Zantac burns big pharma

As Zantac litigation risk wipes $43bn off public company valuations are investors right to be worried?

The sudden realisation that Zantac faces product liability lawsuits can conceivably be linked to the loss of $43bn in company market valuations over the past two days. But the issue has been known about for at least two years, and nothing new has actually happened to trigger this week’s falls.

Yet apparently, as far as investors in GSK, Pfizer, Sanofi, Johnson & Johnson and the newly minted Haleon are concerned, the risk is suddenly real. So what is the issue, what is the risk, are concerns justified, and how big could the companies’ liability be? Evaluate Vantage takes a look.

Is Zantac linked with cancer?

Most of the companies involved have now issued statements stressing that there is no link between ranitidine, the active ingredient in the heartburn drug Zantac, and cancer. The FDA and EMA have already concluded that there is no such risk.

However, this misses the point: the risk came not from ranitidine but from a nitrosamine impurity found in Zantac tablets.

Yet this too is not the whole story. It is not clear how high a level of nitrosamine can be said to pose a risk of cancer, and it is not even known how much of this impurity Zantac contained. Evercore ISI says one testing lab, Valisure, might have triggered the original nitrosamine concerns, and suggests that Valisure has a conflict of interests.

Sanofi pulled Zantac OTC in 2019 over an “abundance of caution”, and the following year the FDA requested the removal of all ranitidine-containing products, citing a risk to public health from rising nitrosamine levels in Zantac over time.

Who “owned” Zantac and when?

Legacy GSK and Pfizer companies sold Zantac until 1998, by which time the drug had gone OTC. J&J bought Pfizer’s OTC business in 2006, immediately ceding Zantac to Boehringer Ingelheim, which sold it on to Sanofi in 2017. GSK spun out its remaining consumer health business as Haleon this year.

Yesterday Pfizer said it had sold Zantac “only between 1998 and 2006”, while Sanofi said it had acquired rights after the medicine had been on the market for over 35 years. Haleon said it “never marketed” the drug in any form, and neither of course did J&J.

However, again these facts miss the point: it does not so much matter who sold the drug when, but rather with whom any liability rested as the rights were passed around.

What is the actual issue?

Thousands of personal injury lawsuits were filed once the nitrosamine impurity became known and Zantac was pulled from sale. Sanofi cites 3,450 cases filed across all jurisdictions, 2,850 of which name it as sole or co-defendant. GSK, Pfizer and Boehringer feature as the other defendants, and there are apparently 150,000 other potential cases – plaintiffs who have not yet filed but have registered personal injury claims.

Neither J&J nor Haleon have been named. The risk over these two companies relates to indemnity clauses they had agreed; J&J says it has received indemnity demands from Sanofi and Boehringer, while an SEC filing reveals that Haleon has “indemnification obligations in favour of” GSK and Pfizer.

What is the risk?

Fundamentally, the risk is that one or more plaintiffs convince a court that they took Zantac OTC during the relevant period, and that as a result of this and the relevant company’s negligence they developed cancer. In reality the chances of this being proved are extremely small – GSK cites scientific publications refuting a link with cancer – and the scope of plaintiffs’ complaints has already been narrowed.

But the issue is more subtle, namely that actions are pursued by lawyers conscious of dealing with extremely deep-pocketed companies, and that these companies decide to settle out of court to bring the matter to a close.

What are companies doing?

Issuing statements defending Zantac, minimising their involvement with the drug, and stressing that nothing has changed in the past two years.

And bickering among themselves. Pfizer cites “substantial indemnification claims” it has against others. Sanofi and Boehringer (while seeking indemnification from J&J) are themselves disputing their obligations and are locked in arbitration.

This arbitration is expected to reach a conclusion around the end of this year. A product liability trial involving GSK in Madison County, Illinois is scheduled to begin in 10 days’ time, while another is set for February 2023. Sanofi says the first trial that “may involve” it as a defendant is also scheduled for February, as a part of California state court proceedings.

How exposed are they?

This, of course, is the question everyone wants answered, and some analysts have had a go. Morgan Stanley, for instance, says damages could reach $45bn.

Evercore is more restrained, saying initial estimates are always overblown, and suggesting $1-2bn each for companies that actually sold Zantac, with J&J and Haleon picking up part of this tab owing to the indemnity agreements. Interestingly, recent opioid settlements suggest that an individual company’s exposure has less to do with the period of time it sold a product and more with how deep its pockets are.

Clearly recent product liability settlements, including over opioids, are fresh in investors’ memory. But even the most egregious cases did not result in settlements amounting to anywhere near the $43bn that investors wiped off big pharma valuations this week.

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