Hi Pete, MATK might get some more lift Monday.
From Andrew Bary`s column in this weeks Barrons:
...The staid U.S. infant-formula market is about to be shaken up by the introduction of a new formula supplemented with two key nutrients, DHA and AA, that have improved mental development of babies in several clinical trials.
The little-noticed announcements Thursday by Ross Labs, maker of Similac, and Mead Johnson, producer of Enfamil, could be a boon to an obscure Maryland biotechnology company, Martek Biosciences, the only provider of a patented blend of DHA and AA oils to the formula industry. Ross is a division of Abbott Labs, while Mead Johnson is part of Bristol-Myers Squibb.
Many experts believe that DHA and AA are key components of breast milk that make it a superior nutritional source for babies. Until now, regular formula hasn't included DHA or AA, which naturally occurs in fish and other foods. DHA is the more important of the two oils for brain and eye development.
Martek rose 7 last week to 28.10, a 33% gain, including a five-point gain Thursday, amid optimism that the moves by Ross and Mead Johnson, which dominate the U.S. formula market with an estimated 80%-90% combined market share, will finally result in significant sales and earnings for Martek, which waited for years before the Food and Drug Administration in 2001 finally certified Martek's blend of DHA and AA as safe for use in infant formula. Martek is the only company that has received such FDA approval. Martek has the subject of bullish coverage in Barron's, including an initial story, "Oh Baby!" in May 2000.
"This is a huge development for Martek," says Jim Carruthers, a partner at Eastbourne Capital, a San Raphael, California, investment firm that holds about two million shares of Martek stock, roughly 10% of the outstanding stock.
Carruthers believes that Martek could eventually earn several dollars a share, compared with a net loss of 73 cents a share on revenues of just $18 million in the company's latest fiscal year, ended October. He and other Martek bulls are excited because they believe that formula enhanced with DHA (docosahexaenoic acid) and AA (arachidonic acid) may quickly gain market share and potentially dominate the U.S. market, which now totals $2 billion to $3 billion.
Moreover, the U.S. introduction could speed the penetration of boosted formula in overseas markets, where several companies already have had some success. The global formula market totals $6 billion to $8 billion.
The question is whether parents will pay extra for enhanced formula, which is expected to cost 10%-15% more than regular formula. Formula isn't cheap, costing $3 to $4 for a pre-mixed quart can. "What parents aren't going to want the best formula for their baby?" asks George Haywood, a New York private investor and sizable Martek shareholder. "I'd also hate to be the marketing manager for the low-IQ formula."
One clinical study showed that babies fed DHA-enhanced formula had a higher IQ than those who consumed ordinary formula, while another clinical study showed better eyesight in babies fed the enhanced formula. Some skeptics might argue that it's tough to accurately distinguish relatively fine gradations in cognitive development in such young children.
Here's the bullish Martek math:
The company is estimated to earn a 5% royalty on the sale of its DHA and AA oil blend. If the boosted formula takes over the entire U.S. market, Martek could generate revenues of $125 million and about $2 a share in profits. Control of the global market could mean $300 million in revenues for Martek and $4 a share in profits. Carruthers and other bulls also believe that Martek could reap significant sales from DHA dietary supplements for women who are pregnant and breast-feeding.
Competitive threats to Martek on the formula front may not materialize because any rival would have to pass muster with the FDA and go up against an entrenched Martek, which produces DHA from algae.
The main risk for Martek is that consumers don't adopt enhanced formula. If sales prove disappointing, Martek's stock could fall because the company has staked its future on DHA and its current sales are low.
But one major U.S. maker, Mead Johnson, is particularly excited about prospects for its boosted formula, which should be available in early February as Enfamil LIPIL. Mead Johnson calls the introduction "a real breakthrough in infant formulas."
Many leading experts, including Dr. William Sears, author of a series of baby books, are big boosters of DHA-enhanced formula. It should be said that Ross Labs is less enthusiastic about DHA, arguing that its current Similac product without DHA and AA is just as good for babies.
Expect considerable newspaper and TV publicity about the new "smart baby" formulas in the weeks ahead because the media love that kind of story. That could raise the profile of Martek, which remains little known on Wall Street.
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