Category: Print Edition

  • A Journey, Not a Destination

    A Journey, Not a Destination

    Photo: BNS

    Navigating successful post-market requirements for ENDS products

    By Yvonne Wilding

    This month marks the deadline for submitting premarket tobacco applications to the U.S. Food and Drug Administration (FDA). Many organizations have worked diligently to ensure their submissions are as complete and robust as possible. Their goal is to ensure that they are sufficiently complete to allow acceptance for filing and, following substantive review, that the product may be granted a market order by the FDA, allowing it be sold in the United States. By early September, hundreds of PMTAs for electronic nicotine-delivery systems (ENDS) had been submitted to the FDA, and a number are currently undergoing substantive review.

    However, in this article I will remind applicants that their obligations do not stop at PMTA approval but persist for the entire life cycle of the product in market—and products can be removed from market potentially more easily than they can be brought to it.

    During its PMTA review, the FDA extensively evaluates the provided experimental data to make a risk-benefit assessment of the new product and ascertain its suitability to be designated as “appropriate for the protection of public health” (APPH).

    This includes scrutinization of the quality and compliance aspects of the manufacturing processes and review of extensive research information generated on the specific product to allow the FDA to evaluate any potential public health risks associated with the product. The research aspects are compiled by the applicant into different modules of the eTobacco Technical Dossier and include chemistry and manufacturing, toxicology risk assessment and clinical and human experience evidence.

    There will be a series of investigations in human volunteers to look at the pharmacokinetics (PK) of the product and its delivery of nicotine compared to comparator products. The PK profile of a product has the potential to affect the abuse potential—i.e., how easily someone may become addicted to nicotine. In addition, there will typically be several human behavior studies to check that the users can operate the device safely and effectively and to assess their preference for this product against competing products. Additionally, there is a significant amount of research done in never-smokers to ascertain how likely they are to start smoking with this product. The numbers of volunteers in the studies are often very large and care is taken to look not only at a representative U.S. population from their demographics but also to incorporate a significant number of young adults in order to be able to make extrapolations to a youth (11–18 years of age) population.

    Advertisement

    The research data provided to the FDA also includes extensive data on the performance of the device in laboratory-controlled conditions and its delivery of nicotine in each puff under different device settings and different coil components. Stability of the product on storage and extractables and leachables are measured, and quantitative data on the discharge of harmful and potentially harmful constituents (HPHCs)—a list of 33 chemicals of most toxicological concern detailed in the FDA guidelines) is collected. The toxicology and the chemistry data are linked to consumer behavior information and topography data to indicate how a consumer will use the product, enabling the estimation of the likely exposure to potentially hazardous aerosolized constituents and hereby the risk-benefit of this new product can be ascertained.

    Assessing the actual product though, is only part of the information required. The product must also be assessed for risk-benefit alongside data from existing relevant tobacco-containing products, much of which is obtained from scientific publications. These comparator products would typically be combustible cigarettes or similarly performing ENDS. It would be wrong to assume that ENDS are without risk, but in a PMTA, the risk relative to other comparator products, e.g., combustible cigarettes, is described. Based on this assessment of these actual and relative risk estimates, the FDA will decide on whether the product is APPH. This approval process can be considered the first step of the journey.

    There are several regulatory documents published by the FDA Center for Tobacco Products (CTP). These include Guidance for Industry and Proposed Rule, both of which have sections on post-marketing requirements, although most detail is provided in the Proposed Rule (Federal Register Vol. 84, No. 186, 25 Sep. 2019, Subpart D – Postmarket Requirements section, $1,114.39–$1,114.41).

    Having been granted a market order from the FDA, there is an explicit ongoing commitment for each approved SKU to collect and provide information and submit it for regulatory review. Following each review, the FDA will consider whether it is appropriate that the product is maintained in market. Reasons why the FDA may decide to remove a product from market could include any of the following: the product is no longer considered to be APPH; there is inaccurate representation of factual data, the applicant has not set up a system for maintaining records and/or fails to make appropriate records and submit reports.

    Advertisement

    The post-marketing updates required by the FDA can be put into three main categories: changes to manufacturing processes and controls; changes to the health risks associated with the product; and sales, distribution and marketing information.

    Periodic reports need to be submitted to CTP within 60 calendar days of the reporting dates which will be specified in the applicant’s marketing order and must include the following:

    Manufacturing and processes

    • A description of changes to the manufacturing, facilities or controls during the reporting period
    • An explanation of why the changes were made and why these change do not result in the generation of a new tobacco product that is different from the one for which the original order was granted

    Health risks

    • An inventory of ongoing and completed studies by or on behalf of the applicant that have not previously been reported
    • Full reports of information published or known, or which should be reasonably known, to the applicant concerning scientific investigations and literature about the tobacco product that have not been previously reported
    • Significant findings from publications not previously reported
    • A summary and analysis of all serious and unexpected adverse experiences reported to the applicant or that the applicant is aware of
    • A statement of any changes to the overall risk associated with the product and a summary of the health risks, including the nature and frequency of the adverse experience and potential risk factors

    Sales, marketing and distribution

    A summary of sales and distribution of the tobacco product for the reporting period to include:

    • Total U.S. sales and demographic characteristics of purchaser
    • Specimens of labelling and detail of any changes
    • Full-color copies of all advertising material used with dates of dissemination
    • A description of advertising and marketing plans
    • Actions taken to restrict youth access and limit youth exposure to labelling, advertising or promotion
    • Use of social media
    • Use of partners, influencers or bloggers
    • An assessment of the impressions left by advertising and audience demographics

    In addition to the above categories, there is also a requirement to provide any additional information specified or any additional requests under the terms of the marketing order and an overall assessment of how the product continues to be APPH.

    Advertisement

    As well as the requirement for regular submission of post-marketing reports, if there are any serious and unexpected adverse events reported to the applicant, these must be reported to CTP’s Office of Science via the Health and Human Services Safety Reporting Portal within 15 days of the applicant having received the report.

    There are strong concerns among the public, health policy makers and government that the potential health benefits of switching smokers from combustible cigarettes to a less harmful way of accessing nicotine may be dramatically offset by young nonsmokers being attracted to vapor devices and through use of these devices drive an increase in nicotine addiction in youth. Smoking volumes of combustible cigarettes have been falling for many years across the world, which will ultimately lead to significant improvements in health, although the evidence will take several years to become apparent. Understandably, there is much enthusiasm that the scourge of tobacco smoking-related diseases may be, if not eliminated, significantly reduced in future generations.

    It is in the interest of consumers who may wish to move to a safer form of nicotine intake that PMTA applicants are fully compliant with the post-marketing requirements and continue to work with the FDA and lobbyists to contribute to and maintain an appropriate balance of risk reduction and health benefit realization. If these products, stated to be APPH, are no longer available to consumers, then the consumers’ opportunity to potentially improve their long-term health outlook is diminished.

    Many of the larger companies manufacturing ENDS products may have specific regulatory compliance staff and sales and marketing departments that are fully trained, equipped and resourced to deal with the FDA requirements, but for the smaller organizations, without such infrastructure, this resource requirement, skill set, potential complexity and the associated costs, particularly if the organization has a large number of SKUs, can be particularly onerous.

    The cost and resource requirements of maintaining established products in market has been recognized in the pharmaceutical industry for a very long time. As pharma companies typically prefer to invest in novel medicine development or in the enhancement of existing medicines to provide patent life extensions, some older, established products are still very successful and so the maintenance of the post-marketing requirements of these products from a regulatory and pharmacovigilance perspective is often outsourced to specialist contract research organizations (CROs) who collect and report this data on behalf of the pharma companies. These CROs can provide the necessary resources, expertise and experience to make this a cost-effective solution.

    It will be interesting to see how many ENDS products are successful in receiving a positive market order decision from the FDA only to be subsequently removed from the market as they fail to satisfy their post-market approval requirements, causing these products to be potentially as ephemeral as the aerosols they disperse.

     

    Advertisement
    Yvonne Wilding is director of product safety and compliance at Broughton Nicotine Services (BNS). BNS operates exclusively in the ENDS sector. Its team of scientific and regulatory experts, backed by its in-house, custom-built contract research organization facility, understands customers’ specific challenges and opportunities. With expertise across the U.S. and EU for tobacco products, medical devices and pharmaceuticals, BNS is committed to working with customers to increase the value of their business and advance a smoke-free future. For more information, visit www.broughton.com.
  • Damage Done

    Damage Done

    Photo: Stefan Malloch | Dreamstime.com

    Even as last year’s EVALI crisis has abated, the misperceptions it created about vaping persist.

    By Stefanie Rossel

    Roughly a year ago, a mysterious lung illness struck thousands of U.S. vapers. Emergency room visits increased from July 2019 and peaked in September before ebbing off. By Feb. 18, 2020, 68 people had died from complications of the lung disease, which was quickly termed EVALI—“e-cigarette, or vaping, product use associated lung injury.”

    However, EVALI turned out to be a misnomer, and the mystery surrounding vaping illness was quickly resolved—although some experts took longer to recognize the obvious than others. As the Centers for Disease Control (CDC) eventually acknowledged, illegal THC-containing vapor cartridges, also known as carts, were the true cause of the vaping-related illness. They contained a new thickening agent, vitamin E acetate oil, that was used as a diluent for tetrahydrocannabinol (THC), the psychoactive substance in marijuana. By destroying the surfactant, vitamin E acetate oil prevents the lungs from working properly. In addition, when heated, the agent can form a toxin that affects the respiratory tract.

    Tony Abboud

    “It is important to note that vitamin E acetate, a component found in illegal black market THC cartridges, was identified by the CDC as a primary cause of EVALI—and not nicotine vapor, contrary to what was portrayed by the media,” stresses Tony Abboud, executive director of the Vapor Technology Association (VTA). “Industry standard FDA-regulated nicotine-containing vapor products were not involved, much less to blame for cases of lung illnesses in September of 2019.”

    Professor Michael B. Siegel from the Boston University School of Public Health was one of the first to hint at the fact that bootlegged e-liquids containing THC were likely to be the origin of the vaping-related illnesses and deaths. One year after the height of the crisis, he says, EVALI is no longer an issue. “Shortly before we all got distracted by Covid-19, we were already seeing a dramatic decline in EVALI cases. At this point, the outbreak seems to be over. Apparently, the use of vitamin E acetate oil as a thickening agent in THC vape cartridges has been discontinued and by now the remaining carts in the supply chain have been through the life cycle, so the problem is essentially over.”

    Advertisement

    Long-term impact

    But while the illness may have gone away, the impact of the way in which U.S. health authorities handled the crisis lingers on. From September 2019, the two U.S. leading health authorities, the Food and Drug Administration (FDA) and the CDC, issued contradicting advice. The FDA warned against vaping THC purchased from informal sources. The CDC, by contrast, didn’t publicly single out illegal THC liquids as the probable cause of EVALI until November 2019 and continued to caution against vaping all e-cigarettes until January 2020. There has been no official rehabilitation of the legal vapor business, and the sector continues to suffer from an underserved blemish.

    “Unfortunately, and quite sadly, the discovery and confirmation that vitamin E acetate oil thickener was the cause of EVALI has had virtually no impact on the communications that are coming from most state health officials and local health agencies and organizations,” says Siegel. “Very few, if any, state health departments put updates on their websites notifying consumers that the problem was discovered and that THC carts, not e-cigarettes, were found to be the problem. Massachusetts is a great example. The Massachusetts Department of Public Health—to this day—maintains the position that we have no idea what caused the outbreak. It has not corrected its errant and premature conclusion that this was due to e-cigarettes. And it has not issued a clear statement clarifying that the cause was THC vape carts. The majority of the public still believes that e-cigarettes were causing EVALI and have no idea that it was THC vape products.”

