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GSK (GSK) has been battling a wave of class action lawsuits concerning its heartburn drug Zantac for the past two years. Although the company has now settled with plaintiffs in several jurisdictions, the saga is still very much ongoing. Shore Capital analyst Dr Sean Conroy estimated last week that a “worst case" $30bn (£24bn) litigation scenario remained priced into GSK’s shares. 

However, there is considerable doubt over whether the eventual payout will even come close to that. For their part, Citi analysts expect the majority of the remaining cases to be settled in the next six months at a cost of less than $3bn. That’s an improvement on the $5bn prediction that the bank circulated in October. The next major ruling in the litigation is expected to be handed down by a Delaware judge within months – if not weeks.

The so-called Daubert decision will determine whether the plaintiffs’ scientific evidence is admissible in court. In other words, the judge will decide whether the science that would be relied upon in any future trial stands up to scrutiny.

The lawsuits allege that a probable carcinogen known as NDMA was present in Zantac and that the drug led thousands of patients who used it to develop cancer. GSK has continually insisted that there is no evidence to support the claims. “We remain very confident in our position and continue to defend the science and the facts very vigorously,” chief executive Emma Walmsley told analysts on a May earnings call.

Since 2019, there have been 16 independent studies that have been “categoric in showing no causal link between [Zantac] and cancer”, she added.

Self-help measures 

The last time GSK featured in our Ideas section was in May 2022 – only a few months before litigation fears took hold and the share price collapsed. Two years down the line, investors still don’t know when to expect a resolution, or what shape it might take. But much has also changed for the better.

It’s easy to forget that investors had been unhappy with GSK for some time before the Zantac issue reared its head. Despite its reputation as a world-class vaccine developer, the group didn’t manage to get a Covid jab approved until 2022, by which point Pfizer (US:PFE) was the clear market leader. Activist investor Elliott Management also ambushed the company in 2021, pushing publicly for radical restructuring to remedy chronic underperformance. The company urgently needed new blockbuster drugs – and the cash to either develop or acquire them.

The demerger of GSK's consumer health arm, Haleon (HLN), helped in this regard, while two successful vaccines allowed the group to exceed revenue expectations in the past two quarters. Litigation notwithstanding, GSK appears to have manoeuvred its way out of a difficult spot.

“We sense that any lingering concerns that might have remained around GSK’s pipeline and its ability to deliver growth have continued to abate,” said Shore Capital after the release of the group’s Q1 figures earlier this month.

Sales in the first quarter were up 13 per cent on the prior year (excluding Covid-19 solutions) and core operating profit was up 27 per cent at constant currency. Newly launched products, including the RSV vaccine Arexvy and the cancer drugs Ojjaara and Jemperli, played a significant role in this performance.

The group was also buoyed by earlier-than-expected sales of Shingrix, its shingles vaccine, to its co-promotion partner in China. The jab was first approved by the US Food & Drug Administration (FDA) in 2017, and markets outside of the US now represent more than 50 per cent of its global sales. The majority of the 39 markets it’s approved in have shingles immunisation rates below 5 per cent, meaning there’s still a tremendous opportunity for growth.

Elsewhere in GSK’s portfolio, sales of speciality medicines were up 17 per cent in the first quarter, with strong showings from the oncology and HIV portfolios.

Regulatory risks  

Things were somewhat less encouraging in the group’s third division, general medicines, where sales were up just 1 per cent last year at constant exchange rates. This part of the business is also exposed to US drug pricing reforms, which could prove to be a challenge. 

On 1 January 2024, a restriction on rebates paid by drugmakers to the Medicaid federal insurance programme was removed. These rebates were originally designed so Medicaid – which provides health coverage for low-income Americans – paid a cheap price for drugs. However, the elimination of the so-called AMP cap could mean pharma companies have to effectively pay Medicaid to use certain products. 

“We are continuing to assess and manage the impact of the AMP cap removal in the US,” said GSK’s chief commercial officer, Luke Miels. “And as a reminder, there is a $150mn impact in 2023 and we continue to expect up to $550mn of sales at risk for the full year.” 

But it’s important to remember that all of its rivals are exposed to the same raft of reforms. According to analysts at UBS, AstraZeneca (AZN) has the highest exposure of any of its peers to the drug price crackdown. The bank highlighted the group’s oral oncology portfolio as particularly vulnerable and moved the stock to a sell rating earlier this year. GSK, on the other hand, is on a buy.

While the smaller of London’s two pharmaceutical titans has a much thinner pipeline than its larger counterpart, it also has one of the lowest valuations in its industry. AstraZeneca currently trades on almost 18 times projected earnings, according to data from FactSet. Meanwhile, GSK trades on a multiple of under 11. Even Pfizer, which has been experiencing a post-pandemic existential crisis, commands a multiple of 12 times forward earnings. 

Naturally, sentiment towards GSK has been soured by its legal woes, as well as by concerns about a couple of major forthcoming patent expiries. Generic versions of some of the firm’s HIV drugs are due to come to market before 2030, meaning sales of its patented versions will fall. The question of whether it has new drugs ready to replace these lost revenues is pivotal – and we think there are reasons to be optimistic. The vaccine business is growing and a long-acting version of one of its HIV-prevention medications has shown promise in clinical trials.

Research and development costs climbed by 17 per cent in the first quarter of 2024 and represented almost a fifth of sales, reflecting the company’s increased focus on its pipeline. However, GSK isn’t just focused on developing new drugs on its own. The acquisition of respiratory drug developer Aiolos Bio shows it will also pursue expansion through strategic additions. Yes, there’s still the chance that litigation hurts the bottom line in the short to medium term. But at the current price, we think it’s worth looking at the bigger – and now far brighter – picture.