a range of $278 million to $361 million, and that the actual PCT payment of $312 million falls comfortably within this arm's-length range. The Whitmore analysis further validated the appropriateness of the 9.8% WACC by reference to industry cost-of-capital data, clinical-stage compound risk premia, and the specific characteristics of the contributed IP.

By contrast, the IRS examination team valued the PCT payment at $852 million using an income method with a lower discount rate (WACC of 7.2%) and materially different revenue projections that, in PPC's view, do not reflect the information that was reasonably available and the expectations that were reasonable as of the July 1, 2012, effective date. The IRS's valuation would result in an asserted undervaluation of the PCT by approximately $540 million. PPC notes, however, that Tax Year 2012 is outside the scope of the current examination (which covers Tax Years 2017 through 2020), and accordingly the IRS has not proposed a direct adjustment to the PCT payment itself. Rather, the IRS's PCT valuation bears on the examination team's broader contention regarding the overall pricing of intercompany transactions between PPC and PBI.

VI. Cost-Sharing Payments — Reasonably Anticipated Benefits

A. Methodology for Determining Cost-Sharing Percentages

Under the terms of the CSA, each controlled participant's share of the annual qualified R&D costs constituting IDA is determined by reference to its reasonably anticipated benefits ("RABs") from the intangible development activity, in accordance with Treasury Regulation § 1.482-7(e). The RABs are measured as the projected revenue from the exploitation of CSA-covered intangible property in each participant's respective territory, reflecting each participant's share of the total reasonably anticipated economic benefits from the IDA.

Revenue projections underlying the RAB calculations are updated annually, based on then-current market conditions, product lifecycle analysis (including patent expiration dates, anticipated generic competition, and product line extensions), territory-specific commercial developments (including new product launches, regulatory approvals, pricing and reimbursement changes, and market access developments), and the expected contributions of pipeline products to future revenue. The RAB calculations reflect the relative shares of projected revenue attributable to the Americas Territory (PPC) and the Non-Americas Territory (PBI), and are applied to determine each participant's cost-sharing percentage for the applicable tax year.

This methodology ensures that each participant bears a share of the total qualified R&D costs that is commensurate with the share of total anticipated benefits that the participant expects to derive from the IDA, consistent with the arm's-length standard and the specific requirements of Treasury Regulation § 1.482-7(e).

B. PBI's Cost-Sharing Percentages and Payments (PPC Position, TY 2017–2020)

The following table sets forth the total qualified R&D costs constituting IDA for each of the examination years, together with PBI's cost-sharing percentage and the resulting cost-sharing payment from PBI to PPC, as determined by PPC in accordance with the RAB methodology described above and as reported on PPC's federal income tax returns:

As reflected in the table above, PBI's cost-sharing percentage increased over the period from 38.2% in Tax Year 2017 to 42.7% in Tax Year 2020. This increase is consistent with the reasonably anticipated benefits methodology and reflects the growing share of non-Americas revenue relative to total global revenue during the examination period, driven in part by successful product launches and geographic market expansion by PBI in the EMEA and APAC regions, as well as increased penetration of existing markets, particularly for Veritaxol in the European oncology market and Imvara in the Asia-Pacific immunology market.

C. IRS Proposed Cost-Sharing Percentages

The IRS examination team proposed increasing PBI's cost-sharing percentages for each of the examination years, asserting that PPC's projections of reasonably anticipated benefits understated the value attributable to U.S.-source contributions to the IDA and correspondingly understated PBI's share of total anticipated benefits. The following table summarizes the IRS's proposed adjustments:

The IRS's proposed adjustments would increase PBI's cost-sharing percentage by approximately 8 to 12 percentage points across each of the examination years, with a total proposed CSA cost-sharing adjustment of $235,010,000 for Tax Years 2017 through 2020.

PPC's position is that its RAB projections were reasonable, were prepared in good faith based on the best information available at the time, and are supported by the contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP. Moreover, PPC's RAB projections are consistent with actual revenue outcomes observed during the examination period, which confirms the reasonableness of the projections at the time they were made.

In further support of PPC's position, Whitmore Valuation Group LLC conducted a comparable profits method ("CPM") and transactional net margin method ("TNMM") analysis that tested PBI's operating margins against a set of 22 comparable uncontrolled companies, comprising independent distributors and IP-holding companies operating in the pharmaceutical and life sciences industries. The Whitmore analysis confirmed that PBI's operating margins fell within the interquartile range of the comparable set in all four examination years, providing additional evidence that the cost-sharing payments made by PBI were consistent with the arm's-length standard.

VII. Distinction from Legacy IP Royalty Arrangement

Separately from the CSA, PBI licenses certain legacy pharmaceutical compounds from PPC under an intercompany license agreement (the "Legacy IP License"). The Legacy IP License covers compounds that were developed and approved prior to July 1, 2012, and that are not covered by the CSA (the "Legacy Compounds"). These Legacy Compounds were fully developed and commercialized prior to the establishment of the CSA and were not made available as platform contributions to the CSA; rather, they are licensed by PBI from PPC under a separate arm's-length royalty arrangement.

Under the Legacy IP License, PBI pays a royalty to PPC at a rate of 4.5% of net sales of the Legacy Compounds in the Non-Americas Territory. The following table sets forth the non-Americas net sales of Legacy Compounds and the corresponding royalty payments for each of the examination years:

As reflected in the table, net sales of Legacy Compounds in the Non-Americas Territory declined over the examination period, consistent with the natural lifecycle of mature pharmaceutical products that are subject to increasing generic competition and loss of exclusivity.

The Legacy IP royalty arrangement is a separate intercompany agreement from the CSA and is analyzed separately under the transfer pricing rules applicable to controlled transactions involving the transfer of intangible property, specifically Treasury Regulation § 1.482-4 and the comparable uncontrolled transaction ("CUT") method. The Legacy IP License and the arm's-length analysis supporting the 4.5% royalty rate are addressed in detail in the Formal Protest and in Exhibit C (Summary of Economic Analyses).

The IRS examination team proposed increasing the Legacy IP royalty rate from 4.5% to 11.0%, which would generate proposed royalty adjustments totaling $188,040,000 for Tax Years 2017 through 2020. PPC contests this proposed adjustment. PPC's CUT analysis, prepared by Crestfield & Associates LLP and independently validated by Whitmore Valuation Group LLC, identified 14 comparable uncontrolled license agreements involving pharmaceutical intangible property of comparable nature and value. The interquartile range of royalty rates in the comparable set was 3.1% to 6.8%, with a median of 4.4%. PPC's royalty rate of 4.5% falls at approximately the median of the comparable set and well within the interquartile range, demonstrating that the 4.5% rate satisfies the arm's-length standard.

VIII. Regulatory Compliance

A. Treas. Reg. § 1.482-7 Requirements

The CSA satisfies the requirements for a qualified cost-sharing arrangement under Treasury Regulation § 1.482-7, including, without limitation, each of the following:

1. Written Agreement. The CSA is memorialized in a comprehensive written agreement effective July 1, 2012, which contains all terms and provisions required under Treasury Regulation § 1.482-7(b), including the identification of the controlled participants, the scope of the intangible development activity, the method for determining each participant's share of intangible development costs, the territorial allocation of rights in cost-shared intangibles, provisions for changes in participation, and procedures for the resolution of disputes.