    This misperception continues to plague the sector today. “The vape market has been under near-constant attack from organizations that fail to recognize the extensive body of science that points to black market THC being the source of the EVALI lung disease,” says Abboud. “Both the FDA and CDC have come to this same conclusion. The damage to the public consciousness that this false narrative perpetuated has caused states to move towards banning some or all nicotine e-cigarettes. Also, some state officials have improperly used the EVALI issue to claim that certain flavored nicotine vapor products should be banned even though there was zero association between flavors and any EVALI case. These actions have had a negative impact on the vapor market and have scared adults back to smoking. Not only does this harm the health and well-being of consumers, but it also has devastating economic impacts.”

    An excuse to crack down

    Michael B. Siegel headshot
    Michael Siegel

    In the wake of the EVALI outbreak, several states and cities have proposed or enacted e-cigarette and flavored e-liquid bans. “Once again, knowledge of the true cause of the EVALI outbreak had no effect in changing public policy,” says Siegel. “All of the states that enacted emergency bans on e-cigarettes or flavored e-cigarettes because they suspected these products were involved continued to implement these bans after it became clear that e-cigarettes played no role. It is as if the science doesn’t matter at all and policymakers simply enact the policies they want regardless of what the science shows or the actual health impact will be.”

    According to Abboud, states continue to create arbitrary and misguided measures to ban flavors for vapor products without addressing marketing issues. “For example, New York left all flavored combustible products on shelves while going after flavored vapor products even though the New York State Department of Health did not find any presence of vitamin E acetate in the nicotine products they tested,” he says. “Opponents of vaping have seized on the EVALI crisis to redouble their efforts to ban flavors despite there being no logical, much less scientific, connection between EVALI and flavors.” Abboud is convinced last summer’s crisis has set off a dangerous chain reaction of policy decisions and regulations that will do more harm than good as they too are focused on the wrong issues.

    Inaccurate or incomplete press reports have contributed considerably to the public’s misperceptions and not just in the U.S., according to an independent analysis of media coverage before, during and after the EVALI outbreak, commissioned by the Foundation for a Smoke-Free World (FSFW).

    The study found that THC vaping and nicotine vaping, which involve different devices, liquids, supply chains and consumers, were consistently confused by the evaluated media, which focused primarily on nicotine vaping and nicotine. Consequently, people who vaped THC during the EVALI outbreak were not alerted to the potentially life-threatening dangers of illicit, tainted versions of these products. What’s more, U.S. adult misunderstanding increased between September 2019 and January 2020. The share of people who believed THC vaping was the cause of EVALI decreased from 34 percent to 28 percent while the share who believed that nicotine vaping was the cause rose from 58 percent to 66 percent. This development, the analysists said, came on top of numerous surveys showing that public misunderstanding of nicotine itself is widespread, potentially discouraging smokers from using nicotine patches, gum and other replacement therapies to quit smoking.

    Similar trends were observed in other countries, none of which experienced EVALI cases. Among other countries, the FSFW study looked at EVALI news coverage in the U.K., where the country’s health agency, Public Health England (PHE), had stated as early as 2015 that vaping nicotine is at least 95 percent safer than smoking combustible cigarettes. Nevertheless, an increasing number of articles sounded alarms about nicotine vaping in the latter half of 2019. Even though U.K. health authorities repeatedly reiterated PHE’s findings, more than a third of smokers in the U.K. believed that e-cigarettes were equally or more harmful than combustible tobacco, according to a March 2020 report in The Independent.

    Return to combustibles

    EVALI had a devastating effect not only on the vapor industry but also on the concept of tobacco harm reduction. “The preliminary analyses I have seen suggest that there were substantial losses in the e-cigarette category and significant gains in the combustible market,” says Siegel. “I have not yet seen a comprehensive analysis but am currently working on conducting such an analysis myself using bar code sales data. My hypothesis is that the combination of the EVALI scare, the flavored e-cigarette bans and Covid-19 led to increases in cigarette consumption with a concomitant decline in e-cigarette use. I should have an answer late this fall. If confirmed, this would represent a tremendous blow to the concept of harm reduction.”

    The fact that the EVALI outbreak remained a U.S. phenomenon has often been put down to the fact that other countries have long introduced strict regulation for vapor products. The European Union, for instance, regulates e-cigarettes through its revised Tobacco Products Directive (TPD2), which came into force in May 2016. Article 20 lays down minimum safety and quality standards for vapor products and refill containers. Among other things, the law restricts the amount of nicotine in e-liquids to 20 milligrams per milliliter. The high nicotine levels in some U.S. products have likely contributed to the rapid spread of youth vaping in the U.S. The EU directive also prohibits the use of ingredients such as taurine, colorings and caffeine in e-liquids. THC liquids, meanwhile, are hard to find in Europe.

    The U.S. too is moving toward a more regulated market. By Sept. 9, all companies that want their novel nicotine products to remain in the market will have to submit a premarket tobacco product application (PMTA) to the FDA. “These applications will give [the] FDA the opportunity to examine all of the science regarding vaping and, most importantly, the science specific to the products for which applications are filed,” says Abboud. “This means [the] FDA will be making its determination on each application of whether the product is ‘appropriate for the protection of public health.’ These determinations will go a long way to finally dispelling the false narrative perpetuated about vaping.”

    For Siegel, the PMTA pathway is no solution, however. “The great irony is that the PMTA approach does nothing to directly address the possibility of another EVALI [crisis] occurring and actually makes it more likely that something similar could recur,” he says. “The major effect of the enforcement of this deadline will be the decimation of the e-cigarette market, with all of the small companies and most vape shops disappearing and the market being shifted largely over to the big companies with a strong retail—convenience store—presence. What this means is there is going to be an expanding market for both DIY [do-it-yourself] and black market products, especially flavored e-liquids. While many suppliers are trustworthy, there are always those who are going to get into the business solely to make money, and those are the ones I worry about. They may take shortcuts. And ironically, this massive black market and DIY market will not be regulated.”

    Science against misperceptions

    Meanwhile, some scientific sources, such as the Harvard Health Blog in April 2020, have used EVALI as a springboard to suggest that there are “other causes for concern” in vapor products, such as humectants, flavoring agents, heating ingredients or the risk of heavy metal inhalation due to repeated use of refillable cartridges.

    “In low-quality products with poor manufacturing standards and poor quality assurance measures, there are causes for concern, including certain flavoring agents, overheating of the e-liquid and potential heavy metal exposure,” Siegel acknowledges. “Sadly, instead of focusing on implementing a set of safety testing and standards that would get these products off the market and ensure the maximal safety of the vaping product supply, the FDA has been wasting its time focusing on getting rid of cherry vapes and soon will be decimating the entire market. I believe that instead of the ridiculous PMTA requirements, the FDA should simply promulgate safety regulations for e-cigarettes and vaping products. They should have done this back in 2011 when the American E-Liquids Manufacturing Standards Association (AEMSA) had actually drafted a set of standards that I thought were a good basis for regulation.”

    Abboud points to a 2018 report by the U.S. National Academies of Science, Engineering and Medicine (NASEM), which concluded that there was “no available evidence whether or not e-cigarettes cause respiratory diseases in humans.”

    “The report even concluded that switching from traditional smoking to vapor products would reduce harmful health effects,” he says. “For those concerned about the short-term implications of vaping, NASEM also concluded that vaping instead of smoking creates improved health benefits for the respiratory and cardiovascular systems. Most importantly, the FDA is currently reviewing PMTA applications which contain all the relevant science related to specific products that will remain on the market. ‘Other causes of concern’ will be sorted out by the FDA’s team of scientists and, as of this date, no one has rationally claimed that vaping is not a safer alternative to smoking cigarettes.”

    Stefanie Rossel is Tobacco Reporter’s editorial contributor. An experienced trade journalist, she combines sharp reporting skills with in-depth knowledge of the tobacco and vapor industries. Prior to joining Tobacco Reporter, Stefanie was editor-in-chief at Tobacco Journal International, where she worked for a decade. Fluent in English, German and French, Stefanie covers tobacco news around the world. She is based in Germany.
  • Philter of the Future

    Philter of the Future

    The Philter Labs Phlip
    The Philter Labs Pocket

    Philter Labs has developed portable systems to eliminate secondhand smoke and vapor.

    By Marissa Dean

    For years, public health officials have warned that secondhand smoke is just as dangerous as smoking, if not more so, and more recently, elusive “thirdhand” smoke—the residual nicotine and other chemicals left on indoor surfaces by tobacco smoke—has been a topic of concern. And with the creation of vapes came the controversy of how harmful exhaled vapor may be, especially with the current pandemic at hand.  

    With all that in mind, Philter Labs, a technology company in San Diego, California, USA, created two products—one that eliminates secondhand smoke from cigarettes and secondhand vapor from vaporizers and another that removes secondhand vapor from pen and stick vapor products.

    Philter Labs was co-founded in 2014 by Christos Nicolaidis, a veteran entrepreneur and CEO of Philter Labs, and John Grimm and Yuval Shenkel, product engineers with decades of experience designing innovative medical components for Fortune 500 companies. After seeing how vaporizers were changing the way people consumed nicotine, they wanted to find a way to get rid not only of traditional secondhand smoke but also of secondhand vapor.

    The company’s goal, according to its website, is to allow “adult vapers and nonvapers to socially coexist … while eliminating secondhand smoke and protecting their personal right to vape or smoke.” A bonus comes in the form of environmentally friendly clean air, void of the pollutants that are found in secondhand smoke and vapor.

    Advertisement

    As people have become more health-conscious, concern about secondhand smoke and vapor has increased accordingly. “Our surveys have found that 67 percent of people who smoke and vape are concerned with secondhand smoke [and vapor] and how it affects the environment around them,” writes Nicolaidis. This shift toward more responsible vaping and smoking has led to a higher demand for Philter’s environmentally conscious filter technology, leading to a sales increase for the company and a more than 20 percent customer return rate. Naturally, the Covid-19 outbreak has affected this as well—many users are looking for ways to continue to vape without putting those around them at risk. It’s still unclear exactly how vaping and smoking aid in the spread of the virus, but it has been suggested that vapor and smoke clouds can suspend the virus in the air and spread it to others. Using Philter devices would help prevent this.

    When asked in an email exchange how Philter’s technology works, Nicolaidis said, “It’s important to first point out that our products are designed to preserve users’ normal smoking or vaping experience, so we never interfere with the inhale. But upon exhale, the user has the option to blow their smoke back into our Philter instead of the air. Inside the Philter, a proprietary combination of filtration mediums and airflow algorithms work together to capture 97 percent of airborne particulates, pollutants and VOCs [volatile organic compounds] down to a particulate size about 30 times smaller than the width of a human hair.” The products do not capture the smoke emitted by the lit ends of combustibles, however.

    “Our Philter is the first in the nanofiltration space for vaping that has been validated as EN 1822 HEPA compliant by a globally recognized independent particulate testing laboratory,” Nicolaidis added.

    Philter products, made for use with tobacco, cannabis and CBD, differ from existing solutions in three ways, according to Nicolaidis. The first notable difference is that Philter products do not simply mask secondhand smoke and vapor—they capture it and eliminate the harmful elements. Philter’s science-based filtration processes have been granted three utility patents with several others pending.

