Big Pharma Is Headed For A Big Lawsuit

Image source: Wikimedia Commons

What's going on?

Shares of major pharmaceutical firms GlaxoSmithKline (GSK), Haleon, and Sanofi tumbled last week as a potentially cancer-causing drug goes to court.

What does this mean?

Heartburn drug Zantac was pulled from the market in 2020 when it was found to contain a cancer-causing substance, and drugmakers GSK and Sanofi have been braced for a lawsuit ever since. But if investors were shocked that Big Pharma could put profit above health, they certainly didn’t show it – until now. Legal proceedings are kicking off next week, and investors suddenly seem a lot more nervous about holding stocks that could be affected. There could be a few worth worrying about too, since Sanofi is just one of many drugmakers with rights to the drug, and there are a handful of distributors involved as well. But GSK could have the most to lose: the powerhouse first brought Zantac to the market, and its spin-off Haleon might be tarred with the same brush. Investors just ditched them all: shares of GSK, Haleon, and Sanofi fell about 10% last week.

Why should I care?

For markets: Bayer’s remorse.

Investors value a company based on the cash it’s expected to make in the future, so anything – including potentially billion-dollar lawsuits – that threatens those cash flows will reduce what an investor’s willing to pay for the shares today. After all, they’ve seen profit-wrecking pharma payouts before: Bayer bought agricultural biotechnology firm Monsanto for $63 billion in 2018, and ended up paying $12 billion only a couple years later to settle lawsuits around Monsanto’s weed-killer Roundup.

For you personally: Not-so-defensive stock.

This isn’t great timing: investors tend to hold healthcare stocks during recessionary times like these because they make products people need no matter what. Still, some investors will fare better than others: those who own a basket of healthcare stocks via an exchange-traded fund – rather than individual ones – are better protected against selloffs that affect a few specific companies.

Originally posted as part of the Finimize daily email.

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