It started out relatively small, or as small as a recall of one of the first drugs to top $1 billion in annual sales can be. In September 2019, individual companies began recalling popular heartburn medication Zantac. In April 2020, the Food and Drug Administration issued an official market withdrawal of the drug because it found that levels of known carcinogen N-nitrosodimethylamine (NDMA) increase in the drug over time when stored under normal conditions.
Drug recalls are scary enough when they deal with something that can easily be traced back to an error in the manufacturing process, such as metal pieces. However, things get far more complicated when dealing with nitrosamines like NDMA, which result from little-understood chemical interactions. These contaminants have proven difficult to avoid, and the more scientists learn about them, the more they are beginning to realize the dangers – dangers that include being found in much higher amounts than expected in many drugs that were not testing for them before the FDA required them to do so in 2020.
This development could have long-lasting negative effects on the companies making drugs found to have high levels of nitrosamine contamination. Lawyers are lining up to fight for compensation for those who developed cancer after taking the drugs in question, and the ball is only just beginning to roll, with the upcoming round of federal Zantac trials set to begin in the first half of 2023.
An overlooked problem rears its head
Nitrosamines have been known and recognized as carcinogens for at least 65 years, but it was not until 2018 when their high contamination levels in certain everyday drugs came to light. The FDA permits up to 96 nanograms of NDMA in drugs and food based on its calculations that this would result in a 1 in 100,000 cancer risk for people, but in 2018, Swiss drugmaker Novartis AG (NVS, Financial) found as much as 20,000 nanograms of NDMA in certain blood pressure pills, which were quickly recalled.
Realizing that this problem might be more widespread than initially thought, the FDA instructed all drugmakers to test their products for the potential carcinogens, and unacceptably high levels of nitrosamines began cropping up all over the place, including in Zantac and its generic version ranitidine, Pfizer’s (PFE, Financial) smoking cessation drug Chantix, blood pressure and muscle relaxant drugs from Pfizer and Novartis’ generics business and Merck’s (MRK, Financial) diabetes drugs. Little is understood about why this happens; for Zantac, it appears to be because levels of NDMA increase over time under normal storage conditions due to little-understood chemical interactions.
The Zantac lawsuits are alleging that makers of the drug misled customers about the potential health risks in order to improve sales. Since NDMA is something that can be tested for, the plaintiffs argue that refusing to perform the proper testing each year means the drugmakers cannot claim the contamination was due to accident or justifiable negligence.
How much will this cost big pharma?
The full affects of these nitrosamine-linked lawsuits could take years to play out in full. It might also prove difficult to eliminate them from drugs since the contaminant levels are often increasing due to unexpected triggers such as normal storage temperatures.
The Zantac lawsuits in particular will be far-reaching because the drug has been through several transfers in ownership since it first hit the market in 1983. Originally developed by GSK PLC (GSK, Financial), it was later sold to Pfizer, then Boehringer Ingelheim and lastly Sanofi SA (SNY, Financial) in 2017.
A recent report from Morgan Stanley (MS, Financial) analysts estimates that trials over nitrosamines in Zantac could cost the makers of the drug $45 billion. Other drugmakers that could come into the litigation crosshairs include Pfizer and Merck, and testing continues to identify more contaminated drugs.
Some analysts argue that the market is already overreacting to the news and that any litigation costs are already being priced in, since shares of GSK and Sanofi have been selling off since the end of July. However, attributing this selloff to the Zantac litigation might be inaccurate since it also coincides with the release of disappointing second-quarter results for late Covid-19 vaccine entrant Novavax (NVAX, Financial), highlighting that GSK and Sanofi’s own late-entry Covid-19 vaccine is likely to disappoint on the earnings front. Neither Merck nor Pfizer have sold off recently.
Regardless of whether any appropriate selloffs have or have not happened, some believe that the argument against Zantac makers will not go over well with juries, which could put customers on the hook for punitive damages if juries rule that big pharma simply was the victim of an understandable accident.
A lodestone, not a mallet
Those claiming that damages from the Zantac litigation have already been priced into GSK and Sanofi’s stocks may be engaging in wishful thinking.
History has shown time and again that drug lawsuits on a nationwide scale act like a lodestone on the stock, not a mallet. There will be no one-and-done hit that the investing public soon forgets about completely, not when as many as 160,000 customers have already filed claims. The quarterly financial results will be bringing up related expenses for years to come as an explanation for why earnings were not higher.
For example, Bayer AG (FRA:BAYA, Financial) has spent years defending against lawsuits from its popular weedkiller Roundup, which is a known carcinogen due to its active ingredient glyphosate. The company has set aside $16 billion do deal with settlements on the case. No analysis on the stock is complete without at least mentioning the Roundup problem.
Those with investments in big pharma may thus find it worthwhile to keep an eye out for any developments in the nitrosamine drug saga. GSK and Sanofi look like they will be the hardest-hit at the moment, but Pfizer and Merck could also face litigation, and so could any other big pharma names with drugs that turn out to have far more nitrosamines than expected.
