##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended July 31, 2009
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From  to
 
 COMMISSION FILE NUMBER 0-22354
 MARTEK BIOSCIENCES CORPORATION
  Delaware
(State or other jurisdiction of incorporation or organization)
    
    52-1399362
(I.R.S. Employer Identification Number)
 6480 Dobbin Road, Columbia, Maryland 21045
 (410) 740-0081
   
 þ o
 o o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



PART I FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults Upon Senior Securities
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    30Signatures
    
    
    31Exhibit 10.01Exhibit 31.01Exhibit 31.02Exhibit 32.01Exhibit 32.02
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements.
 MARTEK BIOSCIENCES CORPORATION
  July 31,
    
    
    October 31,In thousands, except share and per share data
    
    2009
    
    
    2008(unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    129,345
    
    
    $
    102,495Short-term investments
    
    
    7,383
    
    
    
    Accounts receivable, net
    
    
    37,318
    
    
    
    40,438Inventories, net
    
    
    125,339
    
    
    
    99,553Deferred tax asset
    
    
    20,936
    
    
    
    24,821Other current assets
    
    
    3,029
    
    
    
    4,866Total current assets
    
    
    323,350
    
    
    
    272,173Property, plant and equipment, net
    
    
    255,651
    
    
    
    265,900Deferred tax asset
    
    
    
    
    
    
    13,535Long-term investments
    
    
    4,197
    
    
    
    11,336Goodwill
    
    
    51,592
    
    
    
    51,592Other intangible assets, net
    
    
    32,251
    
    
    
    30,997Other assets, net
    
    
    11,267
    
    
    
    448Total assets
    
    $
    678,308
    
    
    $
    645,981Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    23,589
    
    
    $
    17,105Accrued liabilities
    
    
    20,064
    
    
    
    28,819Current portion of notes payable and other long-term obligations
    
    
    422
    
    
    
    374Current portion of deferred revenue
    
    
    1,481
    
    
    
    1,044Total current liabilities
    
    
    45,556
    
    
    
    47,342Notes payable and other long-term obligations
    
    
    493
    
    
    
    793Long-term portion of deferred revenue
    
    
    8,562
    
    
    
    9,263Deferred tax liability
    
    
    59
    
    
    
    Total liabilities
    
    
    54,670
    
    
    
    57,398CommitmentsStockholders equityPreferred stock, $.01 par value, 4,700,000 shares authorized; none issued or outstanding
    
    
    
    
    
    
    Series B junior participating preferred stock, $.01 par value; 300,000 shares authorized; none issued or outstanding
    
    
    
    
    
    
    Common stock, $.10 par value; 100,000,000 shares authorized; 33,239,299 and 33,147,360 shares issued and
outstanding, respectively
    
    
    3,324
    
    
    
    3,315Additional paid-in capital
    
    
    556,212
    
    
    
    553,871Accumulated other comprehensive loss
    
    
    (831
    )
    
    
    (3,985
    )Retained earnings
    
    
    64,933
    
    
    
    35,382Total stockholders equity
    
    
    623,638
    
    
    
    588,583Total liabilities and stockholders equity
    
    $
    678,308
    
    
    $
    645,981
 See accompanying notes.
  3




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##### Table of Contents



MARTEK BIOSCIENCES CORPORATION
  Three months ended July 31,
    
    
    Nine months ended July 31,Unaudited  In thousands, except per share data
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Product sales
    
    $
    75,044
    
    
    $
    83,481
    
    
    $
    247,218
    
    
    $
    249,965Contract manufacturing sales
    
    
    2,790
    
    
    
    4,922
    
    
    
    10,390
    
    
    
    12,045Total revenues
    
    
    77,834
    
    
    
    88,403
    
    
    
    257,608
    
    
    
    262,010Cost of revenues:Cost of product sales
    
    
    41,129
    
    
    
    47,334
    
    
    
    137,337
    
    
    
    143,010Cost of contract manufacturing sales
    
    
    2,675
    
    
    
    4,374
    
    
    
    10,101
    
    
    
    10,826Total cost of revenues
    
    
    43,804
    
    
    
    51,708
    
    
    
    147,438
    
    
    
    153,836Gross margin
    
    
    34,030
    
    
    
    36,695
    
    
    
    110,170
    
    
    
    108,174Operating expenses:Research and development
    
    
    6,604
    
    
    
    6,278
    
    
    
    20,510
    
    
    
    19,078Selling, general and administrative
    
    
    11,439
    
    
    
    13,554
    
    
    
    37,411
    
    
    
    40,769Amortization of intangible assets
    
    
    1,534
    
    
    
    1,919
    
    
    
    4,910
    
    
    
    5,475Other operating expenses
    
    
    234
    
    
    
    341
    
    
    
    956
    
    
    
    590Total operating expenses
    
    
    19,811
    
    
    
    22,092
    
    
    
    63,787
    
    
    
