GSK jumps 6% after $2.2B Zantac settlement: why analysts see more upside

GlaxoSmithKline (GSK) saw its shares jump more than 6% after the pharmaceutical giant announced a settlement of up to $2.2 billion (€2.01bn) to resolve tens of thousands of lawsuits in the US related to its discontinued heartburn medication, Zantac.

The lawsuits alleged that the drug, which was pulled from the market, caused cancer.

The settlement addresses about 93% of the cases faced by GSK, accounting for approximately 80,000 claimants.

In addition to this major settlement, GSK has agreed to pay an additional $70 million (€64m) to settle whistleblower claims brought by US-based independent laboratory Valisure.

The stock rose 6% in early London trading, reversing what had been a drop of 4.2% in the last 12 months.

Settlement in the best long-term interests of shareholders: GSK

In a statement following the announcement, GSK reiterated its stance on the scientific evidence regarding Zantac and outlined that the settlement will remove significant financial uncertainty.

While the scientific consensus remains that there is no consistent or reliable evidence that ranitidine increases the risk of any cancer, GSK strongly believes that these 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.

GSK said it expects to take an additional charge of £1.8bn (€2.15bn) in its Q3 results of 2024 to account for the settlements, which include the State Courts Settlement, the Qui Tam Settlement, and the remaining 7% of pending cases.

Despite the hefty payout, GSK stated that these settlements would not impact its growth agenda or R&D investments, with costs being covered by existing resources.

Settlement to remove drag on GSK’s share price: Analysts

For GSK shareholders, this settlement marks a significant relief.

According to John Murphy of Bloomberg Intelligence, the resolution “lifts a major investor concern and allows the shares to trade on fundamentals, suggesting upside given GSK’s current significant discount to peers across a range of earnings multiples.”

The Zantac litigation had loomed heavily over GSK’s stock, contributing to underperformance compared to its competitors.

Analysts at Jefferies noted that GSK’s stock is likely to “uptick” by around 10%, now that much of the uncertainty surrounding the Zantac lawsuits has been lifted.

Jefferies had estimated the settlement to fall between $2 billion and $3.5 billion, with the final amount nearing the lower end of this range, described as “the best-case scenario” by Peter Welford, an analyst at the brokerage.

Positive long-term outlook despite lingering risks

Shore Capital analysts echoed the sentiment that GSK’s shares have suffered due to the risks tied to the Zantac litigation.

GSK’s desire to settle cases comes not from any legal or scientific merit but is in the best long-term interests of shareholders and to avoid any further distraction or financial uncertainty that comes with letting litigation continue to protract.

Before the settlement, market analysts like Sean Conroy from Shore Capital believed that GSK’s stock price had already factored in up to $30 billion in potential liabilities, further dragging down the company’s valuation.

UBS analysts, led by Jo Walton, noted the 7% of plaintiffs who are yet to settle with GSK could still cause problems for the British firm.

GSK’s settlement saw it reach an agreement with the 10 largest law firms handling Zantac claims while the remaining lawsuits are being handled by smaller firms. 

However, with much of the litigation risk resolved, analysts predict an improvement in GSK’s share performance in the coming months.

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