GSK (LSE: GSK) shares are up 14% in the last month even though the saga of its heartburn medication Zantac rumbles on.
The ongoing legal proceedings hang like the sword of Damocles above the firm’s share price. They could spell disaster if a link between Zantac and cancer is proven. GSK could be on the hook for billions in payouts.
On the other hand, recent events hint that the legal dispute might be coming to a close. If it does blow over, then the current deflated share price might turn out to be a bargain. Here’s what I think could happen here, along with whether it’s enough for me to buy in.
For the uninitiated, Zantac is an antacid treatment that GSK developed in 1983. It became something of a ‘blockbuster drug’ – found in pharmacies worldwide, available over the counter, and the reason for big sales over many decades.
Then, in 2019, a potential link between the active ingredient – ranitidine – and cancer was found. Zantac was quickly pulled from the shelves and was formally withdrawn in 2020 by request of the FDA due to “probable carcinogen risk”.
But the key word was “probable” as far as that risk is concerned as there’s substantial doubt that the cancer link would hold up in a court of law.
I’m no expert, but from what I understand, ranitidine breaks down into a compound called N-Nitrosodimethylamine, or NMDA. Studies have found an association between NMDA and people who were diagnosed with cancer. The question is whether this is enough to prove that consuming Zantac causes cancer.
Potential damages
If it is, GSK will expect to pay out billions in damages. JPMorgan estimated the payout could go as high as $45bn. Even a fraction of that looks mountainous compared to last year’s $9bn EBITDA.
The news rocked the GSK share price, which went down 36% between 2020 and 2021. The shares still haven’t recovered to this day, despite earnings rising year after year.
So where are we now? Well, the lawsuits are ongoing and there’s plenty of them to keep track of. The most notable decision so far came last December when a Florida judge dismissed thousands of claims as being based on “flawed science”.
More hearings are on the way, with the next one in a California state court this November. That will be one to keep an eye on, but really, it seems to be anyone’s guess how this could turn out.
The long and short of it is that the shares look cheap. They’ve been trading cheaper and cheaper on an earnings basis (see the following graph) and if these lawsuits amount to nothing, I’ve little doubt the shares would see a serious uplift.
Made with TradingView
Am I buying?
Interestingly, the 14% rise in the shares over the last month didn’t coincide with any new developments, This does make me curious of what might be going on behind the scenes.
As to whether I’m buying in here, I’m going to consider it. But I must say I’m put off by how much uncertainty there still is.
