GSK PLC (LSE:GSK, NYSE:GSK) has had its rating upgraded by Credit Suisse on the assumption that its potential liability for Zantac lawsuits will be much smaller than the US$12bn that has been wiped from its market cap in recent weeks.
The Swiss bank swapped its ‘sell’ rating for a ‘hold’ but trimmed the share price target to 1,430p from 1,630p to reflect a US$5bn base-case of liability costs from Zantac.
Vastly underperforming the wider sector, the shares have lost more than a quarter of their value since the start of July, falling from above 1,800p to below 1,340p on the back of lawsuits filed that claim the acid indigestion drug Zantac can cause cancer.
These fears “are likely to remain an overhang for some time, with any outcome of litigation likely to take some years to play out”, said analyst Dominic Lunn in a note to clients.
“As the originator of Zantac and based on cumulative sales, we expect it is likely that GSK would bear a significant proportion of any liability in the event of a settlement," Lunn added.
However, he said the US$12bn wiped off GSK’s market cap “is much higher than what we might expect to be GSK’s share of any settlement if settled”.
The Credit Suisse pharma team estimated circa US$100,000 per case, leading to the base case assumption of US$5bn of additional debt for GSK to capture any potential Zantac liability.
On a more positive note, its respiratory syncytial virus (RSV) vaccine “could be better” than Pfizer’s, with the FTSE 100 company having commented that its RSV vaccine efficacy is “exceptional”. The analysts interpret that as being above 70%, compared with Pfizer’s RSV headline vaccine efficacy of 66.7%.
Headline data at the upcoming ID Week conference next month is expected to underpin Credit Suisse’s forecasts of US$2bn peak sales potential for RSV older adults at GSK.
The upgrade was also based on strategic conclusions from the bank’s PharmaValues 2023 scoring system, which put GSK “in the middle of the pack”, based on analysis of major and specialty pharma companies across valuation and six strategic metrics that are believed to underpin a company’s mid-term prospects.
GSK scored well on valuation and risk from generic drugs, which also benefits its growth metric.
On valuation, GSK trades at 11.4 times forecast 2023 earnings, a 22% discount to peers on 14.7 times.