over 1 year ago • 3 mins
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.
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Data out on Friday showed the UK economy shrank less than expected in the second quarter.
What does this mean?
The UK economy shrank 0.1% last quarter compared to the one before, but it could’ve been worse: economists were expecting twice that, at a time when every increment matters. That marks the first contraction in the economy since the height of the pandemic, and it was down to a domino effect of factors. High inflation has been stoking the cost-of-living crisis, which has left Brits with less disposable income to spend out and about. That, in turn, led to a drop in household consumption (partly reflected in weak retail sales), and a drop in manufacturing. It’s also worth bearing in mind that there was one day less of business, with Brits given a day off to celebrate the Queen’s Platinum Jubilee. So when you put it all together, less shrinkage than expected was actually something of a win.
Why should I care?
For markets: You can relax.
You need two quarters of contraction in a row for an economy to officially be in a recession, and Bloomberg Economics doesn’t think that’ll happen just yet. After all, Brits don’t have a royal day off this time around, which means the economy – measured relative to the quarter before – has an extra day to boost its numbers. And even if there is a downturn, it’s not the end of the world: the US is technically in a recession, but investors seem to have shrugged it off.
The bigger picture: You can stop relaxing now.
The UK might avoid a recession this year, but the Bank of England (BoE) thinks it’s bound to arrive in 2023. The central bank puts that down to – what else? – inflation, which it thinks will peak at around 13% in October on the back of rising energy prices. Then again, the UK energy regulator’s latest data suggests the BoE is still underestimating energy costs, which arguably means it’s still underestimating inflation too…
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