Biotech Values

[walterenergy]

ML on MATK today - still a sell

Putting General Mills license deal in perspective
On 16 June, Martek announced a long-term supply contract with General Mills
(GIS), which sent the stock up more than 10%. This type of deal was widely
expected, so we would SELL into the strength because 1) there are no minimum
purchase requirements so the value is still uncertain & likely less than the Street
estimates, 2) scope of product launches will likely be limited at first, and 3) we
maintain our thesis that as a % of total volume sales, DHA fortified foods are
unlikely to exceed 5-10% of product volumes, limiting Martek’s revenue
opportunity.
Yogurt is likely target product for GIS
We believe that yogurt is the likely target product for GIS’ use of DHA. GIS is the
2nd leading brand for yogurt, which includes the Yoplait and Columbo brands, with
retail sales of about $1 BB, based on IRI data. Based on an analysis of GIS
yogurt volume sales, and an estimated bulk price for Martek’s DHA, we estimate
that the realistic max revenue opportunity from this contract is about $25-30 MM.
If GIS decides to use Martek DHA in its cold cereals as well, there could be
another $20-30 MM revenue opportunity for Martek. But, assuming an ’07 product
launch, we estimate that GIS could contribute $5-10 MM in revenue by ’10.
Achieving max revenue opportunity will be difficult
We maintain our core thesis that GIS, and other food customers, will not fortify
enough products (as a % of volume sales) with DHA for Martek to achieve max
revenue levels. Also, we expect that the scope of product launches will be limited
at first, targeting customers at high-end stores or health food oriented stores, who
are the more likely purchasers. As a result, sales ramps will likely be slower than
expected, potentially leading to disappointments on long-term revenue growth.