Reasons to stay positive on GSK despite ongoing legal issues

The company’s core business is doing well and investors continue to get decent dividends

GSK (GSK) is one of Shares’ 2023 picks of the year based on the potential for the shares to narrow their valuation discount to peers. We said to buy at £14.18.

The shares had previously been weak after various people took legal action against GSK, saying its heartburn drug Zantac causes cancer. Showing this is not true and better performance of the business are key factors which could lead to a higher rating for the shares.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

Last December a US judge in Florida dismissed thousands of lawsuits relating to Zantac on the basis that they were not backed by sound science. This eliminates around a third of all US claimants according to Shore Capital pharma analyst Sean Conroy which bodes well for GSK.

The next test is a legal case that starts in

California on 27 February which should throw more light on the situation.

Earlier this month GSK delivered better than expected fourth quarter sales and profit driven by strong growth in shingles drug Shingrix and its HIV franchise.

Management reiterated 2023 sales growth of 6% to 8% and guided for adjusted earnings per share growth of 12% to 15% excluding contributions from Covid-19 solutions. Consensus expectations for earnings are at the lower end of guidance, suggesting forthcoming upgrades from analysts.

The company guided for 56.5p in dividends for 2023, implying a 3.8% yield on the current share price.

The demerger of consumer healthcare business Haleon (HLN) has provided GSK with more firepower to make acquisitions to complement organic growth. Conroy believes ‘depressed’ valuations in biotech present GSK with an opportunity to revisit deals which have hitherto been seen as uneconomical.

WHAT SHOULD INVESTORS DO NOW?

Despite moving higher in recent months, the shares still trade at a significant 31% discount to the sector. While Zantac litigation worries continue to weigh on the shares, it presents an opportunity for investors to take advantage of improving fundamentals. We remain bullish on the stock.