Market froths up a2 shares after FDA formula deal

Company News

by Glenn Dyer

The a2 Milk Company (ASX:A2M) has joined Bubs Australia and the now-unlisted Bellamy’s in winning approval to supply baby formula to the US to try and fill a growing supply gap from a domestic shortage across the country.

Under the approval from the U.S. Food and Drug Administration (FDA), the dairy major will be able to sell and distribute its a2 Platinum infant milk formula product through to Jan. 6 next year, a2 told the NZX and ASX on Thursday.

Investors grabbed at the news and pushed the shares up more than 4% to a close of $5.41, after touching a day’s high of $5.77, the highest they have been since early September.

The move will help plug the continuing shortfall in baby formula supplies in the United States that was triggered in February by Abbott Laboratories, the biggest supplier of powder infant formula, recalling dozens of products after reports of serious bacterial infections in four infants.

Bubs Australia was the first local milk supplier to win approval from the FDA to supply the US to help counter the shortfall – it has a supply agreement with a number of Walmart stores across the US midwest and south. The unlisted Bellamy’s is now also a supplier.

“If the U.S. requires further support over an extended period, we have the proven ability to scale up significantly,” said a2 Milk CEO David Bortolussi in Thursday’s statement.

The company forecast sales during fiscal 2023 of up to 1 million cans all within the second half, assuming the FDA enforcement discretion remains in place throughout the period, it said.

“The Company is also able to supply Stage 3 toddler product in addition to this which does not require enforcement discretion,” the company pointed out on Thursday.

a2 had applied to sell its infant milk formula in the country earlier this year in the wake of the Bubs deal but the FDA had deferred its request in August.

The announcement cloaked bad news on a2’s profit margins (which has become an ongoing issue for the company in recent years), with a2 warning of lower-than-average gross margins and higher distribution costs in its 2023 financial due to potential air freight and rework costs in the near term, and marketing and trade investments to enter the US market.

But a2 justified the higher costs and weaker margins because it “believes the US represents a significant opportunity to develop its brand in the IMF category over the long term. “

“However, at this early stage, it is difficult to predict the IMF sales potential in the US which is a highly competitive market to enter. Accordingly, the Company believes sales will be significantly below indicated sales during FY23 are expected to be up to 1 million cans all within 2H23, assuming enforcement discretion remains in place throughout the period.

“Actual sales will ultimately depend on customer demand, consumer offtake, supply shortages and market conditions at the time.

“In terms of FY23 earnings impact, whilst incrementally beneficial… The Company will provide an update on US IMF distribution gains and sales outlook in connection with its 1H23 interim results release or earlier as appropriate.”

Subscribe to our Daily Newsletter?

Would you like to receive our daily news to your inbox?