Martek stock plunges 46%

Biotech: Columbia company tells investors it might miss revenue forecast by $60 million.

April 29, 2005|By Tricia Bishop | Tricia Bishop,SUN STAFF

In his column on Dow Jones' Marketwatch.com early this week, Nate Pile advised that Martek Biosciences Corp. of Columbia was a good biotech investment on his "list of core stocks."

By yesterday, however, the author of Nate's Notes had acknowledged that he might need to take "a step back and kind of re-evaluate."

That's because Martek stock plummeted 46 percent yesterday, the largest percentage drop on the Nasdaq stock market, closing at $32.49, down from $60.08 a day earlier.

The shares fell after the company announced after the market closed Wednesday that its revenue projections would be off by about $60 million for the rest of the fiscal year, through October.

The company's problem seems to be that it hasn't been able to produce enough of its nutritional oils, which have become hugely popular in baby formula. The products are said to reduce cholesterol in children, improve growth and eyesight in babies and, according to studies, perhaps play a role in the prevention of Alzheimer's disease.

Egg farmers feed them to their chickens and, in February, cereal giant Kellogg Co. said it would begin fortifying foods with the oils.

Commercial customers have been stockpiling Martek's oils, fearful that the company wouldn't be able to keep up with demand. That has diluted sales growth for this year.

"This is a quarter drop. I'll say it again, this is a quarter drop," Martek Chief Executive Officer, Henry "Pete" Linsert Jr. said during a tense conference call with analysts yesterday morning. "The notion of any long-term change to me is ludicrous."

Revenue changes are a standard measure of a company, but biotechs are not exactly standard companies. As a relatively new industry - looked to as the potential provider of the next big medical breakthroughs - many kinks remain to be worked out in bringing products to market and figuring out how best to distribute them.

Martek's recent stock swings are reminiscent of the fluctuations of countless Internet and telecommunications stocks a few years ago. With biotechnology companies, however, shareholders are betting on a payoff that can be years away and is often measured in complicated licensing deals and potential rather than in stores with product-stocked shelves.

"Some people just aren't willing to wait," said Daniel Eramian, a spokesman for the Biotechnology Industry Organization, a trade group in Washington. "We live in a society that wants a quick fix for everything."

Martek, which has 631 employees in four states, has been rationing its reserves of DHA and ARA, fatty acids found in algae. Customers have been ordering more than they need and squirreling it away, preparing for a potential shortage. That led Martek to retreat from its earlier predictions that big orders would continue throughout the year.

"We just recently became aware of the size of the backlog," Chief Financial Officer Peter Buzy said during yesterday's conference call. "Unfortunately, it was a surprise to Martek."

In a news release issued Wednesday evening, the company lowered revenue expectations by about 20 percent for its 2005 fiscal year, which ends Oct. 31. Martek expects annual revenue of $220 million to $240 million, down from estimates in March of $280 million to $300 million.

It was the second time in two months that revenue predictions had been lowered. Wall Street analysts taking part in the conference call sounded annoyed, even though the company said it has since ironed out most of the wrinkles.

"You had to know that your customers were going to beef up [their] orders," said Scott Van Winkle of Adams Harkness Inc. in Boston. "You only have four major customers. How could you not manage this?"

The bulk of Martek's sales are to large infant formula manufacturers Mead Johnson Nutritionals of Bristol-Myers Squibb Co., American Home Products Corp. of Wyeth-Ayerst, the Ross Products Division of Abbott Laboratories and Nestle SA.

"I think [management] should have had a better heads-up than they did," Dalton Chandler, an analyst with Needham & Co. of New York, said in an interview. "[But] I don't think what has happened in this case has any impact on the long-term prospects of the company. If you believed in it yesterday, there's no reason you should not believe in it today."

Unlike most biotech companies, Martek has turned a profit, and its product doesn't require a long regulatory process, as do those of drug companies. Another bonus for Martek is that investors understand what it does, that is, provide nutritional additives that improve health.

Reached by phone in California yesterday, Pile said Martek is charting new territory and that he still expects the stock to trade between $150 and $200 a share within five years.

"I think people who are selling the stock today probably are making a mistake," he said.

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