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PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT COMMUNICATION

MEMORANDUM

FROM: Garrett Simmons Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103

TO: Leonard Cross, Esq. Sylvia Hartwell, Esq. Calderwood & Harkness LLP

Marcus Whitfield, Vice President, Global Tax Penterra Pharmaceuticals Corp.

Deborah Staines, General Counsel Penterra Pharmaceuticals Corp.

DATE: November 20, 2023

RE: SEC Disclosure Considerations — IRS Transfer Pricing Examination of Penterra Pharmaceuticals Corp. (TY 2017–2020)

MATTER NO.: 1018-00009

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I. Executive Summary

The purpose of this memorandum is to analyze Penterra Pharmaceuticals Corp.'s ("PPC" or the "Company") obligations under the federal securities laws to disclose the ongoing Internal Revenue Service ("IRS") transfer pricing examination and the recently issued proposed adjustments in the Company's upcoming filings with the U.S. Securities and Exchange Commission ("SEC"). In particular, this memorandum addresses the Company's disclosure obligations in connection with its Annual Report on Form 10-K for the fiscal year ending December 31, 2023, as well as any interim Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that may be filed prior to or following the filing of the 10-K.

By way of context, the IRS Large Business & International Division ("LB&I") examination team (Exam Team LB&I-NE-TP-2022-00641) issued a Notice of Proposed Adjustment ("NOPA") on October 12, 2023, proposing net adjustments totaling $380.4 million across the four tax years under examination (TY 2017 through TY 2020). Following the NOPA, the IRS issued a 30-Day Letter on November 8, 2023, providing PPC with the opportunity to file a formal administrative Protest. PPC intends to file that Protest by the extended deadline of December 22, 2023, after which the matter will be referred to the IRS Office of Appeals for consideration.

The financial magnitude of the proposed adjustments is substantial. If the IRS's proposed adjustments were sustained in full, the Company would face additional federal income tax liability of approximately $79.88 million (calculated by applying the applicable statutory rates to the $380.4 million in proposed income adjustments, taking into account the 35% rate for TY 2017 and the 21% rate for TY 2018–2020). In addition, the IRS has proposed a 20% substantial valuation misstatement penalty under Internal Revenue Code ("IRC") § 6662(e), which, if imposed, would result in an additional penalty exposure of approximately $15.98 million. The Company's aggregate potential exposure — inclusive of both additional tax and proposed penalties, but exclusive of interest — therefore totals approximately $95.86 million.

Currently, PPC maintains an uncertain tax position reserve under ASC 740-10 (formerly FIN 48) of $62.4 million related to its Irish intellectual property structure. This reserve was established on the basis of contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP and prior legal analysis performed by this firm in September 2022. While the existing reserve covers a significant portion of the realistic range of potential outcomes, the issuance of the NOPA and the magnitude of the proposed adjustments create an enhanced obligation to evaluate whether the reserve remains adequate and, critically, to determine the appropriate scope and specificity of the Company's SEC disclosures.

Several key stakeholder considerations further heighten the importance of calibrating PPC's disclosure approach. Ridgeview Capital Management LP, the Company's largest institutional shareholder, currently holds approximately 8.3% of PPC's outstanding common shares. Ridgeview, under the direction of Managing Partner Douglas Everett, is known to actively monitor FIN 48 disclosures and changes to tax reserves in the pharmaceutical sector. Any material change to PPC's tax contingency disclosure — or the absence of adequate disclosure — could prompt investor inquiries, activism, or both. Separately, Hargrove National Bank, N.A., the administrative agent under PPC's $1.5 billion revolving credit facility, maintains tax-indemnity and material-tax-event covenants in its credit agreement, and the proposed adjustments may implicate notice obligations under that facility.

In summary, it is our conclusion that PPC has an affirmative obligation to disclose the IRS examination and proposed adjustments as a contingent liability and loss contingency in its upcoming Form 10-K. The required level of specificity is governed by a multi-layered framework that includes ASC 450-20 (formerly FAS 5), ASC 740-10 (FIN 48), SEC Regulation S-K (including Item 103 — Legal Proceedings and Item 303 — MD&A), and applicable SEC Staff Accounting Bulletins. We recommend that disclosure language be carefully calibrated to inform investors of the existence and potential magnitude of the matter, while preserving PPC's strong defense posture and avoiding any concession of weakness that could be exploited in the administrative or judicial proceedings. The specific drafting recommendations set forth in Section V below reflect this approach.

II. Background

A. The IRS Examination

The IRS initiated its examination of PPC on May 16, 2022, when the Company received a Letter 2205-A notifying it that returns for tax years 2017, 2018, 2019, and 2020 had been selected for examination. The examination has been conducted by an LB&I team specializing in transfer pricing matters, designated as Exam Team LB&I-NE-TP-2022-00641.

The examination has focused on the transfer pricing methodology employed by PPC in connection with its Irish intellectual property holding structure. At the center of the IRS's challenge is Penterra Biopharma International DAC ("PBI"), a Designated Activity Company organized under the laws of Ireland with its registered office located at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. PBI serves as the principal non-U.S. entity in PPC's global IP structure, holding rights to certain intellectual property generated through cost-sharing arrangements with PPC and licensing legacy IP from the U.S. parent.

PBI is wholly owned by Penterra Holdings Luxembourg S.à r.l. ("PHL"), a Luxembourg entity that functions as an intermediate holding company. PHL is itself wholly owned by PPC. For U.S. federal income tax purposes, PHL has elected to be treated as a disregarded entity, with the result that transactions between PHL and PPC are disregarded, while transactions between PBI and PPC (or PHL) are treated as transactions between related parties subject to the arm's-length standard of IRC § 482 and the Treasury Regulations promulgated thereunder.

PPC is a Delaware corporation headquartered at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. The Company's common stock trades on the Nasdaq Stock Market under the ticker symbol "PPCA." PPC's Employer Identification Number is 22-3741856. For the fiscal year ended December 31, 2020 — the most recent year under examination — PPC reported total revenue of $6.82 billion and pre-tax income of $1.47 billion.

The IRS's proposed adjustments encompass three principal categories:

(i) Cost-Sharing Arrangement (CSA) Cost-Sharing Ratio Adjustments. The IRS contends that PBI's share of intangible development costs under the parties' qualified cost-sharing arrangement was improperly allocated, resulting in PBI bearing an insufficient proportion of total R&D costs relative to its anticipated benefits from the arrangement. The IRS proposes to adjust the cost-sharing ratios to increase PBI's share, which would correspondingly increase the income allocable to the United States. The aggregate proposed CSA adjustments across all four tax years total $235.01 million.

(ii) Legacy IP Royalty Rate Adjustments. The IRS challenges the royalty rate charged by PPC to PBI for the license of pre-existing ("legacy") intellectual property that was developed by PPC prior to the establishment of the cost-sharing arrangement. PPC applied a royalty rate of 4.5% of PBI's net sales of products incorporating legacy IP. The IRS proposes an adjusted royalty rate of 11.0%, contending that the 4.5% rate is below arm's-length levels and does not adequately compensate PPC for the highly valuable, profit-tested intangibles at issue. The aggregate proposed royalty rate adjustments across all four tax years total $188.04 million.

(iii) Economic Substance Challenge. The IRS has also raised an economic substance challenge to PBI's role in the overall structure, questioning whether PBI possessed sufficient substance — including qualified personnel, decision-making authority, and operational control over the intangible assets — to justify its status as the economic owner of the shared intangible development costs and licensed IP. While this challenge does not carry a separate quantified adjustment beyond the CSA and royalty rate adjustments, it has implications for the applicability of penalties under IRC § 6662(b)(6) and for the overall viability of PPC's structure.

The IRS's proposed gross adjustments under categories (i) and (ii) above total $423.05 million. However, after applying a correlative offset of ($42.65 million) to account for the corresponding reduction in PBI's income that would result from the higher royalty payments and cost-sharing contributions, the net proposed adjustment across all four tax years is $380.4 million.

Following issuance of the NOPA on October 12, 2023, the IRS issued a 30-Day Letter on November 8, 2023. PPC has obtained an extension of the deadline to file its formal Protest to December 22, 2023. Upon filing, the matter will be referred to the IRS Office of Appeals for consideration.

B. PPC's Financial Profile and Key Stakeholders

Penterra Pharmaceuticals Corp. is a large-cap biopharmaceutical company with a diversified product portfolio spanning oncology, immunology, and rare diseases. For the fiscal year ended December 31, 2020 — the last year under examination — PPC reported total revenue of $6.82 billion and pre-tax income of $1.47 billion. The Company's key products include:

• Veritaxol (oncology), with global net sales of approximately $3.12 billion in FY 2020;

• Imvara (immunology), with global net sales of approximately $1.87 billion in FY 2020; and

• Cerulon (rare disease), with global net sales of approximately $0.62 billion in FY 2020.

PPC's fiscal year ends on December 31. The Company is a Nasdaq-listed "large accelerated filer" within the meaning of SEC Rule 12b-2 under the Securities Exchange Act of 1934 and is subject to the full panoply of SEC reporting and disclosure requirements applicable to registrants of its size and complexity.

PPC's independent registered public accounting firm and tax return preparer is Crestfield & Associates LLP. The engagement partner for the PPC audit is Martin Ogilvy. The Crestfield partner principally responsible for transfer pricing matters related to PPC is Susan Lam. Crestfield prepared the contemporaneous transfer pricing documentation supporting the intercompany pricing between PPC and PBI for the years at issue, and Crestfield also serves as the Company's auditor for purposes of the annual financial statement audit, including evaluation of the Company's uncertain tax position reserves under ASC 740-10.

As noted, Ridgeview Capital Management LP holds approximately 8.3% of PPC's outstanding common shares, making it the Company's largest institutional shareholder. Ridgeview's Managing Partner, Douglas Everett, has publicly stated in past communications with PPC's investor relations department that Ridgeview closely monitors FIN 48 disclosures and effective tax rate trends among its portfolio companies. A material change in PPC's tax contingency reserves or a significant new disclosure regarding potential tax liabilities could draw attention from Ridgeview and other institutional investors.

Separately, Hargrove National Bank, N.A. serves as the administrative agent under PPC's $1.5 billion revolving credit facility. The Senior Vice President and Relationship Manager for the PPC account is Christine Bellucci. The credit agreement governing the revolving facility contains, among other provisions, tax-indemnity covenants and a material-tax-event covenant that may impose notice and other obligations on PPC in connection with the IRS examination and proposed adjustments. The implications of these covenants are addressed in greater detail in Section VII below and in a separate memorandum prepared by Nazari (November 2023).

C. Existing FIN 48 Reserve

PPC currently maintains an uncertain tax position reserve under ASC 740-10 (formerly FIN 48) of $62.4 million related to its Irish intellectual property structure. This reserve was established following a comprehensive analysis of PPC's transfer pricing positions, conducted jointly by Crestfield & Associates (which prepared the contemporaneous transfer pricing documentation) and Calderwood & Harkness (which provided a legal assessment of the hazards of the Company's positions in a memorandum dated September 2022).

The $62.4 million reserve reflects the application of the two-step FIN 48 analysis to PPC's transfer pricing positions. In the recognition step, PPC determined that its positions were more likely than not (i.e., greater than 50% likely) to be sustained on their technical merits. In the measurement step, PPC measured the positions at the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement, and reserved $62.4 million for the portion of the benefit that did not meet this threshold.

The positions giving rise to the reserve include:

• PPC's cost-sharing ratios under the CSA, which allocated between 38.2% and 42.7% of total intangible development costs to PBI for TY 2017 through TY 2020; and

• PPC's application of a 4.5% royalty rate for the license of legacy intellectual property from PPC to PBI.

The reserve does not reflect any penalty exposure, as PPC's position has been that the contemporaneous documentation prepared by Crestfield satisfies the reasonable-cause and good-faith exception to the substantial valuation misstatement penalty under IRC § 6662(e)(3)(B).

