Category: Print Edition

  • Marking a milestone

    Marking a milestone

    Tobacco Associates looks to the future with a new president

    Kirk Wayne (right), educating a potential foreign buyer on the virtues of U.S. leaf during one of his numerous trips for Tobacco Associates

    Kirk Wayne announced his retirement from Tobacco Associates during the group’s 70th annual meeting in Wilson, North Carolina, USA, on March 1. He was at the organization for 47 years, including 38 as president,

    The board of directors has elected Hank Mozingo, currently vice president of Tobacco Associates, to replace him.

    “When I began working with Tobacco Associates in June 1970 it never entered my mind that I would be retiring from the same organization,” Wayne marveled. “It has been a challenging and remarkable career.”

    Wayne’s job required extensive international travel, and during the meeting he thanked his wife, Linda, for her support.

    He recalled returning from a business trip to Eastern Europe—still behind the Iron Curtain in those days—just in time for their wedding. The couple married; had a short honeymoon and then went directly to a Bright Belt Warehouse meeting, where they were teased mercilessly about Wayne’s “girlfriends” around the world.

    Just one week later, he embarked on another four-week trip abroad.

    “And so it was for the next 30-plus years, with me traveling six months of each year and always away on Linda’s birthday,” said Wayne.

    But the marriage endured and Tobacco Associates thrived under Wayne’s leadership, promoting U.S. flue-cured Virginia (FCV) leaf abroad on behalf of its farmer members.

    Focus on quality

    Hank Mozingo, the incoming president of Tobacco Associates

    As the U.S. tobacco market declined over the years, Tobacco Associates’ mission became even more important. According to Wayne, the only opportunity for growth in U.S. tobacco today is in the international market.

    So the company’s representatives travel the world, educating prospective buyers on the virtues of American leaf and helping interested manufacturers incorporate the product into their blends. Each year, Tobacco Associates organizes countless seminars; its annual two-week U.S. Tobacco Leaf Study & Training Mission is renowned worldwide, attracting numerous students from around the globe.

    Chairman Allen Wooten, Treasurer Robert Spiers and Mozingo highlighted some of the organization’s 2016 initiatives, including trade servicing missions throughout Southeast Asia and a seminar on tobacco practices in Bali, Indonesia, organized in cooperation with Star Tobacco International.

    Agricultural marketing specialist Bobby Wellons was recognized for his many contributions to such courses.

    Confirming the value of Tobacco Associates’ work, Jie He, vice president of China Tobacco International (CTI) — North America, expressed her appreciation of U.S. tobacco. The Chinese cigarette market is dominated by straight Virginia leaf, but American-blend cigarettes have been gaining popularity. CTI started operating in the U.S. in 2013. Initially, the company bought only from the traditional leaf suppliers, but now it also contracts directly with U.S. growers.

    In turn, Richard Reich, assistant commissioner of the North Carolina Department of Agriculture & Consumer Services, conveyed his gratitude for CTI’s interest in American leaf. “Thank you, Ms. He, for buying our tobacco,” he said.

    While U.S. tobacco is more expensive than that from other origins, Spiers pointed out that the additional upfront cost can be offset by greater sales, due to the high quality of the product.

    For example, Tobacco Associates helped the Saigon Tobacco Co. (STC) in Vietnam develop two cigarette brands, using U.S. tobacco. The investment paid off, with sales of the brands reportedly exceeding STC’s expectations by a factor of three.

    Bobby Wellons (third from right), recognized for his many contributions to Tobacco Associates’ seminars and study missions.

    Persevering

    Successes such as these as welcome, as U.S. tobacco farmers are challenged on many fronts. The 2016 growing season was characterized by “excessive moisture and excessive heat,” according to Reich. In addition, farmers faced a strong U.S. dollar (making their leaf expensive abroad) and a large crop in Brazil, America’s biggest competitor in the FCV arena.

    But the industry has weathered tough seasons before, noted Reich. “Perseverance is the backbone of the farmer,” he said.

    The impact of federal regulations featured prominently during the event. Darryl Jayson, chief operating officer of TMA, highlighted the high cost to manufacturers of compliance with the Food and Drug Administration’s deeming regulations.

    George Scott

    George Scott, vice president—leaf at Universal Leaf North America lamented excessive smoking restrictions. “Disney World still has smoking areas—but they are harder to find than Mickey Mouse,” he said, recalling a recent family outing.

    Jayson was encouraged by the Trump administration’s intention to review, and possibly roll back, existing regulations.

    In the meantime, growers should change their thinking on regulation, advised A. Blake Brown, professor and extension economist, agricultural and resource economics, at North Carolina State University. “View it as a competitive advantage,” he said, pointing out that U.S. growers are better positioned to comply with the onerous requirements than are some of their foreign counterparts.

    The speakers also examined the impact on U.S. leaf volumes of next-generation products. Despite its rapid expansion, the vapor product segment is a long way from overtaking combustible cigarettes. Recently, the growth of the category has flattened, as consumers move from disposable products to e-liquids, according to Jayson.

    Today, all eyes are on heat-not-burn products, particularly Philip Morris International’s iQOS, which has been described as a “game changer.” Launched in 2014, the device has taken the world by storm and is currently available in 20 countries. In just three years, it has captured 5 percent of the tobacco market in Japan.

    Jayson attributed the success of iQOS to its design. Whereas combustible cigarettes deliver a spike of nicotine, vapor products tend to supply nicotine more gradually—a characteristic that leaves some smokers unsatisfied. Using real tobacco, IQOS better mimics the traditional cigarette in this respect.

    The good news about iQOS, from the farmer’s point of view, is that it contains real tobacco—albeit in lower volumes than combustibles do. The tobacco used, however, must meet exacting standards, which suggests an opportunity for U.S. growers.

    “You can do this,” said Brown to the gathered farmers.

    As U.S. tobacco sales continue to decline, the work of Tobacco Associates will only gain in importance—but to carry out is mission, it will need support. In his retirement speech, Wayne urged the industry to keep funding the organization. He compared Tobacco Associates with a state-of-the-art piece of farming equipment. “Its benefits to you are no greater than the amount of fuel you are willing to put into it.”

  • Licensed to heal

    Licensed to heal

    Convinced of the harm-reduction potential of its Voke device, Kind Consumer is looking for a partner to help scale up the manufacturing process.

    By George Gay

    In trying to reduce the population-wide harm caused by tobacco smoking, those involved in the tobacco, tobacco replacement and nicotine sectors look, in part, at product risk but are aware that developing a product with zero—or close to zero—risk will not of itself eliminate such harm. This is clearly demonstrated by the existence of the nicotine patch.

    It is generally recognized that a product’s risk must be set against its performance—mainly its appeal to smokers but also its efficacy in providing a replacement for cigarettes and, if possible, a gateway out of nicotine addiction but not a gateway for nonsmokers into such addiction.

    Given this, the question arises as to where Kind Consumer’s cigarette-shaped nicotine inhaler, Voke, will fit on the continuum of risk and performance once it is launched. The first part of this question is easy to answer because, in 2014, Voke was granted a medicinal license from the U.K.’s Medicines and Healthcare products Regulatory Agency. As Paul Triniman, chief executive of Kind, told Tobacco Reporter in January, Voke is on the “moral high ground.”

    Triniman, who is a chartered accountant with a good grounding in science, having spent most of his working life in the field of biotechnology, said that one of the ways in which Voke differentiated itself from vapor products, including heated-tobacco products, was that its use did not require the generation of heat. Heat was a major problem in respect of toxicants and excipients, he said, and vapor products, including heat-not-burn products, would always raise safety issues associated with chemical reactions generated by heat.

    It is more difficult to answer the second part of the question, concerning Voke’s performance. But here, Triniman pointed out that, from the start, the aim of Kind, which was set up in 2006, was to develop a safer alternative to cigarettes that would address, too, smokers’ psychological and physiological needs.

    Does it achieve these aims? Voke has no tobacco, involves no combustion or heating, and produces no clouds of vapor. But it certainly ticks a number of the important sensorial boxes. It delivers nicotine, which is taken in—more efficiently (quickly) than in the case of vapor devices, I’m told—by drawing on something that closely resembles a cigarette, and it provides something to occupy the fingers while talking with friends.

    Paul Triniman

    Cool contraption

    It offers other advantages, too, but to understand these it is necessary to describe the product briefly for those not familiar with it. The Voke pack, which has an underlying plastic structure and a paperboard cover, is roughly the size, shape and weight of a pack of 20 cigarettes; so it is as convenient as—and arguably more so than—a pack of cigarettes and a lighter. And it is convenient in a way that conventional cigarettes used to be but in many jurisdictions no longer are because, as a medicine, it can be used in public places (at least in the U.K.), some of which are not open even to the use of vapor products.

    One side of the pack contains the sort of canister you would find in an asthma inhaler, but which is visible only if you remove the paperboard cover. The canister contains a gas under pressure in liquid form that comprises basically the same gas as would be found in an asthma inhaler, medicinal-standard nicotine and slight menthol-flavor maskings. The other side contains the cigarette-like device that is accessible by pushing on the bottom of the appropriate side panel that is hinged below the midpoint to allow the panel to open by about 30 degrees—a movement that provides an excellent fiddle factor.

    To use the device, the consumer removes the cigarette-like device and fills it from the canister as one would fill a refillable lighter—by pressing the non-mouth end of the “cigarette” to the canister’s valve, which is accessible at the bottom of the pack. And this leads on to what some consumers might see as two other advantages. One fill of Voke’s “cigarette” provides for a period of consumption that aligns with that of a traditional cigarette, while one canister provides for about 20 “cigarette” refills; so again there is continuity for cigarette smokers.

    The “cigarette” is activated by drawing on it, which opens a valve causing the liquid to expand into an aerosol that is inhaled. There is no visible exhalation, which means that the product is discreet to use and raises no secondary inhalation issues.

    Triniman told me that Voke was a “Marmite” product—that is, you either loved it or loathed it—and he admitted that it could take some time to adjust to it. Partly this adjustment period could be put down to the fact that Voke, which, as is mentioned above, uses no heat, offers a cold experience, rather than the hot or warm experience of a traditional cigarette or vapor product. To get an idea of your first experience of Voke, imagine that you have been offered some soup and, believing it to be hot, put it to your lips only to find that it is vichyssoise. Your initial reaction would be one of surprise, but you would probably go on to enjoy the soup.

    Playing field

    Having tried Voke briefly and having overcome that initial surprise, I can certainly see its appeal. And it has been tested—over 13 weeks on about 160 committed smokers in Edinburgh, Scotland, and Leeds, England. The result, Triniman said, was that about 50 percent of the participants ended with a positive buy intent, and of those, 40 percent thought that they would substitute 75 percent or more of their cigarette consumption with Voke consumption.