    65,912Income from operations
    
    
    14,219
    
    
    
    14,603
    
    
    
    46,383
    
    
    
    42,262Interest and other income, net
    
    
    175
    
    
    
    447
    
    
    
    710
    
    
    
    1,278Interest expense
    
    
    (94
    )
    
    
    (110
    )
    
    
    (283
    )
    
    
    (415
    )Income before income tax provision
    
    
    14,300
    
    
    
    14,940
    
    
    
    46,810
    
    
    
    43,125Income tax provision
    
    
    5,372
    
    
    
    5,608
    
    
    
    17,259
    
    
    
    15,922Net income
    
    $
    8,928
    
    
    $
    9,332
    
    
    $
    29,551
    
    
    $
    27,203Net income per shareBasic
    
    $
    0.27
    
    
    $
    0.28
    
    
    $
    0.89
    
    
    $
    0.83Diluted
    
    $
    0.27
    
    
    $
    0.28
    
    
    $
    0.89
    
    
    $
    0.82Weighted average common shares outstandingBasic
    
    
    33,234
    
    
    
    33,016
    
    
    
    33,191
    
    
    
    32,892Diluted
    
    
    33,346
    
    
    
    33,408
    
    
    
    33,346
    
    
    
    33,235
 See accompanying notes.
  4




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MARTEK BIOSCIENCES CORPORATION
  AccumulatedAdditional
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    Comprehensive
    
    
    RetainedUnaudited  In thousands, except share data
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Income (Loss)
    
    
    Earnings
    
    
    TotalBalance at October 31, 2008
    
    
    33,147,360
    
    
    $
    3,315
    
    
    $
    553,871
    
    
    $
    (3,985
    )
    
    $
    35,382
    
    
    $
    588,583Issuance of common stock under employee stock plans
    
    
    91,939
    
    
    
    9
    
    
    
    225
    
    
    
    
    
    
    
    
    
    
    
    234Shares withheld for tax payments upon vesting of
restricted stock units
    
    
    
    
    
    
    
    
    
    
    (536
    )
    
    
    
    
    
    
    
    
    
    
    (536
    )Equity-based compensation
    
    
    
    
    
    
    
    
    
    
    3,011
    
    
    
    
    
    
    
    
    
    
    
    3,011Tax impact
of exercise of non-qualified stock options and vesting of restricted stock units, net
    
    
    
    
    
    
    
    
    
    
    (359
    )
    
    
    
    
    
    
    
    
    
    
    (359
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,551
    
    
    
    29,551Other comprehensive income (loss):Reclassification of available-for-sale securities,
net of tax of $383
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    646
    
    
    
    
    
    
    
    646Unrealized loss on available-for-sale securities,
net of tax of $(230)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (388
    )
    
    
    
    
    
    
    (388
    )Realized loss on exchange rate forward
contracts, net of tax of $986
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,678
    
    
    
    
    
    
    
    1,678Unrealized gain on exchange rate forward
contracts, net of tax of $744
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,218
    
    
    
    
    
    
    
    1,218Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,705Balance at July 31, 2009
    
    
    33,239,299
    
    
    $
    3,324
    
    
    $
    556,212
    
    
    $
    (831
    )
    
    $
    64,933
    
    
    $
    623,638
 See accompanying notes.
  5




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MARTEK BIOSCIENCES CORPORATION
  Nine months ended July 31,Unaudited  In thousands
    
    2009
    
    
    2008Operating activitiesNet income
    
    $
    29,551
    
    
    $
    27,203Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    21,275
    
    
    
    21,502Deferred tax provision
    
    
    16,329
    
    
    
    15,127Equity-based compensation expense
    
    
    2,959
    
    
    
    2,464Incremental tax benefit from exercise of non-qualified stock options and vesting of restricted
stock units
    
    
    
    
    
    
    (1,221
    )Loss on asset disposals and long-term investments, net
    
    
    382
    
    
    
    487Changes in operating assets and liabilities:Accounts receivable
    
    
    3,119
    
    
    
    (8,422
    )Inventories
    
    
    (25,734
    )
    
    
    (3,701
    )Other assets
    
    
    (3,774
    )
    
    
    3,012Accounts payable
    
    
    1,280
    
    
    
    (2,219
    )Accrued liabilities
    
    
    (4,957
    )
    
    
    6,683Deferred revenue and other liabilities
    
    
    (428
    )
    
    
    1,024Net cash provided by operating activities
    
    
    40,002
    
    
    
    61,939Investing activitiesPurchases of investments, marketable securities and long-term investments
    
    
    
    
    
    
    (16,925
    )Sales and maturities of investments, marketable securities and long-term investments
    
    
    100
    
    
    
    6,075Expenditures for property, plant and equipment
    
    
    (6,733
    )
    
    
    (5,587
    )Capitalization of intangible assets
    
    
    (6,129
    )
    
    
    (3,208
    )Net cash used in investing activities
    
    
    (12,762
    )
    
