Martek Biosciences Corporation F3Q09 (Qtr End 03/31/09) Earnings Call Transcript

Martek Biosciences Corporation (MATK)

F3Q09 Earnings Call

September 2, 2009 4:45 pm ET

Executives

Steve Dubin - Chief Executive Officer

Peter L. Buzy - Chief Financial Officer

Analysts

Tim Ramey - D.A. Davidson & Co.

Dalton Chandler - Needham & Co.

Chris Krueger – Northland Securities

Nick Genova – B. Riley

Daniel Walker - Kalmar Investments

Sarah Lester – Sidoti & Company

Scott Van Winkle - Canaccord Adams

Pamela Bassett – Cantor Fitzgerald

Presentation

Operator

Welcome to the Martek Biosciences Third Quarter 2009 Earnings Results Conference Call. (Operator Instructions) It is now my pleasure to turn the conference over to Mr. Peter Buzy, Chief Financial Officer of Martek Biosciences.

Peter Buzy

Welcome to Martek’s Third Quarter Fiscal 2009 Conference Call. First I would like to start the call off with our Safe Harbor statement, and then I will turn the call over to Steve Dubin, Martek’s Chief Executive Officer.

Our call today will contain forward-looking statements concerning, among other things, expectations regarding production timing of customers and third party suppliers, customer mix, product mix, customer demand, customer inventory levels including destocking, product launches, patent matters and general economic conditions, as well as Martek’s revenue and profitability growth, cash flows from operations, inventory levels and production and purchase costs, specific revenue, gross margin, expense, and income expectations for future periods, as well as any forward-looking statements contained in the Safe Harbor section of today’s earnings release.

These statements are based upon numerous assumptions which Martek cannot control and involve risks and uncertainties that could cause actual results to differ. These statements should be understood in light of the risk factors set forth in connection with the company’s filings with the Securities and Exchange Commission.

With that, I’ll turn it over to Steve Dubin.

Steve Dubin

Our third quarter revenue and earnings were within the guidance we gave you during our second quarter earnings conference call, but as we mentioned during that call, our third quarter revenue and earnings were both negatively impacted by inventory destocking by a number of our infant formula customers.

The good news in the numbers is that despite an overall revenue drop of 12% from the third quarter of 2008, our sales of DHA into markets other than infant formula rose by 41% to a record $10.6 million and earnings per share only dropped by 4%. The earnings per share held relatively steady as a result of improved gross margins and our cost control efforts. The better news is that despite some remaining destocking that will take place in the fourth quarter, I’m encouraged by how our fourth quarter is taking shape.

We’re expecting improved formula sales and another solid quarter for sales of non-infant formula applications. Combining our improving revenue picture with our cost control efforts and our improved gross margin should result in fourth quarter earnings per share in the range of $0.31 to $0.35 and for the full year an earnings per share improvement of between 10-14% despite flat revenues.

We’ve had one of the busiest summers that I can remember at Martek, and the results of which include contracting with two new licensees of our ARA oils for use outside of the US, gaining additional shelf space for our supplements in the US, broadening the approved uses for our food grade DHA in Europe and signing a joint development agreement with BP for the production of microbial oil for biofuel applications which I believe is further validation of the strength of our underlying technology platforms.

Looking ahead to 2010, as it’s still early, my outlook assumes some stabilizing in the global economic situation. I believe we’re well positioned for a solid year. Despite a recent slight decline in US birth rates, we expect to see growth on a global basis for our infant formula products and expect to continue to add additional infant formula licensees as part of our effort to grow international sales of our oils to infant formula companies. We anticipate continued growth in our nutritional products for use outside the infant formula as we grow our base of customers, expand our presence in markets outside of the US, and work to increase our product quality and find more formulation solutions for incorporating our DHA into more customer products.

I also expect to see an uptick in the launches new food and beverage products containing Martek’s Life’sDHA over the next 6 months. In addition, we are going to continue to carefully monitor our spending in 2010 and be cautious while continuing to work to reduce our cost of production. In 2010, we will be continuing to work on the development of new products and technologies to drive our future growth including our new lower cost DHA technology for infant formula, new nutritional oils, our work with Dow Agro Sciences to produce DHA from seed oils, and our biofuels collaboration with BP.

Pete is now going to give you more details on our financial results, and following his remarks we’ll open up the floor to your questions.