    So why isn’t it on the market? Well, clearly, commercializing such a differentiated product takes time, but, to a certain extent, Voke was overtaken by circumstances. When work on it started, it was believed that, under the then-forthcoming revised EU Tobacco Products Directive, all vapor products would need to have a medicines license, but such a requirement fell by the wayside. So Voke, a device expensively developed within all of the constraints necessary to make it conform with a medicines license, is competing with devices developed at less expense without such constraints.

    This clearly rattles Triniman, who said he would like to see clarity brought to bear on regulations governing such products. What was unacceptable was an uneven playing field. “We are believers in regulations for such products, not necessarily because we think regulation is a good thing in itself but because we think the quality control of the products is very important,” he said. “We think the consumer is deserving of reliable quality, and without regulation it is difficult to see how you would achieve that.

    “We’ve taken the moral high ground and sought approval as a medicine, which is what we understood everybody else would have to do, and that has not turned out to be the case. And I think that is commercially challenging for us. We went to a lot of time, trouble and expense to achieve a license.”

    Full focus

    But while Triniman believes that the situation is commercially challenging, it would be wrong to give the impression that he is not optimistic about the future. Voke is a very exciting product that offers a major opportunity for somebody, he said. What he was alluding to here was the fact that Kind is looking for a partner or partners to help it commercialize Voke. In January, Kind and British American Tobacco (BAT), which had partnered with Kind in developing Voke, announced that they were going their separate ways. Kind, according to the announcement, was going to take back ownership for the commercialization of Voke, allowing it to “embrace the full economics of the opportunity.”

    While this might sound like a negative for Voke, given BAT’s experience, size and reach, it was probably a good move for both companies. It allows BAT to put its efforts behind its vapor and heated-tobacco products while getting out from underneath a product that is not a natural fit within its portfolio. And it allows Kind to concentrate on commercializing Voke in the way it thinks best.

    And Triniman sees that as an exciting prospect. “If we were to capture 1 percent of the U.K. smoking market by volume and sold the product at or about the cost of a packet of cigarettes, we would have a product that was twice the size of the best-selling U.K. over-the-counter pharmaceutical,” he said. “That is 1 percent. Now if you compare that with the 5 percent of the market that iQOS has just captured in Japan, you can see that relatively modest market penetrations into the smoking market add up to very meaningful numbers.”

    So could Voke be sold at a price equivalent to that of a cigarette? “We would want to sell it at less than the price of cigarettes because that makes sense,” Triniman said. “My personal view is that traditional [nicotine-replacement therapies] have been far too highly priced relative to the cost of cigarettes. We want this to be a ubiquitous product. We want the smoker to buy this where he buys his cigarettes and not be put off by the price, in fact be encouraged by the price. I think we are able to do that.”

    Global ambitions

    In part, Kind would like a partner to help it scale up the manufacturing process, a process that, of itself, isn’t difficult. The raw materials that go into Voke are readily available and could be assembled anywhere in the world given the necessary controls to ensure compliance with the medicines license. The challenge will be in the scale, and, given the scale, the cost of the operation.

    And Kind could use help in marketing and distributing the product. And here Voke has a number of advantages. While Voke has a medicines license and could be prescribed by a doctor, it has also an over-the-counter or general sales list label; so it can be sold anywhere, from pharmacies to major retailers, corner shops and garage forecourts. Its U.K. medicines license can probably be leveraged in some other countries—with the notable exception of the U.S.—and, at the same time, there is no reason why Voke, under another name and possibly modified, could not be sold in other jurisdictions simply as a consumer product. The ultimate goal is to offer the product almost worldwide.

    As Triniman pointed out, Voke isn’t a product looking for a market. Out there is a market looking for Voke. There are a billion smokers worldwide, and research suggests that most of those derive pleasure, stress relief and relaxation from their habit. Nevertheless, seven out of 10 smokers also want either to cut down or quit their habit now or in the future. So there is a market of smokers who took up smoking because they enjoyed it but realized they would like to do something about it but are unable or unwilling to do so. In 2009, when Kind set out “on the serious development” of Voke, Triniman added, e-cigarettes were still a novelty. Currently in the U.K., 35 percent of smokers either use these products regularly or have used them.

    And so what sort of a product is Voke? Is it a medicine? Is it a consumer product? Officially in the U.K., it is a cessation aid and a harm reduction device. But Triniman, a big man who readily admits that he enjoys good food and wine, is always going to steer to the side of risk reduction. Life is pretty dull if you don’t do something, he said. Life isn’t a rehearsal; so it is necessary to make it as pleasurable as was possible. Voke is an alternative product that sits in its own category, he added.

    The final question has to be: When will Voke be launched? “Well, the license is held now, so it is ready now, but we have to be able to make it, and that’s the challenge,” said Triniman. “We would hope as soon as possible. Being realistic, it is more likely next year than this year, but I shall probably have a better answer for you in three months.”

    Alex Hearn

    Kind Consumer describes itself as a health care research and development company focused on inhalation technologies with innovation programs directed toward pioneering novel inhalation devices that intend to fulfill unmet health problems.

    It has a small team of specialists and is still in a pre-revenue stage of its development.

    It was founded by Alex Hearn, who studied classics at Oxford University but who is also well-read in science and has a keen business sense that allowed him to start in Oxford an entrepreneurial body, the model for which was taken up by other major universities in the U.K. and the U.S. –G.G.

    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.
  • Quiet confidence

    Quiet confidence

    Photos: Taco Tuinstra

    Unassuming yet omnipresent, Hail & Cotton continues to punch above its weight.

    TR Staff Report

    It is neither the world’s largest tobacco merchant nor its most international. Yet when evaluated on the diversity of its products and services, Hail & Cotton International Group (HCIG) has few peers. “We may not be as big as Universal Leaf, but our portfolio is just as broad,” says Michael de la Fargue, president and CEO of HCIG, comparing his firm to the industry leader.

    Indeed, sourcing tobacco from more than 15 countries—either directly or through partnerships—HCIG offers flue-cured Virginia (FCV), burley, dark fire-cured (DFC), dark air-cured (DAC), dark Virginia and sun-cured tobaccos, among other styles, for applications in cigarettes, pipes, cigars, chewing tobacco, moist snuff, snus, roll-your-own and water pipes.

    And it can deliver those tobaccos in any way imaginable: tangled, butted, bundled, stripped, threshed—whatever format the customer may desire. HCIG even keeps on-site a stack of old-fashioned hogsheads for discerning clients in the chewing tobacco business. Its factory in Springfield, Tennessee, USA, is said to offer the most complete range of processing capabilities of any factory in the DFC/DAC arenas.

    Tellingly, of the company’s 200 regular customers, 60 are niche players. Its eagerness to satisfy virtually every requirement, regardless of how unusual or how small in volume, sets HCIG apart in a business increasingly dominated by standardization and considerations of scale. For de la Fargue, that characteristic was one of the reasons he accepted the president and CEO position in 2014.

    “I like the modest attitude of the company, its understated determination,” says de la Fargue, who grew up in Zimbabwe and has carved out a distinguished career in the tobacco industry, working for Japan Tobacco International, Tribac and Casalee (now part of Universal), among other companies. “HCIG is extremely committed.”

    A rich history

    Perhaps the best evidence of that commitment is the company’s longevity. Hail & Cotton (H&C) started in 1902 as a partnership between tobacco veterans E.A. Hail and M.R. Cotton, making it one of the oldest leaf dealers in the U.S. Incorporated in 1923, the company established its first direct packaging operations in Clarksville, Tennessee. As sales increased, it built a second factory in Springfield, producing primarily DFC and DAC tobaccos. The company also exported burley at the time and later expanded into FCV.

    Over the years, H&C added threshing capabilities and expanded its storage facilities. In the 1990s, after its acquisition by Luckett Tobacco Co., H&C consolidated its operations by relocating its threshing facility and corporate headquarters to Springfield. Since then, the company has continuously upgraded its processing facilities. H&C has built or acquired industrial properties to accommodate customer requirements for leaf receiving, purchasing, processing and packed storage of tobaccos of U.S. and other origins.

    In 2011, H&C purchased CdF International Group, which was created in 2007 when Compania General de Tabacos de Filipinas (CdF) of Spain and Lippoel Leaf of the Netherlands combined their businesses to form a new independent leaf dealer.

    CdF was established in 1881 to assume operations of the tobacco factories owned by the Spanish government in the Philippines after the abolition of that country’s tobacco monopoly. After the 1950s, the company expanded internationally, moving into Latin America and Indonesia.

    HCIG was created as a result of the combination of H&C and CdF.

    Michael de La Fargue

    New blood

    The diverse roots of its forerunners enabled HCIG to offer an unmatched portfolio of products, services and geographical origins. The merger also brought together some of the most experienced people in their respective fields. The DAC operations, for example, are handled by Eric van der Linden, who has for many years managed such tobaccos in Indonesia, Brazil and the Dominican Republic, among other places. Chris Cooksey, in charge of HCIG’s North American business, has been with the company for more than two decades, and Andy Spies, who leads the firm’s international operations, boasts equally impressive global tobacco credentials.

    “We have a very solid management team,” says de la Fargue. “Each member has more than 25 years of industry experience.” A tradition of sound management, buttressed by a committed and supportive shareholder, has allowed the company to navigate through challenges such as the 2008 global financial crisis and the increasingly restrictive environment for tobacco.

    Since assuming the helm in 2014, de la Fargue’s strategy has been to supplement the company’s existing strengths with new talent and to keep up with mounting tobacco regulations, such as those enacted by the European Union, the U.S. Food and Drug Administration and various national governments. While most of those regulations are aimed at tobacco product manufacturers, they also impact suppliers, who must help their customers comply. “We have been bringing on board new people to bolster our compliance program,” says de la Fargue, adding that the company has an extensive training program in relation to its size.

    The new blood is welcome, according to de la Fargue, because the tobacco industry, including HCIG, somewhat neglected talent development during the 1990s and the 2000s, leading to a void of people in the 30–45 age range.

    Sustainability and product integrity feature prominently in the company’s thinking. In each of its sourcing areas, HCIG is committed to good agricultural practices, fair labor conditions and environmental protection. “We are too small to have a separate division for each individual issue, but we manage to look after them through our quality and sustainability department,” he says. While happy to carry out sustainability programs on behalf of his customers, de la Fargue insists that the philosophy extends to HCIG’s operations, as well. “We must ensure that our business, too, is sustainable,” he says.

    While lacking the scale of its big-league competitors, HCIG manages to punch above its weight through clever strategies and shrewd partnerships. In some origins, the company runs full-fledged operations, complete with farmer-support services, processing facilities and packing capabilities. In others, it participates with a decidedly lighter footprint. Instead of putting down bricks and mortar, the company may team up with an established local player. All of HCIG’s international operations are managed out of Aalsmeer, Netherlands, supplemented by on-the-ground personnel.

    To de la Fargue, it’s a matter of cleverly managing assets. “It allows us to be agile,” he says. Southern Brazil is a good example. “The last thing that area needs is another leaf processing factory—so we operate through a third party on an exclusive, contracted and pre-committed basis to purchase our requirements ,” says de la Fargue. In Zimbabwe, too, HCIG maintains a light presence, partnering with a trusted local company as that country’s political uncertainty endures.

