Martek Bioscience -- Premium-Priced, Like West Texas Crude (MATK)

Last week, Martek Biosciences, Corp. (MATK), the maker of microalgae-derived oils used in baby formula and dietary supplements, announced results that topped Wall Street forecasts, despite a decline in both profit and revenue.

Martek Biosciences Corp. said that that for the first quarter ended January 31, 2006, its profit slipped 21 percent, but results came in ahead of expectations. The Company earned $5.6 million, or 17 cents per share, down from $7.1 million, or 23 cents per share last year. Revenue for the quarter was $62.9 million, down 5 percent from $66.5 million last year.

The decrease in the quarter compared to the first quarter of fiscal 2005 was primarily due to a previously disclosed build-up of inventory by certain customers in the three months ended January 31, 2005, which the companyt now believes has since been substantially eliminated.

Analysts polled by Thomson Financial had expected the company to earn, on average, 13 cents per share on $61.3 million in revenue.

Martek has entered into license agreements with 21 infant formula manufacturers, who collectively represent approximately 70% of the estimated $8.5 to $9.5 billion worldwide wholesale market for infant formula and nearly 100% of the estimated $3.0 to $3.5 billion U.S. wholesale market for infant formula. Customers include infant formula market leaders Mead Johnson Nutritionals, Nestle, Abbott Laboratories, Wyeth and Royal Numico, each of whom is selling infant formula fortified with Martek’s nutritional oils, which contain DHA (docosahexaenoic acid).

DHA, an omega-3 fatty acid, is the prominent structural fatty acid in the gray matter of the brain and retinal tissues of humans, as well as other animals. DHA is vital for normal brain development for the fetus and infant and for the maintenance of normal brain function throughout life. Whether to supplement infant formulas in the U.S. continues to be a matter of considerable controversy.

DHA is found primarily in tuna, salmon and deep-water fish, and in some algae. DHA is found in fish, primarily tuna, salmon and deep-water fish, but with the threat of mercury contamination, the safest route for DHA supplementation, according to Martek, is a non-fish source, such as algae.

Martek manufactures oils rich in DHA through a fermentation and oil process at manufacturing facilities located in Winchester, Kentucky and Kingstree, South Carolina.

Martek is also expanding its DHA footprint by signing manufacturing deals to sell its branded DHA for use in foods, beverages, and nutritional supplements.

In 2005, Hidden Villa Ranch began selling Gold Circle Farms liquid egg whites containing Martek’s DHA and Vincent Foods launched Oh Mama! nutritional bars for pregnant and nursing women.

In February 2006, the Company and Odwalla, Inc. announced that Odwalla would launch Odwalla Soymilk, which features Martek-branded DHA. Odwalla Soymilk is the first soymilk in the United States to contain DHA.

GlucoBurst, a diabetic drink, and CITRACAL prenatal vitamins, are two other new products launched that are fortified with Martek’s DHA.

The Nutritional Products Group of Martek also specializes in the research and development of another nutritional fatty acids, ARA (arachidonic acid). ARA is a principal omega-6 acid that is present in the membranes of the body's cells, and—like DHA—is highly enriched in the brain. It is a precursor in the production of eicosanoids ( the prostaglandins, thromboxanes, prostacyclin, and leukotrienes. Eicosanoids are important in immunity, blood clotting and other vital functions in the body. Since little or no ARA is found in plants, humans obtain ARA by eating foods such as meat, eggs and milk.

Martek has signed worldwide license and supply agreements with Mead Johnson, Nestlé, and other manufacturers relating to the use of Martek DHA and ARA in infant formulas.

Encouraged by better-than-expected first quarter results and positive analyst commentaries, investors have driven the shares of Martek up almost 13% since its March 7 earnings report.

Citigroup analyst Elise Wang—for one—told clients in a report that the Company's revenue is already tracking above the $235 million low end of Martek's guidance for the year. “New deals and expansion in the company's infant formula market will likely serve as catalysts for the stock,