Can Dyadic Reduce the Costs of Biologics?

Dyadic International is a progressive and interesting company in more ways than one. Founded by Mark Emalfarb in 1979, this commercially proven gene expression company has its roots in industrial biotechnology where Mark Emalfarb pioneered the use of pumice stones & cellulase enzymes in the stone washing of blue jeans. It was in the early 1990’s when Russian scientists hired by Mark Emalfarb discovered the Myceliopthora thermophila fungus, which the Company nicknamed C1.

Over the past two decades the C1 technology has been developed into a next generation protein expression and production system for gene discovery, development, expression and production of enzymes and other proteins.

The journey of how Mark Emalfarb evolved from blue-jeans to genetics is quite intriguing. I would suggest that, if you’d like to understand this background better, along with gaining an understanding of whom Mark Emalfarb is, you should listen to this audio.

However, for the purposes of this paper, we are going to skip over the early days of the discovery and formulization of C1. Instead, we will look at what is special about C1, how it was successfully adopted in the industrial biotechnology industry, and how it is being developed as a potential game changing protein expression and production system for use in the biopharmaceutical industry.

What is a protein expression and production system (“Gene Expression System”)?

Protein bodies make up about 15% of the mass of the average human. Protein molecules are essential to us in an enormous variety of different ways. Much of the fabric of our body is constructed from protein molecules. Muscle, cartilage, ligaments, skin and hair – these are all mainly protein materials.

In addition to these large-scale structures that hold us together, smaller protein molecules play a vital role in keeping our body working properly. Haemoglobin, hormones (such as insulin), antibodies, and enzymes are all examples of these less obvious proteins.

Most genes contain the information needed to make functional proteins. The journey from gene to protein is complex and tightly controlled within each cell. It consists of two major steps: transcription and translation. Together, transcription and translation are known as gene expression.

Protein production is the biological process of creating a specific protein encoded by a gene.

There is a large market for proteins, but how do you manufacture them? Proteins, being a biologic, are grown and harvested from cells. This is not done in a petri dish, but in large vats wherein a rDNA for a protein is introduced to an “expression host”. The expression host is an organism that expresses or produces large amounts of the target protein in a fermentation vessel.

There are many possible expression hosts including mammalian, bacterial and fungal. These each have differing strengths and weaknesses. The key to a successful expression host is an ability to produce commercial quantities of the desired protein structure and activity with a high yield and low cost.

Mark Emalfarb developed a great expression host through his work in developing a gene expression system for producing enzymes used for a variety of industrial uses such as stone washing jeans, and biofuels. This discovery and subsequent improvements led Mark Emalfarb to what is now called the C1 Technology Platform.

C1 becomes a workhorse in industrial applications.

At this time, it’s best to introduce Dyadic International, Inc. (OTCQX: DYAI). This is the company that Mark Emalfarb founded, and which has the exclusive sublicensing rights to C1 for use in the development and use of a C1 Strain as a pharmaceutical platform for the research, discovery, development, manufacture or commercialization of any pharmaceutical product.

When C1 was discovered, Dyadic had ambitions to further develop the effectiveness of the host C1 organism – and after a series of fortuitous mutations Dyadic realized two things:

First, they had a game-changing expression host on their hands. C1’s ability to produce proteins in great quantities, and with high purity, is world class. The applications for creating proteins extended throughout both the industrial and biotechnology industries.

Secondly, they realized they didn’t have the necessary funds to pursue both markets. As a result, Dyadic went after the market with the lower barriers to entry and started developing C1 for industrial applications. This culminated into commercial successes when Dyadic and its licensees developed C1 strains which were able to produce enzymes at very high levels, at industrial scale, and at a low cost for biofuel production. Here’s a glimpse of the development timeline of C1.

There were several business reasons why Dyadic elected to initially develop the C1 technology for use in industrial biotechnology.

First off, the government (meaning the FDA) is much less involved in industrial applications of protein expression. This means that the hurdles to getting a product to market are lower.

As an example, an enzyme that helps break down wood pulp fibers isn’t going to require as extensive safety testing as a drug developed with a new expression host which will require significant clinical and field testing in human trials. The difference here is years and tens or hundreds of millions of dollars. However, it should be noted that in 2009 Dyadic was successful in obtaining GRAS recognition by the US FDA after successfully registering one of its protein products produced using the C1 technology platform.

The second reason that the industrial market made sense for C1 is the cost savings aspect of a high expressing host. When you look at industrial companies, they are all about driving volumes and reducing cost to achieve margins. They compete in low margin businesses and any cost savings that can be delivered are very important to the bottom line. And, if you can demonstrate savings, these companies are very likely to consider adopting a new expression host in order to lower their cost of production.

Counter pose this with the pharmaceutical industry, where branded drug margins are incredibly high and branded drugs suffer very little, if any, from competition. A pharmaceutical company is not focused on developing inexpensive drugs. Frankly, the higher the cost, the more they can charge and make. Pitching C1 as a new expression host that saves money would have fallen on deaf ears in the pharmaceutical industry until recently.

Therefore, Dyadic pursued the, potentially less lucrative but much easier to enter, industrial market for C1. This was a shrewd move and it paid off. Over the years from 2009 through 2015, C1 gained a very strong foothold in industrial biotechnology, winning business with customers such as Abengoa, DuPont, BASF and Shell Oil.

