After opening at 330p on its stock market debut, the Haleon (LSE: HLN) share price has sunk to about 248p. Haleon inherited GSK‘s consumer healthcare portfolio — including brands such as Beechams, Night Nurse, Sensodyne and Panadol — when it spun off on July 18, 2022.
This sounds like a decent stock. So, why has it performed poorly?
Zantac lawsuits
In 2020 the US Food and Drug Administration (FDA) requested Zantac be pulled from the market. European regulators followed suit over concerns the heartburn drug appeared to produce high levels of a cancer-causing chemical when heated. A couple of thousand personal injury cases were then launched.
A UBS research note about the risks to Sanofi from the trials, the first of which started at the end of August 2022, kicked off a sell-off in several healthcare companies’ stocks. This happened on 10 August, and the Haleon share price started tumbling on that day. But where is the link to Haleon?
GSK marketed over-the-counter (OTC) Zantac in the US through a joint venture with Warner-Lambert between 1996 and 1998. Pfizer had the rights between 2000 and 2006. GSK and Pfizer combined their consumer healthcare businesses in 2019. The combined business was later spun off to form Haleon.
Is Haleon at risk?
Haleon has said in a statement that it is not a party to nor primarily liable for any Zantac claims. It has never marketed it in the US. But, Haleon also said that it might have to compensate GSK or Pfizer or both if they are held liable in respect of OTC Zantac if certain conditions are met.
Sanofi, the prime target of the lawsuits, has stated that “the data shows there is no evidence of consumer harm from real-world use of Zantac“. GSK said in a statement that the FDA and European regulators have ruled that there is no evidence of a causal association between treatment with Zantac‘s active ingredient Ranitidine and cancer development.
On balance, I will say that the risk of Haleon having to make a substantial payout is low.
Where next for the Haleon share price?
Unilever offered £50bn to GSK for what is now Haleon in January 2022. The pending Zantac lawsuits were public knowledge. Unilever would have been aware of them and Haleon’s 6% annual revenue growth since 2019. It would have seen this was a solid-cash generating business with operating margins of around 17% over the last couple of years.
Some may say that Unilever would have overpaid if it had been successful. But, consider that the average takeover premium for healthcare businesses was 27.3% in 2018, according to Statista. Unilever’s offer was 20% above Haleon’s market-determined debut enterprise value (EV) of £40bn. If anything, Unilever might have made a lowball offer.
Although those lawsuits could drag on and keep the Haleon share price depressed, I think this is a buying opportunity. If I add the £10.5bn of debt Haleon inherited from GSK to its current market cap of about £23bn, its current EV is about £33.5bn. Unilever thought it was worth £50bn.
The company has not declined operationally since Unilever’s offer, as far as I can tell. I will add to my Haleon position in my Stocks and Shares ISA.
