Shares in FTSE 100 pharma giant GSK (LSE:GSK) took a hit last week as investors became increasingly concerned about upcoming US legal cases concerning Zantac. However the firm, which recently split with its consumer health division, was boosted on Wednesday as the first plaintiff filed for voluntary dismissal. GSK confirmed it had not settled in the case.
GSK is down 34% over the course of the last month, although some of that dip reflects a repricing of shares following the stock split.
A new opportunity
GSK recently split from its fast-moving consumer healthcare business, now known as Haleon. This had long been touted as a good move for both companies. The Haleon listing has earned GSK some £7bn and has allowed the pharma firm to shift some of its debt.
Haleon starts life with net debt of £10.3bn, or four times EBITDA. The split also allows GSK to focus on its core innovative vaccines and speciality medicines business.
The pharma giant has disappointed investors for some years, but the split gives GSK a chance to forge a new, more profitable future. For one, the new GSK and what is now Haleon were not necessarily well aligned. With less debt and more capital, it can fund drug development and acquisitions. As a number of drug patents are due to run out in the coming years, it will need to bring more products to market.
Could I really double my money?
GSK currently has a price-to-earnings (P/E) ratio of 12, which isn’t expensive for a company in the pharma or biotech space. By comparison, AstraZeneca trades with a P/E of 21, almost double the that of GSK. Meanwhile, the sector median is around 26. So it’s clear GSK is trading at a considerable discount right now.
I’m also fairly bullish on the pharma industry in general. Western populations are getting older and pharmaceuticals will play a major part in fighting disease associated with ageing. It should be able to capitalise on these trends, especially with new capital injections, acquisitions and renewed focuses.
Last year, management said that GSK expects to deliver sales growth and adjusted operating profit growth of more than 5% and more than 10% CAGR between 2021-2026.
So, with these two factors in mind, I genuinely could see the the share price extended to double where it is now.
But in addition to growth, investors will be hoping that GSK can throw out the near 3,000 personal injury lawsuits alleging that Zantac caused cancer. While one case has been thrown out, GSK will be tested on many more occasions.
The firm insists that the “scientific evidence supports the conclusion that there is no increased cancer risk associated with the use of ranitidine (the compound present in Zantac)”. The cases could cost GSK billions if it doesn’t manage to dismiss them all.
But I’ll continue to hold my shares and may buy more as I still expect the company to have a bright future.
