The tobacco industry is making acquisitions in the oral drug delivery technology space, indicating an expansion into the oral nicotine market. Investors should be mindful of the similarities between the youth-centered marketing and use of flavorings in e-cigarettes and oral nicotine products, given the legal and regulatory costs imposed on e-cigarette manufacturers.
Philip Morris International (PMI) has recently agreed to acquire Danish company Fertin Pharma, a pharmaceutical company with a specialized focus on oral drug delivery systems. This represents a strategic repositioning by a major tobacco company away from traditional combustible cigarettes and towards (allegedly) reduced-risk non-combustible products. PMI’s new CEO Jacek Olczak described this latest corporate action as part of its strategy to “deliver a smoke-free future”, referring to a 2025 target to generate more than 50% of the company’s net revenues from noncombustible tobacco products.
Fertin Pharma’s industry-leading R&D profile and capabilities in manufacturing gums, pouches, dissolvable tablets, and other solid oral systems for the delivery of active ingredients (including nicotine) are likely to support PMI’s move into the modern oral nicotine market – and help the company to catch up with its competitors. Oral nicotine pouches, the latest iteration of the oral tobacco product line, are tea bag-like pouches designed to be placed between the lip and the gum and contain a form of dehydrated nicotine with added flavors. Nicotine is absorbed into the bloodstream via the oral mucous membranes.
The Scramble for Oral Delivery Capabilities
The other members of the tobacco industry are already ahead of the curve in the modern oral tobacco market via a series of strategic acquisitions. In June 2019, Altria acquired an 80% equity stake in Swiss company Burger Sohne Holding AG, which gave the former the proprietary rights over the On! nicotine pouch brand (Altria now wholly owns On!). Just a month later RJ Reynolds, a subsidiary of British American Tobacco (BAT), announced the rollout of the nicotine pouch brands Velo (in the US) and Lyft (in the UK). PMI’s acquisition of oral delivery R&D capacity was preceded by moves from Altria to acquire the non-exclusive rights to DehydraTECH, a drug delivery technology with an oral format that is patented by Lexaria Bioscience. Not wanting to be excluded from the competitive scramble for oral drug delivery technology, BAT signed an R&D agreement with Lexaria Bioscience in September last year.
This isn’t the Tobacco Industry’s First Rebranding Rodeo
With the marketing of current or potential oral nicotine pouches as ‘safer’, ‘healthier’ products, it is important to remember that this is not the sector’s first product line to reframe its image. ‘Reduced risk’ rebranding efforts date back to the 1950s when tobacco companies marketed cigarettes fitted with filters supposed to deliver less toxins to users, without any public health-based evidence. E-cigarettes and heated tobacco products represent the latest ‘reduced harm’ rebranding campaign. The limited success of the marketing campaigns surrounding ‘reduced risk’ products should raise concerns with investors regarding the future of oral nicotine pouches. There is currently a lack of independent testing of the product in terms of constituents, biomarkers of harm, safety evaluation of the nicotine delivery process, and long-term population health.
The Bumpy Ride of an Early ‘Reduced Risk’ Product
The challenge associated with the ‘reduced risk’ marketing of new generation tobacco products is perhaps best illustrated by the case of Juul Labs, an e-cigarette manufacturer partially owned by Altria that accounts for 75% of the e-cigarettes sold in the US. Juul currently faces 2,339 personal injury lawsuits, a wrongful death lawsuit, and an investigation of the company’s marketing practices by a group of 39 state attorneys general in the US. The plaintiffs in these personal injury lawsuits claim to have suffered seizures; strokes; kidney, heart and lung injury; respiratory failure; popcorn lung; and/or nicotine poisoning. Contrary to the company’s marketing that its product is aimed at providing a healthier alternative to cigarettes for existing smokers, a large majority of the plaintiffs became addicted to the Juul e-cigarette as minors and non-smokers, and some even started smoking regular cigarettes to satisfy a Juul-acquired nicotine addiction.
In June, Juul settled a lawsuit with the state of North Carolina for a payment of $40 million over six years, with lawsuits from at least nine other states in the US still pending. The company has been targeted by parties to the litigation efforts and by anti-vaping advocacy groups (such as the Campaign for Tobacco-Free Kids and Parents against Vaping) as being directly liable for causing a youth vaping and nicotine addiction epidemic in the US.
The extent of this problem is well-documented. Then-US Department of Health and Human Services Secretary Alex Azar stated that the US “has never seen an epidemic of substance use arise as quickly as our current epidemic of youth use of e-cigarettes”. In 2019, a federal investigation revealed that one in every four high school students had used an e-cigarette within the past 30 days. A 2020 national survey showed that about 20% of high school students and 5% of middle-school students said they had vaped using some sort of e-cigarette within the past month. Investors expressed concern that Altria has written down the value of its Juul investment three times since its initial $12.8 billion investment.
The lawsuits referenced above focus on two key aspects of corporate behavior alleged to target young people: Marketing and Product Design.
The Stanford Research into the Impact of Tobacco Advertising (SRITA) program has archived Juul’s deleted social media posts from its Vaporized ad campaign. The archives show that the company’s marketing directly appealed to youth, as the advertisements were filled with young models displaying teen-like behavior, such as dancing to club-like music and featuring clothing styles more reflective of teens than adults. The company also utilized the services of a marketing agency that branded itself as “an authority on millennial culture” to secure influencer guests for its launch party. The promotional role of social media influencers and pop stars with huge teen followings on social media led to a snowballing of peer-to-peer promotion and marketing amongst teens. The Vaporized campaign was also promoted in Vice magazine, a publication that has marketed itself as the “#1 youth media company”.