III. Applicable Legal and Accounting Framework

The Company's disclosure obligations with respect to the IRS examination and proposed adjustments arise under multiple, overlapping legal and accounting standards. This section sets forth the applicable framework.

A. SEC Regulation S-K, Item 103 — Legal Proceedings

Item 103 of Regulation S-K (17 C.F.R. § 229.103) requires a registrant to "[d]escribe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business." This requirement applies to the disclosure in Part I, Item 3 of the Annual Report on Form 10-K.

The general materiality threshold for Item 103 disclosure is whether the proceeding involves a potential liability that, individually or in the aggregate, exceeds 10% of the registrant's consolidated total assets. However, for proceedings involving claims by a governmental authority, the SEC Staff has historically suggested a lower threshold for disclosure, recognizing that governmental proceedings — including tax examinations — may carry reputational and market implications disproportionate to the dollar amounts at issue.

In the present case, the proposed net adjustment of $380.4 million, with an associated potential tax and penalty exposure of approximately $95.86 million, is material to PPC's financial position by any reasonable measure. Even if one were to apply the general 10% threshold to PPC's total consolidated assets (which, based on publicly available financial data, substantially exceed $10 billion), the proposed adjustments would represent a significant contingency warranting disclosure.

A threshold question is whether the IRS administrative proceedings — which have not yet advanced to litigation — constitute "legal proceedings" within the meaning of Item 103. The SEC Staff has taken interpretive positions suggesting that IRS examinations resulting in proposed adjustments may require disclosure under Item 103 even before the filing of a petition in the United States Tax Court or the initiation of a refund suit in federal district court or the Court of Federal Claims. The issuance of the NOPA on October 12, 2023, followed by the 30-Day Letter on November 8, 2023, elevates this matter well beyond the status of a routine audit. The IRS has now formally articulated its position and quantified the proposed adjustments, and PPC is required to either accept those adjustments or pursue formal administrative appeal. Under these circumstances, the matter has crystallized to a degree that squarely triggers Item 103 disclosure.

It is our view that the IRS examination and proposed adjustments must be disclosed in Part I, Item 3 of PPC's Form 10-K for the fiscal year ending December 31, 2023.

B. SEC Regulation S-K, Item 303 — Management's Discussion and Analysis (MD&A)

Item 303 of Regulation S-K (17 C.F.R. § 229.303) requires registrants to discuss in the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") section of their periodic reports any known trends, demands, commitments, events, or uncertainties that are reasonably likely to result in the registrant's liquidity increasing or decreasing in any material way, or that the registrant reasonably expects will have a material favorable or unfavorable impact on net revenues, income from continuing operations, profitability, or capital resources.

The IRS examination and proposed adjustment of $380.4 million — with a potential tax and penalty exposure of approximately $95.86 million — constitute a known uncertainty that must be addressed in MD&A. Even if PPC ultimately prevails in its administrative appeal, the pendency of the matter and the potential for partial or full adverse resolution create an obligation to discuss the following:

• The potential impact on the Company's effective tax rate for the periods under examination and for future periods if the matter is not resolved favorably;

• The potential cash outflow associated with an adverse or partially adverse resolution, and the impact on the Company's liquidity and capital resources;

• The relationship between the proposed adjustments and the Company's existing uncertain tax position reserves; and

• The expected timeline for resolution of the matter, including the anticipated administrative appeal process.

The MD&A discussion should be balanced and measured, providing investors with sufficient information to understand the nature and potential magnitude of the uncertainty without overstating the likelihood of an adverse outcome or conceding the merits of the IRS's position. We address specific drafting recommendations in Section V below.

C. ASC 450-20 (formerly FAS 5) — Loss Contingencies

ASC 450-20 (Contingencies — Loss Contingencies), which codified the principles formerly set forth in FASB Statement No. 5, establishes a three-tier framework for accounting for and disclosing loss contingencies:

(i) Probable. A loss contingency that is "probable" (i.e., the future event or events are likely to occur) must be accrued if the amount of the loss can be reasonably estimated. Even if the loss is probable but the amount cannot be reasonably estimated, disclosure of the contingency is required.

(ii) Reasonably Possible. A loss contingency that is "reasonably possible" (i.e., the chance of the future event or events occurring is more than remote but less than likely) must be disclosed, including an estimate of the possible loss or range of loss, or a statement that such an estimate cannot be made.

(iii) Remote. A loss contingency that is "remote" (i.e., the chance of the future event or events occurring is slight) generally does not require accrual or disclosure, except in limited circumstances such as guarantees.

In the present case, the IRS has issued a NOPA and a 30-Day Letter, but PPC has not yet filed its Protest, and the matter has not yet been considered by the IRS Office of Appeals. PPC believes — and this firm has independently concluded — that the Company's transfer pricing positions are well-supported by applicable law, regulations, and economic analyses. Under these circumstances, the full proposed adjustment of $380.4 million is not "probable" of being sustained. However, given the formal nature of the proposed adjustments and the inherent uncertainty in any tax controversy, a loss contingency clearly exists. Some measure of additional tax liability beyond the current reserve is "reasonably possible," and certain elements of the proposed adjustments — particularly the CSA cost-sharing ratio adjustments — may, in our assessment, carry a moderate degree of risk even if PPC's overall positions are strong.

PPC has already accrued $62.4 million under ASC 740-10 in connection with the uncertain tax positions at issue. The primary question under ASC 450-20 is whether additional accrual is warranted and, if not, what range of reasonably possible loss should be disclosed. Based on this firm's current analysis of the hazards associated with PPC's positions — which is set forth in detail in our separate FIN 48 update memorandum dated November 2023 — we do not believe that additional accrual is required at this time. However, we recommend that PPC disclose the matter as a reasonably possible loss contingency and provide, to the extent estimable, the range of possible additional loss beyond the amounts already accrued. If the range cannot be reasonably determined, the Company should so state in its disclosure.

D. ASC 740-10 (FIN 48) — Uncertain Tax Positions

ASC 740-10 (Income Taxes), which incorporated the principles of FASB Interpretation No. 48 ("FIN 48"), prescribes a two-step process for the recognition and measurement of uncertain tax positions:

Step 1 — Recognition. A tax position is recognized in the financial statements only if it is "more likely than not" (i.e., a likelihood of greater than 50%) that the position will be sustained upon examination by the relevant taxing authority, including resolution of any related appeals or litigation processes, based solely on the technical merits of the position.

Step 2 — Measurement. A tax position that meets the recognition threshold is measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority.

PPC's current uncertain tax position reserve of $62.4 million was established through the application of these two steps to the Company's transfer pricing positions. In the recognition step, PPC — relying on Crestfield's contemporaneous transfer pricing documentation and this firm's prior legal analysis — determined that its positions were more likely than not to be sustained on their technical merits. In the measurement step, PPC concluded that the largest amount of benefit that was greater than 50% likely to be realized was such that a reserve of $62.4 million was appropriate for the portion of the benefit falling below the measurement threshold.

The issuance of the NOPA does not, in itself, change the underlying technical merits of PPC's transfer pricing positions. The arm's-length standard under IRC § 482, the applicable Treasury Regulations (including Treas. Reg. § 1.482-1 through § 1.482-9), and the economic analyses supporting PPC's pricing methodology remain the same. However, the NOPA is a new factor that must be weighed in the overall assessment. The fact that the IRS has formally proposed substantial adjustments — and has quantified those adjustments at a specific dollar amount — informs the evaluation of the "more likely than not" recognition threshold and the measurement of the reserve.

Based on Calderwood & Harkness's updated analysis, set forth in a separate FIN 48 update memorandum dated November 2023, PPC's transfer pricing positions remain more likely than not to be sustained in substantial part. We continue to believe that the Company's CSA cost-sharing ratios and legacy IP royalty rate are within the arm's-length range, and that PBI possesses sufficient economic substance to support its role in the structure. Accordingly, we conclude that the $62.4 million reserve remains appropriate at this stage. We do not recommend a material increase to the reserve at this time, although this assessment should be revisited as the matter progresses through the administrative appeal process.

Notwithstanding the adequacy of the reserve amount, we strongly recommend that the qualitative and quantitative disclosures accompanying the FIN 48 reserve in PPC's financial statement footnotes be enhanced in the upcoming Form 10-K. The disclosure should reflect the issuance of the NOPA, the magnitude of the proposed adjustments, the Company's intent to pursue administrative appeal, and the reasonably possible range of outcomes. In addition, the tabular reconciliation of beginning and ending unrecognized tax benefit balances required by ASC 740-10-50-15A will need to be updated to reflect any changes during the fiscal year.

It is also important to address the interaction between this firm's legal conclusions and the role of Crestfield & Associates as PPC's independent auditor. Crestfield is required to independently evaluate Calderwood & Harkness's legal conclusions regarding the adequacy of the FIN 48 reserve in forming its own audit opinion on PPC's financial statements. Under AU-C Section 501 (Audit Evidence — Specific Considerations for Selected Items) and the relevant provisions of ASC 740-10, Crestfield must assess the reasonableness of management's — and, by extension, legal counsel's — conclusions regarding the recognition and measurement of uncertain tax positions. We have previously provided a letter to Crestfield supporting the FIN 48 reserve (dated September 20, 2022), and an updated letter reflecting the NOPA is currently being prepared. The updated letter will be dated November 20, 2023 and will be delivered to Crestfield in advance of year-end audit fieldwork. The coordination with Crestfield is addressed further in Section VIII below.

E. SAB Topic 5.Y (SAB 92) — Loss Contingencies

SEC Staff Accounting Bulletin ("SAB") Topic 5.Y (derived from SAB No. 92) provides additional guidance on the disclosure of loss contingencies, including reasonably possible losses in excess of amounts already accrued. The SEC Staff has emphasized that registrants should, to the extent estimable, disclose the range of reasonably possible loss in excess of amounts accrued for loss contingencies, and that a failure to provide such disclosure may render the financial statements materially misleading.

In PPC's case, the Company has accrued $62.4 million under ASC 740-10 in connection with its uncertain transfer pricing positions. If the full $380.4 million in proposed adjustments were sustained, the additional federal income tax would be approximately $79.88 million (a simplified calculation based on the applicable statutory rates, taking into account the 35% rate for TY 2017 and 21% for TY 2018–2020). The incremental tax exposure beyond the existing reserve would therefore be approximately $17.48 million ($79.88 million less $62.4 million), though this simplified calculation is subject to further refinement based on the year-by-year allocation of adjustments, the applicable statutory rates, and the interplay between the tax and penalty calculations. When the proposed 20% substantial valuation misstatement penalty of approximately $15.98 million is included, the total potential incremental exposure beyond the reserve is materially higher.

Consistent with SAB Topic 5.Y, we recommend that PPC disclose, to the extent estimable, the range of reasonably possible loss in excess of the $62.4 million reserve. If the Company determines that a specific range cannot be estimated with sufficient precision, it should state that the ultimate resolution of the matter could result in additional liabilities that are material to the Company's financial position and results of operations.

IV. Analysis of Required Disclosures

A. Form 10-K (Fiscal Year Ending December 31, 2023)

Based on the legal and accounting framework set forth in Section III above, PPC's Annual Report on Form 10-K for the fiscal year ending December 31, 2023 should include disclosures in the following sections:

1. Part I, Item 3 — Legal Proceedings

Item 3 of Form 10-K requires a description of material pending legal proceedings. As discussed in Section III.A above, the IRS examination and proposed adjustments meet the threshold for disclosure under Item 103 of Regulation S-K. We recommend that PPC include a disclosure in Part I, Item 3 of the Form 10-K that addresses the following elements:

• That the Company has received proposed adjustments from the IRS relating to its transfer pricing methodology for intercompany transactions with its Irish subsidiary for tax years 2017 through 2020;

• A description of the nature of the dispute in general terms — specifically, that the IRS has challenged the pricing of intercompany transactions between the Company's U.S. operations and its Irish subsidiary, including cost-sharing arrangements and royalty rates for licensed intellectual property;

• The aggregate proposed adjustment amount (approximately $380 million) and/or the potential additional federal income tax effect (approximately $80 million), together with a reference to potential penalties;

• That the Company disagrees with the IRS's proposed adjustments and believes its transfer pricing positions are well-supported by applicable law, regulations, and economic analyses;

• That the Company has filed (or intends to file) a formal Protest and intends to pursue resolution through the IRS Office of Appeals; and

• A cautionary statement that no assurance can be given as to the timing or outcome of the matter.

