GSK Shares Dive as Litigation Woes Deepen

The company will now likely face as many as 70,000 cases from plaintiffs who blame its heart burn drug Zantac for their cancer diagnoses

Christopher Johnson 3 June, 2024 | 11:16AM
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Shares in GSK opened with an almost double-digit plunge today after a weekend ruling opened the firm to a legal pandora's box concerning heartburn drug Zantac, which plaintiffs allege causes cancer.  

GSK's share price dropped 9.5% in early trading to £15.98 from £16.16, well below Morningstar analysts' most recent Fair Value Estimate of £22.20p.

This shift comes as a Delaware judge agreed scientific evidence produced by litigants on the effects of Zantac was admissible.

The decision exposes the business to around 70,000 complaints from litigants, who allege their cancer diagnoses originate from an exposure from carcinagen NDMA. In 2020, the US Food & Drug Administration had pulled Zantac from shelves after it found low levels of a "probably carcinogen" in samples of the drug.

Key Morningstar Metrics For GSK:

• Morningstar Fair Value Estimate: 2,200p
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

If found liable GSK could now face heavy compensation liabilities. The case also puts privately-owned pharmaceutical companies like Boehringer Ingelheim, alongside GSK competitor Sanofi (SAN), into the firing line because they marketed the drug too.

In a statement GSK said it would "immediately seek an appeal."

"[The] scientific consensus is that there is no consistent or reliable evidence that [the drug previously sold as Zantac] increases the risk of any cancer," it said.

"GSK will continue to vigorously defend itself against all claims."

Morningstar Analyst View of GSK Shares

Morningstar analyst and director of equity strategy Damien Conover is yet to issue an updated note on GSK's Fair Value Estimate. However, in a note in May, he said GSK shares remained undervalued because the market did not fully appreciate the company's solid product portfolio.  

"In the [first] quarter, total sales increased 13% operationally (excluding Covid-19 sales), but we expect a slight deceleration in growth over the next three years as recent launches slow," he said at the time.

"HIV drugs (representing over 20% of total sales) gained 14%, supported by strong gains from long-acting drugs, which should continue and provide a cushion for the key 2028 patent losses on short-acting HIV drugs."

However, litigation litigation risk is a contributing factor to Conover assigning the company's shares a Medium Risk Rating.

"We assume a more-than-50% probability of GSK seeing future costs related to product governance ESG risks (such as off-label marketing or litigation related to side effects) and model base case annual legal costs at 2% of non-GAAP net income," he said.

"[But] the risk overhang of potential major legal costs related to Zantac litigation will likely weigh on the company's valuation."

This story will be updated as more information arrives on GSK's Fair Value Estimate

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Christopher Johnson  is data journalist at Morningstar

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