Martek Announces First Quarter FY 2010 Financial Results

Q1 total revenues up 3% and Non-GAAP earnings up 8% from last year - Q1 non-infant formula nutritional revenues increased 40% from fiscal 2009's first quarter.

4 Mar 2010 --- Martek Biosciences Corporation announced its financial results for the first quarter of fiscal 2010. Revenues for the first quarter were $89.8 million, up 3% from $87.4 million in the first quarter of fiscal 2009. GAAP net income was $9.6 million, or $0.29 per diluted share, for the first quarter of fiscal 2010, consistent with the earnings levels in last year's first quarter. The first quarter of fiscal 2010 included expenses associated with the acquisition of Amerifit Brands ("Amerifit") of $1.2 million. Excluding these amounts, net of tax, the fiscal 2010 first quarter earnings would have been $10.4 million, or $0.31 per diluted share, an increase of 8% over the first quarter of fiscal 2009 (see "Reconciliation of GAAP to Non-GAAP Net Income Measure" below).

Commenting on the quarter, Chief Executive Officer Steve Dubin said, "Fiscal 2010 is off to a good start as a result of continued strong growth in Martek's DHA sales for markets outside of infant formula. DHA sales outside of formula increased by 40% over Q1 2009, including a 60% increase in sales of DHA for food and beverage applications as a number of projects that were stalled in the pipeline during the economic downturn are now beginning to come to market. Sales of DHA and ARA for infant formula were down slightly from Q1 2009 levels, but I am encouraged by what appears to be a bottoming of that market and the prospect that we may be returning to growth in the second quarter, a quarter ahead of what we forecasted in our Q4 2009 guidance."

Mr. Dubin continued, "I believe that Martek is well-positioned for growth in 2010 thanks to the combination of a positive outlook for our nutritional ingredients business and the recent completion of our acquisition of Amerifit. Beyond 2010, the Amerifit platform should enable Martek to develop consumer brands for some of the exciting new products in our research and development pipeline, resulting in an acceleration of products to the marketplace and increased gross profit opportunities as we move up the value chain by getting closer to the consumer."

Revenue Summary

Product sales in the first quarter of fiscal 2010 were $84.1 million. While total product sales were essentially unchanged from the first quarter of fiscal 2009, there were changes in the components, most notably an increase of 40% in non-infant formula nutritional revenues along with a 4% decrease in infant formula-related sales.

In addition, contract manufacturing and services revenues in the first quarter totaled $5.7 million, compared with $3.3 million a year ago. Of the $5.7 million in first quarter of fiscal 2009, approximately $4.6 million relates to contract manufacturing activities which the Company anticipates exiting, in large measure, over the course of fiscal 2010. The remaining $1.1 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 first quarter of fiscal 2010 was 43.0%, a slight increase over the 42.4% gross margin realized in the first quarter of fiscal 2009, but a slight decrease from the 43.8% gross margin in Martek's fiscal 2009 fourth quarter. Compared to the fourth quarter, gross profit margins from product sales in the first quarter were up slightly; however, the increase was offset by a decline in contract manufacturing margins. See "Financial Guidance" for the gross margins projected for the Company's second quarter.

Research and development expenses in the first quarter of fiscal 2010 were $7.1 million, or 7.9% of revenue, consistent with the corresponding quarter of last year. 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 first quarter of fiscal 2010, selling, general and administrative expenses ("SG&A") were $13.3 million, or 14.8% of revenue, a slight increase from $13.1 million, or 15.0% of revenue, in the first quarter of fiscal 2009.

Acquisition of Amerifit and Financial Position

On February 12, 2010, Martek completed its previously announced acquisition of Amerifit, a consumer health and wellness company. Amerifit develops, markets and distributes branded consumer health and wellness products and holds leading brand positions in all of its key product categories. Amerifit 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. At closing, Martek paid total, all-cash consideration for Amerifit of approximately $200 million.

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 $50 million and replaces Martek's former credit facility of $135 million which was due to expire in September 2010.

Significant Recent Events

* Non-Infant Formula Product Launches - Products with Martek's life'sDHA were recently launched in the United States including NatelleOne (Azur Pharma Ltd) prescription prenatal vitamin with 250 mg life'sDHA, Algal-900 DHA Softgels (CVS/Pharmacy) with 900 mg life'sDHA, Spring Valley Algal-900 DHA (Wal-Mart) with 900 mg life'sDHA, Horizon Organic Lowfat Chocolate Milk Plus DHA Omega-3 (WhiteWave Foods) and Sara Lee Soft & Smooth Plus Bread (Sara Lee).
* New Scientific Data Published on DHA and ARA - The benefits of DHA and ARA supplementation were recently discussed in the following publications:

o The American Journal of Clinical Nutrition (online, February 2010) published results of a study investigating DHA supplementation on brain function. Thirty-three healthy boys, 8-10 years of age, were supplemented with 400 or 1200 mg/day DHA or placebo for 8 weeks and tested during an activity of continuous performance. The results showed that the DHA level in red blood cells was positively correlated with brain function and inversely correlated with reaction time during the activity. These results demonstrate the important role that DHA plays in regulation of brain activity. Martek provided financial support and life'sDHA for this study.
o The American Journal of Clinical Nutrition (online, February 2010) published the results of a study in which 343 term infants were fed formula containing no long-chain polyunsaturated fats or formula supplemented with 0.32% DHA, 0.64% DHA, or 0.96% DHA throughout the first year of life. All DHA-supplemented formula also contained 0.64% ARA. Visual evoked potential (VEP) was measured at 1.5, 4, 9, and 12 months. At 12 months, all DHA-supplemented infants scored significantly better in VEP visual acuity than those given an unsupplemented formula. There were also no significant differences in VEP visual acuity between the three DHA-supplemented groups. The authors state that these subtle changes in vision are important "because they suggest diet-related modifications in the developmental course of structure and function in the brain and/or retina" and that "dietary supply of DHA during infancy may have long-lasting effects on brain function." 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.

For the second quarter of fiscal 2010, Martek expects infant formula revenue to be between $78.0 million and $82.0 million, non-infant formula nutritional revenue to be between $11.0 million and $12.5 million, and contract manufacturing and services revenue to be between $4.0 million and $4.5 million.

Consolidated gross margin is expected to be between 46.5% and 47.5%, including the non-recurring cost of goods sold adjustment noted above associated with the estimated effects of a write-up of inventory in connection with purchase accounting of $1.1 million, which reduces gross margin by approximately 1%.

Reconciliation of GAAP to Non-GAAP Net Income Measure

The Company makes reference in this release to non-GAAP presentations of fiscal 2010 net income and earnings per share that excludes expenses associated with the acquisition of Amerifit. 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 items were not 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.