    Eric van der Linden

    Regardless of the size of its footprint in each origin, HCIG likes to work with local people. “Our strength is our people on the ground,” says Van der Linden, adding that DAC tobaccos, in particular, require experienced handlers. “DAC is complex, tough tobacco in terms of handling, curing and fermentation—you don’t quickly learn those skills in the GLT,” he says. “Cigarette leaf skills don’t often transfer to cigar tobacco, and vice versa; you need experienced people in each.”

    Constantly monitoring supply and demand, HCIG is always exploring new opportunities. “We aren’t afraid to invest,” says de la Fargue. If the situation calls for it, however, the company will not hesitate to disinvest, either. Recently, for example, HCIG pulled out of Cameroon, having decided that it could no longer justify its presence in light of changing market circumstances.

    At the same time, HCIG is constantly looking for ways to optimize its existing operations. In Indonesia, for example, it recently consolidated its operations, commissioning new machinery and storage facilities while shuttering old ones. Following the reorganization, 90 percent of its Indonesian operations are located on a single compound, improving efficiency and convenience.

    Investment continues apace. In September 2016, HCIG inaugurated a new threshing line at its Industrial Drive facility in Springfield. It also installed a new dust-removal system and updated its stem line. Its Main Street facility in the same town was equipped with a stainless steel conveyor system to meet industry standards. The redrier was converted to a PLC system and received new valves, while the press was fitted with a new oil filtration cooling system using compliant food-grade oil.

    HCIG’s U.S. operations have been ISO 9001:2008 certified since 2011, and the company’s international facilities are working toward the same.

    For the time being, the company is steering clear of nicotine extraction for the vapor industry. Entering the e-liquids business requires heavy upfront investment, according to de la Fargue, and HCIG prefers to stick to its core business instead. “We know tobacco and have chosen to focus on our growing international footprint,” he says.

    While acknowledging the challenges facing the traditional leaf trade, de la Fargue is confident about the future. “The industry is changing rapidly, and we must rise to the occasion,” he says. “It won’t be easy, but I am energized by the challenge.”

    Through sound management, clever partnerships and an unwavering commitment to its customers, HCIG has thrived for more than a century. If it’s up to de la Fargue and his colleagues, the company will remain at the forefront of the leaf tobacco industry for at least another 100 years.

  • Ready to bloom

    Ready to bloom

    Stricter rules for tobacco products mean new opportunities for manufacturers of acetate tow and special cigarette filters.

    By Stefanie Rossel

    When the world’s leading privately held cigarette manufacturer, Philip Morris International, calls for a smoke-free future, you know the outlook for conventional cigarettes is uncertain. In light of ever more stringent restrictions on smoking, increasing taxation and growing competition from cigarette alternatives, such as vapor devices, smoking prevalence in many markets has been falling.

    After years of declining cigarette volumes in the U.S., Western Europe and Japan, 2015 marked another watershed: For the first time in 15 years, tobacco sales dropped even in China, which until then had been the world’s top growth market, making up for losses elsewhere. Unsurprisingly, the ongoing deterioration of cigarette sales has also impacted demand for cigarette components, among them acetate tow for filters.

    Scott Ballard

    According to IHS Markit, world consumption of cellulose acetate filter tow decreased between 2011 and 2016. “The industry utilization for acetate tow has moved down to around 80–85 percent due to a combination of demand drivers, inventory adjustments and new capacity coming online,” says Scott Ballard, vice president and general manager of the fibers business segment at Eastman, a global specialty chemical company based in the U.S.

    “Utilization had been at high levels for an extended period of time, and the downward turn happened a bit faster than expected due to the convergence of these multiple factors at once.”

    For many years, demand for filtered cigarettes was fueled by requirements for lower tar levels, which led to longer and denser filters, according to Perry Aliotti, vice president of global sales of cellulose derivatives at Celanese.

    “Those trends have now peaked, and the China growth engine has begun what we believe will be a slow and steady decline, similar to [that in] the U.S. and Western Europe,” he says. “This demand shift, coupled with the addition of tow capacity in China, has reduced the tow-utilization percentage, despite idling of several assets.” In the coming years, Aliotti expects China’s demand for tow to decline at an annual rate of 1–2 percent. Demand in the rest of the world, he predicts, will drop by 3–4 percent per year.

    Ballard points out that the development of the Chinese market has been harder to predict than that of other countries. “China tow purchases certainly moved down due to a more complex set of factors,” he says. “Positive population and filter-specification trends were offset by the typical erosion drivers you see in the rest of the world, as well as some factors unique to China, such as austerity measures and a substantial buildup of tow and cigarette inventory. After some of the drivers that are one-time events get behind us, we’ll get a better estimate of the longer-term trajectory in China.”

    The Chinese market situation has also impacted demand for specialty filters. In November 2016, Essentra, a leading manufacturer of cigarette filters, cautioned investors that profit that year would be below expectations, partly due to weak Chinese demand. Patrick Meredith, Essentra’s innovation director, remains confident, though. “Though global demand for filters declined in 2016 due, in part, to de-stocking activity in China, we believe the market for specialty cigarette filters remains an opportunity.”

    Filter tow suppliers are adjusting to lower volumes.

    Individual needs

    Adjusting to lower demand, Eastman in 2015 closed its Workington, U.K., acetate tow factory, which had An annual capacity of 24,000 metric tons. In June 2016, the company sold its share in Primester, a cellulose acetate flake joint venture in Kingsport, Tennessee, USA, to its partner, Solvay, an international chemical and advanced materials company headquartered in Brussels.

    “After Eastman’s closure of the Workington plant and the sale of our interest of our acetate flake [joint venture], we are now at the appropriate balance between acetate flake and tow spinning,” says Ballard. “Due to the integration of our remaining assets into our Kingsport site, we really have no good options to further reduce capacity. Eastman’s strategy is to leverage our competency in cellulosics to develop a diverse set of applications to gradually offset the annual declines expected in the cigarette market. We look forward to being able to talk publicly about some of those very soon.”

    Ballard stresses that it is vital to work with customers to understand the evolving environment. Suppliers, he says, must be prepared to support their client’s strategies and meet their requirements. “Most of our new tow specifications are driven by the specific needs of specific customers and less about broad market trends,” he says. “More broadly, we continue to see market interest in tow items that support slim and super-slim cigarette brands.” Despite the challenges, Ballard expects acetate tow to remain an important and attractive base business.

    Indeed, despite the current slump related to shrinking cigarette consumption, the filter and tow sector still holds a lot of potential, thanks in part to increasingly rigid regulation. “Barring a big surprise like a reduction of bidi popularity in India or an increase in female smoking rates in Asia, we see opportunities coming mostly from changes in regulations,” says Aliotti. “Longer filters to control tar are always on the agenda. Novel filters that selectively remove one or more constituents of concern are a real possibility. Even the new heat-not-burn technology utilizes some filter material, but may require very unique specification changes to deliver the taste they’re seeking.”

    Ever-stricter limitations on the marketing and packaging of tobacco products have left the cigarette in many markets as the last medium for tobacco manufacturers to differentiate their brands. As a result, filters are increasingly in the limelight, sporting special properties, shapes or tow colors.

    “Filters are the first impression a consumer has when opening a pack,” says Aliotti. “Thus, filter quality, new technology, unique appearance and innovation are all means to communicate a message to the consumer. The market growth of hollow tube filters, which require heavier specialty tow items, is a great example. Although Celanese does not produce finished filters, we are partnering with machinery makers to understand the interaction between our tow specifications and the firmness and efficiency requirements of the equipment. From that work have come several new tow item offerings to meet the industry needs.”

    “As stricter regulation is enforced, specialty filters will be ever more important as a point of brand differentiation,” confirms Meredith. “While there are clearly challenges to be overcome, we believe the strength in the specialty filter segments, such as tube and capsule filters, provides a strong basis for optimism. Through engaging in constant research and working closely with our partners on innovation and development, Essentra will continue to ensure that it remains market-relevant and provides the products and services our customers and the end consumers really want.”

    The implementation of the revised EU Tobacco Products Directive in May 2016, along with the imminent introduction of plain packaging in the United Kingdom, France and Ireland, has prompted Essentra and other companies to explore new opportunities for product differentiation through specialty filters.

    “Essentra has an extensive portfolio of specialty filters, ranging from colored and shaped cellulose acetate threads to filters with one or two capsules for added flavors,” says Meredith. “In particular, we have seen a rise in popularity for both our tube segment and capsule filters due to the consumer interaction they allow, either through the visual cue provided or the customization opportunity the capsule can provide.”

    The company’s most recent innovation is in line with that trend: The TwinSense dual-segment filter has capsules in both segments.

    As overall demand for cigarette filters declines, suppliers are detecting opportunities in specialty filters.

    Booming niches

    Another trend that requires a high level of expertise in tow manufacture is the rise of slim and super-slim cigarettes, which have become popular especially in Asia, Africa and the Middle East. “Demand for super-slim and even micro-slim tow items is booming,” says Aliotti. “Leading consumer markets like Korea, Japan and Russia are now being joined by China and many other Asian countries.”

    In the 1980s, Celanese pioneered the development of super-slim tow for a Brown & Williamson brand called Capri. “During the research phase, we produced a standard-weight tow band then split it during rod making, using half and throwing half away,” says Aliotti. “We’ve come a long way from that period in our history.”

    In 2016, Celanese patented its technology in ultra-high fiber-size, ultra-low total-weight tow items. “We now are offering a myriad of new tows customized to consumer needs for easy airflow and minimal filtration in these small cigarettes,” says Aliotti. “Our technical and manufacturing teams have also made large strides in the uniformity of these products and in their ability to process at high speeds.”

    While the trend toward slimmer filters is believed to continue in many markets, simply slim sometimes doesn’t appear to be enough, as Meredith observes. “We are already seeing some markets introduce visually different, slimmer filters that incorporate a capsule as the manufacturers continue to push the boundaries of what can be possible to make their products stand out,” he says.

    The acetate tow industry also benefits from the rising popularity of filter-capsule cigarettes. While still dwarfed by overall global cigarette consumption, which stood at 5.6 trillion sticks in 2015, according to Euromonitor data, the niche is growing quickly. In 2015, worldwide sales of filter capsule cigarettes accounted for 64 billion sticks, more than four times the volume in 2011. “Capsule filters place a different set of requirements on tow item selection,” explains Aliotti. “In these structures, tow must make room for the capsule to be firmly centered in the filter, but must still leave a path of easy airflow. Again, Celanese is offering new lower-pressure-drop tow items to meet industry needs. Overall, our portfolio of items has expanded significantly in recent years and will continue to do so.”

  • Demographic boost

    Demographic boost

    Even with a rapidly tightening regulatory environment, cigarette volumes are set to climb in Myanmar.