    The second difference is in size. Nicolaidis describes Philter products as “small, discrete and sophisticated” while stating that most other products are “oversized and impractical to carry.” The two products promoted on the company’s website—which are available for purchase online, on Amazon or at a variety of brick-and-mortar stores throughout North America—the Pocket and the Phlip, offer users options for carrying their products; the Phlip works in coordination with pen and stick vapor products, allowing users to carry one product. The vapor product inserts into the allotted space on the filter, and users inhale from the vape then flip the device around to exhale into the filter. The Pocket, on the other hand, requires users to carry two devices, but it can be used with combustibles as well as vapor products. Instead of inserting the device or combustible into the Pocket, users exhale into the Pocket after inhaling from their vape or combustible as normal. The Pocket captures the secondhand smoke or vapor rather than it being released into the air. Each filter is good for 150 exhales. While both products require you to carry an additional piece, neither is much bigger than the products they are used in conjunction with.

    The third difference focuses on brand marketing. “Our brand messaging is positive and inspirational,” Nicolaidis writes. “Philter use provides an opportunity for people who vape and people who don’t to safely share the same space without the fear or stigma of secondhand smoke. It’s truly a win-win for everyone involved.”

    The goal of keeping the products small and efficient created a few hurdles in development; it took more than four years and 20 prototypes before Philter Labs created a version that was ready for commercialization. The chief technology officer used his experience working on cardiac and spine-related medical devices to help create a miniature microfiltration system “roughly the size of a tube of lipstick.” Engineers also had to consider airflow and exhale to make them feel as natural as possible, realizing each user’s physiology and exhale capacity is different. 

    The company is also working on new technology: “The ‘Moonshot’ for our industry would be a device that captures and eliminates all smoke [including that emitted by the lit end] from a traditional cigarette. While we can’t divulge any details at this time, I can say that Philter’s brilliant minds are hard at work on a Moonshot product, and we expect liftoff in late 2021.” On top of that, Nicolaidis notes that the company is “about to announce a new cutting-edge product that will allow for widespread adoption of [Philter’s] patented filtration technology. It’s a product that’s been in the works for several years and will bring accessibility, ease of use and a high-quality experience to consumers. This is not only a game-changer with respect to the future of vaping and the opportunity to finally begin normalizing vape use in public settings but will also have a positive impact with regard to public policy and how political leaders can offer a solution that protects individuals’ rights while preserving the freedom of people who do not vape or smoke in virtually ‘any’ setting.” Helping to move these projects forward is a recent $1 million funding investment to support corporate growth, which includes new product launches and research and development. In 2018 and 2019, the company also received $2 million in seed financing from Bravos Capital, Explorer Equity and a global Private Equity Fund.  

    The future of filters is changing, and Philter Labs seems to be at the forefront of innovation. Time will tell how its technology will change the vapor industry and the public health landscape—one day soon those clouds of cigarette smoke and vapor may be problems of the past.

    Beyond technology

    Philter Labs’ work doesn’t stop with its nanofiltration technology. The company recently launched an advocacy division, the Philter Project, to help improve communities throughout the U.S. and abroad. Funds have gone toward planting trees in the Amazon through the One Tree Planted initiative, providing veterans suffering from PTSD with Philter Phlips and supporting cannabis-related criminal justice reforms through the Last Prisoner Project.

    Marissa Dean joined Tobacco Reporter in the summer of 2018 as a copy editor.Since that time, she has taken on additional responsibilities, including feature writing.Her skills span the publishing industry from layout and design to copy editing to content creation.
  • For the Long Haul

    For the Long Haul

    Photo courtesy of VCF

    Despite declining sales and considerable regulatory pressure, smokers are likely to still enjoy cigars 100 years from now.

    By George Gay

    It is instructive to read what the U.S. Centers for Disease Control and Prevention (CDC) says about the first report of the U.S. Surgeon General’s Advisory Committee on Smoking and Health, which was published in 1964. According to the CDC’s website, the committee concluded that cigarette smoking [my emphasis] was a cause of lung cancer and laryngeal cancer in men, a probable cause of lung cancer in women and the most important cause of chronic bronchitis. And the CDC goes on to say, in the next sentence, “The release of the report was the first in a series of steps, still being taken more than 40 years later, to diminish the impact of tobacco use [my emphasis] on the health of the American people.”

    It is noticeable how the CDC’s piece glides effortlessly from cigarette smoking, said to be the proven cause of these diseases, to the more general tobacco use. Clearly, since no distinction is being made between cigarette smoking and tobacco use, which could include, for instance, the consumption of snus, there was never any hope that regulators and the anti-tobacco community were going to recognize the more nuanced divide that separates cigarette smoking and cigar smoking.

    It cannot be denied, however, that there is a world of difference between cigars and cigarettes and the way in which they are smoked, something that is given tacit recognition in many countries where the two products are separated by definitions and tax levels. Cigars and cigarettes are produced largely from different materials in different ways, so it is not surprising that they don’t look alike, they don’t taste or smell alike and they are consumed differently, including, in respect of cigars, less frequently. Additionally, cigars have a different, more limited consumer profile to that of cigarettes, with the former being enjoyed mainly by older men.

    And while cigarette smoking is a habit, some say an addiction, cigar smoking can reasonably be seen as one of life’s simple pleasures, verging on a hobby among some people. Fred Vandermarliere, the CEO of VCF (Vandermarliere Cigar Family), which owns owners of J. Cortes and Oliva Cigars, said in an email exchange that taking an hour out of a day to smoke a cigar alone or with friends had the effect of clearing his head—it was a type of destressing that was similar to, though not the same as, the relaxation he enjoyed while cycling. But he said that cigar smoking, like all indulgences, should be enjoyed in moderation. “Don’t smoke, but enjoy,” he added.

    Advertisement

    Lopped in with cigarettes

    The case of mistaken identity that has seen cigars bracketed with cigarettes has been a major obstacle for the cigar business because it has meant that, in large part, cigars have suffered at the hands of regulations developed with cigarettes in mind. In the U.K., where, according to Scott Vines, the managing director of Tor Imports, regulation has banned the display of tobacco products in all shops except the country’s 120 specialist tobacconists, there has been a big reduction in stores stocking handmade cigars (HMCs). This is unsurprising. You don’t have to be an expert to realize that a business that relies partly on regularly offering new products and limited editions, as the cigar business does, needs more retail exposure than is the case with cigarettes.

    But all is not lost. Vines said his company, as part of “the ongoing battle,” lobbied the government via its industry body, the Imported Tobacco Products Advisory Council, and had gained some notable exemptions, such as that concerning what otherwise would have seen standardized packaging applied to larger cigars. This exemption, though seemingly insignificant, is seen as being a very important one for the handmade cigar community. As Vandermarliere pointed out, cigars comprise a niche product with low volumes but high numbers of formats, which means that the introduction of government-mandated pack changes and track-and-trace requirements, for instance, are more detrimental in respect of cigars than in the case of cigarettes, where higher volumes help spread the costs of such changes.

    Advertisement

    For Vines, with sales concentrated in the U.K., a huge hurdle is provided by a system of yearly duty increases that has pushed U.K. cigar taxes to the highest level in Europe. High taxes inevitably mean high retail prices and, in this case, an increase in consumers buying through the websites of companies based in countries with much lower taxes and retail prices. Purchases from Belgium, Germany, the Netherlands, Spain, Switzerland and the U.S. are said to make up most of this trade, which some estimates put at more than 30 percent of the U.K. market.

    Given these issues, it’s not surprising that cigar volumes are declining in the U.K., though much of this decline is occurring in respect of sales of machine-made cigars (MMCs), while sales of HMCs are said to be “holding up.” Along with the retail-display restrictions and increases in taxation, downward pressure on cigar sales has been created too by the country’s system of high product-registration costs and, especially, the 2007 introduction of a ban on smoking in public places.

    Partly because of this fall in volume, but also because of a switch to cigarillos from larger vitolas [Cuban formats], the value of cigar sales in the U.K. is also decreasing, though this fall in value has been partly offset by the yearly increases in duty, which inflate sales prices. Now, about 70 percent of all cigars smoked in the U.K. are cigarillos, which sell at a lower retail price than do HMCs and larger MMCs.

    Declining volume sales were reported also by J. Cortes, which operates around the world but whose main markets are the U.S., France, Spain, Belgium, Italy and the Netherlands, though Vandermarliere also made the point that sales of premium HMCs were fairly stable while those of other cigars were declining. In part, Vandermarliere said, the decline was down to the cigar industry’s tobacco heritage, which meant that it attracted government regulations in the form of smoking restrictions, for instance. But he suggested that the industry was partly to blame for government interference because in producing some products that looked similar to cigarettes it was blurring the cigar/cigarette distinctions.

    VCF’s factory in Belgium

    Evolving preferences

    Whether the emergence of such products could be justified on the grounds of “consumer demand” is debatable, but it is indisputable that cigar-consumer preferences are always evolving, something else that distinguishes cigar smokers from most cigarette smokers but aligns them with consumers of, say, fine food and wines. Vandermarliere said that, in general, though with the exception of those in the U.S., consumers used to know only about Cuban cigars—as they used to know only about French wines. But preferences and tastes had expanded so as to appreciate the special qualities of cigars from other sources. And he gave as an example Nicaragua Fantastic puros [cigars], made by Oliva Cigars, which was acquired by J. Cortes in 2016 and which propelled the U.S. from almost nowhere to the No. 1 spot on the company’s list of markets.

    Vines painted a similar picture when turning his attention to the evolution of the U.K. market. Alongside the switch that had occurred to smaller MMCs, the HMC market had undergone a radical shift in recent years. About 90 percent to 95 percent of the large cigars sold in the U.K. 10–15 years ago had been of Cuban origin, with the remainder being accounted for by all the New World cigar-making countries combined. That had changed considerably with Cuban-origin products now accounting for about 65 percent to 70 percent of the market and New World cigars growing share every year. Indeed, away from London, the share of New World cigars is even higher, with some areas having a 50-50 split. This change is said to have been fueled partly by a consumer desire for new cigar experiences, including the different flavor profiles offered by products from countries such as Nicaragua, the Dominican Republic, Honduras and Mexico, and partly by importers improving the range of New World cigars on offer in the U.K.

    To help prevent the spread of Covid-19, VCF equipped its employees with these stylish masks.

    Coping with Covid

    The question arises, of course, as to what effects the Covid-19 pandemic has had on supplies from such origins and, indeed, on sales in consuming countries. With factories in Sri Lanka, the Dominican Republic, Belgium, Nicaragua and Miami, VCF was bound to be affected by the Covid-19 pandemic, and so it was, but the level of disruption varied hugely—from having to close its Sri Lanka facility for five weeks, during which time workers continued to be paid, to only minor issues in the Dominican Republic. On the retail side, while tobacco was seen as a necessary product in almost all markets and was therefore available through general stores, a lot of markets saw the closure of specialized shops, which put downward pressure on sales. And this downward pressure only added to issues that had been encountered in China and Hong Kong since the beginning of the year. In the U.S., however, many consumers switched to online sales, and Vandermarliere was confident that his company would easily weather the Covid-19 storm. Certainly, he said, by being as flexible and agile as possible, and by keeping in close contact with and protecting its staff, VCF so far had been able to continue delivering cigars.

    Meanwhile, Vines reported that, along with other businesses classed as nonessential, Tor Imports had had to adapt rapidly to continue trading in “any way considered close to normal.” “Tor Imports took the decision not to furlough any of its workforce but instead work with our customers [retail] even more closely to help deliver the same levels of customer service as prior to these strangest of times,” he said. This meant the company had had to change the way it managed its workforce, with the office and warehouse being operated on a skeleton-staff rota to ensure staff safety and the rest of its people working from home. This led to the discovery of new ways of working, such as with Zoom calls, and an improvement in internal and external communications.

