Processa Pharmaceuticals, Inc. (PCSA) Initiation Report

October 28, 2020 Processa Pharmaceuticals, Inc. Page 3 of 16 ALPHA SELECT LIST Institutional Research STOCK OPPORTUNITY We believe PCSA is undervalued at current levels given that it has three clinical stage programs each with existing clinical evidence of efficacy in indications with no other approved therapies and/or large market opportunities. Over the next 12 months, PCSA will be conducting 2 Phase II programs and 1 Phase I program. Near term milestones include the initiation of three clinical trials in H1 2021, interim data from PCS499 in H2 2021, and large readouts from all three programs in 2022. Each program alone could generate $200-300 million following launch, and there are three opportunities to enter a billion dollar or more market. The 12-month price target of $12/share is based on a DCF valuation as shown below: Figure 1: Discounted Cash Flow Valuation PCSA DCF Q4 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E 2034E TV (USD in $000s, except per share) Cash Flow - Operating Activities ($1,075) ($5,271) ($6,023) ($7,139) $26,338 $28,839 $30,586 $44,883 $50,767 $53,718 $56,934 $59,573 $62,461 $65,624 $69,088 Cash Flow - Investing Activities (10) (21) (21) (21) (21) (21) (21) (21) (21) (21) (21) (21) (21) (21) (21) Net Borrowings 624 624 624 624 624 624 624 624 624 624 624 - - - - FCFE ($461) ($4,668) ($5,420) ($6,536) $26,941 $29,442 $31,189 $45,486 $51,371 $54,321 $57,537 $59,553 $62,441 $65,603 $69,067 $418,467 Discount Period 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25 9.25 10.25 11.25 12.25 13.25 10.25 FCFE Present Value ($441) ($3,716) ($3,596) ($3,614) $12,414 $11,305 $9,980 $12,129 $11,415 $10,059 $8,879 $7,658 $6,691 $5,858 $10,658 $64,573 PCSA DCF Summary PCSA DCF Sensitivity: Price Per Share Sum FCFE NPV $160,251 Discount Rate less: Net Debt ($14,685) $12.23 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Implied Equity Value $174,936 0% $83 $34 $19 $11 $8 $5 PT $12 1% $98 $36 $19 $12 $8 $5 Closing Price (as of 10/27/20) 4.17 $ 2% $124 $39 $20 $12 $8 $5 Upside Potential 193% 3% $175 $43 $21 $12 $8 $6 FD Shares Outstanding (000s) 14,307 4% $329 $47 $22 $13 $8 $6 Discount Rate 20% Terminal Growth Rate 3% Blended Probability of Success (POS) 12% PCSA DCF (Price Per Share) Discount Rate FCF Terminal Value Debt Cash Equity Value 7 0.0% 1.0% 2.0% 3.0% 4.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% $23 + $59 $74 $100 $151 $304 - $0 + $1 = $83 $98 $124 $175 $328 10.0% 15 + 18 20 23 27 32 - 0 + 1 = 34 36 39 42 47 15.0% 10 + 8 8 9 10 11 - 0 + 1 = 18 19 20 20 21 20.0% 7 + 4 4 4 5 5 - 0 + 1 = 11 11 12 12 12 25.0% 5 + 2 2 2 2 2 - 0 + 1 = 7 7 7 8 8 30.0% 3 + 1 1 1 1 1 - 0 + 1 = 5 5 5 5 5 Terminal Growth Source: Craig-Hallum Estimates We use a DCF model to calculate a net present value of free cash flows to be ~$160 million based on a discount rate of 20% and terminal growth rate of 0% as shown in Figure 1 . ▪ We estimate that PCS499 could potentially launch in 2024 at $20,000 per treatment. In total, we expect PCS499 could be used to treat ~8k patients by year 2, which is a modest 20% market penetration into the 40k new cases of ulcerative NL diagnosed each year in the US (see Figure 2 for revenue build). 2034 peak sales of $176 million are probability-adjusted to $30 million by applying the average probability of success (17% POS) for an autoimmune program in Phase II. With additional data we could potentially increase the market penetration and POS, since there are no approved therapies for NL. ▪ We estimate that PCS6422 could launch in 2026 with 20% market penetration into the 60k new cases of metastatic colorectal cancer that are diagnosed each year. This figure does not include the additional ~50% of colorectal cancer cases that progress to metastasis. Xeloda is also approved to treat metastatic breast cancer, and we may add this indication if and when the Company plans a study or we see significant backing from the KOL community on off- label usage. We assume a modest $20k treatment cost to walk the fine line between Xeloda ’s $45k cost per 8 cycles and the significantly lower cost of generics (~$2k). Indeed, pricing could vary depending on the efficacy and improved tolerability of adding PCS6422 onto the chemotherapy regimen. 2034 peak sales of $269 million are probability-adjusted to $14 million by applying the average 5% POS for an oncology program in Phase I. We are actually very excited by the CEO’s prior history of working with 5-FU in the 1970s/80s to study its