GSK (LSE:GSK) shares tanked this week, but not because of any new developments. Instead, the stock was down 15% as investors grew increasingly concerned about upcoming litigation proceedings. The court cases are in regards to a heartburn drug originally branded as Zantac.
So let’s take a closer look at the legal proceedings and whether this drop represents a buying opportunity for me.
US litigation proceedings
The shares tanked on Thursday having already nudged downwards earlier in the week. The US plaintiffs contend that the discontinued drug is a carcinogen. More than 2,000 legal cases related to Zantac have now been filed in the US.
Investors have known about these legal cases for a while, but it seems that the market now is getting jitters ahead of the proceedings. Concerns around the compound — known chemically as ranitidine — containing potential cancer-causing impurities emerged in 2018. The first trial begins later this month.
GSK, the US Food & Drug Administration (FDA) and the European Medicines Agency (EMA) have all undertaken tests and found no evidence of a causal association between the heartburn drug ranitidine and the development of cancer in patients, according to the UK-based pharma giant.
But Deutsche Bank analysts told Reuters that the lawsuit could cost the firm billions of dollars.
GSK has vowed to “vigorously defend” itself in the court proceedings. Zantac, developed by the firm, was discontinued in 2020.
Is this a buy opportunity?
Obviously these are not new risks, and buying at this lower price point could be good for my portfolio in the long run. After all, GSK believes it has a strong case to dismiss the legal proceedings against it.
More generally, it recently split from its fast-moving consumer healthcare business, now known as Haleon. And this is widely considered positive for the pharma giant. The split also allows it to focus on its core business, investing in long-term development projects for innovative vaccines and speciality medicines.
The listing of Haleon has earned GSK £7bn and the new firm has taken a considerable proportion of GSK’s debt. The capital will be used to fund drug development and acquisitions. This is particularly important as GSK needs to fill a void as a number of drug patents are due to run out in the coming years. So there’s a need to bring more products to market.
And broadly, I consider the drug and vaccine development sector as one that will continue to grow in the coming years as Western populations age.
However, I had some concerns about GSK’s long-running underperformance. There clearly is no guarantee that the split will see a turnaround in fortunes, although I certainly hope it will.
Right now, I see the 15% drop over the last week as a good opportunity to buy this pharma giant. Yes, there are definitely some near-term challenges, but I’m positive on the long-term outlook. The stock also goes ex-dividend net week, so that’s why I’d buy now.
