DL-Invariant

If you have a pension fund, target date fund, market index, or many variety of diversified products in an IRA, 401k, or similar retirement account, you almost assuredly have money invested in tobacco.

If you look at history, nicotine has been nearly unstoppable. If one cigarette company stops selling them, they will simply cede market share to another. If all stop selling, it would inevitably create a massive black market - there are specific markets that attempt prohibition, you can see what happened historically.

Instead, isn't it rational to be realistic and aim for harm reduction? If Consumers can receive a satisfactory nicotine experience from a product that is going to be far less harmful, isn't that still a net positive?

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.

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...

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.

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.

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.

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.

AFAIK, they must pay for volumes of all products sold under the Listerine brand name, regardless of formulation.

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.

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.