Peter Buzy

Highlights for the third quarter include record non-infant formula sales combined with record gross margin, and while we did experience a drop in sales from the second quarter, primarily due to inventory destocking in the infant formula market that we mentioned on the call last quarter, we earned profits near the high end of our guidance. While indications are that end customer demand for infant formula remains steady and the market appears to be stable despite the weak global economy, some level of inventory destocking remains at the retail level as well as the manufacturing level.

A few of our top customers have reduced inventory levels, and we expect the total impact of the destocking in our fiscal third and fourth quarters to be between $12 to $14 million. To a lesser extent, the decrease in infant formula-related sales from the second quarter was also due to customer production timing and summer shutdowns that we typically experience in our third quarter.

Non-infant formula sales reached record levels for the third consecutive quarter and came in slightly ahead of our guidance. The increase was driven by sales of oils and capsules for pregnancy and nursing and general nutrition as well as products for animal seeds which in total have increased nearly 60% over the past year. Sales for the food and beverage industries have remained within a range of $2.5 to $3 million per quarter over the past year. While there have been many small product launches during that time, many large product launches have been delayed as a result of economic conditions.

We have many projects in the pipeline including some larger projects that are expected to launch in the next couple of quarters. We’re also developing new delivery forms of DHA that could widen the applications for our products, some of which are expected to be available in the marketplace next year. As a result of these factors, we’re expecting improved food and beverage sales over the next few quarters.

Contract manufacturing revenue came in slightly below expectations due to the timing of production campaign; however, Martek has been re-engaged to manufacture shikimic acid, the starting material used to produce an anti-viral drug for the treatment of influenza, which will result in an increase in these revenues over the next two quarters. As we have indicated, we are facing out the majority of our lower margin contract manufacturing business over the long term. Upon completion of the shikimic acid campaign, revenues in this area are expected to decline through the second half of 2010.

Gross margin of 43.7% is the highest ever reported by Martek and was slightly ahead of guidance. Improving product margin was the primary driver of the record number and was positively impacted by both yield improvement in the production of DHA and lower ARA pricing from DSM. Product gross margins are expected to continue to improve in the next quarter, but overall gross margins will likely remain near flat as compared to the third quarter due to a higher percentage of lower margin contract manufacturing business expected in the quarter.

R&D expense of $6.6 million decreased from the second quarter. As we’ve previously indicated, fluctuations in R&D spending levels are normal due to the timing of outside services including third party clinical trial services. We expect an upward trend in R&D spending in the coming quarters as we invest in new application development, lower cost DHA sources to products beyond the current offerings, and the expansion of clinical studies designed to further support the benefits of DHA.

S&A expenses of $11.4 million decreased from the second quarter due to continued cost containment measures employed in response to the challenging economic conditions including the reversal of previously accrued companywide incentive compensation expenses totaling approximately $900,000. We expect SG&A expenses as a percentage of revenue to continue to drop in the near term; however, costs may fluctuate from quarter to quarter due to the timing of marketing and PR campaigns.

Earnings per share of $0.27 came in at the high end of our guidance range. Increased non-infant formula sales, continued strength in gross margins, and monitoring of spending were the key drivers in delivering these results.

Martek’s financial position remains solid with cash increasing to $129 million and minimal debt. Out debt is actually less than $500,000. Cash from operations was $14 million and was impacted by a decrease in DSO from 52 days to 44 days due to the timing of sales within the third quarter. We expect for DSOs to increase in the fourth quarter as sales are expected to be higher during the back end of the quarter as compared to the third quarter. In addition, a $16 million increase in inventory during the quarter impacted cash from operations primarily due to the timing of shipments of ARA from DSM which were higher than anticipated leading up to DSM’s planned summer maintenance shutdown.

We expect total inventories to decrease to the $115 million to $118 million level by the end of our fourth quarter as a result primarily of timing of ARA shipments. As of the end of July, inventories comprised of $82 million of ARA, $21 million of DHA for infant formula use, and $14 million of DHA for non-infant formula applications including food and beverage, nutritional supplements, and animal feeds, and then finally $8 million in raw materials and inventory associated with our contract manufacturing activities. The net results of these working capital changes are expected to result in cash from operations of between $15 to $20 million in the fourth quarter and approximately $55 to $60 million for the fiscal year.

