Cyanotech ( Nasdaq - CYAN ) - Sees Daylight

Cyanotech (CYAN $4.55) is a Hawaiian based producer of specialty nutritional supplements.  Both of the company's products are strains of algae that thrive in the abundant sunlight that Hawaii provides.  Competitors exist.  But Cyanotech is the market leader in both segments.  Astaxanthin accounts for two-thirds of sales and currently is the faster growing product line.  Demand surged a few years ago after Dr. Oz recommended it on his widely viewed television show.  Sales have continued to advance since that time.  Astaxanthin reduces sunburn, joint pain, and macular degeneration.  It also contains anti-aging properties ("antioxidents").  Spirulina, the company's second product, is popular among serious athletes because it improves recovery time after strenuous workouts.  It also possesses large amounts of antioxidents.

Both lines are cultivated in outdoor growing ponds.  Production rises during the summer and falls in the winter due to the amount of sunshine available.  Cyanotech has developed a repeatable process that generates fairly consistent results.  Last year production was impacted by an unusual series of storms.  But weather conditions usually are excellent in Hawaii.  Technical innovation is helping to increase production at the company's existing facility, moreover.  The Obama Administration, as part of its stimulus package in 2009, spent billions in an attempt to develop algae based biofuels.  That effort fell flat.  But the research generated several new strains of astaxanthin with higher yields than Cyanotech's legacy version.  Last year the company established a relationship with one of those research groups.  Several new strains have been tested.  Three have demonstrated significantly higher yields with the same medicinal benefits.  They now are being introduced into more growing ponds.

Output per acre is expanding, too.  Over the past year Cyanotech reduced the size of a few growing ponds in a pilot program.  The algae concentration remained the same.  Total output was identical.  The company now is modifying more ponds to the shorter format.  Once that's completed it plans to construct additional ponds on the excess land created.  Cyanotech also has an option to lease an adjacent property, which could support further expansion.

Cyanotech has shifted its focus towards the consumer market.  For most of the company's history Cyanotech sold its output to other companies that combined it with additional ingredients.  When new management took the helm three years ago Cyanotech began to emphasize the retail channel, developing its own brand of pure astaxanthin.  Bolstered by the Dr. Oz publicity the company has gained more than 50% of the consumer market.  Most sales currently are made through specialty health food stores and similar internet sites.  Over the past year, though, the company has added larger retailers including Vitamin Shoppe, Whole Foods, and Sprouts to its network.  A test with Costco recently was started, moreover, which could amplify performance further.  Margins and revenue from consumer products are higher than on the old bulk sales.  Results promise to accelerate as the transition continues, reinforced by the larger retail partners.

Earnings were virtually erased over the last two years by costs associated with a patent lawsuit.  Cyanotech declined to settle the case, which would have required it to supply astaxanthin in large quantities at bulk prices.  The tables appear to have turned in Cyanotech's favor as the discovery process continued.  The patent in question hasn't held up under scrutiny.  The company still would prefer to settle the case.  But if it does go to court -- a date is scheduled for next March -- Cyanotech could win a large monetary award, in addition to ending the legal outlays.

Reported earnings promise to surge once the legal expense ends.  We estimate income (fully taxed) could jump to $.60 a share next year and keep advancing at a fast pace beyond.  In 2-3 years earnings could reach $.80-$1.00 a share.  That assumes additional stock will be sold to finance growth.  Applying a P/E multiple of 20x to the midpoint of the range suggests a target price of $18 a share, potential appreciation of 295% from the current quote.

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Cyanotech ( Nasdaq - CYAN ) -- Barrels Back

Cyanotech (CYAN $5.75) reported excellent on target Q4 (March) results.  Sales improved 15% to $6.90 million.  Earnings (fully taxed) advanced 80% to $.09 a share. Figures published by the company also included a non cash deferred tax asset adjustment worth $.34 a share.  Production issues that created a setback of $.14 a share for the year were resolved during the period.  Output has been maintained at full capacity in the June quarter, moreover.  The company thinks the problems are unlikely to reoccur.  That differential alone accounts for most of the earnings improvement we are estimating for fiscal 2014 (March).  Revenues promise to advance by 20% as well to $33 million as volume rebounds and average selling prices increase.  Cyanotech traditionally sold most of its astaxanthin and spirulina in bulk for use in other companies' retail products.  Over the past few years Cyanotech has developed its own retail brand, gaining a 50% market share in the segments it serves.  Those programs are being expanded, laying the groundwork for further gains.  On average retail sales generate 200% more revenue per kilogram than bulk shipments.  Approximately 40% of the company's physical output now is sold through retail channels.  Margins could widen as the transition continues.

