Martek Announces Fourth Quarter and FY 2009 Financial Results

COLUMBIA, Md., Dec 16, 2009 /PRNewswire-FirstCall via COMTEX/ -- Martek Biosciences Corporation today announced its financial results for the fourth quarter and fiscal year ended October 31, 2009. Revenues for the fourth quarter were $87.6 million, down 3% from $90.4 million in the fourth quarter of fiscal 2008. Net income was $11.0 million, or $0.33 per diluted share, for the fourth quarter of fiscal 2009, a 5% increase compared with $10.5 million, or $0.31 per diluted share, in last year's fourth quarter. The fourth quarter of fiscal 2008 included a non-recurring tax benefit of $1.5 million. Excluding this tax benefit, the fiscal 2008 fourth quarter earnings would have been $8.9 million, or $0.27 per diluted share. Compared to these prior year non-GAAP amounts, the Company's net income rose by 24% in the fourth quarter of fiscal 2009 (see "Reconciliation of GAAP to Non-GAAP Net Income Measure" below).

Commenting on the quarter and year, Chief Executive Officer Steve Dubin said, "Martek's solid fiscal 2009 financial results, though impacted by the many global economic factors affecting business in general, reflect the quality of Martek's products and the desire of consumers to improve their health and well-being, even in times of economic uncertainty. Sales to our infant formula customers decreased by 5% from 2008 primarily due to the de-stocking issues we have previously discussed as well as declining U.S. birth rates; however, our sales of DHA outside of infant formula increased by over 25% in fiscal 2009, with record quarterly sales achieved in Q4 2009. This increase was substantial in light of the global economy. I expect formula sales to increase slightly in 2010, as we believe that continued growth in international markets is expected to more than offset the impact of declining U.S. births or any additional de-stocking of inventory by our customers."

Mr. Dubin continued, "I also believe we are well-positioned for another year of strong growth in our non-formula markets with a number of new product launches from current customers set to go over the next two quarters and important new customers coming into the market with products over the next several months. Our pre-tax earnings improvement of just over 10% in fiscal 2009 was achieved by controlling costs and by improving the efficiencies of our production processes. Our continuous efforts to improve our manufacturing efficiencies coupled with additional decreases in our ARA costs should result in further gross margin improvements in 2010 and, along with an expected increase in sales, should further improve our profitability over 2009. We also made significant progress on our product pipeline in 2009 and we will be sharing information about these exciting developments publicly early next year."

Revenue Summary

Product sales in the fourth quarter of fiscal 2009 decreased to $81.9 million from $86.6 million in the fourth quarter of fiscal 2008. The revenue decrease in the current year's fourth quarter was caused largely by declines in infant formula revenues due to the continuing effects of de-stocking by certain infant formula customers as well as slight declines in the number of births in the U.S. These revenue declines were partially offset by non-infant formula nutritional revenues of $10.6 million in the fourth quarter of fiscal 2009 which represents a 32% increase from last year's fourth quarter. A breakdown of product sales by market for the fourth quarter and fiscal year periods (in thousands) follows:

In addition, contract manufacturing and services revenues in the fourth quarter totaled $5.7 million, compared with $3.7 million a year ago. This increase was due primarily to the continued production of shikimic acid, a starting material used to produce an anti-viral drug for the treatment of influenza, as well as the initial 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. As previously communicated, the Company anticipates exiting most of its historical contract manufacturing activities over the course of fiscal 2010; however, its development services with BP are expected to continue through at least 2011.

Gross Margin and Operating Expenses

Overall gross margin for the fourth quarter of fiscal 2009 was 43.8%, a significant increase over the 41.3% gross margin realized in the fourth quarter of fiscal 2008. The continued improvement resulted largely from ARA cost reductions and DHA productivity increases.

