Adam Ismail05.01.02
Martek/OmegaTech Acquisition
A sign of things to come?
By Adam Ismail
Last week Martek Biosciences, a Columbia, MD-based biotech company focused on fatty acids, acquired OmegaTech, a Boulder, CO-based competitor, in a $90 million deal that, while relatively small, could define the future of a rapidly growing market.
Martek has been one of the key leaders in the development of fatty acids for health uses, which have been shown in several studies to help everything from heart disease to cognitive function and brain development. While far from a miracle cure, the science is so strong behind fatty acids that FDA has allowed two of them, docosahexaenoic acid (DHA) and arachidonic acid (AA), to be included in infant formulas.
As an equity, Martek has performed very well—its market capitalization is currently around $660 million, up nearly 300% in the past year. Much of that value comes from the patent protection it holds. In fact, Martek is the only company that can use both DHA and AA in infant formulas, so in essence the FDA ruling benefited only them. It benefited the company in almost record time as well, with three major U.S. infant nutrition companies using the company’s oils within a year of the approval and more are in the works.
OmegaTech, on the other hand, focuses on the food industry, which has been much more difficult to compete in, but is still a market ripe with potential. The challenge in the food industry is getting the large, conservative food marketers to incorporate fatty acids into their products, a challenge that has yet to be overcome. This is because food manufacturers do not typically tout products that lack high levels of consumer acceptance or recognition.
A group of fatty acid producers, including OmegaTech, worked to get FDA to approve a health claim but it only covers omega 3 fatty acids from fish oils, a term that is not exactly consumer friendly. To make matters worse, FDA said the food industry had to use a claim that was a full paragraph long and essentially said nothing about the health benefits of the oils. To remedy this, the industry is sitting down and rapidly working to revise the health claim, recruit food manufacturers and strengthen the science.
So, while the going has been tough for OmegaTech, it has still managed to carve out a leading position in the food market, which Martek expects to grow to over $1 billion. For Martek, acquiring a market leader in a complementary segment made perfect sense. They are now positioned to capture a monopoly share of the infant nutrition market, as well as a leading share of the food market, which is poised for take off very soon.
Synergies from the deal may actually give Martek an even more enhanced financial position because both companies primarily use fatty acids that come from microalgae, giving them a chance to consolidate their manufacturing. On top of that, the acquisition was paid for with stock, allowing Martek to continue on essentially unchanged in the infant nutrition space. It is further protected because only $50 million of the deal price is guaranteed, with the rest coming in the form of milestones that include obtaining other regulatory approvals. While not disclosed, these may consist of a new health claim or other factors that could quickly inject additional growth into the marketplace.
Fatty acids certainly have the potential to dramatically improve health and Martek and OmegaTech are betting that the market for fatty acids will grow just as dramatically. The partnership that has resulted from the deal will certainly shakeup the landscape of the market and basically position a new multi-segment supplier to capture a leader’s share of the growth.NW