    
    (19,645
    )Financing activitiesRepayments of notes payable and other long-term obligations
    
    
    (88
    )
    
    
    (8,888
    )Issuance of common stock under employee stock plans
    
    
    234
    
    
    
    6,631Tax payments from shares withheld upon vesting of restricted stock units
    
    
    (536
    )
    
    
    (609
    )Incremental tax benefit from exercise of non-qualified stock options and vesting of restricted
stock units
    
    
    
    
    
    
    1,221Net cash used in financing activities
    
    
    (390
    )
    
    
    (1,645
    )Net increase in cash and cash equivalents
    
    
    26,850
    
    
    
    40,649Cash and cash equivalents, beginning of period
    
    
    102,495
    
    
    
    16,973Cash and cash equivalents, end of period
    
    $
    129,345
    
    
    $
    57,622Supplemental cash flow disclosures:Interest paid
    
    $
    150
    
    
    $
    413Income taxes paid
    
    $
    976
    
    
    $
    795Issuance of shares related to OmegaTech contingent purchase price
    
    $
    
    
    
    $
    10,164
 See accompanying notes.
  6




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
 Consolidation
 Use of Estimates
 Segment Information
 Revenue Recognition
   Shipping Income and Costs
 Income Taxes
  7




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Foreign Currency Transactions and Hedging Activities
  Advertising
 Comprehensive Income
 Investments and Marketable Securities
    Fair Value of Financial Instruments
 Patent Costs
  8




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##### Table of Contents



Goodwill and Other Intangible Assets
 Recently Issued Accounting Pronouncements
 2. DSM SUPPLY AND LICENSE AGREEMENT
   3. INVESTMENTS
    9




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4. FAIR VALUE MEASUREMENTS
        10




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##### Table of Contents



As of July 31, 2009Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    BalanceAvailable-for-sale securities (1)
    
    $
    
    
    
    $
    
    
    
    $
    4,197
    
    
    $
    4,197Trading securities (2)
    
    
    
    
    
    
    
    
    
    
    5,673
    
    
    
    5,673Put Agreement(2)
    
    
    
    
    
    
    
    
    
    
    1,710
    
    
    
    1,710Investments in money market funds (3)
    
    
    98,839
    
    
    
    
    
    
    
    
    
    
    
    98,839Exchange rate forward contracts (4)
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    49Total
    
    $
    98,839
    
    
    $
    49
    
    
    $
    11,580
    
    
    $
    110,468
 (1)
    
    Included in long-term investments in the accompanying consolidated balance sheets.(2)
    
    Included in short-term investments in the accompanying consolidated balance sheets.(3)
    
    Included in cash and cash equivalents in the accompanying consolidated balance
sheets.(4)
    
    Included in other current assets in the accompanying consolidated balance sheets.  Auction RateSecurities
    
    
    Put Agreement
    
    
    TotalBalance on April 30, 2009
    
    $
    9,808
    
    
    $
    1,807
    
    
    $
    11,615Transfers to/(from) Level 3
    
    
    
    
    
    
    
    
    
    
    Total gains (losses) (realized or unrealized): (1)Included in earnings
    
    
    110
    
    
    
    (97
    )
    
    
    13Included in other comprehensive income
    
    
    52
    
    
    
    
    
    
    
    52Purchases, sales, issuances and settlements, net
    
    
    (100
    )
    
    
    
    
    
    
    (100
    )Balance on July 31, 2009
    
    $
    9,870
    
    
    $
    1,710
    
    
    $
    11,580
 (1)
    
    See Note 3 for discussion of Auction Rate Securities and related Put Agreement.  Auction RateSecurities
    
    
    Put Agreement
    
    
    TotalBalance on November 1, 2008
    
    $
    11,336
    
    
    $
    
    
    
    $
    11,336Transfers to/(from) Level 3
    
    
    
    
    
    
    
    
    
    
    Total gains (losses) (realized or unrealized): (1)Included in earnings
    
    
    (1,777
    )
    
    
    1,710
    
    
    
    (67
    )Included in other comprehensive income
    
    
    411
    
    
    
    
    
    
    
    411Purchases, sales, issuances and settlements, net
    
    
    (100
    )
    
    
    
    
    
    
    (100
    )Balance on July 31, 2009
    
    $
    9,870
    
    
    $
    1,710
    
    
    $
    11,580
 (1)
    
    See Note 3 for discussion of Auction Rate Securities and related Put Agreement.  11




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##### Table of Contents



5. INVENTORIES
  July 31,
    
    
    October 31,2009
    
    
    2008Finished goods
    
    $
    54,128
    
    
    $
    45,871Work in process
    
    
    67,445
    
    
    
    49,042Raw materials
    
    
    3,766
    
    
    
    4,640Inventories, net
    
    $
    125,339
    
    
    $
    99,553
  6. PROPERTY, PLANT AND EQUIPMENT
  July 31,
    
    
    October 31,2009
    
    
    2008Land
    
    $
    2,320
    
    
    $
    2,320Building and improvements
    
    
    66,519
    
    
    