B.) Product design
The Juul pods’ candy-like and fruity flavor options, which included Crème, Strawberry, Watermelon, Mint, Cucumber, Fruit, Apple Orchard, Mango Nectar, and Glacier Mint, are likely to appeal to non-smokers and the youth demographic. An analysis of a sample of 1492 e-cigarettes by the American Heart Association and several US-based universities showed that mint, menthol and fruity flavors were a common driver for vaping initiation, especially among younger adults. Another survey shows that more than 80% of youths who have used tobacco products reported that they started with flavoured products. The role of such flavors in causing the vaping epidemic levels among youths in the US led to San Francisco voters overwhelmingly approving a 2018 ballot measure to ban the sale of flavoured nicotine vaping products. In January 2020, the US Food and Drug Administration issued a policy that prioritizes enforcement against certain unauthorized flavoured e-cigarette products that appeal to youths, such as fruit and mint flavors. The combined effect of the appealing flavorings and the ‘reduced risk/harm’ marketing of these vaping products led a considerable number of youths to believe that these products were harmless. A 2019 study found that 40% of interviewed teens did not even realize that nicotine was present in e-liquids.
Similar Practices with Oral Nicotine Pouches
Despite the problems arising from the Juul campaign, there does not appear to be any significant corporate shift away from youth-centered advertising campaigns and product design with regard to the rollout of oral nicotine pouches. This is particularly evident in BAT’s rollout of Lyft in Kenya and Velo in Pakistan. With BAT’s agreement with the Kenyan Ministry of Health to market Lyft under the tobacco control regulations only this year, reports have already surfaced that Lyft is now sold without age restrictions through automatic vending machines, and over the counter in supermarkets, petrol station convenience stores, and local shops at affordable prices. Advocacy groups have complained that the product is already abused by schoolchildren, and that hospitalizations from product use have occurred. Several advocacy groups have submitted a petition to the national cabinet secretary of health to ban the product.
In Pakistan, young influencers with considerable youth following are promoting Velo on social media platforms such as TikTok and Instagram. The marketing of the product to non-smokers in Pakistan was evident in its promotional hashtag #OpenTheCan, an advertisement campaign which tapped the networks of 40 influencers and garnered more than 13 million views. The Bureau of Investigative Journalism has reported that Velo samples are being distributed for free via young brand reps at parties, shopping malls, and restaurants, with no proof of age requirements. The same report also highlighted BAT consumer research showing approximately half of over-18 users of Velo and Lyft have never smoked prior.
In terms of product design, there appears to be little difference between the use of appealing sweet and fruity flavors in e-cigarettes and oral nicotine pouches. The table below shows the range of flavors for the major oral nicotine pouch brands:
|Velo (BAT)||Dragon Fruit, Cinnamon, Spearmint, Wintergreen, Citrus Burst, Peppermint, Coffee, Black Cherry|
|Lyft (BAT)||Midsummer Night Strong (watermelon taste), Morning Bloom (Elderflower taste), Tropic Breeze, Caribbean Spirit (Pina Colada taste), Easy Mint, Tokyo Zing (ginger taste), London Flavor (gin taste), Blonde Roast (Roasted coffee taste), Ruby Berry, Urban Vibe, Freeze-X Strong (peppermint and menthol taste), Ice Cool Strong (Peppermint and menthol taste), Mint, Lime Strong, Licorice Strong, Tropic Breeze (tropical and fruity taste)|
|On! (Altria)||Cinnamon, Wintergreen, Mint, Coffee, Berry, Citrus|
|Zyn (Swedish Match)||Wintergreen, Spearmint, Peppermint, Menthol, Cinnamon, Citrus, Coffee|
|Nordic Spirit (Japan Tobacco International)||Mint, Elderflower, Bergamot Wildberry|
|Rogue (Swisher)||Apple, Cinnamon, Mango, Peppermint, Wintergreen, Honey Lemon|
Given the similarities between Juul e-cigarettes and oral nicotine pouch brands, it is realistic to predict that users could be similarly misled into believing that these products are safe and/or do not contain nicotine. The chances for this misapprehension are particularly high for oral nicotine pouches given these products are marketed as ‘tobacco-free’. This label is problematic given these oral pouches contain nicotine which is derived from tobacco.
Warning Signs for Investors
Similar trajectories can be observed in the marketing practices and product design of Juul e-cigarettes and existing oral nicotine pouch brands, causing them to appeal to non-smokers and youths. Evidence from the emerging markets of Kenya and Pakistan raise concerns that corporate slogans such as ‘Delivering a Smoke-free Future’, ‘Moving Beyond Smoking’, and ‘Building a Better Tomorrow’ do not capture the extent of the harms caused by these products. Given the mounting legal and regulatory costs on Juul Labs and Altria and the increasing rejection of the ‘reduced risk/harm’ label for heated tobacco products, investors should consider whether oral nicotine pouches can be accepted as ‘reduced risk/harm’ products, and for the possible public health litigation and regulatory action imposed on manufacturers.
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By Jayshendra Karunakaren, Analyst, ISS ESG