Martek Revenue Gains Tempered by Operations Woes

COLUMBIA, Md.—Fourth quarter (4Q) and fiscal year 2006 (FY06) ended on a high sales note at Martek Biosciences (NASDAQ: MATK), which posted revenue increases of 20 percent and 24 percent, respectively. However, while research and development costs have historically outpaced revenues at Martek (www.martek.com), it was the continued charges related to its plant operations, including idle facilities and reduced contract manufacturing, challenging margins and sapping earnings.

Infant formula partnerships continue to drive sales, which hit $67.2 million in 4Q and $270.7 million in FY06. Gross margin slipped in 4Q to 35 percent from 40 percent a year ago, but remained relatively flat for the year. The late slip in gross margin was attributed to its idle Kingstree, S.C.-based facility. Under the recent restructuring plan, the company transferred some of the capacity from its Winchester, Ky., facility to the Kingstree plant, in an effort to improve efficiency, thereby reducing manufacturing costs and operating expenses. As a result of the transfer, the company took charges related to employee separation costs and a write-down of certain assets supporting production in Winchester. It expects to incur additional plant restructuring charges through first quarter of fiscal 2007.

Levied primarily in 4Q, the $4.7 million in extraordinary charges dropped income to $0.6 million, compared to $4.9 million earned in 4Q05. Earnings for year compared much more favorably, due partly to a much bigger start-up costs levied in FY05. Earnings for FY06 increased 17 percent to $17.8 million, or $0.55 per share, from $15.3 million, or $0.48 per share, earned the year prior.

Among the fiscal year’s highlights, the company saw a favorable verdict in its patent infringement suit against Lonza/Nutrinova; the National Institutes of Health (NIH) selected Martek life’sDHA™ for a major Alzheimer’s disease study; the company entered into numerous long-term license and supply agreements; and various study results showed significant benefits of DHA (docosahexaenoic acid) supplementation.