Research and development expenses in the fourth quarter of fiscal 2009 were $6.9 million, essentially flat compared to the corresponding quarter of last year. Research and development expenses in fiscal 2009 were $27.4 million, or 8.0% of revenue, a slight increase, on a percentage of revenue basis, from research and development spending levels in fiscal 2008. Martek's research and development focuses on both broadening the market applications for the Company's life'sDHA(TM) as well as leveraging the Company's microbial technology to develop new 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 fourth quarter of fiscal 2009, selling, general and administrative expenses ("SG&A") were $12.6 million, a decrease from $13.4 million in last year's fourth quarter. For the full fiscal year 2009, SG&A expenses as a percentage of revenue were approximately 14.5%, compared to 15.4% in fiscal 2008. The Company closely managed its SG&A spending levels and for fiscal 2009, SG&A was lower than in fiscal 2008 on both a percentage of revenue and absolute dollar basis.

Financial Position

As of the end of the fourth quarter, Martek had $141.1 million in cash and cash equivalents, a minimal amount of debt and the entire balance of its long-term revolving credit facility ($135 million) available for future borrowing. For the fiscal year ended October 31, 2009, the Company generated $65.8 million of cash from operating activities. Martek's year-end inventory value of approximately $116 million is consistent with previously disclosed expectations and reflects a reduction of over 7% from amounts held at the end of the Company's third quarter.

Significant Recent Events

-- Federal Circuit Rules in Martek's Favor in Appeal of Patent Infringement
Case -- In September 2009, the United States Court of Appeals for the
Federal Circuit ruled in Martek's favor in appeal proceedings related to
a patent infringement lawsuit between Martek and Lonza, Ltd., Nutrinova
Inc. and Nutrinova Nutrition Specialties & Food Ingredients GmbH
(collectively "Lonza"). The appeals involve Lonza's U.S. sale and use
of DHA in functional foods and dietary supplements and do not involve
Martek's core infant formula patents. The Federal Circuit ruled in
Martek's favor on all four of the patents in question. One of the
patents has been remanded to the District Court of Wilmington, Delaware
for further proceedings.
-- Multi-Year Sole-Source Infant Formula Supply Agreement -- Martek entered
into a multi-year, sole-source infant formula supply agreement with
leading global dairy company Fonterra Co-operative Group Limited
("Fonterra"). Under the Fonterra agreement, Martek will supply its
life'sDHA(TM) and life'sARA(TM) for all infant formula products
manufactured by Fonterra and sold in Malaysia, Indonesia and China.
Fonterra will also be using Martek's life'sDHA(TM) in its milk-based
Annum(TM) Materna products for pregnant and nursing mothers sold in
Indonesia, Taiwan, Hong Kong, the Philippines, Malaysia, Vietnam,
Singapore, Thailand and China.
-- Non-Infant Formula Product Launches -- New non-infant formula
nutritional products with Martek's life'sDHA(TM) were recently launched
including Nutrioli(R) - DHA Cooking Oil (Ragasa - Mexico), Natrel Omega-3
Milk 2% (Agropur - Canada), Yogurt and Sweet Milk Beverages (Yantang
Loby - China), Sugarless Bliss(TM) Dark Chocolate and Cupcakes with DHA
(Diat Foods - India), Vaalia(R) Drinkable Yogurt (Parmalat - Australia)
and pregnancy and nursing products PreferaOB + DHA(TM) (Alaven
Pharmaceuticals - United States) and up&up(TM) DHA (Target - United
-- New Scientific Data Published on DHA and ARA -- The benefits of DHA and
ARA supplementation were recently discussed in the following
-- The American Journal of Clinical Nutrition (December 2009) reported
12-year follow-up data from over 1,800 people who had participated
in the Age-Related Eye Disease Study evaluating the development of
Age-Related Macular Degeneration ("AMD"). At the end of the 12-year
period, information was graded to determine each individual's AMD
status and comparisons were made with the intake of DHA, EPA, and
the combination of DHA and EPA. Results showed that individuals who
consumed the highest amounts of DHA alone or in combination with EPA
had the lowest level of progression to AMD. EPA alone did not show
a benefit.
-- In the Journal of Pediatric Gastroenterology and Nutrition (online
October 2009), the ESPGHAN Committee on Nutrition updated their 1987
guidelines regarding the nutrient requirements of preterm infants.
These new guidelines now include significant information regarding
the importance of both DHA and ARA for the preterm infant. The
Committee recommended that along with the other nutrients required
for optimal development, DHA and ARA should be included in preterm
infant formula to provide 11-27 mg/100 Kcal for DHA and 16-39 mg/100
Kcal for ARA. Any EPA present should not exceed 30 % of DHA supply.
These recommended inclusion levels are equal to or greater than the
inclusion levels generally found in preterm infant formulas
currently marketed in the United States.
-- A study was published in Circulation (December 2009) in which, from
1984 to 1989, the serum fatty acids of 2,174 healthy men, age 42 to
60 years were measured. At the average follow-up period of 17.7
years, information regarding any previous diagnosis of atrial
fibrillation ("AF"), a common cardiac arrhythmia, was compared to
baseline fatty acid status. Results showed that DHA, and only DHA,
and not EPA or ALA, was associated with a reduced risk for
developing AF. Compared to the reference group, subjects in the
highest DHA quartile had a 38% lower risk for developing AF.