Specific proposed disclosure language for Item 3 is set forth in Section V.A below.

2. Part II, Item 7 — MD&A

The MD&A section of PPC's Form 10-K should address the IRS examination as a known uncertainty that could materially affect the Company's financial condition or results of operations. We recommend that the following topics be addressed:

• A discussion of the IRS examination and proposed adjustments as a known uncertainty, cross-referencing the disclosure in Item 3 and the income tax footnote to the financial statements;

• An analysis of the potential impact on the Company's effective tax rate if the proposed adjustments are sustained in whole or in part, including a discussion of the different statutory rates applicable to TY 2017 (35%, pre-TCJA) versus TY 2018–2020 (21%, post-TCJA), which materially affects the tax impact of any adjustments allocated to different years;

• A discussion of the potential cash outflow and impact on the Company's liquidity in the event of an adverse or partially adverse resolution, noting that the total potential exposure of approximately $95.86 million (inclusive of tax and proposed penalties, but excluding interest) should be evaluated against the Company's available resources, including the $1.5 billion revolving credit facility administered by Hargrove National Bank, N.A.;

• A note that PPC was not enrolled in the IRS Compliance Assurance Process ("CAP") for the tax years at issue, which means that the examination was conducted on a post-filing basis and the proposed adjustments were not the subject of any pre-filing agreement or real-time review by the IRS; and

• A discussion of the expected timeline for resolution, including the anticipated filing of the Protest and referral to IRS Appeals, and a statement that the Company cannot predict with certainty when the matter will be resolved.

The Tax Cuts and Jobs Act of 2017 ("TCJA") rate change warrants specific attention in MD&A. TY 2017 is subject to the pre-TCJA corporate tax rate of 35%, while TY 2018 through TY 2020 are subject to the post-TCJA rate of 21%. The allocation of the $380.4 million in proposed adjustments across the four tax years will therefore significantly affect the total additional tax liability. To the extent that a disproportionate share of the proposed adjustments is attributable to TY 2017 — where the higher 35% rate applies — the potential tax impact will be correspondingly greater. This nuance should be addressed in the MD&A discussion so that investors can understand the sensitivity of the potential tax exposure to the year-by-year allocation of adjustments.

3. Part II, Item 8 — Financial Statements and Notes

The financial statements included in Part II, Item 8 of the Form 10-K should include enhanced disclosures in the income tax footnote. We recommend the following:

Income Tax Footnote. The income tax footnote should discuss the IRS examination, the proposed adjustments, and PPC's assessment of the related uncertainty. The disclosure should note that the IRS has proposed adjustments of approximately $380 million relating to transfer pricing for TY 2017 through TY 2020, and that the Company has filed a formal Protest and intends to pursue resolution through the IRS Office of Appeals. The footnote should state that the Company believes its positions are well-supported and that the ultimate resolution of the matter is uncertain.

FIN 48 Disclosure. The footnote should disclose the $62.4 million uncertain tax position reserve related to the transfer pricing positions at issue. In accordance with ASC 740-10-50-15A, the footnote should include a tabular rollforward of the beginning and ending balances of unrecognized tax benefits for the fiscal year. The rollforward should reconcile any increases or decreases in the reserve attributable to current-year activity, settlements, lapses of statutes of limitations, or changes in the assessment of existing positions. The nature of the uncertain positions should be described — specifically, that they relate to intercompany royalty rates and cost-sharing payments associated with the Company's Irish subsidiary.

Range of Reasonably Possible Outcomes. The footnote should discuss the range of reasonably possible outcomes. At one end of the range, if the matter is resolved with no adjustment (i.e., PPC prevails in full), no additional tax would be due and the existing reserve of $62.4 million could be released, resulting in a favorable impact on the Company's effective tax rate. At the other end of the range, if the full proposed adjustment of $380.4 million were sustained, the additional federal income tax would be approximately $79.88 million, and the proposed penalty under IRC § 6662(e) would be approximately $15.98 million, for a total potential exposure of approximately $95.86 million. The footnote should note that the current accrual of $62.4 million covers a significant portion of the realistic range of potential outcomes.

Resolution Timeline. The footnote should disclose that it is reasonably possible that the total amount of unrecognized tax benefits could change by a material amount within the next 12 months, as the matter is expected to be considered by the IRS Office of Appeals during that period.

Interest Accrual. The footnote should address any interest accrual considerations on potential underpayments at the applicable federal rate under IRC § 6601. Interest on underpayments is assessed from the original due date of the return and compounds daily, which can add materially to the total exposure over the multi-year examination period. To the extent PPC has accrued (or should accrue) interest on the potential underpayments reflected in its FIN 48 reserve, this should be disclosed.

4. Part IV — Certifications and Disclosure Controls

PPC's Chief Executive Officer, Catherine Falk, and Chief Financial Officer, Rajesh Iyer, will be required to execute certifications under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 ("SOX") in connection with the filing of the Form 10-K. These certifications require the certifying officers to attest, among other things, that the filing does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading. The certifying officers must also attest that they have disclosed to the registrant's auditors and the audit committee of the board of directors all significant deficiencies and material weaknesses in internal controls over financial reporting.

In light of the magnitude of the IRS proposed adjustments and the potential financial exposure, the examination and proposed adjustments must be disclosed to the audit committee and discussed in the context of the Company's internal controls over financial reporting. Management should confirm that its disclosure controls and procedures are effective in ensuring that the IRS examination and related contingency are appropriately captured in the Company's periodic filings. Any failure to disclose a contingent liability of this magnitude would raise serious questions under the SOX certification requirements.

We recommend that PPC's General Counsel, Deborah Staines, and VP of Global Tax, Marcus Whitfield, brief the audit committee and the CEO and CFO on the IRS examination and proposed adjustments, the FIN 48 reserve, and the proposed disclosure language in advance of the filing of the Form 10-K.

B. Form 10-Q (Interim Filings)

If material developments occur between annual filings — for example, if the Protest is filed on December 22, 2023, an Appeals conference is scheduled, or the IRS modifies its position — PPC should update its disclosures in the interim Quarterly Reports on Form 10-Q. The MD&A section and the notes to the condensed financial statements included in the Form 10-Q should be updated to reflect the current status of the matter. In particular:

• If the filing of the Protest is completed on or before December 22, 2023, the first quarterly filing after that date (Form 10-Q for the quarter ending March 31, 2024) should confirm that the Protest has been filed and that the matter has been referred (or is being referred) to the IRS Office of Appeals.

• If an Appeals conference is scheduled or conducted during an interim period, the Form 10-Q filed for that period should disclose the current status of the administrative appeal.

• Any changes to the FIN 48 reserve — whether increases, decreases, or adjustments arising from new information — should be reflected in the condensed financial statements and discussed in the notes.

The interim disclosures should be consistent with the framework established in the annual Form 10-K, avoiding any material inconsistency or regression in the level of detail provided to investors.

C. Form 8-K — Current Report Considerations

A separate analysis is required to determine whether the issuance of the NOPA triggers a filing obligation under Form 8-K. The potentially applicable items include:

• Item 8.01 (Other Events). Item 8.01 provides a voluntary disclosure mechanism for events that the registrant deems to be of importance to security holders. A registrant may, but is not required to, file a Form 8-K under Item 8.01 to disclose events not otherwise covered by the specified triggering items.

• Item 2.06 (Material Impairments). Item 2.06 requires the filing of a Form 8-K when a registrant's board of directors, a committee thereof, or authorized officers conclude that a material charge for impairment is required under generally accepted accounting principles.

It is our conclusion that the NOPA alone does not trigger a mandatory Form 8-K filing obligation. The NOPA is a proposed adjustment that is subject to administrative appeal and has not been judicially determined. PPC has not conceded the validity of the IRS's position, and the Company intends to vigorously contest the proposed adjustments through the Protest and Appeals process. Under these circumstances, the NOPA does not constitute a triggering event under any of the mandatory Form 8-K items.

However, if PPC determines at any point that a material charge to earnings is required — for example, if a significant increase to the FIN 48 reserve becomes necessary — a voluntary Form 8-K under Item 8.01 may be appropriate to ensure prompt and transparent communication with the market. Additionally, if a settlement is ultimately reached with the IRS that results in a material charge to earnings or a material release of reserves, a Form 8-K would likely be required under Item 2.06 or voluntarily filed under Item 8.01 at that point. We will monitor developments and advise PPC on the need for any Form 8-K filing as the matter progresses.

V. Specific Drafting Recommendations

A. Proposed Disclosure Language — Legal Proceedings (Item 3)

Based on our analysis of the applicable legal standards and the current status of the IRS examination, we propose the following disclosure language for Part I, Item 3 (Legal Proceedings) of PPC's Form 10-K for the fiscal year ending December 31, 2023:

"The Company has received proposed adjustments from the Internal Revenue Service relating to the Company's transfer pricing methodology for intercompany transactions with its Irish subsidiary for tax years 2017 through 2020. The aggregate proposed adjustments total approximately $380 million, which would result in additional federal income tax of approximately $80 million, plus potential penalties. The Company disagrees with the proposed adjustments and believes its transfer pricing positions are supported by applicable law, regulations, and economic analyses. The Company filed a formal Protest in December 2023 and intends to pursue resolution through IRS Appeals. No assurance can be given as to the timing or outcome of this matter."

We note that the specific dollar amounts referenced in this proposed language (approximately $380 million in proposed adjustments, approximately $80 million in additional tax) may be adjusted based on materiality considerations and the Company's overall disclosure strategy. We recommend that the final language be reviewed and approved by Deborah Staines, General Counsel of PPC, and coordinated with Marcus Whitfield, VP of Global Tax, before inclusion in the Form 10-K. We are available to discuss alternative formulations of the dollar figures — including the possibility of disclosing a range rather than a specific amount, or referencing the potential tax and penalty exposure in the aggregate — based on PPC's judgment regarding the appropriate level of specificity.

B. Proposed Disclosure Language — Income Tax Footnote

The income tax footnote to PPC's financial statements in Part II, Item 8 of the Form 10-K should include the following key elements:

• A reference to the $62.4 million uncertain tax position reserve maintained under ASC 740-10, with an explanation that the reserve relates to the Company's transfer pricing positions involving intercompany royalty rates and cost-sharing payments associated with the Company's Irish subsidiary;

• A statement that it is reasonably possible that the total amount of unrecognized tax benefits could change by a material amount within the next 12 months, in light of the pending IRS examination and administrative appeal;

• A tabular rollforward of the beginning and ending balances of unrecognized tax benefits for the fiscal year, as required by ASC 740-10-50-15A;

• A discussion of the IRS's proposed penalty exposure of approximately $15.98 million under IRC § 6662(e), together with a statement of the Company's belief that reasonable cause and contemporaneous documentation support penalty protection under IRC § 6662(e)(3)(B) and that no accrual for penalties has been recorded; and

• A discussion of the range of reasonably possible outcomes, from no additional liability (if PPC prevails in full) to additional tax and penalties totaling approximately $95.86 million (if the full proposed adjustments and penalties were sustained), noting that the existing reserve of $62.4 million covers a significant portion of the realistic range.

As with the Item 3 disclosure, the final language of the income tax footnote should be reviewed and approved by PPC management and coordinated with Crestfield & Associates to ensure consistency with the audited financial statements.

C. Calibration of Specificity

The calibration of specificity in PPC's disclosures requires a careful balancing of competing considerations. On one hand, PPC's obligations under the federal securities laws — and the expectations of the SEC Staff and the investing public — demand transparency and completeness. Investors are entitled to information that is material to their investment decisions, and the IRS examination and proposed adjustments plainly fall within that category. On the other hand, PPC has legitimate interests in preserving its litigation strategy, protecting privileged communications, and avoiding public statements that could be exploited by the IRS or other adverse parties.

