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Opioid Crisis Threatens Reckitt's Reinvention

Opioid Crisis Threatens Reckitt's Reinvention

(Bloomberg Opinion) -- Reckitt Benckiser Plc has lost its halo. The consumer good group’s strategy now looks to be a hostage to U.S. lawyers.

Under outgoing CEO Rakesh Kapoor, Reckitt had been simplifying and refocusing its portfolio. This effort was expected to culminate in the division of the business into two separate companies: one focused on household products such as Cillit Bang cleaner and Finish dishwasher tabs, the other on consumer health treatments like Nurofen painkillers and Gaviscon heartburn tablets.

That split hasn’t been announced – but investors have been excited by the possibility since Reckitt moved to separate the two business internally in 2017.

The reinvention could now be hampered by the aftershocks from the Justice Department’s indictment of Indivior Plc, the pharma business Reckitt spun off back in 2014. The drugmaker faces a $3 billion fine after U.S. prosecutors alleged it lied about the dangers of its opioid addition treatment to boost sales. Indivior, for its part, says it believes the allegations are “flat wrong.”

Reckitt isn’t the subject of the U.S. indictment. It is, in theory, protected by indemnities detailed in Indivior’s prospectus. But the fact remains that the former parent benefited from the drugmaker’s cash flow before the split and is a much deeper-pocketed target for claimants: its market value is about 200 times greater.

Indeed, Reckitt has long said it faces potential liabilities from DOJ and other investigations relating to its previous ownership of Indivior. A $400 million provision was made in 2017, with the warning there was no certainty of settlement and the final bill could be “materially higher.” In its 2018 annual report, it added that the cost could be “substantially higher.” 

Where that 400 number goes is unclear. What seems increasing likely is that the business will struggle move to forward until the matter is resolved.

A healthcare-household split looks hard until it is clear which side would pay any outstanding liabilities, as analysts at Credit Suisse note. True, the healthcare piece would be the much larger entity – around twice the size of household. But the latter would still be a sizable asset, and lawyers might try to frustrate any separation by arguing that Reckitt was trying to protect a portion of its assets from any claims.

This issue lurked in the background when Altria Group Inc. was preparing the full separation of its Kraft foods unit in 2007 while it was still grappling with litigation over smoking-related diseases. 

More broadly, Reckitt can ill-afford to be enmeshed in a highly public controversy in the U.S. It’s a big market for the consumer healthcare business, and accounts for almost 60 percent of group sales. New healthcare treatments will require U.S. regulatory approval after all.

It's true that Reckitt won’t be ready to do the splits until mid-2020 anyway. Nevertheless, these dynamics surely weaken Reckitt’s negotiating position in any settlement talks. As analysts at Citigroup point out, if the next CEO’s first act was to deal with the U.S. legal issues, it would make it hard to monetize the household business simultaneously. Settling litigation normally comes at a cost. In this case, it looks considerably more than usual.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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