Perrigo's Infant Formula Fallout: A Catalyst for Reckoning or a Temporary Mispricing?

The immediate catalyst for Perrigo's turmoil is a double blow: a securities class action lawsuit filed on November 17, 2025, and a strategic review of its infant formula business announced just two weeks prior on November 5. This sequence frames a critical question: does the market's sharp reaction represent a temporary mispricing, or is it a reckoning for deeper, lasting damage?

The lawsuit, filed in the Southern District of New York, alleges Perrigo misled investors for over two years. It targets the period from February 27, 2023, to November 4, 2025, accusing the company of overstating earnings and cash flow from its infant formula segment. The core allegations are specific and damaging: the business acquired from Nestlé suffered from significant underinvestment in maintenance, required substantial capital and operational expenditures above stated estimates, and had significant manufacturing deficiencies. In other words, the deal that was supposed to be a strategic expansion became a hidden liability that inflated financial results.

Management's own actions confirm the severity of the problem. The announcement on November 5 of a strategic review of its infant formula business was a clear signal of recognition. This review, part of a broader plan to stabilize and streamline, directly addresses the unit's challenges. The market's immediate reaction was brutal, with the stock collapsing 25.2% on November 5. That move priced in the worst-case scenario: a failed acquisition, hidden costs, and a damaged narrative.

The setup now is one of event-driven tension. The lawsuit provides a legal and financial framework for the stock's collapse, while the strategic review offers a potential path forward. The key for investors is to assess whether the current price fully discounts the legal and operational fallout, or if the strategic review could yet unlock value by forcing a disciplined resolution.

Financial Impact: From Misstatement to Strategic Reassessment

The market's reaction to the infant formula fallout has been severe and multi-layered. The stock's 25.2% collapse on November 5, 2025 was the immediate punch, but the damage has compounded. From its pre-acquisition peak, the share price has since fallen by more than 50%. This isn't just a correction; it's a fundamental repricing that discounts the entire narrative of the $170 million Nestlé deal.

The financial results leading up to the strategic review paint a clear picture of the business's struggles. In the third quarter of 2025, the company reported organic net sales down 4.4% year-over-year. A significant portion of that decline--2.8% from businesses under strategic review, which includes both infant formula and oral care-highlights the drag these units were already exerting. The lawsuit's allegations of overstated earnings and hidden costs find a direct echo in the financials: reported operating income fell 9%, and adjusted operating margin contracted by 20 basis points.

The strategic review announced on November 5 is the direct corporate response to this pressure. It is explicitly aimed at accelerating cash flows and reassessing the Company's previously announced investment in this business of $240 million. This move signals that the promised $200–$300 million in annual savings from the "Supply Chain Reinvention Program" have not materialized as planned. Instead, the acquired Gateway plant has become a capital sinkhole, forcing management to re-evaluate its commitment.

The bottom line is a painful reassessment. The company is now forced to cut its full-year 2025 outlook due to the infant formula segment's underperformance and broader market softness. The strategic review is a necessary step to stabilize the portfolio, but it also confirms that the business was a strategic misfit from the start. For investors, the financial impact is clear: the stock's collapse has priced in the worst of the operational and financial damage. The event-driven question now shifts to whether this review can still unlock value by forcing a disciplined exit or restructuring, or if the damage is already fully reflected.

Valuation & Risk/Reward Setup

The stock's sharp decline has likely discounted the worst of the operational and financial fallout. The 25.2% collapse on November 5 and the subsequent drop of over 50% from its pre-acquisition peak price the deal's core allegations. The strategic review announced that day confirms the business was a capital sinkhole, not a strategic asset. For now, the valuation appears to reflect the reality of a failed acquisition and a damaged narrative.

The immediate near-term catalyst is the legal process itself. The deadline for filing a lead plaintiff motion in the securities class action lawsuit is January 16, 2026. This date is critical. It could accelerate proceedings, force the company into settlement talks, and crystallize the potential financial exposure. The appointment of a lead plaintiff often signals a more aggressive pursuit of damages, which could pressure management to resolve the case quickly. The stock may remain volatile as this date approaches, with any news on the motion or settlement negotiations acting as a direct trigger.

The key risk, however, remains operational and balance sheet pressure. The strategic review is reassessing the previously announced investment in this business of $240 million. This suggests the company may write down that capital or sell the unit at a significant loss. Either outcome would further pressure the balance sheet and validate the lawsuit's core claim that Perrigo concealed the true cost of the acquisition. The review's focus on accelerating cash flows underscores the urgency, but it also implies the business is not generating value on its own.

The risk/reward setup is now event-driven and binary. The downside is clear: a write-down or loss-making sale would confirm the worst-case scenario and likely trigger another leg down. The upside is contingent on the strategic review leading to a disciplined, value-maximizing exit that mitigates the financial damage. Given the stock's deep discount, any positive resolution to the review or a favorable settlement could provide a tailwind. But the stock remains down significantly from its highs, indicating lingering investor skepticism about the company's ability to execute a clean exit and restore its financial credibility. The January 16 deadline is the next inflection point to watch.