Processa Pharmaceuticals, Inc. (PCSA) Initiation Report

October 28, 2020 Institutional Research ALPHA SELECT LIST SEE LAST PAGE FOR IMPORTANT DISCLOSURES Page 1 of 16 Robin Garner Senior Research Analyst 612-334-6332 Changes Previous Current Rating: -- Buy Fundamental Trend: -- Stable Price Target: -- $12 FY20E Rev M: -- $0.0 FY21E Rev M: -- $0.0 FY20E EPS: -- ($0.63) FY21E EPS: -- ($0.43) Profile Price: $4.17 52 Wk Range: $3.40 - $18.00 Avg Daily Vol K: 26 Shares Out M: 13.6 FD Shares Out M: 14.3 Market Cap M: $56.7 Insiders Own: 26.6% Short Interest %: 0.1% EPS CAGR: NA Cash (M): $17.6 Cash/Sh: $1.29 Debt (M): $2.91 Fiscal Yr End: Dec. Rev (M) 2019A 2020E 2021E Mar $0.0 $0.0A $0.0 Jun $0.0 $0.0A $0.0 Sep $0.0 $0.0 $0.0 Dec $0.0 $0.0 $0.0 FY $0.0 $0.0 $0.0 EPS 2019A 2020E 2021E Mar ($0.14) ($0.16)A ($0.12) Jun ($0.18) ($0.13)A ($0.11) Sep ($0.16) ($0.16) ($0.11) Dec ($0.23) ($0.09) ($0.09) FY ($0.70) ($0.63) ($0.43) FY EV/Rev NA NA NA EV/EBITDA NA NA NA FY P/E NA NA NA Management CEO David Young, Pharm.D., Ph.D. CBO Patrick Lin CFO James Stanker CDO Sian Bigora, Pharm.D. COO Mike Floyd Processa Pharmaceuticals, Inc. BUY (PCSA - $4.17) Price Target: $12 High Potential Returns in This Portfolio With 3 Clinical Assets. Initiating Coverage With A BUY Rating And $12 Price Target. Processa Pharmaceuticals, Inc. is a clinical stage biopharmaceutical company focused on developing therapeutics that improve survival and/or quality of life in areas of high unmet need. OUR CALL We are initiating coverage of Processa Pharmaceuticals, Inc. (PCSA) with a Buy rating and 12-month price target of $12/share. The current market cap of $30M does not seem to incorporate the cash balance and 3 clinical programs that each address billion+ dollar markets. PCSA has meticulously built a portfolio with high potential returns by inexpensively in-licensing assets with evidence of clinical efficacy and improvement on existing therapies and identifying cost-efficient paths for approval. The experienced management team has completed over 30 FDA approvals and been part of multiple multi-billion-dollar exits in biotech. PCSA owns rights to 5 programs that are de-risked by existing data and is utilizing its deep regulatory expertise to improve the dose regimen or identify a different therapeutic indication for each program. By early next year, PCSA expects to begin 3 clinical trials – PCS499 in Phase IIb to treat necrobiosis lipoidica (NL), PCS6422 in Phase Ia as an adjunct to the chemotherapy 5-FU, and PCS12852 in Phase IIa to treat constipation. We arrive at a $160M valuation using a DCF model with a blended 12% Probability of Success and 20% WACC. If any one of these programs is successful, the Company could generate $200-300M in revenue within a few years and we like the odds with 3 clinical programs running in parallel. We believe investors should own the stock for the following reasons: • Seasoned Management Team with History of Successful Exits. PCSA’s founders include the clinical development team and an investor in Questcor, which took acthar gel from stagnant off-label sales to an approval within 12 months, 9-fold increase in sales over 3 years to $800M, and ultimately sale of the company for $5.6B. PCSA’s CEO was CSO of Questcor and an FDA instructor and pioneer in regulatory science. Dr. Khalid Islam, a co-founder of Elion Oncology, which sold PCS6422 to PCSA and may receive milestones and royalties, was also CEO of Gentium (GENT; acquired for $1B) and Board member of Immunomedics (IMMU; acquired for $21B). • Cost Efficient Clinical Development. The Company has sufficient cash to fund data readouts for 3 different programs through 2022. All programs are in-licensed from other pharma companies that collectively spent $300M in development costs prior to their agreements with PCSA. By not engaging in the scientific discovery process, PCSA can channel more proceeds into its various programs. Further, the Company is extremely capital efficient with <$2.5M in annual overhead expenditures. • Lead Program PCS499 Efficacy in Rare Disease With No Approved Treatments. A Phase II study demonstrated ulcerative healing for patients with severe NL, a rare autoimmune disease affecting ~50k-70k patients in the US. PCS499, which has orphan drug designation, could be the only approved therapy on the market by 2025. • Two Recent Acquisitions Each Represent Billion Dollar Opportunity. We are most excited about PCS6422, which eliminates side effects of the most widely used chemotherapy (5-FU) and represents a $5B market. PCS12852 addresses a $2B market as a more selective 5HT4 receptor agonist with more on target effect in constipation.