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DYAI: Trading At Cash; Billion Dollar Technology for Free

By John Vandermosten, CFA




We are initiating coverage of Dyadic International Inc. (OTCQX:DYAI) with a $4.50 price target based on our estimates for commercialization of the company’s proprietary C1 technology. C1 is a gene expression platform based on a fungus called Myceliophthora thermophila. The expression platform has generated commercial quantities of industrial enzymes used in energy production and is now being developed for use in production of biologic pharmaceuticals.

Dyadic is advancing the C1 platform to address a broad portfolio of biologic applications including vaccines, VLPs, monoclonal antibodies, enzymes, biosimilars and a new category called biobetters. C1 offers several advantages compared to the commonly used mammalian, viral and bacterial expression systems, such as Chinese Hamster Ovary (CHO), HEK-293, baculovirus and E. coli.

View Exhibit I - C1 Pharmaceutical Applications

The advantages of C1 include its unique morphology that allows for greater yields, higher levels of purity for the expressed protein and a rapid development and production cycle compared to established protein secretion systems. Dyadic is enhancing the C1 platform to provide a safe and efficient gene expression system that will produce therapeutic proteins more quickly and at a lower cost compared to current production standards.

DuPont’s purchase of the industrial rights to C1 was a vote of confidence for the technology. Dyadic has also developed multiple collaborations with two unnamed global pharmaceutical companies, Mitsubishi Tanabe Pharma, Sanofi-Aventis, ZAPI, and the Israel Institute for Biological Research, providing additional assurance that C1 is a legitimate expression system. Further evidence that this pursuit is relatively low risk is the R&D financial contribution made by partners. This allows Dyadic to maintain intellectual property rights to any improvements achieved in the system, while benefitting from capital contributed by others. Additionally, the company holds sufficient cash to fund its research and development internally and is not dependent on external financing.

Dyadic is currently working with partners to optimize C1 through maximizing yield, improving purity of output, and reducing the development and production cycle. The process also addresses glycosylation and protease deletion for efficacy and stability. Periodic updates have shown progress against these metrics.

Dyadic’s C1 technology is differentiated from other expression systems in that it uses filamentous fungi as host for expression with several unique characteristics that allow for higher yield and greater purity than other mammalian, insect or bacterial systems. C1’s attributes allow it to use lower cost media compared to other systems and eliminate purification steps due to the lack of viral contaminants. C1 has many attributes that may help it replace the current organization of expression systems.

We expect a steady pickup of research and license related revenues during the C1 development stage. Initial penetration will be modest as the C1 platform builds acceptance. While Dyadic may either sell the technology or be acquired, our valuation model assumes that the platform will be developed internally and receive development, license, upfront, milestone payments prior to commercialization of products through partners. Upon commercialization of products expressed by C1, milestones and royalties are expected.

There are a variety of factors supporting our thesis which argues for material penetration into the gene expression market. The increasing use of biologic drugs requires a revolutionary change that will impact end-user prices for broader acceptance. The C1 system can address both development and manufacturing costs, which are substantially higher for biologics than they are for small molecule drugs. C1’s higher productivity and greater purity of output contribute to this advantage. The market for vaccines and monoclonal antibodies is estimated to be over $130 billion and over $200 billion for all biologics, with both growing at a double-digit rate. These statistics ignore additional targeted niches with difficult to produce proteins and the animal market. Even a modest penetration into mAbs, vaccines and VLPs provides a dramatic revaluation upward from current levels.


There are several protein expression systems employed today including mammalian, bacterial, insect and fungal that are used to produce biologic drugs. The most common system is the Chinese Hamster Ovary (CHO) cell line due to industry familiarity and mammalian post-translational modifications. Despite the benefits and dominance of this cell line, CHO and other common systems appear to have reached a limit in terms of yield, rapidity of protein expression and consistency of output and purity. With the large and growing demand for biologics and high costs for end consumers, there is a need for greater yield and purity for recombinant proteins and lower capital intensity. Revenues from protein expression, including vaccines, monoclonal antibodies and biosimilars, exceeded $130 billion in 2017 and are expected to grow at a 10% CAGR until 2025. With limitations on current production capacity and long fermentation times using the CHO platform, a revolutionary alternative is needed.

Prices for new biologics seem to reach new highs every few months. Examples such as checkpoint inhibitors go for about $150 thousand per course of treatment, and orphans such as Alexion’s Soliris comes in at over $400 thousand per year. To address the high costs of biologics, two factors need to be in place: greater competition and lower manufacturing costs. There is an intense search to find a solution along this dual axis and C1 may provide it.

C1 is a modified strain of the fungus Myceliophthora thermophila which has evolved to produce proteins from a dramatically smaller form factor than its ancestor. It is a filamentous fungi that has evolved into shorter and shorter filaments while improving its protein secretion rate. It also has competitive levels of productivty that have not yet been optimized and has already exceed CHO productivity levels using a simpler and lower cost media.

