Shares in FTSE 100 pharmaceutical firm GSK (LSE: GSK) are now worth about 15% less than they were at the start of August.
GSK’s share price has tumbled as investors have priced in the potential costs of legal claims that heartburn medicine Zantac causes cancer.
However, this UK healthcare stock is now trading on just 11 times forecast earnings, with a dividend yield over 4%.
If management are correct to dismiss the Zantac cancer claims as “meritless”, I think GSK shares could be decent value at this level.
Could GSK shares go to zero?
GSK is facing around 3,000 individual personal injury claims in the US, plus a larger group action in Florida.
The company says that “the overwhelming weight of the scientific evidence” suggests that there is no increased cancer risk associated with Zantac. However, even if this is accepted in court, the legal process could be long and expensive.
It’s not possible to find a direct comparison to this situation. But I think it’s interesting to note that German chemicals group Bayer has so far allocated $16bn to settle long-running claims that Roundup weedkiller causes cancer.
In my view, it’s sensible to assume that GSK will face substantial costs relating to these claims. However, I don’t think there’s any doubt that the company will survive.
After all, GSK currently generates around £5bn a year of surplus cash.
I think the worst that’s likely to happen is that management might have to scale back growth investments and perhaps cut the dividend, in order to fund settlements.
What else do I need to know?
I’m not going to spend time trying to guess at the outcome of the Zantac trials. Instead, I’ve been taking a look at GSK’s recent trading. Is this healthcare business on track to deliver rising profits this year?
GSK has now split from its consumer healthcare division, Haleon (which might also face Zantac costs). This split means that GSK is now a pure-play pharma business with three divisions: vaccines, specialty medicines (eg, cancer treatments), and general medicines (eg, asthma inhalers).
Sales from these three divisions rose by 28% to £14,199m during the first half of this year. Adjusted operating profit rose by 33% to £3,951m during the same period.
CEO Emma Walmsley’s latest guidance for 2022 suggests that full-year sales should rise by around 6%-8%. Adjusted operating profit is expected to be 13%-15% higher.
When profits rise more quickly than sales like this, it tells me that profit margins are improving. That’s good news, too.
GSK share price: buy, sell, or hold?
I’ve learned from experience to be cautious about investing in companies with uncertain legal liabilities. In the US, especially, these can often end up higher than anyone expected.
However, GSK is a large, profitable business, and its debt levels should be lower following the Haleon split. I think the risks from the Zantac claims should be manageable.
For long-term investors, I think GSK could be a solid buy at current levels.
