Martek Biosciences Corporation

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Martek Biosciences Corporation

6480 Dobbin Road
Columbia, Maryland 21045
U.S.A.
Telephone: (410) 740-0081
Fax: (410) 740-2985
Web site: http://www.martekbio.com

Public Company
Incorporated: 1985
Employees: 384
Sales: $114.7 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: MATK
NAIC: 541710 Physical, Engineering, and Biological Research; 325411 Medicinal and Botanical Manufacturing; 325412 Pharmaceutical Preparation Manufacturing; 325414 Other Biological Products Manufacturing

Martek Biosciences Corporation develops and sells products derived from the microalgae it grows. Its Nutritional Products Group manufactures and sells two nutritional fatty acids, docosahexaenoic acid (DHA) and arachidonic acid (ARA). Martek sells its patented DHA and ARA oil blend, Formulaid, to infant formula manufacturers worldwide. The company also sells its DHA oil, Neuromins, to the nutritional supplement industry. The Fluorescent Products Group develops and sells a series of proprietary and non-proprietary fluorescent markers used in drug discovery and research applications.

1985–93: The Research Years

In 1985, Martin Marietta Corporation, saddled with debt from a complicated series of anti-takeover measures, engaged in streamlining its operations. As part of its restructuring, the aerospace giant decided to close its 25-member biosciences department. This department had earlier begun to research ways to use oxygen-producing algae as part of a closed life-support system in space in fulfillment of a contract with the National Aeronautics and Space Administration. Instead of shutting down operations, Dr. Richard J. Radmer, head of Martin's biosciences department, and his colleagues, David Kyle and Paul Behrens, arranged a subcontract with their former employer that allowed them to continue their research. Martin lent Radmer, Kyle, and Behrens most of the equipment they needed to operate the new spinoff in return for about 7 percent of its stock. Radmer, Kyle, and Behrens incorporated as Martek Biosciences Corporation. They rounded up $25,000 to finance Martek and moved themselves into a new laboratory.

Radmer, who held a doctorate in biology from Harvard University and was a member of the graduate faculty at the University of Maryland, became president of Martek. He and his partners were convinced that algae had untold potential uses and set about to collect, cultivate, and experiment with as many strains as possible. "There was all this genetic diversity . . . and it was virtually untapped," said Kyle in a 1997 Knight Ridder/Tribune Business News article.

Grown in Martek's labs in 130-gallon vats of water surrounded by fluorescent bulbs and injected with a mix of nitrates, potassium, phosphates, carbon dioxide, and other elements, Martek's algae typically doubled its weight within five to 24 hours and was ready to harvest within a week. A single 130-gallon container yielded as much as $25 million of algae a year. Of the 10,000 to 30,000 strains of algae believed to exist, by 1988, Martek's scientists had worked with 50 to 100 purified strains, manipulating the cells' manufacture of fats, proteins, and other products to yield food colors, nutritional supplements, lubricants, and chemicals for use in medical diagnoses.

In January 1986, Suburban Capital Corp. led a team of outside investors to advance $750,000 to Martek in return for a 35 percent stake in the company. The company also received its first commercial contract in 1986 to help develop low-cholesterol eggs. (By studying algae's production of fat molecules, the company aimed to control cholesterol production in chickens.) At the time, Martek derived a portion of its revenue from research grants with various agencies under the Small Business Innovative Research Program. Funders included the National Sciences Foundation, the National Institutes of Health, and the Department of Energy.

Martek moved into new offices in 1989. Four years later, in 1993, it held its initial public offering in the midst of a market skeptical about its future. Investors were wary; the typical biotech company spent about ten years and as much as $200 million to research and develop a new product with no guarantee of actual or commercial success. According to the company's chief financial officer, quoted in a 1994 Baltimore Business Journal article, Martek was different, however. It had "a little bit of an advantage because we're not the typical pharmaceutical 'wanna be' company. Our products are a lot closer to the market than others in our sector."

