GlaxoSmithKline, Sanofi and Haleon all sold off sharply this week, losing tens of billions of dollars in market value as investors feared potential US litigation costs centered on popular heartburn drug Zantac.
It’s a well-known issue that’s been lurking in the background for years, but investor concerns exploded this week ahead of the first scheduled court hearing 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 as a prescription drug by Glaxo in the 1980s before becoming an over-the-counter drug.
In 2019, regulators launched a safety review over concerns the drug contained a probable carcinogen called NDMA, prompting manufacturers to pull it off shelves. And by 2020, the USFDA and European Medicines Agency required all versions of the treatment to be withdrawn from the market.
Since then, more than 2,000 cases have been filed in the US alleging that Zantac use can produce NMDA.
The first trial begins on August 22, with key pilot tests scheduled to begin in early 2023.
Zantac heartburn medication is seen at a store in Mountain View, California on October 1, 2019.
Nurphoto | Nurphoto | Getty Images
The litigation is particularly complicated because so many pharmaceutical companies were involved in the drug.
The drug’s patent expired in 1997, so several manufacturers, retailers and distributors of the drug are named as defendants in the lawsuits.
Since 1998 there have been several holders of OTC rights in the US, including GSK, Sanofi, Pfizer and Boehringer Ingelheim.
Haleon, the consumer health company spun off from GlaxoSmithKline last month, is not primarily liable for the claims, according to the company, but may be tangentially linked.
Company responses
In response to this week’s violent price action, GlaxoSmithKline, Sanofi and Haleon have issued statements defending themselves.
Drug makers’ share prices stabilized on Friday morning.
A spokesman for GlaxoSmithKline said: “The overwhelming weight of scientific evidence supports the conclusion that there is no increased risk of cancer associated with use [of] Ranitidine… Claims to the contrary are therefore contrary to the science and GSK will vigorously defend any unsubstantiated claims.”
A Sanofi spokesman said: “There is no reliable evidence that Zantac caused any of the alleged injuries under real-world conditions and Sanofi remains fully confident in its defence. Given the strength of our case and the uncertainty of future proceedings, no contingencies have been established.”
Zantac is the brand name for a drug called ranitidine, a drug used to relieve heartburn.
The Washington Post | The Washington Post | Getty Images
Haleon’s involvement and potential liability appear less clear.
Haleon maintains that it is not a party to Zantac’s claims, saying it “has never marketed Zantac in any form in the United States” and “is not primarily liable for any over-the-counter or prescription claims.”
However, as stated in the prospectus issued on June 1, “to the extent that GSK and/or Pfizer is held liable in relation to OTC Zantac, Haleon may, under certain conditions, be required to indemnify GSK and/or Pfizer” .
What are the analysts saying?
“As with any legal outcome, there is significant uncertainty,” Credit Suisse’s European pharma team said in a statement. “That’s especially true in this case, where four companies have participated in owning Zantac rights over time.”
According to the team, as the trademark originator, GSK could be responsible for the majority of the liabilities and not the OTC manufacturers.
Redburn said in a research note that given that 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.
The pharma team at Deutsche Bank Research on Thursday upgraded its recommendation on Sanofi to a buy from a hold because “the Zantac reflex is starting to look a little overdone.”
Deutsche Bank doesn’t see this as an obvious buying opportunity, but argues that “it feels outrageous to sustain a sell at this level.”
The team adds, “Both GSK and SAN now appear to have a classic conundrum: mired in fear of an impending liability overhang that they are yet to fully assess.”
How big could the settlements be?
Credit Suisse says that depends on the strength the court sees in a link between NMDA and cancer and any evidence of wrongdoing.
Previous drug settlements have ranged from $30,000 to $270,000 per claimant based on evidence of wrongdoing.
There are currently more than 2,000 known applicants, but this number is expected to increase as the proceedings progress.
Compare to Bayer, Monsanto
For many investors and analysts, this ordeal brings back memories of the Bayer Roundup saga.
Shortly after Bayer’s 2018 acquisition of Monsanto, Roundup-related lawsuits escalated rapidly, ultimately 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 disclosed to investors prior to the closing of the transaction, GSK flagged the Zantac litigation as a key risk to Haleon in the prospectus released to investors in June.
In the nearly 500-page document, GSK warned: “The group has indemnification obligations in favor of the GSK group and the Pfizer group that could be material and have a material adverse effect on the group’s finances.”
Unlike Bayer’s Roundup, Zantac has been withdrawn by regulators worldwide. Additionally, 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 another glyphosate, but it’s very likely that we see several billion dollars of liability,” writes Deutsche Bank.