Dyadic International Inc (DYAI)

[Paullee]

Noble's report _ Target 11
Step Closer to Generating Human-like Proteins with C1 Platform
Ahu Demir, Ph.D., Biotechnology Research Analyst
Fundamental Analysis

RatingOutperform
Refer to the end of the Report for Analyst Certification and Disclosures
This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D). This report is provided on Channelchek for informational purposes only and should not be used to make investment decisions. B/D is not an investment advisor and as such, offers no advice or recommendation to buy or sell any securities. Consult an investment advisor who has a fiduciary responsibility to manage your assets in your best interest and who can help determine investment suitability for you. Refer to Disclosures & Disclaimers for more detail.
November 26, 2019 - ANALYST SUMMARY
Building block for human glycan is produced by C1 platform. Dyadic's research partner VTT Technical Research Centre of Finland (VTT) presented data showing expression of building block (G0 glycan) of human-like glycoproteins (at 94% relative expression). We think this is a key milestone for the company to validate C1 platform in bioproduction.
Expressing human-like proteins is in sight. Glycoproteins, such as monoclonal antibodies, are proteins that have sugars (glycans) attached to them. The majority (over 50%) of the biologics, sales of which are expected to grow to over $300 billion by 2022, are glycoproteins. Glycoengineering is crucial in drug development, as glycans have marked effects on stability, activity, antigenicity, and pharmacodynamics. Therefore, glycoengineering to produce human-like proteins is one of the biggest milestones for Dyadic. We believe obtaining the initial glycan structure (G0) to achieve this milestone brings this goal a step closer in sight.
Increasing price target. We think the recent data, in addition to multiple partnerships that were established YTD, expand the intrinsic value of Dyadic's shares. Based on the recent developments, we are increasing our price target to $11 from $9 based on the increased probability of success to 30% from 25% and reduced discount rate to 12% from 15%. Based on a discount cash flow (DCF) analysis using Cimzia market alone, we arrive at our new price target of $11. We see upside as the company validates C1 expression system expanding to multiple biologics markets. In our opinion, the current stock price, despite recent gains, does not reflect the value of DYAI's portfolio. We are reiterating our Outperform rating on the stock.


Investment Appraisal
Dyadic is developing a proprietary C1 gene expression platform to improve manufacturing of biologics, an important market expected to reach over $300 billion in annual sales in 2022. C1 technology is expected to provide an efficient and cost-effective method to manufacture more affordable biologic medicines in larger volumes, using smaller fermentation vessels. The company has shown high business development activities by establishing partnerships in various sectors in biologics market including vaccines, animal health, and others. The company is also advancing in-house efforts to validate C1 technology in this large market of biologics including biosimilars, metabolites, gene therapy, and others. We think achieving expression of G0 glycosylation by C1 platform is a key milestone for the company as G0 is the building block to generate human-like proteins.
Most biotherapeutic (over 50%) products are glycoproteins including monoclonal antibodies (mAbs), Fc-fusion proteins, clotting factors, and cytokines. Protein glycosylation is a post-translational modification (PTM) that is important for various biological functions, pharmacokinetics and immunogenicity of recombinant glycoprotein therapeutics. As we previously discussed in our initiation report, the expression systems used for glycoprotein productions have significantly different glycosylation machineries. Plants, yeasts and non-human cell lines can generate sugars containing high mannose glycans, which represent an immature glycan structure. Glycoprotein production in non-human systems such as yeast, plant and fungal cells is attractive, but makes it necessary to eliminate risks arising from the non-human glycans of yeast, plant and fungal cells. The presence of the wrong sugar in a glycoprotein biologic can cause excessively rapid clearance and/or antigenic reactions via immunogenic reactions, which are undesired features of these candidate compounds. Therefore, glycoengineering carries major importance during the development of these drugs, as glycans have marked effects on stability, activity, antigenicity, and pharmacodynamics in intact organisms.
Exhibit 1. Glycan Structure in C1 platform


Source: Company SEC filings
Dyadic has an ongoing research and development agreement with VTT Technical Research Centre of Finland (VTT), a third-party contract research organization. VTT presented data on glycoengineering of C1 strains at the 11th annual PEGS Europe Protein & Antibody Engineering Summit on November 21, 2019. VTT has shown achieving expression of G0 glycoform at 94% rate relative to other forms of glycan, representing a relatively high abundance (Exhibit 2). The expression of G0 glycan structure is the first step to generate human-like proteins.
Exhibit 2. G0 Glycan Expression Levels Reached 94% by using C1 Technology

Source: Company SEC filings
We think achievement of this milestone is significant for Dyadic. Although, it is still early in development, obtaining the building block in glycoengineering brings Dyadic a step closer to generating human-like biotherapeutics. We view the data generated in glycoengineering and multiple partnerships established YTD-2019 as value creating events for the company. We are increasing our price target to $11 from $9 based on increased the probability of success to 30% from 25% for Dyadic's current programs and reduced the discount rate in our model to 12% from 15%. We are using a probability-adjusted discount cash flow (DCF) analysis using Cimzia market alone. We forecast $123 million, $262 million and $416 million of sales in F2023, F2024 and F2025, respectively. We calculated a terminal value of $1.2 billion. Based on our valuation, we arrive at our new price target of $11. We believe there is upside potential for the share price as the company validates C1 expression system in bioproduction and develops other biotherapeutic agents.