Martek also did not just burn cash in research and development; it sold its synthetically produced oils from the start. Revenues were small—$850,000 in 1988—but there was hope for more. In 1988, Martek was selling its oils in Japan to lubricate the bearings of gyroscopes which guided machines that dug tunnels for optical cables. The lubricant, made from the fats within the cells of algae, was 5 to 14 times more stable than petroleum-based products, and sold in small vials for as much as $2,000.

In 1989, Martek entered into a relationship with Oxford Partners of Stamford, Connecticut, and a group of five other investors. The venture capital syndicate gave Martek $2 million in return for ownership of about a third of the company. Martek used the money to move into new larger offices.

1994–99: Commercializing Its Discoveries

In late 1994, Martek introduced another product. Formulaid, its infant formula for low-birth weight infants, began to sell in Europe. Formulaid featured two known components of breast milk—DHA, docosahexaenoic acid, and ARA, arachidonic acid. In the 1980s and early 1990s, studies had begun to suggest that breast-fed babies had higher levels of DHA and ARA in their brain than their formula-fed counterparts, and, consequently, higher I.Q. and better visual acuity.

Martek had identified a species of algae rich in DHA and a fungus rich in ARA and developed a method of extracting the two fatty acids. Being a non-animal source of DHA, it did not contain the toxins or pollutants found in animal-source fatty acids. After raising cultures from the test tube to fermentation tank, the algae and fungi were dried, refined, and bleached, and the fatty acid removed and blended with sunflower oil. The resulting mixture could be added to infant formulas during their manufacture. Martek held three patents for the technologies employed to produce Formulaid. It began taking important steps to commercialize its DHA- and ARA-rich product worldwide in a bid to grab a piece of the then $5 billion worldwide market in infant formula.

However, Formulaid's appearance began a debate about adding fatty acids to infant formulas. While the European market went ahead and embraced Formulaid, the American market awaited the results of several studies to show whether Martek's nutritional boost was a safe and effective way to enhance infants' neurological development.

Meanwhile, there appeared other applications for DHA. In 1995, Martek signed an agreement with the drug firm, Neuromedica Inc., to combine DHA and dopamine into a treatment for tardive dyskinesia, a disorder that causes uncontrolled facial and other bodily movements and reduced intellectual functioning. The company also started selling DHA dietary supplements, under the name Neuromins, to supplement diets low in foods that contain DHA. General Nutrition Center, a U.S. chain, started selling Neuromins capsules nationwide in 1997.

By 1997, Martek had licensing agreements to provide it DHA- and ARA-rich oil to six infant formula manufacturers that together represented more than 40 percent of the infant formula market. These licensing deals brought in nearly $4 million in revenue in 1996 from sales of fatty acid-enriched formula in 24 countries. Still the company had yet to post a profit in its 12-year existence. In 1996, it had experienced a loss of $8.9 million. In 1997, it had a net loss of $15.4 million with revenues of $4.4 million.

By 1998, somewhere in the vicinity of 50 companies worldwide included Martek's oils in their pre-term infant formulas, and the company signed two more licensing agreements with companies in Australia to include its oils in full-term infant formulas. Iams Company added the DHA-containing nutritional oils to its Eukanuba brand formulas for puppies and kittens. The British Nutrition Foundation and the Joint Expert Committee on Human Nutrition of the United Nations Food and Agriculture Organization and World Health Organization recommended that DHA and ARA be included in all formulas for infants. The January 1998 issue of Pediatrics cited DHA as the "likely" breast milk component responsible for the improved academic outcomes and visual acuity of breast-fed children.

