The crisis over contaminated baby formula has escalated with product recalls following recalls in recent weeks. On Friday, the Paris prosecutor said he had opened investigations into five companies that make the formula. Parents and investors are nervous.
The investigation concerns possibly contaminated infant nutrition products distributed by three of the world's largest dairy groups, Be protected, danoneand privately held Lactalis, as well as smaller brands Babybio and La Marque en Moins.
The recalls were due to possible contamination of cereulide, a heat-stable toxin that can cause nausea, vomiting and diarrhea when consumed. While symptoms usually resolve within a day, they can lead to more serious complications.
The Paris prosecutor said he opened his investigations for “deception regarding goods that represent a danger to human health,” a crime punishable by up to seven years in prison and a fine of up to 3.75 million euros ($4.45 million), according to a translated statement. CNBC reached out to the companies mentioned for comment.
In January, Nestlé CEO Philipp Navratil said he was sorry for the concern and disruption this had caused to parents and customers. “Let me assure you that your safety and well-being is our top priority,” he said.
The prosecutor's office took over the case due to the large number of complaints throughout the country, he said.
Additionally, the French Ministry of Health is investigating three reported infant deaths in cases where consumption of infant formula affected by the recall was reported. On February 11, it said that no causal link had been established and that judicial investigations were underway.
Retreats around the world
Nestlé published a “sequence of events” on January 29, saying it found traces of cereulide in batches of some of its finished products in early December at its factory in the Netherlands.
On December 10, it informed Dutch authorities, the European Commission and potentially affected countries about the potential risks, according to the company's schedule, which added that it began recalls on the same day of all batches produced: 25 products in 16 countries in Europe.
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In January, the Swiss company issued its first major public recall of the SMA, Beba and Little Steps brands across Europe, followed by recalls by French peers Danone, the maker of best-selling products Aptamil and Cow & Gate, and Lactalis.
So far, there have been recalls in more than 60 countries.
The source of contamination was traced to an ingredient supplier of arachidonic acid (ARA) oil, which is often added to baby formula, Nestlé said.
The consequences have increased over time because many different companies and multiple brands used this provider. The supplier has not been officially named. The UK Food Standards Agency said ARA oil supplier was no longer used by Nestlé or Danone.
It still urged parents and caregivers to check if the formula products they have at home were among the lots listed in the recalls.
On February 2, the European Food Safety Authority established a threshold level for cereulide toxin. There had previously been no harmonized standard because of its rarity, said Barclays analyst Warren Ackerman.
Earlier this month, UK authorities said they had received at least 36 clinical reports of babies showing symptoms consistent with cereulide poisoning.
Nestlé and Danone report results this week
Nestlé's infant formula accounts for about 5% of revenue, and the company has revealed that recalled products account for only about 0.5% of revenue. “The higher 5% figure is probably more relevant given the likely consumer confusion and brand equity risk,” Bernstein analyst Callum Elliott said in January.
“For Danone, infant formulas are more important: according to our estimates, they represent around 21% of the group's revenue, and more than that in terms of profitability.”
Nestlé and Danone are scheduled to report results later this week, where investors hope to get a better idea of the financial impact of the recalls.
Shares of Nestle and Danone have lagged the European benchmark so far this year amid recalls of the companies' baby formula products.
As investors worry about the financial fallout and potential reputational damage, Nestlé shares have risen 1.7% so far this year, while Danone shares have lost 5.5%. The pan-European Stoxx 600 The index is up 4.6% over the same period.
Shares of Nestlé and Danone plunged in late January, at the height of the recall announcements, but have since recovered some of their losses.
– CNBC's Charlotte Reed contributed to this report.