    64,731Machinery and equipment
    
    
    264,967
    
    
    
    262,831Furniture and fixtures
    
    
    3,087
    
    
    
    2,963Computer hardware and software
    
    
    17,191
    
    
    
    16,119354,084
    
    
    
    348,964Less: accumulated depreciation and amortization
    
    
    (107,943
    )
    
    
    (91,268
    )246,141
    
    
    
    257,696Construction in progress
    
    
    9,510
    
    
    
    8,204Property, plant and equipment, net
    
    $
    255,651
    
    
    $
    265,900
   12




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##### Table of Contents



7. GOODWILL AND OTHER INTANGIBLE ASSETS
  July 31, 2009
    
    
    October 31, 2008Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedIntangible Asset
    
    Gross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetTrademarks
    
    $
    2,189
    
    
    $
    (970
    )
    
    $
    1,219
    
    
    $
    2,153
    
    
    $
    (850
    )
    
    $
    1,303Patents
    
    
    26,883
    
    
    
    (10,511
    )
    
    
    16,372
    
    
    
    22,533
    
    
    
    (7,795
    )
    
    
    14,738Core technology
    
    
    1,708
    
    
    
    (769
    )
    
    
    939
    
    
    
    1,708
    
    
    
    (683
    )
    
    
    1,025Current products
    
    
    10,676
    
    
    
    (5,185
    )
    
    
    5,491
    
    
    
    10,676
    
    
    
    (4,652
    )
    
    
    6,024Licenses
    
    
    12,176
    
    
    
    (3,946
    )
    
    
    8,230
    
    
    
    11,968
    
    
    
    (4,061
    )
    
    
    7,90753,632
    
    
    
    (21,381
    )
    
    
    32,251
    
    
    
    49,038
    
    
    
    (18,041
    )
    
    
    30,997Goodwill
    
    
    51,592
    
    
    
    
    
    
    
    51,592
    
    
    
    51,592
    
    
    
    
    
    
    
    51,592$
    105,224
    
    
    $
    (21,381
    )
    
    $
    83,843
    
    
    $
    100,630
    
    
    $
    (18,041
    )
    
    $
    82,589
  lifesDHA.
  8. NOTES PAYABLE AND LONG-TERM DEBT
   9. COMMITMENTS AND CONTINGENCIES
 Scientific Research Collaborations
  13




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Patent Infringement Litigation
    Other
 10. STOCKHOLDERS EQUITY
      14




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##### Table of Contents



11. NET INCOME PER SHARE
   Three months ended July 31,
    
    
    Nine months ended July 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    8,928
    
    
    $
    9,332
    
    
    $
    29,551
    
    
    $
    27,203Weighted average shares outstanding, basic
    
    
    33,234
    
    
    
    33,016
    
    
    
    33,191
    
    
    
    32,892Effect of dilutive potential common shares:Stock options
    
    
    76
    
    
    
    309
    
    
    
    94
    
    
    
    268Restricted stock units
    
    
    36
    
    
    
    83
    
    
    
    61
    
    
    
    75Total dilutive potential common shares
    
    
    112
    
    
    
    392
    
    
    
    155
    
    
    
    343Weighted average shares outstanding, diluted
    
    
    33,346
    
    
    
    33,408
    
    
    
    33,346
    
    
    
    33,235Net income per share, basic
    
    $
    0.27
    
    
    $
    0.28
    
    
    $
    0.89
    
    
    $
    0.83Net income per share, diluted
    
    $
    0.27
    
    
    $
    0.28
    
    
    $
    0.89
    
    
    $
    0.82
  12. COMPREHENSIVE INCOME
  Three months ended July 31,
    
    
    Nine months ended July 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income, as reported
    
    $
    8,928
    
    
    $
    9,332
    
    
    $
    29,551
    
    
    $
    27,203Other comprehensive income (loss):Reclassification of available-for-sale securities,
net of tax of $, $, $383 and $, respectively
    
    
    
    
    
    
    
    
    
    
    646
    
    
    
    Unrealized gain (loss) on available-for-sale securities,
net of tax of $19, $(15), $(230) and $(313), respectively
    
    
    32
    
    
    
    (27
    )
    
    
    (388
    )
    
    
    (553
    )Realized loss (gain) on exchange rate forward contracts,
net of tax of $66, $5, $986 and $(144), respectively
    
    
    125
    
    
    
    8
    
    
    
    1,678
    
    
    
    (254
    )Unrealized gain on exchange rate forward contracts,
net of tax of $372, $41, $744 and $69, respectively
    
    
    544
    
    
    
    74
    
    
    
    1,218
    
    
    
