Zantac Legal Ruling Represents a Major Win for GSK and Sanofi

Consistent with our expectations, the Multidistrict Litigation, or MDL, Zantac ruling dismissed cases claiming the drug caused cancer. While we don’t expect any changes to our fair value estimates for GSK (GSK), Sanofi (SNY), and other drug firms that have sold the gastroenterology drug Zantac, the market’s overreaction in late summer appears to have largely reversed course based on this ruling, and the shares have largely recuperated the over $30 billion in market capitalization lost when significant investor concern over Zantac litigation emerged in August. Even with the rebound, we continue to view the stocks as undervalued, with the market not fully appreciating the growth potential of the firms and their wide moats.

We believe the MDL ruling was largely based on the lack of consistent or reliable evidence that Zantac causes cancer. We believe the vast majority of clinical data supports a favorable safety profile. While the recent ruling is a step in the right direction, we expect the Zantac litigation process will continue to play out for over a year, with the first of several bellwether cases likely to start in February 2023. We expect a long legal process before firms likely settle claims at a level below $1 billion. For reference, most drug side-effect settlements range from nothing to low-double-digit millions of dollars. The largest drug settlements due to side effects tend to range from $2 billion to $7 billion. However, the opioid settlements for key drug firms totaled close to $20 billion. We don’t expect litigation costs at the high end of the range, since the Zantac issues look less damaging for Sanofi and GSK.

Zantac was removed from the U.S. market close to two years ago due to potential carcinogenic effects, but the strong safety profile of the drug in previous decades—it was launched in 1981—suggests challenging legal hurdles for plaintiffs. Also, Zantac was switched to over-the-counter status many years ago, further suggesting a very safe profile.