    By Shane MacGuill

    In common with many other emerging tobacco markets, Myanmar combines strong growth potential with ethical and reputational risks for international manufacturers. After decades of isolation, the country is beginning to re-emerge in the international community. The path to full liberalization of an economy and, more importantly, a society, is rarely a straight one, and Myanmar is no exception with concerns about governance and political violence yet to be resolved. Significant for the longer term, though, it is a country with a large, young population and a culture of tobacco use. As such, Myanmar is one of only a handful of global markets likely to provide future volume growth for the industry.

    As of 2016, more than 54 million people live in Myanmar, up from 52 million in 2011. While the growth rate declined to 1 percent in 2016, according to the Myanmar Ministry of Health and Sports, forecasts suggest that the population will reach 56 million by 2020 and exceed 60 million by 2030, allowing Myanmar to retain its place among the world’s 30 most populous countries.

    Disposable incomes have been rising quickly – albeit from a low base – in Myanmar.

    It is also a young population, with a median age of 28 years (though this is expected to rise to 32 years by 2030). A third of the total population is under 18 years, and 60 percent is aged between 18 and 59. By comparison, only one-fifth of France’s population is under 18. This backdrop provides advantageous conditions for economic growth in general and suggests there may be a significant consumer base for nicotine products in the medium term.

    Two-thirds of Myanmar’s population—a higher share than in most neighboring countries—lives in rural areas. Levels of urbanization are slowly increasing, though. Some 35 percent of Myanmar’s population lived in cities in 2016, compared with 32 percent in 2011. By 2030 this is expected to reach almost 45 percent. However, this is still below the Asia Pacific average, where more than 40 percent of the population already lives in urban areas.

    While in the recent past Myanmar’s economic profile was dominated by stagnation, it is now characterized by abundant potential, and it is in this context that the prospects for tobacco should be placed. Since 2008, the country has engaged in an economic and democratic liberalization process (albeit imperfect) that has spurred its economic development. Real annual gross domestic product growth in Myanmar stood at 7.5 percent on average over the period of 2011–2016. Facilitated by increased inflows of foreign direct investment and further regulatory and economic reforms, growth is expected to continue at at least these levels between 2017 and 2022. As a corollary, Euromonitor International expects the number of middle-class consumers in Myanmar to double by 2022.

    Myanmar’s market for rolled manufactured cigarettes has been expanding at a compound annual growth rate volume of between 5–10 percent since 2011.

    Current consumption

    According to The Tobacco Atlas, 31 percent of males and 7 percent of females in Myanmar used tobacco products daily in 2013, implying a total smoking population of around 7 million. However, only 9 percent of males and less than 1 percent of females smoked cigarettes, with the balance of the population consuming other tobacco products, which are usually distributed through unofficial channels. In addition, the Ministry of Health and Sports states that only around 10 percent of cigarette smokers use filtered cigarettes.

    Euromonitor is initiating direct research of Myanmar’s tobacco market in its data release scheduled for mid-2017. The company estimates that the market for rolled manufactured cigarettes has been expanding at a compound annual growth rate (CAGR) volume of between 5–10 percent since 2011 and accounted for in excess of 10 billion sticks in 2016. Driven by rising consumer income, the expansion of modern grocery retailers and liberalized trade rules, the market value has grown to around $500 million in 2016.

    Traditional tobacco products, such as cheroots, remain popular in Myanmar.

    Per capita consumption lags behind regional peers, standing at a bit above 300 cigarettes in 2016, compared with more than 900 sticks across the Asia Pacific region and more than 1,000 sticks in Vietnam. This suggests that tobacco users in Myanmar spread their consumption across one or more different product categories.

    Roughly half of all tobacco use in Myanmar is in the form of smokeless tobacco, in particular betel nut, tobacco and spices mixed in palm leaves. Traditional cheroots, made from chopped-up tobacco leaves, stems and wood chips, and bidis remain popular and make up most of the remaining tobacco consumption, especially in rural areas. Consumption of rolled manufactured cigarettes is therefore marginal in the total context, but manufacturers anticipate consumers to transition into the segment over time. Consumption of Western-style cigars and other tobacco products is negligible in Myanmar due to higher price points and the availability of indigenous alternatives.

    Quantifying the black market in Myanmar is an imprecise science. However, estimates by industry representatives suggest that illegal sales are double those of duty-paid cigarettes. Illegal imports from neighboring countries are also prevalent, with smuggled cigarettes reportedly even being sold through supermarkets. Like in other markets in the region, handmade products are difficult to track and tax; therefore, bidis and cheroots account for the great majority of unofficial sales.

    Myanmar’s regulatory regime, while still less restrictive than those in many developed countries, has been tightening. Smoking is prohibited in health care facilities, educational facilities, government offices and some other enclosed spaces. However, there are no restrictions on smoking in other public areas, including cafes and restaurants.

    Regulations regarding marketing are a mixed bag. Direct tobacco advertising is not allowed, except point-of-sale advertising. However, companies are allowed to use indirect advertising, such as promotional discounts and brand placements on TV shows/movies. A 2016 order, due to come into effect this month, mandates the use of 75 percent graphic health warnings on the front and back of every pack, a scenario that makes Myanmar’s packaging regulations more restrictive than those in many developed markets.

    Cigarettes and tobacco products in Myanmar are subject to excise tax. The special commodities tax on cigarettes was increased to 120 percent from 100 percent in 2016, meaning that in total excise now makes up over half of the final pack price paid by consumers.

    Cheroots manufacturing is largely a cottage industry.

    Building on tradition

    While Myanmar is sometimes regarded as a frontier tobacco market, international companies have a long history there and are already heavily involved once again. Cigarette manufacturers, such as British American Tobacco (BAT), were forced to leave Myanmar in the early 2000s by a combination of the direct stipulations of international sanctions and the broader reputational issues relating to involvement with Myanmar’s political system of the time. However, following democratization and economic liberalization, the international manufacturers are steadily ramping up activities in the country. While concerns persist about corruption and government involvement in the economy, global players now see a presence in Myanmar as a boon rather than a bother.

    BAT re-entered the market in 2013 and has invested heavily in the intervening years in combination with a local company, IMU Enterprise. Japan Tobacco has also been expanding its presence in the past three to four years, building a new factory for its local subsidiary, Japan Tobacco Myanmar, in conjunction with local partner Kyaw Win. Quite simply, this concerted focus from international manufacturers on the Myanmar market is predicated on the belief that sales of cigarettes will post robust growth in the short to medium term.

    Red Ruby is one of the most popular brands in Myanmar

    Most urban smokers purchase cigarettes from supermarkets or corner stores. Cigarettes in Myanmar are sold in 20-stick packages, and the price of a pack of cigarettes in supermarkets in Yangon—the country’s largest city—ranges from around $0.60–$0.70 for a leading local brand such as Red Ruby to upward of $2.50 for an imported international brand, such as Marlboro. However, unofficial sales still prevail, and cigarettes are also widely distributed by street vendors and in traditional markets.

    Local brands dominate in the market, due to the distinct price differential with imported brands. Ruby is the most popular brand, accounting for an estimated 40 percent of market by volume. It is followed by BAT’s London brand, which accounts for 20 percent of volume sales. Other leading brands are Duya, Red & Blue and 555.

    Looking forward, tobacco consumption will increase in Myanmar both in general terms and specifically in the case of machine-manufactured cigarettes.

    Even in the context of an increasingly constricted regulatory environment and renewed focus on the country from local and international tobacco control agencies, Euromonitor believes that a CAGR of about 10 percent in volume terms up to 2021 is not unreasonable, driven by rising consumer incomes and increasing brand awareness. What’s more, filtered cigarettes are an under-indexed segment in Myanmar, and the presence of the global players will continue to boost sales of these products and, with that, the overall market value.

    Shane MacGuill is head of tobacco research at Euromonitor International.

  • Bouncing back

    Bouncing back

    Brazilian leaf volumes are set to recover after last year’s unusually small harvest.

    By Stefanie Rossel

    Brazil’s 2015–2016 tobacco growing season was a tough one. Hit by the most severe El Nino in years, the crop shrunk by around 25 percent in volume. The weather phenomenon brought about massive rains in Brazil’s south; combined with a reduction of the planted area and a reduced yield per hectare, the adverse weather conditions led to the smallest harvest of flue-cured Virginia (FCV) in more than a decade.

    The growers association Afubra estimates 2016 FCV production at 460,000 tons, down from 595,000 tons one year earlier. Similarly, the country’s burley crop shrank from 83,000 tons in 2015 to 55,000 tons in 2016. Dramatic as it may sound, the production decline also had its upside: Occurring at a time of global leaf oversupply, it helped stabilize the market, according to Danny Schwengber, sales manager at Premium Tabacos do Brasil. “The green price moved up considerably,” he says. In spite of the smaller crop, income for farmers rose about 40 percent compared with the previous year, notes Erni Dockhorn, director and president of UTC Brasil.

    Philip Morris Brazil (PMB), Brazil’s second-largest tobacco company and one of the major leaf buyers in the country, initiated a number of measures to support its contracted tobacco farmers during the difficult season.

    “PMB created a temporary cash-advance program to allow farm activities,” says leaf director Gerson Assmann. “PMB’s ‘tabela’ price—the official price for tobacco trade—was increased above the farmer’s cost of production with an extra bonus to support farmers. Farmers received 50 percent of their estimated sales revenues before delivering their crop. In addition, a special group of field technicians instructed farmers about growing side sprouts in fields hit by hailstorms, which recover most of their crops. These initiatives ensured support to our contracted farmers in a time of need and our commitment with tobacco farmers and workers,” says Assmann.

    PMB maintains a set of procedures to guarantee crop volumes even in times of unprecedented severe weather. “Almost all other factors influencing plant development can be managed,” explains Assmann. “A good estimation system evaluates crop tendencies and volumes, allowing us to adapt our operation accordingly. As an example, a major influence on crop results are tobacco seeds. All seed varieties delivered by PMB for this crop season followed weather and resistance recommendation made by ProfiGen, one of the world’s leading tobacco seed producers.”

    Souza Cruz, Brazil’s largest cigarette maker and since 2015 a wholly owned subsidiary of British American Tobacco (BAT), also took measures to mitigate the effects of El Nino.

    “Our technological set [of tools], ranging from soil preparation, potential high-production varieties, inputs of high quality, specialized technical assistance and producers database, were essential factors to mitigate losses and to achieve the volume and profile required by Souza Cruz and the BAT group,” says Helio Moura, national leaf growing manager at Souza Cruz. “Although we have suffered the damages from the most rigorous El Nino in recent years, the impact on our volume was completely manageable.”

    Gerson Assmann

    Great expectations

    Prospects for the upcoming crop—at the time of writing still being harvested—are decisively brighter. “The Brazilian farmers expanded in a big way the planted area for this coming crop, principally encouraged by the excellent return they received from the previous one,” says Dockhorn. According to Afubra, the planted FCV area has risen from 252,000 hectares in 2016 to 271,111 hectares this year. The association predicts a FCV crop volume of 610,000 tons in 2017. The burley crop is anticipated to reach 72,000 tons in the current season, grown on a planted area of 35,122 hectares (compared with 28,572 hectares in 2016).