2. Controlled Participants. Both PPC and PBI qualify as controlled participants within the meaning of Treasury Regulation § 1.482-7(j)(1)(i), as each participant performs functions, assumes risks, and employs assets in connection with the intangible development activity covered by the CSA. PPC serves as the primary R&D performer, while PBI contributes regulatory, medical affairs, and commercial resources and bears the economic risks associated with the exploitation of CSA-Developed IP in the Non-Americas Territory.

3. Cost-Sharing Based on Reasonably Anticipated Benefits. Cost-sharing percentages are determined annually based on each participant's reasonably anticipated benefits from the IDA, measured as projected revenue from the exploitation of CSA-covered intangible property in each participant's respective territory, in accordance with Treasury Regulation § 1.482-7(e). The RAB calculations are updated each year to reflect current market conditions, product lifecycle developments, and territory-specific commercial factors.

4. Platform Contribution Transaction. PBI made a PCT payment of $312 million to PPC on July 1, 2012, to compensate PPC for the pre-existing intangible property made available to the CSA as of the effective date, in compliance with Treasury Regulation § 1.482-7(g). The PCT payment was determined using an income method (DCF approach) and is supported by contemporaneous and independent economic analyses demonstrating that it falls within the arm's-length range.

5. Contemporaneous Documentation. Contemporaneous documentation has been maintained in compliance with Treasury Regulation § 1.482-7(k) and the documentation requirements of Internal Revenue Code § 6662(e) for each of the examination years, as described in Section VIII.B below.

B. Contemporaneous Documentation

Crestfield & Associates LLP, PPC's transfer pricing advisors, prepared comprehensive contemporaneous transfer pricing documentation for each of Tax Years 2017, 2018, 2019, and 2020. The Crestfield engagement was led by Martin Ogilvy, CPA (Engagement Partner) and Susan Lam, CPA (Transfer Pricing Partner). The documentation was prepared in accordance with the requirements of Internal Revenue Code § 6662(e)(3)(B) and Treasury Regulation § 1.6662-6, which establish the standards for contemporaneous documentation that provides a "reasonable cause" defense against the imposition of the substantial valuation misstatement penalty under IRC § 6662(e).

The contemporaneous documentation for each examination year includes, among other components, the following:

• A detailed functional analysis of PPC and PBI, identifying the functions performed, risks assumed, and assets employed by each controlled participant in connection with the IDA and the exploitation of CSA-Developed IP;

• Selection and application of the best method for determining the arm's-length consideration for the controlled transactions, in accordance with Treasury Regulation § 1.482-1(d);

• Annual RAB calculations, including detailed revenue projections, product lifecycle analyses, and territory-specific market assessments;

• Comparability analyses, including the identification and analysis of comparable uncontrolled transactions, comparable companies, and comparable profit levels, as appropriate for the methods applied;

• Financial data, including segmented financial results for PPC and PBI attributable to the CSA-covered activities; and

• Documentation of any material changes in business operations, market conditions, or other circumstances affecting the transfer pricing analysis during the applicable year.

This contemporaneous documentation forms the basis for PPC's reasonable-cause defense against the proposed Internal Revenue Code § 6662(e) substantial valuation misstatement penalty, as further addressed in Exhibit E to the Formal Protest.

IX. PBI's Economic Substance and DEMPE Functions Under the CSA

PBI is not a mere shell entity, passive holding company, or entity without genuine substance. To the contrary, PBI performs substantive DEMPE functions — that is, functions relating to the Development, Enhancement, Maintenance, Protection, and Exploitation of intangible property — in connection with the CSA. PBI exercises meaningful decision-making authority, bears genuine economic risks, and employs significant resources in carrying out its business activities in the Non-Americas Territory.

The following key indicators of PBI's economic substance and DEMPE functions are relevant to the assessment of the arm's-length nature of the CSA and the intercompany transactions thereunder:

• Employees and Personnel. As of December 31, 2020, PBI employed 185 individuals in Dublin, Ireland, a figure that has grown substantially from the 52 employees at PBI's establishment in 2012. PBI's workforce includes qualified professionals in regulatory affairs, medical affairs, commercial strategy, supply-chain management, market access, pharmacovigilance, and corporate functions. The growth in PBI's headcount over the eight-year period from inception reflects the genuine expansion of PBI's operational responsibilities and commercial activities in the Non-Americas Territory.

• Board Governance and Decision-Making. During Tax Years 2017 through 2020, PBI's Board of Directors held a total of 42 board meetings in Dublin, comprising quarterly meetings and additional special sessions as required. These board meetings involved substantive deliberation and decision-making on matters including product pricing strategies for non-Americas markets, market entry and market withdrawal decisions, regulatory submission strategies, capital expenditure approvals, and other matters material to PBI's business operations.

• Regulatory Expenditures. PBI incurred cumulative regulatory expenditures of €47.2 million across the 68 country markets in the Non-Americas Territory during Tax Years 2017 through 2020. These expenditures reflect PBI's independent engagement with regulatory authorities in Europe, Asia-Pacific, and other non-Americas jurisdictions, including the submission of marketing authorization applications, regulatory renewals, label updates, and post-marketing commitments.

• Independent Pricing Decisions. PBI exercises independent pricing authority across all 68 non-Americas country markets in which it commercializes CSA-covered products. PBI's pricing decisions are made based on local market conditions, competitive dynamics, health technology assessments, reimbursement frameworks, and other territory-specific factors, and are not dictated or controlled by PPC.

• Physical Presence. PBI maintains approximately 18,000 square feet of dedicated office space at Sandyford Business Park, Dublin, which serves as PBI's principal place of business and the location from which PBI's personnel conduct PBI's day-to-day operations.

• Independent Treasury Operations. PBI conducts independent treasury operations through its principal banking relationship with Glenmore Bank Ireland plc, maintaining operating accounts, cash management facilities, and intercompany settlement arrangements.

• Risk-Bearing. PBI bears genuine market risk in connection with the exploitation of CSA-Developed IP in the Non-Americas Territory. PBI assumes the economic risks associated with product commercialization in 68 country markets, including demand risk, pricing and reimbursement risk, regulatory risk, currency risk, and competitive risk. PBI also bears the risk that its cost-sharing payments to PPC may not be fully recovered through future commercial revenues in the Non-Americas Territory.

• Key Commercial Decisions. PBI makes key commercial decisions independently, including decisions regarding pricing, market entry and market withdrawal, distribution partner selection and management, promotional strategies, and clinical and medical affairs activities directed at non-Americas healthcare professionals and patients.

