GSK update eases investors’ fears as focus turns to vaccines

Relief for GSK (LSE:GSK) investors after the drugs giant moved to end two years of Zantac litigation uncertainty was today balanced by near-term worries over the uptake of key vaccines.

GSK shares reached early afternoon 5% or 70p higher at 1528p, below the initial 10% uptick predicted by Jefferies analysts following last night’s disclosure.

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The stock slumped from 1,800p as far as 1,315p over summer 2022 after claims of a Zantac cancer link were accompanied by initial speculation of a potential liability as high as $25 billion.

The risk overhang has dogged the FTSE 100-listed company ever since, with shares barely changed this year despite upgraded 2024 profit guidance.

Jefferies said the settlement of 93% of Zantac liability cases for $2.2 billion is equivalent to about 40p a share and compared with its own $2 billion-$3.5 billion estimate.

GSK, which admitted no liability, intends to fund the costs from existing financial resources and said there will be no impact on its “growth agenda or investment plans”. Its dividend policy for a payout equivalent to 40%-60% of earnings is unchanged, it told City analysts.

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Having noted higher previous product liability settlements in the pharma industry, UBS said the value of the GSK agreement should be a positive surprise to investors. It said: “We see the settlement as a clear positive, removing a major overhang and uncertainty for investors.”

The bank pointed out that the remaining 7% of cases were outstanding because the company had chosen to approach the 10 largest plaintiff firms as a priority. The process is set to conclude by the end of the first half of 2025.

Like counterparts at Jefferies, UBS warned that other factors may continue to hang over GSK’s valuation despite the removal of Zantac uncertainty.

UBS said these near-term challenges included weak uptake for the respiratory syncytial virus (RSV) product Arexvy and increasing competition in long-acting HIV prevention.

It also flagged slower-than-expected uptake of shingles vaccine Shingrix in China.

Launched in the third quarter of 2023 and available in major retail pharmacies, Arexvy generated £244 million in sales in the first six months of the year.

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It had two-thirds of the retail vaccination share in the second quarter, but demand decreased overall in line with anticipated respiratory virus seasonality patterns.

UBS has a Neutral stance and price target of 1,580p, while Jefferies had a price target of 2,000p prior to yesterday’s legal developments.

The US bank said: “Concerns linger over sales expectations for RSV vaccine Arexvy in both the second half and 2025 given recent slow US RSV vaccine uptake and data supporting an every three year re-vaccination schedule.

“In addition, investors continue to debate the sustainability of the Shingrix franchise, given US sales declines and potential concerns around uptake in China.”

GSK is due to post third-quarter results on 30 October, having upgraded full-year guidance in July as new launches in oncology boosted sales growth in its Specialty Medicines division.

Turnover is now expected to grow by between 7% and 9% and core earnings per share in the range of 10% and 12%. It recently paid a 15p a share quarterly dividend as part of plans to distribute 60p a share across the year.

Shore Capital points out that shares trade on a forward looking multiple of 8.1 times, a significant discount to peers and below the 12 times that GSK has historically commanded. It believes shares deserve to be at 2,200p.

Analyst Sean Conroy expects that the Zantac developments will serve as a clearing event for GSK and be broadly well received.

He added: “This now provides an excellent opportunity for the shares to properly re-rate and allow people to refocus their attention on the improving growth outlook GSK has been delivering since the demerger of Haleon (LSE:HLN).”