Affordability Is Martek's Challenge As It Looks to Turn Algae Into Fuel

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By Mike Musgrove
Washington Post Staff Writer
Thursday, August 20, 2009

Now that its flagship product is in nearly every container of infant formula sold in the United States, Martek Biosciences is looking to edge its way into the gas tank.

The Columbia firm, which develops nutritional supplements for food and beverages based on the fermentation of algae, announced this month that BP has agreed to invest $10 million over a 30-month period to fund research seeking ways to inexpensively develop vehicle fuel from organisms such as seaweed.

"We believe sugar to diesel technology has the potential to deliver economic, sustainable and scaleable biodiesel supplies," BP Biofuels chief executive Philip New said in a statement. "BP is very pleased to be entering this important partnership with Martek."

For BP, the Martek partnership represents just one of many investments to develop sustainable alternative energy forms. Since 2006, BP has announced investments of more than $1.5 billion in biofuel research, and other deep-pocketed energy giants are looking into this area as well. In July, Exxon said it would invest $600 million in a similar type of algae research.

If Martek's research yields an affordable product, there eventually could be a significant financial upside for Martek -- but that's a big if, experts say.

"This is a fairly small bet [by BP] on a fairly long-shot idea, but that doesn't mean that it's not worth doing," said Tim Ramey, an analyst with D.A. Davidson & Co. who follows Martek. Because of those long odds, Ramey dubs the BP investment as a bit of "wildcatting in the fermentation vessel."

In theory, Martek President David Abramson said this week, turning algae into the type of fuel BP could use isn't a remarkable accomplishment. The larger, more important trick would be to develop a product for a price that matches or beats the cost of fuels used by vehicles today.

"This is very doable in a lab, if you don't care about the price," he said.

If Martek develops a viable product, it would receive royalty payments from BP whenever that product was sold. Regardless of whether that happens, Martek will keep any research that may prove beneficial to its growing line of food and beverage products, under the terms of its deal with BP.

Martek's annual revenue was $352 million last year, nearly 90 percent of which came from sales to baby formula manufacturers. Using algae, Martek makes DHA, an omega 3 fatty acid that has been proven to be important for brain and eye development in babies. As the only company that makes what is regarded as a "clean" DHA product -- other manufacturers offer DHA in the form of fish oil derived from tuna and salmon -- Martek's product has cornered the U.S. market. Nearly all baby formula sold in this country contains DHA produced by Martek. Outside the United States, Martek's products can be found in nearly 50 percent of the market.

In the last three years, Martek has been expanding its DHA business by striking deals with food and beverage makers such as Coca-Cola, which is offering a new type of Minute Maid juice that claims to "help nourish your brain" thanks to Martek's DHA.

As recent studies have indicated DHA may have benefits for adults as well, Martek has sought to take advantage of a larger potential market, branding its product as "Life's DHA" with a logo that all of its new partners are required to include on their packaging materials. The company is hoping that the logo will stick in the minds of consumers in the same way that computer buyers once gravitated to machines that featured "Intel Inside."

Some of Martek's patents around DHA development are set to expire next year, however, and some analysts see Martek's BP deal as a way for the company move forward into possible new businesses should fresh competition emerge on the DHA front.

"They're trying to reinvent themselves with deals like this, knowing that their main business might be changing," Ramey said.

Abramson disputes that the company has anything to worry about, patent-wise. Some patents have already expired, he said, but the process of making DHA is tricky enough that his company doesn't fear competition will descend quickly.

In any case, Martek has a library containing thousands of species of algae stored in freezers at its Columbia facility. Algae can do more than just generate DHA, and it is possible that one of the thousands of species in its collection may contain the company's next big product.

Might it be diesel fuel? Bentley Offutt, principal analyst at Offutt Securities, said investors won't know for years whether the research money was well spent.

"Things in genetic engineering take a long, long time."


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