There are a couple of other balance sheet items worth mentioning. First, our balance sheet includes a $7.4 million short-term investment. It’s related to investments in student loan backed auction rate securities that were previously classified as long-term assets. Under an agreement with the financial institution, we have the right to sell these securities back to that institution starting June 30, 2010. Also, other long-term assets increased by $11 million related to a payment to DSM as previously disclosed in one of our 8-K filings. The payment will be amortized to cost of sales over the period in which we’ve locked in improved ARA pricing.

Looking ahead, based upon discussions with our infant formula licensees, we believe a large portion of the inventory destocking will be behind us after the fourth quarter, and based upon recent end customer sales data believe that Martek sales for infant formula will return to growth for fiscal 2010.

For the fourth quarter, we expect revenue to be between $87 to $92 million with infant formula sales between $69 million and $75 million. This range reflects some level of inventory destocking. We expect non-infant formula nutritional revenues of $9.5 million to $11.5 million, non-nutritional revenues of approximately $800,000, and contract manufacturing and services revenue of between $6 million to $6.5 million. Contract manufacturing is expected to be higher than in recent periods as a result of the shikimic acid campaign. The estimate also includes revenue for services related to the BP Biofuels agreement expected to be between $800,000 and $1 million in the fourth quarter.

Gross margin is expected to be approximately 43% to 44%. Net income is expected to between $10.4 and $11.8 million, and diluted earnings per share of between $31 and $35 on weighted average shares outstanding of approximately $33.4 million. Cash from operations is expected to increase over Q3 levels.

For the full year, expect revenues to be between $345 and $350 million, net income to be between $40 and $41.4 million, and diluted EPS of between $1.20 and $1.24. This equates to an increase in pre-tax earnings of 10% to 15% over fiscal 2008 in a down economy. Though our full year revenue range has been slightly lowered compared to the guidance from our last call due primarily to inventory destocking that came in at the higher end of our range, we anticipate a strong fourth quarter including continued improvement in gross profit margin, expense control efforts which have allowed us to keep our full year EPS guidance largely intact.

In summary, the core business is sound, and while we continue to experience inventory destocking, we believe that end customer sales for infant formula products containing DHA continue to grow. We anticipate moderate growth in profitability over 2008 with our improvements in gross profit margins and ongoing expense containment. With inventory destocking behind us, we expect a return to growth in infant formula markets in 2010, earnings continue to be a priority at the company, and we can adjust spending levels in response to the demand from the marketplace and financial performance of the company, and finally although economic conditions are impacting the rate of new product launches for non-infant formula products, we continue to anticipate for fiscal 2009 growth in all of our non-infant product categories

Before I open up the call for questions, I want to state that we will not be able to answer any specific questions regarding our customers, the status of infant formula contract discussions, their product launches due to confidentiality agreements. We can, however, address questions regarding the sales of our oils for use in these products and related trends and expectations.

We will now open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tim Ramey - D.A. Davidson & Co.

Tim Ramey - D.A. Davidson & Co.

I was wondering what is your view of the real final takeaway growth in infant formula would be right now, ex destocking and so on? There seem to be some cross currents here with some concerns about declining birth rates and economic impact and the WIC program. You’ve indicated you think it will return to global growth next year. What would be the current baseline assumptions of growth?

Peter Buzy

The moving parts here, we have the inventory destocking that we’ve seen in 2009, and that range is somewhere between $12 and $14 million. We do anticipate because of some of the reduction in birth rates in the US, some number, maybe in a range of somewhere between 2-3% reduction, and that may result in a reduction of US infant formula demand. That is then really offset by what we’re seeing which is continued growth in the international markets. The international market growth range is probably for this year mid single digits. I think some of our initial forecast said that should increase going into next year.

Steve Dubin

I think if you want a ballpark for next year, and again it’s early and unfortunately the birth rate data is always about 8 or 9 months old, but we’re looking at probably a decline of 1% to 3% in the US and growth internationally of 5% to 10%.

Tim Ramey - D.A. Davidson & Co.

How would you weight that, roughly a 50-50 mix?

Steve Dubin

I think that’s pretty close.

Tim Ramey - D.A. Davidson & Co.

Your cash balance is really healthy. I think you made some comments last quarter about maybe thinking about the use of cash, or making a step in that direction. Anything further that you’d like to say on uses of cash?

