Media

By Mark Rendell

With millions of consumers abandoning cigarettes, tobacco companies are spending billions on smokeless alternatives, but they could be too late

Between a Starbucks and a kebab shop on Toronto’s busy Yonge Street retail corridor, the words “inventing a smoke-free future” appear on the window of a sleek, silver-fronted store. Inside, gadgets resembling Apple products are neatly arranged on wooden tables.

“Are you currently a cigarette smoker?” the saleswoman asks, showing off the IQOS, a device slightly larger than an index finger that looks like an electronic cigarette, but uses sticks of tobacco rather than liquid to create a smoke-like vapour.

“It’s not completely without risk,” she said, explaining how a little blade inside the gadget pierces the cigarette and heats the tobacco to 330 degrees, just shy of combustible temperature. “But absolutely reduced risk compared with continued smoking.”

With a clean, minimalist vibe, the store looks like somewhere to buy an eyebrow wax or a $2,000 laptop rather than a pack of smokes. But IQOS is owned by tobacco giant Philip Morris International Inc. And the aesthetic nod to health spas and Silicon Valley is at the heart of the industry’s attempt to keep the millions of consumers who are abandoning cigarettes.

Over the past several years, tobacco companies have pumped billions of dollars into “potentially reduced risk” products, both tobacco-heating devices such as IQOS, as well as e-cigarettes and vapes that use nicotine-infused juices mixed with propylene glycol and glycerine to create the sensation of smoking.

These devices are still a small part of Big Tobacco’s globe-spanning business, but majors like PMI and British American Tobacco PLC are making noises about a future where they make more money from “next generation” products than from cigarettes.

Both companies — or rather their subsidiaries, Rothmans Benson & Hedges Inc. (PMI) and Imperial Tobacco Canada Ltd. (BAT) — have begun dipping their toes into the Canadian market with the respective releases of IQOS and Glo in a limited number of test markets.

A lack of federal regulations and a hodgepodge of provincial rules, however, have largely kept the big players away from the market, leaving the “smoking cessation” field to independent vape producers and retailers willing to navigate the regulatory fog.

That’s set to change in the coming months. This past week, the federal government passed Bill S-5, an update to the Tobacco Act that will provide a framework for Health Canada to regulate vaping and heat-not-burn tobacco products.

“Assuming that vaping becomes legal in Canada, we will be in there,” said David O’Reilly, BAT’s group scientific and R&D director. “And we’ll be bringing the scale that BAT and Imperial bring.” 

The smooth-talking, silver-haired executive is in his office at BAT’s massive research facility in Southampton, England, where he oversees hundreds of engineers and scientists, the majority of whom are working on “reduced risk” products. On his desk are several vapes; he said he quit smoking by using snus, an oral tobacco product similar to dipping tobacco, and continues using BAT’s various gadgets.

“By 2020, we estimate there will be 100 million next-generation-product consumers on the planet,” O’Reilly said. “We’re not doing this for PR, we’re doing this for good business sense.”

On a global scale, BAT’s investment is beginning to show returns. In 2017, the company made nearly £300 million in revenue from vaporizer products and more than £200 million from Glo, mostly in Japan, the largest heat-not-burn market. It expects to introduce Glo to another 14 countries this year, and is forecasting over £1 billion in revenue from next-generation products in 2018 and £5 billion by 2022.

“By 2030, it will be 30 per cent of our business,” O’Reilly said. “By 2050, 50 per cent of our business.”

Key to this sales growth is cultivating the idea that these products are better for your health than cigarettes; that consumers and regulators should trust products developed and tested by large tobacco companies rather than independent vape manufacturers; and that governments should apply liberal tax and advertising regimes so that consumers are encouraged to switch from cigarettes.

Touring the Southampton facility, that assiduously crafted message is on display.
In one of the building’s many labs, a tangle of wires runs from the battery of a vaporizer, being developed for the Polish market, to a heat monitor. A machine puffs on the vape every 33 seconds, at a force supposed to emulate an intake of breath, to see if the battery will overheat over time.

In the next lab over, human-like lung tissue grown in a petri dish is exposed to vapour sucked through a mechanical lung apparatus.

“We don’t want to overinterpret the data, but everything we see from all the tests we do (on heated tobacco products) is showing reduced risk,” said a lab-coat-wearing biologist overseeing pre-clinical tests that look for various “bio-markers” in the lung tissue.

Answering the question of relative harm is crucial for tobacco companies’ ability to commercialize e-cigarettes and tobacco heating products, and they’re spending extraordinary amounts of money trying to build a case for regulators. So far, the reception has been mixed.

In the United States, PMI’s request to the Food and Drug Administration to market IQOS as a “reduced risk” product was condemned in January by the scientific panel advising the agency, which said the company had not conclusively proved IQOS use would result in less disease.

