Reckitt shares plunge over baby formula fears

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Shares in Reckitt Benckiser have slumped by 9% to a 10-year low after a US court ruling that a baby formula produced by rival Abbott Laboratories had caused a little girl to develop fatal necrotising enterocolitis (NEC), a bowel disease, says Jack Simpson in the Guardian. The verdict, which saw Abbott ordered to pay $495 million (£385 million) in damages, follows similar judgments against both companies over their formulae for premature babies. With Reckitt due to face its own NEC-related trial in September, investors are “waiting to see whether the company will be subject to further payouts”.

The lawsuits amount to little more than a “shakedown” against both firms and their “life-sustaining formula for pre-term infants”, which only makes them a few million a year in sales, says The Wall Street Journal. Experts think the causes of NEC are “unclear”, with recent trials showing “that the formulas and fortifiers don’t increase the incidence of NEC”. But both companies may be forced “to pull their products from the market”. This in turn could have “consequences for the health of premature infants”, with Abbott’s CEO already warning of a “public health crisis” if the verdict is allowed to stand.

What this means for Reckitt

The verdict is “close to a worst-case scenario” for Reckitt, says Alistair Osborne in The Times. Note that “litigious” US lawyers have already “lined up another thousand cases”, picking jurisdictions where juries are said to be “particularly amenable to big awards”. Reckitt’s liability has been estimated at between £400 million and £8 billion. This also makes its “belated” plans, which it outlined last week, to sell off infant-formula maker Mead Johnson, which Reckitt bought for $16.6 billion in a “howler” of a deal, “even more fanciful”.

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The prospect of additional delays to any sale of Mead is a pity because management’s overall plans for streamlining the company are “eminently sensible”, says Lex in the Financial Times. As well as selling the baby formula division, it will get rid of the “low-growth home-care products”, including Cillit Bang and Air Wick Air Fresheners, which comprised around 30% of Reckitt’s £14.6 billion of sales last year. It should therefore be able to keep its “power brands” – across health, hygiene and home – in a “higher-growth, higher-margin business” with £10.3 billion of sales. If these plans are thwarted then it “will face renewed calls for a more radical overhaul”.

Even if the legal problems surrounding the baby formula are resolved, restructuring Reckitt may take a long time, says Karen Kwok on Breakingviews. The home-care assets “won’t be sold until the end of next year”. What’s more, Reckitt’s board “hasn’t said whether it will return the money to shareholders or invest in the business”. Inflation is also making it harder to pass on costs to consumers. No wonder, then, that investors were “not convinced” by Reckitt’s plans even before the latest setback.

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