The Zantac fears also fall within a broader context that may also be pressuring the pharmaceutical sector:
- US drug pricing legislation is near final Congressional passage after seven years of wrangling in DC. Our view here remains that clearing the “policy overhang” actually improves long-term visibility for the industry, and the actual impact is much less than has been feared at various points in the past few years (less than 3% of global pharma earnings over the next 10 years). However, in the near term, the headlines have clearly provided an excuse for taking profit on defensive stocks that had already positively rerated as concerns rose over the broader economic outlook.
- 2Q results were as expected across pharma. Very few companies raised guidance, but 2H22 and 2023 earnings outlooks are well supported by fundamentals with significantly less downgrade risk than the broader market.
Zantac: What’s happening?
- Zantac is an old heartburn drug first approved in the 1980s. Its patents expired in the late 1990s, and Zantac was later cleared by the FDA as an OTC (over-the-counter) medicine (i.e., available in retail stores without a prescription). It sold several billion dollars over its life as a prescription drug and was used by millions of patients. At least five pharma companies have marketed branded Zantac over the years, including GSK (original developer), Sanofi (OTC version), Pfizer, and Boehringer Ingelheim. Currently, marketing rights are owned by Haleon, Glaxo’s recently spun-out consumer health business. Notably, Haleon’s Zantac product has been reformulated to remove the specific chemical component that caused the cancer risk discussed below.
- In 2019, the drug was voluntarily withdrawn from the market after independent studies concluded that the drug may degrade over time, leading to unacceptably high concentrations of a chemical known as NDMA, which has been linked to several types of cancer. The evidence is inconclusive, but there are several studies suggesting a link.
- Since 2019, over 2,000 lawsuits have been filed against various of the companies above relating to the cancer risk. This is not new information per se, but it has become a focus for the market as the first court case is scheduled to begin later this month.
- Approximately USD 37 billion has been wiped off the combined values of GSK, Sanofi, Pfizer, and Haleon since Tuesday, 9 August (Boehringer Ingelheim is unlisted). Currently, it is hard to compare this aggregate market value decline to any reasonable assessment of the potential liability given no cases have even come to court yet, and it is complicated by the need to apportion any final costs across four or five companies. Litigation overhangs tend to linger, and usually require more detail around potential jury awards that investors can then compare to other historical litigations and thus frame a range for the potential liability.
- Pharma is no stranger to product liability cases, and investors are eventually able to frame the financial risk within the context of a company’s long-term earnings and cash flow generation.
Main contributors: Lachlan Towart, Eric Potoker
Original report - Zantac litigation pressures pharmaceutical stocks, 11 August, 2022.