    Weather conditions remained favorable throughout the season. “At transplanting time, there was a risk of drought due to a La Nina warning,” recalls Assmann. The climatological counterpart of El Nino, La Nina can cause drought in southern Brazil, but during the event, this did not happen. As a result, the industry is anticipating large volumes for the 2016–2017 crop.

    The quality of the current crop is expected to be average to good, with some variations between the growing areas. “Rain volumes during November were slightly lower than historical averages, negatively influencing early harvests,” says Assmann. “December, on the other hand, presented good rain volumes, allowing the development of a good-quality crop in the field. Unfortunately, the extra volumes transplanted for this season pressured most farmers to speed up the curing process. This had a negative impact on parts of the Brazilian crop.”

    Brazil has been the world’s leading tobacco exporter since 1993.

    Brazil is the world’s second-largest tobacco producer behind China and has been the leading exporter since 1993. It is also one of only a handful of countries capable of producing the sought-after flavorful tobaccos.

    The sector is of significant economic importance. According to SindiTabaco, Brazil’s interstate tobacco industry union, tobacco accounted for 1.14 percent of all Brazilian exports, with the value of shipments amounting to $2.19 billion in 2015. Occupying less than 1 percent of the country’s land area, tobacco ranks sixth as a generator of value in the Brazilian agribusiness sector.

    For a long time, the European Union has been the main destination for Brazilian tobacco. It accounted for 41 percent of the volume shipped in 2016, according to Brazil’s Ministry of Industry, Foreign Trade and Services. The EU is followed by the Far East with 28 percent, North America (12 percent), Eastern Europe (7 percent), and Africa/Middle East and Latin America with 6 percent each. The major importing countries are Belgium, China and the U.S. Altogether, Brazilian leaf is exported to 90 countries.

    The vast majority of Brazilian tobacco production consists of FCV (82 percent) and burley (17 percent), which are grown in the country’s comparatively rich and industrialized southern states Rio Grande do Sul, Santa Catarina and Parana. Dark air-cured tobaccos are grown further to the north, in the states of Bahia and Alagoas.

    Small-scale farming is typical of Brazilian tobacco cultivation. According to SindiTabaco, on average holdings measure 15.2 hectares, of which only 16.6 percent are dedicated to tobacco. This share, however, accounts for 65 percent of farm income, making tobacco a highly profitable crop.

    Helio Moura

    Certified cultivation

    Brazil’s labor, energy and raw material costs are comparatively high, and the country faces fierce rivalry from African countries with equally suitable climates but lower production cost. Nonetheless, Brazilian tobacco executives believe their leaf is competitive on the global market.

    “Brazil is working on the reduction of labor needs, improved health protection, increased safety and higher profits for those who produce tobacco,” says Dockhorn. “The aim is to improve yields and reduce production costs.”

    The success of Brazil’s leaf tobacco industry is often attributed to its integrated system. Buyers supply their contracted farmers with inputs and agronomic assistance and recover these expenses when the tobacco is delivered.

    “It is part of our strategy to increase quality and productivity so that we can bring more prosperity to our integrated producers and maintain the competitiveness of our business,” explains Moura. “To deliver year-over-year productivity growth, our technical staff is directly in contact with the integrated producers to provide support that can result in sustainable volume growth without losing focus on quality. Another key aspect is our investment in production technology and innovative processes, which are directed to achieving productivity and quality gains, not only in the field but also in all areas of the operation. Through this strategy, we can mitigate impacts and bring benefits to producers and costumers, as well as generate value for the country.”

    PMB has recently taken an important step to upgrade the integrated production system. “Two years ago, the agronomy team developed the program Field+, where dedicated instructors visit farms in vehicles equipped with training material and media capabilities, capacitating farmers and rural workers to adopt better health and safety practices in their daily activities,” says Assmann. “The program was very well-received by the rural community, as it helps them to acquire knowledge at their own farms.”

    Preparing for export

    An external audit ratifies the compliance with the specific technical standards for sustainable production. Good agricultural practices and the standardization of production processes are at the center of certification requirements, which include the mandatory use of wood of legal and sustainable origin, correct disposal of empty pesticide containers, the use of seeds authorized by the national cultivar register, and the adoption of conservation practices like direct planting and minimum tillage.

    Farmers are required to apply only fertilizers and pesticides recommended and registered by the apprpriate organizations. They must use personal protective equipment and special harvest clothing. Child labor is prohibited, as is field burning and the handling of pesticides by minors (under age 18), the elderly (over age 60) and pregnant women.

    Traceability plays a major role in the program, which requires all procedures involved in production, from soil preparation to delivery at the processing plant, to be registered on specifically developed worksheets. Increasing regulation may hence affect Brazilian tobacco positively, according to Moura. “Our production model, the integrated system, one of the sustaining pillars of the business, allows us to control the whole supply chain, making it possible to have the complete traceability of our product,” says Moura.

    With its carefully managed integrated system, Brazil seems well-prepared for the tobacco industry’s increasingly regulated future.

     

     

     

     

  • Magic bullet?

    Magic bullet?

    IQOS could spell the beginning of the end for combustible cigarettes. But will it receive the required regulatory support?

    By George Gay

    When Philip Morris International (PMI) reported in February last year that its 2015 cigarette shipment volume was down by 1 percent, CEO Andre Calantzopoulos was able to provide some good news too, part of which described how PMI had significantly expanded the rollout of iQOS—one of its heated tobacco vapor products—in Japan and had introduced it into several new markets. Cigarette volume was down again, this time by 1.4 percent, when the company reported in April 2016 its first-quarter results for 2016, but at that time Calantzopoulos was able to say that PMI was “excited by the progress, best represented by our impressive HeatStick [the consumable insert part of the iQOS system] share momentum in Japan, of our reduced-risk product, iQOS.”

    The second quarter, reported in July 2016, saw cigarette volume down by 4.8 percent, but again the news from the vapor front was better. “A highlight of the quarter was our exceptional iQOS performance in Japan, where HeatSticks reached a national share for the quarter of 2.2 percent, demonstrating the tremendous potential of the reduced-risk products category,” Calantzopoulos said in a statement that seemed, in talking of an actual market share rather than generalities, to lift the progress of iQOS onto another plane. And in the third quarter, reported in October 2016, cigarette volume was down by 5.4 percent, but Calantzopoulos was able to say, “We are particularly encouraged by the strong performance of iQOS across all of its launch geographies, particularly in Japan, where HeatSticks recorded a quarterly share of 3.5 percent.”

    Three and a half percent. It doesn’t take a genius to figure out where this is going, especially given the fact that, in September 2016, PMI announced that it was inaugurating in Italy its first manufacturing facility for large-scale production of two heated-tobacco alternatives to cigarettes. The initial annual production capacity of the factory, which has involved an investment of about €500 million ($532.12 million), will be about 30 billion units. The announcement was given weight, I believe, by the fact that it was made at an event at the factory in the presence of then Italian Prime Minister Matteo Renzi.

    “Our ambition is to lead a full-scale effort to ensure that noncombustible products ultimately replace cigarettes to the benefit of adult smokers, society, our company and our shareholders,” said Calantzopoulos. “This factory is a milestone in our roadmap toward this paradigm shift.”

    But if there were still any doubts about PMI’s commitment to heated-tobacco technology, Calantzopoulos disposed of them in announcing toward the end of last year the launch of iQOS in the U.K. At that time, he said he would like to work with governments toward the “phase-out” of conventional cigarettes. He was quoted by the BBC as saying that the company knew its products harmed their consumers and that the only correct response was “to find and commercialize” ones that were less harmful. “That is clearly our objective,” he said.

    Long road ahead

    Andre Calantzopoulos

    Not everyone was won over. The Guardian newspaper quoted Rae Maile, tobacco industry analyst with City of London firm Cenkos Securities, as saying that Calantzopoulos was vague about how long it might take for cigarettes to disappear. “He didn’t say when … so it’s any time in the next century,” Maile said. “There are 1 billion people quite happy with smoking,” he said. “Cigarettes are easy to use, convenient and don’t need recharging. People know the health risks and are willing to accept them.”

    Maile was perhaps a little harsh in expecting a timeline for the phase-out, but there’s clearly some truth in what he said. Inertia reigns, and it will take some heavy lifting by a lot of people—some of whom are not used to cooperating with each other—to shift smokers away from their habit. But, then again, sometimes products just capture the imagination. Calantzopoulos said that trials in Japan had shown that 70 percent of smokers stayed with iQOS, compared with a general conversion rate of 20 percent for e-cigarettes.

    Maile’s comments hit home, however, partly because of his raising of the convenience issue. But even this has two sides to it. On the one side, a pack of cigarettes and a lighter constitute a very compact and easy-to-use system of nicotine delivery. On the other, cigarettes are not convenient if you are unable to use them in an increasing number of places, even in your own home if you live in some multi-unit dwellings in the U.S. and elsewhere. So clearly, if governments decide that it is preferable that those people determined to use nicotine products vape rather than smoke, they can help in balancing the convenience issue by allowing the use of vapor devices in more places than they allow the use of cigarettes. As Calantzopoulos implied at the launch of iQOS in the U.K., there are good reasons why governments and the vapor industry should work together on these issues—as long as any discussions are open.

    Much will depend, no doubt, on how representative Japan’s tobacco and vapor markets turn out to have been. And now that the iQOS manufacturing capacity limitations have been overcome, the U.K. market will be an interesting test from a number of points of view. I’m not a marketing man, but I would be surprised if there wasn’t a fairly large gap between the attitudes and aspirations of Japanese and British nicotine consumers.

    Another issue concerns the fact that the authorities in the U.K. have generally embraced the idea of tobacco harm reduction and gone a long way in encouraging smokers to use e-cigarettes to try to quit smoking. Despite what the U.S. Food and Drug Administration and the European Commission might think, e-cigarettes are not tobacco products. But iQOS is a tobacco product—though not a combustible one—and it will be interesting to watch how, if at all, the launch of iQOS shifts the vapor debate in the U.K.

    Broad debate

    Products such as iQOS have great potential, providing that authorities embrace the principle of harm reduction and implement appropriate regulatory frameworks.

    One thing that is certain is that there needs to be a wide-ranging debate about products such as iQOS, Japan Tobacco’s Ploom and British American Tobacco’s Glo. I noticed that the preamble to a question posed last year by a member of the European Parliament to the commission said, in part, “The major difference between iQOS and e-cigarettes is that while the latter use a liquid transformed into vapor, iQOS heats the tobacco and keeps it burning, which is very harmful to health.” The commission, for all its faults, is usually well-informed, and I’m sure that the answer, which I hadn’t seen at the time of writing, will point out the error—and the danger—of using the word “burning,” given that the developers of these products have gone to considerable lengths to ensure that the tobacco they contain is not burned.

