The worst-performing FTSE 100 stock last week was GSK (LSE:GSK). It dropped by almost 13%, in a week when the top gainer rose by 23%. There were some fundamental drivers behind the slump in the GSK share price, which have changed my view on whether I want to invest right now. Here are the details.
FDA action
Last week, it emerged that GSK is now involved in around 3,000 personal injury claims, relating to Zantac. Even as I write, I can understand the incredible headache that this is going to cause going forward. The amount of press stories, expensive legal fees and distraction from GSK’s other business lines are all likely. The major cases are due to begin in early 2023.
The fall in the share price last week was linked to the concern investors have about lawsuits in the US. The US Food and Drug Administration (FDA) forced GSK to pull a drug named Zantac from shelves back in 2019. The worry was that it was claimed some components within the drug contributed towards cancer.
We’ll have to see how these cases pan out and what precedent is set in early court sessions. It’s too early for me to make a judgement call on the future share price based on current information. However, the drop last week as news on this topic broke is a clear sign that some investors aren’t keen to wait and see what happens.
Taking a step back
Putting this issue to one side, over the past year GSK shares are only down by 4%. Financial performance during this period has been solid.
Q2 results from last month highlighted turnover growth of 19% year on year, with the outlook for the rest of 2022 promising. The company stated that it expects full-year “sales to increase between 6-8% and adjusted operating profit to increase between 13-15%”.
The company is also lighter after having spun-off some brands in a new listed entity, Haleon. Although this reduces the size of GSK, there are plenty of good arguments supporting the move on the grounds of higher efficiency and being more nimble.
Is the GSK share price good value?
Including the slump last week, I estimate the price-to-earnings ratio to be 16.55. By comparison, industry peers’ P/E ratios are 11.46 (Hikma Pharmaceuticals), and 69.51 (Dechra Pharmaceuticals). So I’d conclude that the current price seems fair value.
The share price would need to rally 26% before reaching the one-year highs, and fall around 6% before reaching the lows. So from a technical perspective, the share price does look appealing.
The concern I have is that I don’t think the full impact of the lawsuits has been felt yet. This could blow up into a large-scale issue, or simply be headline noise that quickly fades. I don’t think we’ll know the answer for some time, but this uncertainty makes me cautious about investing.
Ultimately, I think the GSK share price is at a fair value, rather than a great value. I’m happy to sit on the sideline for the moment, with the aim of buying when more clarity on the lawsuits comes through.
