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MARTEK BIOSCIENCES' FORMULAID MICROALGAL INFANT FORMULA TARGETED FOR 1994 LAUNCH

This article was originally published in The Tan Sheet

Executive Summary

MARTEK BIOSCIENCES' FORMULAID MICROALGAL INFANT FORMULA TARGETED FOR 1994 LAUNCH assuming the successful completion of clinical trials and efforts to optimize manufacturing methods, the company reported in a Sept. 9 registration statement with the Securities & Exchange Commission covering an initial public stock offering. "If clinical studies under way demonstrate safety and Martek's manufacturing efforts are completed as planned," the company said it "believes that infant formula products for pre- term infants incorporating Forinulaid will be introduced to the market in 1994, with products for term infants following thereafter." Martek is a Columbia, Md.-based R&D startup specializing in microalgae research aimed at nutritional and pharmaceutical applications. The company's nutritional R&D is currently focused on developing "designer" oils that are rich in omega-6 and omega-3 polyunsaturated fatty acids, including docosahexaenoic acid (DHA) and arachadonic acid (ARA), that can be manufactured "under low- cost product conditions." The IPO registration describes Formulaid as "a blend of designer oils consisting of certain essential [polyunsaturated fatty acids], including DHA and ARA, that are present in human milk but are not available in virtually all infant formulas today." When added to infant formula at proper levels, Formulaid "provides DHA in concentrations that closely match those in human milk," Martek said. The company added that "nearly all infant formulas have lacked DHA and ARA" because of the difficulty of commercially producing the fatty acids. Martek is speculating that increased dietary DHA levels "may be associated with mental and visual development of infants" based on studies in the medical literature comparing breast-fed infants to formula-fed infants as well as studies comparing infants fed formula supplemented with DHA. The lone clinical study cited by the company found that pre-term infants fed a formula supplemented with DHA from fish oil "exhibited a more rapid development of mental and visual acuity than a control group" fed standard formula. However, Martek acknowledged that it is unaware of published studies that "conclusively demonstrate" that DHA positively affects the development of infants. Martek has signed licensing agreements for its microalgae- based infant formula technology with three infant formula manufacturers: Mead Johnson, American Home Products and Nutricia. Martek estimated that the three manufacturers "represent over 40% of the U.S. market and approximately 35% of the worldwide market." In addition, Martek said it is "actively pursuing additional licenses for Formulaid with over 15 other infant formula producers throughout the world." The agreements with Mead Johnson, AHP and Nutricia entitle Martek to up-front licensing fees and royalties based on sales of infant formula products containing Formulaid; however, the agreements do not require licensees to include Formulaid in their products. Citing the recent formula ingredient taurine, Martek pointed out that manufacturers "historically" have chosen to include new ingredients "in all of their brands." The licensees, who are responsible for obtaining FDA clearance for Formulaid as an infant formula ingredient, are expected to "self-affirm" the GRAS (generally recognized as safe) status of the ingredient rather than submit a food additive petition to FDA, Martek noted. "Self-affirmed GRAS status will be based on clinical and other studies conducted by each licensee as well as the preclinical studies conducted by the company and perhaps others," Martek added. While observing that FDA may not agree with the self-affirmed GRAS status of the ingredient, Martek pointed out that certain nucleotides, including carnitine, have been added to infant formulas without the need for FDA affirmation of GRAS status. Although Martek has achieved commercial scale manufacturing capability for Formulaid through conventional fermentation processes, the company said it plans to "continue to scale-up and optimize its Formulaid production until an economically feasible cost is reached or until (the company] reaches agreement with one or more manufacturing partners." In order to optimize DHA and ARA production -- both of which have been produced in 80,000 liter fermenters -- Martek said it has "contracted with outside fermentation scale-up facilities and an oil processing pilot plant" for assistance in scale-up. In addition, since Martek does not have the fermentation capacity to supply the overall market, the company said it is seeking joint venture or licensing agreements with "major fermentation companies to act as producers of Formulaid." The company also pointed out that its licensees "may elect to manufacture Formulaid" although it "believes this is unlikely." Martek is also looking at DHA-based dietary supplements for pregnant and nursing women as potential business areas as well as enteral nutritional products based on its "designer" oils. The company said it "plans to conduct or participate in human studies with respect to several of these potential applications in 1994." Martek currently markets a number of products used in pharmaceutical research that generated revenues of $ 1.2 mil. in the nine months ended July 31. In addition, the company is conducting research in the areas of microalgae-based pharmaceuticals and breath test diagnostics. Since its founding in 1985, Martek has raised approximately $ 8.8 mil. through private stock placements while accumulating a net deficit of $ 6.3 mil. from operations. The company was founded by the former head of the biosciences department at Martin Marietta, Richard Radmer, PhD, who is currently president and chief scientific officer at Martek. Chairman and CEO of the company is venture capitalist Henry Linsert. Martek's management team also includes former Dupont- Merck VP-Technical Operations Thomas Fisher, who holds the title of senior VP-operations and is responsible for pharmaceutical production, quality control and engineering. Martek is looking to raise over $ 37 mil. from the IPO of over 3.1 mil. shares at a proposed offering price of $ 12 a share. The company plans to use $ 13 mil. from the proceeds to fund clinical trials and other studies for its nutritional and diagnostic products, while $ 3 mil. will be used for R&D and $ 5 mil. will be put toward capital expenditures. The balance of the proceeds, Martek said, will go toward working capital and general expenses. The lead underwriters of the offering are Hambrecht & Quist, Salomon Brothers and Bear Stearns.
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