We recommend the following principles to guide the calibration of PPC's disclosures:

• Inform without conceding. The disclosures should provide investors with a clear and accurate understanding of the nature, magnitude, and status of the IRS examination, without including any language that could be interpreted as conceding weakness in PPC's transfer pricing positions or suggesting that the Company expects an adverse outcome.

• Protect privilege. The disclosures should not reveal the substance of Calderwood & Harkness's hazards-of-litigation analysis, the parameters of any settlement authority that PPC may establish, or the specific elements of the Company's defense strategy. These matters are protected by the attorney-client privilege and the attorney work product doctrine, and their disclosure — whether in SEC filings or otherwise — would be prejudicial to PPC's interests.

• Avoid specific settlement ranges. The disclosures should not reference specific settlement targets, ranges, or negotiating positions. While the disclosure of a reasonably possible range of loss under ASC 450-20 and SAB Topic 5.Y is appropriate, this range should be framed in terms of the potential legal exposure (i.e., no additional tax at one end, full proposed adjustment at the other), not in terms of the Company's internal assessment of a likely settlement amount.

• Coordinate with auditors. All disclosure language should be coordinated with Crestfield & Associates (Martin Ogilvy, engagement partner) to ensure that the disclosures are consistent with the audited financial statements and with Crestfield's own conclusions regarding the FIN 48 reserve. Crestfield's audit opinion will cover the adequacy of PPC's tax contingency disclosures, and any inconsistency between the Company's disclosure language and Crestfield's assessment could give rise to audit complications.

VI. Institutional Shareholder Considerations

A. Ridgeview Capital Management LP

As noted above, Ridgeview Capital Management LP holds approximately 8.3% of PPC's outstanding common shares, making it the Company's largest institutional shareholder. Ridgeview's Managing Partner, Douglas Everett, has a well-documented history of actively monitoring FIN 48 disclosures and effective tax rate trends among portfolio companies in the pharmaceutical sector. Ridgeview has, in prior instances involving other portfolio companies, engaged in direct dialogue with management regarding tax reserve adequacy and has been known to advocate for enhanced disclosure when it perceives that a company's tax contingencies are insufficiently transparent.

In light of Ridgeview's established interest in these matters, the disclosure of the IRS examination and proposed adjustments in PPC's Form 10-K could prompt investor inquiries. A sudden material increase in the FIN 48 reserve — or a new disclosure of a significant contingent liability that was not previously flagged — could raise concerns among Ridgeview and other institutional investors regarding the adequacy of PPC's prior disclosures and the Company's overall tax risk management. Such concerns could, in turn, lead to requests for meetings with management, shareholder proposals, or other forms of engagement.

We recommend the following approach to mitigate unnecessary market concern:

• PPC's disclosure language should be clear, measured, and consistent with the Company's strong defense posture. The disclosure should convey confidence in PPC's transfer pricing positions while acknowledging the uncertainty inherent in any tax controversy.

• PPC's investor relations team should be briefed on the substance of the disclosure in advance of the Form 10-K filing. The investor relations team should be prepared to respond to inquiries from Ridgeview and other investors in a manner consistent with the Company's public disclosures, without revealing privileged information or providing additional detail beyond what is contained in the filing.

• The General Counsel, Deborah Staines, should coordinate with investor relations on talking points and Q&A preparation in advance of the filing.

B. Broader Market Impact

PPC's common stock trades on the Nasdaq Stock Market under the ticker symbol "PPCA." Any material disclosure regarding potential tax exposure — particularly a disclosure that includes specific dollar amounts — has the potential to affect the Company's stock price. The market reaction will depend on a number of factors, including the size of the disclosed exposure relative to PPC's market capitalization and earnings, the market's assessment of the likelihood of an adverse outcome, and the clarity and confidence conveyed by the disclosure language.

We recommend that PPC consider the timing of its disclosure relative to its quarterly earnings announcements. If the Form 10-K is filed in close proximity to an earnings release, the Company may wish to address the IRS examination proactively in its earnings call and press release, consistent with its SEC filings, to avoid the appearance that the disclosure was buried in the annual report. Proactive communication — framed in the context of PPC's strong defense posture and available resources — is generally more effective at managing market expectations than reactive responses to investor and analyst inquiries.

VII. Credit Facility Covenant Considerations

This memorandum does not undertake a comprehensive analysis of PPC's obligations under the Hargrove National Bank credit facility, as that analysis is the subject of a separate memorandum prepared by Nazari and dated November 2023. However, a brief summary of the relevant considerations is warranted, given the potential interaction between PPC's SEC disclosure obligations and its credit facility covenants.

PPC maintains a $1.5 billion revolving credit facility with Hargrove National Bank, N.A. as administrative agent. The Senior Vice President and Relationship Manager for the PPC account is Christine Bellucci. The credit agreement governing the facility includes, among other provisions, the following covenants of relevance:

• Tax-Indemnity Covenant. The credit agreement contains representations and covenants regarding PPC's compliance with applicable tax laws and regulations, and may require PPC to indemnify the lenders for certain tax-related losses or liabilities.

• Material-Tax-Event Covenant. The credit agreement includes a covenant requiring PPC to provide notice to the administrative agent upon the occurrence of a "material tax event," as defined in the agreement. The definition of "material tax event" may encompass the receipt of proposed adjustments from a taxing authority that exceed a specified threshold, the initiation of administrative or judicial proceedings related to a material tax controversy, or the accrual of additional tax reserves in excess of a specified amount.

The IRS's proposed adjustment of $380.4 million, with an associated potential tax and penalty exposure of approximately $95.86 million, could constitute a "material tax event" within the meaning of the credit agreement, depending on the specific definitional thresholds set forth in the agreement. If the proposed adjustments trigger the material-tax-event covenant, PPC may be required to provide written notice to Hargrove National Bank within a specified period.

Notably, if the ultimate settlement of the matter falls within the range of the existing FIN 48 reserve of $62.4 million, the resolution may not independently trigger the material-tax-event covenant, as the Company will have already established a reserve in anticipation of the potential liability. However, this conclusion depends on the specific language of the covenant and the applicable thresholds.

We recommend that PPC review the relevant covenant definitions in the credit agreement and consult with Hargrove National Bank regarding notice requirements. If a notice is required, it should be delivered promptly to avoid any allegation of a covenant breach. In addition, to the extent that the credit facility covenants are material to the Company's liquidity or financial condition, the SEC disclosure — particularly in the MD&A section — should note any credit facility implications, including the potential impact of the IRS examination on the Company's compliance with its credit facility covenants.

VIII. Interaction with Auditor (Crestfield & Associates LLP)

The coordination between Calderwood & Harkness and Crestfield & Associates LLP is a critical element of PPC's disclosure and financial reporting process with respect to the IRS examination. Crestfield occupies a dual role in connection with this matter: it is both the independent registered public accounting firm responsible for auditing PPC's financial statements and expressing an opinion thereon, and the firm that prepared the contemporaneous transfer pricing documentation supporting PPC's intercompany pricing for the years at issue.

Crestfield's engagement partner for the PPC audit is Martin Ogilvy, and the Crestfield partner principally responsible for transfer pricing matters related to PPC is Susan Lam. Both individuals are familiar with the substance of PPC's transfer pricing positions and the IRS's examination of those positions.

Under AU-C Section 501 (Audit Evidence — Specific Considerations for Selected Items) and ASC 740-10, Crestfield is required to independently evaluate Calderwood & Harkness's legal conclusions regarding the FIN 48 reserve in forming its own audit opinion. Crestfield may not simply rely on this firm's assessment; rather, it must exercise its own professional judgment in determining whether the FIN 48 reserve is reasonable and whether the related disclosures are adequate. This independent evaluation necessarily involves a review of the technical merits of PPC's tax positions, the magnitude and nature of the IRS's proposed adjustments, and the legal and factual bases for this firm's conclusions.

To facilitate Crestfield's evaluation, Calderwood & Harkness previously provided a letter to Crestfield dated September 20, 2022, in which we set forth our conclusions regarding the recognition and measurement of PPC's uncertain tax positions under ASC 740-10. That letter reflected our assessment of the hazards of PPC's positions as of that date — prior to the issuance of the NOPA.

An updated letter is currently being prepared, to be dated November 20, 2023, reflecting the NOPA and the current status of the IRS examination. The updated letter will address, among other things, (i) this firm's continuing assessment that PPC's transfer pricing positions are more likely than not to be sustained in substantial part, (ii) the bases for our conclusion that the $62.4 million reserve remains appropriate, (iii) the factors that could cause the reserve to change in future periods (including the outcome of the Appeals process), and (iv) our assessment of the penalty exposure under IRC § 6662(e).

We recommend that the updated letter be delivered to Crestfield promptly to ensure that the audit team has adequate time to review and evaluate our conclusions before commencing year-end audit fieldwork. The timing of the letter delivery should be coordinated with Marcus Whitfield and Deborah Staines. In addition, Calderwood & Harkness should be available to meet with the Crestfield audit team — including Martin Ogilvy and Susan Lam — to discuss our conclusions and respond to any questions that may arise during the audit process.

Crestfield's audit opinion on PPC's financial statements for the fiscal year ending December 31, 2023, will need to address the adequacy of the Company's tax contingency disclosures. If Crestfield concludes that the FIN 48 reserve is materially understated or that the disclosures are inadequate, it could result in a qualification of the audit opinion or a requirement for PPC to revise its financial statements and disclosures. Early and transparent communication between Calderwood & Harkness, Crestfield, and PPC management is essential to avoiding any such outcome.

IX. Timeline and Action Items

The following timeline summarizes the key action items arising from this memorandum:

Immediate (November 2023):

• Finalize updated FIN 48 analysis memorandum for internal use, reflecting the NOPA and the current status of the IRS examination.

• Prepare and deliver updated letter to Crestfield & Associates LLP (to be dated November 20, 2023) supporting the FIN 48 reserve of $62.4 million and addressing the NOPA.

• Brief PPC's General Counsel (Deborah Staines) and VP of Global Tax (Marcus Whitfield) on the disclosure recommendations set forth in this memorandum.

December 2023:

• File formal Protest with the IRS by the extended deadline of December 22, 2023.

• Coordinate with PPC General Counsel on proposed disclosure language for the Form 10-K, including the Item 3 (Legal Proceedings) disclosure, the MD&A discussion, and the income tax footnote.

• Review covenant definitions under the Hargrove National Bank credit facility and determine whether notice to the administrative agent is required.

January–February 2024:

• Work with PPC CFO (Rajesh Iyer) and General Counsel (Deborah Staines) to finalize Form 10-K disclosure language.

• Review draft Form 10-K sections — including Item 3, Item 7, and Item 8 — with the Crestfield & Associates audit team (Martin Ogilvy and Susan Lam) to ensure consistency with the audited financial statements.

• Brief PPC's audit committee on the IRS examination, the FIN 48 reserve, and the proposed disclosures.

• Coordinate with PPC investor relations on communication strategy and talking points in advance of the Form 10-K filing.

Ongoing:

• Update disclosures in interim Form 10-Q filings as material developments occur, including the scheduling or completion of an IRS Appeals conference, any settlement discussions, or any changes to the FIN 48 reserve.

• Monitor the progress of the Appeals process and reassess the adequacy of the FIN 48 reserve in light of new developments.

• Advise PPC on the need for any Form 8-K filing if material developments warrant current reporting.

Upon Resolution:

• If and when the IRS examination is resolved — whether through settlement, agreement, or further administrative or judicial proceedings — prepare a Form 8-K if the resolution results in a material charge to earnings or a material release of reserves.