    Given this, it is possibly not surprising that Tor Imports seems to have weathered the pandemic rather well, but I hardly expected Vines, in answer to a question, to say that the company had done “remarkably well!” It had delivered above-average sales, he said, partly because customers geared up with a solid online offering had positively thrived during a lockdown that had coincided with unusually good weather for the U.K., allowing many consumers working from home to enjoy cigars.

    Advertisement

    It is not surprising that Vines takes a positive view of the future. After all, if you can conjure increased average cigar sales during a pandemic that causes lockdowns around the world, anything is possible. And one of the things that came into its own during the lockdown and that will be retained is the virtual cigar event. Such events, said Vines, had been a huge success, allowing cigar manufacturers to take part in multiple events in the same week without having to travel huge distances.

    But another reason for confidence, perhaps, is that Tor Imports has added a second string to its bow. It has its own brand of cigars, Charatan, which it bought from British American Tobacco in 2018 and which is made by Joya de Nicaragua. Expanding distribution of Charatan cigars outside the U.K., coupled with that of Charatan Pipe tobacco, which is already available in Switzerland and Norway, is said to be a key part of the company’s strategy.

    Vandermarliere, too, is confident about the future, but he has no illusions. Cigar manufacturers, he said, were operating in a market that was declining under a lot of regulatory pressure, so they weren’t giant tech companies that could look forward to doubling their businesses in five years. Nevertheless, J. Cortes believes that in 20, 50 or even 100 years from now, people would still be enjoying good cigars. And because of that belief, this family company with global reach would continue to invest in the cigar industry. Times would be tough, but then they would be tough for companies in other industries too, he added.

    Part of this confidence is down to the way that Oliva Cigars has invested to ensure supplies of tobacco. It has invested in tobacco stocks and even in tobacco farms in Nicaragua, where it is introducing techniques to manage land and water resources responsibly—in a way that will allow tobacco to be grown there for the next 50 years at least.

    Advertisement
    George Gay is Tobacco Reporter’s European editor, but his territory spans the globe. Based in London, George has covered the tobacco industry since 1982, initially for a U.K.-based publication and since 2004 for Tobacco Reporter. George’s understanding of industry issues, combined with his keen sense of observation and dry wit, have earned him a loyal following among Tobacco Reporter’s readers.
  • Measuring Up

    Measuring Up

    Photo: Broughton Nicotine Services

    How instrumentation suppliers and laboratory service providers are supporting customers with their PMTA submissions

    By Stefanie Rossel

    Although there has been a 120-day extension due to the outbreak of the Covid-19 pandemic, Sept. 9 will definitely be the final day: If a company wants its “recent” tobacco products to remain in the U.S. market, it has to submit a premarket tobacco product application (PMTA) to the U.S. Food and Drug Administration (FDA) by then. In 2016, the FDA announced that all tobacco products not on the market prior to Aug. 8, 2016, would require authorization before entering the market and all products on the market prior to that date would have a grace period during which companies could prepare their PMTAs for submission.

    The candidate products will all undergo a several-stage review during which they have to demonstrate with the help of scientific data that they are “appropriate for the protection of public health.” The FDA will consider the risks and benefits of the products not only to the individual but also to the overall population, including whether existence of the product will increase the likelihood of nonusers starting using them. The evaluation also includes reviews of product ingredients, constituents, toxicological profile, health impact, manufacturing and packaging processes as well as labeling.

    Tobacco Reporter asked several instrumentation suppliers and providers of laboratory services how they experienced the run-up to the FDA’s extended deadline, which was originally set for May 12, 2020.

    “The date for the premarket submission was set well in advance, so there was increased demand but no real ‘rush,’” says Tobias Krebs, managing director of German company Vitrocell, which specializes in in-vitro testing technology.

    Ian TIndall

    Ian Tindall, head of innovation and marketing at Cerulean, says there has been a noticeable demand for extra testing capacity in the U.S. but that most of this demand was generated in late 2019, and the extension to the submission date had not really been visible.

    “The larger companies have had this well organized all the way along, and from our experience, the anticipated rush for testing at the contact research organizations has not been mirrored in a late rush for test equipment,” Tindall explains.

    “I should note that the EVALI crisis at the back end of 2019 did generate demand for additional testing of vaping products and a consequent surge in instrument demand, and this did put pressure on the business, but we feel we met all the urgent demands successfully. More recently, some of the focus has moved away from vaping devices towards tobacco-heating products, and we have been increasing supply kits and specialist machines and upgrades for this sector of the industry.”

    In February 2019, Cerulean teamed up with Tews, a leading supplier in the field of industrial microwave moisture and density measurement. Cerulean now exclusively markets Tews laboratory devices for the tobacco industry. Based in Hamburg, Germany, Tews also has a U.S. subsidiary. “We can now jointly address emerging requirements for density and moisture testing in the industry and work effectively with clients in this regard,” says Tindall.  

    Thomas Schmidt

    Thomas Schmidt, director of scientific and technical affairs at Borgwaldt KC, a German manufacturer of high-end quality control instruments and precise measurement devices that is part of the Hauni group of companies, notes that the PMTA process was communicated early and the instruments used to generate the data were available. “Besides new developments like our next generation of analytical vaping machines, the NGX series, we have, however, made some modifications to existing instruments—on our LM5SP and LM5SF, for example, which are both intended to collect aerosol in different collections procedures and increased the flexibility in usage to meet the specific demands of certain customers,” says Schmidt.

    Broughton Nicotine Services (BNS) has noted a definite increase in demand for its services in the runup to the PMTA deadline, according to Chris Allen, vice president of scientific and regulatory affairs. For many companies, he contends, the PMTA has been the first opportunity to truly characterize and stress test their products.

    “This has inevitably led to clients learning more about their products and the need to understand further so that risks can be mitigated and improvements made in the future,” Allen says. “The extension has provided additional time for these companies to perform further characterization and bolster their applications. In addition, we’ve seen a wave of companies who had been delaying the PMTA process or having partial information take advantage of the extension in order to commit to the PMTA pathway.”

    Photo: Borgwaldt KC

    Heavy workload

    Matters are complicated by the FDA’s requirement that applicants file a separate application for each brand variant. For suppliers of instrumentation equipment and labs, this has meant a lot of additional work in recent months. “This has had no impact on our business but has required software development to become FDA compliant,” says Eric Favre, managing director of Sodim, a French company specializing in metrology for the tobacco industry and, like Borgwaldt KC, part of the Hauni group of companies. Sodim has developed a specific device called VPA (vaping puff analyzer). “This device has required adaptations for new formats with specific sample holders,” says Favre.

    “The established manufacturers of traditional tobacco products have lots of data available for marked products, which they can provide to the FDA. In [the] case of modified and new products, especially vaping products, the manufacturers were not all aware of what is expected,” Schmidt points out. “These products are newer to the market and do not have sufficient historical data available to refer to. Therefore, we were not surprised that this has led to an increased demand for our next-generation product (NGP) machines and has driven us to develop a new generation of analytical vaping machines, our NGX family and other innovations and modifications within the available Borgwaldt KC portfolio to meet the needs of the market.”

    Allen says that although each product is unique, the FDA is accepting “bundled” submissions for multiple products, which enables clients to save cost and tell the “story” of a group of products. “Despite the ability to include multiple products under one submission, the level of analytical testing has been significant,” he says. “We had been planning our expansion in line with the PMTA since 2015 and moved into our new dedicated nicotine products facility in 2018.”

    The expansion project was completed in January of 2019 following an investment of £10 million ($12.41 million) into people, facilities, analytical equipment, software development and quality standard certification. The company recruited more than 70 new team members, not only within the analytical function but also across clinical, nonclinical and project management.

    Vitrocell observed increased demand for systems with higher output. “We needed to increase our development activities but could tie in new orders in our regular production scheme,” says Krebs.

    “We are fortunate that in the way we have set up our supply chain and manufacturing facility we can redeploy resources quickly and keep customers satisfied with extending lead times,” Tindall says. “Some special requests have taken a little longer to fulfill than our standard lead time, but by switching capacity, say, from our standard smoking machines to vaping and THP testing machines, we have managed to meet our delivery commitments. That is not to say we have not met bumps in the road, but the unsung heroes in the back office who keep the production machine running have really risen to the challenge.”

    A key part of the PMTA is to understand how your product behaves, what the risks are and therefore what quality control checks need to be in place.

    Far-reaching measurements

    Testing required for PMTA applications is manifold; it includes the analysis of tobacco and e-liquid constituents, ingredients and additives, especially the 33 substances listed by the FDA as harmful and potentially harmful constituents (HPHCs), smoke and vapor constituents as well as all physical parameters of the products, toxicological assessments and topographic data, notes Schmidt. “We have seen a remarkable increase in interest in our topography products as well as our NGP vaping devices,” he says.

    In vitro data play a role in the application too. For Vitrocell, this translated into demand for its exposure solutions. Cerulean witnessed greater interest in its vaping machines, particularly with an accessory that determines the density of the vapor. “We have published a lot of work that shows how this device, primarily designed for showing when an e-cigarette stops effectively forming aerosol, can be used to monitor the full life delivery of aerosol of an e-cigarette device,” Tindall explains. “Beyond measurement is the need from our customers’ perspective for installation and servicing in line with good laboratory practice [GLP], with an installation qualification and an operational qualification step that is properly documented.”

    According to Allen, the level of testing required to demonstrate the shelf life of the product, including extractables and leachables, should not be underestimated. “Having the analytical data available is just the start of the process. Conclusions need to be drawn from this data to understand the performance of the product and most importantly to risk assess from a toxicological perspective,” he says. “This is why we saw the creation of the integrated chemistry consultancy and toxicological teams of paramount importance as having these teams on-site enables us to design the analytical studies in line with the end purpose and perform ‘real-time’ risk assessments.” BNS has also developed ToxHQ, a unique internal software tool to complete rapid toxicological screening and risk assessment. The central repository holds chemical data used in e-liquid formulations, including chemical identifiers, properties and classifications, such as HPHC-registered chemicals, Allen says.

    Chris Allen

    Managing the data

    Once the products have been authorized, further measurements will be needed to maintain compliance. “This will be an interesting development over the coming months and as we start to see FDA feedback on the PMTAs,” Allen points out. “It will very much depend upon the product sub-category, e.g., e-liquid, closed system or open device, but the critical point is demonstrating that you have control over the finished product. A key part of the PMTA is to understand how your product behaves, what the risks are and therefore what quality control checks need to be in place as either verification of incoming parts or ingredients, in-process controls or analysis of the manufactured product.”

    As an instrumentation supplier, Tindall says the company must recognize that once equipment has been bought, its use might change subtly over time. “We have a mission to ensure that time does not make our products obsolete. Consequently, as part of our product development strategy, we have upgrade paths plotted for most equipment that allows adaptations as regulatory pressures change or research applications and the new products by research demand. One thing beyond ongoing measurement that should not be minimized is the need to ensure that the equipment used is running properly.”

    In the course of a PMTA as well as during the control period afterward, massive amounts of data are generated, requiring expert management. Borgwaldt KC’s instrumentation features a data collection tool for this purpose. The company offers a variety of methods for collection, storage and submission of data to the customer’s data management system. “Our products are in compliance with the FDA requirements related,” Schmidt says, “but in general, the quantitative analysis of specific substances is requiring other analytical equipment in the labs.”