Capital spending is on the rise.  Several growing ponds were modified last year to produce astaxanthin, Cyanotech's fastest growing product line.  An extraction facility also is being built, to remove the key ingredients from the algae grown in the ponds.  Currently, the material is shipped to outside vendors who perform the work.  Plans are being developed to increase the number of ponds, as well.  Cyanotech borrowed money to finance the first round of capacity improvements.  If the sales and profitability outlook remains bright a stock offering could be pursued in the future.

Legal costs reduced income by $.06 a share in fiscal 2013 (March).  Cyanotech was sued for patent infringement a few years ago.  The company researched the claim and unearthed a litany of errors, casting doubt on its validity.  Costs may continue to be incurred as the battle continues, perhaps for another two years.  But the data appear persuasive in Cyanotech's favor.  Our estimates reflect a similar hit to earnings in the upcoming year.

A variety of initiatives could accelerate growth.  A new round of media publicity could bolster demand if an upcoming book about astaxanthin's benefits builds momentum.  Direct television marketing will be tested, as well.  A blitz in San Diego will be tried, in addition to that.  Cyanotech plans to duplicate the comprehensive marketing approach it already uses in Hawaii.  The 50th state is a huge user of Cyanotech's products with some estimates placing penetration at 10% of the adult population.  Success in San Diego could foreshadow a move into Los Angeles.

Cyanotech remains a high risk investment.  The nutritional supplement business is highly competitive, and consumer tastes can be whimsical.  Even well designed marketing programs can fail.  Capital requirements aren't astronomical but they are significant.  Very few companies make it big.  The ones that do succeed can make it really big, however.  Cyanotech has two exceptional products that are less vulnerable to competition than most supplements, because it has the best growing conditions and the best quality.  In 1-2 years earnings could reach $.75 a share.  Applying a P/E multiple of 20x suggests a target price of $15 a share, potential appreciation of 160% from the current quote.

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Cyanotech ( Nasdaq - CYAN ) -- Production Rate Improves

Cyanotech (CYAN $5.00) appears on track to report reasonably good Q4 (March) results.  Production setbacks curtailed output earlier in the fiscal year.  The fourth quarter typically is Cyanotech's slowest growing season, moreover, due to less and weaker sunlight.  The technical problems appear to be resolved.  Output has been up year to year for the last four months.  While limited inventories may have prevented March period sales from achieving their full potential, a solid performance appears achievable.  Sales and marketing efforts continue to bear fruit.  That's shifting output increasingly toward the retail channel and away from bulk customers, boosting profit margins.  Our estimates are unchanged.  A stronger performance could be realized next year if the current trends are sustained.

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Cyanotech ( Nasdaq - CYAN ) -- Demand Accelerates

Cyanotech (CYAN $4.70) appears on track to produce reasonably good Q4 (March) results.  The company is the leading producer of algae used in natural supplements used by high endurance athletes and other health conscious consumers.  Over the years Cyanotech was scientifically focused.  Resources were devoted to enhancing quality and production.  Marketing was given short shrift.  Until the current management arrived on the scene most output was sold in bulk quantities to other nutrition companies that combined it with additional ingredients, and resold it at a big mark-up.  The new management team took the scientific side of the business and put their efforts into developing Cyanotech's own direct sales channels.  That project is working.  The company's branded products have gained the leading market share in the independent health store channel.  That percentage is over 33% and it's continuing to rise.  New products are being developed to expand that penetration.  New brand names are in the works to allow the company to move into the high volume chain store segment without disrupting the specialty business.

Last year the scientists let the company down.  Production snafus curtailed production.  That in turn affected margins.  And it all took place at a time when marketing costs were accelerating.  That was a dangerous combination that sliced the stock price in half.  The damage was contained because a rising percentage of sales were shifting from low margin bulk customers to higher priced retail channels.  The retail initiative remains in an early stage of development, though.  Only 33% of the company's physical output is sold at those higher prices currently.  The rest is still sold to bulk customers.  But the future was uncertain because of the production problems.  They had to be resolved before Cyanotech could put the pedal to the metal on the marketing front.

