Listerine Royalties(invariant.substack.com)
invariant.substack.com
Listerine Royalties
https://invariant.substack.com/p/listerine-royalties-the-origin-story
29 comments
Wonderful catch!
This was an unfortunate error on my part. The initial claim was based on this source:
https://www.listerineprofessional.com/products/oral-care-rou...
Thank you so much for bringing this to my attention. I have amended the article, and have included a footnote reflecting the initial error.
Fortunately, I don't think that this altars the approach to the valuation portion of the analysis.
This was an unfortunate error on my part. The initial claim was based on this source:
https://www.listerineprofessional.com/products/oral-care-rou...
Thank you so much for bringing this to my attention. I have amended the article, and have included a footnote reflecting the initial error.
Fortunately, I don't think that this altars the approach to the valuation portion of the analysis.
> And in the future, Dr. Lawrence would receive $20 for every gross (144 bottles) sold. This was later amended to be based on ounces sold to equivalize different container sizes.
Since it's denominated in USD, wouldn't inflation have eaten up a large percentage of the royalty over time?
Since it's denominated in USD, wouldn't inflation have eaten up a large percentage of the royalty over time?
At the time, the US dollar was pegged to gold.
That's covered briefly in the article, but basically they move such huge volumes that it's still a lot of money - and there's potential for growth in international markets.
You're correct in your baseline of thinking. If you dig into the valuation portion of the article, I explore that a bit.
International growth, strong USD, usage rates increasing. Overall, it's volumes vs inflation. Volumes have been growing faster on a relative basis.
Certainly a long-term risk; just one of many.
International growth, strong USD, usage rates increasing. Overall, it's volumes vs inflation. Volumes have been growing faster on a relative basis.
Certainly a long-term risk; just one of many.
Additionally, the driver for the huge volume increase was partly Listerine going down market from an expensive medicine to a mass market product. $20 in 1881 is apparently equivalent to $580 now. J&J probably only get around $200 revenue for each gross of Listerine sold now (a guess based on retail prices and markups), suggesting that despite inflation the royalty is still a respectable 10% but implying the 1881 price must have been much higher, in real terms, than Listerine costs now.
$20 USD was a lot in 1915. The average worker probably made $400 a year back then.
Some mouthwash has been implicated in oral cancers. It wouldn't take long for sales to tank and alternative formulation and branding to seize the market.
Smart investors would of course have a time machine to cash out before that happened.
Smart investors would of course have a time machine to cash out before that happened.
Listerine is one of the most heavily studied oral care products in all of history.
It is also the only nationally branded antiseptic mouthwash in the U.S. that has earned the ADA seal of acceptance(American Dental Association.)
While we can accept what you're saying is a risk, I think it is exceedingly unlikely.
It is also the only nationally branded antiseptic mouthwash in the U.S. that has earned the ADA seal of acceptance(American Dental Association.)
While we can accept what you're saying is a risk, I think it is exceedingly unlikely.
If you'd told me stocks in high street shops would be a risk investment because of online shopping when Amazon started I would have laughed in your face. They are not immensely un-risky holdings any more, because people's shopping habits moved. Look at Macy's value. It's way down from peak.
Revlon is a major consumer brand. How many people know about its involvement in haemophilia treatment, and the downside risks? Its in bancruptcy. How can a brand with that kind of recognition, which also owned Elizabeth Arden, tank?
I love listerine strips. I use them all the time. I haven't used TCP mouthwash since a big panic around phenols, and TCE in the 80s. I think the market moved. I certainly don't use Listerine any more, or use "fishermens friends" mouth lozenges which have chloroform in then (or used to)
The risk isn't "cancer" its "ohmygod cancer" headlines.
Revlon is a major consumer brand. How many people know about its involvement in haemophilia treatment, and the downside risks? Its in bancruptcy. How can a brand with that kind of recognition, which also owned Elizabeth Arden, tank?
I love listerine strips. I use them all the time. I haven't used TCP mouthwash since a big panic around phenols, and TCE in the 80s. I think the market moved. I certainly don't use Listerine any more, or use "fishermens friends" mouth lozenges which have chloroform in then (or used to)
The risk isn't "cancer" its "ohmygod cancer" headlines.
I appreciate the pushback, and love how you're thinking about this.
