GSK has reached agreements to settle 93% (approximately 80,000 cases) of U.S. state court cases related to its heartburn drug Zantac, for up to $2.2bn. The settlement has been reached with no admission of liability.
As a result, the company expects to recognise charges of £1.8bn in the third quarter for all Zantac-related cases.
The costs of these settlements will be funded through existing resources.
The shares were up 5.9% following the announcement.
Our view
GSK received a positive market reaction to the news that the majority of lawsuits relating to alleged cancer links to its heartburn drug Zantac were being settled for $2.2bn. We believe this essentially draws a line under the matter, allowing investors to pay more attention to operational performance. And here there’s reason to be positive.
So far, GSK’s upgraded guidance twice this year. That’s despite two key products, Arexvy and Shingrix coming up against headwinds in the important US market. But both products still have the potential to reach new patient populations. There’s also some blue sky potential if initial data suggesting Shingrix can help prevent dementia leads to further product development. But there are a lot of hoops to jump through before that becomes a reality.
The financial progress is underpinned by excellence in research & development that spawned four major product approvals last year. There's potential for more significant clinical milestones in 2024. However, there can be no guarantee of continued success. Falling sales of COVID-19 medicines have held back growth but now that they are no longer material, comparatives are becoming less demanding.
Beyond vaccines, the group also has a strong presence in HIV treatments which make up about 20% of total revenues. Its newer HIV treatments are a key part of GSK's future, as generic competitors eat away at pricing power for some of the group's legacy treatments. But the group focus for HIV is shifting to the group’s long-acting innovation therapies. And it’s these that have helped capture additional market share and drive double-digit growth for the category in the first half.
Cancer treatment, although relatively small in terms of current sales, is growing rapidly, and the development pipeline looks promising.
Net debt has been coming down and currently sits at under 1.4x forecast cash profits, which we don't see as a major concern. The strong financial position supports a prospective dividend yield of 4.3%, but remember, no future payouts to shareholders can be assured.
GSK's valuation is below the long-term average, and significantly less demanding than many of its peers. We believe the progress on settling the Zantac case materially de-risks the investment case, so strong execution of the growth strategy and clinical pipeline is likely to be the key focus for shareholders moving forward. So far so good, but remember, the drug approval process is long and expensive, with many treatments never seeing the light of day.
Environmental, social and governance (ESG) risk
The pharmaceuticals sector is relatively high-risk in terms of ESG. Product governance, particularly with safety and marketing, and affordable access to treatment are the key risk drivers. Labour relations, business ethics and bribery and corruption are also contributors to ESG risk.
According to Sustainalytics, GSK's overall management of material ESG issues is strong. There's an independent, board-level, corporate responsibility committee focused on ESG performance and framework and 10% of executive pay is tied to ESG metrics. It's ranked first on both the Access to Medicine Index and Access to Vaccines Index thanks to industry-leading efforts to ensure medicines and vaccines are provided to patients in need. Management practices concerning the transparency of clinical trials are strong, and it's committed to international standards. But despite a strong product safety programme, GSK lacks external quality management certification at its manufacturing sites.
GSK key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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