Dyadic International is a development-stage biotech trading at $1.85 when it sits on $1.60 in cash. The cash remains from the sale to Dupont in 2015 of rights to their C1 fungus-based biological manufacturing platform for industrial applications. Dyadic retained rights for non-industrial applications and for the last three years has been developing the C1 fungus platform for manufacture of biological drugs and vaccines. The company is 40% owned by ceo Mark Emalfarb who has managed the cash like it was his own. Stock buybacks have totaled $22 million while the company has spent just $10 million of their own money on C1 development. Most R&D has been funded by pharmaceutical partners including seven active partnerships in 2018. Dyadic projects to still have at least $1.40 in cash on June 30, the date the retirement-aged ceo has long promised to begin technology monetization efforts. Purchasing Dyadic shares is a bet that the C1 technology is worth more than the $0.45 a share by which the current stock price exceeds the projected cash balance. The company is uplisting to Nasdaq in Q1 2019 to attract more investors to make that bet.

 

Dyadic historically used a specific fungus, the C1 fungus, to produce the enzymes for industrial applications. The company started in 1979 producing pumice used to stone wash blue jeans. When the industry switched to using enzymes to produce the stonewashed look, Dyadic switched from producing pumice to producing enzymes. The C1 fungus was used as it has a unique morphology that makes it highly productive and relatively inexpensive. It’s relatively easy to grow in massive quantities as it tolerates wider ranges of pH and temperature than CHO cells. Its morphology results in low viscosity mixtures so transfer of oxygen and nutrients are not hampered. Importantly, the C1 fermentation cycle of 5-7 days is less than half the time required for CHO. This makes it a quick development platform that can also be used as the production platform. Over about 15 years, mutations of this fungus were discovered that made it more and more productive. Particularly significant was the discovery of the “white strain” followed by development that increased the productivity of this strain 12-fold from 2011 to 2014. This increased the value for industrial enzyme production, but it also opened up pharmaceutical applications. In 2015, the rights to the C1 technology were sold to Dupont for $75 million. Dyadic held on to pharmaceutical rights in humans and animals as Emalfarb wanted to explore whether the C1 fungus could be used to produce vaccines and biological drugs.

 

After three years of development the answer is yes, the C1 fungus can produce a great variety of biological drugs. If you look at the company’s investor presentations you’ll see they’ve produced many of the currently approved multi-billion dollar biologics like Certolizumab, Keytruda and Remicade. The C1-produced drugs seem to bind identical to ones produced by CHO cells and show no adverse reactions in mice. In partnership with Sanofi-Pasteur they’ve produced flu vaccines which seem to work in mice too. Most importantly, the high productivity of C1 in industrial applications seems to be present with biological drugs too. The investor presentation shows two 12,000 liter tanks of CHO cells being replaced with one 2,000 liter tank of C1 with equivalent productivity. Since C1 is easier to grow too, a $1 billion dollar CHO cell factory might be replaced with a C1 factory costing half as much or less.

So why do I own Dyadic shares? Three reasons.

 

 

First, the technology is likely at least worth something. I’m no biotech expert, but the biotech experts are spending their companies’ money to develop or at least explore C1 technology for their needs. Dyadic has seven disclosed R&D partnerships fully funded by the pharmaceutical companies. These include collaborations with Mitsubishi Tanabe, Sanofi-Aventis, and the renowned Israel Institute for Biological Research. There’s a variety of objectives in these programs. Sanofi-Aventis and Mitsubishi Tanabe’s programs are evaluating C1 to overcome specific gene expression challenges but also as a platform to manufacture of a wide range of biologic vaccines and drugs. As biological drugs come off patent, the cost of production of biosimilars will become very important. Broad use of C1 by a partner, licensor, or buyer like Sanofi or Mitsubishi Tanabe could be worth hundreds of millions of dollars. Even if the C1 platform isn’t widely adopted, it may be used to make the difficult to express proteins that CHO can’t make well at all. Many of the emerging bispecific antibodies, in particular, can be made by C1 but are otherwise difficult to make. C1 produces proteins quickly in just 5 to 7 days, less than half the time for CHO. One of the collaborations is exploring potential value as part of a drug discovery program producing candidate proteins for laboratory testing quickly. Dyadic has a collaboratios in animal medicines that are less difficult to gain acceptance than human medicines. It’s likely that at least one of Dyadic’s seven paid-for collaborations are going to at least amount to something. Something is all that’s needed to cover the current market valuation above cash.

 

Second, Dyadic is not a never-ending science experiment that continues to burn cash. Emalfarb is 62 years old. After the sale to Dupont in 2015, he promised shareholders that they were going to investigate the pharmaceutical applications but would make a decision on how to monetize on June 30, 2019. If the technology wasn’t going anywhere, the company would return the projected $1.40 a share in cash to shareholders and close down. If they had opportunities to monetize through licensing or a sale of the company they would do so. The company has just six employees as the company-funded research and development is done through contract research organizations in Europe. Most of the R&D is done at their pharmaceutical and vaccine company collaborators facilities at the collaborators expense. Shutting down the company and turning off the cash burn is cheap and realistic. Emalfarb has repeated the promise to monetize beginning on June 30 many times, most recently on the 2nd quarter conference call on August 9th. Their investor relations representative also emphasized that promise to

me at an investor conference.

 

Third, Emalfarb has been a director since the company founding and has been running this company as ceo since 2004. The work on C1 as an expression platform started way back in 1992. He cashed in the industrial rights to C1 in 2015 for $75 million. He and a family trust own about 40% of the shares and he has been very cautious spending the company’s cash as much of it is his personally. Buybacks have used $21.8 million of the cash. Notably, those buybacks were only done at prices below $1.40 per share. Such purchases are risk free to Emalfarb as they actually increase the cash per share on the June 30, 2019 monetization date. Only about $10 million or so of the cash has been used by the company for R&D and SG&A. But there’s been a lot of research and development by collaborators with the support work done by Dyadic being fully funded by the collaborator.Emalfarb recognizes C1 development is high risk and is only spending money on what is risk free, very low risk, or very high value. The company in 2018 has gone to significant expense to become SEC reporting compliant, filing the form 10 on November 5th. A reverse split and Nasdaq listing is coming in the first quarter of 2019. Emalfarb is not spending the money to uplist with the intent of wrapping up the company and distributing the cash on June 30. He’s demonstrated his caution at spending money so he apparently believes the uplist expenditure will be very high value. I see this as confidence that some significant licensing deals are coming. After years of watching this company, the intent to uplist was the reason I took a position.

 

In summary, this is another Gee Whiz biotech trading only slightly above cash. But the ceo is in this right along with the shareholders and doesn’t want this to continue forever. With a valuation only slightly above cash despite years of development and numerous fully-paid collaborations, the upside-downside is attractive. Important to return on capital is that investors won’t have to wait long to see how it turns out.