Martek Announces Second Quarter FY 2010 Financial Results

COLUMBIA, Md., June 3 /PRNewswire-FirstCall/ -- Martek Biosciences Corporation (Nasdaq: MATK) today announced its financial results for the second quarter of fiscal 2010. Revenues for the second quarter were $124 million, up 34% from $92.4 million in the second quarter of fiscal 2009. GAAP net income was $12.5 million, or $0.37 per diluted share, for the second quarter of fiscal 2010, compared to $11.0 million, or $0.33 per diluted share, for the second quarter of fiscal 2009.  These revenues and earnings include the results of Amerifit Brands ("Amerifit" or "branded consumer health products"), the acquisition of which was completed by Martek on February 12, 2010.  

The second quarter of fiscal 2010 included charges related to the acquisition of Amerifit of $3.5 million.  Excluding these amounts, net of tax, the fiscal 2010 second quarter earnings would have been $15.0 million, or $0.45 per diluted share, an increase of 37% over the second quarter of fiscal 2009  (see Table II "Reconciliation of GAAP to Non-GAAP Net Income Measure" below).

Commenting on the quarter, Chief Executive Officer Steve Dubin said, "The improving economy, new launches of products with Martek's life'sDHA, growing international markets for Martek's products and sales of Amerifit's branded consumer health products all contributed to Martek's record quarterly results.  This year as a whole is looking strong from a revenue perspective, although revenues for the balance of 2010 are projected to be somewhat uneven on a quarter-to-quarter basis due to customer plant shutdowns for maintenance and other timing matters. Martek's strong run rate coming out of fiscal 2010 should provide an excellent platform from which to grow as some of Martek's new products currently in development begin to hit the market over the next eighteen months as additional consumer brands launched through Amerifit's marketing and distribution channels."

Revenue Summary

Product sales in the second quarter of fiscal 2010 increased $30.9 million to $119.1 million from $88.2 million in the second quarter of fiscal 2009. This increase was partially attributable to the branded consumer health product sales of the newly-acquired Amerifit which totaled $18 million for the period from acquisition date (February 12, 2010) through April 30, 2010.  The remainder of the increase, or $12.9 million, was almost entirely the result of sales of our nutritional ingredients in both the infant formula and non-infant formula markets. Demand increases outside the United States, particularly in Asia, were a key driver of this growth. We believe that a portion of the nutritional ingredient revenue increase, estimated to be in the range of $4 million to $8 million, was associated with inventory stocking by our customers following depletion of inventories in 2009 as well as their production timing and related product ordering patterns.

A breakdown of product sales for the second quarter and fiscal year to date periods (in thousands) follows:

In addition, contract manufacturing and collaborations revenues in the second quarter totaled $4.9 million, compared with $4.3 million a year ago.  Of the $4.9 million in second quarter of fiscal 2010, approximately $3.9 million relates to contract manufacturing activities, which the Company continues to anticipate exiting, in large measure, in the third quarter of fiscal 2010. The remaining $1 million relates to revenues associated with Martek's joint development agreement with a subsidiary of BP p.l.c. ("BP") for work on microbial oils for use as biofuels, which began in late fiscal 2009. These development services with BP are expected to continue through at least 2011.  

Gross Margin and Operating Expenses

Overall gross margin for the second quarter of fiscal 2010 was 46%, an increase over the 42% gross margin realized in the second quarter of fiscal 2009.  This improvement was largely due to ARA cost reductions in the 2010 period and the positive impact on gross margins of branded consumer health product sales. Included in the second quarter's gross margin is the negative effect of approximately $1.7 million (gross margin impact of 1.4%) related to one-time inventory step-up costs resulting from the Amerifit acquisition. Excluding these step-up costs, gross margin would have been 48%.    

Research and development expenses in the second quarter of fiscal 2010 were $8.8 million (with no amounts related to Amerifit), consistent with previously stated guidance and up from $7.2 million in last year's second quarter. The increase was due to the Company's expanded clinical and pre-clinical research activities during the current quarter along with higher personnel costs. Martek's research and development focuses on both broadening the market applications for the Company's life'sDHA™ as well as leveraging the Company's microbial technology platform to develop new high-value product offerings. The Company continues to expect quarter-to-quarter fluctuations in research and development expenses mainly due to the timing of outside services, including third-party clinical trial services.

During the second quarter of fiscal 2010, selling, general and administrative expenses ("SG&A") were $17.9 million, or 14% of revenue, a slight increase compared to 13% of revenue in last year's second quarter.

Given their significance to the Amerifit business, Martek will now separately disclose expenses incurred associated with advertising and promotion. Such costs during the second quarter totaled $4.0 million, or 3% of revenue. Going forward, we anticipate significant advertising and promotion expenses each quarter as a result of our recently-acquired branded consumer health products business, with such costs fluctuating from quarter to quarter due to the timing of particular advertising and promotional campaigns.  

Financial Position  

As noted above, on February 12, 2010, Martek completed its acquisition of Amerifit.  To finance the Amerifit acquisition, Martek utilized existing cash of approximately $115 million along with the proceeds from a new term debt facility totaling $75 million and $11 million drawn from a new revolving credit facility. Martek's new revolving credit facility has a total borrowing capacity of $100 million and replaces Martek's former credit facility of $135 million which was due to expire in September 2010.

