A2 Milk is set to gain a toe-hold in the highly competitive US infant formula market after gaining a temporary green light from the US Food and Drug Administration (FDA).
Infant formula made overseas has
A2 Milk is set to gain a toe-hold in the highly competitive US infant formula market after gaining a temporary green light from the US Food and Drug Administration (FDA).
Infant formula made overseas has been landing in the US to alleviate a severe shortage there, largely caused by a product recall by Abbott Nutrition and the months-long closure of a major formula production facility in Sturgis, Michigan.
While a handful of outside companies have already been selling formula to the US under its temporary provisions, A2 Milk’s application had been deferred.
Dual-listed a2 Milk said it believed today’s approval represented a “significant opportunity” to develop its brand in the infant formula category over the long term, but said it expected its margins to be lower than average.
Managing director and chief executive David Bortolussi said the company expects to sell a million cans to the US over the second half of this financial year.
“From an earnings point of view, we expect it to be a lower margin business, for various reasons, including the competitive environment in the marketplace and the higher costs to serve and deliver the product into the US, which would be mainly by airfreight,” Bortolussi told the Herald.
“We are excited by the US infant formula opportunity but the primary aim of our strategy is capturing the full potential of the China market, which we will remain focused on,” he said.
China is by far the world’s biggest market for infant formula and has formed the platform for a2 Milk’s strong earnings growth for several years.
Bortolussi said access to the US would allow the company to contribute “on a humanitarian basis” to help solve the supply shortage.
“Hopefully, over time, it may provide us with an opportunity to build on our infant formula business in the US market.
“It is our intention at this stage to participate in that transition process and to hopefully obtain longer term FDA approval to remain in the market going forward,” he said.
There are three main players in the US formula market - Abbott Nutrition, Mead Johnson Nutrition and Nestle USA.
“The three main players have a significant market share in the market - we don’t underestimate how difficult it will be to compete against them and to carve out a presence for ourselves,” Bortolussi said.
A2 Milk has been in the US for seven years following a similar strategy it used in Australia - building brand awareness through the sale of fresh a2 milk - which contains just the a2 beta protein as opposed to standard milk, which has both the a1 and a2 beta proteins.
The New Zealand-founded a2 Milk maintains that its products can help those consumers who have trouble digesting standard milk.
Bortolussi said the US was a difficult market because the level of concentration by the major companies was higher than it is in most other markets.
There is also a high level of state procurement of formula, through the Women and Infant Children (WIC) subsidy scheme.
WIC is aimed at low-income pregnant and postpartum women, infants, and children younger than 5 years who are at nutritional risk.
WIC served about 6.2m participants each month in fiscal year 2021, including an estimated 43 per cent of all infants in the United States, according to USDA data.
Harbour Asset Management senior research analyst Oyvinn Rimer said that at an assumed ebitda margin of 20-22 per cent, the 1 million cans would translate to $5.5m in earnings, or about 2 per cent of a2 Milk’s forecast 2023 earnings.
“It’s fairly immaterial,” he said.
“It does not really move the dial, but clearly some sharemarket participants will hope for a permanent place in the US market.”
After Abbott’s problems at Michigan, the US authorities have acknowledged that there is a lack of competition, Rimer said.
“So I guess if a2 Milk delivers a good outcome and provides volume in the temporary period that they have been given, then they will at least be in the mix going forward.”
A2 Milk’s share price spiked higher on the news to $6.45 - its highest point since November 2021 - before re-tracing a little.
Synlait Milk - a2 Milk’s main infant formula manufacturer - was also firm.
If the proposal is to proceed, shareholders would be required to vote to approve it.