Big Tobacco strives to convince critics that they can kick cigarettes

When one of the world’s largest tobacco groups says it wants to “stop smoking the world,” it will surely meet with skepticism, so it came as no surprise that Philip Morris International’s £ 1 billion effect sterling in a British company that produces asthma inhalers has caused a stir.

The New York-listed group, which has a market capitalization of $ 155 billion, characterized its offering Vectura pharmaceutical company earlier this month as part of its “natural evolution toward a broader health and wellness company.” However, the UK government has pledged to monitor the deal for reasons of public interest.

It is one of a series of acquisitions that large tobacco companies have made to diversify beyond their traditional business, in products from vaporizers and e-cigarettes to oral nicotine bags, but Philip Morris can state, with reason, which has taken the initiative to broaden its horizons. Since 2008, it has invested $ 8 billion to support its smoke-free strategy.

“This is a very bold move by the owner of Marlboro,” Emmanuel Babeau, the group’s chief financial officer, told the Financial Times. “We believe and will contribute to the phasing out of cigarettes,” he added.

Activists, however, question the extent to which an industry that has for decades been accused of putting pressure on dark money and sponsoring questionable academic studies when it says it is interested in health should be questioned.

“It’s not the first time Philip Morris has said he cares deeply about the health of its consumers,” said Matt Myers, president of the American charity Campaign for Tobacco-Free Kids.

He acknowledged that the group had gone further than most rivals in promoting the use of lower-risk alternatives, but argued that the company still marketed cigarettes heavily in many middle- and low-income countries, where now 80 % of smokers in the world live. “Many of these actions are incompatible with rhetoric,” he said.

Philip Morris accused organizations like the Campaign for Tobacco-Free Kids of delaying the transition out of cigarettes by pushing to prevent the sale of vapors and other alternatives.

Addictive dividend yields

The tobacco industry has faced constant skepticism since evidence emerged decades ago that it had lied to the public about the dangers of smoking.

The global tobacco industry, which according to British American Tobacco is worth about $ 818 billion, sells to almost one in five people on the planet. Meanwhile, smoking, including second-hand smoke, kills approximately 8 million people a year, according to the World Health Organization. This compares to the 4.1 million deaths recorded so far by Covid-19.

The market is divided about the attractiveness of the industry. Many investors withdrew tobacco from their portfolios years ago, but others are drawn to the oversized cash flows that an addictive product can generate. Cigarette makers have long been known for their prodigious dividend yields: 5% for Philip Morris, more than 7% for Altria and BAT.

More recently, Philip Morris has tried to broaden its appeal by playing on investors ’trend for sustainability, with CEO Jacek Olczak organizing an online broadcast on the subject last month. He told participants that his company had linked executive salaries to his new mission of “not smoking the world” by eliminating cigarettes. The company has also argued that health-conscious investors would do better to get involved with tobacco companies than to deviate from them.

“I don’t think philosophically that exclusion has ever solved any problem,” André Calantzopoulos, Olczak’s predecessor, told FT last year. “Commitment is the only way to change human behavior.”

Still, investors continue to move in the opposite direction. ABN Amro decided to stop investing in tobacco stocks in 2018. Ruben Zandvliet, business adviser and human rights adviser to the Dutch bank, told FT that foreclosure was not his default choice when dealing with controversial companies, but “For tobacco we decided it was the only option because the negative impact is so extreme.”

“There is no way to commit successfully, as it would mean forcing them to stop selling tobacco and a complete overhaul of their business model,” he added, describing Philip Morris’ offer for Vectura as “the most cynical of vertical integration that I could imagine ”.

Gail Hurley, sustainable finance adviser to the tobacco-free portfolio pressure group, said it was “important to remember that new products like e-cigarettes are not harmless” even if they are not as harmful as cigarettes.

Zandvliet said the bank had never assessed the financial impact of its decision, because customers had not requested it.

Others have remained true to the decisions to stay there despite the economic loss. Calpers, the largest public pension fund in the United States, which divested itself of tobacco in 2000, has maintained its decision despite a 2018 study showing it has lost about $ 3 billion in revenue.

Skepticism about a world without cigarettes

In his perspective of his “beyond nicotine” strategy, Philip Morris has been careful to point out to investors that the products he sees replacing cigarettes could be just as profitable, if not more so.

The group earned nearly a quarter of its $ 28.7 billion net revenue last year with its low-risk portfolio, which includes IQOS, a cigarette-like device that heats tobacco instead of burning it. This makes it an industry leader: the proportion of sales of less harmful products stands at just over 5% at BAT and below 3% at Imperial Brands.

Philip Morris “has a much higher earnings-to-earnings ratio than anything else in the industry,” noted Rae Maile, an analyst at Panmure. “In that sense, investors vote with their feet.”

“The investment case around IQOS has captured investors’ imagination, ”he said, adding that IQOS took time to deliver profits after its launch in 2014,“ but this year Philip Morris has updated the guide. of profits … and announced a share repurchase program: now we not only have any history, but also delivery ”.

But few other tobacco companies are as positive about the likelihood of a cigarette-free world as Philip Morris, who has said it supports the UK government’s goal of eliminating almost all cigarette smokers by 2030.

Even if today’s market leaders stop selling cigarettes, skeptics argue, someone will.

“Hopefully there will be a day when we are no longer considered the tobacco industry and a tobacco business,” Kingsley Wheaton, BAT’s director of marketing, told FT. “Now, the day BAT sells its last cigarette, will this be the last cigarette sold in the world? I suspect not. “

Japan Tobacco International, which manufactures Old Holborn and Camel tobacco, does not specify the proportion of sales of non-cigarette products, but said that “we see [cigarettes], heated tobacco products and other low-risk products that coexist in the foreseeable future ”.

Imperial Brands, the London-listed group behind the Winston and Davidoff cigarettes, has taken a completely different approach. In January, its new CEO, Stefan Bomhard, announced that the group was refocusing on cigarettes, arguing that he had “overly focused” on alternatives. Last week he announced a restructuring of its steam research facilities in Liverpool, putting half of the jobs at risk.

Who will be the new consumers?

Industry critics have another concern: their need for new consumers if current smokers switch to cigarette alternatives.

Moira Gilchrist, vice president of strategic and scientific communications for Philip Morris, asks the same question: “What happens when all adult smokers stay to become low-risk products?”

His answer lies in the company’s research on CBD, a non-psychoactive extract of cannabis plants, and the company’s recent acquisition of nicotine bags and Fertin Pharma pills. One way would be for Philip Morris to sell products that promote “sleep, energy and calm,” he said.

“I think we’re showing the world what our path is after smoking products,” he added, “We take a lot of care to make sure we reach the right audience.”

Deborah Arnott, chief executive of the UK-based Action Group on Smoking and Health, is not convinced that the tobacco industry can move away from nicotine products.

“Philip Morris has raised this idea that it’s about becoming smokers and not addicting new generations,” he said. “But in the long run, it can only work if new generations become addicted.”