In July, the FDA announced a new regulatory plan to focus on reducing nicotine levels in cigarettes, with the purpose of reducing cigarette addiction. The agency plans to come out with a product standard to set a lower level of nicotine in cigarettes, but not until it receives comments from the industry and the public on whether it should forge ahead as planned or not. This has started many conversations, several initiated by the FDA itself.
“We truly find ourselves at a crossroads when it comes to efforts to reduce tobacco use,” stated FDA Commissioner Scott Gottlieb. “But if we’re going to meaningfully improve the public health, we need to be willing to take a hard look at our entire approach.”
The FDA’s new nicotine-focused framework provides companies a pathway to create new product innovations for consumers “to enjoy satisfying levels of nicotine without the risk of lighting tobacco on fire,” Gottlieb said in a CNBC interview. “It’s not the nicotine that kills you; it’s all the other carcinogens in lighting tobacco on fire,” he added.
Mitch Zeller, director of the U.S. Food and Drug Administration’s Center for Tobacco Products (CTP), provided further insight into the FDA’s new comprehensive regulatory plan for nicotine regulation at the National Association of Tobacco Outlets (NATO) regional education seminar in Denver this August. He stressed the agency’s commitment to “striking the right balance between smart regulation and encouraging innovation of satisfying, less harmful products” while also making sure any product standard is “steeped in science” and is made with “robust” participation from stakeholders.
“This is not a spectator sport—this is a participatory sport,” he stated.
From the investment side, Wells Fargo noted that while key questions surrounding the policy’s timing and implementation remain unanswered, “We strongly believe this is realistically a multiyear effort (no less than two years, by law)” and “[o]verall, we were broadly encouraged by the tone and substance of Zeller’s remarks.”
Wells Fargo believes Philip Morris International’s (PMI) iQOS heat-not-burn device could be a strong beneficiary of the FDA’s new mandate, potentially driving even greater upside to its per-share price targets for PMI and Altria Group. However, in the near term, it expects “some level of overhang on valuations to persist given the uncertainty on timing/details of the FDA’s strategy.”
Morgan Stanley said it is revising its price targets and valuation methodology to reflect a “likely sustained valuation overhang” from the FDA’s new tobacco regulatory plan, adding that it perceives this risk as “overly discounted” at its “top pick” British American Tobacco (BAT) and at Imperial Brands, and appropriately reflected in current valuation for Altria Group.
‘Less is More’ Crusade
Big Tobacco is behind much of the widely publicized “less is more” innovation, and thus, is naturally backing up the new government directives. PMI submitted two applications to the FDA—a premarket tobacco product application for its iQOS and a modified-risk tobacco product (MRTP) application to market the device as a reduced-risk alternative—which, if approved, could pave the way for the product to be marketed and sold by Altria Group through a commercial agreement between the two companies.
What’s more, PMI, which recently registered the Foundation for a Smoke-Free World as a charitable U.S. organization, pledged up to $1 billion over the next 12 years to the nonprofit group for conducting scientific research on “how to best achieve a smoke-free world and advance the field of tobacco harm reduction.”
According to Reynolds American CEO Debra Crew, technological innovation presents the industry with an incredible opportunity to provide smokers their desired nicotine levels using less harmful alternatives to conventional cigarettes. In a recent CNBC report, Crew stated that the industry is ready to meet the challenge and expects to see increased innovation. She added that for progress to happen, the industry must work together with the government.
Even the vapor groups have something positive to say regarding Big Tobacco’s advancements—but with a plea that this be the start of an “opening up” to all tobacco harm reduction efforts.
In a submission to the FDA on Philip Morris Products S.A.’s MRTP for iQOS and Marlboro Heatsticks, American Vaping Association (AVA) President Gregory Conley called on the agency to grant the applications, saying adult smokers “deserve access to a wide variety of smoke-free nicotine and tobacco products.” He then added that the AVA’s only concern is that if this application is granted, adult smokers will be accurately informed that iQOS poses lower risks to users than smoking, but it “will remain a federal felony for manufacturers of vapor products, smokeless tobacco and smokeless nicotine products to truthfully inform consumers that their products do not contain smoke, let alone that they are less hazardous than smoking.”
Nevertheless, there is good reason to doubt that the government’s new nicotine reduction plan, as it is currently outlined, will work.
Wells Fargo is also betting the ultimate policy, after public and industry comment, will be a step in the right direction. “While still a mere supposition, even the FDA harbors the expectation that smoking-related disease and death would decrease ʻconsiderablyʼ under the right nicotine-reduction policy. If the FDA is serious about harm reduction and embracing a continuum-of-risk approach, we expect its final policy to ultimately be a positive for [reduced-risk product] consumption led by, in our view, iQOS.”
– Story by Renée M. Covino
This story first appeared in the November/December 2017 issue of Tobacco Business magazine. Members of the tobacco industry are eligible for a complimentary subscription to our magazine. Click here for details.