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EXHIBIT C

SUMMARY OF ECONOMIC ANALYSES IN SUPPORT OF PENTERRA PHARMACEUTICALS CORP.'S TRANSFER PRICING POSITIONS (TY 2017–2020)

Comparable Uncontrolled Transaction (CUT) Analysis Comparable Profits Method (CPM) / Transactional Net Margin Method (TNMM) Analysis Income Method / Discounted Cash Flow (DCF) Analysis

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

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

Prepared by:

Whitmore Valuation Group LLC 200 Ashbury Asset Advisors, Suite 700 Boston, Massachusetts 02109

Under Direction of Counsel Calderwood & Harkness LLP Matter No. 1018-00009

Pursuant to Kovel Arrangement Reference: 1018-00009-KV, dated June 20, 2022

Lead Economist: Dr. Helena Vasquez, Ph.D., Managing Director Supporting Economist: Dr. Rohan Chakrabarti, Ph.D., Senior Director

This Exhibit summarizes the economic analyses performed by Whitmore Valuation Group LLC ("WVG" or "Whitmore"). The underlying full reports, workpapers, and supporting data have been produced separately and are listed in Section VII of this Exhibit. This document has been prepared at the direction of counsel under a Kovel arrangement and is subject to attorney-client privilege and work-product protection. Nothing herein should be construed as a waiver of any applicable privilege.

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I. INTRODUCTION AND PURPOSE

A. Overview of the Engagement

Whitmore Valuation Group LLC ("WVG" or "Whitmore") was retained by Calderwood & Harkness LLP, outside tax counsel to Penterra Pharmaceuticals Corp. ("PPC" or the "Taxpayer"), under a Kovel arrangement executed on June 20, 2022, bearing Reference No. 1018-00009-KV. The Kovel arrangement was structured in accordance with the principles set forth in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), such that WVG's engagement falls within the scope of the attorney-client privilege and work-product doctrine, as all economic analyses were performed under the direction of, and for the purpose of rendering legal advice by, Calderwood & Harkness LLP to its client, PPC.

The purpose of WVG's engagement was to perform independent economic analyses, benchmarking studies, and expert evaluations supporting PPC's transfer pricing positions with respect to intercompany transactions between PPC and its Irish subsidiary, Penterra Biopharma International DAC ("PBI"), a Designated Activity Company organized and tax-resident in Ireland. The intercompany transactions at issue encompass a qualified cost-sharing arrangement ("CSA"), an intercompany license agreement covering legacy pharmaceutical intellectual property, and a platform contribution transaction ("PCT") payment made at the inception of the CSA.

WVG's analyses were conducted in accordance with applicable professional standards and the requirements of the Internal Revenue Code ("IRC"), Treasury Regulations, and relevant guidance, including the arm's-length standard set forth in IRC § 482 and Treas. Reg. § 1.482-1 et seq. The analyses address the three principal categories of adjustment proposed in the Internal Revenue Service's ("IRS") Notice of Proposed Adjustment ("NOPA") dated October 12, 2023, which collectively total $380.4 million in proposed adjustments across Tax Years ("TY") 2017 through 2020.

This Exhibit C provides a summary of the methodologies employed, the data gathered and analyzed, the results obtained, and the conclusions drawn by WVG. The complete underlying reports, workpapers, data sets, and supporting documentation have been produced separately in connection with the IRS examination and are catalogued in Section VII of this Exhibit. WVG's analyses were led by Dr. Helena Vasquez, Ph.D., Managing Director of WVG, with supporting analysis conducted by Dr. Rohan Chakrabarti, Ph.D., Senior Director of WVG. The qualifications and relevant experience of each economist are set forth in Section VI below.

B. Summary of IRS Proposed Adjustments Addressed

The NOPA dated October 12, 2023, proposes three categories of adjustments to PPC's taxable income for TY 2017 through 2020. WVG's economic analyses are directed at each of these categories, as summarized below:

1. CSA Cost-Sharing Ratio Adjustments — $235.01 Million. The IRS proposes increasing PBI's share of qualified cost-sharing payments under the CSA by approximately 8 to 12 percentage points across each of the four examination years. The IRS asserts that PPC's projections of reasonably anticipated benefits ("RAB") understated the value properly allocable to PPC's Americas territory, thereby understating PBI's required cost-sharing contribution. This proposed adjustment totals $235.01 million across TY 2017–2020.

2. Legacy IP Royalty Rate Adjustments — $188.04 Million. The IRS proposes increasing the intercompany royalty rate charged by PPC to PBI for the license of certain pre-2012 legacy pharmaceutical compounds from the contractual rate of 4.5% of net sales to a rate of 11.0% of net sales. The IRS's proposed rate is based on a set of purportedly comparable transactions selected by the IRS economist. This proposed adjustment totals $188.04 million across TY 2017–2020.

3. Correlative Offset — ($42.65 Million). The IRS has allowed a correlative offset of $42.65 million, reflecting the income tax consequences of the increased cost-sharing payments and royalty payments on PBI's income, as well as related adjustments.

4. Net Proposed Adjustment — $380.40 Million. The net proposed adjustment across all three categories totals $380.40 million for TY 2017–2020, calculated as follows:

The three economic analyses summarized herein—a Comparable Uncontrolled Transaction ("CUT") analysis of the legacy IP royalty rate, a Comparable Profits Method ("CPM") / Transactional Net Margin Method ("TNMM") analysis of PBI's operating margins and the CSA cost-sharing ratios, and an Income Method / Discounted Cash Flow ("DCF") analysis of the PCT payment—collectively demonstrate that PPC's transfer pricing methodologies and results are consistent with the arm's-length standard under IRC § 482 and the applicable Treasury Regulations. No adjustments to PPC's transfer pricing positions are warranted, and the proposed adjustments totaling $380.40 million should be withdrawn in their entirety.

C. Regulatory Framework

WVG's economic analyses were performed within the regulatory framework governing transfer pricing under U.S. federal income tax law. The principal authorities applicable to the intercompany transactions at issue are summarized below:

IRC § 482 and the Arm's-Length Standard. IRC § 482 authorizes the Secretary to allocate income, deductions, credits, or allowances among two or more organizations, trades, or businesses owned or controlled by the same interests, in order to prevent evasion of taxes or clearly reflect the income of such entities. The operative standard is the arm's-length standard, which requires that the results of controlled transactions be consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances. See Treas. Reg. § 1.482-1(b)(1).

Treas. Reg. § 1.482-1(d) — Best Method Rule. The best method rule requires that the method selected to determine the arm's-length result be the one that provides the most reliable measure of an arm's-length result under the facts and circumstances of the particular transaction. The reliability of the result depends on the degree of comparability between the controlled transaction and any uncontrolled comparables, and the quality of the data and assumptions used in the analysis. WVG's selection of the CUT, CPM/TNMM, and income method/DCF approaches for the respective transactions was guided by this rule.

Treas. Reg. § 1.482-4 — Methods for Intangible Property. The regulations governing transfers of intangible property set forth multiple methods for determining the arm's-length consideration for such transfers, including the CUT method under Treas. Reg. § 1.482-4(c), the comparable profits method under Treas. Reg. § 1.482-4(d) (by reference to § 1.482-5), and the profit split method. The CUT method, which is the primary method applied by WVG to evaluate the legacy IP royalty rate, identifies comparable uncontrolled transactions involving similar intangible property under similar circumstances and uses the royalty rates or other consideration in those transactions to test the arm's-length character of the controlled transaction.

Treas. Reg. § 1.482-7 — Qualified Cost-Sharing Arrangements. The regulations governing qualified CSAs prescribe rules for determining cost-sharing contributions based on reasonably anticipated benefits, as well as for determining arm's-length PCT payments for pre-existing intangible property contributed to the CSA. Treas. Reg. § 1.482-7(e)(1) requires that each participant's share of intangible development costs be proportional to its share of reasonably anticipated benefits from the CSA activity. Treas. Reg. § 1.482-7(g)(4) specifies the income method as a method for determining the arm's-length PCT payment.

OECD Transfer Pricing Guidelines. Although the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the "OECD Guidelines") are not binding on the IRS or U.S. courts, they constitute persuasive authority and are frequently referenced in transfer pricing analyses. WVG's analyses are consistent with the principles articulated in the OECD Guidelines, particularly Chapter VI (Special Considerations for Intangibles), Chapter VIII (Cost Contribution Arrangements), and Chapter II (Transfer Pricing Methods), as set forth in both the 2017 and 2022 revisions of those Guidelines.

D. Structure of This Exhibit

This Exhibit is organized into the following sections:

• Section II presents the CUT analysis evaluating the arm's-length character of PPC's 4.5% royalty rate for the license of legacy pharmaceutical IP to PBI.

• Section III presents the CPM/TNMM analysis evaluating PBI's operating margins for TY 2017–2020 and the implications for the CSA cost-sharing ratios.

• Section IV presents the income method / DCF analysis evaluating the arm's-length character of the $312 million PCT payment made by PBI at the inception of the CSA.

• Section V summarizes the conclusions from all three analyses and addresses the proposed adjustments in the aggregate.

• Section VI sets forth the qualifications of the economists who performed the analyses.

• Section VII lists the supporting exhibits and workpapers referenced throughout this Exhibit.

II. COMPARABLE UNCONTROLLED TRANSACTION (CUT) ANALYSIS — LEGACY IP ROYALTY RATE

A. Background and Transaction Description

PBI licenses certain legacy pharmaceutical compounds from PPC pursuant to an intercompany license agreement (the "Legacy License Agreement") originally executed on July 1, 2012, and amended effective January 1, 2015. The Legacy License Agreement covers pre-2012 vintage compounds—i.e., pharmaceutical products that were approved and commercially available prior to the inception of the CSA and that are not subject to the CSA's cost-sharing provisions. These legacy compounds consist primarily of mature specialty therapeutics and oncology compounds that were first commercialized between 2003 and 2011.

Under the Legacy License Agreement, PBI pays PPC a royalty of 4.5% of net sales generated in the non-Americas territory (i.e., all territories worldwide excluding North America, Central America, South America, and the Caribbean). The royalty rate was established based on a benchmarking analysis conducted by PPC's contemporaneous transfer pricing advisors at the time of the agreement's execution, and was maintained throughout the examination period.

Legacy compound net sales in the non-Americas territory during the examination period, and the corresponding royalty payments to PPC, were as follows:

The declining sales trend evident in this data reflects the natural product lifecycle of mature, pre-2012 compounds. These compounds have faced increasing competition from generic entrants in multiple non-Americas markets, patent expirations, and the ongoing transition of prescribing patterns toward newer therapeutic alternatives. This declining trajectory is a critical comparability factor, as it demonstrates that the legacy compounds in question are in the late stages of their commercial lifecycle—a characteristic that bears directly on the appropriate royalty rate.

The IRS, through its NOPA dated October 12, 2023, proposes increasing the intercompany royalty rate from 4.5% to 11.0% of net sales. The IRS's proposed rate is based on a CUT analysis conducted by IRS economist Dr. Alan Washburne, who selected a different set of purportedly comparable transactions to support the higher rate. The IRS's proposed adjustment, calculated as the differential between the 11.0% proposed rate and the 4.5% contractual rate (a 6.5 percentage point increase) applied to PBI's non-Americas net sales, totals $188.04 million across the four examination years, as follows:

WVG's CUT analysis, summarized below, demonstrates that PPC's 4.5% royalty rate is within the arm's-length range and that the IRS's proposed 11.0% rate is not supportable.

B. Methodology — CUT Method Under Treas. Reg. § 1.482-4(c)

WVG selected the CUT method as the best method for evaluating the arm's-length character of the legacy IP royalty rate, in accordance with the best method rule set forth in Treas. Reg. § 1.482-1(d). The CUT method is described in Treas. Reg. § 1.482-4(c), which provides that the arm's-length royalty for a controlled transfer of intangible property is determined by reference to the amount charged in comparable uncontrolled transactions.

The CUT method was selected as the best method for the following reasons:

First, the availability of sufficiently comparable third-party pharmaceutical license agreements involving similar intangible property categories supported the application of the CUT method with a high degree of reliability. The pharmaceutical industry has a long-established practice of licensing commercial-stage compounds on a territorial basis, and the terms of such licenses—including royalty rates, exclusivity provisions, and territorial scope—are frequently disclosed in public filings, regulatory submissions, and industry databases. This availability of comparable data distinguishes the CUT method from alternative methods for which data quality or functional comparability may be more limited.