    Vitrocell offers solutions that enable its systems to be operated with GLP compliance. “Beyond that, data management is performed using the current technology of the customer,” Krebs relates.

    Advertisement

    “There is a lot of data generated, and we have worked with a number of customers to ensure that there is a seamless exchange of data with their laboratory information and management systems (LIMS),” Tindall states. “The vast number of LIMS suppliers has meant that we have had to do this on a case by case basis, and we feel we have been successful in this. We are very conscious of the increasing burden of data generation and storage. Our 21CFRpart11 packages, which are available on many of our products, create complex audit trails. The Internet of Things (IOT) and Industry 4.0 initiatives will increase the amount of data on machine performance that is available to an auditor, user or engineer, and this will be the next challenge to face.”

    Allen says that the retention of records is critical within any regulatory process. As BNS evolved from its pharmaceutical facility Broughton Laboratories, retention of both hard and electronic data has always been an integral part of the company’s quality management system. “Over the past twelve months, we’ve generated in excess of 200,000 lines of HPHC data for our clients, so effective data management is key. The utilization of LabHQ LIMS, developed by our sister company Broughton Software, including integration with the laboratory instrumentation and dynamic reporting, enables us to manage such large datasets.”

    The handful of PMTA approvals to date were granted after long and tedious reviewing processes. Thus far, only three products have received marketing authorization: Swedish Match’s General snus, Philip Morris’ IQOS device and Heatsticks along with two varieties of 22nd Century’s Moonlight cigarettes. What happens when the FDA gets overrun with submissions remains to be seen. Favre expects feedback from the FDA before the end of this year.

    “There will be huge amounts of data for the regulators to review,” Schmidt says. “It will be a monumental task to say the least.”

    “The FDA [is] undoubtedly going to see a significant number of applications,” Allen comments. “The PMTAs we’ve been working on consist of tens of thousands of pages, so this is going to be a large volume of data for [the] FDA to review. The big question will be how many PMTAs make it through to the review stage, which will impact most on [the] FDA’s resource. Once in substantive review, this very much depends on what additional data is requested by [the] FDA as any major amendment of an application, either by the applicant or at the FDA’s request, would result in a new 180-day review period.”

    He concludes: “In the same manner that all regulated industries have had to evolve, the electronic nicotine-delivery systems market will be no different. The PMTA process is simply a starting point, and as the FDA learns more about the products and risks, we’re likely to see further guidance issued—for example, the addition of new analytes and a deeper understanding of other possible chemical reactions and their risks to human health.”

    Stefanie Rossel is Tobacco Reporter’s editorial contributor. An experienced trade journalist, she combines sharp reporting skills with in-depth knowledge of the tobacco and vapor industries. Prior to joining Tobacco Reporter, Stefanie was editor-in-chief at Tobacco Journal International, where she worked for a decade. Fluent in English, German and French, Stefanie covers tobacco news around the world. She is based in Germany.
  • When Crime Pays

    When Crime Pays

    Photo: Ridzani Tshivhase

    Cigarette smuggling thrives in southern Africa.

    By Thulani Mpofu

    On May 15, 2020, South African police in northern Limpopo Province near the border with Zimbabwe impounded four vehicles and cigarettes worth ZAR1.4 million ($83,530).

    The drivers, transporting cigarettes smuggled from Zimbabwe, avoided arrest by bolting out of their vehicles and out-sprinting police.

    A fortnight later, four South African men and a Zimbabwean woman were arrested in the same province after a high-speed chase while attempting to spirit 10,000 boxes, or 200,000 sticks, of cigarettes into South Africa. In the last two weeks of June, 30 people were arrested resulting in the confiscation of cigarettes worth ZAR4 million.

    The consignments had been smuggled through the official border post at Beitbridge, or via some 200 illegal crossing points on the Limpopo River, which forms the border between the two southern African countries.

    In Botswana on April 4, police in a northern district close to Zimbabwe arrested a Motswana and a Zimbabwean for smuggling 127 cartons of cigarettes into that country.

    On April 16, three men were arrested near South Africa’s border with Mozambique while transporting 20,095 packs of cigarettes worth ZAR900,000. The contraband was coming from Mozambique.

    “Cigarette smuggling is a big problem for us,” South Africa Police Service Limpopo Province spokesperson Brigadier Motlafela Mojapelo told Tobacco Reporter.

    “We are on alert all the time and make arrests every day, but they are undeterred. I can tell you that since March we have arrested nationals of both countries numbering at least 100. What they tell us during investigations is that the crime pays for those who avoid arrest, but our message to them and would-be smugglers is that ultimately we will catch them.”

    Beitbridge Border Post (Photo: Bulawayo24)

    Trafficking of cigarettes from Zimbabwe into South Africa, the biggest economy in southern Africa and the most lucrative market for both licit and illicit cigarettes in the region, is rampant. Hundreds are arrested yearly for transporting the illegally imported tobacco into South Africa as well as Namibia and Botswana. Individuals and more organized cartels whose kingpins are rarely arrested are involved.

    Apart from being the main destination of trafficked cigarettes from Zimbabwe, South Africa is consistently the biggest African importer of tobacco grown in its northern neighbor. For example, in 2018, South Africa spent $100.8 million importing 32.2 million kg of tobacco from Africa’s top growing nation and the globe’s fourth-biggest producer. In that year and as in other years, South Africa’s spending and volume of imports was second to China, which imported 59.1 million kg of the leaf, worth $449.7 million.

    Advertisement

    According to a report by the Atlantic Council of the United States, “The Illicit Tobacco Trade in Zimbabwe and South Africa: Impacts and Solutions,” released in March 2019, high taxes that South Africa, Namibia and Botswana charge on cigarette imports are the major factor discouraging legal importation of the product, encouraging smugglers to try their luck.

    Members of the Southern Africa Customs Union (SACU)—South Africa, Namibia, Botswana, Eswatini and Lesotho—charge an average of ZAR16.66 in excise tax on a 20-pack of cigarettes. With a 15 percent value added tax, the total cost of the pack rises to about ZAR20. This suggests, according to an Atlantic Council study, any pack of cigarettes selling for less than the minimum collectable tax of around ZAR20 is likely smuggled or broadly illicit.

    An Ipsos study whose findings were released in November 2018 established that Rudland & George cigarettes, manufactured by one of Zimbabwe’s largest tobacco-growing contractors, Gold Leaf Tobacco, had become the biggest-selling brand in South Africa overall, retailing at ZAR10 a pack.

    The research estimated that illegal cigarettes accounted for 33 percent of all cigarettes sold in South Africa. The tobacco is especially prominent in the informal trade where they make up about 42 percent of that market. Due to their low prices, illegal cigarettes are an attractive bargain for smokers.

    A separate research by the Tobacco Institute of South Africa (TISA) said 38 percent of the illicit sticks were smuggled from Zimbabwe, making that country pivotal for any illicit trade strategy.

    Advertisement

    The financial prejudice of smuggled tobacco to the economies of Zimbabwe and South Africa is not accurately known, said a Harare-based tax consultant, Tendai Mavima.

    “There are no records for smuggled goods, so we cannot be specific in the economic impact,” he said.

    “But it is known cigarettes are being smuggled every day. Both economies suffer because if cigarettes are smuggled, it means losses in income tax, value added tax, excise duty and other taxes applicable to cigarette trade. For Zimbabwe, illegal exports in cigarettes means loss of foreign currency.”

    A Japan Tobacco study released in March 2018 suggests that South Africa lost about $1.5 billion in tax revenue to illicit trade between 2010 and 2016. BAT South Africa estimates that the illegal cigarette market cost South Africa “a conservative” ZAR8 billion every year.

    In its March 2019 report, the Atlantic Council of the United States said although cigarettes are smuggled from Zimbabwe into Botswana, Namibia and Mozambique, the three countries have smaller and poorer populations, leaving South Africa as the most attractive market for cigarette smugglers keen on large profits.

    South Africa police stand guard over Pacific Breeze cigarettes smuggled from Zimbabwe (Photo: OperaNewsHub)

    Actors are not only small-time traders who use undesignated exit points along the Limpopo River but also some “untouchables” who are well connected to the ruling elites in Zimbabwe and South Africa. Small traders typically use small vehicles to carry the contraband, but the “untouchables” carry theirs in large trucks that pass through Beitbridge Border Post where some officials are bribed to wave the vehicles across the border.

    “A former smuggler claims that one of these cigarette-smuggling cartels involves politicians in the highest levels of government from both Zimbabwe and South Africa but would not divulge names,” the report says.

    “This cartel is said to operate a smuggling scheme that runs from Harare to Durban. Huge trucks are used to smuggle the cigarettes from their loading points in Harare through formal border crossing points and onwards to their destination. These trucks are not stopped or searched on the Zimbabwean side of the border. The cigarette brands that are most frequently smuggled are Remington Gold and Pacific Blue, both owned by Savanna Tobacco [now known as Pacific Cigarette Company]. Beitbridge border post is a major point of entry.”

    In late March 2020, South Africa banned tobacco and alcohol sales, saying consumption of both increased the risk of spread of Covid-19. The Fair Trade Independent Tobacco Association, an industry lobby group in that country, argued in a statement that the ban only worsened the black market and the smuggling of cigarettes.

    Gift Mugano, a researcher at South Africa’s Nelson Mandela University, told Tobacco Reporter that individual smugglers and large companies are taking advantage of porous borders in southern Africa and poor government monitoring of their tobacco value chains. Countries, he said, lose much money in the forms of import and export taxes, excise duty and value added tax.

    “Our borders in the region are porous,” he said.

    “For example, there is no fence separating Zimbabwe’s border with Mozambique, the same for the border between Zimbabwe and Botswana. People, some of them smugglers, just walk or drive across. Even the formal border posts are porous because officials can be bribed.”

    Echoing the Atlantic Council report, a World Bank study, “Confronting Illicit Tobacco Trade: A Global Review of Country Experiences,” which focuses on SACU, expresses concern over criminal enterprises’ close ties to leading political figures in South Africa.

    “Recently, a notorious cigarette smuggler’s lavish birthday party is reported to have been attended by high-profile policemen and politicians,” said the report released in January 2019.

    Advertisement

    “Similarly, multiple reports allege that a leading cigarette smuggler met with South Africa’s ex-president to secure a votes-for-protection agreement. All future policy and enforcement measures must reckon with the reality that, in this region, the tobacco industry is disproportionately powerful.”

    The paper says government agencies in the SACU region have had little impact on illicit tobacco trade because of lack of focus, priority and resources allocated to tobacco regulation and to excise goods in general. Furthermore, they are unable to effectively secure tobacco supply chains at key points especially at production, shipment and on the retail segment. Some law enforcement agencies, the document adds, do not have nonintrusive inspection assets, such as scanners, to detect undeclared goods.

     “Tobacco is like gold,” Mugano said.

    “Many find it profitable to smuggle both commodities within the region and millions [of dollars] are involved. Like gold, cigarette smuggling is done by syndicates involving big companies. Those money-mongers are connected to figures in high places politically. Because of that, containing smuggling will be difficult.”

    In her book Dirty Tobacco: Spies, Lies and Mega-Profits, published in June 2020, Telita Snyckers, a South African author and a tax and customs lawyer, argues that some tobacco companies smuggle their own product to evade tax. Illegally trafficked cigarettes, the book adds, are potentially more profitable than cocaine, heroin, marijuana and guns.

    “The industry—even licensed, bigger players—has a long and consistent history of fines, felonies and infringements, spanning decades, across the globe,” the book reads in part.

