It took just 98 minutes for a dozen ordinary Americans in an Illinois court to unanimously land a $60mn blow against a consumer goods giant based thousands of miles away in the UK.
Reckitt, headquartered in the town of Slough just outside London, was handed the verdict last week after a jury voted in favour of a mother who said her baby died after consuming one of the company’s formulas for premature babies — Enfamil Premature 24 — in a US neonatal intensive care unit.
The damages sum awarded makes Reckitt the latest European company in danger of falling foul of the US’s mass tort litigation system, following Bayer and its glyphosate lawsuits, and Boehringer Ingelheim and blood thinners.
It is also one of a series of calamities at Mead Johnson, the US baby formula business Reckitt acquired for $17.9bn in 2017, making the home of Nurofen and Dettol more vulnerable to activist calls for a break-up.
Investors are likely to call for Reckitt to settle, analysts said. However, Reckitt’s chief executive Kris Licht has vowed to overturn the damaging verdict and the company is seeking to appeal.
“It is going to be hard to button this thing up nicely,” said Brian Fitzpatrick, an expert on class-action litigation at Vanderbilt University, arguing that Reckitt — which is facing many more claims in relation to Enfamil — would have to fight it out over several trials. “That is going to take a while, and it is going to require victories,” he said.
Shares in the company plummeted last Friday as investors scrambled to calculate how big a dent further plaintiff awards might leave, and whether its liability could reach the dizzying amounts shelled out by Bayer and others. Analyst estimates vary from between £400mn and £8bn.
London-listed Reckitt, whose portfolio also spans hygiene products such as Finish and consumer health brands including Strepsils, has frustrated investors over the past year with a spate of bad news, including an accounting issue in its Middle East business, which emerged in its full-year results a few weeks ago.
Shares in the group have fallen more than a quarter over the past year.
The company’s push into baby formula through the acquisition of Mead Johnson is widely seen to have been a failure. In 2020 the company reported a £5bn writedown on the acquisition, which it attributed to falling birth rates and local competition in China. Reckitt sold its Chinese formula businesses to private equity firm Primavera the following year.
Last year, the US food and drugs watchdog sent Reckitt and two other manufacturers a warning over its baby formula manufacturing safety standards.
Reckitt previously sought a sale of the business in 2022. Speaking to the Financial Times following the Illinois verdict, Licht did not confirm or deny that the company was exploring a sale again.
“Who is going to want to buy an infant formula business?” asked one consumer sector banker, adding that as well as the litigation liability, the category as a whole was unattractive due to declining populations in Europe and North America.
In the latest case, the US plaintiff’s baby died of Necrotising Enterocolitis (NEC), an often fatal condition in premature infants. Feeding a child breast milk or a breast milk formula is known to substantially reduce the risk of NEC, and the plaintiff in Illinois successfully claimed that Reckitt failed to warn that formula feeding increased the risk.
Reckitt rejected the verdict by arguing it had no scientific basis. “We are pursuing all options to have the verdict overturned and we believe the science is on our side,” Reckitt said.
“When a premature infant goes into the [neonatal intensive care unit], because they are premature, they are at risk of NEC regardless of what they are feeding,” said Susan Sholtis, who heads up the company’s nutrition division, adding that neonatal doctors “believe if we don’t have these options, babies will die in the NICU.”
The US plaintiff’s lawyers are hoping future juries will be more likely to be swayed by grieving parents than a large corporation.
There are approximately 450 claims filed in federal courts against Mead Johnson and rival manufacturer Abbott Laboratories in relation to NEC, grouped together under one judge. Four cases have been selected as so-called bellwether trials but are not expected to proceed this year.
Once appealed, the award could be reduced by a judge but that process could take more than a year, and there are thousands more state claims waiting in the wings, filed on behalf of plaintiffs in Illinois, Missouri, California and Pennsylvania, among others.
The next state trial is scheduled to take place in St Louis, Missouri, in the autumn. Lobbyists at the American Tort Reform Association, which campaigns against excessive awards, has ranked the city as one of its “judicial hellholes”, arguing that judges there “allow junk science to be presented in their courtrooms” and courts “are a prolific producer of nuclear verdicts”.
A representative of the 22nd Judicial Circuit in Missouri declined to comment.
Reckitt is hoping that some of the cases will be thrown out during the lengthy pre-trial process over a lack of evidence.
Bernstein analyst Bruno Monteyne said that while the company’s legal arguments were in his view sound, the situation would remain uncertain for another 1-2 years.
“Many investors do not need to have a position on Reckitt, and may choose to simply ignore the stock while this is ongoing,” he said, arguing that they may prefer to focus on companies in the attractive consumer health category “without any of the accounting scandals, or exposure to risky US infant nutrition”.
Despite the company’s misfortunes, analysts agree that Reckitt is at its core a strong business, with successful brands in a desirable category. Throughout the cost of living crisis consumer health businesses have benefited from customers not trading down to cheaper alternatives, as they have in other sectors such as packaged food.
Barclays analysts see £2bn as “an extreme worst case”, and expect a gradual share price recovery in the coming months.
Jefferies analyst David Hayes, who estimated the total liability at between $2.5 and $7.5bn, argued that Reckitt should seek settlement soon.
The company had previously agreed to pay up to $1.4bn to settle a long-running investigation into the sale and marketing of an opioid addiction treatment by its former subsidiary Indivior.
But if Reckitt does offer to settle, individuals could still choose to opt out of a settlement and pursue their claims individually.
A more immediate threat is if activist investors begin to circle.
“If an activist investor comes forward, the most likely strategic option they’ll push for is probably to break up the company at this point,” said Barclays analyst Iain Simpson. “But before that can happen, legal risk needs to come off the table.”
Any pressure from investors for a settlement may damage Reckitt’s negotiating position with plaintiffs. “Publicly you’d expect Reckitt to be saying they’ll appeal everything until the end of time. That strengthens their hand in negotiations,” said Simpson.
He added that in a worst-case scenario, the company could split off Mead Johnson “to create a firewall between the legal risk there and the rest of the company.”
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