The functional analysis supporting PBI's economic substance is documented in detail in the Functional Analysis Report, which is referenced in Exhibit D to the Formal Protest. The functional analysis was further supported by 12 in-depth interviews of key PBI employees, conducted in Dublin by the Whitmore Valuation Group team, covering PBI's organizational structure, decision-making processes, risk management practices, and contributions to the IDA.

X. Summary of IRS Proposed Adjustments Relating to the CSA

The following is a summary of all proposed adjustments set forth in the NOPA dated October 12, 2023, relating to the CSA and the related Legacy IP License:

1. CSA Cost-Sharing Ratio Adjustments. The IRS proposed increasing PBI's cost-sharing percentages under the CSA for Tax Years 2017 through 2020, resulting in proposed additional cost-sharing payments from PBI to PPC totaling $235,010,000, as detailed in Section VI.C above.

2. Legacy IP Royalty Rate Adjustments. The IRS proposed increasing the royalty rate on the Legacy IP License from 4.5% to 11.0%, resulting in proposed additional royalty income to PPC totaling $188,040,000 for Tax Years 2017 through 2020, as detailed in Section VII above.

3. Combined Gross Proposed Adjustment. The combined gross proposed adjustment from the CSA cost-sharing ratio adjustments and the Legacy IP royalty rate adjustments is $423,050,000.

4. Correlative Offset. The IRS examination team allowed a correlative offset of ($42,650,000) to avoid double-counting between the CSA cost-sharing adjustments and the Legacy IP royalty adjustments, to the extent that certain income items would otherwise have been subject to adjustment under both the CSA analysis and the royalty analysis.

5. Net Proposed Adjustment. After applying the correlative offset, the net proposed adjustment is $380,400,000 for Tax Years 2017 through 2020.

6. Proposed Penalty. The IRS proposed the imposition of a substantial valuation misstatement penalty under Internal Revenue Code § 6662(e) of approximately $15,977,000, computed as 20% of the underpayment of tax attributable to the $380,400,000 net proposed adjustment at the 21% corporate tax rate (i.e., 20% × ($380,400,000 × 21%) = approximately $15,977,000).

PPC contests all proposed adjustments — both the CSA cost-sharing ratio adjustments and the Legacy IP royalty rate adjustments — and the proposed IRC § 6662(e) penalty in full, as set forth in detail in the Formal Protest and the supporting exhibits filed therewith.

XI. Conclusion

Based on the foregoing summary, PPC respectfully submits the following conclusions with respect to the CSA between PPC and PBI:

The CSA between PPC and PBI was established and has operated in compliance with the requirements of Treasury Regulation § 1.482-7 governing qualified cost-sharing arrangements and the arm's-length standard of Internal Revenue Code § 482 and the regulations thereunder. The CSA was memorialized in a comprehensive written agreement effective July 1, 2012, and has been administered in accordance with its terms throughout the examination period.

PBI's cost-sharing percentages of 38.2%, 39.6%, 41.1%, and 42.7% for Tax Years 2017, 2018, 2019, and 2020, respectively, accurately reflect PBI's reasonably anticipated benefits from the intangible development activity, as measured by projected revenue from the exploitation of CSA-covered intangible property in the Non-Americas Territory. These cost-sharing percentages are supported by contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP and by independent economic analysis performed by Whitmore Valuation Group LLC.

The PCT payment of $312 million, made by PBI to PPC on July 1, 2012, to compensate PPC for the pre-existing intangible property made available to the CSA, falls within the arm's-length range of $278 million to $361 million, as validated by Whitmore Valuation Group's discounted cash flow analysis applying a WACC of 9.8%, which appropriately reflects the risk profile of the contributed pharmaceutical IP.

PBI maintains substantial economic substance in Ireland, performing genuine DEMPE functions with 185 employees, €47.2 million in cumulative regulatory expenditures, 42 board meetings held in Dublin during the examination period, and the exercise of independent commercial judgment across 68 non-Americas markets. PBI is not a mere conduit entity, but a fully operational business entity that bears genuine economic risks and performs substantive functions in connection with the CSA.

For the foregoing reasons, PPC respectfully submits that the IRS's proposed CSA cost-sharing adjustments of $235,010,000 for Tax Years 2017 through 2020 are unwarranted, unsupported by the applicable legal and economic standards, and should be withdrawn in their entirety.

Exhibit B to Formal Protest of Penterra Pharmaceuticals Corp., dated December 22, 2023.

Prepared by Calderwood & Harkness LLP, counsel for Penterra Pharmaceuticals Corp.

Contact: Leonard Cross, Responsible Partner Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 C&H Matter No. 1018-00009

Product	Therapeutic Area	Global Net Sales (2020)	Non-Americas Net Sales (2020)
Veritaxol	Oncology	$3.12 billion	$1.34 billion
Imvara	Immunology	$1.87 billion	$790 million
Cerulon	Rare Disease	$620 million	$280 million
Tax Year	Total Qualified R&D Costs	PBI Cost-Share Percentage	PBI Cost-Share Payment
2017	$487,300,000	38.2%	$186,150,000
2018	$523,800,000	39.6%	$207,420,000
2019	$561,200,000	41.1%	$230,650,000
2020	$598,400,000	42.7%	$255,520,000
Tax Year	PPC Position (%)	IRS Proposed (%)	Increase (pp)	Additional Payment Proposed
2017	38.2%	48.2%	+10.0	$48,730,000
2018	39.6%	50.6%	+11.0	$57,610,000
2019	41.1%	52.3%	+11.2	$62,850,000
2020	42.7%	53.7%	+11.0	$65,820,000
Total	$235,010,000
Tax Year	Legacy Compound Non-Americas Net Sales	Royalty Rate	Royalty Payment
2017	$814,600,000	4.5%	$36,660,000
2018	$762,300,000	4.5%	$34,300,000
2019	$691,800,000	4.5%	$31,130,000
2020	$624,100,000	4.5%	$28,080,000

