GSK PLC (LSE:GSK, NYSE:GSK) is 'still appealing' - even in the wake of a significant legal setback, according to regional broker Shore Capital, which set out its 'buy' case in the wake of the UK drug giant's decision to challenge a key US court ruling.
The Delaware state court ruling allowed plaintiffs' expert testimony in Zantac trials, contrary to a previous Federal court decision dismissing all multi-district litigation (MDL) cases.
GSK insists there is no reliable evidence linking Zantac (ranitidine) to certain cancers and remains confident in its defence.
The majority of outstanding cases, approximately 75,000 claimants, are in Delaware state court, increasing the likelihood of further settlements in 2024. Shore notes that volatility in GSK's share price will persist until the scope of potential damages is clarified.
It believes Zantac litigation has disproportionately impacted GSK's share price since the Haleon demerger, overshadowing the company's improving growth outlook.
Sanofi and Pfizer recently settled US cases for $25,000 per claimant, significantly lower than the over $200,000 initially anticipated by the market.
Shore Capital estimates a worst-case scenario of up to $30 billion in litigation costs is already factored into GSK's share price. As such, it sees a compelling risk-reward profile.
Shore views the current discount to peers as unwarranted, attributing it to misguided assumptions about Zantac litigation costs.
It highlights GSK's potential for near-term growth and long-term ambitions, which are not reflected in its current earnings multiple.
Its shares are trading at a forward-looking price-to-earnings ratio (PER) of approximately nine times for fiscal year 2025, a significant discount to peers with a mean of 17 times and a median of 13 times.
Historically, GSK has commanded a PER of around 12 times. Shore's fair value estimate of 2,200p implies a PER of about 12 times.
The broker said that GSK offers an attractive investment opportunity, balancing litigation risks with growth potential.
It maintains confidence in GSK's ability to overcome current challenges and deliver shareholder value. Investors are advised to consider the long-term growth prospects and potential resolution of litigation issues when evaluating GSK's stock.
In morning trading, GSK shares were changing hands for 1,633.5p, up 0.8%.