The A2 Milk Company Ltd (ASX: A2M) share price is in focus today after the business announced FDA approval in the US.
FDA approval
A2 Milk shares are on watch as the business announced that the US Food and Drug Administration (FDA) has notified the company it has exercised its discretion to allow A2 Milk to import infant formula.
On 10 August 2022, the FDA had deferred further consideration of A2 Milk’s application. But, the company has continued to engage with the FDA to meet its requirements and to reconsider A2 Milk’s application.
A2 Milk can import, sell and distribute its a2 Platinum infant formula (stages 1 and 2) from New Zealand into the US – this has been approved through to 6 January 2023. It is also able to supply stage 3 toddler product which does not require enforcement discretion.
The product that will be supplied to the US has the same formulation as a2 Platinum, but has different scoops, mixing instructions and labelling requirements to meet the FDA requirements. This product is not currently in inventory and needs to be manufactured as soon as possible.
It is expected that Synlait Milk Ltd (ASX: SM1) would be able to substantially produce 9 million cans of a2 Platinum over a nine-month period. But, not so fast…
How good is this news?
A2 Milk said it believes the US represents a significant opportunity to develop its infant formula brand over the long-term. But, it noted the US is a highly competitive market.
The company believes sales will be significantly below manufacturing capacity. Sales during FY23 are expected to be up to 1 million cans, all within the second half of FY23, assuming enforcement discretion remains in place throughout the period.
A2 Milk also expects the gross profit margin to be “lower than average, distribution costs to be higher due to potential air freight and rework costs in the near term, and incremental market and trade investment to enter the category.”
Final thoughts on the A2 Milk share price
It’s good news that A2 Milk has managed to get approval. However, it’s not quite amazing as the news initially seemed – lower margins aren’t ideal.
If this is the start of a good breakthrough into the country, then that’s great for A2 Milk. However, it seems like the company missed a trick by not being accepted along with the initial group of successful applicants.
The company may well achieve a good turnaround from here, but the Chinese market seems uncertain and the US based infant formula sales are expected to come with lower margins.
There are other ASX growth shares I’d rather go for.