EXHIBIT B
Summary of Cost-Sharing Arrangement Between Penterra Pharmaceuticals Corp. and Penterra Biopharma International DAC
Filed as Exhibit B to the Formal Protest of Penterra Pharmaceuticals Corp. (EIN: 22-3741856), dated December 22, 2023
IRS Examination Reference: Exam Team ID LB&I-NE-TP-2022-00641 Tax Years at Issue: 2017, 2018, 2019, 2020
Prepared by: Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 C&H Matter No. 1018-00009
I. Introduction and Purpose
This Exhibit B provides a comprehensive summary of the Qualified Cost-Sharing Arrangement ("CSA") entered into between Penterra Pharmaceuticals Corp. ("PPC"), a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550, and Penterra Biopharma International DAC ("PBI"), a Designated Activity Company organized under the laws of Ireland, with its registered office at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. This summary describes the essential terms and operative provisions of the CSA, including its effective date, the scope of the intangible development activity undertaken by the participants, the platform contribution transaction, the methodology for determining cost-sharing percentages, and the annual cost-sharing payments made by PBI during the examination years.
The CSA was structured and documented in compliance with the requirements of Treasury Regulation § 1.482-7, which governs qualified cost-sharing arrangements between controlled participants. As described in detail herein, the CSA satisfies each of the substantive and procedural requirements set forth in the applicable regulations, including the requirement that cost-sharing payments be determined with reference to each participant's reasonably anticipated benefits from the intangible development activity, that a platform contribution transaction payment be made to compensate for pre-existing contributions, and that contemporaneous documentation be maintained in accordance with applicable penalty-protection standards.
This summary is submitted in support of PPC's Formal Protest contesting the Notice of Proposed Adjustment ("NOPA") dated October 12, 2023, issued by the Large Business and International Division, Northeast Transfer Pricing Practice Area, under Exam Team ID LB&I-NE-TP-2022-00641. The NOPA proposed net adjustments of $380,400,000 across Tax Years 2017, 2018, 2019, and 2020, consisting of adjustments to PBI's cost-sharing percentages under the CSA and adjustments to the royalty rate applicable to a separate legacy intellectual property license agreement. PPC contests all proposed adjustments and the associated proposed penalty in full, as set forth in the Formal Protest and the supporting exhibits filed therewith.
For a complete understanding of the organizational structure of the Penterra group, reference is made to Exhibit A to the Formal Protest, which sets forth a corporate structure chart depicting the chain of ownership from PPC to Penterra Holdings Luxembourg S.à r.l. ("PHL"), a société à responsabilité limitée organized under the laws of the Grand Duchy of Luxembourg, registered at 14, rue Aldringen, L-1118 Luxembourg (Registre de Commerce et des Sociétés No. B 168452), to PBI. PHL is treated as a disregarded entity for United States federal income tax purposes, with the result that PBI is treated as a wholly owned subsidiary of PPC for purposes of Internal Revenue Code § 482 and the regulations thereunder.
II. Parties to the Cost-Sharing Arrangement
A. Penterra Pharmaceuticals Corp. (PPC)
Penterra Pharmaceuticals Corp. ("PPC") is a corporation organized and existing under the General Corporation Law of the State of Delaware. PPC's shares of common stock are listed on the Nasdaq Global Select Market under the ticker symbol "PPCA." PPC is the ultimate parent company of the Penterra global group of companies. PPC's employer identification number is 22-3741856.
PPC's principal business activities consist of the research, development, manufacture, and commercialization of specialty pharmaceutical and biotechnology products, with a primary therapeutic focus in oncology, immunology, and rare-disease therapeutics. PPC maintains a diversified product portfolio that includes both approved products generating significant commercial revenue and a robust pipeline of investigational compounds at various stages of clinical development.
For its fiscal year ended December 31, 2020, PPC reported consolidated annual revenue of approximately $6.82 billion and pre-tax income of approximately $1.47 billion, as reflected in PPC's audited financial statements and its Annual Report on Form 10-K filed with the United States Securities and Exchange Commission. As of December 31, 2020, PPC employed approximately 14,500 individuals worldwide, including research scientists, clinical development professionals, regulatory affairs specialists, manufacturing personnel, and commercial and administrative staff.
Under the CSA, PPC serves as the U.S.-based controlled participant. PPC retains the exclusive rights to exploit intangible property developed through the intangible development activity funded by the CSA (collectively, "CSA-Developed IP") in the Americas territory, which is defined in the CSA as encompassing all countries and territories located in North America, Central America, South America, and the Caribbean (the "Americas" or the "Americas Territory").
Key personnel of PPC with oversight responsibilities relevant to the CSA and intercompany transfer pricing matters include:
• Catherine Falk, Chief Executive Officer
• Rajesh Iyer, Chief Financial Officer
• Deborah Staines, General Counsel
• Marcus Whitfield, Vice President, Global Tax
B. Penterra Biopharma International DAC (PBI)
Penterra Biopharma International DAC ("PBI") is a Designated Activity Company organized and existing under the laws of Ireland, with its registered office at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. PBI's Irish Tax Reference Number is 3218764T. PBI was incorporated under Irish law on March 15, 2012, and commenced commercial operations in connection with the establishment of the CSA effective July 1, 2012.
Under the CSA, PBI serves as the non-Americas controlled participant. PBI acquired the exclusive rights to develop and exploit PPC's pharmaceutical intellectual property portfolio outside the Americas Territory, specifically in the Europe, Middle East, and Africa ("EMEA") region and the Asia-Pacific ("APAC") region (collectively, the "Non-Americas Territory" or the "Rest of World Territory").
For its fiscal year ended December 31, 2020, PBI reported revenue of approximately €2.14 billion and pre-tax income of approximately €1.06 billion, as reflected in its audited statutory financial statements filed with the Irish Companies Registration Office. PBI is subject to Irish corporation tax at the standard rate of 12.5% on its trading income. Since fiscal year 2016, PBI has claimed the benefit of Ireland's Knowledge Development box regime, which provides for an effective tax rate of 6.25% on qualifying income derived from qualifying intellectual property assets, to the extent that such income is attributable to qualifying research and development expenditures.
As of December 31, 2020, PBI employed 185 individuals, a figure that has grown substantially from the 52 employees at the time of PBI's establishment in 2012. PBI's workforce includes professionals in regulatory affairs, medical affairs, commercial strategy, supply-chain management, market access, and pharmacovigilance, all of whom are based in Dublin. PBI's Managing Director is Aidan Naughton, who has served in that capacity since PBI's incorporation and who exercises primary responsibility for the strategic and operational management of PBI's business activities.
PBI maintains approximately 18,000 square feet of dedicated office space at its registered office location at Sandyford Business Park, Dublin. PBI conducts its principal Irish banking relationship through Glenmore Bank Ireland plc, through which PBI maintains operating accounts, treasury facilities, and intercompany cash management arrangements.
From an ownership perspective, PBI is 100% owned by Penterra Holdings Luxembourg S.à r.l. ("PHL"), which is itself 100% owned by PPC. As noted above, PHL is treated as a disregarded entity for United States federal income tax purposes pursuant to Treasury Regulation § 301.7701-3. Accordingly, for purposes of Internal Revenue Code § 482 and the transfer pricing regulations thereunder, PBI is treated as a directly owned subsidiary of PPC, and transactions between PPC and PBI are subject to analysis under the arm's-length standard.
