Many investors expected today’s move in GlaxoSmithKline (NYSE:GSK), with shares of GSK stock plunging more than 8% in early afternoon trading. That’s because, on Friday, a Delaware judge ruled that expert witnesses would be allowed to testify in court that the company’s discontinued Zantac heartburn medication may have caused cancer.
This ruling will allow 70,000 lawsuits to proceed, alleging that Zantac caused cancer. Many investors in the U.K.-based drugmaker hoped the courts would dismiss this request, but it does appear some significant legal exposure could be on the horizon as a result of this decision.
With that said, let’s dive into what’s transpired thus far and what GlaxoSmithKline investors should consider moving forward.
GSK Stock Sinks on Serious Legal Headwinds
Lawsuits against major pharmaceutical companies appear to be ramping up, with settlements from several major players seen in recent years. From the opioid epidemic to other lawsuits tied to cancer claims, this industry remains difficult to assess from a risk/reward perspective. This case against GlaxoSmithKline is just the latest example for investors looking at the big pharma space to try to wrap their heads around.
With a decline of more than 8% at the time of writing, it does appear investors are now pricing in some sort of significant settlement amount for this company to move past these lawsuits. Right now, it remains unclear whether the company intends to prove its case in court or settle. But in either case, investors are clearly anticipating some sort of monetary hit, with some estimates suggesting the amount could be in the $2 billion to $3 billion range.
That would certainly be a big hit for the drugmaker. But with this potential headwind now seemingly priced into the stock, the question for investors moving forward is whether this stock is a buy on this dip. After all, we saw how certain large pharma companies performed after their legal woes were settled.
Currently, I think there’s too much uncertainty around this name to justify taking a stance in either direction. The market could be pricing this risk all wrong, as estimating potential damages is a difficult game. Accordingly, I think this is a stock investors may be best rewarded by sitting on the sidelines right now.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
