Shares in London-based pharmaceutical giant GlaxoSmithKline (NYSE:GSK) tanked this week amid investor concerns over possible litigation risks relating to Zantac (ranitidine), a popular heartburn drug.
"GSK has been named as a defendant in approximately 3,000 filed personal injury cases in federal and state court and numerous unfiled claims registered in a census established by the Court presiding over the Zantac Multidistrict Litigation (MDL) proceeding. Class actions alleging economic injury and a third-party payer class action also have been filed in federal court."
GSK, in a stock exchange statement issued on August 11, 2022
Surprisingly, however, very little new information has come to light. The U.S. Food and Drug Administration first warned about low levels of a nitrosamine impurity called N-nitrosodimethylamine (NDMA) found in ranitidine products back in 2019. It also requested the removal of all ranitidine products from the market more than two years ago, back in April 2020.
Put simply, investors and analysts are only now starting to pay serious attention to the ranitidine developments, particularly in relation to the litigation risks for big pharma. This sparked a big selloff in companies associated with the Zantac brand, although most have recovered part of their losses today.
GSK no longer owns the Zantac brand, nor manufactures ranitidine - it developed the H2 histamine receptor antagonist as a prescription drug in the 1970s and 1980s alongside Warner-Lambert, but later sold its stake in the brand to its joint venture partner in 1998. Since then, Pfizer (PFE) acquired Warner-Lambert, which later sold Zantac to Germany-based Boehringer Ingelheim, which in turn sold it to Sanofi (SNY) in 2017.
That said, it is likely that GSK retains potential historical liability relating to the drug. That risk could also affect Haleon (HLN), the consumer health business spun off from GlaxoSmithKline in July this year. In its prospectus, Haleon's investors were warned that the company "has indemnification obligations in favor of the GSK Group and the Pfizer Group, which could be significant and have a material adverse effect" on the company.
NDMA is an environmental contaminant and a probable carcinogen that can be found at low levels in drinking water and everyday food items, including meats, dairy products and vegetables. Nitrosamine impurities should not cause harm when ingested at low levels, although they may increase the risk of cancer if people are exposed to them at above acceptable levels and over long periods of time, according to the FDA.
Although the FDA found that levels of NDMA in many ranitidine finished drug products were lower than its acceptable limits, levels of NDMA increase over time at room temperature, and especially so in hotter storage temperatures.
Moreover, ranitidine is not the only drug found to contain higher than acceptable levels of NDMA. The FDA also recalled a number of unrelated medicines, including some losartan-containing and valsartan-containing drugs - angiotensin II receptor blockers that are used to treat high blood pressure and heart failure.
GSK strenuously defends the safety of the drug and is confident in its legal defenses.
"The overwhelming weight of the scientific evidence supports the conclusion that there is no increased cancer risk associated with the use of ranitidine. Suggestions to the contrary are therefore inconsistent with the science, and GSK will vigorously defend itself against all meritless claims alleging otherwise."
GSK, in a stock exchange statement issued on August 11, 2022
It cited 11 epidemiological studies that show "the totality of the reliable evidence does not support that ranitidine increases the risk of any type of cancer." Additionally, a number of studies show "no evidence that exposure to NDMA through ranitidine increases the risk of cancer."
Nevertheless, a high level of uncertainty lingers over the scale of the litigation risks for the companies involved. Litigation is potentially very expensive and unpredictable, particularly when a civil jury trial takes place.
Zantac, an over-the-counter heartburn medicine in the US since 2004, was one of the world's best-selling drugs with tens of millions of regular and occasional users globally. With so many users and cancer prevalence being so high, the worst-case scenario could see potential liabilities be in the tens of billions of dollars.
We only need to look to Johnson & Johnson (JNJ), which has been spending the better part of the last decade trying to defend the safety of its talc-based baby-powder products to limited avail. The company faces more than 40,000 lawsuits from customers claiming its talc products caused cancer due to possible contamination with small amounts of asbestos, a known carcinogen.