III. Effective Date and Execution
The CSA was entered into with an effective date of July 1, 2012. The CSA agreement was executed contemporaneously with PBI's operational establishment and the commencement of its business activities following PBI's incorporation on March 15, 2012, under Irish law. The period between PBI's incorporation and the CSA's effective date was used to complete the organizational formalities necessary to establish PBI as a fully operational entity, including the hiring of initial personnel, the establishment of banking relationships, the negotiation and execution of office lease arrangements, and the preparation of the transfer pricing documentation supporting the platform contribution transaction and the initial cost-sharing allocations.
The CSA has been in continuous effect from July 1, 2012, through the conclusion of the examination years (Tax Years 2017, 2018, 2019, and 2020) and remains in force as of the date of the filing of this Formal Protest. The CSA has not been amended, modified, terminated, or suspended at any time since its effective date, although the annual cost-sharing percentages have been updated each year in accordance with the methodology specified in the agreement, as described in Section VI below.
IV. Scope of the CSA — Intangible Development Activity
A. Intangibles Covered
The CSA covers the development, enhancement, maintenance, protection, and exploitation ("DEMPE") of PPC's pharmaceutical intellectual property portfolio. The intangible property subject to the CSA includes, without limitation, the following categories of intangible assets:
• Patents and patent applications, including composition-of-matter patents, method-of-use patents, formulation patents, and process patents;
• Know-how, trade secrets, and proprietary technical information relating to pharmaceutical compounds, drug delivery systems, and manufacturing processes;
• Regulatory data and filings, including Investigational New Drug Applications, New Drug Applications, Marketing Authorization Applications, and associated clinical trial data packages;
• Clinical trial data, including data from Phase I, Phase II, Phase III, and Phase IV clinical studies;
• Marketing intangibles, including trademarks, trade names, brand names, promotional materials, and market-access strategies; and
• Any other intangible property developed, enhanced, maintained, or protected through the intangible development activity funded under the CSA.
The key commercial products subject to the CSA, together with their global and non-Americas net sales for the fiscal year ended December 31, 2020, are set forth in the following table:
Veritaxol is PPC's largest-selling product and is regarded as a blockbuster pharmaceutical compound in the oncology therapeutic category. The product was initially approved by the United States Food and Drug Administration prior to the effective date of the CSA and has been the subject of ongoing development, life-cycle management, and label-expansion activities funded through the CSA during the examination years. Imvara, an immunology compound, is PPC's second-largest commercial product and has experienced significant growth in both the Americas and non-Americas territories throughout the examination period. Cerulon, a rare-disease therapeutic, is a more specialized product with a smaller overall revenue base but with significant growth potential in the non-Americas territory, particularly in the EMEA region.
In addition to the approved products listed above, the CSA covers a pipeline of investigational compounds at various stages of preclinical and clinical development, the commercial potential of which is reflected in the reasonably anticipated benefits projections used to determine cost-sharing percentages.
B. Territorial Allocation of Rights
Under the terms of the CSA, the rights to exploit CSA-Developed IP are allocated between the two controlled participants on a territorial basis:
• PPC retains the exclusive rights to exploit all CSA-Developed IP in the Americas Territory, which is defined as encompassing all countries and territories in North America (including the United States, Canada, and Mexico), Central America, South America, and the Caribbean.
• PBI acquires the exclusive rights to exploit all CSA-Developed IP outside the Americas Territory, specifically in the EMEA and APAC regions (collectively, the "Non-Americas Territory" or the "Rest of World Territory").
PBI exercises its rights to exploit CSA-Developed IP in the Non-Americas Territory through a combination of direct commercial operations and arrangements with related and third-party entities. In particular, PBI manages contract manufacturing and distribution arrangements for non-Americas markets through Penterra Manufacturing Ireland Ltd. ("PMI"), a related-party contract manufacturer. PMI is an Irish limited company (Companies Registration Office No. 512347) with its principal manufacturing facility at Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland. PMI employs approximately 620 individuals at its Ringaskiddy facility and operates under a cost-plus arrangement with PBI at a markup of cost plus 8%, which is consistent with the arm's-length compensation for contract manufacturing services in the pharmaceutical industry.
PBI has independently managed the commercialization of CSA-covered products across 68 country markets in the Non-Americas Territory. In connection with these commercialization activities, PBI exercises independent pricing authority, makes market entry and market withdrawal decisions, selects and manages distribution partners, and oversees regulatory submissions and approvals in each applicable jurisdiction.
C. Intangible Development Activity
Both PPC and PBI fund qualified research and development activities constituting "Intangible Development Activity" or "IDA" as defined under Treasury Regulation § 1.482-7(j)(1). The IDA encompasses all activities that are reasonably anticipated to contribute to the development, enhancement, maintenance, protection, or exploitation of the intangible property covered by the CSA, including basic and applied research, preclinical development, clinical development (Phase I through Phase IV studies), regulatory affairs activities, and certain post-marketing studies and life-cycle management activities.
The majority of research and development activities constituting IDA are physically conducted by PPC in the United States, primarily at PPC's research and development facilities in Princeton Junction, New Jersey, and at PPC's clinical operations center in Wilmington, Delaware. PPC's U.S.-based R&D organization includes approximately 3,200 scientists, physicians, clinical development professionals, and supporting research staff.
PBI contributes to the IDA by providing personnel and resources in regulatory affairs, medical affairs, and commercial functions from its Dublin operations. PBI's contributions to IDA include, among other activities, the design and execution of non-Americas regulatory strategies, the preparation and submission of marketing authorization applications to the European Medicines Agency and national competent authorities, the conduct of non-Americas-specific clinical studies (including regional bridging studies and local efficacy trials), and medical affairs activities directed at non-Americas healthcare professionals and opinion leaders.
PBI's cumulative regulatory expenditures for non-Americas regulatory submissions totaled €47.2 million across Tax Years 2017 through 2020. These expenditures reflect the substantial investment by PBI in obtaining and maintaining regulatory approvals across the 68 country markets in which PBI commercializes CSA-covered products.
V. Platform Contribution Transaction (PCT)
A. Nature and Purpose
Pursuant to Treasury Regulation § 1.482-7(g), PBI made a platform contribution transaction ("PCT") payment to PPC to compensate PPC for PBI's use of pre-existing intangible property (the "platform contributions") that PPC made available to the CSA as of the CSA's effective date. The requirement for such a payment arises from the principle that, where a controlled participant makes available to the CSA pre-existing resources, capabilities, or rights that are reasonably anticipated to contribute to the development of cost-shared intangibles, the other controlled participants must compensate the contributing participant for such platform contributions in accordance with the arm's-length standard.