Second, the nature of the controlled transaction—a straightforward, territory-based license of approved pharmaceutical compounds in exchange for a running royalty—is well-suited to the CUT method. The Legacy License Agreement does not involve complex bundled services, equity participations, milestone payments, or other non-royalty compensation elements that would complicate the identification of comparable transactions or require extensive adjustments.

Third, the comparability factors specified in Treas. Reg. § 1.482-4(c)(2) were analyzed and found to be satisfied to a degree that supports a high level of reliability. These comparability factors include:

(i) The nature of the intangible property, including whether it involves the same general type of product or process;

(ii) The stage of development of the intangible at the time of the transaction—here, approved, commercial-stage compounds, as distinguished from preclinical or clinical-stage compounds;

(iii) The exclusivity of the rights granted under the license;

(iv) The geographic scope of the license—here, a territory-based license for the non-Americas territory;

(v) The contractual terms, including the duration of the license, sublicensing rights, and termination provisions;

(vi) The economic conditions prevailing at the time of the transaction, including competitive dynamics and market conditions in the relevant therapeutic areas; and

(vii) The risk allocation between licensor and licensee, including the assumption of commercialization risk, regulatory risk, and market risk by the licensee.

Each of these factors was systematically evaluated for each comparable transaction identified in WVG's search, as described below.

C. Comparable Transaction Search and Selection

WVG conducted a comprehensive search for comparable uncontrolled pharmaceutical license agreements using multiple data sources. The search encompassed the following databases and information sources:

• Greaves Services Inc. Database: A proprietary database of licensing agreements extracted from SEC filings, containing detailed information on royalty rates, territorial scope, exclusivity, and other contractual terms.

• Sundial Health IT Royalty Rate Database: A subscription-based database of over 15,000 licensing agreements across multiple industries, including pharmaceutical and biotechnology licenses.

• SEC EDGAR Filings: Direct searches of publicly filed agreements (Form 10-K, 10-Q, 8-K, and exhibits thereto) for pharmaceutical companies disclosing the terms of third-party licensing arrangements.

• WVG Proprietary Database: WVG's internally maintained database of pharmaceutical licensing agreements compiled from prior engagements, public disclosures, and industry publications.

• Industry Publications and Surveys: Published royalty rate surveys and industry reports from organizations such as the Licensing Executives Society (LES), Medius Associates, and Ridgeway Group.

From the initial universe of pharmaceutical license agreements identified through these sources, WVG applied a systematic set of screening criteria to identify the most comparable transactions. The screening criteria were designed to isolate agreements that are functionally, contractually, and economically comparable to the Legacy License Agreement between PPC and PBI. The screening criteria and results of each filtering step are summarized below:

Step 1: Industry Focus — Pharmaceutical / Biotechnology. WVG limited the search to license agreements involving pharmaceutical or biotechnology intangible property. Agreements involving medical devices, diagnostics, agricultural biotechnology, or other non-pharmaceutical intangibles were excluded. This initial screening reduced the universe to approximately 1,240 agreements.

Step 2: Approved (Marketed) Compounds. WVG limited the search to licenses involving compounds that had received regulatory approval and were being commercially marketed at the time the license was executed. This criterion is critical because PPC's legacy compounds are mature, approved products, and the royalty rates for licensed approved compounds differ materially from those applicable to preclinical or clinical-stage compounds, which carry substantially higher development risk and correspondingly higher royalty-rate expectations to compensate for that risk. Agreements involving exclusively preclinical or clinical-stage compounds were excluded. This step reduced the universe to approximately 390 agreements.

Step 3: Territory-Based Licenses. WVG limited the search to licenses granting territorial rights (e.g., EMEA, Asia-Pacific, or specific country groupings), consistent with the non-Americas territorial scope of the Legacy License Agreement. Worldwide licenses were excluded, as the economics of a worldwide license differ significantly from those of a territorial license due to differences in market access, regulatory requirements, and competitive dynamics. This step reduced the universe to approximately 145 agreements.

Step 4: Royalty-Based Compensation. WVG limited the search to licenses in which the consideration included a running royalty calculated as a percentage of net sales. Agreements providing for lump-sum payments, equity stakes, or purely milestone-based compensation without a running royalty component were excluded. Agreements with hybrid structures (running royalties plus milestones) were retained provided the running royalty component was separately identifiable and quantifiable. This step reduced the universe to approximately 87 agreements.

Step 5: Arm's-Length Transactions Between Unrelated Parties. WVG excluded any agreements between related parties or entities under common ownership or control, retaining only agreements between unrelated, independent parties. This step reduced the universe to approximately 72 agreements.

Step 6: Temporal Relevance. WVG limited the search to agreements executed within a reasonable time frame relative to the examination period—specifically, agreements executed between January 1, 2010, and December 31, 2020. Agreements executed outside this window were excluded to ensure that the economic conditions reflected in the comparable agreements are sufficiently similar to those prevailing during the examination period. This step reduced the universe to approximately 48 agreements.

Step 7: Detailed Comparability Review. The remaining 48 agreements were subjected to a detailed comparability review, during which each agreement was evaluated against the full set of comparability factors enumerated in Treas. Reg. § 1.482-4(c)(2). Agreements that exhibited material differences from the Legacy License Agreement in terms of the nature of the intangible (e.g., involving fundamentally different therapeutic areas with different risk-return profiles), the contractual terms (e.g., short-term licenses of fewer than three years), or the risk allocation (e.g., agreements in which the licensor retained significant commercialization obligations) were excluded from the final sample. Following this detailed review, 14 comparable uncontrolled pharmaceutical license agreements were identified and retained for the final CUT analysis.

Comparability Adjustments. Where necessary and appropriate, WVG applied quantitative comparability adjustments to the royalty rates observed in the 14 comparable agreements to account for identified differences in comparability factors between the comparable transactions and the controlled transaction. Adjustments were applied to account for the following factors:

• Exclusivity: Certain comparable agreements involved non-exclusive licenses, whereas the Legacy License Agreement grants PBI exclusive rights in the non-Americas territory. Non-exclusive licenses typically command lower royalty rates; accordingly, WVG made upward adjustments to the royalty rates observed in non-exclusive agreements to account for this difference.

• Territory Scope: Certain comparable agreements covered a narrower or broader geographic territory than the non-Americas territory. WVG made adjustments based on the relative revenue potential of the licensed territories using publicly available market data from Tidewater Holdings and other industry sources.

• Stage of Product Lifecycle: Certain comparable agreements involved compounds at somewhat earlier stages of their commercial lifecycle than PPC's legacy compounds. WVG made downward adjustments to the royalty rates observed in agreements involving earlier-stage marketed compounds to account for the remaining patent life and growth potential differential.

• Volume: Certain comparable agreements contained volume-based royalty tiers or caps. WVG adjusted for differences in sales volume to ensure that the royalty rates used in the analysis reflected comparable revenue levels.

All adjustments were documented in the full CUT Analysis Report and supporting workpapers, which have been produced separately.

D. Results of CUT Analysis

The results of WVG's CUT analysis, based on the 14 comparable uncontrolled pharmaceutical license agreements identified and adjusted as described above, are as follows:

PPC's intercompany royalty rate of 4.5% of net sales for the Legacy License Agreement falls squarely within the arm's-length interquartile range of 3.1% to 6.8%. Indeed, PPC's rate of 4.5% is essentially at the median of 4.4% and only marginally below the mean of 4.6% observed across the 14 comparable transactions. This result provides strong confirmation that PPC's royalty rate is an arm's-length rate, consistent with the rates that unrelated parties would charge in comparable licensing transactions for mature, approved pharmaceutical compounds in territorial markets.

By contrast, the IRS's proposed royalty rate of 11.0% falls well above the maximum royalty rate (9.2%) observed in any of the 14 comparable transactions, and far exceeds the upper quartile of the interquartile range (6.8%). The IRS's proposed rate is therefore inconsistent with the arm's-length standard as measured by the CUT method, and represents a result that no uncontrolled parties, transacting at arm's length under comparable circumstances, would reach for a license of mature, approved pharmaceutical compounds in a territorial market.

The consistency of PPC's 4.5% rate with the arm's-length range is robust across the examination period, notwithstanding the declining trend in legacy compound net sales. The declining sales trajectory is, in fact, an additional factor supporting PPC's rate: as the legacy compounds move further into their lifecycle decline, the remaining value of the licensed intangible property diminishes, which would be expected to result in royalty rates at or below the median of the comparables—precisely the result observed.

E. Critique of the IRS's CUT Selection

The IRS's proposed 11.0% royalty rate is based on a CUT analysis performed by IRS economist Dr. Alan Washburne, who selected a different and significantly narrower set of purportedly comparable transactions. WVG has reviewed Dr. Washburne's analysis in detail and has identified multiple material deficiencies that undermine the reliability of the IRS's CUT selection and the resulting 11.0% rate. These deficiencies are summarized below and are addressed at greater length in WVG's separate Rebuttal of IRS Economist's Analysis, dated January 2024.

1. Inclusion of Early-Stage (Clinical) Compound Agreements. Dr. Washburne's comparables include several agreements involving compounds that were in clinical development (i.e., Phase II or Phase III clinical trials) at the time of the license, rather than approved, commercially marketed products. Royalty rates for clinical-stage compounds are systematically higher than royalty rates for approved compounds because the licensee assumes significantly greater development risk—including the risk of clinical failure, regulatory rejection, and delayed market entry. The inclusion of clinical-stage agreements in the comparable set artificially inflates the observed range of royalty rates and produces an upwardly biased result. PPC's legacy compounds, by contrast, were all approved and commercially marketed prior to the execution of the Legacy License Agreement, and the appropriate benchmark is the royalty rate for approved compounds, not for development-stage compounds.

2. Inclusion of Worldwide License Agreements Without Adjustments. Dr. Washburne's comparables include several worldwide license agreements—i.e., agreements granting the licensee rights across all global territories, including the United States. Worldwide licenses typically command higher royalty rates than territory-based licenses because the licensee acquires access to the U.S. market, which is the largest and most profitable pharmaceutical market in the world and represents a disproportionate share of global pharmaceutical revenue. The inclusion of worldwide agreements without appropriate downward adjustments to account for the exclusion of the Americas territory in PBI's license is a material comparability flaw that biases the IRS's analysis upward.

3. Failure to Adjust for Exclusivity and Volume Tiers. Several of Dr. Washburne's comparables involve exclusive licenses with volume-based royalty escalation clauses, milestone payments, or other contractual features that are not present in the Legacy License Agreement. Dr. Washburne did not apply adjustments to account for these differences, resulting in royalty rates that reflect the combined effect of exclusivity, milestones, and volume tiers rather than a simple running royalty on a flat-rate basis. This failure to adjust for contractual differences further undermines the comparability of the IRS's selected transactions.

4. Inclusion of Bundled Service Agreements. Certain of Dr. Washburne's comparables involve license agreements that are bundled with co-promotion, co-development, or joint venture arrangements, under which the licensor provides substantial ongoing services to the licensee in addition to granting IP rights. The inclusion of these agreements inflates the apparent royalty rates because the consideration nominally characterized as a "royalty" in fact compensates the licensor for both the IP license and the ongoing services. WVG excluded bundled service agreements from its analysis as a matter of standard comparability practice, and the IRS's failure to do so is a significant methodological deficiency.

5. Small Sample Size. Dr. Washburne's analysis relies on a sample of fewer than 10 comparable transactions, a substantially smaller set than the 14 comparable agreements identified by WVG. The small sample size reduces the statistical reliability of the IRS's results and increases the sensitivity of the interquartile range to individual outliers.

In light of these deficiencies, WVG concludes that the IRS's proposed 11.0% royalty rate does not satisfy the comparability requirements of Treas. Reg. § 1.482-4(c)(2) and does not represent the best method application under Treas. Reg. § 1.482-1(d). The IRS's CUT selection is materially less reliable than WVG's CUT analysis, and the resulting 11.0% rate is not an arm's-length rate.

F. Conclusion on CUT Analysis

Based on the foregoing analysis, WVG concludes that PPC's 4.5% royalty rate for the license of legacy pharmaceutical IP to PBI under the Legacy License Agreement is within the arm's-length range as determined by the CUT method. The interquartile range of royalty rates observed in 14 comparable uncontrolled pharmaceutical license agreements is 3.1% to 6.8%, with a median of 4.4% and a mean of 4.6%. PPC's 4.5% rate falls at the median of this range, confirming that the rate is arm's-length.