    125Comprehensive income
    
    $
    9,629
    
    
    $
    9,387
    
    
    $
    32,705
    
    
    $
    26,521
  15




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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
 This Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements concerning our business and operations, including, among other things,
statements concerning the following:
 
    
    expectations regarding future revenue, revenue growth, gross margin, operating
cash flow and profitability;
 
    
    expectations regarding product introductions and growth in nutritional product sales;
 
    
    expectations regarding potential collaborations and acquisitions;
 
    
    expectations regarding demand for products with our nutritional oils;
 
    
    expectations regarding sales to and by our infant formula licensees and supplemented
infant formula market penetration levels;
 
    
    expectations regarding marketing of our oils by our infant formula licensees;
 
    
    expectations regarding future agreements with, and revenues from, companies in the
food and beverage, pregnancy and nursing, nutritional supplement, and animal feed
markets;
 
    
    expectations regarding future revenues from contract manufacturing customers;
 
    
    expectations regarding growing consumer recognition of the key health benefits of DHA
and ARA;
 
    
    expectations regarding competitive products;
 
    
    expectations regarding future efficiencies and improvements in manufacturing
processes and the cost of production of our nutritional oils;
 
    
    expectations regarding future purchase volumes and costs of third-party manufactured
oils;
 
    
    expectations regarding the amount of production capacity and our ability to meet
future demands for our nutritional oils;
 
    
    expectations regarding the amount of inventory held by us or our customers;
 
    
    expectations regarding production capacity utilization and the effects of excess
production capacity;
 
    
    expectations regarding future selling, general and administrative and research and
development costs;
 
    
    expectations regarding future capital expenditures;
 
    
    expectations regarding levels of consumption through governmental programs of infant
formula products containing our nutritional oils; and
 
    
    expectations regarding our ability to maintain and protect our intellectual property.
 Forward-looking statements include those statements containing words such as the following:
 
    
    will,
 
    
    should,
 
    
    could,
 
    
    anticipate,
 
    
    believe,
 
    
    plan,
 
    
    estimate,
 
    
    expect,
 
    
    intend, and other similar expressions.
 All of these forward-looking statements involve risks and uncertainties. They and other
forward-looking statements in this Form 10-Q are all made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. We wish to caution you that our actual
results may differ significantly from the results we discuss in our forward-looking statements. We
discuss some of the risks that could cause such differences in Part II, Item 1A. Risk Factors in
this report on Form 10-Q and in our various other filings with the Securities and Exchange
Commission. Our forward-looking statements speak only as of the date of this document, and we do
not intend to update these statements to reflect events or circumstances that occur after that
date.
  16




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##### Table of Contents



GENERAL
 lifesDHA lifesARA lifesDHA ® ® ® lifesARA
  lifesDHA
   
    
    the timing of international infant formula market introductions by our customers;
 
    
    the timing of our customers ordering patterns;
 
    
    the timing and extent of stocking and destocking of inventory by our customers;
 
    
    the timing and extent of our customers production campaigns and plant maintenance
shutdowns;
 
    
    the timing and extent of introductions of DHA into various child and/or adult
applications and the marketplace success of such applications;
 
    
    the levels of inclusion of our oils in infant formula;
 
    
    the continued acceptance, and extent thereof, of products containing our oils under WIC
and other regulatory programs in the U.S.;
 
    
    the continued acceptance of these products by consumers and continued demand by our
customers;
 
    
    the ability of our customers to incorporate our oils into various foods and beverages;
 
    
    our ability to protect against competitive products through our patents;
 
    
    competition from alternative sources of DHA and ARA; and
 
    
    agreements with other future third-party collaborators to market our products or develop
new products.
   17




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##### Table of Contents



RECENT HIGHLIGHTS
 
    
    Joint Development Agreement with BP- Martek entered into a Joint Development Agreement
(JDA) with BP to work on the production of microbial oils for biofuels applications. Under
the terms of the multi-year agreement, Martek and BP will work together to establish proof of
concept for large-scale, cost effective microbial biodiesel production through fermentation.
BP has agreed to contribute up to $10 million to this initial phase of the collaboration with
Martek performing the biotechnology research and development associated with these initial
development activities. All intellectual property developed under the JDA will be owned by
BP, with an exclusive license to Martek for application and commercialization in nutrition,
cosmetic and pharmaceutical applications. Additionally, each party is entitled to certain
payments from technology that is commercialized in the other partys field.
 
    
    Multi-Year Sole-Source Infant Formula Supply Agreements- Martek entered into a
multi-year sole-source supply agreement with Puleva Food for the use of ARA in infant
formulas produced by Puleva and sold in Spain. Puleva is part of the Ebro-Puleva group,
Spains largest agro-food business. Martek also entered into a multi-year sole-source supply
agreement with Milk Powder Solutions under which Martek will serve as Milk Powder Solutions
exclusive supplier for all of its ARA needs for infant formula products in China and Vietnam
under the Gold Cow brand name.
 