    “There is ample proof that the tobacco industry incorporated smuggling and other tax and duty evasion measures as an explicit part of its business strategy,” writes Snyckers.

  • The Safety Net

    The Safety Net

    Photo: zikamatej |Pixabay

    Fine-cut tobacco will offer hard-up smokers a legal alternative—if tax officials can keep their ambitions in check.

    By Stefanie Rossel

    The continuous decline in tobacco consumption over the past years has not only impacted sales of factory-made cigarettes (FMC) but also left its mark on the hand-rolling tobacco market. Global fine-cut tobacco retail value stood at $23.73 billion in 2019, down from $24.11 billion in 2018, according to Euromonitor International.

    With a consumption of 24,298 tons in 2019, Germany remained by far the largest market, with stable sales over the past decade. “In Germany, fine-cut tobacco has an important buffer function between FMC and illicit cigarettes,” says Michael von Foerster, managing director of Germany’s smoking tobacco association Verband der Deutschen Rauchtabakindustrie. “It’s a real alternative for all those who want to enjoy tobacco but can’t afford or don’t want to buy expensive cigarettes.”

    In terms of rolling tobacco sales, Germany was followed by France, with 7,620 tons, and Poland, with 6,590 tons. Fine-cut tobacco was also popular in the U.K. (6,346 tons) and Belgium (6,098 tons). Across the European Union (EU), fine-cut consumption stood at 80,663 tons in 2019, down from 82,044 tons the previous year.

    Advertisement

    “In general, one can say that the fine-cut market is now stable whilst still being characterized as very diverse across the EU,” explains Peter van der Mark, secretary general of the European Smoking Tobacco Association (ESTA). “It is difficult to talk of a ‘European’ market for fine-cut tobacco as this product is not spread homogeneously across the union. In most countries, fine-cut tobacco is still a niche product whilst it can also be a long-established traditional product with a sizeable market share in other countries.”

    After the financial crisis of 2008, the fine-cut market in Europe grew substantially until the crisis subsided. “Since 2014, with the general economic recovery, the fine-cut market stabilized and then declined over several years and is stable again,” says Van der Mark. “In 2014, requirements of the EU’s revised Tobacco products Directive (TPD2) entered into force and became mandatory in 2016. The impact on tobacco companies in the EU, and especially on smaller and mid-sized companies, has been significant. The costs of the legislative requirements, including those for track-and-trace, lead to several companies closing down, the shifting of manufacturing plants and other companies being sold. In the end, the TPD2 is driving further market consolidation. Fine-cut taxation has been increased with the minimum requirements of the excise directive, with the last minimum increase in January 2020. In some member states, fine-cut taxation was increased significantly, and tax levels sometimes reached the ones for cigarettes. This led to an increase in illicit trade.”

    Michael von Foerster

    Impact on exports

    According to Van der Mark, the track-and-trace system for fine-cut tobacco products, which manufacturers, importers and distributors had to implement in record time, presented a challenge to the sector. By May 20, 2019, the transition period for both cigarettes and fine-cut tobacco ended. Intended to combat illicit cigarette trade, the EU track-and-trace system requires that each tobacco package carries a unique identifier (UI) code that must be scanned and recorded at every step of the distribution chain and transmitted to both the manufacturer’s database and the EU database, allowing authorities to trace and authenticate tobacco products. This required an entirely new level of data transfer technology as well as a highly developed IT infrastructure and updated packaging machinery. The system involves around 720 million scans a day across the EU, ESTA reports on its website.

    Van der Mark fears the track-and-trace system will impede European manufacturers’ ability to export their rolling-tobacco products. “The system, as provided for in the European Tobacco Products Directive, was meant for products placed on the European market—as common sense dictates—but this obligation was later extended through the implementing regulation to export products when manufactured in Europe,” he says.

    “As a result, the European tracking and tracing system can introduce a de facto export ban if products are destined to a jurisdiction where regulations are incompatible with the track-and-trace code either due to packaging or labeling regulation or due to incompatibility of the EU code with the code used in the destination country. Fine-cut tobacco, being predominantly manufactured in Europe, often by smaller and mid-sized companies, has as a result already been significantly and disproportionally impacted and disadvantaged,” says Van der Mark.

    Advertisement

    Getting taxation right

    Peter van der Mark

    Taxation has always played an important role in the fine-cut tobacco sector. The EU requires member states to levy a minimum rate of excise duties on cigarettes, which means that a pack of twenty FMC with a retail selling price, excluding taxes, of €0.70 ($0.79) would end up having a retail price, including all taxes, of €3. For fine-cut tobacco, the minimum excise rate stands at 48 percent of the weighted average retail selling price, or €60 per kg, which is significantly lower.

    “The directive underlines the objective of ‘convergence’ and ‘approximation,’” says Van der Mark. “This also means that tax levels must cater to the differences that exist between the product categories. Fine-cut tobacco, for example, is a nonfinished product that requires consumers to make additional purchases, its consumers have different characteristics than cigarette consumers and production of fine-cut tobacco involves a higher share of smaller and mid-sized companies.

    “For these reasons, fine-cut tobacco has a lower tax-bearing capacity than cigarettes, which is well reflected in the tobacco excise directive, which set the minimum rate for fine-cut tobacco at two-thirds of the minimum level for cigarettes. This tax differential is also key in curbing illicit trade as it allows fine-cut tobacco to fulfill its ‘buffer function’ by capturing price-out cigarette consumers that would have otherwise sought cheaper alternatives, including nonduty paid products. This, also, was well understood by many member states. In general, member states have implemented these new minimum rates in 2020, but this required for some of them significant step increases that put unnecessary pressure on the fine-cut tobacco market,” says Van der Mark.

    “Price differences between individual EU member states increase the incentive for cross-border shopping or even contraband,” confirms Von Foerster. “That’s why a sensible tax harmonization within the EU makes sense. The continuously high revenues from tobacco tax in Germany in parallel with the steady decline in cigarette consumption show that a balanced tax policy with moderate tax hikes and balanced product categories works.”

    Advertisment

    Potential opportunity

    With the Covid-19 pandemic that has paralyzed the global economy for almost six months now, consumers will likely have less income at their disposal in the coming months or even years—a situation that typically results in downtrading within the tobacco category. Past experiences, such as the financial crisis of 2008, suggest that consumption of fine-cut tobacco and associated government revenues will grow this time too.

    “When consumers’ disposable income is under pressure, consumers are looking for more affordable alternatives, and downtrading to fine-cut tobacco is the legal option,” says Van der Mark. “This, however, requires one condition to be met: that a country’s tax policy allows fine-cut tobacco to be that cheaper alternative. In several countries, taxation on fine-cut tobacco was aligned with that of cigarettes in the last few years as governments were looking at increasing revenues. In those cases, consumers’ available alternatives were found on the black market, which produces no revenues at all. Authorities, therefore, need to understand that market mechanism to develop the right tax policy.”

    Advertisement

    Von Foerster expects the German government to stick to its strategy of moderate tobacco tax hikes, even as it needs to fund multi-billion-euro economic aid programs. “The amendment of the European tobacco excise directive was only just started,” he says. “The amended version is expected to be released in one-and-a-half years. It is unlikely that Germany will change its tobacco taxation legislation during that period. Furthermore, negative examples, such as Greece or France, show that a thoughtless significant tobacco tax hike will not lead to the desired additional revenue—on the contrary, it will lead to a massive plummeting of revenues. Interestingly, this is true for all taxes. It is high time politicians learned from this experience.”

    Van der Mark notes that the EU tax directive sets only minimum rates, and many member states, including France, Ireland and the U.K., have implemented far higher taxes, resulting in high levels of illicit trade and nondomestic-duty-paid consumption.

    “It would not be surprising if several member states indeed seek to increase their revenues from tobacco sales, thinking demand for tobacco in general is relatively inelastic,” he says. “They, however, should pay due attention to the fact that the demand for legal products is much more elastic. If member states increase taxes without ensuring that consumers can still find cheaper and legal alternatives, consumption may then shift to illicit products, and state coffers will not see the rise in tax receipts that were expected.”

    Advertisement
    Stefanie Rossel is Tobacco Reporter’s editorial contributor. An experienced trade journalist, she combines sharp reporting skills with in-depth knowledge of the tobacco and vapor industries. Prior to joining Tobacco Reporter, Stefanie was editor-in-chief at Tobacco Journal International, where she worked for a decade. Fluent in English, German and French, Stefanie covers tobacco news around the world. She is based in Germany.
  • Counting Down

    Counting Down

    Photo: Tobacco Reporter archive

    The nicotine industry prepares for a shakeout in the wake of the premarket tobacco product application deadline.

    By Kenneth Robeson

    Chris Allen

    The phrase “time is money” has seldom been more apt for the tobacco industry.

    The United States District Court recently granted the Food and Drug Administration’s (FDA) request for an extension of the premarket tobacco product application (PMTA) submission deadline for certain tobacco products, which the FDA requested due to the Covid-19 pandemic. Applications are now required to be filed by Sept. 9, 2020, for many e-cigarettes, cigars and other deemed tobacco products.

    What does this mean for the tobacco industry? Several things—from a significant reduction in the products that retailers can place on store shelves to changes in management, manufacturing, R&D and marketing.

    “Those working towards a PMTA have benefited most as this has either provided the time to complete existing studies or generate more data,” said Chris Allen, vice president of scientific and regulatory affairs for Broughton Nicotine Services, a privately owned laboratory delivering analytical, scientific and regulatory services for the electronic nicotine-delivery systems (ENDS) industry based in Lancashire, England. “Also, those that are intending to exit the market have a slight reprieve in that they can continue selling their products for an extra 120 days.”

    In addition to a significant reduction in the product portfolio, said Allen, manufacturers are coming to the realization that they are going to need to invest “far more” in their quality-management systems as manufacturing guidance evolves. “Although it is not expected the manufacturing regulations will be as stringent as pharmaceutical GMP, it may be significantly higher than the standards that many companies currently work to.”

    Advertisement

    ‘The reality’

    Barnaby Page

    “The deadline change was triggered by the Covid situation and requested by the FDA, which stated, among other things, that it had refocused some of FDA CTP staff on other emergency matters related to Covid,” noted Patricia I. Kovacevic, a global legal and regulatory strategist and attorney and the founder of consulting firm Regulation Strategy, which has offices in Tampa, Florida, USA, and London. “While the extra time appears beneficial to the entire industry, the reality is that most clinical studies, testing labs and so on would not have carried on, at least during the three critical lockdown months, April to June.”

    Thus, Kovacevic added, there is “a slight benefit” for the industry to have additional time to refine PMTA submissions. “But those who were not ready with the substantive work needed for PMTAs—including various clinical and nonclinical controlled trials—would not see their situation improve much due to the extension.”

    “For vapor, it doesn’t substantively change the picture,” suggested Barnaby Page, editorial director of ECigIntelligence, a provider of detailed global market and regulatory analysis, legal tracking and quantitative data for the e-cig, heated-tobacco and combustible-alternatives sector worldwide, and TobaccoIntelligence. “Any company which was not already reasonably well prepared to submit by 20th May is unlikely to be able to make it by 9th September.”

    However, Page added, “for those who were close, it will be welcome given that the run-up to the 20th May deadline came at possibly the most disruptive point of the Covid pandemic.”