The pre-existing intellectual property that constituted PPC's platform contributions consisted primarily of clinical-stage and approved oncology compounds developed by PPC prior to July 1, 2012, together with associated regulatory data packages, manufacturing know-how, and pre-existing marketing intangibles. These platform contributions formed the foundation upon which subsequent intangible development activity under the CSA was conducted and represented a significant source of value to PBI in connection with PBI's exploitation of CSA-Developed IP in the Non-Americas Territory.
B. PCT Payment Amount
PBI made a lump-sum PCT payment of $312,000,000 to PPC on July 1, 2012, the effective date of the CSA. The PCT payment was funded through a combination of an initial equity contribution from PHL (reflecting PPC's indirect capitalization of PBI) and available cash resources of PBI.
The PCT payment amount of $312,000,000 was determined using an income method, specifically a discounted cash flow ("DCF") approach, in which the present value of PBI's reasonably anticipated incremental income streams attributable to the pre-existing platform contributions was calculated. The DCF analysis applied a weighted average cost of capital ("WACC") of 9.8% as the discount rate, reflecting pharmaceutical-industry risk premiums, the specific risk profile of the contributed intangible property (including clinical-stage compounds with inherent development risk), and the market and regulatory risks associated with the commercialization of pharmaceutical products in the Non-Americas Territory.
C. Arm's-Length Validation
Contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP (Transfer Pricing Partner: Susan Lam, CPA) at the time of the CSA's establishment supported the conclusion that the PCT payment of $312 million was consistent with the arm's-length standard as applied under Treasury Regulation § 1.482-7(g). The documentation included a detailed description of the platform contributions, an analysis of the functional profiles and risk allocations of the participants, and a comprehensive DCF valuation employing the income method.
In connection with the preparation of PPC's Formal Protest, an independent economic analysis was conducted by Whitmore Valuation Group LLC, an independent economics and valuation consulting firm. The Whitmore engagement was led by Dr. Helena Vasquez (Lead Economist) and Dr. Rohan Chakrabarti (Supporting Economist), and was retained under a Kovel arrangement pursuant to Engagement Reference 1018-00009-KV, dated June 20, 2022, to preserve the attorney-client privilege and work product protections applicable to the analysis.
Whitmore Valuation Group revalued the PCT using updated revenue projections and the same 9.8% WACC discount rate employed in the original contemporaneous documentation. The Whitmore analysis concluded that the arm's-length value of the PCT payment falls within a range of $278 million to $361 million, and that the actual PCT payment of $312 million falls comfortably within this arm's-length range. The Whitmore analysis further validated the appropriateness of the 9.8% WACC by reference to industry cost-of-capital data, clinical-stage compound risk premia, and the specific characteristics of the contributed IP.
By contrast, the IRS examination team valued the PCT payment at $852 million using an income method with a lower discount rate (WACC of 7.2%) and materially different revenue projections that, in PPC's view, do not reflect the information that was reasonably available and the expectations that were reasonable as of the July 1, 2012, effective date. The IRS's valuation would result in an asserted undervaluation of the PCT by approximately $540 million. PPC notes, however, that Tax Year 2012 is outside the scope of the current examination (which covers Tax Years 2017 through 2020), and accordingly the IRS has not proposed a direct adjustment to the PCT payment itself. Rather, the IRS's PCT valuation bears on the examination team's broader contention regarding the overall pricing of intercompany transactions between PPC and PBI.
VI. Cost-Sharing Payments — Reasonably Anticipated Benefits
A. Methodology for Determining Cost-Sharing Percentages
Under the terms of the CSA, each controlled participant's share of the annual qualified R&D costs constituting IDA is determined by reference to its reasonably anticipated benefits ("RABs") from the intangible development activity, in accordance with Treasury Regulation § 1.482-7(e). The RABs are measured as the projected revenue from the exploitation of CSA-covered intangible property in each participant's respective territory, reflecting each participant's share of the total reasonably anticipated economic benefits from the IDA.
Revenue projections underlying the RAB calculations are updated annually, based on then-current market conditions, product lifecycle analysis (including patent expiration dates, anticipated generic competition, and product line extensions), territory-specific commercial developments (including new product launches, regulatory approvals, pricing and reimbursement changes, and market access developments), and the expected contributions of pipeline products to future revenue. The RAB calculations reflect the relative shares of projected revenue attributable to the Americas Territory (PPC) and the Non-Americas Territory (PBI), and are applied to determine each participant's cost-sharing percentage for the applicable tax year.
This methodology ensures that each participant bears a share of the total qualified R&D costs that is commensurate with the share of total anticipated benefits that the participant expects to derive from the IDA, consistent with the arm's-length standard and the specific requirements of Treasury Regulation § 1.482-7(e).
B. PBI's Cost-Sharing Percentages and Payments (PPC Position, TY 2017–2020)
The following table sets forth the total qualified R&D costs constituting IDA for each of the examination years, together with PBI's cost-sharing percentage and the resulting cost-sharing payment from PBI to PPC, as determined by PPC in accordance with the RAB methodology described above and as reported on PPC's federal income tax returns:
As reflected in the table above, PBI's cost-sharing percentage increased over the period from 38.2% in Tax Year 2017 to 42.7% in Tax Year 2020. This increase is consistent with the reasonably anticipated benefits methodology and reflects the growing share of non-Americas revenue relative to total global revenue during the examination period, driven in part by successful product launches and geographic market expansion by PBI in the EMEA and APAC regions, as well as increased penetration of existing markets, particularly for Veritaxol in the European oncology market and Imvara in the Asia-Pacific immunology market.
C. IRS Proposed Cost-Sharing Percentages
The IRS examination team proposed increasing PBI's cost-sharing percentages for each of the examination years, asserting that PPC's projections of reasonably anticipated benefits understated the value attributable to U.S.-source contributions to the IDA and correspondingly understated PBI's share of total anticipated benefits. The following table summarizes the IRS's proposed adjustments:
The IRS's proposed adjustments would increase PBI's cost-sharing percentage by approximately 8 to 12 percentage points across each of the examination years, with a total proposed CSA cost-sharing adjustment of $235,010,000 for Tax Years 2017 through 2020.
PPC's position is that its RAB projections were reasonable, were prepared in good faith based on the best information available at the time, and are supported by the contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP. Moreover, PPC's RAB projections are consistent with actual revenue outcomes observed during the examination period, which confirms the reasonableness of the projections at the time they were made.
In further support of PPC's position, Whitmore Valuation Group LLC conducted a comparable profits method ("CPM") and transactional net margin method ("TNMM") analysis that tested PBI's operating margins against a set of 22 comparable uncontrolled companies, comprising independent distributors and IP-holding companies operating in the pharmaceutical and life sciences industries. The Whitmore analysis confirmed that PBI's operating margins fell within the interquartile range of the comparable set in all four examination years, providing additional evidence that the cost-sharing payments made by PBI were consistent with the arm's-length standard.
VII. Distinction from Legacy IP Royalty Arrangement
