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The TSAs generally run for 24 months following the separation, although some services
could be provided for a longer period of time (less than 60 months) in certain
circumstances such as if the functions are limited by regulatory approval. The company
noted that it plans on working with JNJ in establishing its own stand-alone IT functions,
which would run concurrent to the TSA and could account for less than a 100 bps
headwind to profitability and decline post-2023.
The TMAs cover Self Care products including certain Tylenol, Zyrtec, Mortin, Benadryl and other OTC products that represented less than 10% of KVUE􀋖s 2022 sales. Within
the TMAs, KVUE is responsible for demand forecasting (both binding and non-
binding), and JNJ will be responsible for sourcing raw materials and manufacturing. The TMAs have different lengths depending on product but in all cases phase out over a This document is being provided for the exclusive use of DAVID WANG at MARLOWE PARTNERS LP.
21
Andrea Teixeira, CFA AC
(1-212) 622-6735
andrea.f.teixeira@jpmorgan.com
North America Equity Research
29 May 2023 J PMORGAN
five-year period (could be extended for three additional 12-month periods under certain
circumstances), and the company aims to exit most of the TMAs within three years.
Generally speaking the TMAs take a longer time to exit vs. TSAs given the time line for
regulatory approvals or marketing authorization transfers. The TMA periods are 3-60
months for Tylenol products and 21-60 months for Zyrtec, Motrin, and Benadryl products.
To be fair, some of the potential savings opportunity could be eroded if KVUE opts to
select another third party to facilitate any G&A or manufacturing function, although it􀋖s
possible that a different third-party fee could be lower than JNJs (because JNJ now has
to make a margin on these contracts), and/or KVUE could look to drive efficiencies out of processes and manufacturing. Additionally, there is risk that KVUE standing up its
own functions or in-sourcing manufacturing could run into challenges if it or third
parties are unable to replicate JNJ processes.
This document is being provided for the exclusive use of DAVID WANG at MARLOWE PARTNERS LP.
22
Andrea Teixeira, CFA AC
(1-212) 622-6735
andrea.f.teixeira@jpmorgan.com
North America Equity Research
29 May 2023 J P M O R G A N
Financial Outlook
Path to ~+4% Top Line over Next Few Years with Upside If
Elasticities Hold Up
KVUE􀋖s long-term algorithm calls for organic top-line growth to be competitive with
category growth rates, which the company expects to be around +3-4% per annum
through 2025. This growth rate is consistent with the recent past where KVUE􀋖s
categories grew at a roughly +3.5% CAGR from 2018-2021 (although category organic
growth CAGR accelerated in 2019-2022 given COVID tailwinds and pricing to +4.8%).
Figure 27: KVUE Organic Growth Drivers by Year
1.4% 2.6%
-0.1%
-1.6%
1.8%
2.8%
1.7%
1.2%
4.0%
7.6%
2.2%
1.4%
-0.2% -0.3%
-0.1%
-4%
-2%
0%
2%
4%
6%
8%
10%
2020 2021 2022 2023E 2024E 2025E
Volume Price/Mix Other*
Source: Company reports and J.P Morgan estimates; *Other relates to carve-out financial
adjustments
Figure 28: KVUE Historical and Forward 3Y CAGR Drivers
1.3% 1.0%
2.3%
3.7%
0%
1%
1%
2%
2%
3%
3%
4%
4%
5%
5%
L3Y (2020-2022) N3Y (2023-2025)
Volume Price/Mix
Source: Company reports and J.P. Morgan estimates.
That said, based on historical data it appears that KVUE has been underperforming the
overall category growth rate over the same period (we estimate organic growth CAGR
+2.6% 2018-21), although the company has been transforming the business to put it on
a better footing for organic growth by sharpening resource allocation and optimizing the
portfolio (e.g., SKU rationalization, acquisitions/divestitures). In fact, KVUE􀋖s organic
growth trends have accelerated for three consecutive years since 2019 – ramping from
+1.4% in 2019 to +3.8% in 2022 with the 2019-2022 CAGR +3.4%. As we noted,
organic growth over the past few years has been hampered by supply chain disruptions,
SKU rationalization, and COVID-19, and excluding these items the company estimates
that its organic growth CAGR from 2019-2022 would have been about +5.4%.
Figure 29: KVUE Historical Sales Bridge
$ m
$14,950
$14,324
+1.4%