This success validated C1’s ability to produce high quality enzymes at high yields and purity. Through their efforts, C1 has become a well-regarded expression host in many industrial applications. All of which culminated with the sale of Dyadic’s Industrial Biotechnology business to DuPont on December, 31, 2015 for $75 million.

Money in the Bank, Biopharmaceutical Industry Awaits

At the time of the sale of the industrial business to DuPont, Dyadic had two options. They could have scaled back research and development and returned a lot of money to investors. Or, they could take a portion of the proceeds from the sale to DuPont and pursue the more expensive, but potentially much more lucrative, field of biopharmaceuticals.

Taking a fresh look at the biopharmaceutical industry, the landscape had changed since 2009. On a secular basis, there is an ever-increasing focus on the high cost of biologic drugs. Biopharmaceutical companies were selling billions of dollars of lifesaving treatments for patients suffering from debilitating diseases. However, the expense of developing and producing these biotherapeutics has priced many people in developed nations out of the market for these therapies; and they are all but impossible to afford in the less developed countries, where many of these sufferers reside.

This desire to make drugs less expensively comes at a time when the whole healthcare industry is under growing pressure from insurers, regulators and the public at large to reduce prescription drug costs. In the eyes of many, the cost of healthcare has gotten out of control across the World and big pharma is seen as the primary culprit. Biologic drugs already make up ~ 20% of prescription drugs and are not only the fastest growing segment of prescription drugs, but also the most expensive drugs.

In addition to the growing pressure to reduce drug costs, we have seen the introduction of the first bio-equivalents. These are biologic drugs that are similar to generics, in that they are reproductions of existing, off patent, medications. However, unlike generic pharmaceuticals, biotech drugs are grown not engineered. Thus, there is a higher hurdle to achieving equivalence in the body and you can never achieve complete similarity.

The ability of companies to create bio-equivalent therapies, and to get them past the FDA and into use, has the same effect on biotech as generics did on drug manufacturers. There is an immediate price reduction in the medications. And, when you get pricing pressure, companies suddenly become more cost sensitive. This is starting right now in the biopharmaceutical industry and the trend will only accelerate over time.

The Biotechnology Bottleneck

It’s expected that biologics developed with low yielding gene expression systems will face heightened reimbursement challenges, necessitating next generation expression host development.

While the biotech and biopharmaceutical companies have spent billions of dollars to discover new genes and to improve their functions, they have not matched those efforts in discovering the more efficient gene expression systems needed for developing and manufacturing lower cost biologic vaccines and drugs.

It is right into this trend of companies seeking to reduce the cost of production of biologics that Dyadic’s C1 next generation protein expression and production system seems to fit like a glove. C1 is also highly productive, reducing both the capex and opex for companies that pursue production with C1 versus other hosts such as CHO (which are Chinese Hamster Ovaries, the most commonly used host for high priced biologic drugs).

In addition, the company believes the unique attributes of C1 may create attractive research, licensing, collaboration and other opportunities if C1 demonstrates operational efficiencies, improved properties, lower cost and reduced capital requirements for biologic vaccine and drug manufacturers.

Dyadic is just now embarking on this mission to break open the bottleneck in biologic manufacturing with what it believes will be a disruptive next generation expression host. In particular, as the aging population grows in developed and undeveloped countries, Dyadic believes the C1 technology may help bring biologic drugs to market faster, in greater volumes, at lower cost, and with new properties to drug developers and manufacturers and, hopefully, improve access and cost to patients and the healthcare system, but most importantly saving lives.

It appears Big Pharma is starting to recognize the need for a solution such as C1. As the article “CHO stopper? Biogen looks to alternative cell lines for future of bioproduction“ highlights that “The Chinese hamster ovary (CHO) cell line is not the future for biomanufacturing says Biogen”.

At this time, two of the largest pharmaceutical companies have signed proof of concept research agreements with Dyadic, under which they are paying for preliminary studies of C1 for use in the development & manufacturing of biologic drugs. The pipeline of additional, potential partners is strong and Dyadic has guided investors to expect more signings in 2017 and beyond.

Meanwhile, thanks to the proven success of C1 in industrial applications, Dyadic is sitting on a small cash hoard. Which means the company is fully funded to see C1 through its initial success in biologic manufacturing without the need to seek additional funding. This is rather rare in the biotech industry and certainly helps to de-risk the story.

We believe that Dyadic represents a compelling investment idea. An expression host that has proven itself to be productive and commercially profitable in the production of industrial proteins, C1 has a relatively high likelihood of being successfully transitioned for use in biopharmaceutical manufacturing. Meanwhile, the company is fully funded and staffed, and has certain major pharmaceutical companies interested in learning about what they are accomplishing, to the point where they are signing and funding partnerships.

The trend to lower costs in the production of biotherapeutics will only continue to accelerate. Dyadic has the potential to be a big winner in helping to rein in costs. C1 has shown itself to be a workhorse in the industrial space; we’re looking forward to seeing what it can do for the biopharmaceutical manufacturing industry, in reducing the cost of biologic drug development and to ultimately saving lives across the world.