Back in 2018, a St. Louis jury awarded $4.7 billion to 22 women who claimed the company's baby powder product for their ovarian cancer. On appeal, the Missouri Court of Appeals ruled against J&J's request to throw out the compensation and punitive damages awarded to the women, although it did reduce the total pay-out to $2.5 billion. J&J tried all legal avenues to appeal the decision, but both the Missouri Supreme Court and the US Supreme Court refused to overturn that verdict.
To date, J&J has been forced to pay nearly $3.5 billion in verdicts and settlements to resolve talc cases. Meanwhile, it has set out to contain the cost of future litigation claims by transferring its talc liabilities to a ring-fenced Texas-based subsidiary, LTL Management LLC, which promptly filed for Chapter 11 bankruptcy.
Of course, the situation is not the same with Zantac. Warily then, I would say this time is different.
There is very limited scientific evidence supporting a causal link between ranitidine use and any cancer risk. In any case, Zantac has had many owners over the years - which spreads the risk over a number of multi-billion dollar pharmaceutical giants. Since ranitidine has long ago lost its patent protection, there are also generic manufacturers - which too have been caught up by NDMA contamination.
GSK also sold the Zantac brand more than two decades ago, meaning claimants face the difficult challenge of proving that higher than acceptable levels of NDMA contamination were present in the drug during GSK's ownership. The FDA has said that it "does not have scientific evidence to determine how long NDMA has been present in ranitidine products."
The number of claims made against GSK and others is still relatively low, compared to some other recent high-profile class-action lawsuits against big pharma companies - although that could certainly change if some claimants start to achieve success at court. The first personal injury claim linking Zantac to cancer is set to be heard in a court in Illinois later this month.
Zantac is an unwelcome distraction, as GSK is otherwise making decent efforts to tackle its historic underperformance and deliver on its promising pipeline of new drugs and vaccines. The pharma giant is undergoing a major transformation of the group to improve shareholder returns and unlock its growth potential.
Only last month did GSK complete the spin-off of Haleon, its consumer business, to focus on strengthening its R&D pipeline. The company had earlier bought Sierra Oncology and Affinivax, two clinical-stage biotech firms which bring potential new products to its development pipeline. Respectively, the acquisitions broaden its exposure to treatments for rare forms of cancer and gain it access to a novel class of vaccines.
Looking ahead, it has a pipeline of more than 68 vaccines and medicines. This includes 8 phase III starts and 11 phase I/II starts in the first half of this year. It expects to achieve regulatory submission acceptance for 11 new products between now and 2025, including an RSV vaccine for older adults, which could achieve peak annual sales of as much as $2.5 billion. Companies including Pfizer, J&J, Sanofi, Moderna (MRNA) and AstraZeneca (AZN) are also racing to get an RSV therapy or vaccine approved, but GSK is the first to publish phase III results showing statistically significant protection in older adults.
Green shoots of growth are visible too. GSK has had a very strong start to 2022. Turnover increased by 25% to £14.1 billion (~$16.9 billion), while adjusted operating profit climbed 26% to £4.0 billion (~$4.7 billion). Particularly, GSK's vaccine business is growing robustly as pandemic pressures on healthcare systems ease. Its shingles vaccine Shingrix, which is seeing growing adoption worldwide, saw sales more than double in the second quarter of 2022, compared to a year ago.
On these encouraging growth figures, management raised its outlook for 2022. It now expects sales for the full year to grow by between 6-8% (previously 5-7%), and adjusted operating profit to increase by 13-15% (previously 12-14%).
Even if GSK is to avoid multi-billion dollar settlement costs with its Zantac claimants, the huge litigation risks are an unwelcome distraction. GSK's management, which was already struggling to convince investors and analysts on its ability to deliver growth and improve valuations, will now face pressure from an additional front.
The uncertainty will be another overhang on valuations, restrict already tight financial resources and potentially constrain its ability to make bolt-on acquisitions to enhance its product pipeline. With this going on, I expect renewed calls for management change to get the company back on track.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of GSK.L either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.