DYAI Looking Increasingly Compelling

Dyadic is a name that we have covered in the past here at Tailwinds. When we last looked at it, the story was one of a great value play with a massive potential upside (Here’s the link to our initial report). However, the upside was difficult to quantify and that led us to put our funds elsewhere; until we had a better sense that potential industry adoption was coming, it seemed like a directionless stock.

Lately, things have been picking up for Dyadic on several fronts. This is causing us to revisit the name. We still have no way of knowing the final outcome, but the likelihood of the Company proceeding down the path of success, with numerous milestones along the way, has increased dramatically. Dyadic has always been a compelling risk/reward situation; now the odds of the reward scenario are much higher.

A quick recap on Dyadic and C1

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. C1 is a platform for making biologics both faster and cheaper.

On a secular basis, there is an ever-increasing focus on the high cost of biologic drugs. 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 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.

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).

What has changed in the last year?

As CEO Mark Emalfarb said to me recently, “We have gone from theory to practice.” Since last fall, the Company has put out a lot of very significant data. This data has demonstrated C1’s effectiveness in both high purity and high volume production of numerous classes of proteins of many different types.

This success has been validated through many partnerships with large pharma and biotech companies. In 2018, Dyadic signed partnerships with over 7 companies, including major pharma companies Sanofi-Aventis and Mitsubishi Tanabe Pharma.

The Company is also moving forward on internal development of two bio-similars. These are basically generic versions of biologics and would represent an avenue to potentially very large markets. The two drugs they are going after first are Obdivo and Cimzia; both of these drugs have well over $1B in sales annually.

As Mark said, which is demonstrated in the partnerships and early progress on development, “Momentum is building!”

On the corporate side, Dyadic is in the process of uplisting to the Nasdaq exchange. The stock is trading at $2.40…if they can close over $2 for 90 consecutive trading days (or $3 for 5 consecutive trading days), the uplist goes through.

Normally an uplist is positive as it opens the door for many more investors. With Dyadic making an appearance at the upcoming Roth Conference, it seems likely that there will be a positive effect here. However, I believe this uplisting is much more significant…

In the past, the CEO has stated that, if the technology didn’t gain traction, he would shut down the Company and return the massive cash hoard ($1.60 per share) to investors, of which he is the largest. By uplisting to Nasdaq, Dyadic is going to assume many additional costs on a yearly basis.

CEO Emalfarb’s willingness to pay these expenses demonstrates his belief that the technology has passed a tipping point and is going to be successful.

That is the most compelling aspect of what has changed in the last year, in my mind. As an investor, you want to see management’s confidence (especially monetarily) in the Company. Emalfarb has dramatically stated that confidence in my opinion.

The bottom line

Dyadic still represents a compelling investment from a risk perspective. The downside is larger than it was when DYAI traded below cash value last year, but it still is around 33% until the safety net of cash and corporate buybacks sets the floor.

Meanwhile, the upside is potentially huge. And, it’s more clear than ever that Dyadic is positioned to achieve success in disrupting the enormous market that is biologic manufacturing.

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/.


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