Many healthcare stocks did well on the stock market in 2022, yet one company stood out as a laggard due to a legal matter which has just seen an important breakthrough.

GSK (GSK) fell 10% in the year versus a 34% gain both from AstraZeneca (AZN) and Eli Lilly (LLY:NYSE), and a 48% advance from Indivior (INDV).

Holding the FTSE 100 company’s shares back has been litigation pursued in US courts over claims that GSK’s heartburn drug Zantac caused cancer.

In early December, one class action suit representing thousands of claimants was dismissed by a US federal judge on the basis it lacked scientific evidence. GSK’s shares surged on the news as investors breathed a sigh of relief.

Analysts at Jefferies had estimated a worst-case scenario for GSK leading to compensation payments of up to $17 billion with some estimates from other analysts as high as $45 billion.

An appeal is still possible from the claimants regarding the dismissed Zantac case and there are associated cases still outstanding. Therefore, anyone buying the shares must understand the risks involved with this matter and on a broader basis given there is no guarantee that new drug developments will be successful.

So why should you buy the shares? GSK makes vaccines and specialty medicines to prevent and treat disease. In November the company raised its annual profit and sales guidance for the second time in six months, implying positive momentum in the business.

You’re able to buy the shares far cheaper than most of its quoted peers, so there is the opportunity to get a good entry point if you have faith in the long-term ability for GSK to generate good returns.

GSK currently trades on 9.9 times forecast earnings for 2023. That compares with typical mid-to-high teens ratings for pharmaceutical peers and 13.7 times earnings for the FTSE 100 index. GSK’s shares also offer a 4% prospective dividend yield.

Berenberg believes GSK is on track to deliver double-digit medium-term profit growth with potential for margin expansion.

Activist fund manager Elliott Advisors holds a stake in GSK with the hope of driving change, saying the business is not performing to its potential. GSK has already acquiesced to some of Elliott’s demands including beefing up its board and demerging its consumer healthcare unit, Haleon (HLN).

GSK has since laid out plans to grow sales by more than 5% a year and adjusted operating profit by more than 10% a year between 2021 and 2026.

‹ Previous2022-12-22Next ›