Negative press can always be a head headwind.
I'd counter, if you look across the world, as oral hygiene has become a greater focus as we learn to appreciate it's importance in overall wellness, there is a huge positive trend: Health organizations and governments are spending huge amounts of money to support the adoption and frequent use of products like antiseptic mouthwash.
Bad headlines can certainly stifle volumes a bit, but long-term I am not sure they'd ever be enough to counter the concentrated efforts of so many major establishments.
Negative press can always be a head headwind.
I'd counter, if you look across the world, as oral hygiene has become a greater focus as we learn to appreciate it's importance in overall wellness, there is a huge positive trend: Health organizations and governments are spending huge amounts of money to support the adoption and frequent use of products like antiseptic mouthwash.
Bad headlines can certainly stifle volumes a bit, but long-term I am not sure they'd ever be enough to counter the concentrated efforts of so many major establishments.
I'll trust second-hand info received from Sloan Kettering oral cancer specialists instead, thank you.
Also:
"Alcohol-based mouthwash as a risk factor of oral cancer"
[0] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6982979/
Also:
"Alcohol-based mouthwash as a risk factor of oral cancer"
[0] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6982979/
Conclusions:
"It cannot be guaranteed that the use of mouthwash represents an independent risk factor for the development of head and neck cancer. However, the risk does increase when it occurs in association with other carcinogenic risk factors."
"It cannot be guaranteed that the use of mouthwash represents an independent risk factor for the development of head and neck cancer. However, the risk does increase when it occurs in association with other carcinogenic risk factors."
Yes, exactly. The statement contradicts the author's position that is "exceedingly unlikely" to be a cause of oral cancer. Taken together with the medical consensus that alcohol itself is a considered to be a cause of oral cancer I have to wonder why anyone would be completely surprised by the conclusion that alcoholic mouthwash also increases the risk of cancer.
In the article:
"Listerine also has years of comprehensive clinical research supporting the health benefits, as well as potential risks, of its use. This should greatly reduce concern around the possibility of future product lawsuits."
I should have elaborated in my previous comment - I don't think there is zero risk. When I said exceedingly unlikely, I meant as an overall material risk.
If you do hold the belief the risk is material, you can factor a scenario analysis and create a blended EV to apply to valuation approach. This would help reflect the risk when trying to price the royalties.
I appreciate the criticism! Love reading all these different perspectives.
"Listerine also has years of comprehensive clinical research supporting the health benefits, as well as potential risks, of its use. This should greatly reduce concern around the possibility of future product lawsuits."
I should have elaborated in my previous comment - I don't think there is zero risk. When I said exceedingly unlikely, I meant as an overall material risk.
If you do hold the belief the risk is material, you can factor a scenario analysis and create a blended EV to apply to valuation approach. This would help reflect the risk when trying to price the royalties.
I appreciate the criticism! Love reading all these different perspectives.
I don't think the American public cares too much about products which cause cancer. Certainly not enough to punish companies from a sales standpoint. Johnson & Johnson have known for decades that they sold talc powder contaminated with asbestos and was killing people, but consumers never punished them for it. You can't even tell by looking at a graph of the last 5 years of JNJ stock when this news came out and were fined for it. It didn't make a dent. They won't even pay the fine. They spun up a new company to own the liability and are declaring it bankrupt instead. They *STILL* sell asbestos talc powder outside the US and Canada.
https://www.reuters.com/investigates/special-report/johnsona...
https://www.reuters.com/investigates/special-report/johnsona...
Some mouthwash has been implicated in oral cancers.
Listerine has offered an alcohol-free (alcohol being the concern for oral cancer) version for quite a while.
Listerine has offered an alcohol-free (alcohol being the concern for oral cancer) version for quite a while.
Presumably they still pay out on that, but I wonder if with sufficient shift in formulation and brand, they could get out of it?
AFAIK, they must pay for volumes of all products sold under the Listerine brand name, regardless of formulation.
Discussion on this from 3 months ago:
https://news.ycombinator.com/item?id=31112411
https://news.ycombinator.com/item?id=31112411
[deleted]
I foresee a strange future in which a Blockchain ties itself to la share of Listerine royalties and ultimately becomes the king of Crypto currencies with the backing of a century+ old underlying asset.
