Zantac is making GSK investors feel distinctly dyspeptic. Claims that the stomach ulcer drug causes cancer are resulting in litigation risk. Until that subsides, the unloved UK pharma group will continue to lag rivals. Strong third-quarter results out on Wednesday did little to settle investor’s fears.
Chief executive Emma Walmsley has been looking for the right prescription for investors after sustained underperformance. The gap with rival AstraZeneca, which has a leading immunotherapy portfolio, is growing wider. Despite strength in vaccines, GSK was nowhere in the fight against Covid. A spin-off of the group’s consumer division — Haleon — is the latest experiment to deliver disappointing results.
The group’s market capitalisation was around £80bn in February 2022 before the Haleon demerger was announced. Today, investors own a GSK worth £58.5bn plus £12.3bn of Haleon stock for a total of around £71bn — down more than 10 per cent. The MSCI World Pharma index has returned almost 20 per cent over the same period.
The stock screens pretty cheaply if GSK’s growth forecasts are to be believed, on a price/earnings multiple of some 10 times 2023 earnings. AstraZeneca — admittedly with a much better record of picking winners — trades at a 50 per cent premium, on Barclays estimates.
The outlook remains far from terminal. R&D spending is growing, up 20 per cent since 2017. That will help boost annual sales and earnings growth to more than 5 per cent and 10 per cent respectively to 2026, GSK thinks. Blockbuster drugs are far from guaranteed. But uptake of GSK’s shingles jab has driven the second increase in 2022 guidance, with operating profits now expected to be up between 15 per cent and 17 per cent this year. A new vaccine for respiratory syncytial virus has shown strong trial results.
The issue, for GSK, is its exposure to legal risk from Zantac. The potential cost of such liabilities is hard to estimate. When news broke, investors wiped tens of billions of combined value from exposed stocks, including GSK, Pfizer and Haleon. Until a line is drawn under this threat, it will continue to overshadow GSKs turnround efforts.
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