It looks like the setback has been fixed.  Output has blossomed over the past month.  And there appears to be a logical explanation for the problem, and the solution.  Fourth quarter performance will be impacted by the temporary slowdown in production.  It takes several months to turn around an algae crop.  But output promises to rise in upcoming months as the changes are implemented and more sunshine lifts output further. 

The long term outlook remains bright.  Cyanotech has two products with leading market shares in high growth segments.  The natural products industry continues to expand overall.  The areas targeted by the company are growing 10%-20% a year.  And pricing to the retail channel brings Cyanotech 2x-3x the revenue it garners from bulk sales.  As the 67% of output now devoted to bulk converts to retail pricing both revenue and margins promise to expand.  Production capacity might be expanded, as well. 

We estimate sales will improve 10%-20% in the coming fiscal year to $30-$33 million.  Demand already is outstripping supply.  Cyanotech's high octane marketing program is poised to deliver further impetus.  Production probably will be the limiting factor.  That's a complete reversal from past years.  Our single point estimate assumes some lingering effects.  Earnings should climb nonetheless on the strength of expanding gross margins.  Overhead costs are likely to be constrained, moreover, until the rebound in output demonstrates greater certainty.  Income could reach $.50 a share.  In 2-3 years sales could attain $50 million to provide income of $.75 a share.  That figure assumes the sale of an additional 2 million shares to support growth.

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Cyanotech ( Nasdaq - CYAN ) -- Production Miscue Intensifies

Cyanotech (CYAN $4.25) has been battling poor Spirulina yields over the past year.  That's the company's legacy product.  Overall growth is being generated by the high potential Astaxanthin line, despite the setbacks in Spirulina output.  That segment continues to gain momentum, both in terms of consumer demand and better than expected production volume.  Cyanotech thought it had the Spirulina issue fixed during the December quarter.  Harvests improved in response to some modifications in growing cycles, returning nearly to previous levels.  Spirulina recently took a new turn for the worse, though.  Sufficient material is being produced to keep up with packaged goods demand.  But the excess that Cyanotech customarily sells in bulk to other packaged goods producers has been lost, at least temporarily.  That's relatively low margin business so the impact on financial performance is likely to be modest.  But the fact the problem has not been resolved creates uncertainty about Spirulina's future.  Draining those production areas and starting over would be expensive.  Converting them to Astaxanthin also would incur expenses.  Cyanotech has been building up retail demand for Spirulina, hoping to fill the pipeline with multiple products, not just Astaxanthin.  Our estimates are unchanged for the moment.  But they could could down if the issue is not resolved in a timely fashion, and with a high degree of confidence.

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Cyanotech ( Nasdaq - CYAN ) -- Transition on Track

Cyanotch (CYAN $5.00) reported unexceptional Q3 (Dec.) results.  Sales advanced 8% to $7.24 million. Fully taxed income declined 33% to $.10 a share.  The shift from bulk shipments to branded product sales exhibited steady improvement, though.  Bulk revenues comprised 56% of the quarter's total, compared to 67% in the year ago period.  Both astaxanthin and spirulina showed 42% gains in the packaged goods segment.  The decline in bulk volume resulted mainly due to lingering spirulina production problems, which limited output.  Performance has improved but remains below full potential.  Marketing costs accelerated in the period as Cyanotech widened its retail distribution network.  Those expenses likely will remain elevated as expansion continues.  Margins are likely to improve in the March quarter as the production improvements take effect.  Sales probably will be level, though, due to seasonal growing factors (less sunlight).  We have reduced our full year earnings estimate by a nickel to $.35 a share.

Margins should keep improving next year as more business goes through the retail channel.  End user demand remains vibrant.  Better capacity utilization could lift physical output.  Packaged goods should deliver higher revenue per kilogram.  Some capacity might be switched from spirulina to astaxanthin to supply that faster growing segment.  The long term outlook remains positive.  Sales and margins could keep improving well into the decade.

