Analyzing the Future: Reassessing the Role of Risk-Reduced Products
Given that it is impossible to predict the future with certainty, the 20118 Global Tobacco & Nicotine Forum, which was held in London in September, set a herculean task for the panelists of its breakout session, “Analyzing the Future: Reassessing the Role of Risk-Reduced Products.” But, as it turned out, the panelists were in luck because, as they sat down, the ghostly outline of a future arrived in front of them in the form of a just-issued statement from the U.S. Food and Drug Administration (FDA) demanding, in part, that, within 60 days, five electronic cigarette manufacturers accounting for 97 percent of the market for these products come up with robust ways of addressing what the agency described as an “epidemic” of teenage vaping or face market restrictions on their products. Juul Labs and its Juul electronic cigarette seemed to be a focus of the FDA’s attention.
Unsurprisingly, given that the analysts who made up the panel had only had time to glance at the statement, their musings produced more questions than answers. The only thing they knew for certain was that the share prices of tobacco manufacturers had risen on the back of the FDA’s statement, presumably because the huge success that Juul had been enjoying had been weighing on tobacco stocks, while the threats to the tobacco manufacturers’ own e-cigarette businesses were thought to be more muted.
Panelists wanted to know where the evidence for the “epidemic” had come from and how the statement fit with the FDA strategy previously announced whereby it was due to investigate reducing the nicotine levels in combustible cigarettes while providing an environment in which alternative nicotine-delivery products such as e-cigarettes could be market-approved more efficiently.
One panelist said that it would be a negative if it turned out that the FDA required the proposed nicotine reduction in combustible cigarettes at a time when nicotine-replacement therapy products provided the only fallback position for smokers. But it was also said that the FDA’s rhetoric might not be matched by what it could do in practice, given that its decisions needed to be based on science. And there were suggestions that the FDA could be challenged on the grounds that it was acting capriciously or that its actions amounted to prohibition. The current administration, it was suggested, was not going to oversee the destruction of a major industry.
One way or another, things are changing, even the present doesn’t much resemble the past. There was a time when regulators did what they did without it having much impact on consumers, and the share prices of tobacco companies went up. But prior to the FDA announcement, shares were down significantly in respect of all the tobacco multinationals. One panelist put this down, in part, to the fact that the tobacco business was exposed to more potential outcomes and disruption than in the past—in respect of reduced-risk products and the FDA’s position on combustible products, for instance. Another panelist thought that while tobacco had been exposed to more disruption, that disruption was manageable. The tobacco industry still had its combustible business as an anchor. In the U.S., accelerated volume declines during the past year and a half had to be seen against a background of two phenomenal previous years and a 10-year average decline of only about 4 percent. On top of that, the ability of manufacturers to raise prices had remained strong. Internationally, volumes were not declining as fast as they were in the U.S., and pricing was strong. And while there were tax and regulatory shocks to one or two individual markets most years, these were offset by companies having a wide geographical spread.
The disruptive threat posed by reduced-risk products was manageable because the tobacco companies had a stake in the category and had deep pockets through which they could buy startups where necessary, though it was conceded that they had missed Juul Labs. Two panelists, however, warned against getting ahead of customers by declaring a smoke-free future, while one panelist bravely raised the issue that if tobacco companies were to have a future in noncombustibles, at some point the industry and the public health community that supported reduced-risk products were going to have to face the fact that nontobacco users would take up these new products.
The panelists seemed to agree that nicotine products would not become a winner-take-all category and that the Japanese experience would not be replicated elsewhere, with the possible exception of South Korea. And it was thought that, even in Japan, to get reduced-risk products beyond 30 percent of the market would require new devices. In the U.K., there had been a slow uptake of heat-not-burn products, which were said to have more chance in relatively high-nicotine countries such as the U.S. This would seem to indicate that the Japanese experience is thought to be down partly due to the absence on that market of e-cigarettes.
The panelists seemed to agree that there would be limited merger and acquisition activity in the future unless the China National Tobacco Corporation decided that it was no longer content with its domestic market, in which case all bets were off. Most investors would be wary of spending billions on companies operating in a mature combustible market. And there were only limited opportunities for acquiring the sorts of “bolt-ons” that Japan Tobacco (JT) had been buying up in recent times. However, there seemed to be agreement that Imperial Brands would be acquired by JT, but not in one chunk and perhaps not for a decade. By this time, the panelists were peering deeply into the future.