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Bubs share price soars on US baby formula shortage

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Bubs shares are up 45% following a deal with the Biden administration.

The Australian baby formula company has signed a deal with the Biden administration to send its products to the US, as the country battles baby food shortages.

Under the deal, Bubs will send 27.5 million bottles of formula to the US.

This is made up of 1.25 million tins.

In a statement to the ASX, Bubs says it will deliver the first 500,000 tins immediately.

Unsurprisingly, investors' reaction to the news was positive, with shares lifting 45% to 71 cents at the time of writing.

The news is lifting sentiment, with rivals A2 Milk having its share price appreciate by 9.95% to $4.75.

US President Joe Biden said it was good news as "safe infant formula" is coming to the US.

"We're doing everything in our power to get more formula on shelves as soon as possible," he said on Twitter.

What is causing the shortage?

A combination of factors is currently causing the shortage, which is seeing prices in the US soar.

The issues started back in February with the closing of the Abbot Laboratories' manufacturing plant in Michigan.

This led to the recalling of key baby formula products including Similac and EleCare.

And while Abbott said on Tuesday it plans to start production in its facilities from 4 June, it will take until 20 June to supply EleCare.

Adding to the problems is the American dairy industry.

Moves to protect them have seen importations of baby formula from Europe and Canada blocked.

The windfall for Bubs might only be for a couple of months, with the US government invoking the Defence Protection Act to speed up the production of formula. These measures are to off-set price gouging on the limited supply the country currently has.

What's next for Bubs?

The company says it can deliver at least 1.25 million tins in the coming weeks and months, which makes up 27.5 million bottles of infant formula.

As it currently stands, the company has 500,000 tins currently in stock and will begin manufacturing 750,000 more which were already planned and scheduled for completion in the next few months.

The company points out it will leverage its already established retail distribution footprint, aiding sales of the soon to be shipped formula.

In its investment note, Bubs says supply to existing Australian retailers and export markets remain unchanged, as the company has the ability to increase current production.

What does Bubs think of the deal?

Bubs Australia CEO and founder Kirsty Carr said the company said it welcomes the opportunity to support American families.

"Australia and the United States have relied on each other in times of crisis for more than 100 years,"

"This is no different and all credit goes to the US government for fostering initiatives that allow us to respond and assist," she said.

Bubs Australia promises the deal will not affect supply levels in Australia.

The company notes it has the capacity to triple production at the Dandenong factory.

According to the CEO, the facility is currently capable of producing 10 million tins of formula annually and can triple capacity to meet demand.

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At the time of publication, Matt Miczulski owned shares of PATH, ASAN, S and CRWD.

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