The IRS's proposed royalty rate of 11.0% is well above the arm's-length range and is based on a set of comparables that suffers from multiple material deficiencies, including the inclusion of early-stage compound agreements, worldwide licenses, bundled service agreements, and the failure to apply appropriate comparability adjustments. The IRS's proposed adjustment of $188.04 million is without merit, and no adjustment to PPC's legacy IP royalty rate is warranted under IRC § 482 or Treas. Reg. § 1.482-4.

III. COMPARABLE PROFITS METHOD (CPM) / TRANSACTIONAL NET MARGIN METHOD (TNMM) ANALYSIS — PBI OPERATING MARGINS (2017–2020)

A. Background and Transaction Description

Penterra Biopharma International DAC ("PBI") is a Designated Activity Company organized under the laws of Ireland and tax-resident in Ireland. PBI was incorporated on March 15, 2012, and commenced operations effective July 1, 2012. PBI functions as the IP-holding company and principal for the commercialization of PPC's pharmaceutical products in the non-Americas territory—i.e., all territories worldwide excluding North America, Central America, South America, and the Caribbean.

PBI participates in a qualified cost-sharing arrangement with PPC, effective July 1, 2012, under which PBI co-funds research and development ("R&D") costs in exchange for the right to develop and exploit pharmaceutical IP developed under the CSA outside the Americas. PBI's share of qualified R&D costs under the CSA is determined based on PBI's share of reasonably anticipated benefits ("RAB") from the CSA activity, in accordance with Treas. Reg. § 1.482-7(e)(1).

PBI's cost-sharing percentages, and the resulting cost-sharing payments to PPC, during the examination period were as follows:

The modest increase in PBI's cost-sharing percentage over the four-year period reflects the gradual growth in PBI's share of reasonably anticipated benefits as the non-Americas territory's share of projected revenue from CSA-covered products increased relative to the Americas territory.

The IRS proposes increasing PBI's cost-sharing percentages by approximately 8 to 12 percentage points in each year, as follows:

The IRS's proposed increased percentages would yield additional cost-sharing payments from PBI to PPC totaling $235.01 million across the four examination years. The IRS asserts that PPC's RAB projections systematically understated the value properly allocable to the Americas territory, thereby understating PBI's required cost-sharing contribution. WVG's CPM/TNMM analysis, described below, tests whether PBI's operating margins—which incorporate the effect of the cost-sharing payments as reported—are consistent with arm's-length results, and whether the IRS's proposed increased cost-sharing percentages would produce arm's-length or distorted results.

B. PBI's Functions, Assets, and Risks

A central issue in the IRS examination concerns the functional profile of PBI—specifically, whether PBI performs sufficient substantive functions, controls meaningful risks, and employs significant assets to justify its position as the IP holder and principal for non-Americas operations. WVG's functional analysis, which was conducted as a component of the CPM/TNMM analysis to support the selection and evaluation of comparable companies, demonstrates that PBI is not a shell entity, but rather a substantive operating company performing meaningful Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") functions with respect to the non-Americas pharmaceutical IP.

The principal functions, assets, and risks of PBI during the examination period are summarized below:

Functions Performed by PBI:

• Personnel. PBI employed 185 full-time employees as of the end of TY 2020, a significant increase from the 52 employees at PBI's establishment in 2012. PBI's employee base includes senior management, regulatory affairs specialists, medical affairs professionals, commercial strategy and marketing personnel, supply chain managers, and finance and legal staff. The growth in PBI's headcount over the eight-year period from inception to 2020 reflects the expanding scope of PBI's non-Americas operations and its increasing functional capacity.

• Regulatory and Medical Affairs. PBI maintains a dedicated regulatory affairs function responsible for preparing and managing regulatory submissions, obtaining and maintaining marketing authorizations, and ensuring ongoing regulatory compliance across 68 country markets in the non-Americas territory. During the TY 2017–2020 examination period, PBI incurred cumulative regulatory expenditures of approximately €47.2 million on non-Americas submissions, including the preparation of Common Technical Document ("CTD") dossiers, periodic safety update reports, variations and renewals, and interactions with national regulatory authorities.

• Commercial Strategy and Pricing. PBI makes independent pricing decisions across 68 country markets in the non-Americas territory, taking into account local market conditions, competitive dynamics, health technology assessment requirements, reimbursement frameworks, and local regulatory constraints. Pricing decisions are made by PBI's commercial leadership team in Dublin and are documented in pricing committee memoranda and board minutes.

• Distribution and Supply Chain Management. PBI manages contract manufacturing arrangements with Penterra Manufacturing Ireland Ltd. ("PMI"), a related entity that operates a pharmaceutical manufacturing facility at Ringaskiddy, Co. Cork, Ireland, under a cost-plus 8% transfer pricing arrangement. PMI employs approximately 620 employees at the Ringaskiddy facility. PBI coordinates the supply chain for non-Americas markets, including inventory management, quality oversight, logistics, and distribution partner relationships.

• Corporate Governance. PBI maintains a board of directors that meets regularly in Dublin. During the TY 2017–2020 examination period, PBI's board of directors held 42 meetings in Dublin, at which key commercial and strategic decisions were discussed and approved. Board minutes documenting these meetings have been produced in connection with the IRS examination.

Assets Employed by PBI:

• intellectual Property. PBI holds the rights to exploit pharmaceutical IP in the non-Americas territory under the CSA (for post-2012 IP) and the Legacy License Agreement (for pre-2012 IP). PBI's IP portfolio constitutes its most significant asset.

• Physical Assets. PBI occupies approximately 18,000 square feet of office space at Claremont House, Sandyford Business Park, Dublin, Ireland, which serves as PBI's headquarters. PBI also utilizes the PMI manufacturing facility at Ringaskiddy under contract manufacturing arrangements.

• Financial Assets. PBI maintains independent banking relationships with Glenmore Bank Ireland plc, including operating accounts, treasury management facilities, and intercompany settlement accounts.

Risks Borne by PBI:

• Market Risk. PBI bears the market risk associated with the commercialization of pharmaceutical products in the non-Americas territory, including the risk of adverse changes in market conditions, competitive dynamics, pricing and reimbursement policies, and patient demand.

• Regulatory Risk. PBI bears the risk of adverse regulatory actions, including the denial or withdrawal of marketing authorizations, the imposition of post-marketing safety requirements, and changes in regulatory standards across 68 country markets.

• Currency Risk. PBI operates in multiple currency zones and bears foreign exchange risk on revenues denominated in currencies other than the euro, including the British pound, Japanese yen, Australian dollar, and others.

• R&D Investment Risk. As a CSA participant, PBI co-funds R&D expenditures with PPC and bears the risk that the R&D investments may not produce commercially successful products.

PBI Revenue and Profitability (FY 2020):

PBI's total revenue for FY 2020 was approximately €2.14 billion, and its pre-tax income was approximately €1.06 billion. PBI's key products commercialized in the non-Americas territory include Veritaxol (non-Americas net sales of approximately $1.34 billion in 2020), Imvara (approximately $790 million), and Cerulon (approximately $280 million).

The foregoing functional analysis demonstrates that PBI performs substantive DEMPE functions, controls significant risks, employs meaningful assets—both tangible and intangible—and earns returns commensurate with its functional profile. PBI is not a mere conduit or shell entity; it is the appropriate entity to hold and exploit non-Americas IP rights and to bear the associated costs and risks.

C. Methodology — CPM/TNMM Under Treas. Reg. § 1.482-5

The CPM, as described in Treas. Reg. § 1.482-5, was applied as a corroborative method to test whether PBI's operating margins are consistent with arm's-length results, thereby validating the CSA cost-sharing ratios that produce those margins. The TNMM, as described in Chapter II of the OECD Transfer Pricing Guidelines, is functionally equivalent to the CPM for purposes of this analysis, and WVG's references to the CPM should be understood to encompass the TNMM as well.

The profit level indicator ("PLI") selected for the CPM/TNMM analysis is the operating profit margin, defined as operating income divided by net revenue. The operating profit margin was selected as the most appropriate PLI because it is sensitive to both the revenue earned and the cost structure of the entity, and it captures the effect of the CSA cost-sharing payments—which are included in PBI's operating costs—on PBI's overall profitability. Changes in the CSA cost-sharing ratios directly affect PBI's operating profit margin: higher cost-sharing percentages increase PBI's costs and reduce its operating margins, while lower cost-sharing percentages decrease PBI's costs and increase its operating margins. The CPM/TNMM therefore provides a direct test of whether the cost-sharing ratios produce arm's-length results.

The CPM/TNMM tests PBI as the tested party, comparing PBI's operating profit margin against those of comparable uncontrolled companies performing similar IP-holding, commercialization, regulatory, and distribution functions in the pharmaceutical industry. If PBI's operating margins fall within the arm's-length interquartile range of operating margins observed among comparable companies, the cost-sharing ratios underlying those margins are confirmed as producing arm's-length results. Conversely, if the IRS's proposed increased cost-sharing ratios would compress PBI's margins below the arm's-length range, the proposed ratios are shown to be inconsistent with arm's-length results.

D. Comparable Company Search and Selection

WVG conducted a comprehensive search for comparable uncontrolled companies using financial databases, public filings, and industry publications. The search was designed to identify independent companies performing functions, employing assets, and bearing risks comparable to those of PBI, as described in Section III.B above. The search criteria applied were as follows:

• Industry: Pharmaceutical and/or biotechnology companies, classified under SIC codes 2833–2836, NAICS codes 325411–325414, or equivalent industry classification codes.

• Functions: Companies performing functions similar to PBI's DEMPE profile, including IP management, commercialization, regulatory submissions, marketing, distribution coordination, and pricing decisions. Both IP-holding entities and pharmaceutical distributors with DEMPE-like functions were included in the search universe.

• Geographic Focus: Companies with operations focused on EMEA (Europe, Middle East, and Africa) and/or APAC (Asia-Pacific) territories, consistent with PBI's non-Americas geographic focus.

• Public Financial Data: Companies with publicly available financial data for at least three of the four examination years (2017–2020), enabling the calculation of operating profit margins.

• Independence: Companies that are independent entities, not subsidiaries or divisions of larger multinational groups to the extent that related-party transactions would distort operating margins. Companies with significant controlled transactions (exceeding 25% of total revenue from related parties) were excluded unless sufficient segmented data was available to isolate the effects of such transactions.

• Financial Viability: Companies that were not in bankruptcy, liquidation, or start-up mode during the examination period, as the financial results of such companies would not be representative of arm's-length conditions.

The search process proceeded in stages, beginning with a broad universe of pharmaceutical companies identified through the Bureau van Dijk Orbis and Drayton Services Inc. databases, and progressively narrowing the set through application of the foregoing criteria. Each candidate company was subjected to a detailed review of its annual reports, financial statements, product portfolio, geographic focus, and functional profile. Companies that did not satisfy the comparability criteria upon detailed review were excluded from the final sample.

Following this process, WVG identified a final sample of 22 comparable companies. The sample includes IP-holding entities and pharmaceutical companies with DEMPE-like functions operating primarily in EMEA and APAC markets. The sample represents a diverse cross-section of the pharmaceutical industry, including companies commercializing oncology products, specialty therapeutics, and generics/biosimilars, with a range of functional intensity from distribution-focused entities to entities performing significant IP management, regulatory, and commercial functions.

Comparability adjustments were applied to the operating margins of certain comparable companies to account for identified differences in functional intensity, asset base, and risk profile relative to PBI. These adjustments included working capital adjustments (to account for differences in accounts receivable, inventory, and accounts payable levels that affect operating margins) and, where appropriate, adjustments for differences in the level of R&D expenditure.

E. Results of CPM/TNMM Analysis

The results of WVG's CPM/TNMM analysis, based on the 22 comparable companies identified and adjusted as described above, are presented below. The interquartile range of operating profit margins for the comparable companies, and PBI's actual operating profit margins for each examination year, are as follows:

As demonstrated in the foregoing table, PBI's actual operating profit margins fell within the arm's-length interquartile range in all four examination years (TY 2017–2020). PBI's margins are consistently above the median of the comparable companies, which is consistent with PBI's role as an IP-holding principal performing significant DEMPE functions and bearing substantial commercialization risk.

