GSK Facing Legal Woes, No Longer A Buy

In previous coverage, GSK (NYSE:GSK), a large ($76.5 billion) global biopharma company, was held up as a Buy for its A+ rated dividend (which decreased to 3.67% yield), A+ rated profitability on $9.1 billion revenue in Q4, A grades on valuation and EPS revisions, and as a defensive healthcare stock in this bear market. It is one of the five stocks promoted for their dividends that have all underperformed among personal recommendations (Figure 1), but it was the best of the bunch. It has mostly tracked the reference SPDR S&P 500 Trust ETF (SPY) until pulling away since the beginning of April (Figure 2). Longs may want to lock in their profits as GSK stock is unlikely to continue that trajectory, given future legal headwinds.

Figure 1. Performance of CSI’s Buys and Strong Buys from September 2022 compared to S&P ETF

Figure 2. GSK Price chart compared to S&P ETF since February

On a lawsuit filed in May 2021, The High Court of Justice Business and Property Court of England and Wales ruled on April 5 that GSK subsidiary Tesaro was obligated to pay AstraZeneca royalties “on all net sales of Zejula in each country in which there are licensed patents from the first commercial sale in that country”. In October 2012, Tesaro entered into two license agreements to make milestone and royalty payments to AstraZeneca Limited based on the achievement of certain development and regulatory milestone events and on net sales of Zejula and had made a total of $1.5 million milestone payments through December 31, 2017. Worldwide Zejula sales were £462 million in 2022 and £395 in 2021. While, it is almost a certainty the royalties aren’t for double digits, AstraZeneca’s haul could be in the hundreds of million pounds.

On the Zantac (ranitidine) front, the earliest trial is set for July 24, the first of tens of thousands of cases still in state courts. Recent developments include a plaintiff win on March 24 allowing them to call experts to testify, which set the stock back 2.4%. This comes after a Bloomberg Businessweek investigation in February that the GSK knew 4 decades ago that its H2 receptor antagonist (H2RA) heartburn med could form high levels of probable carcinogen N-nitrosodimethylamine (NMDA). This could happen in the stomach or even during storage, such as on a store shelf or medicine cabinet.

Among the unflattering pieces:

• As early as 1981, researchers in Italy (where Zantac was already approved) wrote to Lancet that “preincubation [of ranitidine] with nitrite in human gastric juice from untreated individuals (60 min at 37°C) or simply acidification of nitrite-ranitidine mixtures results in toxic and mutagenic effects in bacteria.” Since the optimal pH for these conditions was found to be 2-3, they advised not taking Zantac close to (or with) meals. This would be disregarded by GSK, as prescribing information until 1997, when the drug became generic, showed it was to be taken after a meal.
• In an unpublished March 1982 manuscript by R.J.N. Tanner and other researchers from GSK’s Division of Biochemical Pharmacology determined that in their first test, “when 10 mM ranitidine was incubated with 40 mM sodium nitrite, 232 µg NDMA was formed,” which is 2,400 times higher than the 0.096 µg of NDMA the FDA sets as a reasonably safe limit for human consumption per day.
• Ranitidine has both a nitroso (N-) and dimethylamine (DMA) chemical group, so it inherently has the potential to form NDMA. During the FDA Advisory Committee meeting for Zantac in May 1982, GSK withheld the Tanner report as well as information on ranitidine’s instability and special temperature, storage and transportation needs to prevent degradation that had circulated within the company in the form of memos and other internal communications. Had the Agency been alerted to these dangers, it could’ve impacted Zantac’s quick approval and becoming one of the world’s first blockbusters.

Readers may recall that in September 2019, Valisure, an accredited laboratory, started the recall ball rolling by filing an FDA Citizen Petition after it detected extremely high levels of NMDA in “every lot tested, across multiple manufacturers and dosage forms of the drug ranitidine” in their pharmacy. In one of their tests, allowing industry standard “Simulated Gastric Fluid”, 40 mM sodium nitrite, and one 150 mg tablet of ranitidine to react for one hour yielded 23.6 µg NMDA per tablet. This is almost 250 times the safety limit. Subsequently, the FDA itself found NMDA in all samples it tested.

Much research has been done that confirm exogenous (factors such as storage time and temperature) and endogenous (natural decomposition) production of NDMA production from ranitidine. According to GSK’s own investigation, NDMA wasn’t detected in freshly prepared batches of ranitidine, so it’s not made during the process or introduced as a contaminant. The lowest rate of NDMA formation GSK found in a few samples from 2014 was calculated to be approximately 0.04 mcg/g per year. This means that at best, the safety limits would’ve been exceeded after 2.5 years on the shelf.

Several epidemiologic studies support the case that NDMA-contaminated ranitidine can increase cancer risk in the community. From 2013 to the first quarter of 2020, 13,856 adverse events (“AEs”) for ranitidine monotherapy were submitted to the FDA Adverse Event Reporting System (FAERS), representing 9.8% of the 143,359 AEs for all proton pump inhibitors (PPIs) and other H2RAs commonly used for heartburn. The proportionate reporting ratios of total digestive system cancers were 3.7 times higher than that of PPIs and non-ranitidine H2RAs. Table 1 lists other digestive tract cancers which were highly elevated and statistically significant than its comparators. These are just from reported AEs. In a 2022 prospective observational study in a Taiwanese population, long-term (1-year) ranitidine use was associated with a 26%, 22% and 35% higher cancer rate in the stomach, liver and pancreas, respectively, compared with H2RA famotidine. Overall, ranitidine users had a 10% higher likelihood of cancer (95% CI, 1.06–1.15, p<0.001).

Table 1. Digestive system cancer-related AEs reported for ranitidine

Click to enlarge

To conclude, by not settling out of court, GSK will be subject to a long, litigious period. The premises from the prior article still hold; however, the market may have already milked the Alpha for all its worth. Scientific evidence doesn’t seem to back the company prevailing in the Zantac cases anyway, so why take the chance? In the past decade (Figure 3), GSK has only outperformed the broad market once (in 2018). It would probably be wise for investors to take their money and run elsewhere.

From Figure 1, even other high-yield Big Pharmas like Dividend Aristocrat Johnson & Johnson (JNJ) can no longer be recommended, although JNJ is facing its own legal problems. Investors who are only comfortable with defensive healthcare stocks boasting consistent earnings could look into Vertex Pharmaceuticals (VRTX), a Buy for its strong growth. Otherwise, smaller-caps seem to offer the much better short-term prospects.

Figure 3. GSK Annual Returns versus Peers