Will Mead Johnson Nutrition Be Spoiled by Another Potential Scandal?

Last summer, infant formula maker Mead Johnson Nutrition (NYSE: MJN  ) was accused of conspiring to fix prices and engaging in anti-competitive practices in China. Having agreed to cut prices, change its sales and marketing practices, and pay tens of millions of dollars in fines, it now finds itself embroiled in yet another potential scandal there.

Source: Mead Johnson Nutrition.

In its annual report filed with the Securities and Exchange Commission the other day, Mead Johnson revealed the SEC is investigating the company for possible violations of the U.S. Foreign Corrupt Practices Act, which often deals with allegations of bribery of foreign officials. It says it's also investigating the allegations that certain expenditures made in connection with promotion of its products violated its own policies, let alone federal law.

There must be something about the Chinese milk market that invites skullduggery, because consumers there have suffered through one scandal after another, often with deadly result. In 2004, dozens of babies died and hundreds became malnourished after being given fake milk powder. Hundreds of others developed "big-head disease," a form of malnutrition. In 2008, infant formula producers again tainted supply, having added melamine to boost protein levels. Batches of Synutra International's (NASDAQ: SYUT  ) products were found to contain the industrial compound that's used to make plastic, and its stock cratered. Worse, six infants died from the episode and hundreds of thousands more were hospitalized with kidney problems and illness.

Synutra was hit again two years ago after reports arose that twin infants using its powdered milk became ill and one of them died, though the company denied its products were the cause. Last year, formula maker Yili had to initiate a recall because of high levels of mercury. 

Fears over the quality of the domestically produced formula led to a huge market opportunity for international producers. Multinational corporations like Nestle, Danone, and Mead Johnson saw parents clamoring for their formula, going so far as to pay double the price in foreign countries and having it shipped to China. Supermarket chains like Tesco were forced to impose rationing as a means of limiting the practice, but demand was so great that prices soared by as much as 30%, with analysts predicting the industry could become a $25 billion market opportunity by 2017.

In the wake of the price-fixing accusations, Nestle and Danone immediately agreed to lower their prices, while a number of other firms were fined more than $109 million. Mead Johnson, which makes Enfamil, paid $33 million, local producer Biostime paid $26 million, Abbott Labs paid $12 million, and Fonterra paid $720,000. 

In addition to infant formula, there's also been the widely reported problems Yum! Brands had in China with tainted chicken, and more recently Wal-Mart, with selling donkey meat snacks in the country that were found to contain the DNA of other animals, namely fox.

There is a huge opportunity for international suppliers to capitalize on the distrust locals have of domestically supplied products. But whether it's through tainted products or paying bribes, they're likely to ruin it if they continue to run roughshod over the trust they've been shown.

Having just come off having its reputation tainted in the price-fixing scandal, Mead Johnson Nutrition does itself and its investors no favors with a new bribery scandal.

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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