    
    Non-Infant Formula Product Launches- Several non-infant formula nutritional products with
Marteks lifesDHAwere launched by Marteks customers, including Parents Choice Pediatric
Drink, Walgreens Finest Natural Multi-vitamins and Walgreens Flax + DHA dietary supplement.
 
    
    Approval in European Union of New Food Applications for lifesDHA- Martek received
approval from the Standing Committee On The Food Chain and Animal Health (SCFCAH) of the
European Union for the use of Marteks lifesDHAin bakery products, cereal bars, and
beverages, including milk-based and milk analogue drinks, throughout the 27 Member States of
the European Union. This expands the current categories approved in 2003 which include
breakfast cereals, spreadable fat and dressings, certain dairy products and food supplements.
 
    
    New Scientific Data Published on DHA- The benefits of DHA supplementation were recently
discussed in the following publications.
 
    
    A report published in Developmental Neuropsychology(June 2009) evaluated resting
heart rate during the first six months of life in healthy, full-term infants. The
newborns were either breastfed or given cows milk-based or soy-based commercial infant
formula containing different levels of DHA and ARA throughout the study period.
Results showed that infants fed higher levels of DHA and ARA from either breast milk or
infant formula had lower heart rates and higher values for heart rate variability
measures compared to infants fed lower levels of DHA and ARA. According to the
authors, these results indicate that adequate DHA is important for parasympathetic tone
during this important period in development of cardiovascular regulation.
 
    
    A study published in the British Journal of Ophthalmology(March/April 2009)
reported findings from a multi-year study of the effects of diet on the progression of
age-related macular degeneration. This large clinical trial supplemented over 2,000
people with 5, 6, and 18 times the Recommended Dietary Allowance levels of vitamins C,
E and/or zinc and other minerals. In this current report, the investigators quantified
the dietary intake of DHA and EPA in the study groups as well. Results showed that
consuming a diet rich in DHA slowed the progression of early age-related macular
degeneration and that the DHA benefit occurred independently from EPA and the usual
study supplements.
 MANAGEMENT OUTLOOK
   PRODUCTION
   18




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES AND
THE USE OF ESTIMATES
  Fair Value Measurements
 RESULTS OF OPERATIONS
 Revenues
  Three months ended July 31,
    
    
    Nine months ended July 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Product sales
    
    $
    75,044
    
    
    $
    83,481
    
    
    $
    247,218
    
    
    $
    249,965Contract manufacturing sales
    
    
    2,790
    
    
    
    4,922
    
    
    
    10,390
    
    
    
    12,045Total revenues
    
    $
    77,834
    
    
    $
    88,403
    
    
    $
    257,608
    
    
    $
    262,010
  19




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##### Table of Contents



Three months ended July 31,
    
    
    Nine months ended July 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Infant formula market
    
    $
    63,320
    
    
    $
    74,815
    
    
    $
    215,294
    
    
    $
    223,483Food and beverage market
    
    
    2,681
    
    
    
    2,526
    
    
    
    8,278
    
    
    
    7,793Pregnancy and nursing, nutritional
supplements and animal feeds
    
    
    7,931
    
    
    
    5,019
    
    
    
    20,396
    
    
    
    15,424Non-nutritional products
    
    
    1,112
    
    
    
    1,121
    
    
    
    3,250
    
    
    
    3,265Total product sales
    
    $
    75,044
    
    
    $
    83,481
    
    
    $
    247,218
    
    
    $
    249,965
 lifesDHA
     Cost of Revenues
  Three months ended July 31,
    
    
    Nine months ended July 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Cost of product sales
    
    $
    41,129
    
    
    $
    47,334
    
    
    $
    137,337
    
    
    $
    143,010Cost of contract manufacturing sales
    
    
    2,675
    
    
    
    4,374
    
    
    
    10,101
    
    
    
    10,826Total cost of revenues
    
    $
    43,804
    
    
    $
    51,708
    
    
    $
    147,438
    
    
    $
    153,836
   20




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##### Table of Contents



Operating Expenses
  Three months ended July 31,
    
    
    Nine months ended July 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Research and development
    
    $
    6,604
    
    
    $
    6,278
    
    
    $
    20,510
    
    
    $
    19,078Selling, general and administrative
    
    
    11,439
    
    
    
    13,554
    
    
    
    37,411
    
    
    
    40,769Amortization of intangible assets
    
    
    1,534
    
    
    
    1,919
    
    
    
    4,910
    
    
    
    5,475Other operating expenses
    
    
    234
    
    
    
    341
    
    
    
    956
    
    
    
    590Total operating expenses
    
    $
    19,811
    
    
    $
    22,092
    
    
    $
    63,787
    
    
    $
    65,912
 Research and Development lifesDHA
 Selling, General and Administrative
 Amortization of Intangible Assets
 Other Operating Expenses
 Interest and Other Income, Net
  Interest Expense
   21




