Martek Sees Growth on Nutritional Oils

18 June 2001 00:00  [Source: ICB Americas]

Riding the rising demand for docosahexanoic acid (DHA) and arachidonic acid (AA) in infant formulas and dietary supplements, Martek Biosciences Corp.'s nutritional oils business is posting strong growth. Successive global launches of infant formulas containing Martek's oils have increased company's revenues, and Martek is planning further manufacturing capacity to meet demand for the product.

For the second quarter, Martek posted revenues of $4 million, up 69 percent from last year's $2.4 million. Sales of the company's nutritional products, which consist solely of Martek's DHA and ARA oils, increased by $2 million, a 172 percent increase from last year's $1.1 million. Royalties on sales of infant formula products increased $332,000 or 310 percent year-over year in the second quarter.

Another positive gain for the company is the recent notification from the Food and Drug Administration recognizing Martek's Dhasco and Arasco oil blend as generally recognized as safe (GRAS) when used in specified ratios in infant formulas. Long-chain polyunsaturated fatty acids, such as DHA and ARA, are said to improve the mental and visual development of infants fed formula fortified with the ingredients. The possible introduction of infant formula containing Martek's oils in the US by the end of this year will stimulate growth for the company as well as provide a need for additional manufacturing capacity for its DHA and ARA oils production.

Martek confirmed earlier this month that the company intends to expand its production capacity because of future volume demand. The company is planning on having additional capacity on line next fiscal year with as much as five times the current capacity, says Pete Buzy, Martek's chief financial officer. Further details will be announced in the third quarter. "Right now we are actively in discussion with several potential partners from a production standpoint," says Mr. Buzy.

Meanwhile, Martek is hiking up maximum production capacity and is optimizing its production process and efficiencies to meet sales volume increases. The company has current capacity to support annual sales of $40 million to $60 million with a production facility in Winchester, Ky., where all of the company's DHA is produced. Martek's ARA is currently manufactured for the company by DSM.

With the additional market launches expected over the next six to 12 months, including the US, analysts are confident that the company will meet its nutritional products revenue goal of $18 million to $19 million for the remainder of the fiscal year and the doubling of oils sales in 2002 from 2001. JP Morgan raised its $16.2 million revenue estimates to $18.1 million for fiscal year 2001 and $32.2 million for 2002. Adams, Harkness and Hill (AHH) estimate sales under $20 million this year and $50 million in 2002.

"While our $50 million 2002 revenue estimate is much more aggressive, we are not shying away from this estimate as it assumes sales to formula companies in the US in first quarter next year," says AHH analyst Scott Van Winkle. "If our sales estimates prove too high, we would expect it to be the result of timing rather than market acceptance," he adds.

Martek is targeting the $6 billion worldwide infant formula market equating to about $300 million to $400 million market sales opportunity, which includes $2 billion that of the US market. Martek has already signed partnership agreement in the US with Bristol-Myers Squibb's Mead Johnson, Abbott Laboratories' Ross Products and American Home Products' Wyeth-Ayerst, which together hold roughly 90 percent of the $2 billion US infant formula market estimated at a 5 to 6 percent royalty rate on any product sold with the Martek additive, according to JP Morgan. Currently, infant formula companies marketing formula with Martek's oils are Wyeth-Ayerst, Mead Johnson, Novartis, Nutricia in New Zealand and Australia and Maabarot in Israel.

"We have license agreements with infant formula companies that comprise 60 to 65 percent of the global infant formula market so there is a huge amount of growth potential for our company," says Angela Tsetsis, director of marketing at Martek. "The company's products right now are only at about 2 percent of that $6 billion target growth," Ms. Tsetsis adds.

"Although it is still very early, and they have a long way to go, the growth of Martek's nutritional oils business is very rapid and is doubling year to year," says AHH's Mr. Van Winkle.

Martek's outlook for future revenue growth remains positive, according to the company management, and for the remainder of fiscal 2001. Term infant formulas containing Martek's oils will be introduced in additional countries and royalties from the company's nutritional oils will continue to grow. While the infant formula supplement is the clearly the most important part of Martek's revenues, the company also mentioned several other pipeline projects for its DHA and ARA products that it is just beginning to develop, including supplements for pregnant and lactating mothers.

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