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GSK - Zantac cases dismissed by federal court

GSK has responded to yesterday's ruling by the federal Multi-District Litigation (MDL) court in the United States...

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GSK has responded to yesterday's ruling by the federal Multi-District Litigation (MDL) court in the United States, over claims that heartburn drug Zantac (ranitidine) caused cancer.

All cases alleging the five remaining cancers in the MDL were dismissed. The court found that the claims were not backed by sound science.

GSK stated that it will continue to defend itself vigorously, including against all claims brought at the state level.

The shares were up 10.8% following the announcement.

View the latest GlaxoSmithKline share price and how to deal

Our View

It was important for GSK to hit the ground running after spinning off its consumer healthcare arm, Haleon. They've done just that, quick out the blocks with an upgrade to full year guidance.

Underlying operating profit this year's expected to be well ahead of the group's goal for annual growth of 10% per year out to 2026. Strength in Specialty Medicines, which are for hard-to-treat conditions and therefore command a premium, underpin this goal. The group aims to grow its portfolio with new treatments rather than tweaking their usage as it has done in the past. This opens the door for greater growth, but more risk as well.

The drug approval process is complicated, with many treatments never seeing the light of day. That means hundreds of thousands can be funnelled into drug development that bears no fruit. GSK's hoping to reduce this margin of error by focusing on rare treatments backed up by gene-specific data, but there are no guarantees, and recent clinical updates from GSK have included both disappointments and successes.

Cancer treatment is one key area for growth, with several late-stage treatments in the pipeline, including monelotonib via the Sierra Oncology acquisition with an authorisation decision by the US FDA due in June 2023.

The Group also has a strong presence in HIV treatments which make up more than half of speciality medicines revenues. Its newer HIV treatments are key part of GSK's future as generic competitors eat away at pricing power for some of the group's existing treatments.

Recently, GSK's vaccines have been hitting the headlines for the right reasons. Shingrix being one of the most influential growth drivers, and the RSV vaccine hitting important developmental milestones. Subject to regulatory approvals the vaccine could launch next year. GSK believes this could eventually add $4bn annually to revenues.

We're encouraged by GSK's improving debt position, and analyst forecasts suggest it'll be just 1.5x cash profits by the year end, a level that we feel comfortable with. GSK's provided firm guidance on this year's guidance on this year's dividend pay outs. For 2023, the first 'clean' reporting period following the demerger, forecasted dividend pay outs are about 2 times covered by free cash flow. That's according to consensus estimates. However, no dividends can ever be guaranteed.

Compared to forecast earnings, the valuation is below the long-term average, and significantly below many of its peers. The Zantac litigation has been one factor weighing on investor sentiment, and although not done and dusted, we believe the MDL ruling will strengthen GSK's position against other claims. To further close the rating gap will require strong execution of GSK's growth strategy and clinical pipeline. New drug approvals are never a given, even after a successful late-stage trial.

GSK key facts

All ratios are sourced from Refinitiv. 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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 7th December 2022