GSK PLC and other big pharma companies lost at least US$39bn from their combined market value this week over claims that stomach acid drug Zantac causes cancer.
The litigation itself could be only part of the problem for the companies, analysts said.
Barclays pointed out that value destruction for companies in extended legal battles “can often exceed settlement size by orders of magnitude until absolute clarity emerges", as seen with Bayer’s share price through its own litigation issues.
“And absolute clarity is likely at least a year away.”
Fears of a multi-billion-dollar lawsuit led to a total of US$39bn being wiped from GSK PLC (LSE:GSK, NYSE:GSK), Haleon PLC (LSE:HLN, NYSE:HLN), Pfizer Inc (NYSE:PFE) and Sanofi SA (ADR) (NYSE:SNY)’s combined market capitalisation in less than a week, according to Barclays' calculations.
Financial analyst Danni Hewson at AJ Bell said: “Investors fear they will have to shell out big bucks if found guilty of failing to properly warn users about health risks, with allegations that Zantac causes cancer.”
Industry exposure of at least US$50bn is now priced into their share value “to a significant degree”, the Barclays analysts said.
GSK, its spinout Haleon, Pfizer and Sanofi will face off with angry customers in less than a fortnight in a trial that will examine allegations about the drug’s potential to cause cancer.
Legal proceedings are due to kick off later this month in a court in Illinois with the Joseph Bayer versus Boehringer Ingelheim et al case.
Next month federal judges will then begin to select cases for potential bellwether trials after the court rules on preliminary motions.
Analysts estimate GSK is most exposed in the Zantac case, carrying 35% of the risk burden for its role in marketing the drug on prescription.
GSK sold the product for the longest time and so the dose was likely to be higher with more available records, Barclays said in a research note today.
However, plaintiffs may be more likely to be found to testify against Sanofi, which sold the product recently, Barclays said.
About 65% of the remaining liability relates to over-the-counter sales made by Warner-Lambert, Pfizer, Boehringer Ingelheim, and Sanofi.
Whether or not the groups face aggregate, or joint, liability is at stake.
Legal precedents include the Vioxx painkiller drug case against US Merck over claims it led to heart attacks, which led to one of the biggest settlements of its kind worth US$4.85bn, while the Bayer and Monsanto case cost the companies as much as US$10bn.
The impact of the Zantac trials on big pharma could last for many months or years, amid recession fears in both the US and Europe, with further trials planned for February.
Barclays’ analysts said in the research note on Friday: “As we have seen from Bayer’s share price through its litigation issues, value destruction can often exceed settlement size by orders of magnitude until absolute clarity emerges. And absolute clarity is likely at least a year away.”
Some corners of the market estimate that court settlements could cost the big pharma groups on trial as little as US$5bn while others predict the trials could cost as much as US$45bn.
While settlements in other industries have fetched far more than US$10bn, Barclays analysts view it as ‘highly unlikely’ that settlements in the Zantac trials will be as costly.
A prospectus published by Haleon on 7 June that highlighted the trial as a potential risk may have been the catalyst for the sell-off, but with the first trial due to kick off in just over a week momentum is building.
Big pharma are well aware of the risk such legal cases can pose to their market share.
Bayer’s shares have underperformed by 80% since the first ‘bellwether’ cancer verdict against the company in August 2018, analysts said.
This week Sanofi suffered a market cap loss of US$18.23bn, following a 14.4% decline in its share price, Barclays estimates.
GSK lost 15.1% from its share price between 5 August and 11 August, Barclays said, wiping US$12.3bn from its market capitalisation.
Almost US$5bn and US$4bn was wiped from Pfizer and Haleon’s market cap, respectively.
Barclays analysts said the ‘sell first; ask questions later’ method of share dealing “makes some sense”, especially when an overhang or potential share dilution emerges that’s impossible to discount.
GSK insisted in a statement today that the Zantac litigation was “inconsistent with the scientific consensus” and that it “will vigorously defend all claims”.
“Based on these investigations and experiments, GSK, the FDA, and the EMA have all independently concluded that there is no evidence of a causal association between ranitidine therapy [Zantac] and the development of cancer in patients,” GSK said in a statement today.