Separately from the CSA, PBI licenses certain legacy pharmaceutical compounds from PPC under an intercompany license agreement (the "Legacy IP License"). The Legacy IP License covers compounds that were developed and approved prior to July 1, 2012, and that are not covered by the CSA (the "Legacy Compounds"). These Legacy Compounds were fully developed and commercialized prior to the establishment of the CSA and were not made available as platform contributions to the CSA; rather, they are licensed by PBI from PPC under a separate arm's-length royalty arrangement.
Under the Legacy IP License, PBI pays a royalty to PPC at a rate of 4.5% of net sales of the Legacy Compounds in the Non-Americas Territory. The following table sets forth the non-Americas net sales of Legacy Compounds and the corresponding royalty payments for each of the examination years:
As reflected in the table, net sales of Legacy Compounds in the Non-Americas Territory declined over the examination period, consistent with the natural lifecycle of mature pharmaceutical products that are subject to increasing generic competition and loss of exclusivity.
The Legacy IP royalty arrangement is a separate intercompany agreement from the CSA and is analyzed separately under the transfer pricing rules applicable to controlled transactions involving the transfer of intangible property, specifically Treasury Regulation § 1.482-4 and the comparable uncontrolled transaction ("CUT") method. The Legacy IP License and the arm's-length analysis supporting the 4.5% royalty rate are addressed in detail in the Formal Protest and in Exhibit C (Summary of Economic Analyses).
The IRS examination team proposed increasing the Legacy IP royalty rate from 4.5% to 11.0%, which would generate proposed royalty adjustments totaling $188,040,000 for Tax Years 2017 through 2020. PPC contests this proposed adjustment. PPC's CUT analysis, prepared by Crestfield & Associates LLP and independently validated by Whitmore Valuation Group LLC, identified 14 comparable uncontrolled license agreements involving pharmaceutical intangible property of comparable nature and value. The interquartile range of royalty rates in the comparable set was 3.1% to 6.8%, with a median of 4.4%. PPC's royalty rate of 4.5% falls at approximately the median of the comparable set and well within the interquartile range, demonstrating that the 4.5% rate satisfies the arm's-length standard.
VIII. Regulatory Compliance
A. Treas. Reg. § 1.482-7 Requirements
The CSA satisfies the requirements for a qualified cost-sharing arrangement under Treasury Regulation § 1.482-7, including, without limitation, each of the following:
1. Written Agreement. The CSA is memorialized in a comprehensive written agreement effective July 1, 2012, which contains all terms and provisions required under Treasury Regulation § 1.482-7(b), including the identification of the controlled participants, the scope of the intangible development activity, the method for determining each participant's share of intangible development costs, the territorial allocation of rights in cost-shared intangibles, provisions for changes in participation, and procedures for the resolution of disputes.
2. Controlled Participants. Both PPC and PBI qualify as controlled participants within the meaning of Treasury Regulation § 1.482-7(j)(1)(i), as each participant performs functions, assumes risks, and employs assets in connection with the intangible development activity covered by the CSA. PPC serves as the primary R&D performer, while PBI contributes regulatory, medical affairs, and commercial resources and bears the economic risks associated with the exploitation of CSA-Developed IP in the Non-Americas Territory.
3. Cost-Sharing Based on Reasonably Anticipated Benefits. Cost-sharing percentages are determined annually based on each participant's reasonably anticipated benefits from the IDA, measured as projected revenue from the exploitation of CSA-covered intangible property in each participant's respective territory, in accordance with Treasury Regulation § 1.482-7(e). The RAB calculations are updated each year to reflect current market conditions, product lifecycle developments, and territory-specific commercial factors.
4. Platform Contribution Transaction. PBI made a PCT payment of $312 million to PPC on July 1, 2012, to compensate PPC for the pre-existing intangible property made available to the CSA as of the effective date, in compliance with Treasury Regulation § 1.482-7(g). The PCT payment was determined using an income method (DCF approach) and is supported by contemporaneous and independent economic analyses demonstrating that it falls within the arm's-length range.
5. Contemporaneous Documentation. Contemporaneous documentation has been maintained in compliance with Treasury Regulation § 1.482-7(k) and the documentation requirements of Internal Revenue Code § 6662(e) for each of the examination years, as described in Section VIII.B below.
B. Contemporaneous Documentation
Crestfield & Associates LLP, PPC's transfer pricing advisors, prepared comprehensive contemporaneous transfer pricing documentation for each of Tax Years 2017, 2018, 2019, and 2020. The Crestfield engagement was led by Martin Ogilvy, CPA (Engagement Partner) and Susan Lam, CPA (Transfer Pricing Partner). The documentation was prepared in accordance with the requirements of Internal Revenue Code § 6662(e)(3)(B) and Treasury Regulation § 1.6662-6, which establish the standards for contemporaneous documentation that provides a "reasonable cause" defense against the imposition of the substantial valuation misstatement penalty under IRC § 6662(e).
The contemporaneous documentation for each examination year includes, among other components, the following:
• A detailed functional analysis of PPC and PBI, identifying the functions performed, risks assumed, and assets employed by each controlled participant in connection with the IDA and the exploitation of CSA-Developed IP;
• Selection and application of the best method for determining the arm's-length consideration for the controlled transactions, in accordance with Treasury Regulation § 1.482-1(d);
• Annual RAB calculations, including detailed revenue projections, product lifecycle analyses, and territory-specific market assessments;
• Comparability analyses, including the identification and analysis of comparable uncontrolled transactions, comparable companies, and comparable profit levels, as appropriate for the methods applied;
• Financial data, including segmented financial results for PPC and PBI attributable to the CSA-covered activities; and
• Documentation of any material changes in business operations, market conditions, or other circumstances affecting the transfer pricing analysis during the applicable year.
This contemporaneous documentation forms the basis for PPC's reasonable-cause defense against the proposed Internal Revenue Code § 6662(e) substantial valuation misstatement penalty, as further addressed in Exhibit E to the Formal Protest.
IX. PBI's Economic Substance and DEMPE Functions Under the CSA
PBI is not a mere shell entity, passive holding company, or entity without genuine substance. To the contrary, PBI performs substantive DEMPE functions — that is, functions relating to the Development, Enhancement, Maintenance, Protection, and Exploitation of intangible property — in connection with the CSA. PBI exercises meaningful decision-making authority, bears genuine economic risks, and employs significant resources in carrying out its business activities in the Non-Americas Territory.
The following key indicators of PBI's economic substance and DEMPE functions are relevant to the assessment of the arm's-length nature of the CSA and the intercompany transactions thereunder:
• Employees and Personnel. As of December 31, 2020, PBI employed 185 individuals in Dublin, Ireland, a figure that has grown substantially from the 52 employees at PBI's establishment in 2012. PBI's workforce includes qualified professionals in regulatory affairs, medical affairs, commercial strategy, supply-chain management, market access, pharmacovigilance, and corporate functions. The growth in PBI's headcount over the eight-year period from inception reflects the genuine expansion of PBI's operational responsibilities and commercial activities in the Non-Americas Territory.
• Board Governance and Decision-Making. During Tax Years 2017 through 2020, PBI's Board of Directors held a total of 42 board meetings in Dublin, comprising quarterly meetings and additional special sessions as required. These board meetings involved substantive deliberation and decision-making on matters including product pricing strategies for non-Americas markets, market entry and market withdrawal decisions, regulatory submission strategies, capital expenditure approvals, and other matters material to PBI's business operations.
