A2 Milk secures US market access: A bullish headline but lacking details

A2 Milk (ASX: A2M) has finally joined rival Bubs Australia (ASX: BUB) in efforts to the relieve the ongoing infant formula shortage in the United States.

The US Food and Drug Administration on Thursday granted the company temporary access to sell its a2 Platinum infant formula through to 6 January, 2023.

Eight months ago, US baby formula heavyweight Abbott Nutrition was forced to halt productions at its Michigan plant after a contamination incident. The plant was responsible for approximately 20% of domestic supply.

Product adaption required

A2 Milk flagged that the product supplied to the US will have the same formulation as a2 Platinum but requires different scoops, mixing instructions and labeling requirements to meet FDA requirements.

"This product is not currently available in inventory and needs to be manufactured as soon as possible," the company said in a statement.

“We are increasing our supply to respond to this situation, while importantly ensuring that we continue to meet the needs of our other IMF consumers and trade partners in China and other markets," commented CEO David Bortolussi.

"If the US requires further support over an extended period, we have the proven ability to scale up significantly," he added.

A drag on margins

"In the near-term, and prior to confirming distribution plans, sales during FY23 are expected to be up to 1 million cans all within 2H23, assuming enforcement discretion remains in place throughout the period," said Bortolussi.

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

A2 Milk expects the US exports to be 'incrementally beneficial' but lower margin due to higher distribution costs, potential air freight and production rework costs.

More broadly speaking, the US opportunity was viewed as a 'highly competitive market to enter' and its sales potential remains difficult to predict at this early stage.

While temporary FDA approval makes a great headline, more time is needed to determine whether or not anything substantive will come out of supplying the US.

A2 Milk share price chart