Is A2 the key to a healthier future?

Friday 20th July 2001

If the company's theory holds water, A2 Corporation may be on the way to becoming an El Dorado

The launch of A2 Corporation last year has been swathed in a flurry of excitement over the mega-dollar potential of its developmental A2 milk product but today, a year out, investors are still waiting for the supposed creamy froth of lucrative returns.

The Dunedin-based biotech company contends that A2 milk, as opposed to the more common A1 milk produced in New Zealand and overseas herds, is a healthier product that lessens the chances of succumbing to heart disease or diabetes.

But in doing so, the minnow from the south is pitting itself against a dairy industry, domestic and international, that has traditionally revolved around the previously unchallenged position of A1 milk and its associated products.

The doubting Thomases, and there have been many, say the possible A1 link to people predisposed to diabetes and heart disease is not new. And they are right.

Over the past two decades, studies in Finland, Iceland, France, Germany and Japan have acknowledged the links in those countries between A1 milk and a higher incidence of diabetes and heart disease than in countries where A1 milk is not consumed in large amounts.

So has the overseas findings provided a golden opportunity for New Zealand scientists and their backers to tap into a possible goldmine, or is there greater substance beneath the A2 froth?

Shoeshine has an open mind on the whole issue but detractors of A2 theory claim research over the years has yielded no substantive proof of the A1 disease link, or of the beneficial effects of A2 either.

The cynics say the findings are correlative rather than a proved cause-and-effect case.

However, A2 Corporation's Dr Corran McLachlan remains unfazed and points to examples of the Masai and Samburu tribes from Africa who have high milk intakes but almost negligible rates of coronary heart disease.

This is apparently so because the tribes' traditional herds of cattle, goats and yak produce only A2 milk.

If Dr McLachlan's theory holds water and can one day be proven beyond doubt, it must surely have the potential to turn A2 Corporation into a potential El Dorado.

It is listed on the secondary board of the Stock Exchange, and information is therefore scant, but it is known Dr McLachlan is a 20% principal shareholder through his investment vehicle Machin Investments.

Another 20%, interestingly enough, is owned by a couple of venture-capital companies from Monaco while some 50% of the company is tightly held by a handful of trusts - mainly Dunedin-based.

A squint at the company's prospectus, issued to raise $12 million earlier this year, gives an indication about why the company has had no trouble in raising capital for its activities.

For the 2002 year, A2 Corporation is conservatively expecting to make a net surplus of $15.6 million. By 2006, net profits are expected to rise to $129 million.

The figures do provide a compelling argument for wanting to invest in A2 but is this still pie-in-the-sky financial projections or will A2 milk prove to be a true bonanza for its backers?

Certainly there have been niggling doubts in some quarters about the ownership of intellectual property in connection with the A2 research but, last December, A2 Corporation reportedly paid $8.5 million for a half-share in the patent held jointly with the New Zealand Dairy Board covering the milk protein research and its link to Type 1 diabetes.

A2 Corporation already holds 100% of the patent covering the McLachlan heart link work.

But what are the chances of securing supply of A2 milk during a period when dairy farmers are already enjoying one their best seasons ever.

Can A2 Corporation entice sufficient farmers to begin producing A2 milk for domestic and international consumption, or will the company need to run its own herds to produce the required supplies?

There are approximately 14,000 dairy farmers in New Zealand and around 96% of what they produce is exported with only 4% going to the domestic market.

Under GlobalCo, too, farmers are able to supply competitors with up to 20% of milk produced on their farms.

If the right carrots are therefore dangled, securing adequate supplies of A2 should not pose a problem.

There is also no regulatory bar to the production of A2 milk and the only impediment would be the time needed to genotype and sort the preferred A2 cows from the rest.

But even this would be just a matter of course as A2 Corporation has already developed a DNA test to identify and select pure A2 cows.

At present, approximately 20% of the New Zealand dairy herd produces pure A2 milk - sufficient to supply the New Zealand fresh milk market with pure A2 milk seven times over.

However, by crossing the herd with A2/A2 bull semen, the percentage of pure A2 cows can be quickly increased - compelling stuff indeed.

However, it won't be all plain sailing for A2. In Shoeshine's view, the acid test for the company will be in convincing consumers to switch to A2 milk.

Old habits die hard and the benefits of A2 milk have yet to be proven.

But then it is also human nature to err on the side of caution when in doubt.

Ultimately, the one factor that will sway the minds of consumers will be the safety angle or, more importantly, the "perceived" safety angle.

And if there is a "perceived" safer product on the market being offered at a non-prohibitive cost, consumers may well flock to it.

Correct marketing and pricing will be therefore critical in the success or otherwise of the A2 product.

If A2 Corporation gets it wrong, it will, at best, be peddling a health product in a niche market.

If it gets it right, and further research backs up its A2 claims, the "blue sky" is potentially there.

Comments from our readers

No comments yet