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##### Table of Contents



Income Tax Provision
   Net Income
  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  LIQUIDITY AND CAPITAL RESOURCES
  
    
    cash generated from operations;
 
    
    cash received from the exercise of stock options; and
 
    
    debt financing.
   22




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##### Table of Contents




    
    our ability to operate profitably and generate positive cash flow;
 
    
    growth in our infant formula, food and beverage and other nutritional product sales;
 
    
    the extent and progress of our research and development programs;
 
    
    the cost and progress of pre-clinical and clinical studies;
 
    
    the time and costs of obtaining and maintaining regulatory clearances for our products
that are subject to such clearances;
 
    
    the costs involved in filing, protecting and enforcing patent claims;
 
    
    competing technological and market developments;
 
    
    the development or acquisition of new products;
 
    
    the cost of acquiring additional and/or operating and expanding existing manufacturing
facilities for our various products and potential products (depending on which products we
decide to manufacture and continue to manufacture ourselves);
 
    
    the costs associated with our internal build-up of inventory levels;
 
    
    the costs associated with litigation to which we are a party;
 
    
    the costs of, and any capital requirements related to, merger and acquisition activity;
and
 
    
    the costs of marketing and commercializing our products.
   23




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##### Table of Contents



Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk.
     
 Item 4.
    
    Controls and Procedures.
 a)
    
    Evaluation of Disclosure Controls and Procedures.We, under the supervision and with
the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of our disclosure controls and
procedures pursuant to Exchange Act rules 13a-15(e) and 15d-15(e) and based on this
evaluation our Chief Executive Officer and Chief Financial Officer have concluded that, as
of the end of the period covered by this report, the disclosure controls and procedures
were effective.
 b)
    
    Internal Control Over Financial Reporting.There was no change in our internal control
over financial reporting in connection with the evaluation required by paragraph (d) of
Rules 13a-15 or 15d-15 under the Exchange Act that occurred during Marteks quarter ended
July 31, 2009 that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
  24




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings.
      25




---



##### Table of Contents



Item 1A.
    
    Risk Factors.
   We are aware of several products that are currently available, and products under development,
that may present a serious competitive threat to our products. If we are unable to maintain a
competitive differentiation from these products, our revenues may be adversely affected.
   
    
    Abbott Nutritionals (then known as the Ross Products Division of Abbott Laboratories), a
significant Martek licensee and customer, filed a generally recognized as safe notification
on January 2, 2002 seeking Food and Drug Administration (FDA) concurrence that its tuna
oil source of DHA and its fungal source of ARA, as manufactured by Suntory Limited, are
generally recognized as safe when used as ingredients in infant formula. In April 2006, the
FDA notified Ross Products that it had no questions at that time regarding Ross conclusion
that DHA-rich oil from tuna and ARA-rich oil from Mortierella alpinaare safe as sources of
DHA and ARA in term and post-discharge preterm infant formulas. While Abbott Nutritionals
has not announced any introduction of such oils into infant formula in the U.S. and has
agreed to purchase its total needs for DHA and ARA from us through at least 2011, and while
we are not aware of any plans by our other licensees to do so, the GRAS notification
removes a significant regulatory hurdle to the introduction of competitive products in the
U.S.
 
    
    GlaxoSmithKline is currently selling LOVAZA, a prescription DHA/ EPA ethyl ester for
treatment of hyperlipidemia. LOVAZA is a lipid-regulating agent which includes both EPA
and DHA from fish oil. GlaxoSmithKline has recently filed an application with the FDA for
an indication that will expand the use of LOVAZA. Other pharmaceutical companies offering
other applications using omega-3 fatty acids may be expected.
 
    
    Suntory Limited, Cargill Inc., through a joint venture with a company in China, and
other independent Chinese manufacturers are producing or attempting to produce and
distributing a fungal source of ARA. In addition, we are aware that there may be
manufacturers in China and India attempting to produce an algal source of DHA, but we are
uncertain of the overall status and commercial potential of these efforts.
 
    
    Some infant formulas now on the market outside the United States, including those
marketed by certain of Marteks licensees, use DHA derived from other sources, such as fish
oil or eggs.
 
    
    In December 2005, Lonza Group LTD, a Swiss chemical and biotechnology group, acquired
from Nutrinova Nutrition Specialties & Food Ingredients GmbH, a wholly-owned subsidiary of
Celanese Corporation, Nutrinovas business having as its product a DHA-rich microalgal oil.
Since the acquisition, Lonza has actively marketed its DHA oil to the food, beverage and
dietary supplement market in Europe and Asia, and was actively marketing in the United
States. Nutrinova and Lonza are defendants in patent infringement actions involving our
DHA patents that we have brought in the United States, Germany and France. One of
Nutrinovas customers is also a defendant in these actions in Germany. These lawsuits are further described below in the
risk factor regarding patent protection and in Item 3 of Part I of this Form 10-K, Legal
Proceedings.
 
