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Martek irons out Q3 blip, prepares for mainstream entry

By Jess Halliday , 07-Sep-2006

Martek Biosciences' operating profit leaped back into the black in Q3, as it continues to reap rewards from the fortified infant formula boom and more cost-effective DHA production.

For the three months ended July 31 the Maryland microalgae ingredient supplier reported income from operations of $8.7m, compared to a loss of $0.6m for the same period of last year. Sales increased 84 per cent to $66.3m.

Martek might have based its business to date on ARA for infant formula, but it has been preparing to spread its wings into mainstream foods - its long-time, long-term plan. Last week the Maryland company unveiled its DHA brand as life'sDHA - a name and logo that will appear on future food products containing the ingredient.

 

The latest results suggest Martek is on a strong financial position to make the move - and a license and supply agreement with General Mills, similar to an early one with Kellogg, was a highlight of the quarter.

 

It should be borne in mind that Q3 2005 was an anomalous quarter since it bore the brunt of a sales drop-off as customers used up stocks they had amassed to protect themselves against potential future shortages.

 

Even so, these latest results belie a general upswing in Martek's fortunes - sales in Q4 2004 were $47.3m and profit was $4.7m.

 

President and CEO Steve Dubin said he expects it to be 12 to 18 months before products containing life'sDHA are on store shelves.

 

The company has also sought to make its DHA a more attractive option for other potential food clients, adapting its production process to reduce costs and ensure it has spare capacity available so it can move quickly to supply customers when orders start to come in.

 

In Q3 it spent $6.2m on research and development expenses, a large chunk of which went towards clinical studies on the cognitive benefits of DHA - a hot area of interest for consumers, health care professionals and educators around the globe.

 

The fortified infant formula market is also growing, as evidence to support the benefits of products mirroring the essential fatty acid profile of human breast milk stacks up - including the cognitive development of babies.

 

The US is the stronghold of Martek's DHA and ARA for infant formula business, where its ingredients are used in 80 per cent of fortified formulators. What is more, formulas with Martek's ingredients are soon to be available in Women, Infant and Children programs in 48 states.

 

Martek recently signed an exclusive license and supply agreement with Hain Celestial for fortified formulas - a relationship that may be extended into other food and beverage products in the future.

 

Outside of the US, Martek said the Asian market is showing particular interest in fortified formulas; the latest licensee in the region is South Korean market leader Namyang Dairy Products, which signed with Martek in June.

 

Although all this news might make it seem Martek ARA is flying out of the warehouse door, the company is being cautious not to order too much from its own supplier DSM, and will have bought less this year than last. This will result in higher unit costs over the year.

 

There is a small cloud around Martek's overarching silver lining. Its results communication contained the caveat: "Our revenues are subject to quarter-to-quarter fluctuations from factors such as our customers' production timing, including maintenance shutdowns, unplanned equipment downtime and production cycles, as well as our customers' stocking and destocking inventories."

 

It expects a combination of these factors - plus a drop in contract manufacturing revenues - to affects its Q4 results, with total revenues of $62m to $66m. While this will be less than the preceding quarter, it will still exceed Q4 2004 sales by 15 per cent and contribute to anticipated overall growth of 20 per cent for the full fiscal.

 

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