Peter Buzy

We continue to monitor what our potentially use of cash is in the future. We do think that it was a smart thing to build our balance sheet up with additional cash compared to a year ago. However, we have not announced anything, and it’s something that the company continues to evaluated, and as you said, if there is a change, we’ll make an announcement when that were to happen in the future.

Tim Ramey - D.A. Davidson & Co.

Steve, you had return goals or return characteristics that you were striving for. Would that motivate the company to be more proactive with its use of cash? I’m wondering if the board thinks that the company ought to adopt some guidelines in terms of goals for return on invested capital or return on assets.

Steve Dubin

We look at it more on an opportunity by opportunity basis, and we have a lot of things in the pipeline that we’re working on that could be worthy of spending cash on and some that may not, so as the opportunities arise, we take a look at each one and try to evaluate the cost versus the potential return on moving forward in the area.

Peter Buzy

And one example is and it’s not big dollars, we did do the DSM arrangement during the quarter and committed $11 million to them that will improve the cost structure over the next several years with DSM, which we think is one of best uses of our cash.

Operator

Your next question comes from the line of Dalton Chandler - Needham & Co.

Dalton Chandler - Needham & Co.

Let me ask a clarifying question here with regard to your comments on the domestic and international growth in the formula market. You said mid single digits internationally. Were you talking about the growth in the number of births with a market penetration number on top of that?

Steve Dubin

I think we’re talking about the growth in our market opportunity next year. That’s a combination of increased penetration. It takes into account penetration, birth rates, everything. In the US, it’s more pure birth rates because we’re fully penetrated, so we’re going to up and down with the US birth rates in the US market.

Dalton Chandler - Needham & Co.

You also mentioned despite the fact the economy continues to be difficult you’re expecting an uptick in food and beverage launches over the next 6 months. Can you just comment on why you expect that and what the drivers are there?

Steve Dubin

I think the drivers are everything from back to school in some cases to companies working on application things for a long time and getting to solutions to a continued belief and excitement about the health benefits that DHA provides to the customers of those products and the new customers seeing some current customers have market success with their products. I think people are being more cautious, and we’ve had a relatively slow year on new product launches compared to 2008, but we’re seeing some increased activity lining up right now.

Dalton Chandler - Needham & Co.

On the slightly low revenue guidance for the full year, and you commented that was related to destocking. I think the range of $12 to $14 million is within an even wider range you gave last quarter, so is the issue just that you now think it’s going to be at the top of that range versus maybe the middle?

Peter Buzy

It is, yes.

Operator

Your next question comes from the line of Chris Krueger – Northland Securities.

Chris Krueger – Northland Securities

You have answered this infant formula question in a couple of different ways, but at the end of the day, what is the actual end user growth rate takeaway from stores. I just want to make sure I’m understanding where that is at right now in the US.

Steve Dubin

End-user growth rate in the US, it’s hard to give you an exact number because you’re combining. We only get IRI’s data outside of Wal-Mart, so Wal-Mart is a big part of this whole market, so we can’t give you exact data because we don’t know but looking at all the evidence, we believe that the end-user takeaway is down a couple of percent this year.

Chris Krueger – Northland Securities

I have a question on your recent approval in Europe for DHA use in a bigger array for food and beverage products. How is your penetration into a pipeline of potential products going there? Or is it just too early to say?

Steve Dubin

There is a nice pipeline, and it helps us in a lot of ways because if a company with broad product range has difficulty, you can always put our stuff in one-third of your product range, so this sets up a lot of things, and we’re looking at different ways to address it, but we’ve been working on solving this novel foods issue for six years. We finally got approval, and I think there is a lot of excitement about this in Europe. That being said, the European functional foods market is still small, but we’ve seen some launches, and we do expect some launches coming out in Europe and in other parts of the world in the next 6 to 9 months.

Chris Krueger – Northland Securities

On those lines, any food and beverage products that were launched in the last 1 to 2 years what just fizzed out or didn’t work out that have gone away that you can quantify?

Steve Dubin

I don’t have the exact numbers in front of me, but I think the last set of numbers I saw was that about 75% of all the launches that took place either met or exceeded customer’s expectations and most of the rest went away, and that’s a pretty good rate because I think if you look at new food and beverage products that hit the market, usually the failure rate is inverse to our experience, so it’s a very high failure rate, and I think that we’ve done well having the success rate we’ve had, but sure, there have been a number of products that have not made it for various reasons.

Operator

Your next question comes from the line of Nick Genova – B. Riley.