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Cyanotech ( Nasdaq - CYAN ) -- Restores Growth

Cyanotech (CYAN $5.00) appears on track to produce excellent on target Q3 (December) results.  The company experienced production problems with its Spirulina line during the past two quarters.  That issue has been resolved, enabling output to rebound to previous levels.  Astaxanthin volume wasn't impacted.  That line probably will diminish as it usually does during the winter, due to reduced sunlight.  But on a year to year basis production remains at a high level.  Cyanotech added several marketing executives earlier in the year to build the retail and Internet channels.  Those efforts are beginning to bear fruit.  Greater traction is likely in subsequent periods.  Average prices are rising as more output is shifted from bulk to retail customers.  Orders continue to outpace capacity by a sizable margin.  Income is poised to show a solid positive comparison in the December quarter.  Cyanotech currently outsources its "extraction" process, which purifies the output for human consumption.  Turnaround time tends to be a month.  Since the production fix occurred midway during the quarter some of the increased volume might not get shipped by December 31.  If a favorable turnaround is achieved a stronger performance is possible.

Any unfilled orders will be delivered in Q4 (March).  That quarter usually is Cyanotech's low point, due to the short days (less sunlight).  Still, output per acre has been improving with the exception of the recent Spirulina setback.  So another favorable comparison is likely in that period, as well.  Our full year earnings estimate is unchanged at $.40 a share.

Higher average selling prices should expand margins in fiscal 2014 (March).  Marketing costs probably will continue to rise.  But selling prices to retail chains tend to be 2x-3x higher than in the bulk channel.  Cyanotech is creating multiple products to address that market, moreover, creating the potential for greater revenues per store.  Demand continues to accelerate for Astaxanthin and Spirulina, fueled by athletes who use the products for energy and recovery, and health conscious consumers seeking immunity from disease, better eyesight, and sunburn protection, among other things.  We estimate revenues will advance 29% next year to $36 million, providing earnings of $.65 a share (+62%).

A key lawsuit seems to be going Cyanotech's way.  One of its bulk customers sued the company earlier in the year over patent infringement.  In reply Cyanotech completed its existing supply contract, but declined to renew it.  That output was diverted to other customers, which are willing to pay higher rates.  The litigant failed to show it even had a patent during the trial's discovery stage.  That company has been extracting settlements from other industry participants for several years with its non-existent intellectual property.  Cyanotech was the first to fight back.  A settlement remains possible but at this point it looks like the whole thing might be dropped for lack of evidence.

Physical expansion is in the pipeline.  Space is available in the office park in Hawaii where Cyanotech operates.  Additional growing capacity probably will be added on a sequential basis over the next several years. 

In 2-3 years sales could attain $50 million to support income of $1.00 a share.  Applying a P/E multiple of 15x suggests a target price of $15 a share, potential appreciation of 200% from the current quote.  Product line extensions, broader retail distribution, and production expansion could yield a substantially stronger showing.

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Cyanotech ( Nasdaq - CYAN ) -- Barrels Back

Cyanotech (CYAN $5.75) appears on track to report reasonably good Q2 (September) results.  The high potential astaxanthin line has continued to build momentum.  New growing ponds have entered production.  And average selling prices are drifting upward as output is diverted from bulk sales to higher margin packaged products.  The legacy spirulina line continued to encounter problems, though.  That segment still represents more than 50% of Cyanotech's growing capacity.  A variety of production issues have curtailed volume.  That's put a crimp in sales directly.  It also has incurred extra costs, as the company strives to fix the problem. 

Margins may be affected by the addition of two sales and marketing executives.  That's laying the groundwork for a pick-up in direct to consumer sales, via social media and other techniques.  It also is boosting distribution to a broader group of specialty retail stores.  Legal expenses will impact margins, as well.  Cyanotech is battling it out with a bulk customer that is trying to force the company to keep selling astaxanthin at abnormally low prices.  That issue probably won't be resolved for another two quarters, although there's little reason to think Cyanotech will be forced to continue the arrangement once the existing contract expires.

Meantime, worldwide astaxanthin demand still exceeds supply.  Industry growth has begun to moderate, following last year's surge.  But plenty of opportunity remains.  A large majority of specialty health food retailers don't carry astaxanthin products.  Large potential exists in the chain store segment, as well.

