Dyadic…Understanding the Value Proposition of C1 and the Stock

Last Friday, Dyadic CEO, Mark Emalfarb, gave an online investor presentation at a Virtual Investors Conference. The presentation was well done in that it really made the case for C1 as a disruptive technology for the biologics industry. If you haven’t had the chance to listen to the presentation, you can register and watch it here.

The point that Emalfarb really hammered home was the value proposition of C1 to manufacturers. As the biologics industry has taken off, more and more therapeutics and vaccines have come to market. This wave of innovative new medicines isn’t slowing down.

But, while the medicines themselves have advanced tremendously, the production methodology hasn’t. Biotech companies are still deeply rooted in their use of CHO (Chinese hamster ovaries) as the preferred gene expression host for biologic production. CHOs were used in the first biologic and all but a handful since then. They are a known commodity in the space. They are not, however, the best available option out there; most convenient, yes, as they are well known with the FDA, but, really, it’s beyond time to move on past CHO into better alternatives.

There are many reasons to find an alternative to CHO, the most important one being cost. Biologics are incredible, life-saving medicines. They are also expensive enough to bankrupt the average consumer of them, with treatments running from the 10s to 100s of thousands of dollars.

A lot of the cost of this, besides in the development of the drugs, is in manufacturing. CHO is simply not a very expressive (i.e. productive) host, nor is it the best in terms of consistency. The result of which is expensive manufacturing. C1 is a potential game-changer when it comes to addressing this cost issue.

This potential is evident in both Cap-Ex…

and OpEx…

Now, there is a lot of work to be done to get C1 to the point where it replaces CHO in a portion of biologics manufacturing, much less takes over as the go to gene expression host. However, there are many trends in biologic manufacturing that should help push C1, and other alternatives to CHO, forward.

These trends all revolve around the expense of manufacturing. For example, the advent of bio-similars will be putting pricing pressure on manufacturers.  At the same time, the ever increasing costs of therapeutics are forcing many insurers to change reimbursement patterns. The end result being that C1’s ability to provide manufacturers with a potential lower capex and opex solution is going to make it an increasingly attractive value proposition going forward.

From an investment point of view, Dyadic represents an equally, if not more so, compelling opportunity. There are very few biotech companies in the public market who have a fully funded development program in place. DYAI is one of these companies.

As we’ve discussed before, the upside if Dyadic is successful in reducing the cost of manufacturing biologics is substantial. The Company’s opportunity is substantial, as evidenced by the money they received for selling the rights for C1 in industrial applications to DuPont. The industrial market for expression hosts is much smaller than that for biologics, yet DYAI received $75M from DuPont in 2015.

It is a reasonable assumption, based on market size and the margins that drug companies demand, that C1 will be worth a lot more in a sale to a drug manufacturer…if Dyadic is successful in developing it. At Tailwinds, we are very intrigued by the upside potential of the stock, which is why we have it in our Tailwinds Select Portfolio. We believe that, if Dyadic is successful with C1, we will return multiples on our investment. This is pretty clear.

However, what the market seems to be missing out on is the incredible value that is present in Dyadic shares.

It’s a given that the market for a new and improved expression host would be huge. And, it’s well established that C1 has a track record of successful protein production in industrial uses and it stands a very good chance of translating that success into biologics, where it could be a true game-changer.

What the market tends to ignore here is the virtually risk-free aspect of an investment in DYAI. Because of their substantial cash position, Dyadic has fully funded development of C1 through year-end 2018, a time during which its success could very well be established.

I think that will happen and shares will go substantially higher. But, truly, biotech development is not a given and they might stumble. Let’s look at what happens if they aren’t successful.

Dyadic has around $1.85 a share in net cash. They are also repurchasing $5M in shares at opportunistic prices, which simply raises their per share cash, but we can ignore this in the equation.

At $1.85 per share in cash as of July 1, 2017, and a year-end 2018 timeline for proof of success, Dyadic has 6 quarters of cash burn before we have definitive proof of success. This proof may come much sooner, but let’s also ignore that point.

The burn rate of DYAI I’m calculating in a different manner than usual. Because their primary asset is cash (and investments), and they have limited liabilities, I’m simply taking recent changes in their shareholder’s equity as the true burn. As such, it appears the company is burning about $2M per quarter, which equates (with 28.7M shares outstanding) to about 6-7 cents per quarter.

Which means that, in a worst case scenario in which C1 fails and we don’t figure this out until December of 2018, DYAI will still have around $1.45 per share in cash. At this time, the CEO would likely return cash to shareholders (he’s the largest, by the way), by liquidating the Company.

This is, in my opinion, a worst case analysis. There are many things that could drive a higher valuation for shareholders beyond the obvious one of C1’s success. More shares repurchased below cash, a sale to DuPont of the complete rights to C1 (quite likely, by the way), or even the Company getting development fees from potential partners, two of whom they have announced they expect to sign in coming months.

Suffice to say, Dyadic has a lot of ways to return cash to shareholders in excess of current trading levels. Which makes, in my opinion, the shares a truly compelling risk/reward proposition at this valuation, or anywhere near here.

C1 has proven itself successful as a low cost, highly productive gene expression host. The value proposition to potential pharma partners is compelling and will likely become more evident over time. Meanwhile, Dyadic as a stock is an even more compelling value play and investors seeking high potential returns with minimal downside risk would be wise to look at it now.

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TW Research's Disclaimers & Disclosures: TW Research may have been compensated for writing this article. For a full list of disclaimers and disclosures, please visit http://tailwindsresearch.com/disclaimer/.


  1. Nope. Not buying it.
    It is going to take decades before this is any sort of real. CHO cells (derived from an ovary NOT ovaries themselves) are the current work horse, but to think that “specially engineered strains of the filamentous fungi Myceliophthora thermophile” are going to be the end all be all for biologics. Nope. Biosimilars – nope not going to happen, there is no way that this fungi is going to produce a biosimilar with the same glycosylation profile as the originator. As even in a recent Dydaic report it says “While C1’s glycosylation capabilities have been found to be more similar to human glycosylation than traditional yeast expression hosts, significant research will be required to access that segment of the market.” Don’t think glycosylation profiles are important? Why did the FDA have Myozyme become Lumizyme because Genzyme changed reactor scale which altered the glycosylation profile of the molecule? Also today’s manufacturing problems aren’t related to titer and expression – the real bottleneck these days is downstream processing. Additionally, there is NOT a single biologic on the market today that any manufacturer is going to GO BACK TO A PHASE 1 TRIAL to use this, REGARDLESS of cost savings. Repeat all the trials and reapply? (Because this is what you would have to do to use this expression system) No way. Have a chance with someone who is preclinical – maybe.
    They might be selling – but no way I am buying


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