Reckitt’s share price was up 10% in early trading on Nov. 1 after the company, together with Abbott, recorded a first victory in the ongoing litigation over necrotizing enterocolitis, or NEC, linked to its premature infant formula.
This is a significant win for Reckitt after adverse rulings in two previous trials battered its share price this year. We believe this paves the way for previous damages to be substantially reduced on appeal and is positive for the many ongoing cases across the US.
We think it’s encouraging that the win came from a jury in Missouri—a state known for generous jury awards, and where the prior $495 million verdict against Abbott was delivered.
Preemie formula is an essential product that only accounts for around $9 million of sales for Abbott and less than $1 million for Reckitt. A potential exit from this market by the two manufacturers could be devastating for preemies who lack access to adequate amounts of breast milk.
The Bottom Line
We confirm our £65.00 fair value estimate and our wide moat rating. We have argued that this year’s negative share price reaction was likely more pronounced than any potential settlement the company might face.
Key Morningstar Metrics For Reckitt Benckiser Group RKT
We believe this outcome will go a long way toward restoring investor confidence. We have previously estimated a potential settlement of $1 billion-$3 billion if the companies move to eliminate the uncertainty.
Much will hinge on the appeals court’s outcome, but this may give them the ammunition to overturn the previous damages, lowering the risk of a substantial settlement.
What Could Happen Next With Reckitt?
This development boosts confidence in Reckitt’s transformation journey and the shareholder value that can be generated from the planned divestment of the Mead Johnson infant nutrition business.
However, the timing of a potential deal remains uncertain. The US Food and Drug Administration, the Centers for Disease Control and Prevention, and the National Institutes of Health issued a joint statement in early October stating that there is no conclusive evidence that preterm infant formula causes necrotizing enterocolitis.
The statement emphasized the critical nature of the product for those instances when human milk is insufficient.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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