Valuation Summary
Valuation Summary
Our 12-month price target for Dyadic's shares is $11 based on a probability-adjusted discount cash flow (DCF) analysis. We believe the recent licensing and research agreements expands the potential of C1 platform in biologic market beyond Cimzia and biosimilars. We forecast $123 million, $262 million and $416 million of sales in F2023, F2024 and F2025, respectively. We calculated a terminal value of $1.2 billion. We are lowering the discount rate to 12% from 15% based on the recent data update and the partnerships. Based on our valuation, we are arriving at our price target of $11.

Risks
Dyadic is a discovery stage company, and investment is subject to risk. These risks include but are not limited to:
Experimental therapeutic product risk. The company's risk profile is based primarily, in our belief, on the company's thesis being based on the preclinical, clinical and commercial prospects of the technology. Current funding at the company is being directed toward these programs and should there be any missteps, negative trial data or delays, this could impact the stock negatively. Adding additional risk to both programs is their early stage nature. Drug development is fraught with failures and this risk is increased significantly during the earlier stages of development.
Development timeline risk. The company's shares could be subject to increased volatility, in our belief, based on the time frame required to get meaningful proof of concept data from the planned preclinical program. Positive data could yield a potential validation of the technology and the platform. Investors may choose to delay investment in the company, despite potential excitement, until meaningful clinical data is generated.
Financing risk. As with a majority of discovery-stage biotechnology companies, the ability to maintain sufficient funding is critical to the progress of candidates. Should the company experience problems raising sufficient capital, its development programs' progress could be significantly impeded, leading to both delays in development timelines as well as potential negative effects on investor confidence. Each of these could have a negative impact on share price.



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Company Specific Disclosures
The following disclosures relate to relationships between Noble and the company (the "Company") covered by the Noble Research Division and referred to in this research report.
The Company in this report is a participant in the Company Sponsored Research Program ("CSRP"); Noble receives compensation from the Company for such participation. No part of the CSRP compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed by the analyst in this research report.