• Update the FIN 48 reserve to reflect the resolution. For illustrative purposes, if the matter were settled at $47.6 million in additional tax, the existing reserve of $62.4 million would be adjusted to approximately $14.8 million, reflecting the release of the excess reserve attributable

PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT COMMUNICATION
MEMORANDUM
FROM: Garrett Simmons Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103
TO: Leonard Cross, Esq. Sylvia Hartwell, Esq. Calderwood & Harkness LLP
Marcus Whitfield, Vice President, Global Tax Penterra Pharmaceuticals Corp.
Deborah Staines, General Counsel Penterra Pharmaceuticals Corp.
DATE: November 20, 2023
RE: SEC Disclosure Considerations — IRS Transfer Pricing Examination of Penterra Pharmaceuticals Corp. (TY 2017–2020)
MATTER NO.: 1018-00009
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I. Executive Summary
The purpose of this memorandum is to analyze Penterra Pharmaceuticals Corp.'s ("PPC" or the "Company") obligations under the federal securities laws to disclose the ongoing Internal Revenue Service ("IRS") transfer pricing examination and the recently issued proposed adjustments in the Company's upcoming filings with the U.S. Securities and Exchange Commission ("SEC"). In particular, this memorandum addresses the Company's disclosure obligations in connection with its Annual Report on Form 10-K for the fiscal year ending December 31, 2023, as well as any interim Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that may be filed prior to or following the filing of the 10-K.
By way of context, the IRS Large Business & International Division ("LB&I") examination team (Exam Team LB&I-NE-TP-2022-00641) issued a Notice of Proposed Adjustment ("NOPA") on October 12, 2023, proposing net adjustments totaling $380.4 million across the four tax years under examination (TY 2017 through TY 2020). Following the NOPA, the IRS issued a 30-Day Letter on November 8, 2023, providing PPC with the opportunity to file a formal administrative Protest. PPC intends to file that Protest by the extended deadline of December 22, 2023, after which the matter will be referred to the IRS Office of Appeals for consideration.
The financial magnitude of the proposed adjustments is substantial. If the IRS's proposed adjustments were sustained in full, the Company would face additional federal income tax liability of approximately $79.88 million (calculated by applying the applicable statutory rates to the $380.4 million in proposed income adjustments, taking into account the 35% rate for TY 2017 and the 21% rate for TY 2018–2020). In addition, the IRS has proposed a 20% substantial valuation misstatement penalty under Internal Revenue Code ("IRC") § 6662(e), which, if imposed, would result in an additional penalty exposure of approximately $15.98 million. The Company's aggregate potential exposure — inclusive of both additional tax and proposed penalties, but exclusive of interest — therefore totals approximately $95.86 million.
Currently, PPC maintains an uncertain tax position reserve under ASC 740-10 (formerly FIN 48) of $62.4 million related to its Irish intellectual property structure. This reserve was established on the basis of contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP and prior legal analysis performed by this firm in September 2022. While the existing reserve covers a significant portion of the realistic range of potential outcomes, the issuance of the NOPA and the magnitude of the proposed adjustments create an enhanced obligation to evaluate whether the reserve remains adequate and, critically, to determine the appropriate scope and specificity of the Company's SEC disclosures.
Several key stakeholder considerations further heighten the importance of calibrating PPC's disclosure approach. Ridgeview Capital Management LP, the Company's largest institutional shareholder, currently holds approximately 8.3% of PPC's outstanding common shares. Ridgeview, under the direction of Managing Partner Douglas Everett, is known to actively monitor FIN 48 disclosures and changes to tax reserves in the pharmaceutical sector. Any material change to PPC's tax contingency disclosure — or the absence of adequate disclosure — could prompt investor inquiries, activism, or both. Separately, Hargrove National Bank, N.A., the administrative agent under PPC's $1.5 billion revolving credit facility, maintains tax-indemnity and material-tax-event covenants in its credit agreement, and the proposed adjustments may implicate notice obligations under that facility.
In summary, it is our conclusion that PPC has an affirmative obligation to disclose the IRS examination and proposed adjustments as a contingent liability and loss contingency in its upcoming Form 10-K. The required level of specificity is governed by a multi-layered framework that includes ASC 450-20 (formerly FAS 5), ASC 740-10 (FIN 48), SEC Regulation S-K (including Item 103 — Legal Proceedings and Item 303 — MD&A), and applicable SEC Staff Accounting Bulletins. We recommend that disclosure language be carefully calibrated to inform investors of the existence and potential magnitude of the matter, while preserving PPC's strong defense posture and avoiding any concession of weakness that could be exploited in the administrative or judicial proceedings. The specific drafting recommendations set forth in Section V below reflect this approach.
II. Background
A. The IRS Examination
The IRS initiated its examination of PPC on May 16, 2022, when the Company received a Letter 2205-A notifying it that returns for tax years 2017, 2018, 2019, and 2020 had been selected for examination. The examination has been conducted by an LB&I team specializing in transfer pricing matters, designated as Exam Team LB&I-NE-TP-2022-00641.
The examination has focused on the transfer pricing methodology employed by PPC in connection with its Irish intellectual property holding structure. At the center of the IRS's challenge is Penterra Biopharma International DAC ("PBI"), a Designated Activity Company organized under the laws of Ireland with its registered office located at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. PBI serves as the principal non-U.S. entity in PPC's global IP structure, holding rights to certain intellectual property generated through cost-sharing arrangements with PPC and licensing legacy IP from the U.S. parent.
PBI is wholly owned by Penterra Holdings Luxembourg S.à r.l. ("PHL"), a Luxembourg entity that functions as an intermediate holding company. PHL is itself wholly owned by PPC. For U.S. federal income tax purposes, PHL has elected to be treated as a disregarded entity, with the result that transactions between PHL and PPC are disregarded, while transactions between PBI and PPC (or PHL) are treated as transactions between related parties subject to the arm's-length standard of IRC § 482 and the Treasury Regulations promulgated thereunder.
PPC is a Delaware corporation headquartered at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. The Company's common stock trades on the Nasdaq Stock Market under the ticker symbol "PPCA." PPC's Employer Identification Number is 22-3741856. For the fiscal year ended December 31, 2020 — the most recent year under examination — PPC reported total revenue of $6.82 billion and pre-tax income of $1.47 billion.
The IRS's proposed adjustments encompass three principal categories:
(i) Cost-Sharing Arrangement (CSA) Cost-Sharing Ratio Adjustments. The IRS contends that PBI's share of intangible development costs under the parties' qualified cost-sharing arrangement was improperly allocated, resulting in PBI bearing an insufficient proportion of total R&D costs relative to its anticipated benefits from the arrangement. The IRS proposes to adjust the cost-sharing ratios to increase PBI's share, which would correspondingly increase the income allocable to the United States. The aggregate proposed CSA adjustments across all four tax years total $235.01 million.
(ii) Legacy IP Royalty Rate Adjustments. The IRS challenges the royalty rate charged by PPC to PBI for the license of pre-existing ("legacy") intellectual property that was developed by PPC prior to the establishment of the cost-sharing arrangement. PPC applied a royalty rate of 4.5% of PBI's net sales of products incorporating legacy IP. The IRS proposes an adjusted royalty rate of 11.0%, contending that the 4.5% rate is below arm's-length levels and does not adequately compensate PPC for the highly valuable, profit-tested intangibles at issue. The aggregate proposed royalty rate adjustments across all four tax years total $188.04 million.
(iii) Economic Substance Challenge. The IRS has also raised an economic substance challenge to PBI's role in the overall structure, questioning whether PBI possessed sufficient substance — including qualified personnel, decision-making authority, and operational control over the intangible assets — to justify its status as the economic owner of the shared intangible development costs and licensed IP. While this challenge does not carry a separate quantified adjustment beyond the CSA and royalty rate adjustments, it has implications for the applicability of penalties under IRC § 6662(b)(6) and for the overall viability of PPC's structure.
The IRS's proposed gross adjustments under categories (i) and (ii) above total $423.05 million. However, after applying a correlative offset of ($42.65 million) to account for the corresponding reduction in PBI's income that would result from the higher royalty payments and cost-sharing contributions, the net proposed adjustment across all four tax years is $380.4 million.
Following issuance of the NOPA on October 12, 2023, the IRS issued a 30-Day Letter on November 8, 2023. PPC has obtained an extension of the deadline to file its formal Protest to December 22, 2023. Upon filing, the matter will be referred to the IRS Office of Appeals for consideration.
B. PPC's Financial Profile and Key Stakeholders
Penterra Pharmaceuticals Corp. is a large-cap biopharmaceutical company with a diversified product portfolio spanning oncology, immunology, and rare diseases. For the fiscal year ended December 31, 2020 — the last year under examination — PPC reported total revenue of $6.82 billion and pre-tax income of $1.47 billion. The Company's key products include:
• Veritaxol (oncology), with global net sales of approximately $3.12 billion in FY 2020;
• Imvara (immunology), with global net sales of approximately $1.87 billion in FY 2020; and
• Cerulon (rare disease), with global net sales of approximately $0.62 billion in FY 2020.
PPC's fiscal year ends on December 31. The Company is a Nasdaq-listed "large accelerated filer" within the meaning of SEC Rule 12b-2 under the Securities Exchange Act of 1934 and is subject to the full panoply of SEC reporting and disclosure requirements applicable to registrants of its size and complexity.
PPC's independent registered public accounting firm and tax return preparer is Crestfield & Associates LLP. The engagement partner for the PPC audit is Martin Ogilvy. The Crestfield partner principally responsible for transfer pricing matters related to PPC is Susan Lam. Crestfield prepared the contemporaneous transfer pricing documentation supporting the intercompany pricing between PPC and PBI for the years at issue, and Crestfield also serves as the Company's auditor for purposes of the annual financial statement audit, including evaluation of the Company's uncertain tax position reserves under ASC 740-10.
As noted, Ridgeview Capital Management LP holds approximately 8.3% of PPC's outstanding common shares, making it the Company's largest institutional shareholder. Ridgeview's Managing Partner, Douglas Everett, has publicly stated in past communications with PPC's investor relations department that Ridgeview closely monitors FIN 48 disclosures and effective tax rate trends among its portfolio companies. A material change in PPC's tax contingency reserves or a significant new disclosure regarding potential tax liabilities could draw attention from Ridgeview and other institutional investors.
Separately, Hargrove National Bank, N.A. serves as the administrative agent under PPC's $1.5 billion revolving credit facility. The Senior Vice President and Relationship Manager for the PPC account is Christine Bellucci. The credit agreement governing the revolving facility contains, among other provisions, tax-indemnity covenants and a material-tax-event covenant that may impose notice and other obligations on PPC in connection with the IRS examination and proposed adjustments. The implications of these covenants are addressed in greater detail in Section VII below and in a separate memorandum prepared by Nazari (November 2023).
C. Existing FIN 48 Reserve
PPC currently maintains an uncertain tax position reserve under ASC 740-10 (formerly FIN 48) of $62.4 million related to its Irish intellectual property structure. This reserve was established following a comprehensive analysis of PPC's transfer pricing positions, conducted jointly by Crestfield & Associates (which prepared the contemporaneous transfer pricing documentation) and Calderwood & Harkness (which provided a legal assessment of the hazards of the Company's positions in a memorandum dated September 2022).
The $62.4 million reserve reflects the application of the two-step FIN 48 analysis to PPC's transfer pricing positions. In the recognition step, PPC determined that its positions were more likely than not (i.e., greater than 50% likely) to be sustained on their technical merits. In the measurement step, PPC measured the positions at the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement, and reserved $62.4 million for the portion of the benefit that did not meet this threshold.
The positions giving rise to the reserve include:
• PPC's cost-sharing ratios under the CSA, which allocated between 38.2% and 42.7% of total intangible development costs to PBI for TY 2017 through TY 2020; and
• PPC's application of a 4.5% royalty rate for the license of legacy intellectual property from PPC to PBI.
The reserve does not reflect any penalty exposure, as PPC's position has been that the contemporaneous documentation prepared by Crestfield satisfies the reasonable-cause and good-faith exception to the substantial valuation misstatement penalty under IRC § 6662(e)(3)(B).
III. Applicable Legal and Accounting Framework
The Company's disclosure obligations with respect to the IRS examination and proposed adjustments arise under multiple, overlapping legal and accounting standards. This section sets forth the applicable framework.
A. SEC Regulation S-K, Item 103 — Legal Proceedings
Item 103 of Regulation S-K (17 C.F.R. § 229.103) requires a registrant to "[d]escribe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business." This requirement applies to the disclosure in Part I, Item 3 of the Annual Report on Form 10-K.
