Ann: Investor presentation USA, page-56

To take up some of the issues raised on this thread:

The chances of a takeover at present would seem rather slight and not likely to be a factor in the company (a2MC) deciding to make a presentation to US investors. It is not looking for a takeover, and there are no signs of one being in the offing. An outsider would need a pretty strong reason to launch a takeover bid, and it's not really evident what that could be. The company's market capitalisation is out of all proportion to its ability to produce profits in the short term future. And the obvious course for a would-be buyer wanting to share in a2MC's future would be to acquire a stake on market and build from there. No sign of that.

Besides, there's still debate about the A2 hypothesis, which would put most would-be buyers off. There shouldn't be, because anyone who follows the scientific research on this subject knows it's all pointing in the same direction. It's not just that A2 milk is "better", it's that A1 milk (which means ordinary standard milk that you buy in the shops), carries both digestive problems and health risks for some consumers. A lot of contributors on this thread obviously don't know this. As long as the debate and doubts continue, a takeover is probably not bankable at anything like A2M's current share price.

Somneone has mentioned the company appointing a lawyer to its board. That should hardly be surprising. He's been advising the company for years and knows it inside out. And a lawyer on the board can be pretty useful. No special significance about this.

There's been a lot of loose talk about patents for identifying A2 cows and testing A2 milk. These are entirely separate issues. First, the patent that expired recently is one that covers a method of testing milk to ensure it is pure A2. Being able to ensure the purityof A2 milk is extremely important because although scientists know that milk which contains a mixture of A2 and A1 carries certain risks to the consumer, they don't know how much A1 you need to consume in order to be at risk. It will vary from person to person, in the same way that the gluten risk for people with certain disease conditions varies. For some, even a little gluten will be risky, so you have to avoid it completely. Others have better tolerance. It may be that even a very little A1 protein in milk may adversely affect some consumers.

The a2 Milk Company declares that its products are completely free of the AQ1 protein. First it tests all its milk as it goes from the farm to the processing plant, to stop any A1 contaminating the A2 production process. Then the product is again tested as it leaves the plant and before it enters the market. The company has a contract with a hi-tech outfit called Proteomics to do this at testing labs in each country. I don't personally know if Proteomics uses the testing method covered by the patent which recently expired. It doesn't matter. This routine is carefully set out in the Information Memorandum presented by the company in support of its application early last year for listing on the ASX. It's available on its website and is a guarantee that A2 milk and products made from it are 100% A1 protein free.

But even before all this, every cow in every herd supplying milk to the company is required to be tested, to ensure that the two genes which control whether its milk is A1 or A2 are both A2. If the cow has even just one A1 gene, its milk will not be accepted. All cows in the A2 herd have to be milked separately from cows that are not pure A2, and their milk stored in separate vats and transported separately to the processing plant. No cross-contamination. Documents on the company's website explain all this. This all entails extra costs to the farmer and the company, which is why a2 milk costs more than standard milk.

The usual way to test a cow is to take a sample of hairs from its tail and send them to the lab. It could be done by taking a blood sample but the hair test is a lot easier. The patent covering this testing is starting to run out in some countries soon, although some aspects of it may be covered by a second patent. In any case, some form of testing method will be required for product integrity, whether the patent is owned by a2MC or not. It's not a2MC's major source of income.

Regarding companies already selling A2 milk in the US market, these are very few and they aresmall-scale. One of them is Origin, which sells milk in Cleveland, Ohio, using Guernsey cows. Guernseys have a reputation of being almost all A2A2 because their milk is highly sought after for its creaminess, and farmers tend to avoid cross-breeding them. But that doesn't mean all Guernseys are pure A2. Bulls don't care who they mate with and funny things can happen on farms, so Guernsey cows would need to be tested to be sure, like all others. Whether Origin is breaching a2MC's patents and trademarks I wouldn't know for sure. It's not using the a2 trademark with a small "a". If it's selling milk called A2 that is not pure A2, this may infringe US laws regarding truthfulness of labelling. Anyway, Origin's boss is doing a great job explaining the importance of drinking A2 and avoiding A1.

The a2 Milk Company has said it is confident that its suite of patents and trademarks will provide it with very good protection in the US. We'll see. The company probably doesn't want to spend too much money suing rivals in the courts. It does not aspire to control everyone selling A2 or to exclude all competition. What it does want is a fair playing field where it can reasonably acquire a decent chunk of the market based on its knowledge of the science underlying A1-A2 and its experience and technological know-how. And it wants to protect the A2 milk image and a2 brand . Again, all this is made clear in company documents available on the internet.

So there's nothing to stop competitors entering the market, but it won't be easy. Creating pure A2 herds isn't easy, and then ensuring product integrity is not easy or cheap either. To convert a typical dairy herd to pure A2 by selective breeding takes about a decade and involves some cost and loss of production. Herds are usually owned by farmers, not by the processing companies, so a commercial competitor has to persuade the farmers that the trouble and expense is worth it, and promise to pay them a premium at the end of it all. Very few farmers and processing companies worldwide are convinced of the A2 proposition, so they haven't even started the process as yet.

The only country where there is a big awareness of A2 among farmers and processing companies is Australia. In NZ, it's coming, and some farmers are quietly converting their herds, but Fonterra tries to tell them A2 is just a marketing gimmick. And in India, the world's biggest milk consumer, there's a huge political and public controversy because its native hump-backed breeds are (or were) all A2 originally but are now disappearing because of cross-breeding. It may become the first country in the world to require labelling to tell consumers the percentage of A1 and A2 in all milk sold.