• Regulatory Expenditures. PBI incurred cumulative regulatory expenditures of €47.2 million across the 68 country markets in the Non-Americas Territory during Tax Years 2017 through 2020. These expenditures reflect PBI's independent engagement with regulatory authorities in Europe, Asia-Pacific, and other non-Americas jurisdictions, including the submission of marketing authorization applications, regulatory renewals, label updates, and post-marketing commitments.
• Independent Pricing Decisions. PBI exercises independent pricing authority across all 68 non-Americas country markets in which it commercializes CSA-covered products. PBI's pricing decisions are made based on local market conditions, competitive dynamics, health technology assessments, reimbursement frameworks, and other territory-specific factors, and are not dictated or controlled by PPC.
• Physical Presence. PBI maintains approximately 18,000 square feet of dedicated office space at Sandyford Business Park, Dublin, which serves as PBI's principal place of business and the location from which PBI's personnel conduct PBI's day-to-day operations.
• Independent Treasury Operations. PBI conducts independent treasury operations through its principal banking relationship with Glenmore Bank Ireland plc, maintaining operating accounts, cash management facilities, and intercompany settlement arrangements.
• Risk-Bearing. PBI bears genuine market risk in connection with the exploitation of CSA-Developed IP in the Non-Americas Territory. PBI assumes the economic risks associated with product commercialization in 68 country markets, including demand risk, pricing and reimbursement risk, regulatory risk, currency risk, and competitive risk. PBI also bears the risk that its cost-sharing payments to PPC may not be fully recovered through future commercial revenues in the Non-Americas Territory.
• Key Commercial Decisions. PBI makes key commercial decisions independently, including decisions regarding pricing, market entry and market withdrawal, distribution partner selection and management, promotional strategies, and clinical and medical affairs activities directed at non-Americas healthcare professionals and patients.
The functional analysis supporting PBI's economic substance is documented in detail in the Functional Analysis Report, which is referenced in Exhibit D to the Formal Protest. The functional analysis was further supported by 12 in-depth interviews of key PBI employees, conducted in Dublin by the Whitmore Valuation Group team, covering PBI's organizational structure, decision-making processes, risk management practices, and contributions to the IDA.
X. Summary of IRS Proposed Adjustments Relating to the CSA
The following is a summary of all proposed adjustments set forth in the NOPA dated October 12, 2023, relating to the CSA and the related Legacy IP License:
1. CSA Cost-Sharing Ratio Adjustments. The IRS proposed increasing PBI's cost-sharing percentages under the CSA for Tax Years 2017 through 2020, resulting in proposed additional cost-sharing payments from PBI to PPC totaling $235,010,000, as detailed in Section VI.C above.
2. Legacy IP Royalty Rate Adjustments. The IRS proposed increasing the royalty rate on the Legacy IP License from 4.5% to 11.0%, resulting in proposed additional royalty income to PPC totaling $188,040,000 for Tax Years 2017 through 2020, as detailed in Section VII above.
3. Combined Gross Proposed Adjustment. The combined gross proposed adjustment from the CSA cost-sharing ratio adjustments and the Legacy IP royalty rate adjustments is $423,050,000.
4. Correlative Offset. The IRS examination team allowed a correlative offset of ($42,650,000) to avoid double-counting between the CSA cost-sharing adjustments and the Legacy IP royalty adjustments, to the extent that certain income items would otherwise have been subject to adjustment under both the CSA analysis and the royalty analysis.
5. Net Proposed Adjustment. After applying the correlative offset, the net proposed adjustment is $380,400,000 for Tax Years 2017 through 2020.
6. Proposed Penalty. The IRS proposed the imposition of a substantial valuation misstatement penalty under Internal Revenue Code § 6662(e) of approximately $15,977,000, computed as 20% of the underpayment of tax attributable to the $380,400,000 net proposed adjustment at the 21% corporate tax rate (i.e., 20% × ($380,400,000 × 21%) = approximately $15,977,000).
PPC contests all proposed adjustments — both the CSA cost-sharing ratio adjustments and the Legacy IP royalty rate adjustments — and the proposed IRC § 6662(e) penalty in full, as set forth in detail in the Formal Protest and the supporting exhibits filed therewith.
XI. Conclusion
Based on the foregoing summary, PPC respectfully submits the following conclusions with respect to the CSA between PPC and PBI:
The CSA between PPC and PBI was established and has operated in compliance with the requirements of Treasury Regulation § 1.482-7 governing qualified cost-sharing arrangements and the arm's-length standard of Internal Revenue Code § 482 and the regulations thereunder. The CSA was memorialized in a comprehensive written agreement effective July 1, 2012, and has been administered in accordance with its terms throughout the examination period.
PBI's cost-sharing percentages of 38.2%, 39.6%, 41.1%, and 42.7% for Tax Years 2017, 2018, 2019, and 2020, respectively, accurately reflect PBI's reasonably anticipated benefits from the intangible development activity, as measured by projected revenue from the exploitation of CSA-covered intangible property in the Non-Americas Territory. These cost-sharing percentages are supported by contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP and by independent economic analysis performed by Whitmore Valuation Group LLC.
The PCT payment of $312 million, made by PBI to PPC on July 1, 2012, to compensate PPC for the pre-existing intangible property made available to the CSA, falls within the arm's-length range of $278 million to $361 million, as validated by Whitmore Valuation Group's discounted cash flow analysis applying a WACC of 9.8%, which appropriately reflects the risk profile of the contributed pharmaceutical IP.
PBI maintains substantial economic substance in Ireland, performing genuine DEMPE functions with 185 employees, €47.2 million in cumulative regulatory expenditures, 42 board meetings held in Dublin during the examination period, and the exercise of independent commercial judgment across 68 non-Americas markets. PBI is not a mere conduit entity, but a fully operational business entity that bears genuine economic risks and performs substantive functions in connection with the CSA.
For the foregoing reasons, PPC respectfully submits that the IRS's proposed CSA cost-sharing adjustments of $235,010,000 for Tax Years 2017 through 2020 are unwarranted, unsupported by the applicable legal and economic standards, and should be withdrawn in their entirety.
Exhibit B to Formal Protest of Penterra Pharmaceuticals Corp., dated December 22, 2023.
Prepared by Calderwood & Harkness LLP, counsel for Penterra Pharmaceuticals Corp.
Contact: Leonard Cross, Responsible Partner Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 C&H Matter No. 1018-00009
Product | Therapeutic Area | Global Net Sales (2020) | Non-Americas Net Sales (2020)
Veritaxol | Oncology | $3.12 billion | $1.34 billion
Imvara | Immunology | $1.87 billion | $790 million
Cerulon | Rare Disease | $620 million | $280 million
Tax Year | Total Qualified R&D Costs | PBI Cost-Share Percentage | PBI Cost-Share Payment
2017 | $487,300,000 | 38.2% | $186,150,000
2018 | $523,800,000 | 39.6% | $207,420,000
2019 | $561,200,000 | 41.1% | $230,650,000
2020 | $598,400,000 | 42.7% | $255,520,000
Tax Year | PPC Position (%) | IRS Proposed (%) | Increase (pp) | Additional Payment Proposed
2017 | 38.2% | 48.2% | +10.0 | $48,730,000
2018 | 39.6% | 50.6% | +11.0 | $57,610,000
2019 | 41.1% | 52.3% | +11.2 | $62,850,000
2020 | 42.7% | 53.7% | +11.0 | $65,820,000
Total | $235,010,000
Tax Year | Legacy Compound Non-Americas Net Sales | Royalty Rate | Royalty Payment
2017 | $814,600,000 | 4.5% | $36,660,000
2018 | $762,300,000 | 4.5% | $34,300,000
2019 | $691,800,000 | 4.5% | $31,130,000
2020 | $624,100,000 | 4.5% | $28,080,000

EXHIBIT B

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