Nick Genova – B. Riley

On the gross margin line, you guys did a nice job coming in at the high end there or actually exceeding your original guidance, I believe. Even though infant formula came in below expectations and it came down in at $63 million, down quite a bit sequentially, how much of an impact in there is there from the lower capacity utilization, and can you talk about how you guys overcame that?

Peter Buzy

Most of what rolls through margin in any specific quarter is material that we had effectively on the balance sheet that previous quarter, so really the production activity in the third quarter does not, unless we throw out a bad one or something fairly unusual, impact margins for that quarter.

Nick Genova – B. Riley

On the freshness of inventory, with that ARA that you guys got that’s up about $15 million, do you guys have contractual minimums there that would become an issue or is the lack of supply since they shut down somewhat in Q4, is that enough to get you back in line where you need to be?

Peter Buzy

We do have an annual commitment with DSM. What we’ve seen in previous years if inventory typically hits the high water mark of ARA in the third quarter, it will come down fairly substantially in Martek’s fourth quarter and a little bit going into our first quarter, and most likely it will settle in the 6- to 7-month, and we believe that that’s a reasonable range.

Steve Dubin

We have commitments I think for the next 2+ years. What we did when we signed the agreement, we tried to estimate what the market would be and commit to slightly less than what we think the market will be and our production will make up the balance. So it should be less if the market grows the way we see it.

Nick Genova – B. Riley

On the SG&A line, if I back out that reversal in the accrual for the incentive compensation, that gets you to a $12.3 million number on SG&A. Is that a fairly decent run rate to use going forward, because you guys think that may start to continue to come down as you control costs. Is that a good run rate?

Peter Buzy

I think that’s probably a reasonable rate. Right now, Martek’s internal models for the fourth quarter are showing somewhere between a $12.3 and a $12.9 million SG&A spend.

Nick Genova – B. Riley

On the BP deal, the accounting treatment there, it sounds like there is going to be $1 million in sales in the contract manufacturing sales line, and I’m assuming there’s an expense to offset, and that expense offset would go through the cost of contract manufacturing sales. Is that correct?

Peter Buzy

That’s correct. The contract manufacturing and other and the cost associated with that which is primarily development dollars has been reflected in cost of sales.

Operator

Your next question comes from the line of Daniel Walker - Kalmar Investments.

Daniel Walker - Kalmar Investments

The fact that the infant formula markets are growing somewhat less fast now, to what degrees is DSM sharing that burden?

Steve Dubin

Under the agreement, if the market is varying by a few percent, there is no sharing really for the next couple of years. If you have a dramatic decline, there are sharing provisions in place.

Daniel Walker - Kalmar Investments

You announced that cooking oil deal earlier this year. I believe it was in a Latin country probably Mexico. You thought that might be a very interesting application. Can you talk about how that’s going thus far and whether that’s likely to have broader global implications?

Steve Dubin

It was just launched within the last few weeks. We’re very excited about it. It’s a great company, Ragasa in Mexico. They are going all out on this thing. They’ve got trucks with rolling billboards on delivery trucks touting the benefits of their new oils. It’s really exciting, and I think oil companies around the world have been watching us and have been seeing what’s going on, and it has resulted in a lot of companies discussing adding our DHA to their oils around the world, so we are very excited about the particular opportunity with our partner, Ragasa in Mexico, and we’re excited about the application of this technology around the world because of cooking oils are used very heavily in many parts of the world, and so it’s pretty exciting. A few years ago I don’t think any of us even envisioned the possibility of putting DHA in a cooking oil.

Daniel Walker - Kalmar Investments

The cooking oil that they are adding it to, is it their core product or are they segmenting and creating an additional product?

Steve Dubin

I believe it’s a new SKU of their product. They are approaching this the way we think optimizes the chances for success because they are doing a lot of PR, a lot of advertising, TV, radio, print, media. This is a big effort.

Daniel Walker - Kalmar Investments

Is it strictly in Mexico?

Steve Dubin

I’m 99% sure it’s strictly in Mexico.

Daniel Walker - Kalmar Investments

If one looks at your non-infant formula revenue in the quarter, pregnancy, and supplements, is there channel loading in that large sequential increase?

Peter Buzy

There’s always a possibility of some stocking going on as new products are launched, but I don’t think it’s a material number. I think we have benefited over the last couple of quarters from KB Pharma’ exit from the market, but right now it looks sustainable.

