INSTITUTIONAL RESEARCH Biotechnology INITIATION REPORT Member FINRA/SIPC Toll-Free: 561-391-5555 ⬧ www.DawsonJames.com ⬧ 1 North Federal Highway - Suite 500 ⬧ Boca Raton, FL 33432 Jaguar (NASDAQ/JAGX) January 3, 2019 BUY It’s Time for a Natural Solution Jason H. Kolbert Head of Healthcare Research 646-465-6891 It's time for a natural solution. Crofelemer, brand name Mytesi, is a natural product derived from an abundant source, the Corton lechleri tree. It treats diarrhea at its [email protected] source by normalizing secretion of water into the gut. Mytesi is the only FDA approved antisecretory diarrhea treatment on the market today. Investment Highlights Current Price $0.28 Mytesi revenues are starting to build, reflecting Jaguar's focused product launch Price Target $1.00 efforts. Chronic diarrhea is a common side-effect of HIV therapy and annually Estimates F2017A F2018E F2019E impacts greater than 250,000 people in the U.S. Jaguar is looking to address this Revenues ($000s) $ 4,361 $ 4,620 $ 16,054 population with a new salesforce that is now actively promoting the drug. Sales growth 1Q March $ 822 $ 804 $ 2,482 since promotion efforts began in 2017 looks favorable. We estimate Mytesi could 2Q June $ 897 $ 884 $ 3,085 3Q September $ 1,100 $ 1,132 $ 4,542 reach $4.4M in revenues this year, $15.7M in 2019, and $28.7M in 2020, driving the 4Q December $ 1,542 $ 1,800 $ 5,946 company to break-even. We estimate that by 2028 Mytesi in HIV alone can reach F2017A F2018E F2019E $76M in revenues, which would represent less than 10% of the total HIV market. We EPS (diluted) $ (0.66) $ (1.80) $ (0.09) see the potential for Mytesi to be a big drug, not just in HIV chronic diarrhea, but in 1Q March $ (0.33) $ (0.78) $ (0.05) multiple other markets such as cancer therapy diarrhea (CTD), irritable bowel 2Q June $ (0.12) $ (0.44) $ (0.03) 3Q September $ 0.07 $ (0.51) $ (0.01) syndrome (IBS), short bowel syndrome (SBS), and congenital diarrheal disorder 4Q December $ (0.27) $ (0.07) $ 0.00 (CDD). Like many micro-capitalized emerging growth companies, raising capital has been challenging. On a positive note Jaguar successfully completed a $9M capital EBITDA/Share ($0.79) ($1.15) ($0.08) raise in September 2018. The raise was anchored by a corporate partner (Knight EV/EBITDA (x) 9 10 139 Therapeutics; TSX: GUD; not rated) which acquired distribution, licensing, and Stock Data 52-Week Range $0.12 - $6.60 supply rights in Canada and Israel. We estimate that Jaguar ended the year with close Shares Outstanding (mil.) 24.6 to $6.3M in cash. This should be enough capital, depending on top-line revenues, to Market Capitalization (mil.) $7 support operations for the next year. We view the weakness in the stock as an artifact Enterprise Value (mil.) $11 of the company's capital raises and as such an opportunity as Mytesi fundamentals Debt to Capital 155% appear solid. We are therefore initiating coverage of Jaguar with a Buy rating and a Book Value/Share $2.46 $1 price target. Price/Book 0.9 Average Three Months Trading Volume (K) 4,270 Insider Ownership 35.3% It's time for a natural solution. Crofelemer, brand name Mytesi, is a natural product Institutional Ownership 13.3% derived from an abundant source, the Croton lechleri tree. It treats diarrhea at its source Short interest (mil.) 2.2% by normalizing secretion of water into the gut. Mytesi is the only FDA approved Dividend / Yield $0.00/0.0% antisecretory diarrhea treatment on the market today. The initial indication is for HIV- Jaguar Health, Inc. (JAGX) associated noninfectious diarrhea, but plans are underway to expand the label for CTD Volume (Thousands) Price (USD) Volume Jaguar Health, Inc. followed by additional indications in areas like IBS and IBD. In CTD, two 5 investigator-led studies, one supported by Genentech, a division of Roche (RHHBY; 4 not rated), now underway, and a second study, sponsored by Puma Biotechnology (PBYI; not rated), still in the planning stage, are being designed to evaluate the effects 3 of crofelemer to mitigate the diarrhea which causes patients to terminate their therapy 2 course early. These market segments represent greater than 500K possible patients 40,000 1 translating into an estimated $1B market opportunity. As Jaguar is not the sponsor, 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec timing of data is uncertain, though we may see some data by 1Q19. We believe good Source: FactSet Prices data could help attract a corporate partner which could pay our estimated $12.6M in Initiation - January 3, 2019 - Buy - Price Target $1.0 expenses for the company to run a Phase 2, Proof of Concept (POC) study. Please find Important Disclosures beginning on Page 22. Page 1 of 23 www.dawsonjames.com January 3, 2019 Unlock Mytesi’s potential. Mytesi was launched in late 2016 by Napo