This result directly corroborates the accuracy and arm's-length character of the CSA cost-sharing ratios applied by PPC (38.2% to 42.7% for PBI's share). The cost-sharing ratios produce PBI operating margins that fall within the arm's-length range observed among comparable independent companies performing similar functions and bearing similar risks.

Conversely, the IRS's proposed increased cost-sharing percentages (48.2% to 53.7%) would significantly increase PBI's costs, compressing PBI's operating margins to levels below the arm's-length interquartile range. WVG computed PBI's pro forma operating margins under the IRS's proposed cost-sharing ratios as follows:

Under the IRS's proposed cost-sharing ratios, PBI's operating margins would fall below the arm's-length range in every year, producing results that are inconsistent with the returns an independent company performing PBI's functions and bearing PBI's risks would expect to earn. This outcome demonstrates that the IRS's proposed adjustments would produce a result that is less consistent with the arm's-length standard than PPC's reported results—precisely the opposite of what an adjustment under IRC § 482 should achieve.

F. Analysis of Reasonably Anticipated Benefits (RAB) Projections

Treas. Reg. § 1.482-7(e)(1) requires that each participant's share of intangible development costs under a qualified CSA be proportional to its share of reasonably anticipated benefits from the CSA activity. The RAB shares are determined based on projections of the benefits that each participant expects to derive from the CSA, measured by reference to projected income or revenue from the exploitation of the developed IP.

PPC's RAB projections, which underpin the cost-sharing ratios applied during the examination period, were based on actual and projected revenue splits between the Americas and non-Americas territories for each product covered by the CSA. The revenue projections were prepared contemporaneously by PPC's strategic planning group and were based on a bottom-up analysis of product-by-product revenue expectations, incorporating assumptions about market size, market penetration, pricing, competitive dynamics, patent life, and regulatory timelines in each territory.

The actual non-Americas share of global revenue for PBI's three key products during the examination period validates the RAB shares underpinning PBI's cost-sharing percentages:

These actual revenue distributions are consistent with the RAB shares used to determine PBI's cost-sharing percentages of 38.2% to 42.7%. The modest difference between the actual revenue shares (42%–45%) and the cost-sharing percentages reflects the fact that the RAB methodology incorporates forward-looking projections that account for expected growth trajectories and discount rates across territories, as permitted under the regulations. The key point is that the actual data corroborates the reasonableness of the projections at the time they were made, a standard required under the regulations.

The IRS's proposed cost-sharing percentages of 48.2% to 53.7% imply RAB shares for the non-Americas territory that are significantly higher than actual revenue distributions. The IRS has not demonstrated that the non-Americas territory's share of reasonably anticipated benefits exceeds the approximately 42%–45% range reflected in actual results. The IRS's proposed percentages are therefore inconsistent with both contemporaneous projections and actual market data.

G. Critique of the IRS's Position on Cost-Sharing Ratios

The IRS asserts that PPC's RAB methodology understates the value properly allocable to PPC's Americas territory, and that PBI should bear a commensurately higher share of R&D costs. WVG's analysis demonstrates that this assertion is not supported by the available evidence:

1. PPC's Projections Were Reasonable at the Time Made. Treas. Reg. § 1.482-7(e)(1) requires that RAB shares be based on projections that are reasonable at the time made, taking into account all available information. PPC's contemporaneous projections were prepared using standard pharmaceutical industry forecasting methodologies, were reviewed and approved by senior management, and were consistent with projections used for other business purposes (e.g., budgeting, investor guidance, and strategic planning). The reasonableness of these projections is further confirmed by the fact that actual results during the examination period closely tracked the projected revenue distributions.

2. The IRS's Proposed Percentages Lack Support in Comparable Company Data. The IRS has not provided comparable company data or benchmarking analysis supporting the proposition that cost-sharing percentages of 48.2% to 53.7% would produce arm's-length results for an entity with PBI's functional profile. As demonstrated in Section III.E above, the IRS's proposed percentages would compress PBI's operating margins below the arm's-length range.

3. Application of the IRS's Proposed Ratios Produces Below-Arm's-Length Results. The CPM/TNMM analysis demonstrates that PBI's pro forma operating margins under the IRS's proposed cost-sharing ratios would fall below the lower quartile of the arm's-length range in every examination year. This result is inconsistent with PBI's functional and risk profile as IP owner and principal, and confirms that the IRS's proposed ratios do not satisfy the arm's-length standard.

H. Conclusion on CPM/TNMM Analysis

Based on the foregoing analysis, WVG concludes that PBI's operating margins fall within the arm's-length interquartile range in all four examination years (TY 2017–2020), based on a CPM/TNMM analysis using 22 comparable companies. PPC's CSA cost-sharing ratios of 38.2% to 42.7% for PBI's share produce arm's-length results. The IRS's proposed increased ratios of 48.2% to 53.7% would compress PBI's margins below the arm's-length range, producing results inconsistent with PBI's functional and risk profile.

No adjustment to the CSA cost-sharing percentages is warranted under IRC § 482 or Treas. Reg. § 1.482-7. The IRS's proposed adjustment of $235.01 million is without merit and should be withdrawn in its entirety.

IV. INCOME METHOD / DCF ANALYSIS — PLATFORM CONTRIBUTION TRANSACTION (PCT) VALUATION

A. Background and Transaction Description

Effective July 1, 2012, PBI entered into the qualified CSA with PPC, acquiring the right to develop and exploit PPC's pharmaceutical IP portfolio outside the Americas. PBI was incorporated on March 15, 2012, approximately three and one-half months prior to the commencement of the CSA. As part of the CSA, PBI was required to compensate PPC for the pre-existing IP contributed by PPC to the CSA as of the effective date. This compensation took the form of a platform contribution transaction ("PCT") payment.

The pre-existing IP contributed by PPC to the CSA as of July 1, 2012, consisted primarily of clinical-stage and approved oncology compounds and specialty therapeutics, along with associated know-how, trade secrets, manufacturing processes, and regulatory data packages. The contributed IP represented the foundation upon which subsequent CSA-funded R&D activities would build.

PBI made a PCT payment of $312 million to PPC on July 1, 2012, representing the arm's-length value of PBI's buy-in to the pre-existing IP for the non-Americas territory. The $312 million PCT payment was determined based on a contemporaneous DCF analysis performed by PPC's transfer pricing advisors at the time of the CSA's inception.

The IRS, through the NOPA, asserts that the $312 million PCT payment undervalued the pre-existing IP by approximately $540 million. The IRS values the PCT at $852 million, based on an income method / DCF analysis performed by IRS economist Dr. Alan Washburne using a weighted average cost of capital ("WACC") of 7.2% and revenue projections that WVG considers materially more aggressive than the projections supported by contemporaneous evidence.

Although TY 2012 is outside the examination years at issue (TY 2017–2020), the IRS's PCT valuation is relevant to this Protest because the IRS seeks to recharacterize ongoing CSA cost-sharing ratios and royalty rates for TY 2017–2020 based on the alleged PCT undervaluation. The IRS's theory is that the $312 million PCT payment reflects a systematic undervaluation of non-Americas IP that also manifests in the cost-sharing ratios and royalty rates during the examination period. WVG's PCT valuation analysis therefore serves to refute this premise and to demonstrate that the overall CSA framework, including the PCT payment, is consistent with arm's-length principles.

B. Methodology — Income Method / DCF Under Treas. Reg. § 1.482-7(g)(4)

The income method, specifically a discounted cash flow ("DCF") approach, is the method specified in Treas. Reg. § 1.482-7(g)(4) for valuing PCT payments. Under the income method, the arm's-length PCT payment is determined by estimating the present value of the stream of future benefits that the PCT payor (i.e., PBI) is expected to derive from the pre-existing IP contributed to the CSA, discounted at an appropriate rate that reflects the riskiness of those projected cash flows.

WVG performed an independent DCF valuation of the pre-existing IP contributed by PPC to the CSA, using the following key inputs:

1. Projected Revenue Streams. WVG projected the future revenue streams that PBI would derive from the contributed IP in the non-Americas territory. The revenue projections were based on PPC's contemporaneous business plans and strategic projections as of July 2012, validated and where necessary adjusted based on actual results through the end of TY 2020. The projection period extended through the estimated useful life of the contributed IP.

2. Projected Operating Costs. WVG projected the operating costs associated with commercializing the contributed IP in the non-Americas territory, including cost of goods sold (based on PMI's cost-plus manufacturing arrangements), regulatory expenditures, commercial and marketing costs, and selling, general, and administrative expenses. These cost projections were developed based on PBI's actual cost structure and comparable industry benchmarks.

3. Tax Rates. WVG incorporated applicable tax rates into the after-tax cash flow projections, including Ireland's standard trading rate of 12.5% and the Knowledge Development box ("KDB") rate of 6.25%, which became applicable beginning in FY 2016. The blended effective tax rate was applied based on the proportion of PBI's income qualifying for the KDB rate.

4. Useful Life of Contributed IP. WVG estimated the useful life of the contributed IP based on the remaining patent lives, regulatory exclusivity periods, and expected product lifecycles of the individual compounds included in the contributed portfolio. The weighted average useful life of the contributed IP was estimated at approximately 12 years from the CSA effective date.

5. Discount Rate / WACC. WVG determined an appropriate WACC for discounting PBI's projected cash flows from the contributed IP, as described in detail in Section IV.C below.

The DCF model projected PBI's net after-tax cash flows from the contributed IP for each year of the projection period, discounted those cash flows to present value as of July 1, 2012, and summed the present values to determine the arm's-length PCT payment.

C. Discount Rate / WACC Analysis

The discount rate is one of the most critical inputs to any DCF valuation, and the selection of an appropriate WACC is a primary area of disagreement between WVG and the IRS economist. WVG determined an appropriate WACC of 9.8% for discounting PBI's projected cash flows from the contributed IP. The IRS applied a WACC of 7.2%. The 2.6 percentage point difference between these two rates accounts for a substantial portion of the divergence in PCT valuations.

WVG's WACC of 9.8% was determined using the following components and methodology:

Cost of Equity. The cost of equity was derived using the Capital Asset Pricing Model ("CAPM"), which calculates the expected return on equity as:

Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium + Size Premium + Additional Risk Premiums

The risk-free rate was based on the yield on 20-year U.S. Treasury bonds as of July 1, 2012. The equity risk premium was based on the long-horizon equity risk premium reported by Westmark Consulting Group (now Sundial Advisors) for the relevant period. The beta was derived from a set of pharmaceutical-industry-specific comparable companies with risk profiles similar to PBI's, specifically specialty pharmaceutical and biotech companies with meaningful exposure to regulatory and clinical development risk. WVG's beta selection focused on companies in the specialty pharmaceutical and oncology subsectors, which are characterized by higher volatility and risk than the broader pharmaceutical industry. A size premium was applied based on PBI's market capitalization equivalent at inception. Country risk premiums for the non-Americas territory were also incorporated, reflecting the additional risk associated with commercializing pharmaceutical products across 68 country markets with varying regulatory frameworks, reimbursement systems, and economic conditions. Finally, a technology risk premium was applied to reflect the specific risks associated with pharmaceutical IP, including the risk of clinical failure for pipeline products, the risk of generic competition, and the risk of adverse regulatory actions.

Cost of Debt. The cost of debt was based on PPC's and comparable companies' actual and estimated borrowing costs at the time of the CSA inception, calculated as the weighted average yield-to-maturity on outstanding senior unsecured debt obligations of comparable investment-grade pharmaceutical companies. An adjustment was made for the tax deductibility of interest expense.

Capital Structure Weighting. The cost of equity and cost of debt were weighted based on pharmaceutical-industry norms for capital structure, as reflected in the debt-to-equity ratios of the comparable companies used in the beta derivation.

Summary of WACC Components:

WVG considers the IRS's WACC of 7.2% to be inappropriately low for the following reasons:

(i) Inflation of Present Value. A lower discount rate increases the present value of projected cash flows, thereby artificially inflating the PCT value. The mathematical effect of a 2.6 percentage point reduction in the discount rate, compounded over a 12-year projection period, is significant and accounts for a substantial portion of the difference between WVG's and the IRS's PCT valuations.