The general materiality threshold for Item 103 disclosure is whether the proceeding involves a potential liability that, individually or in the aggregate, exceeds 10% of the registrant's consolidated total assets. However, for proceedings involving claims by a governmental authority, the SEC Staff has historically suggested a lower threshold for disclosure, recognizing that governmental proceedings — including tax examinations — may carry reputational and market implications disproportionate to the dollar amounts at issue.
In the present case, the proposed net adjustment of $380.4 million, with an associated potential tax and penalty exposure of approximately $95.86 million, is material to PPC's financial position by any reasonable measure. Even if one were to apply the general 10% threshold to PPC's total consolidated assets (which, based on publicly available financial data, substantially exceed $10 billion), the proposed adjustments would represent a significant contingency warranting disclosure.
A threshold question is whether the IRS administrative proceedings — which have not yet advanced to litigation — constitute "legal proceedings" within the meaning of Item 103. The SEC Staff has taken interpretive positions suggesting that IRS examinations resulting in proposed adjustments may require disclosure under Item 103 even before the filing of a petition in the United States Tax Court or the initiation of a refund suit in federal district court or the Court of Federal Claims. The issuance of the NOPA on October 12, 2023, followed by the 30-Day Letter on November 8, 2023, elevates this matter well beyond the status of a routine audit. The IRS has now formally articulated its position and quantified the proposed adjustments, and PPC is required to either accept those adjustments or pursue formal administrative appeal. Under these circumstances, the matter has crystallized to a degree that squarely triggers Item 103 disclosure.
It is our view that the IRS examination and proposed adjustments must be disclosed in Part I, Item 3 of PPC's Form 10-K for the fiscal year ending December 31, 2023.
B. SEC Regulation S-K, Item 303 — Management's Discussion and Analysis (MD&A)
Item 303 of Regulation S-K (17 C.F.R. § 229.303) requires registrants to discuss in the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") section of their periodic reports any known trends, demands, commitments, events, or uncertainties that are reasonably likely to result in the registrant's liquidity increasing or decreasing in any material way, or that the registrant reasonably expects will have a material favorable or unfavorable impact on net revenues, income from continuing operations, profitability, or capital resources.
The IRS examination and proposed adjustment of $380.4 million — with a potential tax and penalty exposure of approximately $95.86 million — constitute a known uncertainty that must be addressed in MD&A. Even if PPC ultimately prevails in its administrative appeal, the pendency of the matter and the potential for partial or full adverse resolution create an obligation to discuss the following:
• The potential impact on the Company's effective tax rate for the periods under examination and for future periods if the matter is not resolved favorably;
• The potential cash outflow associated with an adverse or partially adverse resolution, and the impact on the Company's liquidity and capital resources;
• The relationship between the proposed adjustments and the Company's existing uncertain tax position reserves; and
• The expected timeline for resolution of the matter, including the anticipated administrative appeal process.
The MD&A discussion should be balanced and measured, providing investors with sufficient information to understand the nature and potential magnitude of the uncertainty without overstating the likelihood of an adverse outcome or conceding the merits of the IRS's position. We address specific drafting recommendations in Section V below.
C. ASC 450-20 (formerly FAS 5) — Loss Contingencies
ASC 450-20 (Contingencies — Loss Contingencies), which codified the principles formerly set forth in FASB Statement No. 5, establishes a three-tier framework for accounting for and disclosing loss contingencies:
(i) Probable. A loss contingency that is "probable" (i.e., the future event or events are likely to occur) must be accrued if the amount of the loss can be reasonably estimated. Even if the loss is probable but the amount cannot be reasonably estimated, disclosure of the contingency is required.
(ii) Reasonably Possible. A loss contingency that is "reasonably possible" (i.e., the chance of the future event or events occurring is more than remote but less than likely) must be disclosed, including an estimate of the possible loss or range of loss, or a statement that such an estimate cannot be made.
(iii) Remote. A loss contingency that is "remote" (i.e., the chance of the future event or events occurring is slight) generally does not require accrual or disclosure, except in limited circumstances such as guarantees.
In the present case, the IRS has issued a NOPA and a 30-Day Letter, but PPC has not yet filed its Protest, and the matter has not yet been considered by the IRS Office of Appeals. PPC believes — and this firm has independently concluded — that the Company's transfer pricing positions are well-supported by applicable law, regulations, and economic analyses. Under these circumstances, the full proposed adjustment of $380.4 million is not "probable" of being sustained. However, given the formal nature of the proposed adjustments and the inherent uncertainty in any tax controversy, a loss contingency clearly exists. Some measure of additional tax liability beyond the current reserve is "reasonably possible," and certain elements of the proposed adjustments — particularly the CSA cost-sharing ratio adjustments — may, in our assessment, carry a moderate degree of risk even if PPC's overall positions are strong.
PPC has already accrued $62.4 million under ASC 740-10 in connection with the uncertain tax positions at issue. The primary question under ASC 450-20 is whether additional accrual is warranted and, if not, what range of reasonably possible loss should be disclosed. Based on this firm's current analysis of the hazards associated with PPC's positions — which is set forth in detail in our separate FIN 48 update memorandum dated November 2023 — we do not believe that additional accrual is required at this time. However, we recommend that PPC disclose the matter as a reasonably possible loss contingency and provide, to the extent estimable, the range of possible additional loss beyond the amounts already accrued. If the range cannot be reasonably determined, the Company should so state in its disclosure.
D. ASC 740-10 (FIN 48) — Uncertain Tax Positions
ASC 740-10 (Income Taxes), which incorporated the principles of FASB Interpretation No. 48 ("FIN 48"), prescribes a two-step process for the recognition and measurement of uncertain tax positions:
Step 1 — Recognition. A tax position is recognized in the financial statements only if it is "more likely than not" (i.e., a likelihood of greater than 50%) that the position will be sustained upon examination by the relevant taxing authority, including resolution of any related appeals or litigation processes, based solely on the technical merits of the position.
Step 2 — Measurement. A tax position that meets the recognition threshold is measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority.
PPC's current uncertain tax position reserve of $62.4 million was established through the application of these two steps to the Company's transfer pricing positions. In the recognition step, PPC — relying on Crestfield's contemporaneous transfer pricing documentation and this firm's prior legal analysis — determined that its positions were more likely than not to be sustained on their technical merits. In the measurement step, PPC concluded that the largest amount of benefit that was greater than 50% likely to be realized was such that a reserve of $62.4 million was appropriate for the portion of the benefit falling below the measurement threshold.
The issuance of the NOPA does not, in itself, change the underlying technical merits of PPC's transfer pricing positions. The arm's-length standard under IRC § 482, the applicable Treasury Regulations (including Treas. Reg. § 1.482-1 through § 1.482-9), and the economic analyses supporting PPC's pricing methodology remain the same. However, the NOPA is a new factor that must be weighed in the overall assessment. The fact that the IRS has formally proposed substantial adjustments — and has quantified those adjustments at a specific dollar amount — informs the evaluation of the "more likely than not" recognition threshold and the measurement of the reserve.
Based on Calderwood & Harkness's updated analysis, set forth in a separate FIN 48 update memorandum dated November 2023, PPC's transfer pricing positions remain more likely than not to be sustained in substantial part. We continue to believe that the Company's CSA cost-sharing ratios and legacy IP royalty rate are within the arm's-length range, and that PBI possesses sufficient economic substance to support its role in the structure. Accordingly, we conclude that the $62.4 million reserve remains appropriate at this stage. We do not recommend a material increase to the reserve at this time, although this assessment should be revisited as the matter progresses through the administrative appeal process.
Notwithstanding the adequacy of the reserve amount, we strongly recommend that the qualitative and quantitative disclosures accompanying the FIN 48 reserve in PPC's financial statement footnotes be enhanced in the upcoming Form 10-K. The disclosure should reflect the issuance of the NOPA, the magnitude of the proposed adjustments, the Company's intent to pursue administrative appeal, and the reasonably possible range of outcomes. In addition, the tabular reconciliation of beginning and ending unrecognized tax benefit balances required by ASC 740-10-50-15A will need to be updated to reflect any changes during the fiscal year.
It is also important to address the interaction between this firm's legal conclusions and the role of Crestfield & Associates as PPC's independent auditor. Crestfield is required to independently evaluate Calderwood & Harkness's legal conclusions regarding the adequacy of the FIN 48 reserve in forming its own audit opinion on PPC's financial statements. Under AU-C Section 501 (Audit Evidence — Specific Considerations for Selected Items) and the relevant provisions of ASC 740-10, Crestfield must assess the reasonableness of management's — and, by extension, legal counsel's — conclusions regarding the recognition and measurement of uncertain tax positions. We have previously provided a letter to Crestfield supporting the FIN 48 reserve (dated September 20, 2022), and an updated letter reflecting the NOPA is currently being prepared. The updated letter will be dated November 20, 2023 and will be delivered to Crestfield in advance of year-end audit fieldwork. The coordination with Crestfield is addressed further in Section VIII below.
E. SAB Topic 5.Y (SAB 92) — Loss Contingencies
SEC Staff Accounting Bulletin ("SAB") Topic 5.Y (derived from SAB No. 92) provides additional guidance on the disclosure of loss contingencies, including reasonably possible losses in excess of amounts already accrued. The SEC Staff has emphasized that registrants should, to the extent estimable, disclose the range of reasonably possible loss in excess of amounts accrued for loss contingencies, and that a failure to provide such disclosure may render the financial statements materially misleading.
In PPC's case, the Company has accrued $62.4 million under ASC 740-10 in connection with its uncertain transfer pricing positions. If the full $380.4 million in proposed adjustments were sustained, the additional federal income tax would be approximately $79.88 million (a simplified calculation based on the applicable statutory rates, taking into account the 35% rate for TY 2017 and 21% for TY 2018–2020). The incremental tax exposure beyond the existing reserve would therefore be approximately $17.48 million ($79.88 million less $62.4 million), though this simplified calculation is subject to further refinement based on the year-by-year allocation of adjustments, the applicable statutory rates, and the interplay between the tax and penalty calculations. When the proposed 20% substantial valuation misstatement penalty of approximately $15.98 million is included, the total potential incremental exposure beyond the reserve is materially higher.
Consistent with SAB Topic 5.Y, we recommend that PPC disclose, to the extent estimable, the range of reasonably possible loss in excess of the $62.4 million reserve. If the Company determines that a specific range cannot be estimated with sufficient precision, it should state that the ultimate resolution of the matter could result in additional liabilities that are material to the Company's financial position and results of operations.
IV. Analysis of Required Disclosures
A. Form 10-K (Fiscal Year Ending December 31, 2023)
Based on the legal and accounting framework set forth in Section III above, PPC's Annual Report on Form 10-K for the fiscal year ending December 31, 2023 should include disclosures in the following sections:
1. Part I, Item 3 — Legal Proceedings
Item 3 of Form 10-K requires a description of material pending legal proceedings. As discussed in Section III.A above, the IRS examination and proposed adjustments meet the threshold for disclosure under Item 103 of Regulation S-K. We recommend that PPC include a disclosure in Part I, Item 3 of the Form 10-K that addresses the following elements:
• That the Company has received proposed adjustments from the IRS relating to its transfer pricing methodology for intercompany transactions with its Irish subsidiary for tax years 2017 through 2020;
• A description of the nature of the dispute in general terms — specifically, that the IRS has challenged the pricing of intercompany transactions between the Company's U.S. operations and its Irish subsidiary, including cost-sharing arrangements and royalty rates for licensed intellectual property;
• The aggregate proposed adjustment amount (approximately $380 million) and/or the potential additional federal income tax effect (approximately $80 million), together with a reference to potential penalties;
• That the Company disagrees with the IRS's proposed adjustments and believes its transfer pricing positions are well-supported by applicable law, regulations, and economic analyses;
• That the Company has filed (or intends to file) a formal Protest and intends to pursue resolution through the IRS Office of Appeals; and
