Martek Biosciences (NASDAQ:MATK) shares leapt 16.7% in recent trading, as the maker of nutritional supplements turned in solid earnings growth. The company recently inked a deal that appears to augur well for its near-term results. Still, investors should be aware of the potential risk.
The Columbia, Md.-based company indicated that second-quarter revenue rose 25.8% versus last year's second quarter, to $70.2 million. Earnings, meanwhile, surged 83%, to $6.3 million, which translated to $0.19 per share. Martek attributed its performance to strong domestic and international sales of infant formulas that use its nutritional oils, which contain docosahexaeonic acid (DHA) and arachidonic acid (ARA). These ingredients are believed to offer health benefits to newborns and adults.
Formula sales, particularly from one company, are likely to be a big factor in future results. Martek recently inked a 10-year agreement with Bristol-Myers Squibb's (NYSE:BMY) Mead Johnson unit, the largest formula manufacturer in the U.S. Martek had already provided Mead Johnson with DHA and ARA, but the new deal makes Martek the exclusive supplier of these ingredients to the formula maker until at least 2011.
The Mead Johnson deal appears to be good news, but it also has a possible downside, since it seems likely to increase Martek's dependence on the Bristol-Myers' unit. Admittedly, Martek has agreements under which Abbott Laboratories' (NYSE:ABT) Ross Products division and Wyeth (NYSE:WYE), among others, also use its nutritional oils. But Martek has been particularly reliant on Mead Johnson, which accounted for 49% of product sales last year. That's down from 57% in 2003, but the new pact could reverse this trend of revenue diversification.
As long as Mead Johnson's business stays healthy, the nutritional products outfit's prospects also look good. Still, any slip in formula sales at Bristol Myers' unit would certainly be a major blow. Given its heavy revenue concentration, investors may want to be cautious on Martek.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
