It rarely ends well when a company has an apparent open-ended liability. Finance directors and analysts have routinely and massively underestimated the costs. Instances range from BP’s Deepwater Horizon oil spill to Danske Bank’s embroilment in alleged money laundering and Philips’ agonies over a sleep apnoea device.
The corollary is the market’s willingness to reinstate value when a financial threat diminishes. Investors added €10bn to GSK and Sanofi’s combined market worth on Wednesday following a US legal ruling. A judge threw out claims related to Zantac, a heartburn medication allegedly linked to cancer.
Judge Robin Rosenberg ruled that scientific evidence provided by the claimants was flawed. If other courts share this view, the two pharma companies could get off lightly.
The decision refers to federal litigation. Litigants may appeal against it. Zantac also faces state-level suits.
Even so, shareholders can now see that GSK has an exit route from attacks over Zantac. That makes it a much more investable proposition. There will be no shortage of investors rejigging their financial models for the UK-listed pharma group.
The group is mid-turnround, and has produced strong results so far this year. The main question for GSK concerns the health of its product pipeline, especially in oncology. Emma Walmsley, GSK’s chief executive, has raised R&D spending and appointed a new head. But two recent pieces of bad news — regarding blood and ovarian cancer drugs Blenrep and Zejula — will have done nothing to assuage investor fears.
That said, GSK looks cheap. Even after the rebound, it is only on 10 times 2022 earnings, according to S&P Global. That is about half the multiple of AstraZeneca, which is admittedly growing faster. GSK looks mispriced for a company committed to more than 10 per cent annual profit growth through 2026. The gap may now close. Barclays estimates $13bn of value that GSK lost last summer was because of investor nerves.
The Zantac court ruling is a clear positive for the companies that sold the products. It should soothe the whole industry. When the Zantac story gained traction this summer, guesstimates of the potential liabilities wiped £30bn off the combined values of the stocks involved.
That reflected the suspicion that alleged liabilities generally turn into the real kind. The Zantac ruling should encourage investors to take a more sanguine view of the next challenge from the world’s litigation factories.
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