Financial Guidance

Martek expects total revenues for the first quarter of fiscal 2010 to be between $85 million and $89 million with first quarter infant formula revenue projected to be between $67 million and $71 million reflecting an additional impact of the customer de-stocking first experienced in fiscal 2009. First quarter non-infant formula nutritional revenue is projected to be between $10 million and $11 million, and contract manufacturing and services revenue is projected to be between $5.0 million and $6.0 million. First quarter gross margin is expected to be between 43.5% and 44.5%. Excluding due diligence costs incurred (see next paragraph), net income for the first quarter is projected to be between $9.6 million and $10.7 million, and diluted earnings per share are projected to be between $0.29 and $0.32.

As discussed previously, the Company has an ongoing process of evaluating potential merger and acquisition candidates that will support Martek's future growth and expand its product offerings. Related to these continuing evaluations, the Company's first quarter expenses will include due diligence costs, which to date are approximately $1.0 million, or $0.02 per diluted share. After including these non-recurring expenses, net income for the first quarter is projected to be between $8.9 million and $10.0 million, and diluted earnings per share are projected to be between $0.27 and $0.30. No agreements have been reached and there is no assurance that the Company will complete any acquisitions in the near term.

With respect to fiscal 2010, Martek anticipates modest growth in infant formula revenues, most of which is expected to take place in the second half of the year, as penetration in the overseas markets is expected to outpace any decreases domestically due to declining birth rates. Moreover, meaningful growth is projected in the non-infant formula category during fiscal 2010 fueled, in part, by certain new customers that are expected to launch products in fiscal 2010. On an overall basis, the Company expects growth in both revenues and profitability over fiscal 2009 with profitability growing at a higher rate than revenues primarily due to improvements in gross profit margins.

Reconciliation of GAAP to Non-GAAP Net Income Measure

The Company makes reference in this release to non-GAAP presentations of fiscal 2008 net income and earnings per share that excludes certain non-recurring tax benefits. We are providing this information to assist investors in comparing the results of the current periods to those in the prior year periods when the non-recurring items were present. We caution investors, however, that these non-GAAP results should only be considered in addition to results that are reported under current GAAP and should not be considered as a substitute for results that are presented under GAAP. Following is a schedule showing the reconciliation of net income reported under GAAP to the non-GAAP financial measure included herein ($ in thousands):


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; (2) its expectations regarding customer stocking or de-stocking of inventory; (3) its expectations regarding revenue, gross margin, operating expenses and income for the first quarter of and full fiscal year 2010; (4) its expectations regarding launches by customers of products containing Martek's life'sDHA(TM) and future revenues associated with Martek's contract manufacturing and collaborative services with BP; and (5) possible acquisition activities. Furthermore, Martek's operating results are subject to quarter-to-quarter fluctuations, some of which may be significant. 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, 2008 and other filed reports on Form 10-K, Form 10-Q and Form 8-K.

About Martek

Martek Biosciences Corporation /quotes/comstock/15*!matk/quotes/nls/matk (MATK 17.56, -0.68, -3.73%) is a leader in the innovation and development of omega-3 DHA products that promote health and wellness through every stage of life. The Company produces life'sDHA(TM), a vegetarian source of the omega-3 fatty acid DHA (docosahexaenoic acid), for use in foods, infant formula and supplements, and life'sARA(TM) (arachidonic acid), an omega-6 fatty acid, for use in infant formula. For more information on Martek Biosciences, visit

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