    Tobacco and vapor companies can go some way toward promoting the harm reduction debate, and, on its website, PMI describes its various vapor products as consumer goods, intended as substitutes for combustible tobacco products. It says that any claim that the use of a particular product is less harmful than is smoking should be backed up by robust science. “Our scientific assessment program follows a step-by-step approach inspired by standards and practices long adopted by the pharmaceutical industry and by guidance issued by the U.S. [Food and Drug Administration’s] Center for Tobacco Products,” it says.

    “Our studies on one of our heated-tobacco products, Platform 1 [iQOS], are well-advanced. We have already determined that the aerosol generated by Platform 1 produces 90 to 95 percent less harmful and potentially harmful compounds compared to a reference cigarette, and that the aerosol is 90 to 95 percent less toxic than smoke from a reference cigarette. In a three-month clinical study recently carried out in Japan and the U.S., the average reduction in 15 biomarkers of exposure to 15 harmful and potentially harmful compounds measured in smokers who switched to Platform 1 approached the effect observed in smokers who quit smoking for the duration of the study.

    “While conclusions on the risk reduction profile of Platform 1 will be based on the totality of the evidence, such results give us confidence that we are on course with our plans to demonstrate that Platform 1 is not only a reduced-exposure product but also a less harmful alternative for smokers.”

    PMI’s science is to be put to the test. In December 2016, the company announced it had submitted to the U.S. Food and Drug Administration’s (FDA) Center for Tobacco Products a modified-risk tobacco product (MRTP) application for its iQOS electronically heated tobacco product. “This is consistent with the company’s stated goal of submitting its MRTP application in 2016,” the company said in a note posted on its website. “PMI anticipates the FDA taking a minimum of 60 days to complete an administrative review to determine whether to accept the application for substantive review.”

    There is a lot at stake here, and it is just as well that PMI is making this application. Much of the vapor industry is currently under threat in the U.S. because of the rules brought in by the FDA that have deemed e-cigarettes to be “tobacco products” and that in important aspects are more restrictive than are the rules governing traditional tobacco cigarettes. Some observers have been fighting to put clear water between e-cigarettes and combustible cigarettes and have been hoping that the new administration would be opposed to the deeming rule’s threatening the existence of thousands of small businesses. Launching onto the U.S. market a vapor device that does contain tobacco might complicate the debate and will almost certainly be used by those intractably opposed to vapor products.

    Of course, a premarket tobacco product application will be made for iQOS soon, and the product is likely to be on the U.S. market by July, a long while before it receives MRTP certification, assuming that its MRTP application is successful. But if the FDA accepts the MRTP application for “substantive review,” this will go at least some way to placating some of those opposed to vapor products.

    If the FDA were to grant an MRTP in respect of iQOS, it would certainly be a game changer given that U.S. consumers proved accepting of the product. But it would probably be as well not to hold our breath. The FDA proved inordinately slow and ultimately unhelpful in assessing the first full MRTP application to be put before it, which had to do with snus, a tobacco product that doesn’t involve inhalation and that has been shown to be protective against Parkinson’s disease (also see “Trailblazer,” page xx).

    High stakes

    Bonnie Herzog

    There is a lot at stake, too, beyond the reduced-risk battleground. Following the announcement by PMI that it had made an MRTP application for iQOS, Altria issued a reminder that it has an exclusive license to sell the product in the U.S. In December 2013, PMI and Altria announced that they had established a strategic framework to commercialize reduced-risk products and e-cigarettes. “Under the terms of a set of licensing, supply and cooperation agreements, Altria will make available its e-cigarette products exclusively to PMI for commercialization outside the United States, and PMI will make available two of its candidate reduced-risk tobacco products exclusively to Altria for commercialization in the United States,” the announcement said.

    Bonnie Herzog, managing director of equity research for tobacco (and a number of other business sectors) at Wells Fargo Securities, said that, based on a detailed, 10-year analysis of the market potential for the iQOS platform globally, she believed the product had the potential to change the trajectory of smoking. And, she added, both PMI and Altria had a competitive advantage given iQOS’ “superior technology,” given its “first mover” advantage with commercialization and clinical trials, and given the ability to leverage the ubiquitous Marlboro brand.

    In fact, Herzog believes that the iQOS issue could accelerate the acquisition of Altria by PMI. Herzog said that iQOS would be worth more to PMI if it owned Altria because PMI would in that case capture the full sales margin. It would also be able to accelerate the growth of iQOS in the U.S. given that it would then have full control over sales and distribution there, as well as elsewhere in the world.

  • Trailblazer

    Trailblazer

    Even as it suffers setbacks, Swedish Match’s MRTP application offers a path for other tobacco companies to follow.

    By Timothy S. Donahue

    Developing less risky alternatives to cigarettes is all the rage nowadays. Nearly every tobacco company has an alternative tobacco product that aims to be safer than smoking. However, only one company can be first in gaining approval from the U.S. Food and Drug Administration (FDA) to make the claim publicly.

    Despite recent setbacks, Swedish Match (SM) remains far ahead of the pack. In June 2014, the firm filed a modified-risk tobacco product (MRTP) application for its General snus brand. It was the first such application to ever be accepted for review by the FDA. Snus is a moist tobacco product placed under the upper lip that does not involve spitting or chewing. In mid-December 2016, the FDA finally responded to the 135,000-page document. The regulatory agency decided to defer any decisions on whether to allow the company to claim the products cause less harm than cigarettes or whether to allow removal of a warning that the products may cause mouth cancer.

    In another first, the FDA stated that it believed the SM application “could be amended to support issuance of modified risk orders.” However, it also informed the company that it would not be able to remove a warning that the products may cause gum disease and tooth loss. SM intends to meet with the FDA (a 45-day response deadline places a possible meeting in mid-February, although no date could be confirmed as of this writing), according to Jim Solyst, vice president for federal regulatory affairs for SM. The FDA requires SM fully address all remaining concerns within two years.

    “What we will do is certainly have a conversation with the FDA, but the exact nature of those discussions have yet to be determined. We are more than willing to keep this process going, to respond to the letters we’ve received and the document they put out,” said Solyst. “We would need some additional information, some clarification as to what would be the path forward. Yes, we will have discussions. We believe it’s in all parties’ best interests that we keep this dialogue going.”

    One challenge facing SM is that the FDA’s “conversations” with tobacco companies are not necessarily of the type that most people associate with that word. They are more like a dialogue through documents. When a tobacco company meets with the FDA’s Center for Tobacco Products (CTP), it’s a listening session where a company presents, the FDA listens, and at some point later the FDA makes a decision that is often unclear and more often without explanation. “The burden has always been on us, the applicant, to propose something,” says Solyst. “Then they comment on it.”

    Risk reduction quantified

    Jim Solyst

    The actions on the MRTP applications have no impact on SM’s premarket tobacco product application (PMTA) authorizations issued for eight of its General snus products in November 2015. SM was the first—and, so far, only—tobacco company to receive product approvals under the PMTA process. In its PMTA, SM proposed that General snus should be considered to be protective of the public health, and the FDA agreed. In its response, the agency determined that the General snus products are protective of the public health and contain significantly lower levels of harmful constituents compared with over 97 percent of the smokeless products on the U.S. market.

    “They even went further than we did,” says Solyst. “They quantified the risk reduction.” The MRTP response, however, was different. “The FDA stated that ‘No, this is not quite what we need. We’re not willing to remove the warning labels, and we want you to do your consumer perception in a different way.’ Going forward, part of our conversation with them would be, well, ‘Which way is that?’ Yes, it’s been a difficult process. They aren’t very clear on their expectations.”

    Understanding the industry interest and complexity of its decision, the FDA did attempt to explain its scientific review process and what was considered in the actions taken against SM in its MRTP application. In a note on its website, the FDA states that to pursue an MRTP order, a company, among other things, is required to establish that submitted modified-risk data for a product is supported by scientific evidence that shows “the product (as actually used by consumers) can significantly reduce the harm and risk of tobacco-related disease to individual tobacco users, as well as benefit the health of the population.”

    In its MRTP applications, SM proposed to remove two warning statements required of smokeless tobacco products by the FDA: one stating that the product can cause gum disease and tooth loss, and the other stating the product can cause mouth cancer. In reviewing these requests, the FDA determined that “removing the warning statement about gum disease and tooth loss would imply that using these snus products cannot cause gum disease and tooth loss, as compared to other smokeless tobacco products,” according to its statement. Similarly, the FDA determined that removing the warning statement about mouth cancer would imply that using these snus products cannot cause mouth cancer. “Based on the available scientific evidence, we determined that the applicant’s proposal to remove this warning should be denied,” wrote the FDA. “There is sufficient evidence that the use of these products increases the risk of mouth cancer in users compared to nonusers.”

    However, the FDA did state that evidence provided by SM may support other claims, such as a claim about the “reduced risk of mouth cancer provided on the product labeling, in advertising, or otherwise outside of a health warning. That claim would need to be carefully worded and adequately tested with consumers to ensure satisfaction of the MRTP requirements, including consumer comprehension.”

    The FDA’s use of the word “imply,” however, is confusing. Is the agency attempting to determine how the general public may or may not interpret a statement without doing any reasonable research? Is the research of the wording a responsibility of the applicant? Solyst says he’s not sure. It’s hard to guess as to the FDA’s intent. “We believe that what they’re basically saying is that because there are the existing warning labels, they’re not going to remove them. They don’t address this specifically, but if you look back at the 2015 decision, the inference would be that had there not been a warning label at all, that’d be a different story,” says Solyst. “Because there is already a warning label, they’re not inclined to remove it no matter how much evidence we present.”

    Public interpretation

    Further muddying the waters, SM also asked to revise a third warning statement to say that General snus products present “substantially lower risks to health than cigarettes.” This seemed fair considering the FDA’s PMTA response that General snus products were 97 percent safer than similar products. Even the FDA’s review of the submitted scientific evidence for the MRTP concluded that “General snus products, as used by consumers in Sweden and Norway, may pose substantially lower health risks to individual smokers who switch completely to these products for some health outcomes, such as lung cancer or chronic obstructive pulmonary disease.”

    Conversely, the FDA again claims that there is insufficient scientific evidence to support the claim, as would be implied by a generalized statement about health risks as compared to smoking. “However, as with the evidence related to mouth cancer, the evidence on relative health risks provided by Swedish Match may support a different explicit claim, such as one outside of a health warning providing information concerning the differences in specific health risks, if the claim is carefully constructed, and adequately tested,” wrote the FDA.

    Why the FDA is trying to speculate at public interpretation is anyone’s guess. The agency may be losing sight of the bigger picture by being so vague and secretive. “We think that telling smokers that these products are 97 percent safer than similar products is the key message; this message is getting lost,” says Solyst, adding that maybe the FDA wants SM to take more of a relative risk approach. “Should our claims be that this product is significantly less risky than other products? That very well could be what they’re saying. The main message is, to us, that they’re not going to remove the current labels, but that doesn’t mean they wouldn’t consider other marketing claims. They seem to want us to continue this process. They gave us options, and one of those options was to present different claims. That’s why we need more information from them. What exactly do they mean by that; what evidence would be necessary to go that route?”