    According to George Parman, director of communications for Altria Client Services in Richmond, Virginia, USA, his company submitted PMTAs for 35 On! Nicotine Pouch products on May 15, and the FDA accepted them for scientific review in the second week of June. They are manufactured by Helix Innovations, an Altria joint venture responsible for the global On! nicotine pouch product portfolio. To support the applications, Altria submitted more than 66,000 pages of documentation, including six primary studies.

    The On! nicotine pouches are tobacco leaf-free and available in seven flavors and five nicotine levels. The product line was distributed in over 28,000 stores at the end of the first quarter, including the top five convenience store chains by volume. According to IRI, total oral tobacco-derived nicotine category sales in 2019 grew approximately 275 percent compared to 2018.

    “We believe the scientific evidence in these applications demonstrates that the marketing of On! is appropriate for the protection of public health,” said Paige Magness, senior vice president of regulatory affairs for Altria Client Services, in a release. “On! nicotine pouches are a key part of our vision to responsibly lead the transition of adult smokers to a noncombustible future.” The FDA will now undertake a substantive scientific review of the applications.

    Advertisement

    ‘Subjective term’

    Maggie Gowen

    And for those companies that will not be ready in time?

    “Ready,” Kovacevic believes, “is a subjective term in this context.” Small manufacturers would not have had the resources needed to comply no matter what the deadline might have been “but would have enjoyed the additional time to participate in the market. The top five bestselling products manufacturers were preparing for this moment, some as early as 2013.”

    If a company has not amassed the necessary science and assembled the right scientific and regulatory team beginning at least two years ago “or at least early last year, at this point it is too late to consider anything else but a last-moment attempt at litigation if even that were possible,” Kovacevic added.

    Maggie Gowen, marketing director for Avail Vapor in Richmond, Virginia, USA, said that ENDS manufacturers who don’t submit a PMTA by the new date will be considered noncompliant. “It will be up to the FDA how they choose to enforce the industry after the deadline. Reasonable regulation is needed based on sound science.”

    What comes next cannot help but be influenced by the Covid-19 pandemic, said Broughton’s Allen, who emphasized that ENDS products are designed to deliver chemicals deep into the lungs. “We may not like or agree with regulation, but it is inevitable for any major industry and there to protect us. There is undoubtedly a loss in consumer confidence in the safety of ENDS and no data on the risk of long-term use.”

    The regulations, he added, must see to it that everything possible is done to ensure that “the safest of products are on the market [to] protect the public but also the long-term future of the industry.”

    At the manufacturer level, ECigIntelligence’s Page predicted, there will be fewer companies, “probably many fewer, clear winners and losers from the PMTA process.” For retailers and consumers, the long-term changes “will not be so dramatic once the short-term shock of many brands disappearing has been adjusted to.” What he termed the “wildcard” is whether the FDA turns out to prefer certain kinds of devices to others. “For example, if it seems to favor open or closed systems. That could have a substantial effect on retailing if some channels end up with lots of legal products and others with many fewer.”

    “The immediate—as in 10th September—impact on retailers and consumers is likely to be negligible,” Page said. “We don’t expect the FDA to start enforcement immediately on brands that have not submitted a PMTA application.” Over the longer term, of course, the number of available products will diminish. Just how long that “longer term” is remains an open question. “It could be a few months; it could even be a couple of years.”

    Page and his colleagues think it likely that there will be “some tolerance” shown to applicants who miss the deadline “as long as they can demonstrate they are well advanced in preparing their application and are serious about doing it.” Retailers and consumers, however, “can’t really prepare with any confidence. The ball is in the manufacturers’ court right now and then the FDA’s.”

    Advertisement

    ‘Appetite for enforcement’

    Patricia Kovacevic

    Most c-stores and major chains primarily sell products manufactured by companies that will have met the PMTA submission deadline, noted Kovacevik, and may legally continue to sell their products “for at least one year thereafter and longer if FDA issues a marketing order following the review of the respective products’ PMTAs.”

    At the same time, she noted, the FDA’s “appetite for enforcement is relatively low in general, and the product universe is so vast, with so many SKUs—potentially millions of SKUs—that it will take FDA months, if not years, to figure out what products need to be taken off the market because a PMTA or other type of premarket application was not filed by the respective deadline, and to issue warning letters, then to follow up with more stern enforcement action.”

    Another factor to consider is that a new administration in Washington, D.C., might bring “interesting developments not necessarily favorable to the ENDS industry,” Kovacevik added, “and change is always challenging.”

    Consumer choice will shrink, Avail Vapor’s Gowen concurred, because not every manufacturer will be able to afford the “enormous” expense of the PMTA process. “There is a big fear that we will see a shift back to deadly combustibles, unfortunately.” There is, she conceded, “a lot of politics in play at the executive, federal, state and local levels.” There is also what she called “an enormous amount” of misinformation about the vapor industry, which “as a whole has been unfairly blamed due to a few bad actors, and that includes the CDC [Centers for Disease Control and Prevention]. If a company wants to remain a player in the marketplace, the hope is they will submit a PMTA by the Sept. 9 deadline.”

    And for the remainder of 2020?

    “It’s difficult to tell at this point,” Gowen concluded. “It will certainly be an interesting year, as if it hasn’t been interesting enough.”

  • The Forest for the Trees

    The Forest for the Trees

    Photo: MSA

    Management Science Associates helps customers put their data to work.

    By Taco Tuinstra

    During TMA’s 2020 virtual conference, Management Science Associates (MSA) shared its insights into recent U.S. trade trends. MSA Senior Vice President Don Burke highlighted the most important developments in the nicotine market of the past 12 months, including new restrictions on flavors, a higher minimum purchasing age, the 2019 outbreak of vaping-related illnesses and, above all, the impact on sales of the ongoing Covid-19 pandemic.

    Burke’s presentation contained an impressive amount of information but demonstrated only a fraction of MSA’s capabilities. While many firms offer data, MSA goes a step further by processing the information in a way that enables customers to make optimal decisions. Using analytic tools, systems engineering and data management, the company teases out the nuggets that allow clients to solve problems and identify opportunities.

    “We help customers put their data to work,” says Burke.

    MSA typically serves industries where there is either so much data that it is difficult to manage or industries where business critical data are not readily available. Big data, of course, has become a buzzword in recent years. What sets MSA apart is its ability to determine statistical significance from sparse data. Unlike other data companies, MSA takes no ownership of the data it processes. This is a critical element in the company’s business model: MSA is paid to process, cleanse, match, integrate, report and analyze data—but not for the data itself. According to Burke, this keeps MSA unbiased and allows the company to direct clients to the most appropriate data sources for their specific business issues and to integrate those sources with their own data.

    20,21,22,23,24_TheForestForTheTrees.indd
    Advertisement

    Lessons from chemistry

    MSA is the brainchild of Alfred A. Kuehn. In the late 1940s, Kuehn was a chemical engineering student at the Carnegie Institute of Technology (CIT, now Carnegie Mellon University) in Pittsburgh, Pennsylvania, USA and an employee of Gulf Oil R&D. To obtain added perspective and greater control over his research, he was recruited for a business degree at the Carnegie Tech’s Graduate School of Industrial Administration (GSIA), which today is known as the Tepper School of Business.

    Alfred A. Kuehn

    One of Kuehn’s professors, Herbert A. Simon, who would go on to win a Nobel Prize in 1978 for his pioneering research into the decision-making process within economic organizations, instructed his class to study human behavior and learning processes. Most students set up experiments with rats in mazes, but Kuehn took a different approach: He developed a model of buying behavior based on his experience with chemical processes.

    During his research at Gulf Oil, Kuehn had worked on optimizing what was then the world’s largest oil refinery in Port Arthur, Texas, USA. Pondering professor Simon’s assignment, Kuehn realized there were many similarities between his work with petrochemicals and the task at hand. Chemical engineering distinguishes itself from other types of engineering by the fact that things are flowing. “In most other engineering areas, you are building an object, and it is static,” says Kuehn. “That means you need different kinds of measurements.” Kuehn viewed consumer behavior as a flow too. Just as crude oil is impacted by heat, pressure and mixing, consumer behavior is affected by advertising, promotions and price, among other factors.

    Encouraged by Simon, Kuehn started teaching economics at GSIA, bringing science to marketing. Until then, marketing was often taught like law—through case histories. But whereas in law, case studies are important because they become precedents for future law, marketing is dynamic and what was effective last year may be irrelevant next year.

    As he had done as a student, Kuehn took an unconventional approach in front of the classroom. “Instead of the normal methods of faculty members—they write a paper, often forget about it and then write another paper—I asked my students to implement the models we were developing,” he says.

    Advertisement

    Kuehn created and computerized a model of the detergent business to help Lever Brothers (aka Unilever) make business decisions. The project was so successful that CIT started using Kuehn’s marketing models as the basis for an instructional management game that was played by all MBA and professional executive students from 1960 until 1995. After that, only minor adjustments, such as changing the industry (watches instead of detergent) and geography (four countries instead of four U.S. regions), were made to the CIT game.

    Today, some form of GSIA’s original academic and scientific underpinnings—referred to as “management science”—is taught at most leading business schools. Impressed by Kuehn’s research, the Ford Foundation began sponsoring Kuehn summer workshops in 1959 to teach quantitative techniques and model building to select marketing faculty members. Some of the participants of that first workshop subsequently edited Mathematical Models and Methods in Marketing containing Kuehn’s marketing/advertising model, published by Richard D. Irwin in 1961.

    Advertisement

    Solving problems

    MSA’s first projects were solving steel industry and consumer packaged goods market research problems using analytic tools, systems engineering and data management technologies. Today, MSA serves a wide variety of additional sectors, including the pharmaceutical industry, casino gaming, the foods business and media companies.

    The company’s work has become sufficiently important that during the Covid-19 crisis, the governor of Pennsylvania had MSA declared an “essential service,” allowing it to keep innovating even as many other businesses were forced to cut back operations. “Many of the services we provide are to businesses dealing with food, medical records and other vital industries—so the information we process and manage for our clients is critical to keep those organizations operating” explains Burke.

    Brown & Williamson became MSA’s first tobacco client in 1969. Today, MSA serves a wide variety of tobacco companies from minor players to multinationals. Separately developed expertise in antitrust regulations enables the company to manage multiple clients within the same industry without running into anti-competitive concerns. MSA boasts a customer retention rate of more than 96 percent, according to Burke, with many relationships lasting more than 40 years. “The only time we have ever lost a tobacco customer has been due to a merger or acquisition,” he says.

    The company’s services have expanded over time. Many MSA products now involve data-management and analytic platforms that manage billions of dollars in trade payments and other mission-critical retail execution applications. When the attorneys general of 46 states in 1998 signed the $246 billion dollar Master Settlement Agreement that ended their healthcare cost-recovery lawsuits against the tobacco industry, they entrusted MSA with the complex task of managing the constantly changing payments from many companies to all states.

    MSA offers its tobacco customers various services. For example, the company collects manufacturer shipment data for a “first read” on the market and distributor shipment data from more than 2,000 distributors for a near census-level measurement of tobacco volumes by store and by item. It also gathers survey and retail scan data to provide the additional measurement of consumer takeaway.

    The insights derived from that information vary by client, according to MSA, but many involve custom analysis of the effectiveness of promotions, assessment of price and price gap analysis, providing tools for forecasting the potential of new products or new product categories and current issues impacting the industry—menthol, flavor bans, new regulations, etc.