I don't get something. If formula is public, why can't any company start selling it without paying any royalties?
The ruling only applied to the ones who inherited the initial contract.
The ruling only applied to the ones who inherited the initial contract.
Parts of the ruling:
"It may be noted that here the parties themselves made no reference to secrecy in either the 1881 or the 1885 agreements. The word "secret" is not used anywhere in either of them. It is true that I have assumed during this discussion that the plaintiff is correct in its contention that what Lambert bargained for was a "secret" formula. But that in *666 no way justifies the further assumption that he also bargained for continuing secrecy or that there would be failure of consideration if secrecy did not continue."
"Thus, I hold that under the agreements in suit plaintiff is obligated to make the periodic payments called for by them as long as it continues to manufacture and sell the preparation described in them as Listerine."
The judge recognized that it was not just the mere formula, but rather the brand name, that supports the value of the product and thus royalty agreement.
It's in J&J's best interest to sell under the brand name, which is the #1 in the world, and simply pay the royalties.
https://law.justia.com/cases/federal/district-courts/FSupp/1...
"It may be noted that here the parties themselves made no reference to secrecy in either the 1881 or the 1885 agreements. The word "secret" is not used anywhere in either of them. It is true that I have assumed during this discussion that the plaintiff is correct in its contention that what Lambert bargained for was a "secret" formula. But that in *666 no way justifies the further assumption that he also bargained for continuing secrecy or that there would be failure of consideration if secrecy did not continue."
"Thus, I hold that under the agreements in suit plaintiff is obligated to make the periodic payments called for by them as long as it continues to manufacture and sell the preparation described in them as Listerine."
The judge recognized that it was not just the mere formula, but rather the brand name, that supports the value of the product and thus royalty agreement.
It's in J&J's best interest to sell under the brand name, which is the #1 in the world, and simply pay the royalties.
https://law.justia.com/cases/federal/district-courts/FSupp/1...
This was a really good read. Does anyone have any book recommendations to start reasoning about valuation in the same way the author did?
Thanks for the kind words!
I am the author.
If you're interested in fundamental valuation, there are quite a few great resources.
I highly recommend starting with:
Value: The Four Cornerstones of Corporate Finance
Investment Valuation, by Aswath Damodaran
I also recommend Aswath's blog https://aswathdamodaran.blogspot.com/
If you enjoyed the article, you might be happy to know there are several other analysis pieces on the Invariant Substack that cover specific companies and walk through valuation methodologies. There will also be many more pieces like this in the future.
Please sub and comment on the Listerine piece, as I'd love to correspond on the platform, and I'd be happy to provide guidance/answer further questions regarding valuation. If you provide any kind of identifier for your sub email, I'm also happy to answer questions and bounce idea via email. I'm always looking to connect with other curious people that love finance.
I am the author.
If you're interested in fundamental valuation, there are quite a few great resources.
I highly recommend starting with:
Value: The Four Cornerstones of Corporate Finance
Investment Valuation, by Aswath Damodaran
I also recommend Aswath's blog https://aswathdamodaran.blogspot.com/
If you enjoyed the article, you might be happy to know there are several other analysis pieces on the Invariant Substack that cover specific companies and walk through valuation methodologies. There will also be many more pieces like this in the future.
Please sub and comment on the Listerine piece, as I'd love to correspond on the platform, and I'd be happy to provide guidance/answer further questions regarding valuation. If you provide any kind of identifier for your sub email, I'm also happy to answer questions and bounce idea via email. I'm always looking to connect with other curious people that love finance.
Since it was based on ounces sold, my initial thought was it would balance incentives of watering down the actual formula over time.
You're smart to think of how it could be gamified.
However, the product is tightly regulated and has stiff competition. The brand name is a huge driver of sales. Anything that could impair the brand image, like dilution of product, would cause more long-term value destruction.
However, the product is tightly regulated and has stiff competition. The brand name is a huge driver of sales. Anything that could impair the brand image, like dilution of product, would cause more long-term value destruction.
The full list of ADA-approved products for plaque/gingivitis control is here:
https://www.ada.org/resources/research/science-and-research-...
All of the rinses in that category have formulas similar to Listerine, but many of them are generic store brands that have also independently obtained ADA approval. The generic rinses work just as well as Listerine, and they wouldn't be subject to the royalties.