CHO cell production rates have been relatively flat for over a decade which suggests future volume growth will be directly tied to net increases in newbuild capacity under the present system. With demand increases for vaccines, mAbs and other proteins expected to grow double digits over the next decade, new production methods are needed that have substantially higher productivity. The combination of new expression cell lines and single use bioreactors (SUBs) may be able to address this demand without the need for a substantial increase in fixed capital investment. Dyadic is working with its contract research organizations to improve C1 technology to produce higher yields at a lower cost with greater accuracy and purity of output.

We anticipate that revenues in the near term will consist of research funding, license fees, upfront payments and milestones from partners developing C1 for use with their biologics development programs. Drug development programs can last up to a decade or more before regulatory approval is granted. Therefore, we anticipate royalty revenues to be received after a development period with steadily increasing penetration as the system is validated. Our target price is generated based on penetration into the broad recombinant protein market and value added by C1 to upstream manufacturing. There are other applications and cost reduction opportunities that may also be developed which will be added to our forecasts as they become more certain.

Key reasons to own Dyadic shares:

‣ High cost of biologics production demands lower cost alternative
‣ C1 technology provides faster cell line development and production cycle
     ∙ Technology addresses high cost component of drug manufacture
     ∙ Favorable characteristics of productivity and purity
     ∙ Less stringent operating conditions required
     ∙ Low-cost synthetic growth media used
     ∙ Avoids mammalian cell related viruses, reducing purification steps
     ∙ Particularly beneficial for expensive, difficult to produce recombinant proteins
‣ Natural alignment between C1 and biosimilars/biobetters due to cost focus
‣ Development fully funded with cash on the balance sheet and partner contributions
‣ CEO holds dominant share of business and has history of cost conscious development

Based on our DCF valuation model, which assumes a royalty based on savings C1 can provide to the industry, we initiate Dyadic International at $4.50 per share.

Chinese Hamster Ovary (CHO) Production

While CHO production is the workhorse of the protein expression world, the system has drawbacks. Some critics see conventional mammalian cell lines as insufficient to produce bi-specific and tri-specific and other advanced biologic molecules. There are long lead times for development of stable and accurate cell lines and yields appear to have plateaued.

In 1957, Dr. Theodore Puck, who was a geneticist at the University of Colorado, isolated ovary cells from a female Chinese hamster to develop a cell line that provided fast generation times of culture in vitro. Since then, CHO cells have been used to produce recombinant therapeutics and biopharmaceutical production. They have emerged as the dominant host for production due to their resiliency, fast generation times, adaptability to a variety of cultures, relatively low risk of viral propagation and ease of use in experiments. CHO provides important product features, such as protein folding and post-translational modifications and are able to grow in suspension, allowing the use of large, stirred-tank bioreactors. The cells are amenable to genetic modifications that permit the introduction of exogenous DNA and the resulting protein expression. CHO cells also produce glycoforms that are closely aligned with human biology.

These favorable characteristics led to over $140 billion of CHO cell production in 2014 and its use in over 70% of approved recombinant proteins. Many of the best-selling biologics use these CHO for expression including Humira, Rituxan, Avastin, Herceptin and Enbrel resulting in all stakeholders gaining intimate familiarity and comfort with the system.

Despite the benefits listed above and their widespread use, CHO cell production presents several difficulties. Due to limited production capacity, construction and maintenance of large, capital-intensive production facilities are required to produce sufficient quantities of desired recombinant proteins. The majority of Chinese Hamster Ovary cell yields fall within the 1 – 5 g/l/d range and are realized over a cell culture duration of 10 – 14 days.

Some of the other shortcomings of CHO systems include:

‣ PTMs are not consistent with human proteins
‣ Post-translational N-glycans can negatively affect the biologic activity, protein stability, clearance rate and immunogenicity of biotherapeutic proteins
‣ Expensive media
‣ Viral contamination
‣ Off-target protein production

Development of C1

C1, a modified strain of Myceliophthora thermophila, is a fungus that has been engineered over time and was originally isolated from alkaline soil in forests of eastern Russia to act as a secretor of natural cellulase. On behalf of Dyadic, Russian scientists isolated it in the 1990s to produce cellulase enzymes used to manufacture distressed denim in the apparel industry. The scientists were able to enhance the production of cellulase from C1 by exposing the fungal cells to ultraviolet light, which provoked a beneficial mutation. This transformation let to a reduction in size of the filaments from long strands to short, which produced a greater number of secreting ends per unit of length resulting in higher productivity. The change in morphology of the C1 fungus also reduced the viscosity of the cells in solution, which allows it to express proteins in large tanks. The greater fluidity of the modified fungus also allowed it to be used in microtiter plates enhancing the testing and expansion process.

View Exhibit II - Comparison of Pre and Post Mutation C1

C1 has a number of characteristics that are favorable as a potential alternative protein expression system. The fungus has a unique morphology that has been used in industrial production of enzymes for more than 20 years producing commercial enzymes in 500,000 liter bioreactors. It also exhibits high productivity, is able to use low cost media for fermentation, expresses at high purity and allows for fewer purification steps which reduces costs. The C1 system also allows for a wider range of pH and temperature to be used as compared to CHO and other systems. This flexibility can limit the impact of proteases, modify glycosylation and have other beneficial impacts. C1 demonstrates a much faster fermentation cycle time of four to seven days, which is about half to a third of the CHO standard of 10 to 14 days. It is likely that the output peak for C1 has not yet been reached and the potential productivity could be greater than pre-commercialization levels.