(ii) Failure to Incorporate Ph

EXHIBIT C
SUMMARY OF ECONOMIC ANALYSES IN SUPPORT OF PENTERRA PHARMACEUTICALS CORP.'S TRANSFER PRICING POSITIONS (TY 2017–2020)
Comparable Uncontrolled Transaction (CUT) Analysis Comparable Profits Method (CPM) / Transactional Net Margin Method (TNMM) Analysis Income Method / Discounted Cash Flow (DCF) Analysis
Filed as Exhibit C to the Formal Protest of Penterra Pharmaceuticals Corp. (EIN: 22-3741856) Dated December 22, 2023
IRS Exam Team ID: LB&I-NE-TP-2022-00641 Tax Years at Issue: 2017, 2018, 2019, 2020
Prepared by:
Whitmore Valuation Group LLC 200 Ashbury Asset Advisors, Suite 700 Boston, Massachusetts 02109
Under Direction of Counsel Calderwood & Harkness LLP Matter No. 1018-00009
Pursuant to Kovel Arrangement Reference: 1018-00009-KV, dated June 20, 2022
Lead Economist: Dr. Helena Vasquez, Ph.D., Managing Director Supporting Economist: Dr. Rohan Chakrabarti, Ph.D., Senior Director
This Exhibit summarizes the economic analyses performed by Whitmore Valuation Group LLC ("WVG" or "Whitmore"). The underlying full reports, workpapers, and supporting data have been produced separately and are listed in Section VII of this Exhibit. This document has been prepared at the direction of counsel under a Kovel arrangement and is subject to attorney-client privilege and work-product protection. Nothing herein should be construed as a waiver of any applicable privilege.
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I. INTRODUCTION AND PURPOSE
A. Overview of the Engagement
Whitmore Valuation Group LLC ("WVG" or "Whitmore") was retained by Calderwood & Harkness LLP, outside tax counsel to Penterra Pharmaceuticals Corp. ("PPC" or the "Taxpayer"), under a Kovel arrangement executed on June 20, 2022, bearing Reference No. 1018-00009-KV. The Kovel arrangement was structured in accordance with the principles set forth in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), such that WVG's engagement falls within the scope of the attorney-client privilege and work-product doctrine, as all economic analyses were performed under the direction of, and for the purpose of rendering legal advice by, Calderwood & Harkness LLP to its client, PPC.
The purpose of WVG's engagement was to perform independent economic analyses, benchmarking studies, and expert evaluations supporting PPC's transfer pricing positions with respect to intercompany transactions between PPC and its Irish subsidiary, Penterra Biopharma International DAC ("PBI"), a Designated Activity Company organized and tax-resident in Ireland. The intercompany transactions at issue encompass a qualified cost-sharing arrangement ("CSA"), an intercompany license agreement covering legacy pharmaceutical intellectual property, and a platform contribution transaction ("PCT") payment made at the inception of the CSA.
WVG's analyses were conducted in accordance with applicable professional standards and the requirements of the Internal Revenue Code ("IRC"), Treasury Regulations, and relevant guidance, including the arm's-length standard set forth in IRC § 482 and Treas. Reg. § 1.482-1 et seq. The analyses address the three principal categories of adjustment proposed in the Internal Revenue Service's ("IRS") Notice of Proposed Adjustment ("NOPA") dated October 12, 2023, which collectively total $380.4 million in proposed adjustments across Tax Years ("TY") 2017 through 2020.
This Exhibit C provides a summary of the methodologies employed, the data gathered and analyzed, the results obtained, and the conclusions drawn by WVG. The complete underlying reports, workpapers, data sets, and supporting documentation have been produced separately in connection with the IRS examination and are catalogued in Section VII of this Exhibit. WVG's analyses were led by Dr. Helena Vasquez, Ph.D., Managing Director of WVG, with supporting analysis conducted by Dr. Rohan Chakrabarti, Ph.D., Senior Director of WVG. The qualifications and relevant experience of each economist are set forth in Section VI below.
B. Summary of IRS Proposed Adjustments Addressed
The NOPA dated October 12, 2023, proposes three categories of adjustments to PPC's taxable income for TY 2017 through 2020. WVG's economic analyses are directed at each of these categories, as summarized below:
1. CSA Cost-Sharing Ratio Adjustments — $235.01 Million. The IRS proposes increasing PBI's share of qualified cost-sharing payments under the CSA by approximately 8 to 12 percentage points across each of the four examination years. The IRS asserts that PPC's projections of reasonably anticipated benefits ("RAB") understated the value properly allocable to PPC's Americas territory, thereby understating PBI's required cost-sharing contribution. This proposed adjustment totals $235.01 million across TY 2017–2020.
2. Legacy IP Royalty Rate Adjustments — $188.04 Million. The IRS proposes increasing the intercompany royalty rate charged by PPC to PBI for the license of certain pre-2012 legacy pharmaceutical compounds from the contractual rate of 4.5% of net sales to a rate of 11.0% of net sales. The IRS's proposed rate is based on a set of purportedly comparable transactions selected by the IRS economist. This proposed adjustment totals $188.04 million across TY 2017–2020.
3. Correlative Offset — ($42.65 Million). The IRS has allowed a correlative offset of $42.65 million, reflecting the income tax consequences of the increased cost-sharing payments and royalty payments on PBI's income, as well as related adjustments.
4. Net Proposed Adjustment — $380.40 Million. The net proposed adjustment across all three categories totals $380.40 million for TY 2017–2020, calculated as follows:
The three economic analyses summarized herein—a Comparable Uncontrolled Transaction ("CUT") analysis of the legacy IP royalty rate, a Comparable Profits Method ("CPM") / Transactional Net Margin Method ("TNMM") analysis of PBI's operating margins and the CSA cost-sharing ratios, and an Income Method / Discounted Cash Flow ("DCF") analysis of the PCT payment—collectively demonstrate that PPC's transfer pricing methodologies and results are consistent with the arm's-length standard under IRC § 482 and the applicable Treasury Regulations. No adjustments to PPC's transfer pricing positions are warranted, and the proposed adjustments totaling $380.40 million should be withdrawn in their entirety.
C. Regulatory Framework
WVG's economic analyses were performed within the regulatory framework governing transfer pricing under U.S. federal income tax law. The principal authorities applicable to the intercompany transactions at issue are summarized below:
IRC § 482 and the Arm's-Length Standard. IRC § 482 authorizes the Secretary to allocate income, deductions, credits, or allowances among two or more organizations, trades, or businesses owned or controlled by the same interests, in order to prevent evasion of taxes or clearly reflect the income of such entities. The operative standard is the arm's-length standard, which requires that the results of controlled transactions be consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances. See Treas. Reg. § 1.482-1(b)(1).
Treas. Reg. § 1.482-1(d) — Best Method Rule. The best method rule requires that the method selected to determine the arm's-length result be the one that provides the most reliable measure of an arm's-length result under the facts and circumstances of the particular transaction. The reliability of the result depends on the degree of comparability between the controlled transaction and any uncontrolled comparables, and the quality of the data and assumptions used in the analysis. WVG's selection of the CUT, CPM/TNMM, and income method/DCF approaches for the respective transactions was guided by this rule.
Treas. Reg. § 1.482-4 — Methods for Intangible Property. The regulations governing transfers of intangible property set forth multiple methods for determining the arm's-length consideration for such transfers, including the CUT method under Treas. Reg. § 1.482-4(c), the comparable profits method under Treas. Reg. § 1.482-4(d) (by reference to § 1.482-5), and the profit split method. The CUT method, which is the primary method applied by WVG to evaluate the legacy IP royalty rate, identifies comparable uncontrolled transactions involving similar intangible property under similar circumstances and uses the royalty rates or other consideration in those transactions to test the arm's-length character of the controlled transaction.
Treas. Reg. § 1.482-7 — Qualified Cost-Sharing Arrangements. The regulations governing qualified CSAs prescribe rules for determining cost-sharing contributions based on reasonably anticipated benefits, as well as for determining arm's-length PCT payments for pre-existing intangible property contributed to the CSA. Treas. Reg. § 1.482-7(e)(1) requires that each participant's share of intangible development costs be proportional to its share of reasonably anticipated benefits from the CSA activity. Treas. Reg. § 1.482-7(g)(4) specifies the income method as a method for determining the arm's-length PCT payment.
OECD Transfer Pricing Guidelines. Although the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the "OECD Guidelines") are not binding on the IRS or U.S. courts, they constitute persuasive authority and are frequently referenced in transfer pricing analyses. WVG's analyses are consistent with the principles articulated in the OECD Guidelines, particularly Chapter VI (Special Considerations for Intangibles), Chapter VIII (Cost Contribution Arrangements), and Chapter II (Transfer Pricing Methods), as set forth in both the 2017 and 2022 revisions of those Guidelines.
D. Structure of This Exhibit
This Exhibit is organized into the following sections:
• Section II presents the CUT analysis evaluating the arm's-length character of PPC's 4.5% royalty rate for the license of legacy pharmaceutical IP to PBI.
• Section III presents the CPM/TNMM analysis evaluating PBI's operating margins for TY 2017–2020 and the implications for the CSA cost-sharing ratios.
• Section IV presents the income method / DCF analysis evaluating the arm's-length character of the $312 million PCT payment made by PBI at the inception of the CSA.
• Section V summarizes the conclusions from all three analyses and addresses the proposed adjustments in the aggregate.
• Section VI sets forth the qualifications of the economists who performed the analyses.
• Section VII lists the supporting exhibits and workpapers referenced throughout this Exhibit.
II. COMPARABLE UNCONTROLLED TRANSACTION (CUT) ANALYSIS — LEGACY IP ROYALTY RATE
A. Background and Transaction Description
PBI licenses certain legacy pharmaceutical compounds from PPC pursuant to an intercompany license agreement (the "Legacy License Agreement") originally executed on July 1, 2012, and amended effective January 1, 2015. The Legacy License Agreement covers pre-2012 vintage compounds—i.e., pharmaceutical products that were approved and commercially available prior to the inception of the CSA and that are not subject to the CSA's cost-sharing provisions. These legacy compounds consist primarily of mature specialty therapeutics and oncology compounds that were first commercialized between 2003 and 2011.
Under the Legacy License Agreement, PBI pays PPC a royalty of 4.5% of net sales generated in the non-Americas territory (i.e., all territories worldwide excluding North America, Central America, South America, and the Caribbean). The royalty rate was established based on a benchmarking analysis conducted by PPC's contemporaneous transfer pricing advisors at the time of the agreement's execution, and was maintained throughout the examination period.
Legacy compound net sales in the non-Americas territory during the examination period, and the corresponding royalty payments to PPC, were as follows:
The declining sales trend evident in this data reflects the natural product lifecycle of mature, pre-2012 compounds. These compounds have faced increasing competition from generic entrants in multiple non-Americas markets, patent expirations, and the ongoing transition of prescribing patterns toward newer therapeutic alternatives. This declining trajectory is a critical comparability factor, as it demonstrates that the legacy compounds in question are in the late stages of their commercial lifecycle—a characteristic that bears directly on the appropriate royalty rate.
The IRS, through its NOPA dated October 12, 2023, proposes increasing the intercompany royalty rate from 4.5% to 11.0% of net sales. The IRS's proposed rate is based on a CUT analysis conducted by IRS economist Dr. Alan Washburne, who selected a different set of purportedly comparable transactions to support the higher rate. The IRS's proposed adjustment, calculated as the differential between the 11.0% proposed rate and the 4.5% contractual rate (a 6.5 percentage point increase) applied to PBI's non-Americas net sales, totals $188.04 million across the four examination years, as follows:
WVG's CUT analysis, summarized below, demonstrates that PPC's 4.5% royalty rate is within the arm's-length range and that the IRS's proposed 11.0% rate is not supportable.
B. Methodology — CUT Method Under Treas. Reg. § 1.482-4(c)
WVG selected the CUT method as the best method for evaluating the arm's-length character of the legacy IP royalty rate, in accordance with the best method rule set forth in Treas. Reg. § 1.482-1(d). The CUT method is described in Treas. Reg. § 1.482-4(c), which provides that the arm's-length royalty for a controlled transfer of intangible property is determined by reference to the amount charged in comparable uncontrolled transactions.
The CUT method was selected as the best method for the following reasons:
First, the availability of sufficiently comparable third-party pharmaceutical license agreements involving similar intangible property categories supported the application of the CUT method with a high degree of reliability. The pharmaceutical industry has a long-established practice of licensing commercial-stage compounds on a territorial basis, and the terms of such licenses—including royalty rates, exclusivity provisions, and territorial scope—are frequently disclosed in public filings, regulatory submissions, and industry databases. This availability of comparable data distinguishes the CUT method from alternative methods for which data quality or functional comparability may be more limited.
Second, the nature of the controlled transaction—a straightforward, territory-based license of approved pharmaceutical compounds in exchange for a running royalty—is well-suited to the CUT method. The Legacy License Agreement does not involve complex bundled services, equity participations, milestone payments, or other non-royalty compensation elements that would complicate the identification of comparable transactions or require extensive adjustments.