• A cautionary statement that no assurance can be given as to the timing or outcome of the matter.
Specific proposed disclosure language for Item 3 is set forth in Section V.A below.
2. Part II, Item 7 — MD&A
The MD&A section of PPC's Form 10-K should address the IRS examination as a known uncertainty that could materially affect the Company's financial condition or results of operations. We recommend that the following topics be addressed:
• A discussion of the IRS examination and proposed adjustments as a known uncertainty, cross-referencing the disclosure in Item 3 and the income tax footnote to the financial statements;
• An analysis of the potential impact on the Company's effective tax rate if the proposed adjustments are sustained in whole or in part, including a discussion of the different statutory rates applicable to TY 2017 (35%, pre-TCJA) versus TY 2018–2020 (21%, post-TCJA), which materially affects the tax impact of any adjustments allocated to different years;
• A discussion of the potential cash outflow and impact on the Company's liquidity in the event of an adverse or partially adverse resolution, noting that the total potential exposure of approximately $95.86 million (inclusive of tax and proposed penalties, but excluding interest) should be evaluated against the Company's available resources, including the $1.5 billion revolving credit facility administered by Hargrove National Bank, N.A.;
• A note that PPC was not enrolled in the IRS Compliance Assurance Process ("CAP") for the tax years at issue, which means that the examination was conducted on a post-filing basis and the proposed adjustments were not the subject of any pre-filing agreement or real-time review by the IRS; and
• A discussion of the expected timeline for resolution, including the anticipated filing of the Protest and referral to IRS Appeals, and a statement that the Company cannot predict with certainty when the matter will be resolved.
The Tax Cuts and Jobs Act of 2017 ("TCJA") rate change warrants specific attention in MD&A. TY 2017 is subject to the pre-TCJA corporate tax rate of 35%, while TY 2018 through TY 2020 are subject to the post-TCJA rate of 21%. The allocation of the $380.4 million in proposed adjustments across the four tax years will therefore significantly affect the total additional tax liability. To the extent that a disproportionate share of the proposed adjustments is attributable to TY 2017 — where the higher 35% rate applies — the potential tax impact will be correspondingly greater. This nuance should be addressed in the MD&A discussion so that investors can understand the sensitivity of the potential tax exposure to the year-by-year allocation of adjustments.
3. Part II, Item 8 — Financial Statements and Notes
The financial statements included in Part II, Item 8 of the Form 10-K should include enhanced disclosures in the income tax footnote. We recommend the following:
Income Tax Footnote. The income tax footnote should discuss the IRS examination, the proposed adjustments, and PPC's assessment of the related uncertainty. The disclosure should note that the IRS has proposed adjustments of approximately $380 million relating to transfer pricing for TY 2017 through TY 2020, and that the Company has filed a formal Protest and intends to pursue resolution through the IRS Office of Appeals. The footnote should state that the Company believes its positions are well-supported and that the ultimate resolution of the matter is uncertain.
FIN 48 Disclosure. The footnote should disclose the $62.4 million uncertain tax position reserve related to the transfer pricing positions at issue. In accordance with ASC 740-10-50-15A, the footnote should include a tabular rollforward of the beginning and ending balances of unrecognized tax benefits for the fiscal year. The rollforward should reconcile any increases or decreases in the reserve attributable to current-year activity, settlements, lapses of statutes of limitations, or changes in the assessment of existing positions. The nature of the uncertain positions should be described — specifically, that they relate to intercompany royalty rates and cost-sharing payments associated with the Company's Irish subsidiary.
Range of Reasonably Possible Outcomes. The footnote should discuss the range of reasonably possible outcomes. At one end of the range, if the matter is resolved with no adjustment (i.e., PPC prevails in full), no additional tax would be due and the existing reserve of $62.4 million could be released, resulting in a favorable impact on the Company's effective tax rate. At the other end of the range, if the full proposed adjustment of $380.4 million were sustained, the additional federal income tax would be approximately $79.88 million, and the proposed penalty under IRC § 6662(e) would be approximately $15.98 million, for a total potential exposure of approximately $95.86 million. The footnote should note that the current accrual of $62.4 million covers a significant portion of the realistic range of potential outcomes.
Resolution Timeline. The footnote should disclose that it is reasonably possible that the total amount of unrecognized tax benefits could change by a material amount within the next 12 months, as the matter is expected to be considered by the IRS Office of Appeals during that period.
Interest Accrual. The footnote should address any interest accrual considerations on potential underpayments at the applicable federal rate under IRC § 6601. Interest on underpayments is assessed from the original due date of the return and compounds daily, which can add materially to the total exposure over the multi-year examination period. To the extent PPC has accrued (or should accrue) interest on the potential underpayments reflected in its FIN 48 reserve, this should be disclosed.
4. Part IV — Certifications and Disclosure Controls
PPC's Chief Executive Officer, Catherine Falk, and Chief Financial Officer, Rajesh Iyer, will be required to execute certifications under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 ("SOX") in connection with the filing of the Form 10-K. These certifications require the certifying officers to attest, among other things, that the filing does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading. The certifying officers must also attest that they have disclosed to the registrant's auditors and the audit committee of the board of directors all significant deficiencies and material weaknesses in internal controls over financial reporting.
In light of the magnitude of the IRS proposed adjustments and the potential financial exposure, the examination and proposed adjustments must be disclosed to the audit committee and discussed in the context of the Company's internal controls over financial reporting. Management should confirm that its disclosure controls and procedures are effective in ensuring that the IRS examination and related contingency are appropriately captured in the Company's periodic filings. Any failure to disclose a contingent liability of this magnitude would raise serious questions under the SOX certification requirements.
We recommend that PPC's General Counsel, Deborah Staines, and VP of Global Tax, Marcus Whitfield, brief the audit committee and the CEO and CFO on the IRS examination and proposed adjustments, the FIN 48 reserve, and the proposed disclosure language in advance of the filing of the Form 10-K.
B. Form 10-Q (Interim Filings)
If material developments occur between annual filings — for example, if the Protest is filed on December 22, 2023, an Appeals conference is scheduled, or the IRS modifies its position — PPC should update its disclosures in the interim Quarterly Reports on Form 10-Q. The MD&A section and the notes to the condensed financial statements included in the Form 10-Q should be updated to reflect the current status of the matter. In particular:
• If the filing of the Protest is completed on or before December 22, 2023, the first quarterly filing after that date (Form 10-Q for the quarter ending March 31, 2024) should confirm that the Protest has been filed and that the matter has been referred (or is being referred) to the IRS Office of Appeals.
• If an Appeals conference is scheduled or conducted during an interim period, the Form 10-Q filed for that period should disclose the current status of the administrative appeal.
• Any changes to the FIN 48 reserve — whether increases, decreases, or adjustments arising from new information — should be reflected in the condensed financial statements and discussed in the notes.
The interim disclosures should be consistent with the framework established in the annual Form 10-K, avoiding any material inconsistency or regression in the level of detail provided to investors.
C. Form 8-K — Current Report Considerations
A separate analysis is required to determine whether the issuance of the NOPA triggers a filing obligation under Form 8-K. The potentially applicable items include:
• Item 8.01 (Other Events). Item 8.01 provides a voluntary disclosure mechanism for events that the registrant deems to be of importance to security holders. A registrant may, but is not required to, file a Form 8-K under Item 8.01 to disclose events not otherwise covered by the specified triggering items.
• Item 2.06 (Material Impairments). Item 2.06 requires the filing of a Form 8-K when a registrant's board of directors, a committee thereof, or authorized officers conclude that a material charge for impairment is required under generally accepted accounting principles.
It is our conclusion that the NOPA alone does not trigger a mandatory Form 8-K filing obligation. The NOPA is a proposed adjustment that is subject to administrative appeal and has not been judicially determined. PPC has not conceded the validity of the IRS's position, and the Company intends to vigorously contest the proposed adjustments through the Protest and Appeals process. Under these circumstances, the NOPA does not constitute a triggering event under any of the mandatory Form 8-K items.
However, if PPC determines at any point that a material charge to earnings is required — for example, if a significant increase to the FIN 48 reserve becomes necessary — a voluntary Form 8-K under Item 8.01 may be appropriate to ensure prompt and transparent communication with the market. Additionally, if a settlement is ultimately reached with the IRS that results in a material charge to earnings or a material release of reserves, a Form 8-K would likely be required under Item 2.06 or voluntarily filed under Item 8.01 at that point. We will monitor developments and advise PPC on the need for any Form 8-K filing as the matter progresses.
V. Specific Drafting Recommendations
A. Proposed Disclosure Language — Legal Proceedings (Item 3)
Based on our analysis of the applicable legal standards and the current status of the IRS examination, we propose the following disclosure language for Part I, Item 3 (Legal Proceedings) of PPC's Form 10-K for the fiscal year ending December 31, 2023:
"The Company has received proposed adjustments from the Internal Revenue Service relating to the Company's transfer pricing methodology for intercompany transactions with its Irish subsidiary for tax years 2017 through 2020. The aggregate proposed adjustments total approximately $380 million, which would result in additional federal income tax of approximately $80 million, plus potential penalties. The Company disagrees with the proposed adjustments and believes its transfer pricing positions are supported by applicable law, regulations, and economic analyses. The Company filed a formal Protest in December 2023 and intends to pursue resolution through IRS Appeals. No assurance can be given as to the timing or outcome of this matter."
We note that the specific dollar amounts referenced in this proposed language (approximately $380 million in proposed adjustments, approximately $80 million in additional tax) may be adjusted based on materiality considerations and the Company's overall disclosure strategy. We recommend that the final language be reviewed and approved by Deborah Staines, General Counsel of PPC, and coordinated with Marcus Whitfield, VP of Global Tax, before inclusion in the Form 10-K. We are available to discuss alternative formulations of the dollar figures — including the possibility of disclosing a range rather than a specific amount, or referencing the potential tax and penalty exposure in the aggregate — based on PPC's judgment regarding the appropriate level of specificity.
B. Proposed Disclosure Language — Income Tax Footnote
The income tax footnote to PPC's financial statements in Part II, Item 8 of the Form 10-K should include the following key elements:
• A reference to the $62.4 million uncertain tax position reserve maintained under ASC 740-10, with an explanation that the reserve relates to the Company's transfer pricing positions involving intercompany royalty rates and cost-sharing payments associated with the Company's Irish subsidiary;
• A statement that it is reasonably possible that the total amount of unrecognized tax benefits could change by a material amount within the next 12 months, in light of the pending IRS examination and administrative appeal;
• A tabular rollforward of the beginning and ending balances of unrecognized tax benefits for the fiscal year, as required by ASC 740-10-50-15A;
• A discussion of the IRS's proposed penalty exposure of approximately $15.98 million under IRC § 6662(e), together with a statement of the Company's belief that reasonable cause and contemporaneous documentation support penalty protection under IRC § 6662(e)(3)(B) and that no accrual for penalties has been recorded; and
• A discussion of the range of reasonably possible outcomes, from no additional liability (if PPC prevails in full) to additional tax and penalties totaling approximately $95.86 million (if the full proposed adjustments and penalties were sustained), noting that the existing reserve of $62.4 million covers a significant portion of the realistic range.
As with the Item 3 disclosure, the final language of the income tax footnote should be reviewed and approved by PPC management and coordinated with Crestfield & Associates to ensure consistency with the audited financial statements.
C. Calibration of Specificity
The calibration of specificity in PPC's disclosures requires a careful balancing of competing considerations. On one hand, PPC's obligations under the federal securities laws — and the expectations of the SEC Staff and the investing public — demand transparency and completeness. Investors are entitled to information that is material to their investment decisions, and the IRS examination and proposed adjustments plainly fall within that category. On the other hand, PPC has legitimate interests in preserving its litigation strategy, protecting privileged communications, and avoiding public statements that could be exploited by the IRS or other adverse parties.
