Can big tobacco quit smoking? After years of cigarette makers trumpeting their progress in building “reduced risk” alternatives, the US Food and Drug Administration’s July announcement that it aims to reduce nicotine levels in cigarettes has injected urgency to the quest.
So much so that Debra Crew, chief executive of Reynolds American, the second-largest American tobacco company, compares the challenge to the US space mission of the 1960s.
“If we can put a man on the moon, we can deliver tobacco to people with less risk than smoking,” Ms Crew told her peers at an industry conference last week. Hours earlier, Philip Morris, maker of Marlboros, promised to spend $1bn to wean people off cigarettes.
To the big tobacco executives gathered at the annual conference in New York, the message was clear.
The FDA’s initiative could be the largest effort to curb smoking since 1965, when president Lyndon Johnson signed legislation requiring cigarettes to be labelled with health warnings. The news was perhaps deepest felt at London-listed British American Tobacco, the world’s largest tobacco group, which had just acquired Reynolds American for $49bn, buying its way back into the $130bn US market after a decade absence. The deal closed just three days before the FDA announcement, making the US its largest market.
Kingsley Wheaton, BAT’s director of “next generation” products, says he was “not surprised” by the FDA’s announcement, which swiftly wiped about $10bn from BAT’s market value.
“Was I surprised that it came at 3pm on a Friday afternoon?Maybe. But I wasn’t particularly surprised with the content,” he said in an interview, calling the market moves an “overreaction”.
BAT, along with rivals such as Philip Morris, is in a race to offset shrinking cigarette sales with a new generation of products. These alternatives come in two main categories: ecigarettes, which turn a nicotine-laced fluid into a vapour, and “heat not burn” devices that turn tobacco into a vapour, but do not burn it.
Tobacco companies have poured billions into development and marketing of these new products, with some success. Philip Morris in its most recent quarter reported that its IQOS “smokeless cigarette”, which heats tobacco in a handheld device, had sold enough to offset a 25 per cent drop in conventional cigarette sales in Japan. The company says it has invested $3bn since 2008 on smoke-free products, which it hopes will account for more than 30 per cent of production by 2025.
“They have been trying to hedge their bets and cultivate new markets to save their business,” says Marc Scheineson, who worked on tobacco regulation as an associate commissioner for the FDA, and is now a partner at law firm Alston & Bird.
But tobacco companies still derive the majority of sales from traditional cigarettes. Only 9 per cent of Philip Morris’s $6.9bn of revenues in the second quarter came from “reduced risk products”, and much of that came just from Japan. BAT has in the past six years spent $1.5bn on next gen products, yet it still declines to give revenue figures for them.
Mr Wheaton says new products such as ecigarettes have a “public perception” problem, particularly in the US. A third of Americans last year said ecigarettes were just as bad as tobacco cigarettes, and 60 per cent said ecigarettes should be regulated as much as tobacco cigarettes.
“We’ve seen perception [of vapour and heating products] in the US dwindle,” he says, blaming “sensational headlines” and bad marketing. “There are a lot of commercial questions still. Next gen products need to be profitable. This is not just an altruistic journey.”
The FDA has not specified how much it aims to trim the nicotine levels from cigarettes, and is currently soliciting comments on what to do. The industry is expected to put up a lobbying fight, and perhaps launch litigation. “If they try to reduce nicotine levels to a very low amount . . . I think they’ll encounter a stiff wind in the face through the courts,” says Mr Scheineson.
Mr Wheatley says it’s “quite possible” to trim US nicotine levels “a little bit”, noting that about half of cigarettes sold to Americans have 12mg of tar and 1.2mg of nicotine, while European cigarettes are capped at 10mg of tar and 1mg of nicotine.
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Still, “it’s not the nicotine that’s bad for you,” he argues, warning of a “large rise in illicit trade” as an unintended consequence of cutting nicotine.
The public health debate over whether less nicotine will yield a reduction in smoking has been at a “complete and total stalemate” for decades, said Mitch Zeller, an FDA director, this week.
There is also a question of whether investors can be convinced that American smokers will finally make the switch. In the past 20 years tobacco stocks have “significantly and consistently outperformed the broader market” despite a string of class action lawsuits and regulatory threats, said analysts at RBC. “But this time could be different.” This latest regulatory shock may not provide the same kind of lucrative buying opportunity as in the past, they said.
Investors appear to agree. Eight weeks after the FDA unveiled its plans, the stock prices of the largest tobacco companies have not recovered. BAT had dropped about 11 per cent to 4,741p a share at the end of last week, while Philip Morris is down 2 per cent and Altria has lost 16 per cent.
source : ft.com