Third, the comparability factors specified in Treas. Reg. § 1.482-4(c)(2) were analyzed and found to be satisfied to a degree that supports a high level of reliability. These comparability factors include:
(i) The nature of the intangible property, including whether it involves the same general type of product or process;
(ii) The stage of development of the intangible at the time of the transaction—here, approved, commercial-stage compounds, as distinguished from preclinical or clinical-stage compounds;
(iii) The exclusivity of the rights granted under the license;
(iv) The geographic scope of the license—here, a territory-based license for the non-Americas territory;
(v) The contractual terms, including the duration of the license, sublicensing rights, and termination provisions;
(vi) The economic conditions prevailing at the time of the transaction, including competitive dynamics and market conditions in the relevant therapeutic areas; and
(vii) The risk allocation between licensor and licensee, including the assumption of commercialization risk, regulatory risk, and market risk by the licensee.
Each of these factors was systematically evaluated for each comparable transaction identified in WVG's search, as described below.
C. Comparable Transaction Search and Selection
WVG conducted a comprehensive search for comparable uncontrolled pharmaceutical license agreements using multiple data sources. The search encompassed the following databases and information sources:
• Greaves Services Inc. Database: A proprietary database of licensing agreements extracted from SEC filings, containing detailed information on royalty rates, territorial scope, exclusivity, and other contractual terms.
• Sundial Health IT Royalty Rate Database: A subscription-based database of over 15,000 licensing agreements across multiple industries, including pharmaceutical and biotechnology licenses.
• SEC EDGAR Filings: Direct searches of publicly filed agreements (Form 10-K, 10-Q, 8-K, and exhibits thereto) for pharmaceutical companies disclosing the terms of third-party licensing arrangements.
• WVG Proprietary Database: WVG's internally maintained database of pharmaceutical licensing agreements compiled from prior engagements, public disclosures, and industry publications.
• Industry Publications and Surveys: Published royalty rate surveys and industry reports from organizations such as the Licensing Executives Society (LES), Medius Associates, and Ridgeway Group.
From the initial universe of pharmaceutical license agreements identified through these sources, WVG applied a systematic set of screening criteria to identify the most comparable transactions. The screening criteria were designed to isolate agreements that are functionally, contractually, and economically comparable to the Legacy License Agreement between PPC and PBI. The screening criteria and results of each filtering step are summarized below:
Step 1: Industry Focus — Pharmaceutical / Biotechnology. WVG limited the search to license agreements involving pharmaceutical or biotechnology intangible property. Agreements involving medical devices, diagnostics, agricultural biotechnology, or other non-pharmaceutical intangibles were excluded. This initial screening reduced the universe to approximately 1,240 agreements.
Step 2: Approved (Marketed) Compounds. WVG limited the search to licenses involving compounds that had received regulatory approval and were being commercially marketed at the time the license was executed. This criterion is critical because PPC's legacy compounds are mature, approved products, and the royalty rates for licensed approved compounds differ materially from those applicable to preclinical or clinical-stage compounds, which carry substantially higher development risk and correspondingly higher royalty-rate expectations to compensate for that risk. Agreements involving exclusively preclinical or clinical-stage compounds were excluded. This step reduced the universe to approximately 390 agreements.
Step 3: Territory-Based Licenses. WVG limited the search to licenses granting territorial rights (e.g., EMEA, Asia-Pacific, or specific country groupings), consistent with the non-Americas territorial scope of the Legacy License Agreement. Worldwide licenses were excluded, as the economics of a worldwide license differ significantly from those of a territorial license due to differences in market access, regulatory requirements, and competitive dynamics. This step reduced the universe to approximately 145 agreements.
Step 4: Royalty-Based Compensation. WVG limited the search to licenses in which the consideration included a running royalty calculated as a percentage of net sales. Agreements providing for lump-sum payments, equity stakes, or purely milestone-based compensation without a running royalty component were excluded. Agreements with hybrid structures (running royalties plus milestones) were retained provided the running royalty component was separately identifiable and quantifiable. This step reduced the universe to approximately 87 agreements.
Step 5: Arm's-Length Transactions Between Unrelated Parties. WVG excluded any agreements between related parties or entities under common ownership or control, retaining only agreements between unrelated, independent parties. This step reduced the universe to approximately 72 agreements.
Step 6: Temporal Relevance. WVG limited the search to agreements executed within a reasonable time frame relative to the examination period—specifically, agreements executed between January 1, 2010, and December 31, 2020. Agreements executed outside this window were excluded to ensure that the economic conditions reflected in the comparable agreements are sufficiently similar to those prevailing during the examination period. This step reduced the universe to approximately 48 agreements.
Step 7: Detailed Comparability Review. The remaining 48 agreements were subjected to a detailed comparability review, during which each agreement was evaluated against the full set of comparability factors enumerated in Treas. Reg. § 1.482-4(c)(2). Agreements that exhibited material differences from the Legacy License Agreement in terms of the nature of the intangible (e.g., involving fundamentally different therapeutic areas with different risk-return profiles), the contractual terms (e.g., short-term licenses of fewer than three years), or the risk allocation (e.g., agreements in which the licensor retained significant commercialization obligations) were excluded from the final sample. Following this detailed review, 14 comparable uncontrolled pharmaceutical license agreements were identified and retained for the final CUT analysis.
Comparability Adjustments. Where necessary and appropriate, WVG applied quantitative comparability adjustments to the royalty rates observed in the 14 comparable agreements to account for identified differences in comparability factors between the comparable transactions and the controlled transaction. Adjustments were applied to account for the following factors:
• Exclusivity: Certain comparable agreements involved non-exclusive licenses, whereas the Legacy License Agreement grants PBI exclusive rights in the non-Americas territory. Non-exclusive licenses typically command lower royalty rates; accordingly, WVG made upward adjustments to the royalty rates observed in non-exclusive agreements to account for this difference.
• Territory Scope: Certain comparable agreements covered a narrower or broader geographic territory than the non-Americas territory. WVG made adjustments based on the relative revenue potential of the licensed territories using publicly available market data from Tidewater Holdings and other industry sources.
• Stage of Product Lifecycle: Certain comparable agreements involved compounds at somewhat earlier stages of their commercial lifecycle than PPC's legacy compounds. WVG made downward adjustments to the royalty rates observed in agreements involving earlier-stage marketed compounds to account for the remaining patent life and growth potential differential.
• Volume: Certain comparable agreements contained volume-based royalty tiers or caps. WVG adjusted for differences in sales volume to ensure that the royalty rates used in the analysis reflected comparable revenue levels.
All adjustments were documented in the full CUT Analysis Report and supporting workpapers, which have been produced separately.
D. Results of CUT Analysis
The results of WVG's CUT analysis, based on the 14 comparable uncontrolled pharmaceutical license agreements identified and adjusted as described above, are as follows:
PPC's intercompany royalty rate of 4.5% of net sales for the Legacy License Agreement falls squarely within the arm's-length interquartile range of 3.1% to 6.8%. Indeed, PPC's rate of 4.5% is essentially at the median of 4.4% and only marginally below the mean of 4.6% observed across the 14 comparable transactions. This result provides strong confirmation that PPC's royalty rate is an arm's-length rate, consistent with the rates that unrelated parties would charge in comparable licensing transactions for mature, approved pharmaceutical compounds in territorial markets.
By contrast, the IRS's proposed royalty rate of 11.0% falls well above the maximum royalty rate (9.2%) observed in any of the 14 comparable transactions, and far exceeds the upper quartile of the interquartile range (6.8%). The IRS's proposed rate is therefore inconsistent with the arm's-length standard as measured by the CUT method, and represents a result that no uncontrolled parties, transacting at arm's length under comparable circumstances, would reach for a license of mature, approved pharmaceutical compounds in a territorial market.
The consistency of PPC's 4.5% rate with the arm's-length range is robust across the examination period, notwithstanding the declining trend in legacy compound net sales. The declining sales trajectory is, in fact, an additional factor supporting PPC's rate: as the legacy compounds move further into their lifecycle decline, the remaining value of the licensed intangible property diminishes, which would be expected to result in royalty rates at or below the median of the comparables—precisely the result observed.
E. Critique of the IRS's CUT Selection
The IRS's proposed 11.0% royalty rate is based on a CUT analysis performed by IRS economist Dr. Alan Washburne, who selected a different and significantly narrower set of purportedly comparable transactions. WVG has reviewed Dr. Washburne's analysis in detail and has identified multiple material deficiencies that undermine the reliability of the IRS's CUT selection and the resulting 11.0% rate. These deficiencies are summarized below and are addressed at greater length in WVG's separate Rebuttal of IRS Economist's Analysis, dated January 2024.
1. Inclusion of Early-Stage (Clinical) Compound Agreements. Dr. Washburne's comparables include several agreements involving compounds that were in clinical development (i.e., Phase II or Phase III clinical trials) at the time of the license, rather than approved, commercially marketed products. Royalty rates for clinical-stage compounds are systematically higher than royalty rates for approved compounds because the licensee assumes significantly greater development risk—including the risk of clinical failure, regulatory rejection, and delayed market entry. The inclusion of clinical-stage agreements in the comparable set artificially inflates the observed range of royalty rates and produces an upwardly biased result. PPC's legacy compounds, by contrast, were all approved and commercially marketed prior to the execution of the Legacy License Agreement, and the appropriate benchmark is the royalty rate for approved compounds, not for development-stage compounds.
2. Inclusion of Worldwide License Agreements Without Adjustments. Dr. Washburne's comparables include several worldwide license agreements—i.e., agreements granting the licensee rights across all global territories, including the United States. Worldwide licenses typically command higher royalty rates than territory-based licenses because the licensee acquires access to the U.S. market, which is the largest and most profitable pharmaceutical market in the world and represents a disproportionate share of global pharmaceutical revenue. The inclusion of worldwide agreements without appropriate downward adjustments to account for the exclusion of the Americas territory in PBI's license is a material comparability flaw that biases the IRS's analysis upward.
3. Failure to Adjust for Exclusivity and Volume Tiers. Several of Dr. Washburne's comparables involve exclusive licenses with volume-based royalty escalation clauses, milestone payments, or other contractual features that are not present in the Legacy License Agreement. Dr. Washburne did not apply adjustments to account for these differences, resulting in royalty rates that reflect the combined effect of exclusivity, milestones, and volume tiers rather than a simple running royalty on a flat-rate basis. This failure to adjust for contractual differences further undermines the comparability of the IRS's selected transactions.
4. Inclusion of Bundled Service Agreements. Certain of Dr. Washburne's comparables involve license agreements that are bundled with co-promotion, co-development, or joint venture arrangements, under which the licensor provides substantial ongoing services to the licensee in addition to granting IP rights. The inclusion of these agreements inflates the apparent royalty rates because the consideration nominally characterized as a "royalty" in fact compensates the licensor for both the IP license and the ongoing services. WVG excluded bundled service agreements from its analysis as a matter of standard comparability practice, and the IRS's failure to do so is a significant methodological deficiency.
5. Small Sample Size. Dr. Washburne's analysis relies on a sample of fewer than 10 comparable transactions, a substantially smaller set than the 14 comparable agreements identified by WVG. The small sample size reduces the statistical reliability of the IRS's results and increases the sensitivity of the interquartile range to individual outliers.
In light of these deficiencies, WVG concludes that the IRS's proposed 11.0% royalty rate does not satisfy the comparability requirements of Treas. Reg. § 1.482-4(c)(2) and does not represent the best method application under Treas. Reg. § 1.482-1(d). The IRS's CUT selection is materially less reliable than WVG's CUT analysis, and the resulting 11.0% rate is not an arm's-length rate.
F. Conclusion on CUT Analysis
Based on the foregoing analysis, WVG concludes that PPC's 4.5% royalty rate for the license of legacy pharmaceutical IP to PBI under the Legacy License Agreement is within the arm's-length range as determined by the CUT method. The interquartile range of royalty rates observed in 14 comparable uncontrolled pharmaceutical license agreements is 3.1% to 6.8%, with a median of 4.4% and a mean of 4.6%. PPC's 4.5% rate falls at the median of this range, confirming that the rate is arm's-length.