    
    Monsanto/Solae are expecting to commercialize an inexpensive, sustainable, vegetarian
omega-3 for foods and beverages in the next one to three years. This product is a soybean
oil containing stearidonic acid (SDA). Monsanto/Solae are positioning SDA as a precursor
to EPA, the other omega-3 found in fish oil . While a large amount of SDA soybean oil must
be included in a food or beverage to achieve the intake level Monsanto has recommended for
SDA, the oil should be inexpensive, claims to have stability and formulation advantages and
may be able to make similar cardiovascular structure-function claims to fish oil. As another
omega-3 on the market, SDA soy oil could be a threat to Marteks food and beverage business.
  26




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##### Table of Contents




    
    Other companies, several with greater financial resources than ours, are developing
plant-based DHA or other plant-based oils that may compete with us and other companies may
be developing chemically synthesized DHA.
 
    
    Several large companies, including BASF AG, DSM Ocean Nutrition (ONC) and a
number of smaller companies, manufacture microencapsulated fish oil products. Although
microencapsulation of the oil resolves many of the odor, stability and taste issues found
with fish oil, a microencapsulated product currently is more costly than regular fish oil.
Fish oil-based products (i) are used as a DHA source by some infant formula companies, (ii)
currently dominate the adult DHA supplement market and (iii) are included in certain foods
on the market in various parts of the world. Because fish oil is generally less costly than
our DHA oil, even when microencapsulated, and continues to improve in quality and gain
general market acceptance, fish oil presents a substantial competitive threat. ONC has
also indicated their desire to enter the microbial oil market.
 If we are unable to obtain or maintain patent protection or if our patents do not provide
protection or we are unable to obtain comparable protection after patent expiration against
competitive products, our results of operations may be adversely affected.
      27




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##### Table of Contents



If we are unable to gain or maintain broad regulatory approvals for the incorporation of our
oils into foods and beverages worldwide, our future revenues in the food and beverage market may
be limited.
  We have a single third-party supplier of our ARA with whom we have a contractual relationship. If this
supplier of our ARA is unable to supply us with our required amounts of ARA or if declines in our
customers demand reduces such ARA requirements, our results of operations and/or financial position may
be adversely affected.
   28




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##### Table of Contents



Our opportunity in the U.S. infant formula market may be limited by the renewal rate of
supplemented formulas into the Women, Infants and Children program or if the eligibility
requirements for participating in the program are made more restrictive or if the amount of
infant formula offered to participants is reduced.
  The market price of our common stock may experience a high level of volatility due to factors such as the volatility in
the market for biotechnology stocks generally, and the short-term effect of a number of possible events.
  
    
    announcements of technical innovations, new commercial products and product launches by us or our
competitors;
 
    
    announcements of use of or intention to use competitors DHA and/or ARA products by our customers;
 
    
    arrangements or strategic partnerships by us or our competitors;
 
    
    announcements of license agreements, acquisitions or strategic alliances by us or our competitors;
 
    
    announcements of sales by us or our competitors
 
    
    announcements of results of clinical trials by us, our competitors or others;
 
    
    patent or other intellectual property achievements or adverse developments;
 
    
    quarterly fluctuations in our revenues and results of operations;
 
    
    failure to enter into favorable third-party manufacturing agreements;
 
    
    regulatory decisions (approvals or disapprovals) or changes concerning our products and our competitors
products;
 
    
    events related to threatened, new or existing litigation, or the results thereof;
 
    
    changes in our estimates of financial performance or changes in recommendations by securities analysts; and
 
    
    general market conditions for growth companies and bioscience companies.
   Changes in foreign currency exchange rates or interest rates could reduce profitability.
   29




---



##### Table of Contents



Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3.
    
    Defaults Upon Senior Securities.
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders.
  
 Item 5.
    
    Other Information.
  
 Item 6.
    
    Exhibits.
 10.01
    
    
    First Amended and Restated ARA Alliance, Purchase and Production Agreement, dated as of July 13, 2009, by and between
Martek Biosciences Corporation and DSM Food Specialties B.V. * +31.01
    
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).*31.02
    
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).*32.01
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.02
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 *
    
    Filed or furnished herewith. +
    
    Confidential treatment was granted for certain portions of this agreement.  The confidential
portions were filed separately with the Commission.  30




---



##### Table of Contents



SIGNATURES
  MARTEK BIOSCIENCES CORPORATION(Registrant)Date: September 9, 2009
    /s/ Peter L. BuzyPeter L. BuzyChief Financial Officer, Treasurer and 
Executive Vice President for Finance and Administration
(Principal Financial and Accounting Officer)  31




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description10.01
    
    
    First Amended and Restated ARA Alliance, Purchase and Production Agreement, dated as of July 13, 2009, by and between
Martek Biosciences Corporation and DSM Food Specialties B.V. * +31.01
    
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).*31.02
    
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).*32.01
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.02
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 *
    
    Filed or furnished herewith. +
    
    Confidential treatment was granted for certain portions of this agreement.  The confidential
portions were filed separately with the Commission.  32