Wide-moat GSK GSK announced that it has agreed to pay as much as USD 2.2 billion (£1.68 billion) to settle the majority of lawsuits in US state courts involving claims that Zantac caused cancer. Although this amount is higher than we anticipated, it is still within the range of expectations. We maintain our £22/$54 fair value estimate. Shares rose nearly 7% on Oct. 10 after the news was released.
Key Morningstar Metrics for GSK
• Fair Value Estimate: £22/USD 54
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
This agreement resolves approximately 80,000, or 93%, of the pending cases in US state courts related to the heartburn drug. The company also announced a separate settlement of $70 million to resolve a "qui tam" complaint previously filed by Valisure.
What is the Impact of GSK's Earnings?
According to The Guardian, the 10 law firms representing the claimants are unanimously recommending that their clients accept the settlement, which is expected to be fully implemented by the end of the first half of next year. The company expects to recognize an incremental charge in its third quarter of £1.8 billion (USD 2.3 billion) for these settlements as well as the remaining 7% of pending state court product liability cases.
Although the magnitude of the settlement amount is large, this news removes a significant risk overhang for the company and should pave the way for investors to focus more on GSK’s product portfolio and pipeline potential instead of headlines.