The IRS's proposed royalty rate of 11.0% is well above the arm's-length range and is based on a set of comparables that suffers from multiple material deficiencies, including the inclusion of early-stage compound agreements, worldwide licenses, bundled service agreements, and the failure to apply appropriate comparability adjustments. The IRS's proposed adjustment of $188.04 million is without merit, and no adjustment to PPC's legacy IP royalty rate is warranted under IRC § 482 or Treas. Reg. § 1.482-4.
III. COMPARABLE PROFITS METHOD (CPM) / TRANSACTIONAL NET MARGIN METHOD (TNMM) ANALYSIS — PBI OPERATING MARGINS (2017–2020)
A. Background and Transaction Description
Penterra Biopharma International DAC ("PBI") is a Designated Activity Company organized under the laws of Ireland and tax-resident in Ireland. PBI was incorporated on March 15, 2012, and commenced operations effective July 1, 2012. PBI functions as the IP-holding company and principal for the commercialization of PPC's pharmaceutical products in the non-Americas territory—i.e., all territories worldwide excluding North America, Central America, South America, and the Caribbean.
PBI participates in a qualified cost-sharing arrangement with PPC, effective July 1, 2012, under which PBI co-funds research and development ("R&D") costs in exchange for the right to develop and exploit pharmaceutical IP developed under the CSA outside the Americas. PBI's share of qualified R&D costs under the CSA is determined based on PBI's share of reasonably anticipated benefits ("RAB") from the CSA activity, in accordance with Treas. Reg. § 1.482-7(e)(1).
PBI's cost-sharing percentages, and the resulting cost-sharing payments to PPC, during the examination period were as follows:
The modest increase in PBI's cost-sharing percentage over the four-year period reflects the gradual growth in PBI's share of reasonably anticipated benefits as the non-Americas territory's share of projected revenue from CSA-covered products increased relative to the Americas territory.
The IRS proposes increasing PBI's cost-sharing percentages by approximately 8 to 12 percentage points in each year, as follows:
The IRS's proposed increased percentages would yield additional cost-sharing payments from PBI to PPC totaling $235.01 million across the four examination years. The IRS asserts that PPC's RAB projections systematically understated the value properly allocable to the Americas territory, thereby understating PBI's required cost-sharing contribution. WVG's CPM/TNMM analysis, described below, tests whether PBI's operating margins—which incorporate the effect of the cost-sharing payments as reported—are consistent with arm's-length results, and whether the IRS's proposed increased cost-sharing percentages would produce arm's-length or distorted results.
B. PBI's Functions, Assets, and Risks
A central issue in the IRS examination concerns the functional profile of PBI—specifically, whether PBI performs sufficient substantive functions, controls meaningful risks, and employs significant assets to justify its position as the IP holder and principal for non-Americas operations. WVG's functional analysis, which was conducted as a component of the CPM/TNMM analysis to support the selection and evaluation of comparable companies, demonstrates that PBI is not a shell entity, but rather a substantive operating company performing meaningful Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") functions with respect to the non-Americas pharmaceutical IP.
The principal functions, assets, and risks of PBI during the examination period are summarized below:
Functions Performed by PBI:
• Personnel. PBI employed 185 full-time employees as of the end of TY 2020, a significant increase from the 52 employees at PBI's establishment in 2012. PBI's employee base includes senior management, regulatory affairs specialists, medical affairs professionals, commercial strategy and marketing personnel, supply chain managers, and finance and legal staff. The growth in PBI's headcount over the eight-year period from inception to 2020 reflects the expanding scope of PBI's non-Americas operations and its increasing functional capacity.
• Regulatory and Medical Affairs. PBI maintains a dedicated regulatory affairs function responsible for preparing and managing regulatory submissions, obtaining and maintaining marketing authorizations, and ensuring ongoing regulatory compliance across 68 country markets in the non-Americas territory. During the TY 2017–2020 examination period, PBI incurred cumulative regulatory expenditures of approximately €47.2 million on non-Americas submissions, including the preparation of Common Technical Document ("CTD") dossiers, periodic safety update reports, variations and renewals, and interactions with national regulatory authorities.
• Commercial Strategy and Pricing. PBI makes independent pricing decisions across 68 country markets in the non-Americas territory, taking into account local market conditions, competitive dynamics, health technology assessment requirements, reimbursement frameworks, and local regulatory constraints. Pricing decisions are made by PBI's commercial leadership team in Dublin and are documented in pricing committee memoranda and board minutes.
• Distribution and Supply Chain Management. PBI manages contract manufacturing arrangements with Penterra Manufacturing Ireland Ltd. ("PMI"), a related entity that operates a pharmaceutical manufacturing facility at Ringaskiddy, Co. Cork, Ireland, under a cost-plus 8% transfer pricing arrangement. PMI employs approximately 620 employees at the Ringaskiddy facility. PBI coordinates the supply chain for non-Americas markets, including inventory management, quality oversight, logistics, and distribution partner relationships.
• Corporate Governance. PBI maintains a board of directors that meets regularly in Dublin. During the TY 2017–2020 examination period, PBI's board of directors held 42 meetings in Dublin, at which key commercial and strategic decisions were discussed and approved. Board minutes documenting these meetings have been produced in connection with the IRS examination.
Assets Employed by PBI:
• intellectual Property. PBI holds the rights to exploit pharmaceutical IP in the non-Americas territory under the CSA (for post-2012 IP) and the Legacy License Agreement (for pre-2012 IP). PBI's IP portfolio constitutes its most significant asset.
• Physical Assets. PBI occupies approximately 18,000 square feet of office space at Claremont House, Sandyford Business Park, Dublin, Ireland, which serves as PBI's headquarters. PBI also utilizes the PMI manufacturing facility at Ringaskiddy under contract manufacturing arrangements.
• Financial Assets. PBI maintains independent banking relationships with Glenmore Bank Ireland plc, including operating accounts, treasury management facilities, and intercompany settlement accounts.
Risks Borne by PBI:
• Market Risk. PBI bears the market risk associated with the commercialization of pharmaceutical products in the non-Americas territory, including the risk of adverse changes in market conditions, competitive dynamics, pricing and reimbursement policies, and patient demand.
• Regulatory Risk. PBI bears the risk of adverse regulatory actions, including the denial or withdrawal of marketing authorizations, the imposition of post-marketing safety requirements, and changes in regulatory standards across 68 country markets.
• Currency Risk. PBI operates in multiple currency zones and bears foreign exchange risk on revenues denominated in currencies other than the euro, including the British pound, Japanese yen, Australian dollar, and others.
• R&D Investment Risk. As a CSA participant, PBI co-funds R&D expenditures with PPC and bears the risk that the R&D investments may not produce commercially successful products.
PBI Revenue and Profitability (FY 2020):
PBI's total revenue for FY 2020 was approximately €2.14 billion, and its pre-tax income was approximately €1.06 billion. PBI's key products commercialized in the non-Americas territory include Veritaxol (non-Americas net sales of approximately $1.34 billion in 2020), Imvara (approximately $790 million), and Cerulon (approximately $280 million).
The foregoing functional analysis demonstrates that PBI performs substantive DEMPE functions, controls significant risks, employs meaningful assets—both tangible and intangible—and earns returns commensurate with its functional profile. PBI is not a mere conduit or shell entity; it is the appropriate entity to hold and exploit non-Americas IP rights and to bear the associated costs and risks.
C. Methodology — CPM/TNMM Under Treas. Reg. § 1.482-5
The CPM, as described in Treas. Reg. § 1.482-5, was applied as a corroborative method to test whether PBI's operating margins are consistent with arm's-length results, thereby validating the CSA cost-sharing ratios that produce those margins. The TNMM, as described in Chapter II of the OECD Transfer Pricing Guidelines, is functionally equivalent to the CPM for purposes of this analysis, and WVG's references to the CPM should be understood to encompass the TNMM as well.
The profit level indicator ("PLI") selected for the CPM/TNMM analysis is the operating profit margin, defined as operating income divided by net revenue. The operating profit margin was selected as the most appropriate PLI because it is sensitive to both the revenue earned and the cost structure of the entity, and it captures the effect of the CSA cost-sharing payments—which are included in PBI's operating costs—on PBI's overall profitability. Changes in the CSA cost-sharing ratios directly affect PBI's operating profit margin: higher cost-sharing percentages increase PBI's costs and reduce its operating margins, while lower cost-sharing percentages decrease PBI's costs and increase its operating margins. The CPM/TNMM therefore provides a direct test of whether the cost-sharing ratios produce arm's-length results.
The CPM/TNMM tests PBI as the tested party, comparing PBI's operating profit margin against those of comparable uncontrolled companies performing similar IP-holding, commercialization, regulatory, and distribution functions in the pharmaceutical industry. If PBI's operating margins fall within the arm's-length interquartile range of operating margins observed among comparable companies, the cost-sharing ratios underlying those margins are confirmed as producing arm's-length results. Conversely, if the IRS's proposed increased cost-sharing ratios would compress PBI's margins below the arm's-length range, the proposed ratios are shown to be inconsistent with arm's-length results.
D. Comparable Company Search and Selection
WVG conducted a comprehensive search for comparable uncontrolled companies using financial databases, public filings, and industry publications. The search was designed to identify independent companies performing functions, employing assets, and bearing risks comparable to those of PBI, as described in Section III.B above. The search criteria applied were as follows:
• Industry: Pharmaceutical and/or biotechnology companies, classified under SIC codes 2833–2836, NAICS codes 325411–325414, or equivalent industry classification codes.
• Functions: Companies performing functions similar to PBI's DEMPE profile, including IP management, commercialization, regulatory submissions, marketing, distribution coordination, and pricing decisions. Both IP-holding entities and pharmaceutical distributors with DEMPE-like functions were included in the search universe.
• Geographic Focus: Companies with operations focused on EMEA (Europe, Middle East, and Africa) and/or APAC (Asia-Pacific) territories, consistent with PBI's non-Americas geographic focus.
• Public Financial Data: Companies with publicly available financial data for at least three of the four examination years (2017–2020), enabling the calculation of operating profit margins.
• Independence: Companies that are independent entities, not subsidiaries or divisions of larger multinational groups to the extent that related-party transactions would distort operating margins. Companies with significant controlled transactions (exceeding 25% of total revenue from related parties) were excluded unless sufficient segmented data was available to isolate the effects of such transactions.
• Financial Viability: Companies that were not in bankruptcy, liquidation, or start-up mode during the examination period, as the financial results of such companies would not be representative of arm's-length conditions.
The search process proceeded in stages, beginning with a broad universe of pharmaceutical companies identified through the Bureau van Dijk Orbis and Drayton Services Inc. databases, and progressively narrowing the set through application of the foregoing criteria. Each candidate company was subjected to a detailed review of its annual reports, financial statements, product portfolio, geographic focus, and functional profile. Companies that did not satisfy the comparability criteria upon detailed review were excluded from the final sample.
Following this process, WVG identified a final sample of 22 comparable companies. The sample includes IP-holding entities and pharmaceutical companies with DEMPE-like functions operating primarily in EMEA and APAC markets. The sample represents a diverse cross-section of the pharmaceutical industry, including companies commercializing oncology products, specialty therapeutics, and generics/biosimilars, with a range of functional intensity from distribution-focused entities to entities performing significant IP management, regulatory, and commercial functions.
Comparability adjustments were applied to the operating margins of certain comparable companies to account for identified differences in functional intensity, asset base, and risk profile relative to PBI. These adjustments included working capital adjustments (to account for differences in accounts receivable, inventory, and accounts payable levels that affect operating margins) and, where appropriate, adjustments for differences in the level of R&D expenditure.
E. Results of CPM/TNMM Analysis
The results of WVG's CPM/TNMM analysis, based on the 22 comparable companies identified and adjusted as described above, are presented below. The interquartile range of operating profit margins for the comparable companies, and PBI's actual operating profit margins for each examination year, are as follows:
