Pharma stocks crater as investors brace for lawsuits

Shares in GlaxoSmithKline, Sanofi and Haleon all sold off sharply this week, shedding tens of billions in market value, amid investor fears over potential US lawsuits focused on the popular heartburn drug Zantac.

This has been a known issue in the background for years, but investor concern exploded this week ahead of the first scheduled trial on August 22.

What is Zantac?

Zantac is the brand name for a drug called ranitidine, a drug used to relieve heartburn. It was originally invented and sold by Glaxo as a prescription drug in the 1[ads1]980s before switching to an over-the-counter drug.

In 2019, regulators launched a safety review over concerns that the drug contains a probable carcinogen called NDMA, prompting manufacturers to pull it from shelves. And by 2020, the USFDA and the European Medicines Agency called for all versions of the treatment to be withdrawn from the market.

Since then, more than 2,000 cases have been filed in the United States with plaintiffs claiming that taking Zantac can generate NMDA.

The first trial will begin on August 22 with key trials starting in early 2023.

Zantac heartburn medicine was seen at a store in Mountain View, California on October 1, 2019.

Nurphoto | Nurphoto | Getty Images

The trial is particularly complicated because so many pharmaceutical players have been involved in the drug.

The patent for the drug expired in 1997, so there are several manufacturers, retailers and distributors of the drug named as defendants in the lawsuits.

There have been several owners of the OTC rights in the US since 1998, including GSK, Sanofi, Pfizer and Boehringer Ingelheim.

Haleon, the consumer health business spun off from GlaxoSmithKline last month, is not primarily responsible for the claims, according to the company, but may be tangentially related.

The company’s response

In response to the violent share price movements this week, GlaxoSmithKline, Sanofi and Haleon have all issued statements defending themselves.

The drug manufacturers’ share prices stabilized on Friday morning.

A spokesperson for GlaxoSmithKline said: “The overwhelming weight of the scientific evidence supports the conclusion that there is no increased cancer risk associated with its use [of] ranitidine … Suggestions to the contrary are therefore inconsistent with the science and GSK will vigorously defend itself against any meritless claims.”

A spokesperson for Sanofi said: “There is no reliable evidence that Zantac causes any of the alleged harms under real-world conditions, and Sanofi remains fully confident in its defense. Given the strength of our case and the uncertainty of future proceedings, there have been no contingencies . established.”

Zantac is the brand name for a drug called ranitidine, a drug used to relieve heartburn.

Washington Post | Washington Post | Getty Images

Haleon’s involvement and potential responsibility seems less clear.

Haleon claims it is not a party to any of the Zantac claims, saying it “never marketed Zantac in any form in the United States” and is “not primarily responsible for any OTC or prescription claims.”

However, as flagged in the prospectus issued June 1, “to the extent that GSK and/or Pfizer are held liable with respect to OTC Zantac, Haleon may be required to indemnify GSK and/or Pfizer” under certain conditions.

What do the analysts say?

“As with any legal outcome, there are significant uncertainties,” Credit Suisse’s European pharma team said in a note. “This is especially true in this case where four companies have been involved in the ownership of the Zantac rights over time.”

As the brand originator, GSK could be on the hook for the bulk of the liabilities, rather than the OTC manufacturers, according to the team.

Redburn said in a research note that given there are multiple manufacturers of the drug as well as retailers and distributors named as defendants, this potentially reduces the absolute impact at the company level.

Deutsche Bank Research’s pharmaceuticals team on Thursday upgraded its recommendation on Sanofi from “Hold” to “Buy” on the basis that “the Zantac knee is starting to look somewhat overdone.”

The German bank does not believe there is an obvious buying opportunity, but argues that “sustaining a selloff at these levels feels extreme.”

The team adds: “Both GSK/SAN now appear to present a classic conundrum: gripped by anxiety over an impending liability overhang they cannot yet fully assess.”

How big can the settlements be?

Credit Suisse says this depends on the strength of the court’s view of any link between NMDA and cancer and any evidence of wrongdoing.

Previous drug settlements have ranged from $30,000 to $270,000 per plaintiff based on evidence of wrongdoing.

There are currently more than 2,000 known plaintiffs, but this is expected to increase as the trials continue.

Comparison with Bayer, Monsanto

For many investors and analysts, this ordeal brings back memories of the Bayer Roundup saga.

Shortly after Bayer took over Monsanto in 2018, Roundup-related lawsuits quickly swelled, costing Bayer billions of dollars and years of legal and financial uncertainty.

As in the case of Bayer’s acquisition of Monsanto, where the litigation risk was flagged to investors before the deal was completed, GSK flagged the Zantac lawsuit as a key risk for Haleon in the prospectus issued to investors in June.

In the nearly 500-page document, GSK warned: “The group has compensation obligations in favor of the GSK group and the Pfizer group, which could be significant and have a material adverse effect” on the group’s finances.

Unlike Bayer’s Roundup, Zantac has been withdrawn by regulators worldwide. Furthermore, there are currently over 2,000 claims related to Zantac and other ranitidine products compared to Bayer which faced 130,000 glyphosate related cases.

“We don’t think the evidence points to this being another glyphosate, but it’s very possible we could see a liability of a few billion dollars,” writes Deutsche Bank.

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