    Spread the word

    Looking back at its PMTA approval, Solyst says another frustration with the FDA is that the CTP didn’t really attempt to get the word out to the industry surrounding the significance of the first PMTA issued. The CTP decision was of global, and possibly even historical, significance. It was the first time any public health regulatory agency had made such a decision (allowing a new, safer tobacco product on the market). “We would have liked to have seen the FDA make more of it. Maybe they will, in the future, but that has been the frustration, which is: We agree with the decision; we just wish it was better known among tobacco users,” Solyst says. “We understand that this is an ongoing process, and we’re not discouraged. We think we have a harm reduction product that has already received one very positive decision from the FDA [in the PMTA], and we expect to continue this process and secure the first MRTP.”

    While continuing and completing the MRTP is important to SM and its vision of a “world without cigarettes,” Solyst says the story is much bigger. As a leader in tobacco harm reduction and the only company to successfully navigate the PMTA course, SM has an obligation to the industry to establish the process of navigating the MRTP minefield. “We’re the only company who’s gotten this far. We feel we have to try to understand what exactly it is that they want. We’re not just acting as a company or as a product, but as a leader in the industry,” he says. “We feel this obligation to demonstrate how this [MRTP] can be done, and that it should be able to be done in an efficient manner. We felt the same way about the PMTA process. Now that we’re the only one with a PMTA, and we think we will do future PMTAs, we have that obligation to set a standard and continue the fight.”

     

  • Race to the bottom

    Race to the bottom

    Some scientists continue to support the idea of lowering nicotine levels. But is it a realistic harm reduction strategy?

    By George Gay

    Over the years, I have attended a lot of symposiums at which learned people have presented wide-ranging research on tobacco consumption and its effects. But because, in most cases, I have had little knowledge of the science they were describing, what I have usually taken away from these sessions is simply a feeling that the person who was speaking was not a tobacco consumer, had never been a tobacco consumer and had little “feel” for the product.

    The question is: Is this lack of direct experience in the product under consideration important? Generally, I would say that it is a negative factor if the person in question is in a position of being able to influence policy in relation to fundamental aspects of the product—its formulation, say, rather than the way it is to be marketed. I say generally because, for obvious reasons, in some cases people have to help devise policies in respect of products that they have never consumed.

    In the recent past, a good deal of research has been focused on examining the idea that cigarettes with a low level of nicotine represent a way forward in the quest to get people to quit smoking. As I understand it, such cigarettes would deliver a level of nicotine below that believed to be necessary to addict new smokers or to maintain addiction in existing smokers.

    This research continues, and some of the people pursuing it readily call for more research to be carried out even though, as far as I know, low-nicotine cigarettes have been rejected by smokers wherever and whenever they have been launched. Many of the researchers, I’m certain, would happily sign up to the adage that smokers smoke for the nicotine but die from the tar. But here they are, on the face of it, advocating as a harm reduction strategy the launch of a product that would require a smoker to ingest hugely increased amounts of tar to obtain the nicotine she needs.

    Why? I don’t really know, but one thought that has occurred to me is that some researchers seem to be possessed of the ability to live comfortably with opposing views firmly lodged in their brains. Some of these researchers, for instance, seem to believe that nicotine is the most addictive substance of all legal and illegal substances, but believe also that nicotine addiction can be broken by requiring cigarettes to be sold in packs that show the picture of a mouth with dental decay.

    I’m not suggesting that all researchers don’t get it. Some get it right by asking the right questions of the right people. Toward the end of last year, the Centre for Substance Use Research (CSUR) in Glasgow, Scotland, published the results of a survey funded by the U.K. smoker group Forest that found that 95 percent of the 600 participating smokers gave pleasure as their primary reason for smoking. What is important here is that the academics carrying out the survey took the trouble to speak to committed smokers, and what they found was different from what we are usually told: that most smokers wish they had never taken up the habit and that all they ever think about is quitting.

    “Minimally addictive levels”

    nicotine photoAnd yet …. Despite my conviction that researchers often see only the cost of smoking and not the value of it, and are therefore probably incapable of looking at this subject in a meaningful way,
    there remains for me the nagging doubt that learned people have devised and recently resurrected this low-nicotine strategy and that it is being considered by such bodies as the U.S. Food and Drug Administration (FDA) and the World Health Organization (WHO).

    So in order to examine the positive side of the low-nicotine strategy, I tried, unsuccessfully, to talk with the people at 22nd Century Group, which describes itself as a plant biotechnology company that is a leader in tobacco harm reduction. But, no matter; an Oct. 13, 2016, press note issued by the group discusses some of the issues that I wanted to raise.

    The press note, titled “22nd Century very low-nicotine cigarettes could reduce U.S. smoking rates by more than 75 percent,” said that a group of leading scientists in the U.S. and New Zealand had published a “special paper” in an international peer-reviewed journal strongly advocating for a national nicotine reduction policy.

    The article, published in the September 2016 issue of Tobacco Control, outlined the “compelling and urgent case” for enacting a national nicotine policy in order “dramatically” to lower smoking rates. The authors were said to have cited results from many of the 15 major clinical studies conducted with 22nd Century’s very low-nicotine (VLN) tobacco.

    “Drs. Eric Donny, Natalie Walker, Dorothy Hatsukami and Chris Bullen authored the special paper that asserts governments around the world should reduce the nicotine content of cigarettes to ‘… ≤ 0.4 mg per gram of tobacco, a 95–98 percent reduction in nicotine content relative to what is currently on the market,’” the 22nd Century press note said. “The Tobacco Control article reinforces the World Health Organization recommendation that member countries ‘mandate reductions in nicotine to minimally addictive levels.’

    “With ownership or exclusive control of more than 200 patents on the genes in the tobacco plant that regulate nicotine production, 22nd Century is the only company in the world capable of growing tobacco with up to 97 percent less nicotine than conventional tobacco plants. Company scientists believe that at just 0.04 mg per gram of tobacco [presumably yield], nicotine is nonaddictive and yet still present in sufficient amounts to stimulate a small number of bio-receptors in the brain, thus greatly reducing cravings in smokers.”

    Left unsatisfied

    nicotine photoThis last-quoted sentence is interesting. It seems to say that a smoker who converts to a low-nicotine brand would find some of her cravings satisfied, but not all of them, and this raises the question as to what she would do about her unrequited cravings. One obvious strategy that she might employ would be to increase her consumption of the low-nicotine cigarettes, but since they would be delivering also tar, the risky element of the product, this seems not to be a strategy that could be recommended for risk reduction. And it surely raises the issue of whether or not the smoker would start changing the way in which she smoked, possibly resurrecting some of the negative factors that apparently arose when smokers started consuming “light” cigarettes.

    Another way to overcome the satisfaction deficit might be for the smoker to consume the low-nicotine cigarettes while applying to herself an appropriate number of nicotine patches, but I rather think that using patches and smoking at the same time comprises a strategy that would be frowned upon by health authorities, for at least one obvious reason. Of course, such an objection could be overcome if the low-nicotine cigarettes were supplemented not by nicotine patches but by nicotine from a vapor device such as an e-cigarette. But would the FDA, for instance, be able to sanction such activities? Could it recommend that a smoker of traditional cigarettes switch to low-nicotine cigarettes, presumably with all of the health implications of the traditional product, plus a vapor product that it seems to believe is riddled with potential, unseen dangers? It seems unlikely.

    A third way would be for the smoker to supplement the low-nicotine cigarettes with traditional cigarettes, but, unless the low-nicotine cigarette had a taste hugely superior to that of any traditional brand, this development is going only in one direction: The smoker is going to rationalize her product purchasing by concentrating on the regular cigarettes that provide the satisfaction she craves. And one thing we know is that low-nicotine cigarettes do not offer a hugely superior taste. For instance, in its press note, 22nd Century says that its “proprietary very low-nicotine Spectrum, Magic and Brand A cigarettes have the taste and sensory characteristics of conventional cigarettes.”

    Backdoor prohibition

    nicotine photoOf course, there is more than one way of handling things, and the question arises as to what would happen if a government were to decide that all cigarettes sold on the market over which it had jurisdiction were to be low-nicotine products, thus removing the competitive element and the opportunity for smokers to supplement their low-nicotine cigarettes with traditional brands. Well, as a number of commentators have pointed out, this would simply be a case of prohibition by the back door because the government would be banning cigarettes as they are currently defined. And even if one is in favor of prohibition, it is obvious that there is a more straightforward way of introducing it.

    Some people have suggested that, as above, governments should require, insofar as they are able (insofar as the illegal trade will allow), that only low-nicotine cigarettes be made available to smokers, and others have suggested that governments might do so. But it has to be said that 22nd Century seems to see its brands competing with traditional brands—certainly on the U.S. market. “We think the United States could—and should—be the first country to require all cigarette manufacturers to offer consumers a very low-nicotine brand style alongside their existing products,” Henry Sicignano III, president and CEO of 22nd Century, was quoted as saying in the October press note.

    One way perhaps of getting over the competitive problem and the prohibition objection would be to introduce nicotine reductions gradually, so that the nascent low-nicotine brand had its nicotine delivery reduced by, say, 5 percent a year. This, too, would not be without its problems, however. In this case, for a good number of years the nascent low-nicotine brand would presumably still be addicting new smokers, and possibly encouraging its consumers to smoke more cigarettes than they otherwise would.

    Additionally, the question would arise as to whether it would be technically possible to lower the amount of nicotine by a controlled, relatively small level from year to year. And if it were technically possible, would the cost of doing so allow the sale of such cigarettes at prices acceptable to smokers, with or without government excise concessions, given that governments were willing to make such concessions? I don’t know—partly because I don’t know whether low-nicotine tobacco can be produced simply through genetic manipulation of the plant, or whether the tobacco has to be modified during processing.

    However, such a gradual reduction might—and I emphasize, might—be what the Tobacco Control paper was suggesting. “The Tobacco Control article authors suggest that such a national nicotine policy could be the centerpiece legislation necessary for New Zealand to reach its goal of becoming smoke-free by 2025,” the 22nd Century press note said. “Because the island nation has a clearly defined goal of becoming smoke-free (< 5 percent prevalence by 2025), and because regulators and tobacco control experts in New Zealand have well-developed tobacco control programs in place, the Tobacco Control paper recognizes that New Zealand presents a ‘unique opportunity’ to implement a nicotine reduction policy for combustible cigarettes.”

    Global considerations

    nicotine photoUp until now, I have been looking at the application of a low-nicotine cigarette strategy to a single market of modest size. But what would happen if it were to be applied to a big market or even internationally via the urgings of the WHO’s Framework Convention on Tobacco Control? Certainly, such a development would raise a number of issues. At the moment, as one company seems to hold the patents on producing the necessary tobacco, I presume that it would take a fairly long time to scale up production to cater for a large market or for an international one, given that tobacco is grown in many countries, presumably with different attitudes to the genetic manipulation of plants. And so I cannot help wondering why, since the world already has in place a number of promising products with considerable success at getting people to quit smoking, it would be considered a good idea to go down a road whose benefits seem to stretch into the distance?

