GSK’s listing of its consumer-products arm Haleon is rapidly “turning into a textbook case of how not to do a spin-off”, says Aimee Donnellan on Breakingviews. The hived-off company, in which Pfizer also owned a stake, floated last month. But last week Haleon’s shares plunged owing to imminent litigation in Illinois over the once-popular heartburn drug Zantac.
GSK – formerly GlaxoSmithKline – stopped selling Zantac in 2019 when US regulators found that a potentially carcinogenic compound was created during the manufacturing process. Haleon, which owns brands such as Sensodyne toothpaste and Panadol painkillers, has never sold Zantac. However, it could have legacy “indemnification obligations” to GSK and Pfizer – a fact that has spooked investors already looking at a pretty “thin” case for holding Haleon.
Branded consumer goods face a tough time as inflation soars and customers seek out value. And it hardly helps that GSK loaded up Haleon with £10bn of debt, four times expected 2022 Ebitda – nor that GSK and Pfizer want to dump their remaining combined 45% holding in the stock.
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During the pandemic we have become used to reading about the “speed and brilliance of innovation in life sciences”, says Alex Brummer in the Daily Mail. The anxiety about Haleon and Zantac is a salutary reminder that new pharmaceutical products often have a “long tail of litigation risk”.
Nor was it just Haleon stock that fell, says Lex in the Financial Times. GSK and Sanofi, which marketed Zantac for a time in the US, slipped too. Morgan Stanley estimates that GSK could account for 30%-60% of any liability, and puts the potential legal hit at anything from $10.5bn-$45bn.
Shares in all three firms have stabilised after assurances about the robustness of their legal positions. Yet investors are right to be “wary”. Bayer’s ongoing legal wranglings over Roundup, the glyphosate weedkiller acquired during the “disastrous” takeover of Monsanto, show how easy it is “to draw a line under compensation claims prematurely”.
The wrong decision
Last December, GSK turned down a £50bn bid for Haleon from Unilever. That “road not taken” is looking very attractive, says Chris Hughes on Bloomberg Opinion. Even applying a “thumping” 50% bid premium to Haleon’s current market value, you get to only £46bn once adding back the net debt. Moreover, “private equity was sniffing around last year, too”. GSK’s chairman Jon Symonds and its boss Emma Walmsley get “paid the big bucks” – £703,000 and £8.2m last year, respectively – to get these decisions right, says Alistair Osborne in The Times.
Instead, GSK has waved goodbye to about £30bn of value, and could now face a “legal dust-up” with its former subsidiary over liability for Zantac claims. “Investors may need to take the entire medicine cabinet to survive this.”
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