By Richa Naidu

LONDON (Reuters] – The U.S. crisis in baby formula has boosted Reckitt Benckiser profits, helping it take over the market for $5.8billion annually. Now, the challenge is to keep there.

The business is reportedly being sold.

Reckitt has increased production of Enfamil since U.S. competitors Abbott Laboratories (NYSE:) In February, dozens of American products were recalled after parents complained about infants getting bacterial infections.

Last week, the British consumer goods firm, which increased formula production by 30% last year, informed Reuters that it now accounts for over 50% of all US baby formula supplies. This is a significant increase from the approximately 3% before the crisis.

Infants are more likely to choose the brand their parents prefer. Reckitt representatives stated that they were trying to retain customers while Abbott products such as Similac go out of stock.

This week, the company stated that it is feeding 211,000 additional babies after this recall.

These are very high stakes. Reckitt is reportedly looking for a way to concentrate on his higher margin consumer and household brands, which range from Durex condoms to Dettol disinfectants. Reckitt had reportedly been trying to sell the formula company since long. The Wall Street Journal stated that it had renewed its attempt to sell the formula business on Friday, which could bring in as much as $7 billion.

The U.S. crisis might not give the U.S. a quick boost, however.

According to the U.S. Food and Drug Administration, Abbott is on track for reopening its Michigan key baby formula factory within one or two week. But Robert Califf (FDA Commissioner) told lawmakers that the wait would continue until July so they could stock up on their products.

Although Abbott’s recall presents an opportunity to other companies, like Neocate maker Danone and Gerber manufacturer Nestle, Reckitt is the one that has most benefitted, since it was No.2 before the crisis.

1. April Barclays (LON: ) Reckitt raised its 2022 sales forecast to 4.4% from 4.0%. It also saw a rise to 7.4% at its nutrition division that includes baby formula, up from 5.0%.

It raised its forecasts to 6.0% in the group, and 12.4% in the nutrition division less than five weeks later.

Refinitiv says that Reckitt analysts have averaged a 4.35% increase in their earnings projections for Reckitt over the past thirty days, to around 311 pence per share.

Iain Simpson from Barclays said, “Near-term, Reckitt is going to have the largest financial impact.” The big question now is what percentage of recent market share Reckitt retains once Abbott has been removed from shelf.

Will IT LASTEN?

The increase in sales would, by itself, result in higher profits. Margins were further enhanced by the United States’ announcement that it would temporarily reimburse the baby formula cost for families with low incomes who are subject to government discounts in States contracting with Nestle and Reckitt.

To be the only provider of formula to low-income households under the Women, Infants, and Children (WIC), companies must bid for state contracts. They offer discounts to states in return for submitting their bids.

This rebate was effectively covered by the government’s intervention.

Bruno Monteyne, Bernstein analyst said that it is great for profitability and top-line because the formula sellers don’t have to pay a rebate to state governments. It will likely add at most 20-30 basis points to higher margins as long as it lasts.

Simpson of Barclays agreed to not be bound by WIC contracts. They estimate they have a margin between 5% and 40-45% on non-WIC contracts.

Analysts warn that Reckitt’s temporary sales boost could be temporary and may lose its customers.

Bernstein’s Monteyne stated that Reckitt may benefit from Abbott’s reputation damage longer-term, but he also noted that the U.S. had overcome a similar backlash in just one year from the 2010 formula recall.

He stated, “There is a good precedent.”

Waverton Investment Management is also a Reckitt shareholder. They believe the short-term market share gains will not be sustainable.

Tineke Frikkee, Waverton’s fund manager said that the U.S. was looking for additional sources to meet demand. Reckitt will lose its market share and Abbott will eventually get their formula back onto shelves.