Key Dates:

1985:: Martin Marietta spins off Martek Biosciences Corporation.
1993:: The company holds its initial public offering.
1994:: Martek introduces Formulaid, its infant formula for low-birth weight infants, in Europe.
1995:: Martek signs an agreement with the drug firm Neuromedica Inc.; acquires a fermentation plant in Winchester, Kentucky.
1998:: Martek collaborates with SmithKline Beecham on research involving the use of Martek's patented Reconnaissance Probe technology.
2001:: The Food and Drug Administration approves use of Martek oils in infant formulas.
2002:: Martek acquires OmegaTech Inc. of Boulder, Colorado; Canada's government health agency, Health Canada, completes a favorable review of Martek's oils inclusion in infant formulas.
2003:: The company acquires FermPro Manufacturing, L.P. and enters into an agreement with SemBioSys Genetics Inc. of Canada.

In a different vein in 1998, Martek collaborated with SmithKline Beecham Corporation on research involving the use of Martek's patented Reconnaissance Probe technology. The probe technology enabled scientists to map the binding sites where drugs interact with receptor-site proteins. Martek signed an agreement with Intergen Company for non-exclusive distribution of its line of ultrasensitive fluorescent products, expanding on a prior relationship it had with Intergen for distribution.

2000–03: Steady Growth

Another sale of stock to institutional investors in 1999 raised an additional $13.5 million in financing for Martek, and by 2000, about 60 countries had approved its oils for use in infant formulas. Martek also had licensing agreements pending with Wyeth-Ayerst Pharmaceuticals Inc., Mead Johnson & Co., and Royal Numico. When Abbott Laboratories signed a worldwide licensing agreement with Martek in April 2000, Martek gained access to 60 percent of the worldwide infant formula market. Its revenues hit $9.7 million in 2000, increasing 58 percent from 1999 totals. The company readied for even greater growth in 2001 when the Food and Drug Administration completed its favorable review of Martek's oils, deeming them safe for use in infant formula.

Putting in motion plans to increase production capacity five-fold, the company purchased a South Carolina fermentation plant. The facility was its second, Martek having purchased its first fermentation plant, located in Winchester, Kentucky, from Coors Brewing Co. in 1995. The addition of the second plant tripled its production capabilities. Martek also sold the assets of its stable isotope business to Spectra Gases in 2001 in order to concentrate on its other products.

Another breakthrough occurred for Martek in 2001 when researchers in its labs and at the Carnegie Institute of Washington figured out a way to make one species of single-celled algae grow without light. By inserting a single gene from either human red blood cells or a different single-celled algae, the researchers were able to make the algae grow in glucose fermenters. However, the company recorded a loss of $13.7 million for 2001 on revenues of $18.8 million due to the purchase of its new facility and extremely high production costs.

In 2002, Martek raised another $22 million through the private sale of common stock, some of which it used to acquire OmegaTech Inc. of Boulder, Colorado, an algal DHA producer. The acquisition allowed Martek to think about entering the $1 billion food and beverage industry with its nutraceuticals. Another step forward occurred when Canada's government health agency, Health Canada, completed its favorable review of Martek's oils inclusion in infant formulas. In addition, Bristol-Myers Squibb's Mead Johnson Nutritionals division and Abbott Laboratories' Ross Products division began to include Martek's oils in Enfamil Lipil and Similac Advance.

Wal-Mart introduced its DHA-enriched label infant formula line, Parent's Choice, in 2003 by which time Martek had licensees in more than 60 countries. Studies continued to provide evidence of the benefits of DHA and ARA, from contributing to higher I.Q. scores for four-year-olds whose diet had been supplemented with the fatty acids after birth to slightly longer gestation lengths for women on supplemented diets during pregnancy. In a final marketing coup, Martek signed a worldwide license with Nestlé, the only one of the major international infant formula companies it had not yet signed an agreement with. The company acquired FermPro Manufacturing, L.P. and entered into an agreement with SemBioSys Genetics Inc. of Canada to develop specialty oil products with potential pharmaceutical and nutraceutical applications.

As Martek looked to the future, it had reason to project continued growth. Although the evidence was as yet inconclusive, some researchers were beginning to believe that DHA- and ARA-enriched diets could prevent cardiovascular disease, Alzheimer's disease, and other dementias.