Dyadic can pursue multiple products with C1 including recombinant vacines, virus like particles (VLPs), new biologic therapies, and biosimilars (biobetters) that are either glycosylated or non-glycosylated. In addition to expressing biologics at the same or improved quality as the innovator, the system can also produce at a much more efficient level generating higher yielding gene expression for biomanufacturing. Greater efficiency will allow some previously non-economic protiens, such as certain bi-specific antibodies and VLPs to be commercialized. Dyadic anticipates that its R&D activities will improve C1 to a level where it can function as a favored alternative to CHO, E.coli and other expression systems for a variety of biologics products.

Since December 2015, Dyadic has been focused on the development of their protein expression platform and has successfully achieved several milestones, including progress on protease deletion, glycosylation and productive capacity. Through their efforts with their contract research collaborators VTT and BDI, Dyadic has generated initial data showing C1’s ability to express a wide variety of recombinant proteins.

View Exhibit III - C1 Portfolio of Expressed Recombinant Proteins

Full-length mAbs have been produced at 2.4 g/l/d and Fc-fusion proteins at 1.35 g/l/d. mAb binding properties were similar to CHO-produced control mAbs. Dyadic announced in September a certolizumab yield of 2.0 g/l/d and a VLP yield of 300 mg per liter. As optimal conditions and promoters are applied, we expect continued improvement.

Additional work has been performed to demonstrate that the binding kinetics of C1’s mAbs match those of approved mAbs produced from CHO cells. An experiment was run using a commercially available ligand produced in CHO which was compared against a C1 produced mAb. A Biacore T200 assay was used to measure the binding properties of the mAbs to the ligand, which generated data demonstrating virtually identical binding kinetics.

Interest by biopharmaceutical companies has been intense and over 100 confidential disclosure agreements to start collaborations have been signed. The company is also conducting outreach to potential research and business partners, and governmental agencies and currently has four funded feasibility and expression projects and has completed two funded proof of concept collaborations with large pharmaceutical companies.

Using current production systems, it can take from 14 to 18 weeks to advance from transfection to bioreactor due to the slower expression rate of popular expression systems. C1 is able to develop cell lines in 10 to 14 weeks saving 30% to 40% of the time required in the upstream process. Fermentation lasts 10 to 14 days using standard production systems, while C1 is able to achieve this in a 4 to 7 day cycle.

Filamentous fungi are naturally prolific hosts for endogenous proteins and are widely used in the production of enzymes for biofuels, food, textile, paper and chemical industries. The differentiating characteristics of fungal systems are their natural capacity to secrete high levels of enzymes and provide faster, less costly fermentation using lower cost of media. There are several attributes of C1 compared to CHO where it has a much faster rate of reproduction and a cost or efficiency advantage.

Cost Pressures Mandating Change

The monetary value of the global pharmaceutical market is over $1 trillion per year and the vast majority of revenues are derived from small molecule drugs and their generic descendants. However, biologics have become an important part of the landscape with revenues of approximately $200 billion in 2017 and they represent the fastest growing segment. As this market becomes a larger part of healthcare spending, it is likely that declining affordability will hamper growth and the ability to treat patients without a fundamental change in the cost and competition structure.

View Exhibit IV - Pharmaceutical Market Segments 2015 and 2021 Sales Estimate

One common theme we address in our research is the inflationary cost pressures present throughout the pharmaceutical value chain. Prescription medication is approximately 10% of total health care costs and represented $325 billion in 2017., This equates to almost $1,000 for every American every year and over $11,000 per year for those over 65. Pricing for specialty drugs, which includes biologics, increased approximately 9% per year every year from 2010 to 2015. 

A GAO report found that much of the rise in drug spending was driven by the use of brand name drugs and over the period of 2010 to 2017, the increase in the price of patented drugs rose an average of 18% every year. Branded drugs with no generic alternatives have increased even more, rising at a 25% average annual rate. These statistics illustrate the high and increasing prices for pharmaceuticals which are not sustainable in the long term. We see change as inevitable either through a radical revolution in the private health care system or government action. When this occurs, manufacturers that have anticipated the realignment with affordability will have already shifted towards lower cost structures and those that have not yet changed will quickly do so. In the world of biologics, a material component of cost that will be addressed for both development and production is the efficiency of the protein expression system.

In the new paradigm, many areas of health care must become more efficient. Research and development, the regulatory process, marketing and distribution, production and other cost centers will tighten their belts to make critical medicines affordable. In contrast to small-molecule drugs, biologics have relatively high production costs due to the complex manufacturing process, making this a focus area. C1 addresses many of the shortcomings apparent in the protein manufacturing system providing higher efficiency and lower cost, suggesting a revolutionary new approach may be coming soon to address a part of this complicated order.

See our full report for further discussion of the recombinant protein manufacture process and a discussion of our valuation assumptions and methodology.


All references can be found in our research report above.

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