    Advertisement

    Examples of MSA services for the tobacco industry:

    • Every Monday morning, MSA processes and projects manufacturer shipment data to provide the first read on the U.S. tobacco industry for the previous week.
    • MSA collects data each week from approximately 2,000 candy and tobacco distributors to report to tobacco manufacturers the shipment volume of each item in the tobacco category to each retail outlet across all classes of trade.
    • MSA operates one of the largest CPG retail scan data programs, at the transaction level, enabling clients to view tobacco market basket information at retail every day and feature pricing and promotion performance, along with consumer demand trends.
    • MSA continually provides analytical data expertise to the tobacco industry to understand and improve overall industry performance.

    Saving money

    Perhaps one of the most striking examples of how MSA helped a customer save money is when Kuehn and the company, along with Andrew Brimmer, the first African American to serve as a governor of the Federal Reserve System, advised the U.S. government against developing a supersonic passenger jet in 1966. After France and Britain teamed up to develop what would later become the Concorde, the U.S. government asked Kuehn and MSA to evaluate the prospects for such an aircraft. MSA quickly determined that despite the prestige attached to having a supersonic transport, it would not be cost effective and successful from a financial and market perspective.

    Kuehn, who was also a pilot, demonstrated that the complexities of traveling at speeds faster than sound are so great that a supersonic passenger jet would not at that time be economical. “The original design included drogue chutes,” he recalls. “Landing with drogue chutes would expose passengers to the same stress experienced by a fighter pilot, going from 300 miles per hour to 10 miles per hour within two miles. And then they were trying to get special consideration—that wherever they arrived they would get priority on the airfield at the expense of everybody else. Furthermore, you were also supposed to forget about the great problems associated with sonic booms.”

    So MSA suggested that instead of building a supersonic transport, the U.S. develop long-distance subsonic jets that would offer time savings by skipping stopovers. “Going to London from the U.S. in those days, you landed in Newfoundland and Ireland—so if we had wide-body, longer distance planes that didn’t have to land, we could make up the time,” says Kuehn. Those long-distance jets went on to become the largest source of annual U.S. export earnings from 1969 until 1993 (after which, Tobacco Reporter readers will be pleased to learn, they were overtaken by shipments of charcoal filtered cigarettes to Japan, according to Kuehn). The Concorde, by contrast, retired in 2003, having swallowed millions of francs and pounds in state subsidies without turning a profit.

    MSA’s RockPoint data center

    Protecting data

    Needless to say, when handling confidential information for competitors in an industry, data security becomes paramount. A tremendous amount of care and some redundancy are required to handle, store and analyze such information.

    According to Mario Cafaro, MSA’s vice president of corporate IT, MSA’s two data centers are among the most secure in the U.S. They are backed up by two fully redundant Tier III equivalent data centers. These state-of-the-art facilities feature full SSAE 18 SOC compliance, highly secure tiers of multi-factor access controls, electric power from two utility companies, complete coverage through internal and external video monitoring along with numerous options for telecom, internet and cloud connectivity.

    The company’s hometown, Pittsburgh, too, offers considerable security advantages. The region just north of the city has one of the lowest seismic ratings in the U.S., and the Appalachian Mountain range protects the area from East Coast hurricanes, for example. What’s more, the data centers are in stable, well-established neighborhoods unlikely to experience social upheavals. In the nationwide protests following the death of George Floyd in Minneapolis, two Pittsburgh Police cars were burned, but the perpetrator was quickly identified and then turned himself in with his parents present, according to MSA.

    The human touch

    While the rapid increase in computing processing power and the rise of artificial intelligence (AI) have turbocharged data analysis, MSA continues to rely heavily on human input. “There is no substitute for a thorough understanding of the data-generation process and a strong industry domain knowledge,” says Kuehn. “A technology-derived fact is simply a statement until humans, with strong domain knowledge, can appropriately apply it to a solution for an industry problem or opportunity.”

    Informed business decisions, he explains, need to be based on appropriate definitions of problems or opportunities as well as data. “The creative approach to exploring and identifying problems and opportunities often includes as much “artistic thinking” as mere numbers,” says Kuehn.

    Steve Gongaware, MSA’s senior vice president of business development, states that MSA is always alert to opportunity: “MSA is keen to offer its insights to new sectors, such as the budding businesses of legal cannabis and CBD.” Its experience working with the tobacco industry places the company in a strong position to do so. “Over the years, tobacco has evolved into a very regulated business, managed very differently than your typical consumer good,” explains Burke. “Once CBD and cannabis gain broader acceptance and mature in their life cycles, they too may likely become regulated industries. So our ability to work with competing firms, our ability to understand all the implications that go into appropriately managing competing businesses and providing value to each of those businesses, will allow us provide appropriate direction to customers in the legal cannabis/CBD space as well.”

    In the meantime, MSA is helping its customers navigate the unprecedented environment brought about by the Covid-19 pandemic, which has upended existing consumer trends and made predictions ever more challenging.

    “What is known this year is the great impact on tobacco consumption of the stay-at-home orders. Consumer confidence is required to return to closer-to-normal behavior and to reduce unemployment levels and potential government stimulus activities,” says Burke. “These variables, all difficult to predict, not only impact overall category consumption, but also each of the individual segments of the tobacco market.” (See box below.)

    “What we have learned is that lockdowns carry a cost, so we must quickly learn about the tradeoffs. Determining what the impacts may be will require continued fast learning and rapid adaptation as the current social turmoil is unlikely to soon create stable market conditions,” he says.

    If anything, the coronavirus crisis has demonstrated the importance of actionable insights—not just raw numbers—to achieve the understanding required to optimize decisions. With its impressive record of helping customers create great value from data, MSA is in a strong position to provide such insights. Whether it is the Covid-19 situation, the illegal THC vaping crisis or an analysis of supersonic jets, MSA has the data and analytical skills to provide the business knowledge that clients need to navigate uncertain situations.

    This year’s trends

    The most significant trend in U.S. tobacco sales noted by MSA this year has been the increase in unit volume. The stay-at-home situation, where consumers are free to use their tobacco products of choice rather than being restricted from smoking or chewing, has contributed to an increase in cigarette sales, marking a break with the typical 4–6 percent annual decline in recent years.

    MSA is also continuing to find strong growth in the “modern oral” category, where items such as pouches, similar to snus, deliver nicotine without tobacco.

    Also, the illegal THC vaping crisis in the last half of 2019, along with vapor flavor restrictions, resulted in declines in the vapor category for the first time in many years.

    MSA has seen a significant increase in growth of lower priced tobacco options, including pipe and roll-your-own tobacco, as unemployment levels have increased, bucking the trend of the past few years when record low unemployment resulted in declines in these categories.

    For more MSA insights, please view TMA’s webinar.

    Taco Tuinstra is Tobacco Reporter’s editorial director.Based in Raleigh, North Carolina, USA, he coordinates the work of staff writers and contributors.On his watch, Tobacco Reporter has won several awards for editorial excellence.Since joining the magazine in 1997, Taco has visited more than 75 countries to meet industry representatives in their markets and to report tobacco news firsthand.
  • Sourcing Success

    Sourcing Success

    Photos courtesy of Belaprom

    Based in Bosnia and Herzegovina, Belaprom obtains its materials from the EU to deliver high-quality cigarette tubes at an affordable price.

    TR Staff Report

    As the cost of cigarettes continues to rise, consumers are finding less expensive ways to smoke. Many are turning to make-your-own (MYO) cigarettes. Using a little machine, MYO allows consumers to create cigarettes at home by inserting their preferred tobacco blends into hollow cigarette tubes.

    A relative newcomer to the filter tubes business, Belaprom was founded in Bosnia and Herzegovina in 2014. Over the past six years, the company has been expanding its operations, product portfolio and consumer base. According to Belaprom’s founders, brothers Nadir Jasarevic and Fadil Jasarevic, the company has grown more than 600 percent since opening its doors.

    “The main reason why Belaprom continues to grow its customer base is because of the quality of the product we produce,” explained Nadir, who added that the brothers ventured into the tobacco industry because they wanted to provide high-quality products at a reasonable price. They also wanted to be the type of business that its clients could count on by providing the highest level of customer service possible.

    “After many years of importing cigarette filter tubes from other European companies, we decided to start producing our own products in order to better the Bosnian economy and bring something new to our country,” says Nadir. “Since beginning Belaprom, the company has grown into the largest cigarette filter tubes producer in the region. This shows that we’ve been doing things the right way.”

    The Jasarevics started Belaprom because there were no major importers of cigarette filter tubes in Bosnia and Herzegovina. They believed that starting a local business could become a lucrative project if the company offered higher quality products at more reasonable prices than other players in the market.

    “The process of starting the tube manufacturing endeavor had many obstacles. Other companies from Bosnia and Herzegovina operated on a smaller scale; however, from the very beginning, Belaprom was designed to be both a manufacturer and an exporter of goods,” says Fadil. “Finding the right machine, training the personnel and securing the best material suppliers took more than two years.”

    As part of its business promotion efforts, Belaprom exhibited at TABEXPO 2019 in Amsterdam. Pictured are General Manager Adnan Mesanovic (left), and Export Manager Mirza Imamovic. (Photo: Taco Tuinstra)

    The brothers developed their business acumen by opening a small grocery store, a business that has since grown into a conglomerate of more than 20 supermarkets, 14 gas stations and Belaprom. Fadil oversees the finances and directs the operations of the supermarkets and gas stations while Nadir is charged with importing goods and services, finding new suppliers and increasing the company’s customer base. “Our goal is to be recognized as a leader in both the industry and the marketplace,” says Fadil. “Our clients are more than customers; they are our partners.”

    At Belaprom, the company focuses on the production of cigarette filter tubes and the import and wholesale of products for broad consumption. “Our production meets the highest of European standards. All our materials used in production are from the European Union. We do this because it allows Belaprom to guarantee the final product meets the needs of even the most demanding of customers,” says Nadir. “The production plant is equipped with state-of-the-art machinery using highly sophisticated technology to create the highest quality products possible.”

    Belaprom’s 3,000-square-meter (approximately 32,292 square feet) production facility is built specifically for the manufacturing of cigarette tubes, according to Nadir. He says that every section of the factory is organized to optimize the production progress. “We decided to purchase Hauni machinery because Hauni is considered the best machine manufacturer in the tobacco industry,” Nadir says. “We use machines that are capable of producing 8,000 tubes per minute or 3,840,000 tubes per day.”

    Belaprom is positioned at the crossroads between the eastern and western countries of Europe. The company currently employs 50 skilled and highly motivated workers producing more than 20 brands, according to Nadir. He says that Belaprom can easily produce a brand that meets the specific criteria for any company in need of cigarette tubes. Currently, Belaprom has four licensed brands: Zlatni Filter, Bella, Practic and Casual. Its most popular brand is Ritual 500, which has a modest but pleasing design.

    “The reason our brands are popular is that the designs are simple, yet appealing. Our customer base includes many different regions of Europe, so our brands are designed to represent the region where they are sold,” says Nadir. “For example, customers from the flatlands of Croatia use the brand Pannonian Choice, which has a green box symbolizing lush, fertile valleys and golden letters that stand for the plentiful harvest of barley.”

    Currently, Belaprom is negotiating the purchase of another tube machine from Hauni for installation sometime later this year. The investment required for the state-of-art equipment is more than €3.5 million ($3.9 million), according to Fadil.

    “Belaprom is ramping up its production capabilities and investing more resources into opening up operations to other parts of the world, especially Southeast Asia with its vast population and economic areas. It is part of our five-year plan,” says Fadil. “Long term, we hope to expand globally, with a primary focus on Eastern Europe and North Africa. It’s a balancing act. While we want to offer more markets our superior products, it must not come with a compromise in customer service. Providing the highest level of service to our partners is our primary mission.”