Daniel Walker - Kalmar Investments

You mentioned that you’re hopeful that there would be more non-IF activity in the next several quarters. To what degree has the buzz related to the neuro findings from the summer’s closed trials made a difference?

Steve Dubin

It’s made no difference yet, and that sounds odd, but we purposely haven’t promoted it yet because we’re trying to get this published in a respectable journal, and you really can’t do much promotion and get it published, so we think there is value in having it published in a respectable journal so that we can take that published article, and that will enable us to I think more effectively talk about the benefits DHA, so stay tuned there’s a lot of activities planned for this when we get that publication.

Daniel Walker - Kalmar Investments

There was a non-company press release from a neutraceutical outfit in the last several weeks. Can you comment on that, and would you comment more broadly on how over-the-counter supplements are doing that are non-pregnancy based?

Steve Dubin

I’m not sure which announcement you’re referring to Dan.

Daniel Walker - Kalmar Investments

You are going to challenge me to find the press release. It was a company in the Southwest of the United States that made a press release.

Steve Dubin

It is a distributor of ours?

Peter Buzy

Was it Horn?

Daniel Walker - Kalmar Investments

Yes.

Steve Dubin

We have distributors around the world, and we signed up Horn to help us. Our non-infant formula salesforce is about 12 people or so. We co-op with distributors around the world, and Horn is one of our newer ones, so it’s getting the word out more broadly and supplements outside of pregnancy and nursing applications are doing well. We just in the last 12 months got decent distribution, and that handicapped us really up until now, so we’ve in Walgreen’s now. We’re in Wal-Mart now, we’re in CVS. If you want to get it, you can get it. A year ago, people were saying where can I get this product, and I had to refer them to certain pregnancy products. It wasn’t easy to get, but now it is, and once we can launch the PR for the MIDAS study, the cognitive study, I think we’re well positioned to see those sales increase.

Peter Buzy

And we do a lot of homework prior to signing up any distributor. We are very comfortable with Horn. They’ve got a very good reputation in the marketplace.

Operator

Your next question comes from the line of Scott Van Winkle - Canaccord Adams.

Scott Van Winkle - Canaccord Adams

Did you talk in more detail about the $11 million investment in future ARA production and what the return on investment timeframe would be for that?

Peter Buzy

We’ve revised during the quarter the arrangement with DSM where we effectively extended the entire term of the arrangement with DSM. We have locked into an agreed upon pricing for the 4 or 5 years. The return on the $11 million investment we believe will pay back within probably about a 2-year time period, and it improves the overall pricing mechanism, and we clarified a few things in connection with the amendment with DSM.

Steve Dubin

It’s a complicated deal. It’s 100 pages the last I remember. So there are kinds of nuances in the deal, but basically, it will result in lower cost to us and more transparency and all kinds of good things. It also I think cements the relationship in terms of developing new IP, sharing the IP that’s already out there. It gives us a better position I believe against competition over the next several years.

Scott Van Winkle - Canaccord Adams

Pete, you said that that was amortized over a 4- to 5-year life?

Peter Buzy

That’ll be amortized over the period in which we’ve locked in pricing which is a 5-year period, and that’ll just be reflected as one of the components in cost of sales.

Operator

Your next question comes from the line of Sarah Lester with Sidoti & Company.

Sarah Lester – Sidoti & Company

You mentioned fluctuations in R&D expense for clinical trials, and I know that there could be still some options for use of DHA in Alzheimer’s patients, and I was wondering if you could just give us an update of your plans for that drug and how that relates to clinical trial expense.

Steve Dubin

I don’t think we’re incurring expense on that in the fourth quarter, so what we have is we have a panel of experts convening for early October who are supposed to look over all the data. There’s still data coming in from the trial, and once we get all that, we’ll get some recommendations I imagine, and I shall be at the meeting myself, so we’ll get recommendations, and then we’ll plot a course on how to proceed, maybe they will say, “hey, don’t do anything” or maybe they’ll say, “here’s where we think you got to go, and this is indication for this population. Here is how the trial ought to be designed,” and then we can make the decision in terms of the thought versus the probability of success versus the market size.

Operator

The next question comes from the line of Pamela Bassett with Cantor Fitzgerald.

Pamela Bassett – Cantor Fitzgerald

Can you talk a little more about the BP deal and what this relationship may turn into? Will you have the opportunity to share in licensing fees from the technology as well as potential operating assets in the future that may produce biodiesel using any microorganisms that you guys might develop?