During the second quarter of fiscal 2010, Martek generated approximately $47 million of cash from its operations. This cash generation enabled a full repayment of the $11 million credit facility draw as well as a paydown of $35 million on the term debt during the second quarter.  The Company expects to repay the remaining balance on its term debt by October 31, 2010.

Significant Recent Events

• MIDAS Study Published Which Shows Martek's Algal DHA Improved Memory and Learning In Healthy Adults with Memory Complaints - The Memory Improvement with Docosahexaenoic Acid (DHA) Study (MIDAS) published in May 2010 in Alzheimer's & Dementia: The Journal of the Alzheimer's Association showed that Martek's algal DHA improved memory function in healthy aging adults.  MIDAS is the first large, randomized, placebo-controlled study to demonstrate the benefits of DHA in maintaining and improving brain health in older adults. MIDAS found that healthy people with memory complaints who took 900mg of Martek's algal DHA capsules for six months had almost double the reduction in errors on a test that measures learning and memory performance versus those who took a placebo, a benefit roughly equivalent to having the learning and memory skills of someone three years younger. The DHA was well-tolerated and subjects taking the DHA also experienced a lower heart rate, providing a significant cardiovascular benefit.  The study was funded by Martek.

• Non-Infant Formula Product Launches with life'sDHA–
  • Foods and Beverages - Fortune Natural Grains Blended Cooking Oil (COFCO – China), Future Star Kid Milk (Mengniu – China), Quiznos® salad dressings (U.S.)  Milkana® Golden Baby Cheese (BSI (Tianjin)® Food Company – China), dha Omega3™ Eggs (M. Lasser – Israel), Earth's Best® Organic Nutritional Mommy Bars (Hain Celestial – U.S.), H-E-B® Reduced Fat Milk (2%) with DHA Omega-3 and H-E-B® Whole Milk with DHA Omega-3 (Morningstar – U.S.), Rice Milk with Omega3 DHA™ (Freedom Foods – Australia).
  • Pregnancy and nursing and nutritional supplements - Pharmaceutical LLC PreferaOB One™ (Alaven® – US), Algal-900 DHA Softgels (Walgreens – U.S.), Natural Omega-3 Vegetarian DHA 100 mg Softgels (Bluebonnet® – U.S.), Natural Omega-3 Vegetarian DHA 200 mg Softgels (Bluebonnet® – U.S.) and Merck Kidabion™ DHA Powder Drink for Children (China).

• New Scientific Data/Recommendations Published on DHA and ARA – In addition to the MIDAS study noted above, the benefits of DHA and ARA supplementation were recently discussed in the following publications:
  • The Journal of Nutrition (April 2010) published the results of a study examining the association between omega-3 fatty acids in serum and cognitive function in mid-life adults.   Levels of serum phospholipid ALA, EPA, and DHA and performance in five major dimensions of cognitive function were determined in 280 healthy volunteers, ages 35 to 54. Using regression analysis, higher levels of DHA were associated with better performance on the tests of nonverbal reasoning and mental flexibility, working memory and vocabulary.  Neither ALA nor EPA showed a significant relationship to cognitive function. 
  • In the EFSA Journal  (March 2010), the European Food Safety Authority's ("EFSA") Panel on Dietetic Products, Nutrition, and Allergies ("NDA") officially adopted and published an Opinion on Dietary Reference Values for fats, including polyunsaturated fatty acids.  The NDA Panel concluded that a daily intake of 250 mg of long-chain omega-3 fatty acids for adults may reduce the risk of heart disease. The NDA Panel set an Adequate Intake ("AI") of 250 mg/day EPA+DHA for adults and an AI of 100 mg DHA/day for infants (>6 months) and young children <24 months.  For pregnant or lactating women, 100-200 mg preformed DHA is recommended in addition to the 250 mg/day omega-3 DHA+EPA AI for adults.
  • The Joint FAO/WHO Expert Group Consultation on Fats and Fatty Acids in Human Nutrition released their recommendations as an interim report from the meeting which was held in Geneva in November 2008.  The report recommends an AI for DHA for ages 0-6 months of 0.1-0.18% energy with no upper limit other than recognizing high maternal milk levels of 1.5% total energy.  The Committee refers to DHA during this period as a conditionally essential nutrient.  The recommended AI for ages 6-24 months is 10-12 mg/kg.  The Committee recognized the importance of DHA for retinal and brain development during this period.  A combination of EPA+DHA was recommended for children ages 2-10 years ranging from 100-250 mg/day.  For adults, daily consumption of 100-250 mg/day DHA+EPA is recommended.
  • The Journal of Pediatrics (June 2010) published a report on medical records as reviewed by investigators unaware of treatment assignment for two cohorts of infants looking at the incidence of respiratory infections and allergies at three years of age. The original two cohorts included 147 infants who had received either a DHA/ARA containing formula (0.32%-0.36% DHA/0.64%-0.73% ARA) or a formula without supplementation for one year. Eighty-nine infants were available for follow up evaluation at age three, 38 in the active and 51 in the placebo group. The DHA/ARA-supplemented groups had significantly lower odds for developing upper respiratory infections, wheezing, asthma, or symptoms of allergy. Martek's life'sDHA™ and life'sARA™ were used in the study.

