A2 Milk, Bubs face best chance yet of cracking US infant formula market

Shares in Australian infant formula brands are soaring as they seize their chance of finally gaining a foothold in the tough US market.

A2 Milk CEO David Bortolussi says the company is standing buy to supply infant formula to US parents. Picture: Britta Campion/The Australian

Shares in Australian infant formula brands are soaring as they seize their chance to splinter a decades-old oligopoly in the US market.

America has long been a pipe dream for Australian infant nutrition companies, with multinationals Abbott, Meade Johnson and Nestle effectively barring access.

But Australian companies now face their best chance of gaining a foothold in the market after a bacterial contamination at Abbotts shut down its factory in Michigan, exacerbating a nationwide formula shortage.

Highlighting the severity of the issue, US President Joe Biden tweeted a deal the powerful US Food and Drug Administration brokered with ASX-listed BUBs to provide 1.25 million tins of formula. Bub shares surged as much as 80 per cent to 78c on Monday, before cooling to 68c.

Shares in bigger rival A2 Milk – which launched its fresh milk products in America five years ago and now has a presence in about 27,000 stores – leapt as much as 12 per cent to $4.85 before settling at $4.77.

Unlike Bubs, A2 milk is yet to gain FDA approval, with the trans-Tasman company submitting its application last week.

But chief executive David Bortolussi – who joined A2 last February as the company shares were nosediving from its peak of almost $20 in mid 2020 following the pandemic-fuelled collapse of the lucrative Chinese daigou market – said “we stand by to assist the US government”.

“We are able to provide support as one of the leading international infant milk brands, leveraging our existing US presence and distribution capability,” he said.

“Currently a2MC (A2 Milk Company) supplies A2 Milk fluid milk, a2 Milk Half and Half and Hershey’s A2 Milk to approximately 27,000 stores for major customers in the grocery, natural and club channels in the US.”

Normally. it takes about 18 months to secure FDA approval to sell infant formula. America’s infant formula crisis has accelerated this process, with Bub’s securing a green light after six months of lobbying.

But Bub’s success also underscores the power of connections. The company recruited Bondi Partners, the firm run by former treasurer and ambassador to the US Joe Hockey, to assist with its US expansion.

It followed Bondi Partners guiding Brisbane-based rapid antigen test maker Ellume to win $340m in funding and contracts from the US government.

American parents last year spent about $US4.3bn on infant formula – a 4.5 per cent rise compared with 2020. The market is expected to hit $US5.61bn by 2027. Despite the growth, only a handful of US-based infant formula manufacturers are registered with the US’s Food and Drug Administration, and just one international company is registered, highlighting the strength of the country’s formula oligopoly.

Abbott said it plans to restart production at the Michigan plant on June 4 after a three month shutdown.

It is not known how the market will react and whether a similar situation to the Chinese infant formula melamine contamination scandal – which steered parents to foreign brands and propelled A2 and others to riches – will eventuate.

Morgans analyst Belinda Moore said if Abbott – which has about a 40 market share – returns to full capacity, it might be too late for Australian companies. Ms Moore also said margins need to be better understood in the context of the Women, Infants, and Children (WIC) program, which is America’s biggest buyer of infant formula and provides it at a significant discount to lower income families.

“ (A2’s) strategy always entering new markets is building the brand with milk and then they try to leverage the brand with other products,” she said.

“But in the US you have a really consolidated market. The top four players have 80 per cent market share and I’m not sure what the margins are like with that WIC program.”

A2 has set an ambitious sales target of $US100m a year by 2026. At its half-year earnings results in February, US segment revenue slipped 5.2 per cent $32.4m, while earnings before interest, tax, depreciation and amortisation fell 41.5 per cent, resulting in a loss of $16.4m compared with the previous corresponding period.

But it said its 12-month rolling market value share in the premium milk category firmed to 1.9 per cent in December 2021 from 1.8 per cent six months earlier.

“Accelerating the path to profitability in the US by FY25/FY26 is a key strategic focus. In addition to driving growth, as planned, the company started to reduce trade spend in 1H22 and now intends to increase pricing in 2H22 to improve gross margins and assist with mitigating increasing distribution costs,” A2 said at the time.

Meanwhile, Bubs began marketing to America’s Asian and Hispanic communities in January as part of its goal for the US to account for 10 per cent of its revenue within five years.