- Shares up 9% to £51.08
- Reckitt’s baby formula business Mead Johnson cleared
- Mead Johnson bought by Reckitt in 2017
Shares in Reckitt Benckiser (RKT) skyrocketed on Friday morning after its US baby formula business Mead Johnson was cleared of liability in a US trial linking the consumer goods group’s premature-baby formula Enfamil to bowel disease.
A state court in St Louis, Missouri on 31 October rejected claims that formulas produced by Abbott Laboratories (ABT:NYSE) and Reckitt division Mead Johnson caused necrotising enterocolitis (NEC) - inflammation of the bowel that can require invasive surgery.
‘Today’s verdict is consistent with the scientific consensus that there is no established causal link between the use of specialised pre-term hospital nutrition products and NEC, and that where human milk is unavailable or when supplementation is necessary, specialised pre-term hospital nutrition products can provide essential, life saving nutrition,’ said Mead Johnson in a statement.
On 15 March, Reckitt Benckiser’s stock plunged to its lowest level in a decade on the revelation a US jury had awarded $60 million to a mother who claimed her infant died after consuming the group’s Enfamil formula.
Baby formula manufacturing rival Abbott who was also implicated in the US trial was cleared of liability.
Abbott’s shares jumped on the news rising nearly 5% to $113 in pre-market trading in New York.
Jefferies analysts said: ‘With the litigation risk still not done, the stock is likely to move somewhere between circa £47 today and towards £55, based on pre-litigation valuation levels, we think. We note our upside price target is £59 and our downside price target is £35.’
More than 1,000 similar cases are still pending, and the companies have been held liable in other trials.
According to Bloomberg Intelligence estimates, Abbott and Mead Johnson face up to $2.5 billion in liability exposure over the litigation.
EXPERT VIEW
Russ Mould, investment director at AJ Bell said: ‘Consumer goods firm Reckitt enjoyed a meaningful relief rally off the back of a ruling in the latest trial on disease risks associated with its baby formula.
‘There has been nothing but bad news on this front for Reckitt for some time so it’s not a surprise this chink of light has been seized upon by investors in a positive way. There are still plenty of outstanding cases so this issue will not go away for Reckitt overnight, but it certainly represents a crumb of comfort for long-suffering shareholders.
‘An eventual resolution of this issue could be a precursor to selling the Mead Johnson business which has been nothing short of a disaster for Reckitt since it was acquired for $16.6 billion in 2017. The company is already on track to sell a portfolio of home care brands like Air Wick and Cillit Bang by the end of next year as CEO Kris Licht continues his restructure of the business.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Sabuhi Gard) and the editor (Martin Gamble) own shares in AJ Bell.
