Sam Irvine
The a2 Milk Company is recalling thousands of baby formula units exported to the US after finding toxins that can cause serious illness in children, in a major blow to the company’s reputation.
Shares slumped on investor fear that the contamination and recall would not only seriously harm growth prospects in the US, but damage the brand in a far more lucrative market for the company: China.
The Auckland-headquartered company only secured approval to export infant formula into the US during the pandemic after local giant Abbott Laboratories was forced to close a plant after four babies fell ill, and two died, after consuming product that contained bacteria.
In 2024, two years after the contamination was detected, Abbott was ordered to pay $US495 million ($687 million) in compensation.
Citi analyst Sam Teeger said that while the recall was isolated to products sold in the US – which have “a different formulation to the English label a2 Platinum infant formula” – “we see a risk that this recall could make its way on social media in China and cause damage to the brand”.
“The food safety and quality of our products is our highest priority. For this reason, we have voluntarily recalled three batches of our a2 Platinum USA label infant milk formula sold only in the US,” a2 Milk’s chief executive David Bortolussi told investors in a statement on Monday.
“I want to reassure parents and caregivers that our infant milk formula products sold in Australia and New Zealand, China and other markets are not impacted by this isolated recall in the US.”
Shares in a2 Milk opened 17 per cent lower on Monday morning at $5.95 before finishing the day at $6.54, down 10 per cent. The company told shareholders that no illness or other harm had been reported and that it expected the financial impact of the recall to be immaterial.
“Markets tend to shoot first and ask questions later when brand risk is involved, which explains the initial sell-off,” said Hailey Kim, an analyst at Wilson Asset Management, which owns a2 Milk shares. “Shares have partially recovered as the market digests the information. We’re seeking to better understand the full extent of the issue and any potential tail risks.”
The recall – announced at the weekend – came days after the Food and Drug Administration announced the results of its largest review of contaminants in infant formula available in the US. North America is a small market for a2 Milk’s infant formula, accounting for 0.1 per cent of revenues.
The Platinum formula has not been exported to the US since December, and the product was only tested in response to new guidance from New Zealand’s food regulatory authority. The company said its products outside the US – its exports across Asia and to Australia – are unaffected.
The bacteria-created toxin, cereulide, is extremely heat-resistant, meaning that preparing the formula with hot water does not eliminate it. After consumption, symptoms can develop over the next six hours and most often involve nausea and vomiting that typically resolve within 24 hours.
The dual-listed company is not the first this year to recall infant formula due to cereulide contamination. In January, food giant Nestlé recalled its Alfamino product due to the possible presence of the toxin.
But a2 Milk has is already battling tighter regulations on Chinese-labelled productions, with additional clearance requirements and testing measures extending the time its products spend in customs. New standards for infant formula, meanwhile, are increasing the time needed for quality assurance.
Synlait, which manufactures the infant formula for a2 Milk, said it was working with the company to assist in its voluntary recall. Synlait said the products had been manufactured in compliance with safety standards.
Teeger said forecasts that a2 Milk shares could reach $8.40 over 12 months didn’t leave “much scope for anything other than flawless execution”.
“[This is] another unfortunate example of the company encountering supply chain challenges following Synlait’s manufacturing issues, evolving testing requirements, an evolving customs regime and freight. It’s unknown to what extent this might be part of a more significant issue,” he added.
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