Overseas, Public Health England, a government body that’s surprisingly supportive of e-cigarettes, remains reticent about tobacco heating research.

“The available evidence suggests that heated tobacco products may be considerably less harmful than tobacco cigarettes and more harmful than e-cigarettes,” the agency noted in a recent assessment. Out of 20 studies that it looked at, however, “12 were funded by manufacturing companies so there is a lack of independent research.”

The level of skepticism around any goodwill or scientific efforts by tobacco companies remains high, not least, as Britain’s Royal College of Physicians puts it, because “there is no firewall between a ‘good’ tobacco industry that is marketing harm-reduction products in the U.K. and a ‘bad’ one that promotes smoking, or undermines tobacco control activities, in low- and middle-income countries.”

E-cigarettes are having an easier time with public health advocates, in large part because there are more independent studies. Based on an analysis of published research, Public Health England concluded, “the cancer potencies of e-cigarettes were largely under 0.5 per cent of the risk of smoking.” The agency actively promotes e-cigarette use in mass advertising campaigns.

What to make of these new products and their various health claims has been the subject of heavy debate in Canada.

The federal government is treating IQOS and Glo as tobacco products, but appears to be taking a relatively liberal approach to e-cigarettes, banning lifestyle advertising but leaving the door open for certain government-approved statements about relative harm.

But the majority of provinces have put e-cigarettes in the same category as tobacco products, with all the limits on advertising and communication that entails. The approach has both critics and defenders.

“You don’t need advertising because consumers are doing it (switching to vaping) on their own,” said Rob Cunningham, senior policy analyst at the Canadian Cancer Society. He dismisses attempts by tobacco companies to market “reduced risk” products as a “public relations effort.”

Tim Stockwell, director of the Canadian Institute for Substance Use Research and a professor at the University of Victoria, takes an opposing view, arguing that alternative nicotine products should be widely marketed.

“Hardly any non-smokers are going to take up vaping and do it to any great extent. And even if every Canadian became addicted to using a vapour … there’d be fewer people dying,” Stockwell said.

“Regulators need to tighten things up to incentivize tobacco companies to price their products (differently). They need to be taxed out of existence, the old cigarettes, then give financial advantages and support for developing the alternative.”

Higher taxes on cigarettes, along with plain packaging rules (also part of S-5) are the public health measures that keep tobacco executives up at night, but lower taxes on next-gen products are a nice consolation prize.

The mini-cigarettes used inside Glos are proving more profitable per unit than traditional cigarettes, according to O’Reilly. But that’s only because, so far, they’re taxed at a much lower rate. 

Even with a favourable tax regime, it’s still not clear just how successful Big Tobacco will be at launching their next-gen products in Canada. In Japan, the main tobacco heating test market, IQOS and Glo have had impressive uptake, but nicotine-containing vape products are not allowed. Even with this prohibition, some recent tobacco heating results have been disappointing.

In April, PMI stock fell more than 15 per cent in a single day after the company’s chief executive announced Japanese IQOS sales had significantly declined quarter over quarter. Other tobacco stocks fell in sympathy, suggesting the market is particularly jittery about poor results in the next-generation category.

The commercial prospects for e-cigarettes may be a different story. In Canada, at least, the question is less about whether there’s a market for a new product than whether tobacco companies can capture market share from incumbent vape companies.

“I don’t think that the tobacco companies are necessarily guaranteed success in this market,” said Amelia Howard, a sociology PhD candidate at the University of Waterloo, whose research focuses on vaping trends.

A lot depends on how well convenience stores take to selling products developed by tobacco companies. Even then, “vaping companies now are developing these (prefilled, closed) systems that could go into convenience stores,” Howard said. “That, to me, would put the tobacco companies at risk unless they’re able to keep up with the innovation in the space.”

That thought is echoed by Boris Giller, communications director at The Canadian Vaping Association and president of 180 Smoke Vape Store, which has 15 locations, mostly in the Greater Toronto Area.

“A lot of the manufacturers are releasing a new version every couple of months, while big tobacco companies have a development cycle of two or three years, and $3 billion, so they can’t respond to the market as fast as the rest of the industry,” he said. “We’re going to see a lot of investment (by tobacco companies in Canadian vaping companies) once they hit their head against a wall in terms of entering the market.”

Whatever happens in Canada — which will depend to a significant extent on how the regulations shape up in the coming year — Big Tobacco appears to have entered a strange phase of its long history.

Companies are trying to sell products that take people away from their core offering, and executives are saying they’re “part of the solution” with a straight face.

But as Peter Luongo, managing director for PMI’s Canadian division puts it, “Whether it’s us doing it or whether it’s our current competitors, or whether it’s new competitors that emerge in the future, long-term people are going to switch from cigarettes to these new products because they’re just better. We’d rather be at the forefront of that change than lagging behind.”