Our estimates are unchanged.  Near term performance is hard to predict due to the spirulina problem.  How fast Cyanotech can transition to higher margin retail products is another unknown.  The impact of legal and personnel expense is another question mark.  Still, a strong showing is likely due to the underlying strength in demand.  New competition has not emerged.  Astaxanthin and spirulina are complicated products to grow.  The long term outlook remains bright.  In 3-5 years sales could reach $50-$100 million to produce income on the order of $1.00-$2.00 a share.

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Cyanotech ( Nasdaq - CYAN ) -- Gets Drilled

Cyanotech (CYAN $5.75) reported lower than expected Q1 (June) results.  The company is a leading producer of dietary supplements that are derived from algae.  Production is based in Hawaii to take advantage of the abundant sunshine there.  Cyanotech also pipes in cold water from the bottom of the Pacific Ocean to treat the algae after it's harvested, to boost potency.  Until recently Spirulina was the company's key product.  Athletes use it to enhance recovery after work-outs and for a wide range of other health benefits.  Demand for Spirulina is growing at a 5%-10% annual rate.  Astaxanthin is a newer product that now has become Cyanotech's hottest selling line.  Astaxanthin contains high levels of antioxidants and provides an even broader range of health benefits than Spirulina.  Demand for Astaxanthin is burgeoning, and that trend appears likely to continue.

June quarter results were affected by production shortages.  Sales rose 9% to $6.51 million.  Backlog increased due to the inability to meet demand.  Earnings (fully taxed) were flat year to year at $.07 a share.  Cyanotech increased growing capacity by 33% in April.  The new ponds all were devoted to Astaxanthin.  They were rolled out throughout the quarter, though, so the incremental production built up over time.  That material is shipped out to third parties which perform an intermediate step called extraction, moreover.  So the impact of the new ponds was limited.  The Astaxanthin side of the business now is getting into full swing.  A stronger contribution is likely in upcoming periods.

The Spirulina operation has become a drag.  Abnormal costs impacted income by $.02 a share in the June period.  Output was below target, as well, which affected sales.  Measures have been implemented to contain the damage but Spirulina probably will remain below potential at least for another quarter or two.

Legal costs are likely to affect margins, too.  A bulk customer is trying to force Cyanotech to keep selling it a low margin version of Astaxanthin.  Cyanotech has rebuffed the effort so far.  The dispute is headed to court.  A settlement appears achievable but until a resolution is reached legal costs could impair income in future quarters.

New marketing efforts promise to reinforce growth.  Cyanotech traditionally has sold most output in a bulk format to companies that combine it with other ingredients for sale to consumers.  The company has beefed up marketing to address that higher margin opportunity directly.  Those costs could impact profitability in the near term.  But sales of packaged goods already are climbing.  And that trend promises to support expanded margins despite the rising marketing, legal, and production costs Cyanotech is facing. 

We have reduced our earnings estimate to $.50 a share to reflect the rising expense levels.  Next year $.65 a share represents a realistic target as more output heads directly into the retail channel.  Major new retail accounts are being cultivated.  Growth could be sustained at above average levels well into the decade.

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Cyanotech ( Nasdaq - CYAN ) -- Victory at Sea

Cyanotech (CYAN $6.65) reported Q4 (March) results that were somewhat below our expectation.  Earnings rose 67% to $.05 a share.  Sales climbed 15% to $5.99 million.  Income was reduced by $.14 a share due to abnormally high production costs associated with the Spirulina line.  That segment represented 35% of total sales for the entire year.  Cyanotech recorded that entire expense in the fourth quarter.  New equipment and procedures have been implemented to return costs to normal.  That effort is expected to be completed over the next few quarters.  We estimate the impact will continue at approximately $.01 a share per quarter.  The high potential astaxanthin line performed as predicted.  In fact, production exceeded the company's forecast for the entire year.  The Q4 sales comparison was skewed a bit by $700,000 of obsolete inventory sales in the year ago period.

Marketing efforts are accelerating.  Most of the company's astaxanthin sales growth has been generated by adding new customers, primarily small natural product stores.  Social media and other business development programs now are being geared up to boost same store volume at those outlets.  Larger chains are being targeted, as well.  In the year just ended bulk sales represented 65% of total revenue; retail, 35%.  The shift to greater retail business promises to lift sales and margins in the current fiscal year.

Volume also should benefit from capacity expansion.  Cyanotech boosted its growing area by 33% last year.  That additional capacity now is ramping up.  Consumer demand for astaxanthin continues to exceed demand, so Cyanotech should have little trouble finding outlets for its higher level of production.