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FUNDAMENTAL ASSESSMENT
The fundamental assessment rating system is designed to provide insights on the company's fundamentals both on a macro level, which incorporates a company's market opportunity and competitive position, and on a micro/company specific level. The micro/company specific attributes include operating & financial leverage, and corporate governance/management. The number of check marks that a company receives is designed to provide a quick reference and easy determination of the company's fundamentals based upon the following five attributes of the company (weighting reflects the importance of each attribute in the overall scoring of company’s fundamental analysis):
Attribute Weighting
Corporate Governance/Management 20%
Market Opportunity Analysis 20%
Competitive Position 20%
Operating Leverage 20%
Financial Leverage 20%
For each attribute, the analysts score the company from a low of zero to a high of ten based upon the analysis described below. The final rating and resulting check marks is a result of dividing the overall score (out of 100%) by ten.
Rating Score Checks
Superior 9.1 to 10 Five Checks
Superior 8.1 to 9 Four & A Half Checks
Above Average 7.1 to 8 Four Checks
Above Average 6.1 to 7 Three & A Half Checks
Average 5.1 to 6 Three Checks
Average 4 to 5 Two & A Half Checks
Below Average 3 to 3.9 Two Checks
Below Average 2 to 2.9 One & A Half Checks
Low Quality 0 to 1.9 One Check
While these are the attributes currently used for the analyst's fundamental analysis, the attributes and weighting may be reviewed, updated with additional attributes, and/or changed in the future based on discussions with the analysts and recommendations from the Director of Research.
Following is the description of each attribute in the fundamental analysis.
Corporate Governance/Management
We believe that a review of corporate governance and assessment of the senior management are important tools to determine investment merit. Good corporate governance aligns management with the interests of stakeholders. As such, analysts are to rank the company on the basis of good corporate governance principles that may include rules and procedures, board composition and staggered term limits, rights and responsibilities, corporate objectives, monitoring of actions and policies, and accountability. In addition, analysts will assess issues with controlling shareholders and whether decisions have been made in the past that were in the interests of all shareholders. In addition, management will be assessed based on industry experience, expertise, and/or track record.
High ranking example: Board and management that is aligned with the interests of shareholders with incentives based on stock price appreciation and with an experienced management team known for exceptional shareholder returns.
Low ranking example: Concentrated ownership without independent directors that do not necessarily align with all shareholders' interests.
The Market Opportunity Analysis
In this review, the analyst assesses the company's macro environment as a measure of understanding the industry. Factors considered include the size and growth potential of the industry under various economic conditions, the emerging demands in the market, technological benefits/disruptions, competition, geographical opportunities, and customer demands/needs, and an assessment of supply and distribution channels. In addition, the analyst will review legal and regulatory trends, as well as potential shifts in consumer or social behavior and natural environment changes.
High rank example: A company in an industry that is growing revenues well above GDP rates (which are on average 2% plus) and/or may have unmet or under-served needs in a rapidly growing market opportunity.
Low rank example: A mature industry that is in secular decline and likely to grow below GDP rates.
Competitive Position
The evaluation of the company's competitive position is another macro environment attribute designed to measure the relevance, market share, position and value proposition, and sustainable differentiations of the company and its products/services within its industry. Ease of entry into the industry and the ability of other well-funded players to potentially enter the market would be determined. As such, the assessment would consider the company's strengths and advantages of its products/services against weaknesses and limitations. This may include the company's current brand awareness, pricing and cost structure, current market strategies and geographic penetration that may affect demand for its products/services. In addition, the company's competitors would be evaluated.
High rank example: An analyst would consider the company's product to be superior to its competitors and that should allow the company to gain market share.
Low rank example: A company with a "me-too" product that does not have any significant technology advantages in an industry that has low barriers to entry.
Operating Leverage
Simplistically, operating leverage is determined by the operating income relative to changes in revenue. The analyst will calculate the impact on sensitivity on gross margins and variable costs to determine operating leverage. The analyst will take into account the ability of the company to cut fixed and variable costs in a challenged revenue environment and technological changes that may impact operating expenses. In addition, the analyst is to assess corporate strategies that include capital investment, which may be required for sustainable revenue growth, marketing expenses, and the company's ability to attract and retain talent and/or employees. The analyst should focus on the revenue opportunity and determine the price elasticity of demand for the company's products or services. In other words, the analyst is to rank the company based on improved operating margins going forward on an absolute and relative basis.
High rank example: A company that has improving margins for the foreseeable future, with significant price elasticity.
Low rank example: A company that is in a challenged revenue environment with a fixed cost structure and limited ability to cut costs, indicating an outlook for declining margins.
Financial Leverage
A strict definition of financial leverage is total debt divided by total shareholder's equity. Financial leverage analysis is to determine the company's ability to improve shareholder value by means of utilizing its balance sheet to grow organically or to acquire assets. Analysts may look at the company's debt to cash flow leverage ratio, interest coverage ratios, or debt to equity ratios. In addition, the interest rate environment and the outlook for interest rates are a factor in determining the company's ability to manage financial leverage. Finally, the analyst is expected to determine the ability to service the debt given the industry and/or company profile, such as cyclicality, barriers to entry, history of bankruptcy, consistency in revenue and profit growth, or predictability in sales and profits and large cash reserves. The analyst is expected to take into account capital intensity of the company and the anticipated of capital allocation decisions.
High rank example: A company with predictable and growing revenue and cash flow with modest debt levels. This may indicate that the company could improve shareholder value through growth investments, including acquisitions, using debt financing.
Low rank example: A company in a cyclical industry in a late stage economic cycle that has above average debt leverage and is in an industry that has a history of financial challenges, including bankruptcies.
ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE
Equity Research Analyst focusing on the Life Sciences sector. 5 years of industry experience. PhD in Chemistry from University of Florida.Post-Doctoral training at Columbia University and New York University. Her scientific training focused on antiviral therapy, oncology and immuno-oncology.
FINRA licenses 7, 63, 86, 87.
CONTINUING COVERAGE
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RESEARCH ANALYST CERTIFICATION
Independence Of View
All views expressed in this report accurately reflect my personal views about the subject securities or issuers.
Receipt of Compensation
No part of my compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in the public appearance and/or research report.
Ownership and Material Conflicts of Interest
Neither I nor anybody in my household has a financial interest in the securities of the subject company or any other company mentioned in this report.
NOBLE RATINGS DEFINITIONS % OF SECURITIES COVERED % IB CLIENTS
Outperform: potential return is >15% above the current price 88% 25%
Market Perform: potential return is -15% to 15% of the current price 11% 2%
Underperform: potential return is >15% below the current price 0% 0%
NOTE: On August 20, 2018, Noble Capital Markets, Inc. changed the terminology of its ratings (as shown above) from "Buy" to "Outperform", from "Hold" to "Market Perform" and from "Sell" to "Underperform." The percentage relationships, as compared to current price (definitions), have remained the same.
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Report ID: 11196
https://www.channelchek.com/company/DYAI/research-report/966