Martek CEO stepping down

Once-hot maker of food supplements posts mixed results


It's been a chaotic year for Martek Biosciences Corp., which has seen more highs and lows than a Swiss mountaineer.

In February, the Columbia maker of algae-based nutritional supplements announced a groundbreaking deal with Kellogg Co. to someday add its omega fatty acids to popular foods. Soon after, Forbes magazine named Martek the nation's sixth fastest-growing public technology company, and its stock hit $69 per share in March.

But a series of missed financial forecasts, inventory issues and a failure to announce more food company deals has led some investors to lose faith. A lowering of revenue estimates caused the stock to plunge by half in late April.

Yesterday brought more turbulence.

Martek shares sank $5.38, or 18 percent, to close at a new low for the year of $23.87. The drop followed news of a sharp decline in year-end profits and the revelation late Tuesday of the pending retirement of Martek chairman and chief executive Henry "Pete" Linsert Jr.

"It's an up-and-down roller-coaster ride for these guys," said Ryan McCormick, an analyst with Wm. Smith & Co. in Denver, who does not own Martek stock. "It's difficult to follow the stock in general."

Despite studies showing that Martek products, often used in infant formula, promote healthy brain and eye development in babies, and may be good for grown-up brains as well, analyst valuations of the company have been tumultuous.

First Albany Capital analyst David Webber has changed his mind on the stock four times since initiating coverage in February, yesterday reiterating the "neutral" ranking he gave Martek in September - and Martek is a client of that New York investment firm.

"We are maintaining our neutral rating despite good [fourth quarter and fiscal year 2005] results ... and continue to expect a sinking consensus ahead," Webber wrote in a report issued yesterday.

Tuesday's financial release showed Martek's revenue for the fourth quarter, which ended Oct. 31, was down about 6 percent from the period in the previous year to $56 million. It still beat estimates of analysts, who projected revenue of about $53 million. And revenue for the year was up about 18 percent overall to $218 million. Annual profit, however, declined two-thirds to $15.3 million from $47 million last year.

Cautious forecasts

The numbers troubled analysts, but their main beef was with the lack of guidance Martek was willing to give about its prospects. The company has been cautious when announcing growth prospects and potential income.

The company estimated Tuesday that sales for the fiscal first quarter that ends Jan. 31 would be about $58 million to $59 million and refused to comment on what might happen for the full coming year.

That, coupled with a continued strategy to increase inventory despite previous problems with overstocking, caused D.A. Davidson & Co. analyst Timothy S. Ramey to downgrade Martek's stock to "under perform" - after having recently upgraded it to neutral.

"I find the big run-up on inventories to be perplexing," said Ramey, whose company has also done investment work for Martek in the past.

"It doesn't make a whole lot of sense to me. This company had an amazing set of circumstances. It's a monopoly player," he said. "This should be a very positive story, and they've had an uncanny ability to get their production wrong almost at every turn."

During the conference call Tuesday, Linsert interrupted his chief financial officer to chastise David W. Munno, a Merrill Lynch & Co. Inc. analyst.

"You ought to come down and see us sometime. We haven't seen you, and our scientists haven't seen you. Our medical people haven't seen you, I haven't seen you, the plant people haven't seen you," Linsert said.

Munno replied that it was an "inappropriate time to bring that up, and it's not true and you guys don't return our calls."


Then Munno issued a report yesterday calling the company's guidance "disappointing" and indicating that "launches from [new food] partners are NOT imminent" as management has said.

"We think it is doubtful that a food partner will put a major brand at risk with a new and unproven supplement," Munno wrote. He lowered his revenue estimates for Martek's next fiscal year to $249 million from $260 million.

Though there is still growth potential in the infant-formula business, Martek's best opportunity for continued success is considered to be a foray into other foods, analysts and executives said.

The company is looking for big manufacturers who will add its nutritional oils, promote them, display Martek's logo and sign long-term supply contracts. But thus far, Martek has announced only a deal with Kellogg, which has yet to yield any product pairings.

Linsert was unavailable for comment yesterday.

Martek President Steve Dubin, who will succeed Linsert as chief executive when he retires in June, said yesterday that the company's relationship with analysts is generally a good one.

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