We are raising our fiscal 2013 (March) earnings estimate by a nickel to $.60 a share (fully taxed).  Our sales estimate is unchanged at $30 million (+22%).  Above average growth could be sustained well into the future.  In 2-3 years earnings could attain $1.00 a share.  Applying a P/E multiple of 15x suggests a target price of $15 a share, potential appreciation of 125%.

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Cyanotech ( Nasdaq - CYAN ) -- New Capacity in Production

Cyanotech (CYAN $7.65) appears on track to produce excellent on target Q1 (June) results.  The company still hasn't reported its March period figures.  Those probably were down sequentially due to seasonal factors.  Less sunlight translates into less output.  But volume almost certainly has jumped in the current period.  Cyanotech's capacity expansion began production in April.  Sunshine has abundant and strong the past two months, as well.  Demand for astaxanthin remains vibrant, moreover.  The transition from lower margin bulk sales to consumer products is reinforcing the uptrend in margins, helping income advance faster than sales.  Our estimates are unchanged. 

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Cyanotech ( Nasdaq - CYAN ) -- Cranks it Up

Cyanotech (CYAN $8.25) reported excellent Q3 (Dec.) results, above our expectation.  Earnings (fully taxed) leaped to $.15 a share versus a breakeven performance the year before.  Sales advanced 71% to $6.71 million.  The company shifted a little of its astaxanthin output to higher margin retail customers.  But a big chunk was shipped to longstanding bulk buyers.  The transition to retail generally lifts per-pound selling prices by 100%-200%.  As more product moves into retail distribution revenues and margins promise to benefit directly.  Most of the period's revenue was derived from algae that was grown in earlier periods.  That material is sent out for processing at a variety of third party locations.  New production was pretty good, under the circumstances.  Volume was robust in October, fueled by abundant sunshine and technology enhancements.  November and December were unusually cloudy, though.  So there might be a drop-off  in upcoming periods as Q3 output goes into circulation.

The trend towards higher margin sales promises to keep profitability on a rising slope.  Cyantotech is gradually weaning its bulk buyers away from its astaxanthin production.  That output currently is being redirected to U.S. mainland specialty retailers.  Those stores typically are run by knowledgeable proprietors who are up to date on all the latest nutriceuticals.  The wave of publicity that cast Cyanotech into the limelight in 2011 still is resonating with that group.  The company also is drumming up business in Europe.  And demand is being reinforced with a significant investment in social media marketing.

The Costco relationship might expand.  Cyanotech has supplied astaxanthin to Costco stores in Hawaii for several years.  One of the chain's specialties is nutriceuticals.  Test marketing on the mainland could begin this year.  That test marketing alone could exert a noticable impact on Cyanotech's financial performance.  If the results are good and the rollout goes national substantial further leverage could emerge.

Cyanotech is tooling up to meet rising levels of demand.  A 33% expansion in growing capacity is nearing completion.  Those new ponds won't all produce at 100% right off the bat.  It might take six months to make all the necessary adjustments.  Still, unit volume should improve as the additional capacity starts to come on line in the June quarter.  Cyanotech also plans to expand its processing capacity so it won't have to send the raw algae out for extraction.  That build-up probably will take 18 months to complete.  Once in place turnaround time should improve, along with profit margins.

We are raising our fiscal 2012 (March) earnings estimate by a dime to $.40 a share (fully taxed).  Next year $.55 a share represents a realistic target.  The transition from bulk to retail distribution is likely to sustain growth at above average rates well into the decade.  More growing ponds could be added, supplying additional impetus.  Astaxanthin is believed to be one of the few nutriceuticals now on the market which produce genuine health benefits.  Cyanotech will have to maintain an effective marketing effort to keep that message in front of consumers.  Re-order rates always have been remarkably high by industry standards, though.  Once new customers are added those recurring revenue streams tend to stay in place.  In 2-3 years fully taxed earnings could reach $.75 a share.  Applying a P/E multiple of 20x suggests a target price of $15 a share.