As demonstrated in the foregoing table, PBI's actual operating profit margins fell within the arm's-length interquartile range in all four examination years (TY 2017–2020). PBI's margins are consistently above the median of the comparable companies, which is consistent with PBI's role as an IP-holding principal performing significant DEMPE functions and bearing substantial commercialization risk.
This result directly corroborates the accuracy and arm's-length character of the CSA cost-sharing ratios applied by PPC (38.2% to 42.7% for PBI's share). The cost-sharing ratios produce PBI operating margins that fall within the arm's-length range observed among comparable independent companies performing similar functions and bearing similar risks.
Conversely, the IRS's proposed increased cost-sharing percentages (48.2% to 53.7%) would significantly increase PBI's costs, compressing PBI's operating margins to levels below the arm's-length interquartile range. WVG computed PBI's pro forma operating margins under the IRS's proposed cost-sharing ratios as follows:
Under the IRS's proposed cost-sharing ratios, PBI's operating margins would fall below the arm's-length range in every year, producing results that are inconsistent with the returns an independent company performing PBI's functions and bearing PBI's risks would expect to earn. This outcome demonstrates that the IRS's proposed adjustments would produce a result that is less consistent with the arm's-length standard than PPC's reported results—precisely the opposite of what an adjustment under IRC § 482 should achieve.
F. Analysis of Reasonably Anticipated Benefits (RAB) Projections
Treas. Reg. § 1.482-7(e)(1) requires that each participant's share of intangible development costs under a qualified CSA be proportional to its share of reasonably anticipated benefits from the CSA activity. The RAB shares are determined based on projections of the benefits that each participant expects to derive from the CSA, measured by reference to projected income or revenue from the exploitation of the developed IP.
PPC's RAB projections, which underpin the cost-sharing ratios applied during the examination period, were based on actual and projected revenue splits between the Americas and non-Americas territories for each product covered by the CSA. The revenue projections were prepared contemporaneously by PPC's strategic planning group and were based on a bottom-up analysis of product-by-product revenue expectations, incorporating assumptions about market size, market penetration, pricing, competitive dynamics, patent life, and regulatory timelines in each territory.
The actual non-Americas share of global revenue for PBI's three key products during the examination period validates the RAB shares underpinning PBI's cost-sharing percentages:
These actual revenue distributions are consistent with the RAB shares used to determine PBI's cost-sharing percentages of 38.2% to 42.7%. The modest difference between the actual revenue shares (42%–45%) and the cost-sharing percentages reflects the fact that the RAB methodology incorporates forward-looking projections that account for expected growth trajectories and discount rates across territories, as permitted under the regulations. The key point is that the actual data corroborates the reasonableness of the projections at the time they were made, a standard required under the regulations.
The IRS's proposed cost-sharing percentages of 48.2% to 53.7% imply RAB shares for the non-Americas territory that are significantly higher than actual revenue distributions. The IRS has not demonstrated that the non-Americas territory's share of reasonably anticipated benefits exceeds the approximately 42%–45% range reflected in actual results. The IRS's proposed percentages are therefore inconsistent with both contemporaneous projections and actual market data.
G. Critique of the IRS's Position on Cost-Sharing Ratios
The IRS asserts that PPC's RAB methodology understates the value properly allocable to PPC's Americas territory, and that PBI should bear a commensurately higher share of R&D costs. WVG's analysis demonstrates that this assertion is not supported by the available evidence:
1. PPC's Projections Were Reasonable at the Time Made. Treas. Reg. § 1.482-7(e)(1) requires that RAB shares be based on projections that are reasonable at the time made, taking into account all available information. PPC's contemporaneous projections were prepared using standard pharmaceutical industry forecasting methodologies, were reviewed and approved by senior management, and were consistent with projections used for other business purposes (e.g., budgeting, investor guidance, and strategic planning). The reasonableness of these projections is further confirmed by the fact that actual results during the examination period closely tracked the projected revenue distributions.
2. The IRS's Proposed Percentages Lack Support in Comparable Company Data. The IRS has not provided comparable company data or benchmarking analysis supporting the proposition that cost-sharing percentages of 48.2% to 53.7% would produce arm's-length results for an entity with PBI's functional profile. As demonstrated in Section III.E above, the IRS's proposed percentages would compress PBI's operating margins below the arm's-length range.
3. Application of the IRS's Proposed Ratios Produces Below-Arm's-Length Results. The CPM/TNMM analysis demonstrates that PBI's pro forma operating margins under the IRS's proposed cost-sharing ratios would fall below the lower quartile of the arm's-length range in every examination year. This result is inconsistent with PBI's functional and risk profile as IP owner and principal, and confirms that the IRS's proposed ratios do not satisfy the arm's-length standard.
H. Conclusion on CPM/TNMM Analysis
Based on the foregoing analysis, WVG concludes that PBI's operating margins fall within the arm's-length interquartile range in all four examination years (TY 2017–2020), based on a CPM/TNMM analysis using 22 comparable companies. PPC's CSA cost-sharing ratios of 38.2% to 42.7% for PBI's share produce arm's-length results. The IRS's proposed increased ratios of 48.2% to 53.7% would compress PBI's margins below the arm's-length range, producing results inconsistent with PBI's functional and risk profile.
No adjustment to the CSA cost-sharing percentages is warranted under IRC § 482 or Treas. Reg. § 1.482-7. The IRS's proposed adjustment of $235.01 million is without merit and should be withdrawn in its entirety.
IV. INCOME METHOD / DCF ANALYSIS — PLATFORM CONTRIBUTION TRANSACTION (PCT) VALUATION
A. Background and Transaction Description
Effective July 1, 2012, PBI entered into the qualified CSA with PPC, acquiring the right to develop and exploit PPC's pharmaceutical IP portfolio outside the Americas. PBI was incorporated on March 15, 2012, approximately three and one-half months prior to the commencement of the CSA. As part of the CSA, PBI was required to compensate PPC for the pre-existing IP contributed by PPC to the CSA as of the effective date. This compensation took the form of a platform contribution transaction ("PCT") payment.
The pre-existing IP contributed by PPC to the CSA as of July 1, 2012, consisted primarily of clinical-stage and approved oncology compounds and specialty therapeutics, along with associated know-how, trade secrets, manufacturing processes, and regulatory data packages. The contributed IP represented the foundation upon which subsequent CSA-funded R&D activities would build.
PBI made a PCT payment of $312 million to PPC on July 1, 2012, representing the arm's-length value of PBI's buy-in to the pre-existing IP for the non-Americas territory. The $312 million PCT payment was determined based on a contemporaneous DCF analysis performed by PPC's transfer pricing advisors at the time of the CSA's inception.
The IRS, through the NOPA, asserts that the $312 million PCT payment undervalued the pre-existing IP by approximately $540 million. The IRS values the PCT at $852 million, based on an income method / DCF analysis performed by IRS economist Dr. Alan Washburne using a weighted average cost of capital ("WACC") of 7.2% and revenue projections that WVG considers materially more aggressive than the projections supported by contemporaneous evidence.
Although TY 2012 is outside the examination years at issue (TY 2017–2020), the IRS's PCT valuation is relevant to this Protest because the IRS seeks to recharacterize ongoing CSA cost-sharing ratios and royalty rates for TY 2017–2020 based on the alleged PCT undervaluation. The IRS's theory is that the $312 million PCT payment reflects a systematic undervaluation of non-Americas IP that also manifests in the cost-sharing ratios and royalty rates during the examination period. WVG's PCT valuation analysis therefore serves to refute this premise and to demonstrate that the overall CSA framework, including the PCT payment, is consistent with arm's-length principles.
B. Methodology — Income Method / DCF Under Treas. Reg. § 1.482-7(g)(4)
The income method, specifically a discounted cash flow ("DCF") approach, is the method specified in Treas. Reg. § 1.482-7(g)(4) for valuing PCT payments. Under the income method, the arm's-length PCT payment is determined by estimating the present value of the stream of future benefits that the PCT payor (i.e., PBI) is expected to derive from the pre-existing IP contributed to the CSA, discounted at an appropriate rate that reflects the riskiness of those projected cash flows.
WVG performed an independent DCF valuation of the pre-existing IP contributed by PPC to the CSA, using the following key inputs:
1. Projected Revenue Streams. WVG projected the future revenue streams that PBI would derive from the contributed IP in the non-Americas territory. The revenue projections were based on PPC's contemporaneous business plans and strategic projections as of July 2012, validated and where necessary adjusted based on actual results through the end of TY 2020. The projection period extended through the estimated useful life of the contributed IP.
2. Projected Operating Costs. WVG projected the operating costs associated with commercializing the contributed IP in the non-Americas territory, including cost of goods sold (based on PMI's cost-plus manufacturing arrangements), regulatory expenditures, commercial and marketing costs, and selling, general, and administrative expenses. These cost projections were developed based on PBI's actual cost structure and comparable industry benchmarks.
3. Tax Rates. WVG incorporated applicable tax rates into the after-tax cash flow projections, including Ireland's standard trading rate of 12.5% and the Knowledge Development box ("KDB") rate of 6.25%, which became applicable beginning in FY 2016. The blended effective tax rate was applied based on the proportion of PBI's income qualifying for the KDB rate.
4. Useful Life of Contributed IP. WVG estimated the useful life of the contributed IP based on the remaining patent lives, regulatory exclusivity periods, and expected product lifecycles of the individual compounds included in the contributed portfolio. The weighted average useful life of the contributed IP was estimated at approximately 12 years from the CSA effective date.
5. Discount Rate / WACC. WVG determined an appropriate WACC for discounting PBI's projected cash flows from the contributed IP, as described in detail in Section IV.C below.
The DCF model projected PBI's net after-tax cash flows from the contributed IP for each year of the projection period, discounted those cash flows to present value as of July 1, 2012, and summed the present values to determine the arm's-length PCT payment.
C. Discount Rate / WACC Analysis
The discount rate is one of the most critical inputs to any DCF valuation, and the selection of an appropriate WACC is a primary area of disagreement between WVG and the IRS economist. WVG determined an appropriate WACC of 9.8% for discounting PBI's projected cash flows from the contributed IP. The IRS applied a WACC of 7.2%. The 2.6 percentage point difference between these two rates accounts for a substantial portion of the divergence in PCT valuations.
WVG's WACC of 9.8% was determined using the following components and methodology:
Cost of Equity. The cost of equity was derived using the Capital Asset Pricing Model ("CAPM"), which calculates the expected return on equity as:
Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium + Size Premium + Additional Risk Premiums
The risk-free rate was based on the yield on 20-year U.S. Treasury bonds as of July 1, 2012. The equity risk premium was based on the long-horizon equity risk premium reported by Westmark Consulting Group (now Sundial Advisors) for the relevant period. The beta was derived from a set of pharmaceutical-industry-specific comparable companies with risk profiles similar to PBI's, specifically specialty pharmaceutical and biotech companies with meaningful exposure to regulatory and clinical development risk. WVG's beta selection focused on companies in the specialty pharmaceutical and oncology subsectors, which are characterized by higher volatility and risk than the broader pharmaceutical industry. A size premium was applied based on PBI's market capitalization equivalent at inception. Country risk premiums for the non-Americas territory were also incorporated, reflecting the additional risk associated with commercializing pharmaceutical products across 68 country markets with varying regulatory frameworks, reimbursement systems, and economic conditions. Finally, a technology risk premium was applied to reflect the specific risks associated with pharmaceutical IP, including the risk of clinical failure for pipeline products, the risk of generic competition, and the risk of adverse regulatory actions.
Cost of Debt. The cost of debt was based on PPC's and comparable companies' actual and estimated borrowing costs at the time of the CSA inception, calculated as the weighted average yield-to-maturity on outstanding senior unsecured debt obligations of comparable investment-grade pharmaceutical companies. An adjustment was made for the tax deductibility of interest expense.
Capital Structure Weighting. The cost of equity and cost of debt were weighted based on pharmaceutical-industry norms for capital structure, as reflected in the debt-to-equity ratios of the comparable companies used in the beta derivation.
Summary of WACC Components:
WVG considers the IRS's WACC of 7.2% to be inappropriately low for the following reasons:
(i) Inflation of Present Value. A lower discount rate increases the present value of projected cash flows, thereby artificially inflating the PCT value. The mathematical effect of a 2.6 percentage point reduction in the discount rate, compounded over a 12-year projection period, is significant and accounts for a substantial portion of the difference between WVG's and the IRS's PCT valuations.
(ii) Failure to Incorporate Ph

EXHIBIT C

I. INTRODUCTION AND PURPOSE

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