Steve Dubin

That’s a good question, and it’s another typical complicated market deal, but we really would like this deal a lot for a number of reasons. It plays on our technology platform, and a platform I think we haven’t spoken that much about in general, but Martek, we have a lot of ability today to take genes from algae which produce a lot of unique carbohydrates, fats, and proteins, put them in other organisms, optimize growth patterns, and I think that’s what attracted BP to us, and the nice thing about this deal is we’re working with a world class partner, one of the world’s leaders in alternative energy sources, and there was already some work done before this agreement was signed. I don’t know if you’d call it exactly a proof of concept, but a pre-proof of concept to make both parties believe that we had at least a decent shot at getting an economical source of microorganism. From our perspective, it helps further this research. We have the rights to certain non-biofuels outcomes of the IP in the neutraceutical, cosmetics, pharmaceutical area, and a lot of this really involves lowering the cost of production. So you can do this technically today. It’s not something that you have to invent totally new technology for because you can use two of our oils today, and it would just be prohibitively expensive. So a lot of the effort is going to be engineering the organism and using unique energy sources and unique production methodologies to lower the cost. So we think that there’s a decent chance that they’ll be options not only biofuels but some of the other things we’re doing. It’s really a great opportunity to work with, like I said, a world class partner that develops some new things in an important area in biofuels and maybe benefit from some of the offshoots to other parts of our business.

Peter Buzy

As far as the long-term economics, they are funding this initial development work which will take the next two to three years. Beyond that, if this is successful, we have a piece of the pie, and whether or not they sell product or license that technology out, if this is successful, Martek will do well.

Steve Dubin

And they have a similar piece of the pie on any neutraceutical, pharmaceutical, and cosmetics application.

Pamela Bassett – Cantor Fitzgerald

So if I understand correctly, there is both a technology related opportunity and potentially licensing fees and royalties as well as the opportunity to participate in future operating companies that might deploy this technology. Do I understand correctly?

Steve Dubin

I don’t know about the operating company part because I’m not sure how BP is going to commercialize this. I’m not sure that they know at this point in time. The total focus today is on making it feasible, and if that works, there are other built-in mechanisms in the deal or options for further cooperation down the line.

Pamela Bassett – Cantor Fitzgerald

You mentioned in your opening remarks, Steve, that you’re going to be focused on new product development. Is the BP work part of that, and what else would fall into that category of new product development?

Steve Dubin

The BP collaboration is in that. We’re working with Dow Agro Sciences on new seed oil on DHA. We have this new technology for DHA for infant formula that we think will be a lower cost product and a great product as far as the second generation DHAs. There are some new nutritional oils we are working on. We’re working on new ways to get DHA into foods and beverages. For instance, our license of the technology from General Mills that we announced some months ago, we’re making good progress on that. We’re working on ways to get DHA into beverages more effectively, so there are a lot of exciting things going on here and there are a few more things that we’ll probably mention hopefully in the next 6 to 12 months. Once all the patent things are ironed out and filed, we’ll try to explain some of the longer term projects more fully.

Pamela Bassett – Cantor Fitzgerald

Can you give us a quick update on the Dow relationship that you mentioned?

Steve Dubin

The last I heard is things are going well. It’s a tough project, but progress is being made.

Pamela Bassett – Cantor Fitzgerald

Finally, timing on publication of results from the MIDAS study and how that might be leveraged in supporting the uptake in the marketplace for supplements?

Steve Dubin

I can’t give exact timing. We certainly hope it will be within the next 6 months, but I can’t refer to that at this point in time, but once it is published we have a whole PR campaign ready to go. It’s a great message. We have products on the shelf, so we’re really poised to take advantage of it. We want to do it the right way, and it’s very hard sit here and wait, I have to tell you, but looking at the long-term benefits here instead of having a quick blitz, we think we have a chance to have sustainable market penetration and this is the right way to do it.

Operator

There are no further questions at this time.

Steve Dubin

Thanks everyone for listening. Like I said, we’re making some really good progress on some of these long-term projects. I think the fourth quarter is looking much better than the third quarter, and I’m optimistic about 2010. We look forward to talking to you more about 2010 on our next conference call.

Operator

Ladies and gentlemen, that does conclude today’s conference call. We thank you for your participation.

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