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Cyanotech ( Nasdaq - CYAN ) -- Catches a Wave

Cyanotech (CYAN $8.25) is a leading producer of nutriceutical products used by high performance athletes and other health conscious consumers.  The company's products are derived from algae, which is harvested from a network of growing ponds in a Hawaiian industrial park.  Cyanotech's leading product historically was Spirulina Pacifica, a dietary supplement that provides energy, cardiovascular benefits, and antioxidents that delay the aging process.  That line is a favorite of distance runners and other high endurance athletes to raise performance and enhance recovery.  A second algae based line, BioAstin, was developed more than a decade ago.  That product offers a wider range of benefits including skin, eye, and joint support and reduced inflamation, along with an even greater level of antioxidents.  Demand never gained momentum, however, due to intense competition for shelf space and the lack of a major marketing effort. 

All that changed early in 2011.  BioAstin was featured on the popular Doctor Oz television show.  The segment was repeated two additional times at 2-3 month intervals.  The claim was made that BioAstin was the #2 supplement in the world, right after Vitamin D.  Demand immediately rocketed after the television broadcasts.  And volume has continued to build.  Repeat business has been strong and new consumers continue to try the product.

Most astaxanthin (BioAstin's central ingredient) sales historically were made to bulk buyers.  Part of the output was used by salmon farmers to color the meat like wild fish.  The farmed version comes out white without the additive.  The rest was sold to bigger supplement companies that included astaxanthin in a variety of consumer offerings.  Cyanotech sold some BioAstin directly to retailers in Hawaii, including Costco.  It also landed a few accounts on the mainland, and operated a small direct sales operation.  Prior to the Doctor Oz breakthrough, though, most revenue was generated by the Spirulina Pacifica line.  Overall growth was moderate.  Profitability was okay.  But there wasn't any real excitement in the picture.

Cyanotech kept a low profile during the initial blast-off.  New management had just taken the helm.  And the company wanted to make sure the increase wouldn't be short-lived.  Demand has continued to build, alleviating those concerns.  Measures now are being implemented to capitalize on the burgeoning opportunity.  Physical capacity is being expanded by 33%.  The poor economy has enabled Cyanotech to obtain space inside its existing office park, simplifying logistics.  Productivity at existing ponds is improving, too.  And less output is being directed to bulk purchasers.  New retail distribution is being arranged instead, at higher selling prices.  An advanced processing unit is slated to go on line over the next 18 months, moreover, boosting turnaround time and margins.  A new name for BioAstin is being evaluated, as well, to lift consumer appeal.

Sales advanced 54% in the June period to $5.95 million.  Fully taxed earnings climbed 40% (excluding stock option expense) to $.07 a share. In Q2 (September) sales jumped another 56% to $5.99 million.  Earnings improved 86% to $.13 a share.  Revenues depend on the amount of algae produced.  And that volume typically declines in the winter because there is less sunlight.  In the year ago December quarter Cyanotech had inventory in reserve to keep revenues intact.  This year the shelves are bare due to the surge in demand.  So a less vibrant comparison may be in the cards.  Cyanotech also is beefing up marketing and other business development activities.  So margins also might get compressed by those additional costs.  The company has a lot of scientific talent on hand, though, so output might turn out to be better than historical metrics would suggest.  Astaxanthin prices are rising, moreover, a trend that's likely to continue and reinforce performance in future periods.

We estimate fiscal 2012 (March) earnings will finish around $.30 a share (fully taxed).  Next year $.45 a share represents a realistic target.  A variety of risks will be encountered over the long haul.  BASF and a slew of Chinese chemical producers are developing synthetic versions of astaxanthin.  The initial target is the fish farming industry.  But over time the lower cost (lower quality) competition could affect Cyanotech's consumer operations.  The industry itself is incredibly competitive and flighty.  Dietary supplements come and go all the time.  It's extremely hard to establish a recurring business, and the marketing costs to sustain demand are steep.  Spending increases that coincide with temporary demand decreases are capable of generating dramatic earnings reversals.  Weather vagaries and other logistical issues present a danger, as well.  On top of that new chairman could take over the two Congressional committees that oversee diet supplements.  Those individuals are considered less supportive of the industry, so regulatory hurdles could become more pronounced.

If Cyanotech avoids those pitfalls sales could reach $50 million in 2-3 years.  Earnings could attain $.75 a share.  Applying a P/E multiple of 20x suggests a target price of $15 a share, potential appreciation of 80% from the current quote.

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