Pharmaceuticals, which in July 2017 became a wholly owned subsidiary of Jaguar Health. Capital constraints of both Napo initially and later Jaguar restrained the commercial launch. Today, Jaguar has a dedicated salesforce of 15 representatives and in June 2018, entered into a co-promote agreement for Mytesi with RedHill Biopharma. Sales trends are showing growth with 1Q18 revenues of $627K, 2Q18 revenues of $884K, and 3Q18 revenues of $1.1M. RedHill is now working with Jaguar to promote Mytesi. Under the terms of the agreement with RedHill, that company's specialized, GI-focused U.S. field salesforce numbering 36 salesmen, plans to promote Mytesi to healthcare practitioners in 38 territories within the U.S. that contain significant numbers of HIV patients and healthcare practitioners that are not currently covered by Napo's field salesforce. RedHill field representatives plan to target lower-decile infectious disease specialists in regions currently covered by Jaguar's salesforce. In addition to these efforts four internal (telephone marketing) RedHill sales representatives plan to actively target healthcare practitioners in other regions not covered by Jaguar or other RedHill field representatives. We see the co-promotion as synergistic to Jaguar's own efforts and believe that building awareness and achieving critical mass is important at this early stage of the launch of a new product in a competitive market environment. Based on our conversations with management we assume Jaguar captures between 85-90% of all related revenues that RedHill generates. A unique MOA, treating diarrhea at the source. Crofelemer's mechanism of action separates it from other diarrhea treatments available on the market. As an antisecretory, it normalizes the secretion of chloride ions, and subsequently water, into the intestinal lumen, while the only other options on the market are either adsorbents like Pepto-Bismol or antimotility drugs like Imodium and more restrictive options like tincture of opium that may not be appropriate for chronic treatment. Crofelemer acts locally in the gut to block calcium-activated chloride channel anoctamin-1 (CaCC) and the cystic fibrosis transmembrane conductance regulator (CFTR) chloride channels with a maximum inhibition of 90% and 60%, respectively. By blocking these channels, the concentration of calcium ions in the gut is reduced, which normalizes the secretion of sodium ions and water. Crofelemer is selective for these two channels and is not absorbed into the bloodstream as such crofelemer is excreted (not metabolized). Beyond HIV: Multiple indications such as CTD, IBS, IBD, SBS, and CDD. Over time, Jaguar plans to expand Mytesi's label with new indications, the most significant of which is for CTD, which is a large market. We model 436K potential Mytesi patients. Two investigator sponsored trials are using crofelemer, one at Georgetown University sponsored by Genentech, a subsidiary of Roche, and one at UCSF sponsored by Puma Biotechnology, which has just begun. We may see data in 1Q-19 from the Georgetown study. As both these trials are investigator run, timing for start or data is uncertain. Beyond CTD, and with a partner who can pay the development costs and bring in up-front capital, there are also indications of IBS and inflammatory bowel disease (IBD) and idiopathic diarrhea. Two interesting indications which may represent a shorter development time to the market are the orphan indications of CDD and SBS. We expect Jaguar to develop a modified formulation of crofelemer, specific to the indication and priced at a premium. Jaguar is also developing a second-generation product, SB-300 for cholera. The cholera indication could result in the company being granted a Priority Review Voucher (PRV) which can be sold in the marketplace. PRV's values range but they have been previously sold for greater than $100M in revenue. As SB-300 is still in the planning stages, we do not include any valuation for it in our model, although we are aware that the company has completed GMP manufacturing of the API. Not just people, animals too. Before the merger with Napo, Jaguar was focused on animal health. The company has several products still being commercialized today and is completing the final stages of some additional crofelemer-related products for animals including dogs, calves, and race horses. We model very modest revenues for these products as the focus now is on the human indications. With that said, we believe in future years, with additional resources, the company could build out its animal health platform. Valuation. We model revenues for Mytesi in HIV-related diarrhea followed by CTD in 2021. We apply a 30% probability of success in the CTD indication as the company lacks the capital to fund the required pivotal trial today.