We recommend the following principles to guide the calibration of PPC's disclosures:
• Inform without conceding. The disclosures should provide investors with a clear and accurate understanding of the nature, magnitude, and status of the IRS examination, without including any language that could be interpreted as conceding weakness in PPC's transfer pricing positions or suggesting that the Company expects an adverse outcome.
• Protect privilege. The disclosures should not reveal the substance of Calderwood & Harkness's hazards-of-litigation analysis, the parameters of any settlement authority that PPC may establish, or the specific elements of the Company's defense strategy. These matters are protected by the attorney-client privilege and the attorney work product doctrine, and their disclosure — whether in SEC filings or otherwise — would be prejudicial to PPC's interests.
• Avoid specific settlement ranges. The disclosures should not reference specific settlement targets, ranges, or negotiating positions. While the disclosure of a reasonably possible range of loss under ASC 450-20 and SAB Topic 5.Y is appropriate, this range should be framed in terms of the potential legal exposure (i.e., no additional tax at one end, full proposed adjustment at the other), not in terms of the Company's internal assessment of a likely settlement amount.
• Coordinate with auditors. All disclosure language should be coordinated with Crestfield & Associates (Martin Ogilvy, engagement partner) to ensure that the disclosures are consistent with the audited financial statements and with Crestfield's own conclusions regarding the FIN 48 reserve. Crestfield's audit opinion will cover the adequacy of PPC's tax contingency disclosures, and any inconsistency between the Company's disclosure language and Crestfield's assessment could give rise to audit complications.
VI. Institutional Shareholder Considerations
A. Ridgeview Capital Management LP
As noted above, Ridgeview Capital Management LP holds approximately 8.3% of PPC's outstanding common shares, making it the Company's largest institutional shareholder. Ridgeview's Managing Partner, Douglas Everett, has a well-documented history of actively monitoring FIN 48 disclosures and effective tax rate trends among portfolio companies in the pharmaceutical sector. Ridgeview has, in prior instances involving other portfolio companies, engaged in direct dialogue with management regarding tax reserve adequacy and has been known to advocate for enhanced disclosure when it perceives that a company's tax contingencies are insufficiently transparent.
In light of Ridgeview's established interest in these matters, the disclosure of the IRS examination and proposed adjustments in PPC's Form 10-K could prompt investor inquiries. A sudden material increase in the FIN 48 reserve — or a new disclosure of a significant contingent liability that was not previously flagged — could raise concerns among Ridgeview and other institutional investors regarding the adequacy of PPC's prior disclosures and the Company's overall tax risk management. Such concerns could, in turn, lead to requests for meetings with management, shareholder proposals, or other forms of engagement.
We recommend the following approach to mitigate unnecessary market concern:
• PPC's disclosure language should be clear, measured, and consistent with the Company's strong defense posture. The disclosure should convey confidence in PPC's transfer pricing positions while acknowledging the uncertainty inherent in any tax controversy.
• PPC's investor relations team should be briefed on the substance of the disclosure in advance of the Form 10-K filing. The investor relations team should be prepared to respond to inquiries from Ridgeview and other investors in a manner consistent with the Company's public disclosures, without revealing privileged information or providing additional detail beyond what is contained in the filing.
• The General Counsel, Deborah Staines, should coordinate with investor relations on talking points and Q&A preparation in advance of the filing.
B. Broader Market Impact
PPC's common stock trades on the Nasdaq Stock Market under the ticker symbol "PPCA." Any material disclosure regarding potential tax exposure — particularly a disclosure that includes specific dollar amounts — has the potential to affect the Company's stock price. The market reaction will depend on a number of factors, including the size of the disclosed exposure relative to PPC's market capitalization and earnings, the market's assessment of the likelihood of an adverse outcome, and the clarity and confidence conveyed by the disclosure language.
We recommend that PPC consider the timing of its disclosure relative to its quarterly earnings announcements. If the Form 10-K is filed in close proximity to an earnings release, the Company may wish to address the IRS examination proactively in its earnings call and press release, consistent with its SEC filings, to avoid the appearance that the disclosure was buried in the annual report. Proactive communication — framed in the context of PPC's strong defense posture and available resources — is generally more effective at managing market expectations than reactive responses to investor and analyst inquiries.
VII. Credit Facility Covenant Considerations
This memorandum does not undertake a comprehensive analysis of PPC's obligations under the Hargrove National Bank credit facility, as that analysis is the subject of a separate memorandum prepared by Nazari and dated November 2023. However, a brief summary of the relevant considerations is warranted, given the potential interaction between PPC's SEC disclosure obligations and its credit facility covenants.
PPC maintains a $1.5 billion revolving credit facility with Hargrove National Bank, N.A. as administrative agent. The Senior Vice President and Relationship Manager for the PPC account is Christine Bellucci. The credit agreement governing the facility includes, among other provisions, the following covenants of relevance:
• Tax-Indemnity Covenant. The credit agreement contains representations and covenants regarding PPC's compliance with applicable tax laws and regulations, and may require PPC to indemnify the lenders for certain tax-related losses or liabilities.
• Material-Tax-Event Covenant. The credit agreement includes a covenant requiring PPC to provide notice to the administrative agent upon the occurrence of a "material tax event," as defined in the agreement. The definition of "material tax event" may encompass the receipt of proposed adjustments from a taxing authority that exceed a specified threshold, the initiation of administrative or judicial proceedings related to a material tax controversy, or the accrual of additional tax reserves in excess of a specified amount.
The IRS's proposed adjustment of $380.4 million, with an associated potential tax and penalty exposure of approximately $95.86 million, could constitute a "material tax event" within the meaning of the credit agreement, depending on the specific definitional thresholds set forth in the agreement. If the proposed adjustments trigger the material-tax-event covenant, PPC may be required to provide written notice to Hargrove National Bank within a specified period.
Notably, if the ultimate settlement of the matter falls within the range of the existing FIN 48 reserve of $62.4 million, the resolution may not independently trigger the material-tax-event covenant, as the Company will have already established a reserve in anticipation of the potential liability. However, this conclusion depends on the specific language of the covenant and the applicable thresholds.
We recommend that PPC review the relevant covenant definitions in the credit agreement and consult with Hargrove National Bank regarding notice requirements. If a notice is required, it should be delivered promptly to avoid any allegation of a covenant breach. In addition, to the extent that the credit facility covenants are material to the Company's liquidity or financial condition, the SEC disclosure — particularly in the MD&A section — should note any credit facility implications, including the potential impact of the IRS examination on the Company's compliance with its credit facility covenants.
VIII. Interaction with Auditor (Crestfield & Associates LLP)
The coordination between Calderwood & Harkness and Crestfield & Associates LLP is a critical element of PPC's disclosure and financial reporting process with respect to the IRS examination. Crestfield occupies a dual role in connection with this matter: it is both the independent registered public accounting firm responsible for auditing PPC's financial statements and expressing an opinion thereon, and the firm that prepared the contemporaneous transfer pricing documentation supporting PPC's intercompany pricing for the years at issue.
Crestfield's engagement partner for the PPC audit is Martin Ogilvy, and the Crestfield partner principally responsible for transfer pricing matters related to PPC is Susan Lam. Both individuals are familiar with the substance of PPC's transfer pricing positions and the IRS's examination of those positions.
Under AU-C Section 501 (Audit Evidence — Specific Considerations for Selected Items) and ASC 740-10, Crestfield is required to independently evaluate Calderwood & Harkness's legal conclusions regarding the FIN 48 reserve in forming its own audit opinion. Crestfield may not simply rely on this firm's assessment; rather, it must exercise its own professional judgment in determining whether the FIN 48 reserve is reasonable and whether the related disclosures are adequate. This independent evaluation necessarily involves a review of the technical merits of PPC's tax positions, the magnitude and nature of the IRS's proposed adjustments, and the legal and factual bases for this firm's conclusions.
To facilitate Crestfield's evaluation, Calderwood & Harkness previously provided a letter to Crestfield dated September 20, 2022, in which we set forth our conclusions regarding the recognition and measurement of PPC's uncertain tax positions under ASC 740-10. That letter reflected our assessment of the hazards of PPC's positions as of that date — prior to the issuance of the NOPA.
An updated letter is currently being prepared, to be dated November 20, 2023, reflecting the NOPA and the current status of the IRS examination. The updated letter will address, among other things, (i) this firm's continuing assessment that PPC's transfer pricing positions are more likely than not to be sustained in substantial part, (ii) the bases for our conclusion that the $62.4 million reserve remains appropriate, (iii) the factors that could cause the reserve to change in future periods (including the outcome of the Appeals process), and (iv) our assessment of the penalty exposure under IRC § 6662(e).
We recommend that the updated letter be delivered to Crestfield promptly to ensure that the audit team has adequate time to review and evaluate our conclusions before commencing year-end audit fieldwork. The timing of the letter delivery should be coordinated with Marcus Whitfield and Deborah Staines. In addition, Calderwood & Harkness should be available to meet with the Crestfield audit team — including Martin Ogilvy and Susan Lam — to discuss our conclusions and respond to any questions that may arise during the audit process.
Crestfield's audit opinion on PPC's financial statements for the fiscal year ending December 31, 2023, will need to address the adequacy of the Company's tax contingency disclosures. If Crestfield concludes that the FIN 48 reserve is materially understated or that the disclosures are inadequate, it could result in a qualification of the audit opinion or a requirement for PPC to revise its financial statements and disclosures. Early and transparent communication between Calderwood & Harkness, Crestfield, and PPC management is essential to avoiding any such outcome.
IX. Timeline and Action Items
The following timeline summarizes the key action items arising from this memorandum:
Immediate (November 2023):
• Finalize updated FIN 48 analysis memorandum for internal use, reflecting the NOPA and the current status of the IRS examination.
• Prepare and deliver updated letter to Crestfield & Associates LLP (to be dated November 20, 2023) supporting the FIN 48 reserve of $62.4 million and addressing the NOPA.
• Brief PPC's General Counsel (Deborah Staines) and VP of Global Tax (Marcus Whitfield) on the disclosure recommendations set forth in this memorandum.
December 2023:
• File formal Protest with the IRS by the extended deadline of December 22, 2023.
• Coordinate with PPC General Counsel on proposed disclosure language for the Form 10-K, including the Item 3 (Legal Proceedings) disclosure, the MD&A discussion, and the income tax footnote.
• Review covenant definitions under the Hargrove National Bank credit facility and determine whether notice to the administrative agent is required.
January–February 2024:
• Work with PPC CFO (Rajesh Iyer) and General Counsel (Deborah Staines) to finalize Form 10-K disclosure language.
• Review draft Form 10-K sections — including Item 3, Item 7, and Item 8 — with the Crestfield & Associates audit team (Martin Ogilvy and Susan Lam) to ensure consistency with the audited financial statements.
• Brief PPC's audit committee on the IRS examination, the FIN 48 reserve, and the proposed disclosures.
• Coordinate with PPC investor relations on communication strategy and talking points in advance of the Form 10-K filing.
Ongoing:
• Update disclosures in interim Form 10-Q filings as material developments occur, including the scheduling or completion of an IRS Appeals conference, any settlement discussions, or any changes to the FIN 48 reserve.
• Monitor the progress of the Appeals process and reassess the adequacy of the FIN 48 reserve in light of new developments.
• Advise PPC on the need for any Form 8-K filing if material developments warrant current reporting.
Upon Resolution:
• If and when the IRS examination is resolved — whether through settlement, agreement, or further administrative or judicial proceedings — prepare a Form 8-K if the resolution results in a material charge to earnings or a material release of reserves.
• Update the FIN 48 reserve to reflect the resolution. For illustrative purposes, if the matter were settled at $47.6 million in additional tax, the existing reserve of $62.4 million would be adjusted to approximately $14.8 million, reflecting the release of the excess reserve attributable

PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT COMMUNICATION

MEMORANDUM

MATTER NO.: 1018-00009

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