No Change to GSK Shares' Fair Value Estimate Despite Litigation Risk

Despite news of future litigations heading in GSK's way Morningstar analyst, Damien Conover, maintains the stock's fair value estimate.

Christopher Johnson 4 June, 2024 | 9:43AM
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Morningstar analysts will make no changes to their Fair Value Estimate for GlaxoSmithKline (GSK) shares following a weekend ruling that exposes the company to litigation risk.

GSK is currently litigating to contain complaints that its heartburn drug Zantac has allegedly caused cancer. But despite a Delaware State Court allowing Zantac experts to give evidence in future cases, Damien Conover, director of healthcare equity research at Morningstar, is holding firm to GSK's Fair Value Estimate of £22.00.

Key Morningstar Metrics For GSK: 

• Morningstar Fair Value Estimate: £22.00.
• Morningstar Rating: ★★★★ 
• Morningstar Economic Moat Rating: Wide 
• Morningstar Uncertainty Rating: Medium 

Despite the increased litigation risk, Conover believes GSK is likely to be successful in its appeal process.

"We expect a high probability of a favourable GSK appeals ruling for a number of reasons," he says.

"These include a federal ruling that didn't allow Zantac plaintiff experts; 16 clinical studies showing no link between Zantac and cancer; the US Food and Drug Administration clearing Zantac to re-enter the market; and recent litigation wins by GSK, including a case in Chicago that was hand-picked by the plaintiffs."

Though he accepts the ruling will create a risk "overhang" for the British pharmaceutical giant over the next twelve months, Conover expects the Delaware court to accept the appeal in the next two months.

"As of the beginning of the year, the vast majority of US state plaintiffs (close to 72,000) out of the total (close to 78,000) are located in Delaware, making the Delaware appeal more important," he says.

"Even if the appeal doesn't go in GSK's favour, the Daubert Ruling only states that plaintiff experts can be used in future trials."

"The ruling doesn't say GSK's Zantac caused cancer. The easiest pathway to dismiss the plaintiffs' cases would be a positive appeal against allowing plaintiff experts. Otherwise, GSK may need to litigate several cases one by one before likely entering a larger settlement."

Conover now expects the Zantac litigation will cost around $1 billion (£781 million), however if the appeal is unsuccessful, he suspects that costs will increase due to higher legal expenses and settlement payouts.

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Christopher Johnson  is data journalist at Morningstar

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