British pharma multinational GSK PLC (LSE:GSK, NYSE:GSK) has persistently been undervalued against its international peer set due to merited fears over the high-profile Zantac litigation.
But with recent victories in the US courts, is this discount beginning to look unfair?
Since 2019, GSK has faced thousands of class-action claims that ranitidine, an active ingredient in its sleep medication Zantac, causes various types of cancer.
While the vast web of litigation is far from nearing an end, recent rulings have moved in GSK’s favour.
This week, the Florida State Court sided with GSK by excluding plaintiffs' expert testimony as unreliable under the Daubert test.
Established in the US Supreme Court case Daubert v. Merrell Dow Pharmaceuticals, the Daubert standard provides criteria for evaluating whether expert testimony is admissible under Federal Rule of Evidence 702.
Discussing these developments, analysts at broker Shore Capital Markets said: “We see these recent rulings as important steps towards clearing the litigation-related overhang that has disproportionately weighed on the share price since the demerger of Haleon and overshadowed the improving growth outlook we believe GSK has been delivering.”
Attention has now shifted to ongoing litigation in Delaware, where there are around 75,000 outstanding cases related to the class action.
GSK previously lost an appeal to strike expert testimony down in Delaware but has since appealed directly to the Supreme Court.
Given this week’s favourable ruling in Florida, the odds of a favourable Delaware outcome have improved for GSK, at least according to Shore Cap.
As such, the broker thinks it could be time to reassess GSK’s peer discount.
GSK shares are currently trading at a forward price-to-earnings (PE) ratio of 8.9 times, “a significant discount to peers and below the circa 12 times GSK has historically commanded”, said analysts.
Assuming a fair value of to 12 times PE, GSK shares should be trading closer to 2,200p rather than the 1,593 price it currently commands.
The stock is therefore a buy in Shore Cap’s eyes.