The GSK share price is up 6.6% as investors celebrate, but still looks cheap with a P/E of 9.4!

Harvey Jones is thrilled to see the GSK share price rebound this morning after a great big legal cloud has lifted. Now he hopes it can deliver on its long-term potential.

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The GSK (LSE: GSK) share price is back in play jumping 6.63% at time of writing after shrugging off a huge shadow that’s been hanging over its prospects for months.

This is great news for me because I bought shares in the FTSE 100 pharmaceutical giant in April. I thought of it as a long-term defensive buy-and-hold, only to find myself nursing a double-digit loss triggered by legal issues.

Its blockbuster heartburn drug Zantac was pulled from sale in the US in 2019, following claims that it contained “unacceptable levels” of probable cancer-causing ingredients. GSK has consistently argued these claims were “inconsistent with the science” but pulled Zantac in the UK too, just in case.

This stock is flying today

Ever since, anxious investors have been waiting to see just how much the US legal claims were going to cost.

On 3 June, the shares plunged 9% in a day after a Delaware judge ruled that 70,000 Zantac lawsuits could move forward. That wiped £7bn off GSK’s market cap.

Morgan Stanley calculated that payouts could hit a staggering $30bn. Others put the figure as low as $2bn, and thankfully, that was much closer to the mark.

Last night, GSK revealed it’s agreed a $2.2bn settlement with 10 law firms representing more than 90% of all legal claims.

I was thrilled and expected this morning’s bounce. I hoped the shares might climb even higher, but the day is yet young.

GSK still claims there’s no consistent or reliable evidence that Zantac increases the risk of any cancer. However, the board decided “settlements are in the best long-term interests of the company and its shareholders as they remove significant financial uncertainty, risk and distraction associated with protracted litigation”.

Growth and a rising yield

As a shareholder, I think it’s made the right move but I’m also a little concerned. Litigation is a constant risk for pharmaceutical companies. It can still cost a pretty penny, even if they believe they’re in the right. Especially in the notoriously litigious US.

It’s hard enough getting new treatments to market, then trying to monetise them before they go off-patent, without sacrificing big winners to legal uncertainties.

Still, I’m hoping GSK can kick on. The shares look priced to go, trading at just 9.41 times earnings, despite this morning’s rally. They’re down 3.3% over one year. I’d buy more right now if I had cash in my trading account, but sadly, I don’t.

GSK is no longer the Dividend Aristocrat of yore. I remember when investors routinely enjoyed yields of 5.5% to 6%. However, CEO Emma Walmsley has diverted profits into building the drugs pipeline. The trailing yield of 3.73% is expected to climb to 4.14% this year and 4.29% next. That’s a bit better.

The 17 analysts offering one-year share price forecasts have set a median target of 1,883.5p. If correct, that’s up 22.1% from today’s 1,554p. In a way, that’s neither here nor there, since I plan to hold this stock for years and ideally, decades. Now the Zantac shadow has lifted, I’m hoping GSK can play catch-up with runaway rival AstraZeneca.

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.

Harvey Jones has positions in GSK. 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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