"Puss" definitely has some negative connotations to it, and I'm almost certain that this is the reason why Playtonic opted to use "Puzz" instead. Especially considering the fact that the character is supposed to be friendly and helpful to Yooka and Laylee... it would seem strange to name a friendly, helpful character Dr. Puss.
"Puzz" retains the pun without drawing upon these negative connotations. I'm glad it was mentioned, because I remember wondering about the reasoning for the name when we first heard it. I was almost certain there was a pun in there somewhere and I'm surprised I never noticed until someone here mentioned it. Now it seems quite obvious.
I've seen an in-game screenshot of Dr Puzz, which cannot be posted on these forums for legal reasons, and I have to say I'm growing towards the design. Seeing her in the game environment, she doesn't look out of place. It works. I had no reason to worry.
I'm glad it's confirmed that there is a reason behind Dr. Puzz's design. Though I had a hunch that was the case, since she handles the transformations in Yooka-Laylee - thus the likelihood that she tried to transform herself at one point in time which backfired and turned her into this state. Also, her mutated appearance and the fact that she's using a machine to transform Yooka and Laylee (rather than using some kind of potion), reminded me of the movie called The Fly.
Dr. Puzz is also a nice call back to Mumbo Jumbo, in that both their appearance are not what they really look like. Perhaps at the end of Yooka-Laylee she succeeds in turning back to her normal self, where Mumbo failed because Grunty was never completely destroyed in the Banjo series.
Speaking of "fitting the environment", would be kinda cool if there were a character who changed clothes in every world, to fit where they were. Like how you change in Kingdom Hearts as you go world to world.
Just one though. Y&L could even make a small comment on it like "why are you the only one ever dressed for the occasion?"