The US Food and Drug Administration (FDA) exercised its discretion to allow A2 Milk Company [ASX:A2M] to import infant milk formula (IMF) products into the US.
The FDA began approving imports into the US on a case-by-case basis when the US was hit by infant formula supply shortages in May.
Bubs [ASX:BUB] was one of the first to be granted a temporary import licence by the FDA, while A2M’s application stalled for months as it sought to meet the FDA’s requirements.
Today, A2M announced its solicitations have succeeded…but up to a point. The FDA has granted A2M the right to import IMF products from New Zealand through to 6 January 2023.
A2M shares were up 5% late on Thursday, bucking the overall market, which broadly fell following yet another 75 basis points rate rise by the US Federal Reserve.
A2 Milk shares have been up 25% in the past six months.
Source: tradingview.com
A2 Milk gets FDA approval to import infant milk formula products
In early 2022, the US plunged into a baby formula supply crisis.
In May, 21% of powdered baby formula was out of stock. The shortage had several causes: broad supply chain snarls, a recall hitting one of the biggest local producers, product restrictions, and a run on products from panicked parents.
The US FDA sought to remedy the situation by exercising its discretionary powers to approve emergency imports on a case-by-case basis.
Bubs, and now A2M, are the ASX beneficiaries of these import grants.
While A2 Milk applied for import rights all the way back in May, it was only in November that the FDA finally ticked off A2M’s application to ship its IMF products.
However, the import window is currently quite narrow — approved through to 6 January 2023.
Any extension will be subject to further FDA approval.
A2M’s US entry won’t be easy going
While A2M was happy to be permitted to ship products to the US, the process won’t be easy…or a cash cow.
The IMF products A2M can ship to the US have the same formulations as its A2 Platinum range but different ‘scoops, mixing instructions and labelling requirements.’
A2 Milk does not have this exact mix in inventory, which ‘needs to be manufactured as soon as possible.’
Additionally, the extra work to get the product in line with FDA’s requirements, along with shipping costs, will dent A2M’s margin.
In the short term, this US import deal will hurt A2M’s bottom line. It seems A2M management hopes the short-term pain will be offset by gaining a foothold in a large IMF market like the US.
But that will not be solely up to A2 Milk. To benefit longer term, A2 Milk must get an extension from the FDA and outcompete rivals for market share in an already competitive space.
As A2M itself conceded:
‘a2MC 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 manufacturing capacity unless the situation changes. 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. Actual sales will ultimately depend on customer demand, consumer offtake, supply shortages and market conditions at the time.’
A2 Milk expects the US import deal to lower gross margins in FY23 due to higher distribution costs and marketing costs.
A crude awakening
Now to something a little different…but very important.
Few things are as important to our modern daily lives as energy.
It powers our lifestyle.
But the recent ruptures in the energy market — stoked by undersupply, rising inflation, and Russia’s invasion of Ukraine — have threatened global energy security.
As the world fractures, most stand to lose.
So what world are we in?
And what does it mean for the energy sector?
You may like to hear what our Editorial Director, Greg Canavan, has to say about the energy industry’s forecast here.
Regards,
Kiryll Prakapenka
For Money Morning
