Consumer Discretionary

Pivoting into the US baby formula market is easier said than done for A2 Milk

Mon 30 May 22, 12:36pm (AEST)
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Key Points

  • A2 Milk shares are up 10% in early trade
  • Rival Bubs has received FDA approval to ship 1.25m tins of baby formula to the US
  • A2 could face potential challenges with entering the US market

A2 Milk (ASX: A2M) has rallied more than 10% in early trade after rival Bubs (ASX: BUB) received US Food and Drug Administration (FDA) approval to export more than 1m tins of baby formula to help ease a severe shortage.

A2 seems to be catching bids thanks to the sharp re-rate for its fellow peer. However, has yet to benefit from the US infant formula shortage.

Where does A2 stand?

In 2015, A2 launched in the US market for liquid milk, not baby formula. The company's North American business has never turned a profit.

Obtaining an FDA approval to sell infant formula is easier said than done.

According to the FDA, approximately 2% of US baby formula is imported and FDA rules make it very hard for new companies to enter the market.

Encouragingly, the FDA began expediting approvals around mid-May, which began to see various international names such as UK's Kendamil receive approval.

Citi said its not impossible for A2 to gain US market access and a pivot towards a US infant formula strategy could drive a re-rating for the stock.

Potential headwinds

Unlike Bubs, which has 100% ownership of its Deloraine Dairy production facility, A2 has a dependency on Synlait Milk (ASX: SM1) for product supply.

Only recently, did A2 pursue its own production via a 75% interest in Mataura Valley Milk on 30 July 2021.

Even then, its not a 100% owned asset.

A2 has said that the acquisition has been producing at lower volumes and expects profitability to improve by FY26.

The FDA said it will prioritise submissions for products "that can demonstrate the safety and nutritional adequacy and have the largest volume of product available and/or those who can get product onto U.S. shelves the quickest."

2022-05-30 12 08 27-The a2 Milk Company Ltd (ASX A2M) Share Price - Market Index
A2 Milk share price chart

 

Written By

Kerry Sun

Finance Writer & Social Media

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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