    I don’t know, for instance, whether low-nicotine tobacco has been produced and tested in respect of all the types and varieties currently being used around the world. And have the questions of the acceptability of and attitudes toward genetically modified tobacco been addressed? Clearly, in some parts of the world products with genetically modified ingredients are more acceptable than they are in others, and questions of acceptance will vary from individual to individual across all markets. It would be wrong to force—because of her addiction—a smoker to consume a genetically modified product if she had some ethical reason for not doing so. On the other hand, would we discover sometime in the future that some smokers read a “genetically modified” label as meaning “safer”?

    One aspect of the 22nd Century note about the Tobacco Control paper is ironic given the extreme caution, verging on hostility, that the FDA and the WHO have applied to their dealings with products such as snus and e-cigarettes. Donny and his collaborators were said to have pointed out the cost of delaying policies to reduce nicotine: “Waiting for the results of [additional] trials before seriously discussing a [nicotine reduction policy] that is rooted in decades of research … could delay potential action and ultimately lead to a failure in efforts to more rapidly improve public health.”

    What is being suggested here is that the FDA, for instance, should dispose of the niceties of further research and just get these low-nicotine cigarettes onto the market. But hang on; from what I understand, these low-nicotine cigarettes involve the consumer and those close to her in inhaling all of the products of combusted tobacco, and so presumably involve them in all of the health risks associated with users and secondhand smokers of regular cigarettes. Surely, the FDA is not suddenly going to act in such a cavalier fashion. The FDA is an organization that, in the case of one brand of snus, an oral tobacco product, the consumption of which is almost certainly more than 90 percent less risky than is smoking low- or high-nicotine cigarettes, took almost 2 1/2 years mostly to fail to reach a decision on whether to allow amendments to health warnings associated with this product that a prominent U.S. public health expert described as “egregiously inaccurate” (see “Trailblazer,” page xx). The FDA has suggested that the process of applying for the amendments should be dragged out—possibly for another two years.

    On this basis, it beggars belief that the FDA could suddenly introduce a low-nicotine policy. And, indeed, this seems to be the case. 22nd Century’s wholly owned subsidiary, Goodrich Tobacco Co., submitted on the last day of 2015 a combined modified-risk tobacco product (MRTP) application and premarket tobacco product applications for 22nd Century’s “Brand A” VLN tobacco cigarettes. The MRTP application apparently seeks only to state, “as truthful and accurate in Brand A packaging and marketing, that the company’s proprietary very low-nicotine cigarettes reduce smokers’ exposure to nicotine.” But it wasn’t until Jan. 5, 2017, that 22nd Century announced that it had received from the FDA “helpful and positive feedback” on its applications.

    I would like to quote one other section of the 22nd Century note. “Building on the results of previously conducted clinical studies, the Tobacco Control article authors summarize the highly attractive characteristics of VLN tobacco: ‘… In current smokers, very low-nicotine content … cigarettes decrease nicotine exposure, decrease cigarette dependence, reduce the number of cigarettes smoked per day, and increase the likelihood of contemplating, making and succeeding at a quit attempt.’”

    This seems to echo the start of this story. It has to be noted that the “highly attractive characteristics” referred to are, I assume, highly attractive insofar as the researchers are concerned. But unless force is used, it is the smokers who will ultimately decide whether these products are attractive enough to consume.

  • Ready to roll

    Ready to roll

    Tipping paper suppliers meet customers’ increasingly complex requirements with a mix of consolidation and innovation.

    By Stefanie Rossel

    Following contracting global cigarettes sales volumes, the market for tobacco papers—already concentrated—saw further consolidation in 2016. Both moves came from Delfortgroup and were aimed to strengthen the company’s presence in the U.S. market. In January 2016, Delfortgroup announced its acquisition of the Mundet Group. The deal gave the company additional manufacturing capacity in Virginia and Tennessee, USA, and Toluca, Mexico. In August 2016, Delfortgroup took over Shamrock Specialty Papers in Greensboro, North Carolina, USA.

    The acquisitions will enhance Delfortgroup’s strength as a global manufacturer for the whole “solution” range involving cigarette, plugwrap, tipping base papers and bobbins, along with a wide variety of papers for specialty product applications, according to CEO Martin Zahlbruckner. With 2,000 employees in six plants in Austria, Hungary, Czech Republic, Finland and Vietnam, Delfortgroup develops, manufactures and distributes high-performance specialty papers for the tobacco, pharmaceutical and food industries. In 2015, the group generated a consolidated turnover of more than €740 million ($789.2 million).

    Martin Zahlbruckner

    In the tipping base paper sector, Delfortgroup is one of only a few committed producers worldwide. They all face a number of challenges as the tobacco industry finds itself in a state of transition, explains Roman Reischl, managing director of German tobacco paper manufacturer Glatz Feinpapiere. “As was predicted last year, customers’ performance in terms of orders and dispositions changed massively,” he says. “There are more and more short runs with narrow time for production and delivery. It is hardly possible to get reliable forecasts … so we have to be very agile and flexible. For us—and probably for everyone in paper production—this means that planning becomes more and more difficult and complex.” He adds that as a family-run manufacturer, his company lives up to the challenge. “We have a simple and flat communication structure, which enables us to react quickly to everything, and we are absolutely flexible in terms of small stock-keeping units or volumes.”

    While tipping base paper is Glatz’s main business, the company also supplies cigarette paper and plugwrap. In all segments, Reischl relates, complexity is increasing, which is also putting pressure on costs. “Fortunately, Glatz is very strong in tipping—we have many years of experience in production and a close cooperation with printers so that our innovation power is on a high level, while staying independent from the printing industry itself. This is extremely important as tipping base paper is not at all a commodity product. It’s more delicate and complex, so only a few select can produce it.”

    He says that the complexity of all cigarette paper products makes it necessary for Glatz to concentrate on its core competences of tipping and low-ignition propensity paper, and continue innovating further in these segments. “These are segments where there is still potential for innovation, and if you carry out innovation, you will reap the reward, unlike in the cigarette paper or plugwrap markets, where nobody is willing to pay more money for developments in products.”

    Supply security, high- and tight-quality parameters, as well as tailor-made solutions and the ability to develop market-ready innovations are key to meeting today’s requirements, according to Delfortgroup. With its product portfolio of tipping base, cigarette paper, plugwrap paper and innerliner base paper—which the company will offer from May 2017—the company says it is a one-stop shop. Delfortgroup works from three mills and five paper machines, with which it claims it makes more than sufficient tipping base paper capacity available. “In addition, we have a well-functioning and continuously tested contingency concept in place,” Zahlbruckner points out. “Due to harmonized operating and quality-management systems, all paper grades can be instantly and expertly switched between paper machines within all sites of the group while maintaining identical quality parameters and standards.”

    A number of factors have lately impacted the tipping base paper segment, such as the growth of the super-slim category. Super-slim cigarettes are increasingly popular in Russia, Korea, Greece and China. “This means smaller-circumference cigarettes and therefore utilization of less surface area of paper,” observes Alex Boone, business development director of global papers at U.S.-based Schweitzer-Mauduit International (SWM), the world’s largest producer of cigarette paper.

    Another recent development has been more of a driver: The growing popularity of flavor-capsule filter cigarettes has led to increasing demand for base tipping solutions for oil resistance. Mudanjiang Hengfeng Paper Group, a cigarette-related paper producer based in northeastern China, offers a solution in this field.

    Natural tipping paper and improved biodegradability also increasingly play a role. As early as 2008, Delfortgroup launched a tipping base paper with tobacco particles and unbleached pulp. Glatz offers a range of unbleached papers for almost all tipping base paper specifications.

    Regulation drives business

    Increasing regulation of tobacco products continues to affect the tipping base paper market. “Good stewardship practices and regulation has and can continue to drive the limitations on the types of chemistries that are allowable in the production of base tipping paper as well as printing. This can drive costs higher and make paper less ‘printer friendly,’” says Boone. However, he continues, “high-quality printing is a must so base papers with high opacity and brightness, as well as high smoothness, are required, which are technical benefits of SWM papers.”

    Regulation is not all bad for tipping base paper suppliers, though. Omar Rahmanadi, CEO at BMJ, an Indonesian manufacturer of specialty paper and packaging for the tobacco industry, predicts a bright future for the segment. “In light of the development of cigarette alternatives and tighter anti-smoking regulations, the demand for high-quality tipping paper will grow in coming years,” he says. “With conventional cigarettes, tighter anti-smoking regulations such as plain packaging and oversized graphical health warnings have forced cigarette companies to rely on the cigarette stick itself for brand communication. That is why tipping paper will get more attention from brand owners.” According to Rahmanadi, cigarette companies are now looking for tipping paper with higher smoothness for better printability and lower grammage for cost saving.

    For Delfortgroup, the revised European Tobacco Products Directive, which came into force last year, has been a driver of innovation because it requires brand owners to identify communication and product design tools even more carefully, explains Christoph Wachter, head of the tipping base paper business unit and general manager of Delfortgroup’s subsidiary Dr. Franz Feurstein. “Tipping base paper with a superior surface enables the converter to print recognizable, distinctive and sophisticated designs on it, which is one of the very few branding instruments in cigarette packaging,” he says.

    Among the company’s recent developments is a sparkling tipping base paper, the glittering effect of which provides a high-end look and feel, making it the paper of choice for the premium segment with high differentiation, Delfortgroup claims.

    Furthermore, the high demand for a “touch” experience has led the company to develop a textured tipping base paper with a special substance. “The special fiber composition and bulk of tipping base paper provides an excellent base for embossing off-line at the converter or online at the cigarette maker,” Wachter explains.

    The Chinese factor

    China, the world’s largest market for cigarettes, has experienced stricter smoking regulations since 2013 and a significant tax hike in 2015. Chinese cigarette volumes have declined accordingly. In 2015, consumption declined by 60 billion sticks, or 1.8 percent, to a retail volume of 2,489.5 billion sticks compared with the previous year, according to Euromonitor International. Declining tar levels in China, too, have affected the market for tipping paper. “One way to reduce tar is to increase tipping length,” explains Boone. “As such, use of tipping paper has increased over time.”

    He says that while filter increase is one way, another is to increase use of natural ventilation with porous plugwrap and pre-perforated tipping. “This would not necessarily change the sales of base tipping but would be a form of value-added paper provided by tipping converters,” says Boone.

    Hengfeng, meanwhile, has developed a tipping base paper with natural porosity, which, it claims, provides a better ventilation rate stability and standard deviation than perforated tipping paper. Tar and carbonmonoxide can be decreased by more than 50 percent, while hydrocyanic acid, phenols and nitrosamines can be removed, the company says.