Are GSK shares a bargain after falling 11%?

GSK shares have taken a hit in recent weeks due to Zantac uncertainty. Here, Edward Sheldon looks at whether they’re now cheap.

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Image source: GSK plc

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GSK (LSE: GSK) shares have taken a tumble recently. A month ago, they were trading for around 1,810p. Today however, the share price is sitting at 1,605p – roughly 11% lower.

Are the shares a bargain after this sharp drop? Let’s take a look.

Zantac uncertainty

For around two years now, there’s been some uncertainty surrounding GSK due to potential litigation related to Zantac – a heartburn drug that was originally marketed by Glaxo Holdings. It was withdrawn from shelves in 2019 after being linked to cancer.

This uncertainty has come back into focus in recent weeks after a Delaware judge allowed more than 70,000 Zantac lawsuits to go forward, ruling that expert witnesses can testify in court that the drug may have caused cancer. These lawsuits could potentially cost the company a lot of money.

Now GSK – which has said that it will “vigorously defend itself” against all claims – has appealed the decision made by the Delaware judge. The FTSE 100 company believes that the scientific consensus is that there’s no consistent or reliable evidence that Zantac increases the risk of cancer.

However for now, the GSK share price remains well off its recent highs. Clearly, the uncertainty is spooking investors.

A bargain buy?

Given the high level of uncertainty related to Zantac, it’s hard to know if the shares are a bargain at current levels. However, my gut feeling is that they’re cheap.

With City analysts forecasting earnings per share of 177p for 2025, the forward-looking price-to-earnings (P/E) ratio is just 9.1. That’s well below the global sector average, which suggests that there’s some value on offer here. Rival AstraZeneca is currently trading on a P/E ratio of 17.

Of course, if GSK was to end up facing huge liabilities from Zantac litigation, the company’s profits could take a hit. In this scenario, the current earnings forecasts would become meaningless. And according to City AM, GSK hasb’t set aside any provision for liabilities beyond legal expenses to defend the litigation.

Potential liabilities

However, it’s worth pointing out that GSK peer Sanofi recently settled about 4,000 Zantac cases for $100m in private, according to Bloomberg. That would imply a payout of $25,000 per plaintiff. Assuming the same amount was paid for 70,000 lawsuits, GSK’s liability would come to around $1.75bn. That wouldn’t be the end of the world for the company, given that analysts are expecting a net profit of over $8bn this year.

One other thing worth mentioning is that analysts at Shore Capital believe that the worst-case scenario ($30bn in litigation costs) is currently being priced into the GSK share price. They have a price target of 2,200p for the stock at the moment. If they’re right, then today’s share price could definitely turn out to be a bargain. If the stock was to hit that level in the next 12 months, investors could be looking at total returns of over 40% once dividends are factored in (the yield is nearly 4% right now).

In light of this analysis from Shore Capital, I think the shares are probably worth considering today as a value play.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca Plc and GSK. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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