Sector Snap: Infant formula makers fall again

Infant formula makers drop as China investigates alleged price fixing; Mead Johnson downgraded

Associated Press

NEW YORK (AP) -- Shares of infant formula makers continued to decline on Wednesday as China investigates alleged price fixing and an analyst downgraded one of the companies named in the inquiry, Mead Johnson Nutrition Co.

On Tuesday the state-run People's Daily reported that companies, including Mead Johnson, Abbott Laboratories, Nestle SA, Danone SA and FrieslandCampina, are under investigation for violating anti-monopoly laws by charging high prices and limiting competition.

Abbott, Nestle and Mead Johnson said Tuesday that they are cooperating with the review.

Consumers in China have been wary to trust domestically produced infant formula after episodes of tainted and fake formula over the past decade killed more than a dozen babies and sickened hundreds of thousands. In May Chinese Premier Li Keqiang said the quality of infant formula should be tested with the same standards used for medicines and that each step of the production process must be monitored.

The companies named in the China investigation make up less than 60 percent of China's infant nutrition market, said Wells Fargo Securities analyst John Baumgartner. He said antitrust concerns were "somewhat premature."

Still, China and Hong Kong accounted for about 30 percent of Mead Johnson's 2012 sales, he said. He downgraded Mead Johnson's stock to "Market Perform" from "Outperform" and cut its price target to a range of $76 to $78. Shares fell 8 percent to $68.85 on Wednesday. They've lost about 13 percent this week.

Even so, he believes that if China fines the company, Mead Johnson should be able to manage it financially.

Larry Biegelsen, also of Wells Fargo Securities, kept an "Outperform" rating on Abbott, saying the company has relatively low exposure to the Chinese infant formula market — he estimates 3 percent of total sales.

Abbott's stock slipped 61 cents, or 1.8 percent, to $34.25.

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