Financial Guidance

Martek is providing certain financial information for Amerifit on a stand-alone basis to provide investors greater clarity through the integration process. Projected results for Martek (not including Amerifit), Amerifit (stand-alone, post-acquisition) and on a consolidated basis for the three months ended July 31, 2010 are as follows:

For the third quarter of fiscal 2010, Martek expects infant formula revenue to be between $76.0 million and $80.0 million, non-infant formula nutritional revenue to be between $12.0 million and $14.0 million, and contract manufacturing and collaborations revenue to be between $2.5 million and $3.0 million.

Consolidated gross margin in the third quarter of fiscal 2010 is expected to be between 49% and 50%.

While our revenues for the balance of 2010 are projected to be somewhat uneven on a quarter-to-quarter basis due to customer plant shutdowns for maintenance and other timing matters, Martek expects full fiscal year 2010 revenue to be between $440 million and $445 million, including infant formula revenues of between $307 million and $312 million. These forecasted revenues include projected fourth quarter 2010 revenues similar to those projected for Martek's third quarter. Such projected fourth quarter revenues would equate to year-over-year growth of more than 25%. Furthermore, the projected 2010 annual revenues would represent year-over-year growth in total revenues of 27% to 29% (9% to 11% excluding Amerifit-related revenues) and contemplate meaningful gains in all markets for our nutritional ingredients, including growth in infant formula revenues of 7% to 9% and growth in non-infant formula nutritional revenues of  27% to 35%.  

Investor Conference Call Webcast

Martek will host a conference call and webcast for investors to review its second quarter results and third quarter of fiscal 2010 outlook at 4:45 p.m. Eastern Time on June 3, 2010. Access to the live audio webcast is available through Martek's website at http://investors.martek.com.  The webcast will be available for replay for 30 days.

General

Sections of this release contain forward-looking statements concerning, among other things: (1) Martek's expectations regarding future revenue growth in and customer demand from the infant formula, pregnancy and nursing, nutritional supplements, animal feeds and food and beverage markets as well as markets for Amerifit products; (2) its expectations regarding revenue, gross margin, operating expenses and income for the third quarter of fiscal 2010 and revenue amounts for the full year 2010 for both Martek and Amerifit; (3) its expectations regarding launches by customers of products containing Martek's life'sDHA™ and future revenues associated with Martek's contract manufacturing and collaborative services with BP; and (4) its expectations regarding future capabilities of and benefits from the Amerifit acquisition.  Furthermore, Martek's operating results are subject to quarter-to-quarter fluctuations, some of which may be significant, and are also subject to future changes in the Company's preliminary purchase price allocation for its Amerifit acquisition.  The forward-looking statements noted above are based upon numerous assumptions which Martek cannot control and involve risks and uncertainties that could cause actual results to differ. These statements should be understood in light of the risk factors and cautionary statements set forth herein and in the Company's filings with the Securities and Exchange Commission, including, but not limited to, Part I, Item 1A of the Company's Form 10-K for the fiscal year ended October 31, 2009 and other filed reports on Form 10-K, Form 10-Q and Form 8-K.

About Martek

Martek Biosciences Corporation (Nasdaq: MATK) is a leader in the innovation, development, production and sales of high-value products from microbial sources that promote health and wellness through nutrition.  The Company's technology platform consists of its core expertise, broad experience and proprietary technology in areas such as microbial biology, algal genomics, fermentation and oil processing.  This technology platform has resulted in Martek's development of a number of products including the Company's flagship product, life'sDHA™, a sustainable and vegetarian source of algal DHA (docosahexaenoic acid) important for brain, heart and eye health throughout life for use in infant formula, pregnancy and nursing products, foods and beverages and dietary supplements. The Company also produces  life'sARA™ (arachidonic acid), an omega-6 fatty acid, for use in infant formula and growing-up milks. Martek's subsidiary, Amerifit Brands, develops, markets and distributes branded consumer health and wellness products and holds leading brand positions in all of its key product categories. Anerifit products are sold in most major mass, club, drug, grocery and specialty stores and include: Culturelle®, a leading probiotic supplement; AZO, the leading OTC brand addressing symptom relief, detection and prevention of urinary tract infections; and ESTROVEN®, the leading all-natural nutritional supplement brand addressing the symptoms of menopause. Martek currently has a number of nutritional health and wellness products under development that it plans to commercialize and distribute through Amerifit's distribution channels.

Martek's technology platform has also made it a sought-after partner on a range of groundbreaking projects in process, including the development of microbially-derived biofuels and the development of DHA-containing oilseeds. For more information on Martek Biosciences, visit http://www.martek.com/. For a complete list of life'sDHA™ or life'sARA™ products, visit http://www.lifesdha.com/. For more information about Amerifit Brands, visit www.amerifit.com.

SOURCE Martek Biosciences Corporation

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