Stock Analysis & Ideas

GSK stock facing the heat over the heartburn drug Zantac litigation

Story Highlights

UK-based pharma company GSK’s stock has been playing in the red zone since last week over fears about an upcoming court battle.

The shares of pharma giant GSK (GB:GSK) are trading down by 7.2% in the last five days amid fears over litigation over its heartburn medicine Zantac.

The company’s consumer products arm, Haleon (GB:HLN) also saw its shares plunge by 7% on Thursday, even though it’s not directly involved in the case.

GSK listed Haleon as a separate entity after it spun off its consumer healthcare segment last month.

The French pharma company, Sanofi (FRA:SNW) (GB:0O59) which marketed the drug between 2017 and 2019, also saw its shares dip by 13% on Thursday.

What is GSK famous for?

GSK, formerly known as GlaxoSmithKline, is among the leading pharmaceutical companies dealing in branded health products, with operations in 160 countries across the world.

GSK is known for its medicines for asthma, anti-depression drugs, antibiotics like Augmentin, and type 2 diabetes drugs in its pharmaceutical division.

Its famous healthcare segment products, which now are a part of Haleon, include products such as Sensodyne, nutritional health drinks, Ostocalcium, Panadol painkillers, and more.

The litigation drama

The impact on shares is due to the fact the case may go to trial this month.

After being on the market for many years, the heartburn drug ranitidine was withdrawn from sale in the U.S. in 2020. The FDA asked to withdraw the drug over claims that it contains a carcinogen known as NDMA.

The litigation has around 3000 plaintiffs and GSK has been named as a defendant.

GSK has issued a statement in its defence after the volatile movement in the share prices. It said: “The overwhelming weight of the scientific evidence supports the conclusion that there is no increased cancer risk associated with the use [of] ranitidine … Suggestions to the contrary are therefore inconsistent with the science, and GSK will vigorously defend itself against all meritless claims.”

The analysts’ view

The analysts look at upcoming trials as short-term challenges affecting the share price. But analysts are worried about the complexity of the litigation.

Emmanuel Papadakis from Deutsche Bank said, “These legal issues are likely to act as a short-term headwind for both GSK and Sanofi.”

Equity research firm Redburn remains quite positive for the companies and said, “Given there are multiple manufacturers of the drug as well as retailers and distributors named as defendants, this potentially reduces the absolute impact at the company level.”

David Risinger from SVB Securities commented, “The worry is overblown, suggesting the stock’s recent pullback presents a buying opportunity given the stock’s valuation and high-single-digit (earnings per share) growth prospects.”

On the other side – quarter results

Last month, GSK reported its results for the second quarter of 2022. This was the company’s first result as a focused pharma unit after the split of consumer products.

The company’s total sales were driven by sales of speciality medicines, vaccines, and general medicines. Total sales were up by 19% to £6.9 billion, with speciality medicine sales increasing by 44% to £2.7 billion. HIV sales were up by 14%.

The operating profit growth was 22% with an operating margin of 29%. The COVID-19 solutions had lower margins and it impacted the growth by around -16%.

The company is positive for the full year and has raised its guidance numbers. It expects its sales growth to be between 6% and 8% and adjusted profit growth to be between 13% and 15%.

View from the City

According to TipRanks’ analyst rating consensus, GSK stock is a Hold. The company has a total of ten ratings, including three Buy, six Hold, and one Sell recommendation.

The average price target is 2,036p, with a low and a high forecast of 1,630p and 2,625p, respectively. The price target is around 43% higher than the current price level.

Conclusion

Investors have soured on the stock in the face of the upcoming court case, but the bigger picture at GSK is rosy.

GSK will face some headwinds and the stock could remain volatile in the short term.

Disclosure

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