ARA shortage eats into profits at Martek

Related tags Martek Docosahexaenoic acid

License agreements with leading infant formula makers helped Martek
Biosciences maintain a strong revenue stream in this year's first
quarter but although it has continued last year's profit-making run
through to 2004, margins were impacted by problems with its ARA

Total revenue at Martek climbed 73 per cent on last year's first quarter to $35.6 million, with 90 per cent of the company's nutritional product sales generated from supply of the fatty acids docosahexaenoic acid (DHA) and arachidonic acid (ARA) to Mead Johnson, Wyeth, Abbott Laboratories and Nestle for use in infant formula.

Supplemented term infant formulas manufactured by three of these companies were introduced in the US in 2002, and Nestle launched a supplemented formula in the US in 2003. Supplemented term formulas are now being marketed by these four companies in over 30 countries around the world, according to Martek.

But costs also rocketed by 74 per cent to $32, 478 million, due to the effects of a power outage in Italy on DSM Food Specialties (DSM) production of ARA. DSM is Martek's third party manufacturer of ARA oil and passed on higher production costs to Martek, which also saw lower sales as a result. DHA inventories also piled up as they could not be blended with ARA, under tight supply. The US firm used air freight for ARA delivery to meet demand during the quarter, raising costs further and shrinking profit margins by 38 per cent, down from 40 per cent for last year's three-month period.

Research and development expenses were also higher after production trials on the use of DHA in food and beverage products and the start of certain collaborative agreements. The acquisition of the company's new Kingstree facility, acquired from FermPro last year, also ate into final profits of $3.4 million, raising administration costs by $2.3 million or 61 per cent.

However Martek revealed that DSM is expected to begin ARA production in the US this spring, which should improve gross profit margins from the third quarter and reduce factors that could impact the production at any one plant.

It has also entered into a new $85 million revolving credit facility, replacing its $10 million revolving line of credit, to fund expansion of its manufacturing capacity, expected to begin in mid 2004 at the Kingston plant and triple production over the next 12-18 months.

Henry Linsert, chief executive officer of Martek, said that 'everything is going into place for an expected good year'.

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