Martek pulls back FY 05 from stockpiling setback

By Jess Halliday

- Last updated on GMT

Related tags Martek Docosahexaenoic acid

Martek Biosciences reported a better-than-expected 4Q that has
helped steer it to growth for the full year, despite hard-hitting
inventory problems.

Total revenues for the quarter, including both product and contract manufacturing sales, were $56.04 million - $3 to $4 million dollars more than predicted. Although this is a seven percent drop from the same period of the previous year, fiscal 2005 has been marked by customer inventory issues which came to light in May and which caused a drop in sales as customers used up excess stock.

The company said that the stockpiling was a result of some of its customers over-buying in an effort to protect themselves from supply problems that have dogged Martek in the past.

"The real impact was in the third quarter, when sales actually decreased,"​ CFO Pete Buzy told Product sales fell to $35.9 million in the three months ended July 31 2005, compared to $47.3 million in the prior year period.

For the entire year, total revenues were up 18 percent to $217.85 million. Operating profit increased 8.7 percent to $22.95 million.

The inventory issues have, however, exposed Martek to fire from some of its shareholders, who have filed a class action lawsuit alleging that it flooded customers with inventory in order to meet financial targets.

"We intend to vigorously defend ourselves and we think that the case is not with merit,"​ said Buzy, who expects that it will be a minimum of six months before the matter is resolved.

He added that this has no impact on day-to-day business, and predictions for Q1 2006 are positive: $58 to $59 million in total sales.

The company is expecting to earnings from contract work to decrease as it completes some outstanding projects, but that side of the business is expected to rebound as the year progresses.

Issues over ARA supply have eased since the expansion of DSM's facility in Belvidere, New Jersey, was phased in the second half of 2005. Martek sources around 90 percent of its ARA from two DSM facilities, one in Italy and one in the states.

Supply was been at pinch point for the past two years or so, forcing the company to air-ship in supply. Since the summer the situation has been less fraught and it has been able to revert to transportation by sea.

The savings this has brought, combined with improvement in the dollar to euro rate, has helped Martek achieve better gross profit margins in Q4 2005 (43 percent compared to 40 percent in Q4 2004).

Martek claims an 80 percent share in the ARA and DHA infant formulas market, which it has build up over the past four years.

It is now seeking to replicate this success with functional foods, an area in which Buzy said omega-3 is still in its infancy, and that interest from food makers will actually come off the back of formulas.

"They have seen that parents are prepared to pay more for a value-added product,"​ he said.

Extending upwards in the age-target also means the company is growing up with its consumers. The ingredients are now used in products for pregnant and lactating women, babies, toddlers and young children and adults.

According to Datamonitor's ProductScan, 308 skus of omega-3 products launched in the US market in 2005 (up to December 5), whether from a marine or a vegetarian source, compared to 171 in 2004.

However given the hot interest in omega-3, with a good many fish and vegetarian-sourced oils on the market, competition between suppliers is fierce. In November Martek unveiled a new, lower cost product offering for food applications that has been made possible by refinements to its manufacturing process.

"A better price point will open the door for more food applications,"​ said Buzy.

As for how growth of the omega-3 food market could affect Martek, a few big hits could be significant, he said.

Due to long product lead time and shelf life stability studies, there is no indication of when Martek's licensing agreement with Kellogg may bear fruit. In the meantime Buzy indicated that the company is in discussion with other food companies of a similar caliber.

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